CREIT 2006 Annual Report

Canadian Real Estate Investment Trust 2006 ANNUAL REPORT CREIT 2006 ANNUAL REPORT CREIT is a publicly traded real estate investment trust (REIT) listed on the Toronto Stock Exchange (TSX) under the symbol REF.UN. Our business is to accumulate a portfolio of high-quality real estate assets… and to deliver the benefits of real estate ownership to our investors. With a disciplined approach, CREIT has delivered reliable monthly distributions to our investors and has generated attractive long-term returns. CREIT is a registered trademark of Canadian Real Estate Investment Trust. FO R WAR D -L O O KIN G D ISCL AIMER Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Certain information in this Annual Report may constitute “forward-looking” statements which involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of CREIT, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements (which involve significant risks and uncertainties and should not be read as guarantees of future performance or results) include statements related to acquisitions, development activities, future maintenance and leasing expenditures, financing, the availability of financing sources and income taxes. Management believes that the expectations reflected in forward-looking statements are based upon reasonable assumptions; however, Management can give no assurance that actual results will be consistent with these forward-looking statements. Without limiting the foregoing, the words “believe”, “expect”, “anticipate”, “intend”, “estimate” and similar expressions identify forward-looking statements. Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements, include, but are not limited to, general economic conditions, the availability of new competitive supply of commercial real estate which may become available either through construction or sublease, CREIT’s ability to maintain occupancy and to timely lease or release space at current or anticipated rents, tenant bankruptcies, tenant defaults, changes in interest rates, changes in operating costs, governmental regulations, taxation, CREIT’s ability to obtain adequate insurance coverage at a reasonable cost, and the availability of financing. Any forward-looking statements in this Annual Report are made as of March 29, 2007, and CREIT assumes no obligation to update or revise them to reflect new events or circumstances, except as required by law. 2 0 06 H I GH LI GHTS $31.47 PER UNIT, UP FROM $22.53 A YEAR EARLIER. INCLUDING REINVESTED DISTRIBUTIONS, INVESTORS EARNED A TOTAL RETURN OF 47.4% FOR 2006. THE OVERALL OCCUPANCY IN THE CREIT REAL ESTATE PORTFOLIO INCREASED TO 96.8% AT CREIT CLOSED THE YEAR ON THE TSX AT YEAR-END 2006, UP FROM 95.5% AT YEAR-END 2005. YEAR-OVER-YEAR FUNDS FROM OPERATIONS (FFO) ROSE 8% PER UNIT ON A FULLY DILUTED BASIS. $1.30 PER UNIT (ANNUALIZED). EXCLUDING A NON-CASH FOREIGN CURRENCY TRANSLATION GAIN OF $1.9 MILLION RECORDED IN 2005, THE INCREASE WAS 10%. IN JUNE, CASH DISTRIBUTIONS WERE INCREASED FROM $1.28 TO NOTABLY, CREIT HAS INCREASED ITS MONTHLY DISTRIBUTION TO UNITHOLDERS EACH YEAR FOR THE PAST FIVE YEARS. THE WEIGHTED AVERAGE COST OF CREIT’S FIXED RATE TERM DEBT WAS REDUCED BY 19 BASIS POINTS TO 5.66%. THE WEIGHTED AVERAGE TERM TO MATURITY DECREASED SLIGHTLY TO 5.79 YEARS FROM 5.91 YEARS. CREIT’S MEZZANINE PROGRAM (DEVELOPED TO PROVIDE A STEADY FLOW OF POTENTIAL PROPERTY $92 MILLION AT YEAR-END 2006. IN 2006, WE ADDED $205 MILLION OF HIGH-QUALITY ASSETS TO OUR REAL ESTATE PORTFOLIO. INCLUDED IN THE ACQUISITIONS FOR THE YEAR WERE 847,000 SQUARE FEET OF INDUSTRIAL PROPERTIES AND 563,000 SQUARE FEET OF DOMINANT, WELL-ANCHORED RETAIL PROPERTIES. ACQUISITIONS) GREW TO STEPHEN E. JOHNSON President & Chief Executive Officer Canadian Real Estate Investment Trust FE LL O W U N I THOLDERS: 2006 was a solid year for CREIT. We again achieved important financial and operating goals and we continued to build our business platform. We reduced our cost of capital, and we recorded financial improvements in all three property sectors of our real estate portfolio (retail, industrial and office properties) on a same-asset basis. We increased our cash distributions again in 2006, and as well, we increased the amount of cash retained for reinvestment. Our results reflect an active and productive year with contributions from acquisition activities, development programs, effective debt financings and most importantly, our property management and leasing activities. Letter to Unitholders > FINANCIAL PERFORMANCE TRANSACTION HIGHLIGHTS For Canadian REITs, Funds from Operations (FFO) 1 is the main reference number used to report earnings. CREIT’s FFO, on a fully diluted basis, rose to $1.93 per Unit for the year ended December 31, 2006, an increase of $0.14 per Unit over the $1.79 per Unit earned for the year ended December 31, 2005. This was an improvement of 8%. Excluding a $1.9-million non-cash foreign exchange translation gain recorded in 2005, the year-over-year improvement was 10%. In aggregate dollars, FFO was $111.0 million in 2006 and $101.6 million the previous year. With continuing solid financial performance to support the decision, CREIT announced midway through the year that, effective June 2006 (for Unitholders of record as of June 30, 2006), the distributions paid to Unitholders would be increased from $1.28 to $1.30 per Unit on an annualized basis. CREIT has established a track record of reliable distributions to Unitholders and growth in these distributions over time. Notably, CREIT has increased its distributions each year for the past five years, from 2002 through to 2006 inclusive. Transaction activities at CREIT include: (i) the acquisition of additional real estate assets for our portfolio; (ii) the placement of mezzanine loans with property developers (with CREIT as lender) to help source or facilitate new acquisitions; (iii) the sale of assets from our portfolio for strategic reasons; and (iv) all debt financings (with CREIT as borrower). CREIT’s transaction activities within each of these categories during 2006 are summarized below. Acquisitions Although the market for acquisitions was very competitive in 2006, we added $205 million of quality assets to our real estate portfolio. By year-end, assets had grown to $1.8 billion, comprising 15.6 million square feet (CREIT’s ownership interest). We added 847,000 square feet to our industrial portfolio, and 563,000 square feet to our retail portfolio. Among the acquisitions were two newly-developed industrial properties in Alberta and Ontario, acquired from Hopewell Development Corporation. These transactions were the direct result of a significant mezzanine lending/acquisition program that CREIT initiated with Hopewell in 2005. 1 Funds from Operations (FFO) is a financial measure which is not defined under Generally Accepted Accounting Principles (GAAP), and should not be considered an alternative to net income, cash flow from operations, or any other liquidity measure prescribed under GAAP. As FFO excludes depreciation, amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year-over-year, reflects the impact on operations of trends in occupancy levels, rental rates, operating costs, realty taxes, acquisition activities and interest costs, and provides a perspective of the financial performance that is not immediately apparent from net income determined in accordance with GAAP. The Consolidated Financial Statements of the Trust for the year ended December 31, 2006, and Management’s Discussion and Analysis of Results of Operations and Financial Condition, which includes a reconciliation of net income to FFO, are posted on CREIT’s website at www.creit.ca. CREIT 2006 Annual Report > 3 Letter to Unitholders > In 2006, we added $205 million of quality assets to our real estate portfolio. By year-end, assets had grown to $1.8 billion, comprising 15.6 million square feet (CREIT’s ownership interest). Another notable transaction was the acquisition of a 50% interest in Carrefour de la Rive-Sud Shopping