CANADA LANDS COMPANY LIMITED QUARTERLY FINANCIAL STATEMENTS Q

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CANADA LANDS COMPANY LIMITED QUARTERLY FINANCIAL STATEMENTS Q Management s Discussion and Analysis of Financial Results For the period ended June 30, 2016 The following Management Discussion
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CANADA LANDS COMPANY LIMITED QUARTERLY FINANCIAL STATEMENTS Q Management s Discussion and Analysis of Financial Results For the period ended June 30, 2016 The following Management Discussion & Analysis for CLCL should be read in conjunction with the corporation s unaudited condensed consolidated interim financial statements included in this quarterly report and the corporations audited consolidated financial statements included in the CLCL annual report. BASIS OF PRESENTATION Financial data included in this Management s Discussion and Analysis ( MD&A ) for the period ended June 30, 2016, includes material information up to August 29, Financial data provided has been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). All dollar references, unless otherwise stated, are in millions of Canadian dollars, except retainers, acres, per diems and per visitor figures. Canada Lands Company Limited (CLCL or the corporation) is the parent company of Canada Lands Company CLC Limited (Canada Lands), Parc Downsview Park Inc. (Downsview Park) and the Old Port of Montréal Corporation Inc. (Old Port). NATURE OF THE BUSINESS CLCL operates within two principal segments: 1) Real Estate, through Canada Lands and Downsview Park, and 2) Attractions, through Canada s National Tower (CN Tower) and Old Port. CLCL, through Canada Lands, carries out CLCL s core real estate business in all regions of Canada. CLCL carries out its policy mandate to ensure the commercially oriented, orderly disposition of selected surplus federal real properties with optimal value to the Canadian taxpayer and the holding of certain properties. This mandate was approved by the Government of Canada (the government) on reactivation in CLCL optimizes the financial and community value of strategic properties no longer required for program purposes by the government. Through Canada Lands, it works to purchase properties at fair market value, then holds and manages or improves and sells them, in order to produce the best possible benefit for both local communities and the corporation s sole shareholder, the Government of Canada. Canada Lands holds real estate across the country in various provinces and in various stages of development, with significant holdings in Vancouver and Chilliwack, British Columbia; Calgary and Edmonton, Alberta; Ottawa and Toronto, Ontario; Montréal, Quebec; Halifax, Nova Scotia; and St. John s, Newfoundland & Labrador. Downsview Park is hectares (572 acres) of land at the former Canadian Forces Base (CFB) Toronto, located in Toronto, Ontario. The land includes the National Urban Park. The balance of the lands will be developed with a full range of uses. CLCL conducts its attractions operations through the CN Tower and Old Port. The CN Tower is an iconic landmark and tourist attraction located in downtown Toronto. The core business is managing the country s highest observation tower including restaurant operations and the unique Edgewalk attraction. Old Port is located in Montréal along the St. Lawrence River. Its core business includes managing and hosting activities on an urban recreational, tourist, and cultural site. Old Port also owns and operates the Montréal Science Centre. GOVERNANCE CLCL continues to provide bare certification of the consolidated financial statements (the financial statements) by its President and Chief Executive Officer and its Vice President Finance and Chief Financial Officer. Due to the additional expense and resources involved, CLCL has not proceeded further with certification. CLCL will monitor developments in this area and assess how it can proceed. CLCL s Board of Directors is composed of the Chairman and five directors. The Chairman and the directors are independent of management and are appointed by the Governor in Council. The compensation for the Chairman and directors is set by the Governor in Council and consists of annual retainers of $9,400 for the Chairman and $4,500 for directors, as well as a per diem rate of $375 for both the Chairman and directors and $250 for teleconference meetings. The Board s expenses for the period ended June 30, 2016 including travel expenses, conferences and seminars, liability insurance and annual retainers and per diems, totalled $0.1 (June 30, $0.1). The Board and senior management expenses are posted on Canada Lands website, 2 OBJECTIVES AND STRATEGIES The corporation s goal in all transactions is to produce the best possible benefit for both local communities and the Government. Real Estate The corporation optimizes the financial and community value from strategic properties that are no longer required by the Government. It purchases these properties at fair market value, then holds and