Management Discussion & Analysis

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Management Discussion & Analysis Canada Lands Company Limited Q3 (October 1, 2017 December 31, 2017) Management s Discussion and Analysis of Financial Results For the period ended December 31, 2017 This
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Management Discussion & Analysis Canada Lands Company Limited Q3 (October 1, 2017 December 31, 2017) Management s Discussion and Analysis of Financial Results For the period ended December 31, 2017 This Management Discussion & Analysis ( MD&A ) provides important information about Canada Lands Company Limited s ( CLCL or the corporation ) business, its financial performance for the period ended December 31, 2017, and its assessment of factors that may affect future results. The MD&A should be read in conjunction with the corporation s unaudited condensed consolidated interim financial statements and notes (collectively the consolidated financial statements) and the corporation s audit consolidated financial statements included in the CLCL 2016/17 Annual Report. The MD&A and consolidated financial have been prepared in accordance with International Financial Reporting Standards ( IFRS ). The following MD&A is the responsibility of management and is as current as at February 22, The Board of Directors of CLCL has approved this disclosure. All dollar amounts, unless otherwise stated, are in millions of Canadian dollars. CLCL s financial reporting, including the 2017/18 MD&A and consolidated financial statements and interim quarterly reports are available on CLCL s website, ABOUT CLCL CLCL is the parent company of Canada Lands Company CLC Limited ( CLC ), Parc Downsview Park Inc. ( PDP ) and the Old Port of Montréal Corporation Inc. ( OPMC ). CLCL operates within two principal segments: 1) Real Estate, through CLC and PDP s development lands (the Downsview Lands ), and 2) Attractions, through Canada s National Tower ( CN Tower ), the park owned by PDP ( Downsview Park ) and the OPMC which includes the Montreal Science Centre ( MSC ). CLCL, through CLC, 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 CLC Lands, it works to purchase properties from the federal government 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. CLC holds real estate across the country in various provinces and in various stages of development, with significant holdings in Vancouver, British Columbia; Calgary and Edmonton, Alberta; Ottawa and Toronto, Ontario; Montréal, Quebec; Halifax, Nova Scotia; and St. John s, Newfoundland and Labrador. PDP is comprised of 231 hectares (572 acres) of land at the former Canadian Forces Base Toronto. The holdings at PDP are composed of active recreation, parkland and development real estate assets. PDP will be developed with a full range of uses in accordance with the approved City of Toronto Downsview Area secondary plan, which includes an area of 291 acres permanently set aside as parkland. CLCL conducts its attractions operations through the CN Tower, the parkland and active recreation areas of PDP and the OPMC which includes the MSC. The CN Tower is an iconic national landmark and tourist attraction located in downtown Toronto. The core business is managing the country s highest observation tower, restaurant operations and the unique EdgeWalk attraction. OPMC is located in the heart of historic Montréal along the St. Lawrence River. Its core business covers two main areas: Old Port of Montreal ( OPM ) manages and hosts activities on the 2.5 kilometre long urban recreational, tourist, and cultural site along the St. Lawrence River; the MSC, along with operating, maintaining and promoting of the Montréal Science Centre, operates the IMAX theatre. 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 six directors. For more details on CLCL s governance, see the Corporate Governance section included within the CLCL 2016/17 Annual Report. The Board s total expenses for the period ended December 31, 2017 including meetings, travel expenses, conferences and seminars, liability insurance and annual retainers and per diems, totalled $0.5 (December 31, $0.3). The Board and senior management expenses are posted on Canada Lands website, OBJECTIVES AND STRATEGIES The corporation s goal in all transactions is to produce the best possible benefit for its stakeholders, local communities, itself and by extension its sole shareholder. 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 to create value, legacy and innovation. Attractions Through the CN Tower, PDP and the OPMC, 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 assets, and maintains the lands, buildings, equipment and facilities on those assets, including the MSC. 