Centre, in Boucherville, Quebec, located along the south shore of the St. Lawrence River in the Greater Montreal area. Carrefour de la Rive-Sud Shopping Centre is a new-format, unenclosed retail property comprising 507,000 square feet of leasable area on 53 acres of land. The property incorporates Super C as a direct grocery store anchor and features numerous high-quality tenants, including Future Shop, Staples, Winners/Home Sense, Home Outfitters, Pharmaprix, two Canadian banks and many other leading fashion, home furnishing and service tenants. The property is 100% leased, with an average remaining lease term of approximately nine years as of December 31, 2006. No leases expire until 2010. This shopping centre is shadow-anchored by three dominant retailers: Ikea, Costco and Rona. By shadow-anchor, we mean that these three retail stores are integrated into our property from a shopper’s perspective, but the actual sites of these stores are not owned by CREIT. Such sites are generally directly owned by the retailer. Inclusive of the shadow-anchors, the shopping centre comprises approximately 1.0 million square feet of leasable area. This acquisition increased our portfolio weighting in high-quality, well-anchored and well-leased retail properties. Mezzanine Lending To help source suitable properties to add to our portfolio, CREIT has an active mezzanine lending program. Essentially the program provides funding for a portion of the equity that our various developer partners require for specific new property developments. One such partner is Hopewell Development Corporation, a well-respected merchant developer focused on the development of industrial and retail properties in several of the key markets where CREIT continues to target growth, including Alberta and Ontario. CREIT receives a market rate of interest on these mezzanine loans, but more importantly, CREIT obtains certain purchase rights that are exercisable when each property development is completed. At year-end 2006, CREIT had $92.3 million invested in such mezzanine facilities, up from $86.6 million at year-end 2005 and $33.7 million at year-end 2004. This mezzanine loan program will be a major contributing source of new acquisitions for CREIT over the next several years. 4 > CREIT 2006 Annual Report Letter to Unitholders > FUNDS FROM OPERATIONS PER UNIT GREW BY ASSET BASE GREW TO DISTRIBUTIONS INCREASED FROM $1.28 TO 2006 Divestitures 8% (PER FULLY DILUTED UNIT) $1.8B $1.30 (BOOK VALUE) COMPRISING 15.6 MILLION SQUARE FEET PER UNIT (ANNUALIZED) IN JUNE 2006 Debt The competitive environment for acquisitions has resulted in some very aggressive bidding for real property assets. As we did in 2005, CREIT took advantage of this environment to cull certain non-core, non-strategic assets from our real estate portfolio. Three small, non-core properties were sold in 2006, providing an overall gain of $3.9 million. The sale of these assets was in CREIT’s best interests over the long-term; however, such sales have a dilutive effect on earnings until the proceeds are reinvested. Given the strong market for acquisitions, we also took steps to continue our strategy with respect to the disposition of partial interests in some of our office properties. The intent of this strategic initiative is to sell a 50% interest in each of our major office properties to an institutional partner. CREIT maintains full leasing and management responsibilities on behalf of the co-ownership. (See Strategy – page 13.) On February 1, 2007, CREIT announced that it had sold a 50% interest in 175 Bloor Street East in Toronto, Ontario, to a Canadian pension fund. This is a Class “A” office property comprised of two towers with a total leasable area of approximately 580,000 square feet. The sale price was $87.5 million. CREIT will recognize an accounting gain in its 2007 results of more than $11 million on the sale of the 50% interest. CREIT’s business model incorporates the effective, but prudent, use of leverage. Our permitted level of debt is 60% of adjusted book value as outlined in CREIT’s Declaration of Trust. CREIT’s level of debt was 57.7% of adjusted book value as of December 31, 2006, which, by design, was up from 54.9% at year-end 2005. This increase was a result of the investment activities completed in 2006. With the sale in early 2007 of a 50% interest in our office property at 175 Bloor Street East in Toronto, our debt level was reduced to under 56%. Two important factors in monitoring debt risk are the weighted average term to maturity and the average cost of debt in place. In line with our objectives, CREIT’s weighted average term to maturity on mortgages and unsecured debentures decreased slightly in 2006, from 5.91 years to 5.79 years. WEIGHTED AVERAGE TERM TO MATURITY (years) years 6.0 5.79 5.6 5.2 4.8 4.4 4.0 04 05 06 CREIT 2006 Annual Report > 5 Letter to Unitholders > CREIT has established a track record of reliable distributions to Unitholders and growth in these distributions over time. AVERAGE COST OF FIXED RATE DEBT (%) % 6.2 PROPERTY HIGHLIGHTS Our existing portfolio performed very well during the year. 5.66 5.8 5.4 In 2006, we completed 2.5 million square feet in lease transactions (total of lease renewals and new leasing). Portfolio Occupancy 5.0 4.6 4.2 04 05 06 Over the course of 2006, we reduced the average cost of our fixed rate term debt by 19 basis points, from 5.85% to 5.66%. CREIT’s interest coverage in 2006 was 3.01 times – significantly better than the interest coverage of 1.65 times required under the trust indenture for our unsecured debentures. Interest coverage is a measure of credit risk that expresses the number of times that earnings, after adjusting for non-cash activities, exceed interest expense. The higher the coverage, the lower the risk. As summarized in the table on page 7, overall occupancy in our real estate portfolio increased by 130 basis points year-over-year. The retail sector occupancy increased by 100 basis points, the industrial sector increased by 90 basis points, and occupancy in our office sector increased by 130 basis points. Same-Asset Performance One of the measures used to analyze productivity in the real estate industry is same-asset performance. CREIT defines “same-asset” as those real estate properties that were in the CREIT portfolio for the full year 2006 and the full year 2005 (properties that underwent any redevelopment or expansion are excluded). The objective of the analysis is to show a full year-over-year performance comparison. Same-asset performance is impacted primarily by changes in rental rates and occupancy levels. 6 > CREIT 2006 Annual Report Letter to Unitholders > PORTFOLIO OCCUPANCY (% AS OF DECEMBER 31) RETAIL Y-O-Y CHANGE INDUSTRIAL Y-O-Y CHANGE OFFICE Y-O-Y CHANGE TOTAL PORTFOLIO Y-O-Y CHANGE 2006 2005 2004 99.0 98.0 98.4 1.0 (0.4) – 96.8 95.9 93.9 0.9 2.0 – 93.5 92.2 92.2 1.30 0 – 96.8 95.5 95.0 1.30 0.5 – Same-asset performance is measured using property net operating income (NOI), which is essentially gross rents received from tenants less property taxes and property-specific operating costs. Overall, same-asset performance met our expectations for 2006. In our same-asset retail portfolio, NOI was up 1% year-over-year. This increase was driven mainly by an increase of 40 basis points in same-asset average occupancy. Average occupancy in our same-asset industrial portfolio was up 120 basis points, which was the main contributor to NOI growth of 3% in our same-asset industrial portfolio. In our same-asset office portfolio, year-over-year NOI increased by 7%. The same-asset average occupancy in our office properties increased 170 basis points over the average occupancy recorded throughout 2005. Given the high costs associated with realty tax and property operating costs in office buildings, changing occupancy levels can have a dramatic impact on NOI. RETURNS TO UNITHOLDERS CREIT closed on the Toronto Stock Exchange at $31.47 per Unit at year-end 2006, up from $22.53 a year earlier. The total return to