manages them or improves and sells them. In its development properties, the corporation follows a rigorous process to create strong, vibrant communities that add lasting value for future generations of Canadians. In all the work the corporation undertakes it strives to achieve its organizational goals of Innovation, Value and Legacy. Attractions Through the CN Tower and Old Port, the corporation provides world-class entertainment and a wide range of unique attractions, exhibits and food and beverage offerings. The corporation also manages and hosts activities and events on urban recreational, tourism and cultural sites, and maintains the lands, buildings, equipment and facilities on those sites, including the Montréal Science Centre. RESOURCES, RISKS AND RELATIONSHIPS RESULTS A summary of the various components of the corporation s Consolidated Statement of Comprehensive Income follows. Discussion of the significant changes in each of these components for the period ended June 30, 2016 compared to prior year s comparative period are provided on the following pages. Period ended June * 2016 Budget 2015 Real estate sales $ 1.2 $ 7.4 $ 54.2 Attractions, food, beverage and other Rental operations Interest and other Total Revenues $ 40.5 $ 47.9 $ 88.8 General and administrative expenses** Income before taxes Net income and comprehensive income (after tax) *By entity Old Port Period ended June 30, 2016 Period ended June 30, 2015 Downsview Park Canada Lands Total Old Port Downsview Park Canada Lands Real estate sales $ - $ - $ 1.2 $ 1.2 $ - $ 52.9 $ 1.3 $ 54.2 Attractions, food, beverage and other Rental operations Interest and other Total Revenues $ 4.7 $ 3.6 $ 32.2 $ 40.5 $ 5.0 $ 56.0 $ 27.8 $ 88.8 General and administrative expenses Income (loss) before taxes (2.5) (2.3) Comprehensive income (loss) after taxes (1.5) (1.7) Total 3 REVENUE Revenue of $40.5 for the period was $7.4 and $48.3 unfavourable to budget and the comparable prior year period, respectively. Revenues comprised four principal sources: 1. Real Estate sales Real estate sales of $1.2 for the period comprised sales of property developed as building lots and sold to builders of single family homes, and developed land blocks. The nature of the corporation s business does not necessarily allow for a consistent year over year volume of sales. Revenue comprises sales in specific projects across Canada as the individual marketplaces dictate. Real estate sales by region were as follows: Three months ended June West $ 1.2 $ 1.3 Ontario Quebec Atlantic Total $ 1.2 $ 54.2 Real estate sales for the period generated a gross profit, excluding general and administrative expenses and income tax, of $0.2 (or 19%), compared to gross profit of $5.6 (or 10%) in the comparable prior year period. Margins vary widely from project to project and are influenced by many factors, including market demand in the project s location, the proximity of competing developments, the mix of product within the project, the cost of land, and the length of time for a project to be sold. 2. Attractions, food, beverage and other hospitality Attractions, food, beverage and other hospitality represent revenue from the CN Tower operations including admissions, restaurants and related attractions, and Old Port and Downsview Park operations including sports facilities, parking, concessions, programming, events, corporate rentals, and other hospitality revenues. CN Tower CN Tower revenue (excluding interest and other) of $23.3 is $3.8 higher than the comparable prior year period. Gross profit of $8.7 for the period was $2.7 higher than the comparable prior year period. The current year to date improvement was principally a result of increased attendance, increased per guest spend and higher margins on food and beverage operations. Attendance during the period was 0.5 million visitors, which was 18% higher than the comparable prior year period. The average guest spending of $48.59 per visitor was $0.70 per visitor or 1.5% higher than the comparable prior year period. Old Port During the period, Old Port revenue of $1.6 from its parking, concessions, programs and events was $0.5 lower than the comparable prior year period. Downsview Park During the period, Downsview Park revenue of $0.2 from its sports facilities and programs and events was $0.6 less than the comparable prior year period. The lower revenues resulted from a strategic decision to outsource these operations through space leases and management agreements in June The revenue from these leases and agreements is now included in Rental operations (see below). The outsourcing had no significant impact on overall profitability. 