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 December 31, 2017 compared to prior year s comparative period are provided on the following pages. For Three Months ended For Nine Months ended December Real estate sales $ 47.1 $ 15.9 $ 92.7 $ 25.8 Attractions, food, beverage and other hospitality Rental operations Interest and other Total Revenues $ 80.5 $ 46.7 $ $ General and administrative expenses Income before taxes Net income and comprehensive income (after tax) *By entity: Old Port Downsview Park Canada Lands Total Old Port Downsview Park Canada Lands Real estate sales $ - $ - $ 47.1 $ 47.1 $ - $ - $ 92.7 $ 92.7 Attractions, food, beverage and other hospitality Three months ended December 31, 2017 Nine months ended December 31, 2017 Total Rental operations Interest and other Total Revenues $ 3.2 $ 3.4 $ 73.9 $ 80.5 $ 16.3 $ 10.4 $ $ General and administrative expenses Income (loss) before taxes (9.3) (0.3) (16.6) (1.6) Comprehensive income (loss) after taxes (7.0) (0.2) (11.4) (1.1) Old Port Downsview Park Canada Lands Total Old Port Downsview Park Canada Lands Real estate sales $ - $ - $ 15.9 $ 15.9 $ - $ - $ 25.8 $ 25.8 Attractions, food, beverage and other Three months ended December 31, 2016 Nine months ended December 31, 2016 Total Rental operations Interest and other Total Revenues $ 3.0 $ 3.2 $ 40.5 $ 46.7 $ 12.5 $ 11.6 $ $ General and administrative expenses Income (loss) before taxes (4.1) (0.5) (8.1) Comprehensive income (loss) after taxes (2.8) (0.4) (5.3) REVENUE Revenue of $80.5 and $233.6 for the three months ended and nine months ended December 31, 2017 were $33.8 and $80.5 favourable, respectively, to the comparable prior year periods. Revenues comprised four principal sources: 1) Real estate sales Real estate sales of $47.1 and $92.7 for the three month and nine month periods ended December 31, 2017, respectively, comprise 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: For Three Months ended For Nine Months ended December West $ 5.9 $ 15.8 $ 12.9 $ 18.1 Ontario Quebec Atlantic Total 47.1 $ $ 25.8 Real estate sales for the three-month period generated a gross profit, excluding general and administrative expenses and income tax, of $21.7 (or 46%). CLCL s year to date sales of $92.7 have generated gross profit of $40.4 (or 44%), compared to $12.7 (or 49%) in the comparable prior year period. As 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, it is difficult to compare year over year results. 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 $18.9 for the quarter and $88.6 year to date is $1.3 and $8.6 higher than the comparable prior year periods, respectively. Gross profit of $11.4 for the quarter and $48.7 year to date is $5.2 and $7.1 higher than the comparable prior year periods, respectively. The current year to date improvement was principally a result of increased attendance, cost efficiencies and higher margins on food and beverage operations. Attendance during the quarter was 339,000 and year to date was 1,740,000 visitors, respectively, which are 10% and 8% higher, respectively, than the comparable prior year periods. The average guest spending for the year to date remained consistent with the comparable prior year period at $50 per guest. OPMC During the quarter and year to date, OPMC generated revenue of $1.4 and $7.1, respectively, from the MSC and its parking, concessions, programs and events operations. The revenues were $0.4 and $3.3 higher than the comparable prior year periods, respectively. The higher revenue than the comparable prior year periods is principally the result of the MSC closure in the prior year from late May to early November due to a labour disruption. PDP During the quarter and year to date, PDP revenue of $0.1 and $0.9, respectively, from its sports facilities and programs and events was consistent with the comparable prior year periods, respectively. 3) Rental operations Rental operations 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 $10.2 for the quarter and $35.4 year to date was generated by investment properties, properties in inventory at various stages of development, and other properties across CLC, OPMC and PDP. The rental revenue is consistent with the comparable prior year periods. Rental revenues by region were as follows: For Three Months ended For Nine Months ended December West $ 3.2 $ 3.5 $ 9.9 $ 10.7 Ontario Quebec Total $ 10.2 $ 9.9 $ 35.4 $ 34.9 Rental gross profits of $nil for the quarter and $6.3 (or 17.8%) year to date, respectively, were $2.2 and $2.5 lower than the comparable prior year periods due to $6.8 of accounting impairments as a result of upgrades and renovations on King Edward parking structure at Montreal Science Centre. 