Unitholders, including reinvested distributions, was 47.4% for the year. While we were again delighted with the return that Unitholders earned for the year, our primary focus has always been on long-term performance. Over the past 13 years (for the period from January 1, 1994 to December 31, 2006), the compound annual return to CREIT investors, including reinvested distributions, has been 18.9 % – a solid performance, particularly given our relatively conservative risk profile. PREDICTING FUTURE RETURNS Our goal is to consistently deliver year-over-year earnings growth of 2% to 3%. Since, over time, our Unit price tends to trade on a multiple of earnings, this growth in earnings should result in a commensurate increase in our Unit price. This assumes that there are no economic or interest rate changes that would otherwise affect our earnings multiple. Therefore, the total return to Unitholders in any given year should be our current yield (which is the current distribution divided by the current price) plus the anticipated Unit price increase that reflects the 2% to 3% growth in earnings, assuming earnings growth is achieved. CREIT 2006 Annual Report > 7 Letter to Unitholders > While we were again delighted with the return that Unitholders earned for the year, our primary focus has always been on long-term performance. Of course, the capital markets are simply never that predictable. Earnings could increase, and the Unit price, notwithstanding, may decrease. Investors therefore have to look at the CREIT Unit price and the yield at a specific point in time, in conjunction with their own view of the economy generally and real estate markets specifically. However, when considering a long-term investment horizon, looking at the current yield plus the anticipated growth rate is a reasonable place for Unitholders to start when formulating their own expectations regarding the likely total returns from their investment in CREIT. SUMMARY The CREIT Board of Trustees and Management were pleased with the steady and solid performance of your REIT throughout 2006. We continued to enhance the quality of our real estate portfolio. And we were delighted, again in 2006, to be in a position to comfortably increase the amount of the monthly distribution paid to our Unitholders. In 2007, we will continue to deliver reliable distributions through the existing earning power of CREIT’s portfolio of high-quality real estate assets. As well, we have a good pipeline for potential new acquisitions. We will maintain our disciplined approach, and we are confident that we will meet the objectives set out for the year. Stephen E. Johnson PRESIDENT & CHIEF EXECUTIVE OFFICER MARCH 29, 2007 8 > CREIT 2006 Annual Report Letter to Unitholders TOTAL RETURNS FOR UNITHOLDERS (INCLUDING REINVESTED DISTRIBUTIONS) 47.4% 29.3% 18.9% 1 YEAR 5 YEARS 13 YEARS FORMAT FOR ANNUAL REPORT Our Unitholders fall into two categories: Registered Unitholders (those holding their CREIT Unit certificate(s) directly in their own name) and Non-Registered Unitholders (those holding their CREIT Units through their investment dealer or another intermediary). More than 95% of our Unitholders are Non-Registered Unitholders, and in response to a query we sent to them with the 2005 annual report, less than 5% of Non-Registered Unitholders requested to receive, by mail, a copy of our Financial Statements and Management’s Discussion and Analysis of Results of Operations and Financial Condition (MD&A). Accordingly, our 2006 annual report has been produced in a summary format that excludes the 2006 Financial Statements and MD&A. We believe that we best serve our investors if we use the annual report simply to communicate two things: I first, a summary of the year’s activities, as we have done in the Letter to Unitholders; and I second, a crisp summary of our Business Model, Strategy and Track Record, which are set out on pages 10 through 25. In addition to serving our existing investors, the annual report in this format can also be used by new investors as a fundamental information piece to understand the basics of the CREIT business. As well, the report can be utilized by our employees as an information document for tenants, joint venture partners and other business interests with whom we interact in the normal course of our activities. This format allows us to both efficiently communicate with our investors and significantly reduce CREIT’s printing costs. This is an environmentally and financially responsible approach. By not including the Financial Statements and MD&A in the annual report, CREIT will save the printing and mailing of more than 1.6 million pages annually. The full, detailed 2006 year-end Financial Statements and MD&A is easily accessed via our website at www.creit.ca. Our practice is to post our annual and quarterly Financial Statements and MD&A to our website as soon as they are released. The 2006 year-end Financial Statements and MD&A were mailed to the limited number of Non-Registered investors who so requested, and to all Registered Unitholders. As well, our Financial Statements and MD&A will be sent to anyone who requests these reports at any time. CREIT 2006 Annual Report > 9 Understanding CREIT Understanding CREIT > Professional investors – pension funds, money managers, wealthy families – have for decades relied on real estate to be an enduring component within a balanced and diversified investment portfolio. As an asset class, commercial real estate (shopping centres, industrial properties and office buildings) has historically delivered, for landlord owners, consistent cash flow along with the preservation of capital. Real Estate Investment Trusts (REITs) were introduced in Canada in 1993 as publicly traded securities. CREIT was listed on the Toronto Stock Exchange in September 1993. After more than 13 years of developmental growth, the REIT market in Canada has evolved into a large, efficient public platform, through which investors of all sizes and types can access a real estate component to fit their own investment portfolio. Canadian REITs should provide investors with most of the benefits that can be achieved through the direct ownership of real estate. But how does an investor choose a specific REIT? Whether it is from the perspective of an existing or potential investor, we believe it is important to understand three fundamental things about CREIT; specifically: I our Business Model; I our Strategy; and I our Track Record. We have used the next several pages to provide a summary of these core business elements. Our intent is to update this section each year as part of our annual report. Understanding CREIT > The CREIT Business Model > TH E C R E I T B U SINESS MODEL Simply stated, the CREIT business is to accumulate a portfolio of high-quality real estate assets… and to deliver the benefits of real estate ownership to our investors. Specifically, our goal is to deliver the following four benefits of real estate ownership to our Unitholders: I current cash flow (a reliable monthly distribution); some tax deferral on the distributions paid out; the preservation of capital; and growth, in both cash flow and capital, over time. I I I 12 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > S TR ATE GY In order to deliver the benefits set out in our Business Model, CREIT developed, and has continuously built upon over the last 13 years, a strategy that incorporates three major components: I Acquisitions – accumulating a portfolio of high-quality, diversified real estate assets; Property Operations – building an exceptional core competency in property management and leasing; and Financial Management – establishing and operating within a disciplined framework for financial management. I I Each of these major components of our strategy is outlined in more detail on the following pages. L CIA NT AN ME FIN AGE N MA AC QU ISI TIO NS PROPERTY OPERATIONS CREIT 2006 Annual Report > 13 Understanding CREIT > The CREIT Business Model > Strategy > High-quality real estate assets