4 3. Rental operations Rental comprises revenue from commercial, industrial and residential properties held as investments as well as properties located on lands under development and held for future development across the country. Rental revenue of $11.9 for the period was generated by investment properties, properties in inventory at various stages of development, and other properties. The rental revenue increased by $1.6 compared to the comparable prior year period. Rental revenues by region were as follows: Three months ended June West $ 3.6 $ 4.6 Ontario Quebec Atlantic - - Total $ 11.9 $ 10.3 Rental gross profits of $3.1 (or 26%) for the period was higher than the comparable prior year period by $ Interest and other revenues Interest and other revenue of $2.5 for the period is comprised principally of interest on short term investments, cash and cash equivalents, long-term receivables and mortgages, and donation and sponsorship revenues at Old Port. OTHER General and administrative expenses General and administrative (G&A) expenses of $6.5 for the period are favourable to the comparable prior year period by $0.4, principally due to non-recurring restructuring costs incurred in Q1 of the prior year. Taxes The effective tax rate for the year of 27.5% is consistent with statutory rates. FINANCIAL POSITION ASSETS At June 30, 2016 and March 31, 2016, the total carrying value of assets was $910.2 and $912.7, respectively. The following is a summary of the corporation s assets: June 30, 2016 March 31, 2016 Inventories $ $ Investment properties Property, plant and equipment Cash and cash equivalents Deffered tax asset recoverable Long-term receivables Trade and other assets Total $ $ Inventories The corporation s inventories comprise properties held for future development of $155.1 (March 31, $155.1), properties under development of $173.3 (March 31, $162.7) and properties held for sale of $6.8 (March 31, $6.9). Inventory is recorded at the lower of cost and net realizable value. The corporation incurred cash expenditures of $12.1 on these properties during the period compared with $6.9 during the comparable prior year period. Spending on inventories varies year over year based on required and planned expenditures on those properties to prepare them for sale. Investment properties Investment properties are principally comprised of land located in Toronto on which the Rogers Centre is built and surrounding the CN Tower Base, along with certain properties at Downsview Park. Property, plant and equipment Property, plant and equipment consist principally of the CN Tower, the National Urban Park, the Plaza Garage, the John Street Parkette, the Montréal Science Centre, quays, bridges, the Old Port office building and land, vehicles, exhibitions, and computers and office equipment. Capital expenditures are made to property, plant and equipment to maintain and enhance the high quality of the infrastructure. There were capital additions of $1.2 for the period compared with $4.6 during the comparable prior year period. Capital expenditures vary period over period based on required and planned expenditures on the property, plant and equipment. There were non-cash depreciation charges against property, plant and equipment of $3.0 for the period compared to $3.1 during the comparable prior year period. These expenditures exclude repairs and maintenance costs. During the period, Old Port s property, plant and equipment s were impaired as the fair value was $0.3 lower than the carrying value. Cash and cash equivalents The corporation continues to maintain high levels of liquidity which will allow it to react to future potential opportunities that may require significant amounts of cash. At June 30, 2016, cash and cash equivalents balances held in major Canadian chartered banks and financial institutions were $181.2, compared to $184.8 at March 31, Deferred tax asset The deferred tax asset amount of $90.8 principally relates to the temporary differences between the carrying values of assets and liabilities for financial reporting purposes which are lower than the amounts used for taxation purposes at Downsview Park. The majority of the deferred tax asset is expected to be realized upon the sale of development lands in future years. Long-term receivables Long-term receivables of $90.7 include mortgages on sold properties and amounts receivable from partners from joint venture cash flows. The decrease in the balance from March 31, 2016 is principally the result of full and partial repayments of vendor take back mortgages from real estate sales in prior years. Trade and other assets Trade and other assets include rent and other receivables, prepaid assets, and CN Tower inventory. LIABILITIES AND SHAREHOLDER S EQUITY The corporation s assets are financed with a combination of debt and equity. The components of liabilities and equity are as follows: 6 June 30, 2016 March 31, 2016 Credit facilities $ 52.2 $ 47.9 Notes payable Trade and other payables Prepaid rents, deposits and others Deferred revenue Provisions Other liabilities Total liabilities $ $ Contributed Surplus Retained Earnings Total liabilities and shareholder s equity $ $ Credit facilities The corporation has two credit facilities. Downsview Park has an unsecured demand revolving credit facility for $ The credit facility can be used by way of loans, bankers acceptances and letters of credit. Downsview Park has utilized $67.0 at June 