4) Interest and other revenues Interest and other revenue of $2.7 for the period and $8.9 year to date is comprised principally of interest on short term investments, cash and cash equivalents, long-term receivables and mortgages, and donation and sponsorship revenues at OPMC. Other General and administrative expenses General and administrative (G&A) expenses of $7.0 for the quarter and $21.0 year to date are favourable to the comparable prior year quarter by $0.6, but unfavourable year to date by $2.3, respectively, primarily due to lower costs in the prior year at the OPMC as a result of the labour disruption. Taxes The effective tax rate for the year of 26.9% is consistent with the statutory rates. FINANCIAL POSITION ASSETS At December 31, 2017 and March 31, 2017, the total carrying value of assets was $1,215.3 and $1,187.2, respectively. The following is a summary of the corporation s assets: December 31, 2017 March 31, 2017 Inventories $ $ Investment properties Property, plant and equipment Cash and cash equivalents Deferred tax asset recoverable Long-term receivables Trade and other assets Total $ 1,215.3 $ 1,187.2 Inventories The corporation s inventories comprise properties held for future development of $169.1 (March 31, $157.2), properties under development of $228.8 (March 31, $231.5) and properties held for sale of $2.1 (March 31, $10.0). Inventory is recorded at the lower of cost and net realizable value. The corporation incurred cash expenditures of $25.3 and $44.1 on these properties during the period and year to date, respectively, compared with $34.1 and $72.0 during the comparable prior year periods. 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 PDP. Property, plant and equipment Property, plant and equipment consist principally of the CN Tower, the Downsview Park, the Plaza Garage, the John Street Parkette, the MSC, quays, bridges, the OPMC 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 $9.9 and $20.0 for the period and year to date, respectively, compared with $2.0 and $4.6 during the comparable prior year periods. 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 $3.7 and $11.0 for the period and year to date, respectively, compared to $3.6 and $10.7 during the comparable prior year periods. These expenditures exclude repairs and maintenance costs. During the quarter and year to date, OPMC s property, plant and equipment was impaired as the fair value was $5.2 and $10.1, respectively, 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 December 31, 2017, cash and cash equivalents balances held in major Canadian chartered banks and financial institutions were $464.9, compared to $439.2 at March 31, Under the terms of its agreements with certain former custodians, the corporation has current notes payable liabilities of $169.9 and sales proceeds sharing liabilities of $78.2 due on demand to former property custodians. The former property custodians have the ability to defer these payments at their discretion. Deferred and current tax assets The deferred and current tax assets amount of $106.8 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 PDP. The majority of the deferred tax asset is expected to be realized upon the sale of Downsview lands in future years. The increase of $11.1 since March 31, 2017 is primarily due to accounting impairments at OPMC that are expensed as incurred for accounting, but deducted over time for income tax purposes, and the prepayment of current income taxes. Long-term receivables Long-term receivables of $57.8 include amounts receivable from partners from joint venture cash flows and are consistent with the March 31, 2017 balance. 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: December 31, 2017 March 31, 2017 Credit facilities $ 39.8 $ 33.0 Notes payable Trade and other payables Sales proceed sharing liabilities Provisions Prepaid rents, deposits and others Deferred revenue Tax liabilities and other Total liabilities $ $ Contributed surplus Retained earnings Total liabilities and shareholder s equity $ 1,215.3 $ 1,187.2 Credit facilities The corporation has two credit facilities. PDP has an unsecured demand revolving credit facility for $ The credit facility can be used by way of loans, bankers acceptances and letters of credit. PDP has utilized $50.5 at December 31, 2017 (March 31, $43.9) of which $10.7 (March 31, $10.9) has been used as collateral for letters of credit outstanding. The other proceeds from the credit facility have been used to finance the construction and development of Downsview lands and the repayment of notes payable. CLC has a senior, unsecured revolving credit facility in the amount of $ The credit facility can be used to secure outstanding letters of credit. CLC has utilized $41.4 at December 31, 2017 (March 31, $54.4) 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. These notes are repayable on the earlier of their due dates from 2018 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) 2018 $ Subsequent years Subtotal Less: amounts representing imputed interest 41.2 $ Trade and other payables Trade and other payables are lower than at March 31, 2017 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. Sales proceeds sharing liabilities Under the terms of three of the corporation s acquisition agreements of purchase and sale for the property with the previous federal custodians, the corporation and former custodian s share in the sales proceeds. These amounts are due on demand. Provisions Provisions represent obligations of the corporation 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 c
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