improve both the reliability of our monthly distributions and our prospects for growth. ACQUISITIONS – Asset Quality The single most important thing that Management can do to ensure reliable monthly distributions is to acquire high-quality real estate assets. As CREIT has grown, we have been able to continually raise the bar on asset quality. reliability of the revenue stream from our real estate portfolio. Geographic diversification also provides multiple markets for potential acquisitions. We are also diversified by product type. Our target product mix is: I 50% retail properties; I 25% industrial properties; and I 25% office properties. Each real estate asset class in which CREIT invests – retail, industrial and office – differs in its degree of risk, return and volatility. We use asset type diversification to mitigate risk and maximize returns. Our product mix is designed to provide stability, growth and solid total returns for our Unitholders over a long-term investment horizon. Strong real estate assets are key to maintaining high occupancy levels – and high rental rates. Great real estate properties attract superior tenants. And superior tenants reduce risk. Therefore, it follows that high-quality real estate assets in the CREIT portfolio improve both the reliability of our monthly distributions, and our prospects for growth. ACQUISITIONS – Asset Diversification By design, we are a diversified REIT. We are diversified geographically. CREIT owns real estate assets in most of the major cities in Canada. This geographic diversification reduces concentration risk and will help enhance the ongoing and long-term OUR TARGET MIX OF REAL ESTATE ASSETS 50% RETAIL PROPERTIES 25% INDUSTRIAL PROPERTIES 25% OFFICE PROPERTIES 14 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > OUR RETAIL REAL ESTATE PORTFOLIO IS THE FOUNDATION FOR RELIABLE CASH DISTRIBUTIONS Asset Diversification – CREIT’s Retail Portfolio Our goal is to balance our total property portfolio such that 50% of CREIT’s income is generated from our retail properties. As an asset class, retail real estate is essentially comprised of shopping centres – but there are many types of shopping centres. CREIT has focused on accumulating a retail portfolio of grocery-anchored, unenclosed centres and other open-air centres anchored by leading retailers on long-term leases. We focus on the acquisition of shopping centres that are located at major street intersections within growing and affluent residential communities. We look to acquire shopping centres that are the location of choice for retail tenants – that is, these are the shopping centres where retail tenants would prefer to lease space over alternative centres in the same neighbourhood or trade area. CREIT also looks to acquire shopping centres where, for a variety of reasons, there are barriers to entry for new competition (for example, lack of retail-zoned land for new development). Internally, CREIT refers to shopping centres with the characteristics described above as proprietar y retail. With proprietar y retail properties, CREIT is able to achieve both high occupancy levels and high rental rates. The retail real estate portion of the CREIT portfolio is the foundation for reliable cash distributions. However, this type of retail real estate will not deliver the income growth required to achieve CREIT’s objectives, because many tenants are on long-term lease contracts with only a limited opportunity to increase rents. We look to the industrial and office assets in our real estate portfolio to deliver higher growth numbers. The retail portfolio square footage and the year-end occupancy percentage over the past 13 years are outlined in the graph below. Occupancy over time has remained exceptionally strong. Low volatility. High reliability. RETAIL PORTFOLIO SIZE (000’s of sq.ft.) AND OCCUPANCY (%) sq.ft. 5,500 99% 5,276 % 100 4,400 94 3,300 88 2,200 82 1,100 76 0 94 95 96 97 98 99 00 01 02 03 04 05 06 70 CREIT 2006 Annual Report > 15 Understanding CREIT > The CREIT Business Model > Strategy > Asset Diversification – CREIT’s Industrial Portfolio Our goal is to balance the portfolio such that 25% of CREIT’s income is generated from our industrial properties. Industrial real estate includes distribution facilities, buildings used for general warehousing and light manufacturing, and/or flex-space facilities that include both office and industrial space within the same rental unit. We look for industrial properties that are of a size and configuration that will readily accommodate the diverse needs of a broad range of commercial tenants. CREIT’s focus is to accumulate an industrial portfolio of high-quality generic assets, located in target markets where we can build critical mass. The term “generic” refers to properties that appeal to a wide range of potential tenants. These properties generate a large demand base and therefore the leasing time frame for any vacant space is reduced. Critical mass in each market is important to provide management efficiencies. In addition, it offers us a better opportunity to directly accommodate the ongoing expansion or contraction requirements of our tenant base. CREIT’s industrial real estate provides a good degree of reliability in occupancy; however, it has greater occupancy volatility than our retail assets. At the same time, income growth possibilities are better in our industrial portfolio. The industrial portfolio square footage and the year-end occupancy percentage over the past 13 years are outlined in the graph below. INDUSTRIAL PORTFOLIO SIZE (000’s of sq.ft.) AND OCCUPANCY sq.ft. 7,000 (%) 97% 6,959 % 100 5,600 94 4,200 88 2,800 82 1,400 76 0 94 95 96 97 98 99 00 01 02 03 04 05 06 70 Asset Diversification – CREIT’s Office Portfolio Our goal is to balance the CREIT real estate portfolio such that 25% of our income is generated from office buildings. CREIT has focused on the acquisition of well-located, high-quality office buildings in target cities, with an emphasis on acquisition at below-replacement cost. Replacement cost is the cost of fully developing a new office property in the current environment. OUR INDUSTRIAL REAL ESTATE PORTFOLIO PROVIDES A GOOD DEGREE OF RELIABILITY IN OCCUPANCY 16 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > VANCOUVER CALGARY TORONTO MONTREAL HALIFAX Acquiring existing office properties at belowreplacement cost allows CREIT to successfully compete on rental rates in the current market and, over time, increase rental rates when new construction begins in a specific market. Generally, rental rates will rise with new construction. New construction is triggered by strong tenant demand and must achieve a rental rate high enough to provide an economic return on the full replacement cost. Given that CREIT’s acquisition costs are generally well below current replacement costs, and given that the market demand for office space is improving, we believe that CREIT’s office portfolio has good income growth potential. From a leasing perspective, office buildings can be volatile in terms of occupancy levels and rental rates. To counter this, CREIT has developed an initiative to sell a 50% co-ownership interest in each of its office properties to an institutional, non-managing partner. This will reduce our exposure to any single office property or office tenant. As well, with an institutional co-owner in place and CREIT as the managing partner, CREIT’s return on invested capital is enhanced by the fee income received for the day-to-day management and leasing of the co-owner’s interest in the property. In our portfolio of 17 office properties, CREIT has entered into a co-ownership arrangement on only six properties as of March 29, 2007. As opportunities arise, CREIT will enter into additional co-ownership arrangements with its office properties. However, in the current competitive market for new acquisitions, the timely redeployment of proceeds is sometimes difficult, so the timing of each new co-ownership initiative must be appropriately managed. The office portfolio square footage and the year-end occupancy percentage over the past 11 years are outlined in the graph below. Occupancy over time reflects greater volatility than that experienced in CREIT’s retail or industrial portfolios. Notably, in 2006, same-asset net operating income in our office portfolio was up a very strong 7%. OFFICE PORTFOLIO SIZE (000’s of sq.ft.) AND OCCUPANCY sq.ft. 3,500 (%) 94% 3,359 % 100 2,800 94 2,100 88 1,400 82 700 76 0 94 95 96 97 98 99 00 01 02 03 04 05 06 70 CREIT 2006 Annual Report > 17 Understanding CREIT > The CREIT Business Model > Strategy > Building a distinctive core competency in property management and leasing has been an important part of our Business Model for many years. 