30, 2016 (March 31, $62.7) of which $14.8 (March 31, $14.8) has been used collateral for letters of credit outstanding. The other proceeds from the credit facility have been used to finance the construction and development of Downsview Park projects and the repayment of notes payable. Canada Lands has a senior, unsecured revolving credit facility in the amount of $ The credit facility can be used to secure outstanding letters of credit. Canada Lands has utilized $72.3 at June 30, 2016 (March 31, $72.3) as collateral for letters of credit outstanding. Notes payable Notes payable are issued in consideration for the acquisition of real estate properties and are due to the Government of Canada. These notes are repayable on the earlier of their due dates from 2016 to 2050 or the dates on which net proceeds become available from the sale by the corporation of the properties in respect of which the notes were issued, except in a limited number of instances where the terms of the note state when the issuer can demand payment and are not dependent on property cash flows. For all notes, the government can elect to defer amounts that are due and repayable. All notes are non-interest bearing. Based on the anticipated timing of the sale of the real estate properties and the specific repayment requirements within the notes, principal repayments are estimated to be as follows: Years ending March 31 (remainder of year) 2017 $ Subsequent years Subtotal Less: amounts representing imputed interest 50.9 $ Trade and other payables Trade and other payables are lower than at March 31, 2016 due to timing and the real estate development activity taking place across the country. All trade and other payables are trade payables and accrued liabilities incurred in the normal course of operations. Provisions Provisions represent obligations of the company where the amount or timing of payment is uncertain and are comprised largely of costs to complete sold real estate projects and payment in lieu of taxes being contested by the corporation. Prepaid rents, deposits and others Prepaid rents, deposits and others are largely comprised of real estate sales deposits by purchasers and builder deposits, which are part of the normal course of operations. Deferred revenue Deferred revenue represents revenue from rental/leasing, programs and events, and development and other income which has not yet been earned by the corporation. Tax liabilities and other Tax liabilities at June 30, 2016 and March 31, 2016 represent the future tax liabilities of the corporation resulting from the temporary differences between the carrying values of assets and liabilities for financial reporting purposes which are higher than the amounts used for taxation purposes. CAPITAL RESOURCES AND LIQUIDITY The company`s principal liquidity needs, which include those of its subsidiaries, over the next twelve months are to: fund recurring expenses; manage current credit facilities; fund the continuing development of its inventory and investment properties; fund capital requirements to maintain and enhance its property, plant and equipment; fund investing activities, which may include: property acquisitions; note repayments; discretionary capital expenditures; federal infrastructure spending at Old Port; fund the operating deficit of the Old Port; and make distributions to its sole shareholder. The corporation believes that its liquidity needs will be satisfied using cash and cash equivalents on hand, available unused credit facilities, and cash flows generated from operating and financing activities. Beyond twelve months, the corporation s principal liquidity needs, including those of its subsidiaries, are credit facility repayments, note repayments, recurring and non-recurring capital expenditures, development costs, federal infrastructure spending at Old Port, and potential property acquisitions. The corporation plans to meet these needs through one or more of the following:: cash flow from operations; proceeds from sale of assets; and credit facilities and refinancing opportunities. At June 30, 2016, the corporation had approximately $83.2 of cash on hand, and $98.0 of cash equivalents consisting of term deposits maturing in 26 days and deposit certificates redeemable at any time. RISK MANAGEMENT The corporation uses a practical approach to the management of risk. The objective of the corporation s risk management approach is not to completely eliminate risk but rather to optimize the balance between risk and best possible benefit to the corporation, its shareholder and its local communities. The corporation updates its enterprise risk assessment regularly to review, prioritize and mitigate against the key risks identified. The assessment includes reviewing risk reports, audit reports, and industry information, and interviewing senior management across the corporation. The corporation s Internal Audit evaluates the 8 design and operating effectiveness of internal controls and risk management. The co
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