18 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > STRONG PROPERTY MANAGEMENT AND LEASING SKILLS ARE ESSENTIAL FOR EXCEPTIONAL PERFORMANCE ANDY ROBINS National Retail Leasing & Development ROBERT O’BRIEN Regional Manager, British Columbia SCOTT SHARPLES Vice President, Western Region PROPERTY OPERATIONS – THE IMPORTANCE OF PROPERTY MANAGEMENT AND LEASING Fundamentally, there are two ways for REITs to consistently grow earnings per Unit – externally by making appropriate acquisitions, and internally by improving the performance of the existing portfolio. Improvements in the performance of the existing portfolio come primarily from escalating rents and/or higher occupancy levels. Increasingly, growth from CREIT’s existing assets will be the key performance driver because, as the portfolio grows, the additional income from each new acquisition has relatively less impact on the results of the portfolio as a whole. So, as we continue to grow, the strength of our property management and leasing capabilities becomes increasingly critical in CREIT’s ongoing performance. Building a distinctive core competency in property management and leasing has been an important part of our business model for many years. FINLEY McEWEN Vice President, Ontario & Manitoba RENÉ ARSENAULT Vice President, Quebec JOHN MOREHOUSE Vice President, Atlantic Region CREIT 2006 Annual Report > 19 Understanding CREIT > The CREIT Business Model > Strategy > CREIT HEAD OFFICE MANAGEMENT & RESOURCE PERSONNEL TIM McSORLEY Vice President & Chief Financial Officer FONG HSIUNG CGA, MBA Vice President, Accounting JEAN LIN B.Comm., CMA Vice President, Transaction Due Diligence FINANCIAL MANAGEMENT CREIT set out from the beginning to develop a disciplined framework for financial management. The three key components of this framework are: I conservative accounting policies; I a prudent level of cash distributions; and I staggered debt maturities. Conservative Accounting Policies – CREIT has taken a one could establish a policy whereby certain employees are “capitalized” to the cost of a new acquisition; or alternatively, one could establish a more conservative policy that would expense the full cost of such employees as incurred. In this example, CREIT adheres to a conservative approach – we expense all employee costs as incurred. This approach will generally negatively impact reported financial results over the short term. However, in our view, this helps in the delivery of higher-quality financial results over the long term. leadership role in developing conservative accounting policies. Under Generally Accepted Accounting Principles (GAAP), accounting policies are expected to be consistent from year to year, but there is generally some flexibility in how a policy is established in the first place. For example, in a real estate investment trust, ADAM PAUL CA Vice President, Investments ARCHNA SHARMA CA, CFA Director, Finance JUDITH SOMERVILLE CA, MBA Trust Secretary 20 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > Prudent Level of Cash Distributions – On the one hand, we want to pay out to our Unitholders as much cash as is practical through our monthly distributions. On the other hand, we want to avoid paying out so much that it impairs the operating fundamentals of the business. Notably, over the past several years, CREIT has consistently increased the amount of the monthly distribution paid to Unitholders and, at the same time, we have increased the amount of cash (from earnings) that we retain in the business. Retained cash is a significant propellant for growth; it is deployed into new acquisitions which will generate additional earnings. In 2006, CREIT’s cash distribution as a percentage of our Funds from Operations (an earnings measure) was 67%. By design, CREIT has one of the most conservative distribution policies among the Canadian REITs. Our conservative payout ratio makes our monthly distributions to Unitholders more reliable; and the reliability of our monthly distributions is one of our top strategic priorities. Staggered Debt Maturities – The CREIT Business Generally, in economic environments where the yield curve is steepening, CREIT will be at the high end of this range. Conversely, as the yield curve flattens, we will look to reduce exposure to floating rate debt by moving into long-term mortgages and/or debentures. The execution of this strategy is dependent upon the timing of investment transactions, debt maturities and capital markets activity. Most of our debt (80% to 95%) is fixed rate term debt, and we strive to spread the maturities for this term debt evenly over 10 years. With this approach, we spread the interest rate risk over 10 years, so that in any one year only 10% of our fixed rate debt is subject to interest rate change. This minimizes CREIT’s interest rate risk in any given year. MORTGAGE AND DEBENTURE MATURITIES % 14.0 12.0 6.1 10.0 8.0 6.0 4.0 4.9 2.0 5.7 % 6.5 5.3 Model incorporates the efficient and prudent use of leverage as part of our capital structure. We are limited to a debt level of 60% of adjusted book value as outlined in CREIT’s Declaration of Trust. CREIT uses two forms of debt: (i) floating rate debt (primarily bank facilities with a term of less than one year); and (ii) fixed rate term debt (primarily mortgages and unsecured debentures). At year-end 2006, CREIT had total debt of $1.1 billion, representing 57.7% of adjusted book value. For both flexibility and interest rate risk management, we generally keep a portion of our total debt (5% to 20%) in floating rate facilities. 0.0 07 08 09 10 11 12 13 14 15 16 Thereafter 4.5 FIXED RATE DEBT AS A % OF TOTAL PRINCIPAL WEIGHTED AVERAGE INTEREST RATE In summary, the financial framework at CREIT actually encompasses many factors. However, the three key components in our approach to financial management are: I accounting policies for the long term; I a prudent level of cash distributions; and I staggered, well-managed debt maturities. CREIT 2006 Annual Report > 21 Understanding CREIT > The CREIT Business Model > Strategy > S TRATE G Y SU MMARY It is about delivering reliability – and growth. Our strategy is not complex. We have set out to accumulate a portfolio of high-quality real estate assets; we aggressively manage and lease our portfolio, and we operate within a disciplined financial management framework. Executed well, this strategy should deliver reliable cash distributions to our Unitholders each month. We also expect our strategy to produce consistent growth over time. Understanding CREIT > The CREIT Business Model > Strategy > Track Record > TR AC K RECO R D As outlined earlier, the Understanding CREIT section of the annual report is meant to provide our investors with a summary of the CREIT Business Model, our Strategy and our Track Record. The true test for the soundness of a business model and the effectiveness of a corporate strategy is track record. Over the next two pages, we have summarized the CREIT Track Record relating to performance measures that we believe are important to investors. Our Track Record demonstrates significant progress in specific areas; however, our focus for the most part is on reliability – and growth. CREIT has delivered reliable monthly distributions to our Unitholders, and consistent growth in earnings over a long-term horizon. Understanding CREIT > The CREIT Business Model > Strategy > Track Record > The true test for the soundness of a business model and the effectiveness of a corporate strategy is Track Record. $1.93 2.0 1.6 ANNUAL GROWTH IN FUNDS FROM OPERATIONS ($ per Unit diluted – 1994 to 2006) CONSISTENT GROWTH IN INCOME 1.2 0.8 Funds from Operations per Unit (diluted) has increased every year since 1993, except in 2001 when CREIT expensed approximately $5 million relating to the internalization of our management. 0.4 0.0 94 95 96 97 98 99 00 01 02 03 04 05 06 $1.29 1.30 1.26 GROWTH IN CASH DISTRIBUTIONS ($ per Unit – 2001 to 2006) CONSISTENT INCREASES IN DISTRIBUTIONS 1.22 1.18 In terms of track record, CREIT has increased the amount of the monthly distribution paid to our Unitholders each year for the past five years. 1.14 1.10 01 02 03 04 05 06 RELIABILITY 2.00 $1.93 FUNDS FROM OPERATIONS ($ per Unit – 2001 to 2006) 1.83 CONTINUALLY IMPROVING 1.66 THE RELIABILITY OF MONTHLY DISTRIBUTIONS 1.49 $1.29 CASH DISTRIBUTIONS 01 02 03 04 05 06 1.32 1.15 As we have steadily increased our distributions, at the same time we have been able to reduce the percentage of our Funds from Operations (an earnings measure) that we distribute to Unitholders. A widening gap between Funds from Operations and our Cash Distributions generally results in an improvement in the reliability of our monthly distributions. 24 > CREIT 2006 Annual Report Understanding CREIT > The CREIT Business Model > Strategy > Track Record TOTAL RETURNS FOR UNITHOLDERS (INCLUDING REINVESTED DISTRIBUTIONS) 47.4% 29.3% 18.9% 1 YEAR 5 YEARS 13 YEARS TOTAL ASSETS ($ millions) 2,000 $1,805 ASSET GROWTH 1,600 1,200 800 400 CREIT’s assets now total approximately $1.8 billion (book value). At year-end 2006, the Trust’s real estate portfolio comprised 15.6 million square feet (CREIT’s ownership interest). More importantly, we have focused our growth on the quality of assets – not quantity. 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 TOTAL CUMULATIVE RETURN 400 $361 CREIT 320 $241 240 TSX REIT 160 SOLID TOTAL RETURNS FOR UNITHOLDERS $100 $185 S&P/TSX COMPOSITE 03 04 05 06 80 Based on a total cumulative Unitholder return on a $100 investment in Units (including reinvested distributions), CREIT has outperformed both the S&P/TSX Composite Index and the S&P/TSX REIT Index over the past five years. 0 01 02 GROWTH OF AN INVESTMENT IN CREIT ($ 000’s) 100 $95.4 TRACKING THE GROWTH OF AN INVESTMENT IN CREIT 80 60 40 20 $10.0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 A $10,000 investment made in CREIT on December 31, 1993 was worth $95,409 at the end of 2006, assuming all distributions were reinvested when paid. 0 The full 2006 Financial Statements and MD&A can be found on our website at www.creit.ca. CREIT 2006 Annual Report > 25 Portfolio At-a-Glance > THE SHOPS AT OAK BROOK PLACE Oak Brook, Illinois SUN LIFE PLAZA Calgary, Alberta CARREFOUR DE LA RIVE-SUD SHOPPING CENTRE Boucherville, Quebec AIRPORT BUSINESS PARK NORTH Mississauga, Ontario PO R TFO L I O AT-A-GLANCE The CREIT real estate portfolio is comprised of 141 properties (as of December 31, 2006). As a diversified real estate investment trust, CREIT has a target property mix of 50% retail assets, 25% industrial properties and 25% office properties. CREIT is also diversified geographically. We have accumulated a solid and substantial property portfolio in most of the major cities in Canada. In the schedule that follows, we provide a brief summary of each property asset in the portfolio. 220 PORTAGE AVENUE Winnipeg, Manitoba BAYMAC SHOPPING CENTRE Richmond Hill, Ontario METROPOLITAN PLACE Halifax, Nova Scotia 100 ALEXIS NIHON BOULEVARD Montreal, Quebec 26 > CREIT 2006 Annual Report Portfolio At-a-Glance MAJOR GEOGRAPHIC CONCENTRATIONS: 38% IN ONTARIO 27% IN ALBERTA (BY PROPERTY NOI FOR THE YEAR ENDED DECEMBER 31, 2006) 141 PROPERTIES 15.6M 96.8% SQUARE FEET (CREIT’S OWNERSHIP INTEREST) PORTFOLIO OCCUPANCY DECEMBER 31, 2006 CORNERSTONE PRINCE ALBERT Saskatchewan 1185 WEST GEORGIA STREET Vancouver, British Columbia CITY WEST DISTRIBUTION CENTRE Edmonton, Alberta 175 BLOOR STREET EAST Toronto, Ontario CREIT 2006 Annual Report > 27 List of Properties > L IS T O F PR O PER TIES RETAIL PROPERTIES Property 135 Wyse Road Young-Kempt Centre 552–560 Sackville Drive 209 Chain Lake Drive 201 Chain Lake Drive Halifax Park Centre Lacewood Square 182–192 Chain Lake Drive 9 Champlain Drive Baie D’Urfe Plaza Hull Power Centre Blue Bonnets Shopping Centre Carrefour de la Rive-Sud Shopping Centre 125–135 Blvd Du Plateau Winston Power Centre Springdale Square BayMac Shopping Centre South Keys Shopping Centre Woodside Shopping Centre Woodside Shopping Centre Phase II Westridge Power Centre North Maple Shopping Centre London North Shopping Centre Brookdale Centre Gardiners Town Centre Halton Village Stafford Centre Walker Square Swift Current Mall Cornerstone Prince Albert Glenmore Square Shawnessy Village London Town Square Cornerstone Power Centre South Trail Shopping Centre St. Albert Square Clareview Towne Centre Crossroads Shopping Centre Summer Breeze Shopping Centre South Point Shopping Centre Depot 170 Cornerstone Camrose Cornerstone Okotoks Cornerstone Fort McMurray Cornerstone Fort Saskatchewan Location Halifax, NS Halifax, NS Halifax, NS Halifax, NS Halifax, NS Halifax, NS Halifax, NS Halifax, NS Dieppe, NB (as at December 31, 2006) Ownership Interest (%) 100 100 100 50 50 100 100 100 100 Total Area (sq.ft.) 10,028 29,878 15,160 89,575 118,303 56,103 45,196 181,701 21,895 63,265 245,755 224,766 506,725 50,053 113,336 105,456 268,213 486,127 325,611 13,500 430,414 196,620 321,353 267,651 105,984 100,482 137,042 132,978 136,152 248,833 76,058 101,923 117,386 112,236 68,116 58,316 50,861 27,040 52,780 81,657 79,628 187,996 153,466 35,512 145,467 81,570 181,212 390,727 64,183 165,949 135,432 102,346 176,920 7,694,936 Ownership Leased (sq.ft.) (%) 10,028 29,878 15,160 44,788 59,151 56,103 45,196 181,701 21,895 63,265 123,123 112,383 253,362 25,077 113,336 105,456 134,107 243,063 162,806 6,750 215,207 98,310 160,677 267,651 105,984 100,482 137,042 132,978 136,152 124,417 76,058 101,923 117,386 112,236 68,116 58,316 50,861 13,520 26,390 40,829 79,628 93,998 76,733 17,756 72,733 81,570 181,212 195,364 64,183 165,949 67,716 51,173 176,920 5,276,098 100 100 81 100 91 100 100 100 100 99 100 100 100 100 100 99 100 100 100 100 100 100 98 100 96 100 100 100 90 100 98 98 100 100 100 100 100 100 100 100 100 100 100 100 100 97 98 99 100 100 91 93 100 99.0 Major Tenants2 Credit Union Atlantic, Cash Money Smith & Scott Steakhouse, Curwin Health & Sport, EB Games Swiss Chalet, Coach’s Restaurant Value Village, Mark’s Work Wearhouse, Burger King Hudson’s Bay Co., Paderno, McDonalds, Nygard Lee Valley Tools, Pro Cycle, Hakim Optical Smitty’s, Swiss Chalet, a Canadian chartered bank Empire Theatres, Sears Canada Inc., Indigo Books & Music Swiss Chalet, Mike’s Restaurant, Rogers Video Provigo, SAQ Wal-Mart, Staples Wal-Mart, Mark’s Work Wearhouse Metro Richelieu, Winners, Best Buy, Business Depot, Home Outfitters Winners, two Canadian chartered banks Winners, Forzani Group Ltd., Staples Fortino’s, Blockbuster Video Wal-Mart, Dominion, Shoppers Drug Mart Wal-Mart, Loblaws, Winners, Indigo Books & Music Home Depot, Winners LCBO Best Buy, Linens-n-Things, Toys “R” Us Wal-Mart, Winners Wal-Mart, Old Navy, Future Shop, Winners, Linens-n-Things Wal-Mart, Food Basics, Winners A&P, Shoppers Drug Mart, Reebok Canada Canadian Tire, Mark’s Work Wearhouse Loeb, Winners, Staples, Mark’s Work Wearhouse Best Buy, Home Outfitters, Michaels, Designer Depot Staples, Safeway Rona Revy, Prince Albert IGA, Future Shop Safeway, Shoppers Drug Mart Safeway, Blockbuster Video London Drugs, Sobeys Sobeys, Staples Future Shop, HomeSense Staples, Indigo Books & Music Future Shop, Dollarama Earl’s Restaurant, Alberta Treasury Branch Staples, Sport Mart PetSmart, Indigo Books & Music PetSmart, Indigo Books & Music Safeway, Staples Sobeys, Mark’s Work Wearhouse Business Depot, a Canadian chartered bank Safeway, Business Depot Extra Foods, Shoppers Drug Mart Save-On-Foods, Best Buy, Indigo Books & Music Loblaws, Zellers, Canadian Tire Indigo Books & Music, Restoration Hardware Sears, Future Shop, Staples, Michaels Overwaitea Food Group, Liquor Distribution Branch Toys “R” Us, Office Depot TJ Maxx, Nordstrom Rack 90 Morgan Road, Baie D’Urfe, QC 100 35 Blvd Du Plateau, Hull, QC 50.1 Decarie Expressway & Rue Jean-Talon, Montreal, QC 50 Boucherville, QC 50 Gatineau, QC 2460 Winston Churchill Blvd., Oakville, ON 55 Mountainash Road, Brampton, ON 1070 Major MacKenzie Drive, Richmond Hill, ON 2210 Bank Street, Ottawa, ON 3105–3175 Highway 7, Markham, ON 3105–3175 Highway 7, Markham, ON 3900 Highway 7 West, Woodbridge, ON 801 St. Clair St., Chatham, ON 1280 Fanshawe Park Road West and 1817 Hyde Park Road, London, ON 950–993 Brookdale Avenue, Cornwall, ON 460–506 Gardiners Road, Kingston, ON 315 Guelph St., Georgetown, ON 3655–3659 Richmond Road, Nepean (Ottawa), ON 4315–4387 Walker Road, Windsor, ON 1 Springs Drive, Swift Current, SK 600 & 800 15th Street, Prince Albert, SK 7740 18th St. S.E., Calgary, AB 70 Shawville Boulevard S.E., Calgary, AB 3431–3545 32nd Avenue N.E., Calgary, AB 1910–1960 Strachan Road, Medicine Hat, AB Calgary Trail South and 34th Ave., Edmonton, AB 445 St. Albert Road, St. Albert, AB 4250 137th Avenue, Edmonton, AB 4212 South Calgary Trail, Edmonton, AB 4108 South Calgary Trail, Edmonton, AB 3203–3289 South Calgary Trail, Edmonton, AB 9930 170th St., Edmonton, AB 6800 & 7300 48th Avenue, Camrose, AB 201 Southridge Drive, Okotoks, AB 8540 Manning Avenue, Fort McMurray, AB N.E. corner of Highways 15 and 21, Fort Saskatchewan, AB 22441 Dewdney Trunk Road, Maple Ridge, BC 2991 Lougheed Highway, Coquitlam, BC 1350 Island Highway, Campbell River, BC 50 100 100 50 50 50 50 50 50 50 100 100 100 100 100 100 50 100 100 100 100 100 100 100 50 50 50 100 50 50 50 50 100 100 50 100 100 50 50 100 Maple Ridge Square Pinetree Village Discovery Harbour Shopping Centre4 1508 & 1580 West Broadway 4 Vancouver, BC Island Home Centre 805 Cloverdale Ave., Victoria, BC Columbia Place Shopping Centre 1210 Summitt, Kamloops, BC Columbia Square Shopping Centre 500 Notre Dame, Kamloops, BC The Shops at Oak Brook Place 2155 West 22nd St., Oak Brook (Chicago), Ill. TOTAL RETAIL1 28 > CREIT 2006 Annual Report List of Properties INDUSTRIAL PROPERTIES Property Burnside Industrial Park (18 properties) Greystone Court 510–560 Orly Blvd. 4771–4825 Couture Blvd. 925 Brock Road 927, 929, 931 Brock Road 90 Nolan Court 1100 Squires Beach Road 8100 Park Hill Drive Airport Business Park North (6 properties) 45 West Wilmot Street (Bldgs A & B) 951 Denison Street 690 Gana Court 6290 Kestrel Road 7455–7465 Birchmount Road 705–725 Belfast Road 410 Business Centre Foothills Industrial Park (14 properties) Skyline Industrial Park (4 properties) Valleyfield Business Centre (Bldgs A–D) Great Plains Business Centre (4 buildings) City West Distribution Centre (Bldgs A, B & C) 5555 59th Avenue S.E. Eastgate Business Park (3 properties) 11724 180th Street Norwester Distribution Centre 5664 69th Avenue S.E. 10775 42nd Street S.E. 4055 106th Avenue S.E. TOTAL INDUSTRIAL1 Location Halifax, NS Halifax, NS Dorval, QC St. Leonard, QC Pickering, ON Pickering, ON Markham, ON Pickering, ON Milton, ON Mississauga, ON Richmond Hill, ON Markham, ON Mississauga, ON Mississauga, ON Markham, ON Ottawa, ON Brampton, ON Calgary, AB Calgary, AB 2880 45th Ave. S.W., Calgary, AB 72nd Avenue, Calgary, AB 11204 184th Street, Edmonton, AB Calgary, AB Edmonton, AB Edmonton, AB 18070 109th Avenue, Edmonton, AB Calgary, AB Calgary, AB Calgary, AB Ownership Interest (%) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 100 50 50 Total Area (sq.ft.) 933,747 96,842 121,361 89,825 270,536 62,044 124,621 286,778 101,463 575,288 188,110 65,326 59,480 40,549 291,338 55,751 300,458 697,523 334,752 272,611 476,485 420,673 254,351 266,675 94,681 443,334 309,274 86,973 N/A 7,320,849 Total Area (sq.ft.) 140,395 221,743 203,019 331,181 290,089 84,365 60,808 192,099 289,896 150,220 577,387 37,500 169,844 1,032,768 68,886 165,843 82,290 4,098,333 Ownership Leased (sq.ft.) (%) 933,747 96,842 121,361 89,825 270,536 62,044 124,621 286,778 101,463 575,288 188,110 65,326 59,480 40,549 194,225 55,751 300,458 697,523 334,752 272,611 476,485 420,673 254,351 266,675 94,681 221,667 309,274 43,487 N/A 6,958,583 97 100 100 100 73 100 90 100 100 100 89 85 100 100 100 6 100 100 96 98 98 100 100 100 100 100 100 100 N/A 96.8 Major Tenants2 Her Majesty the Queen, Cantrax, Lawton’s Drug Stores Ltd. Arrow Networks, Medmira Laboratories Inc. Airport Steel & Tubing, Rosedale Transport Canplast, Serbatech Inc. Emerson Electric Bridge Partners Inc. Artisan Screen Printing, Condi-Dent RDP Fulfillment, TNT Canada Inc. Sauder Moldings Ltd. Sport Chek, Dietrich Industries Inc., Tri-Star Plastics Corp. Flexmaster, Canpaco Inc., Tracelogix Inc. TEDA Enterprises, Black Box Canada Corp. Masternet Ltd. CDC Distribution Centres Autoliv Electronics Canada SL Ross Environmental Unigistix Inc. Global Wood Products, Gienow Windows Calgary Regional Health Authority, Field Aviation Enerflex Systems, Heritage Office Furnishings Canadian Alliance, ATS-Andlauer Ikon Office Solutions, Bridgebrand Foods PTPC Corrugated Company, Direct Integrated Transport Smurfit, WFF Fittings & Flanges ATR Manufacturing Inc., H. Paulin Katoen Natie, Sauder Industries Ltd. Exel Logistics, Henry Schein Ash Arcona, Direct Limited Partnership Wolseley Canada Chevron OFFICE PROPERTIES Property Young Tower 1801 Hollis Street Metropolitan Place 1010 Sherbrooke Ouest 100 Alexis Nihon Blvd. 80 Micro Court3 Birch-Oak Centre 525 University Avenue Heron’s Hill 110 Yonge Street 175 Bloor Street East5 2300 St. Laurent Blvd. 220 Portage Avenue Sun Life Plaza3 1200 Burrard St. 1185 West Georgia St. 1508 & 1580 West Broadway4 TOTAL OFFICE1 TOTAL COMMERCIAL PROPERTY 1 2 3 4 5 Location 6080 Young St., Halifax, NS Halifax, NS 99 Wyse Road, Halifax, NS 1010 Sherbrooke St. W., Montreal, QC Montreal, QC Markham, ON 243–251 North Service Road and 1122 Dorval Drive, Oakville, ON Toronto, ON 2001 & 2005 Sheppard Ave. E., Toronto, ON Toronto, ON Toronto, ON Ottawa, ON Winnipeg, MB 140 4th Ave. S.W., Calgary, AB Vancouver, BC Vancouver, BC Vancouver, BC Ownership Interest (%) 100 100 50 100 100 100 100 90.9 100 100 100 50 50 50 100 100 100 Ownership Leased (sq.ft.) (%) 140,395 221,743 101,510 331,181 290,089 84,365 60,808 174,618 289,896 150,220 577,387 18,750 84,922 516,384 68,886 165,843 82,290 3,359,287 100 100 91 94 84 90 97 100 97 100 83 100 100 99 93 94 98 93.5 96.8 Major Tenants2 EastLink Limited, Public Works, Rogers Wireless ACOA, Canada Life Aviva Insurance, HMQ in Right of Canada Canaccord Capital, Omni Montreal Hotel Trust Quintiles, Stein & Jacobs, Groupe Voyage Vision 2000 Toyota Credit Canada Inc., National Computer Professionals Royal LePage, Tempo Canada Hospital for Sick Children, Ontario Medical Association Financialinx Corporation, Silicon Optix A Canadian chartered bank, Morgan Meighan & Associates Leo Burnett, Towers Perrin Her Majesty the Queen A Canadian chartered bank, Great-West Life Assurance Suncor Energy, Provident Energy A Canadian chartered bank, Ambulatory Surgical Centre Safeway, Fitness World London Life, Sun Life Assurance, Nicola Financial 19,114,118 15,593,968 Subtotal and total occupancy percentages are based on CREIT’s percentage ownership only. Certain occupants are franchisees and the franchisor is not a party to the lease with CREIT. A portion of the property is subject to a long-term ground lease. CREIT holds the property pursuant to a long-term ground lease. On February 1, 2007, the Trust disposed of a 50% interest in the property. CREIT 2006 Annual Report > 29 CREIT’S Board of Trustees C R EI T’ S B O ARD OF TRUSTEES JAMES M. TORY, Q.C. (CHAIRMAN) 1 JOHN F. MARINO 3 At present, Mr. Tory is a corporate director. From 2002 to 2005, Mr. Tory was a retired Partner and Honorary Chair of Torys LLP. From 2002 to the present, Mr. Tory has been a director of Cognos Incorporated and Inmet Mining Corporation. Mr. Tory has been a Trustee of CREIT since June 2003. STEPHEN E. JOHNSON, PRESIDENT & CEO Mr. Johnson has served as the President & Chief Executive Officer of Canadian Real Estate Investment Trust since September 1996. Mr. Johnson has more than 30 years of continuous experience in the real estate industry and he has been a Trustee of CREIT since September 1996. F. ROBERT HEWETT 2,4 Mr. Marino is currently the President and Chief Executive Officer, The Marino Group/Center Court Locations Limited (provides retail leasing ser vices for landlord clients and retail corporate brokerage ser vices). Mr. Marino has been a two-time chair of the Canadian National Convention of the International Council of Shopping Centers (ICSC), a past Provincial Director for Ontario and a member of the “Canadian Committee” for the ICSC. He is also a former member of various committees of the Retail Council of Canada (RCC). Mr. Marino became a Trustee of CREIT in June 2005. LAWRENCE P. MORASSUTTI, C.A. 2,3 At present, Mr. Hewett is a corporate director. From 1997 to 2006, Mr. Hewett was the President & Chief Executive Officer of CMA Holdings Incorporated and a number of its subsidiary companies, including MD Management Limited. Previously he was President, English Language Broadcasting Division, Telemedia Inc. Mr. Hewett has been a Trustee of CREIT since September 1996. W. REAY MACKAY 2,4 Mr. Morassutti is currently the Chairman and Chief Executive Officer of The Morassutti Group (real estate investment, management and consulting). Mr. Morassutti has appeared as an expert witness on real estate valuation matters before a variety of courts and government regulator y bodies across Canada. Mr. Morassutti has been a Trustee of CREIT since June 1990. ROBERT G. WITTERICK, Q.C. 3,4 Mr. Mackay retired in 2003 from his position as Vice Chairman of the Royal Bank of Canada. Previously, Mr. Mackay was President & Chief Operating Officer of RBC Dominion Securities. Mr. Mackay has over 40 years of experience in the financial services sector. Mr. Mackay became a Trustee of CREIT in June 2005. Mr. Witterick has been a partner at Gowling Lafleur Henderson LLP (law firm), specializing in taxation and corporate/commercial law, with particular emphasis on the taxation and structuring of real estate investments and real estate syndications. Mr. Witterick is also a director of a number of public and private corporations, both profit and not-for-profit. Mr. Witterick has been a Trustee of CREIT since June 1990. 1 Mr. Tory serves ex officio as a member of each Committee and replaces a Committee member in his/her absence. 2 Member of the Audit Committee. 3 Member of the Investment Committee. 4 Member of the Compensation & Governance Committee. 30 > CREIT 2006 Annual Report Distribution Reinvestment Plan and Unit Purchase Plan D I STR I B UTIO N REI NV ESTMEN T PL AN AND U NIT PUR CHASE PLAN CREIT’s Distribution Reinvestment Plan (DRIP) and Unit Purchase Plan (UPP) provide Unitholders who are direct registrants with an opportunity to conveniently and economically increase their ownership in CREIT. Unitholders may have their distributions and/or optional cash investments automatically directed to our Transfer Agent to purchase additional Units without commissions. Please note: The Canada Revenue Agency ruled in 2000 that participation in these plans at a discount is a benefit. Information describing the Plans and enrolment forms are available from CREIT’s website at www.creit.ca or by calling Investor Relations at 416-628-7771. DRIP – Monthly distributions are automatically reinvested in additional CREIT Units without commissions. The price of Units purchased with such distributions will be 97% of the weighted average price at which Units of CREIT have traded on the TSX for the five trading days immediately preceding the distribution date. UPP – Optional periodic cash investments in additional CREIT Units may be made without commissions. Minimum purchases of $250 per purchase and maximum purchases of $25,000 per year are permitted under the Plan. Optional cash payments are invested at the weighted average price at which Units of CREIT have traded on the TSX for the five trading days preceding the date of purchase of additional Units (first day of each calendar month). Distributions on Units held under the cash option plan are automatically reinvested in additional CREIT Units. Participants in the UPP can elect to use the Automatic Investment Service, similar to pre-authorized chequing, which allows for automatic withdrawal from your bank account should you wish to make regular periodic purchases. The DRIP and the UPP (the Plans) are offered only to Canadian resident Registered Unitholders, meaning those Unitholders who hold their Units in certificate form. This is necessary in order to allow for the administration of the Plans by our Registrar and Transfer Agent – CIBC Mellon Trust Company. In order to participate, you must first become a direct registrant of CREIT. If you are not already a direct registrant and you wish to participate in the Plans, you must request a share certificate from your broker in respect of your CREIT Units. It is likely that your broker will charge you a service fee to obtain the certificate for you. This fee will be offset by your future savings in brokerage commissions since all administrative costs of the Plans are borne by CREIT. We recommend that you then arrange for safekeeping of your certificate (e.g., in a safety deposit box). Once you have received your certificate, please contact CREIT in order to request an information package, which includes full details on the Plans and an enrolment form; the package is also available on our website at www.creit.ca. Please refer to “Income Tax Considerations” on page 7 of the Plan document. For further information regarding CREIT’s DRIP and UPP, please contact CREIT’s Registrar and Transfer Agent at: CIBC Mellon Trust Company P.O. Box 7010, Adelaide Street Postal Station Toronto, Ontario M5C 2W9 AnswerlineTM: 416-643-5500 or 1-800-387-0825 (Toll-free throughout North America) Fax: 416-643-5501 Website: www.cibcmellon.ca E-mail: inquiries@cibcmellon.ca CREIT 2006 Annual Report > 31 Unitholder Information U N I TH O L D E R I NFORMATI ON STOCK EXCHANGE LISTING TAXATION OF DISTRIBUTIONS Units of CREIT are listed on the Toronto Stock Exchange under the trading symbol REF.UN. The CREIT closing price on the Toronto Stock Exchange on March 29, 2007 was $31.28 per Unit. HISTORICAL DISTRIBUTIONS/ UNIT PRICE INFORMATION The Trust has determined that the distributions paid to its Unitholders in respect of the tax year ending December 31, 2006 are characterized for income tax purposes as follows: Foreign Non-Business Income Other Income Capital Gain Return of Capital 2.73% 60.83% 2.89% 33.55% Distributions to Unitholders are paid monthly. The following char ts show the high and low prices for the Trust’s Units on the Toronto Stock Exchange and cash distributions paid for the periods indicated. Year Ended December 31, 2006 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total High $24.34 $24.79 $26.98 $31.97 Low $20.79 $21.14 $23.50 $24.30 Distributions per Unit $0.3201 $0.3217 $0.3249 $0.3249 $1.2916 PLAN ELIGIBILITY The Trust’s Units are eligible for the following registered plans: RRSP, RRIF, DPSP, RPP. REGISTRAR AND TRANSFER AGENT Months Ended 2007 January 31 February 28 High $32.99 $33.32 Low $29.02 $31.15 Distributions per Unit $0.1083 $0.1083 INVESTOR INFORMATION AUDITORS Deloitte & Touche LLP CANADIAN REAL ESTATE INVESTMENT TRUST 175 Bloor Street East North Tower – Suite N500 Toronto, Ontario M4W 3R8 Tel: 416-628-7771 Fax: 416-628-7777 www.creit.ca 2006 ANNUAL AND SPECIAL MEETING OF UNITHOLDERS The 2006 annual and special meeting of Unitholders will be held at 10:00 a.m. on Tuesday, May 15, 2007 at the Board of Trade, 4th Floor, Boardrooms A–D, 1 First Canadian Place (Adelaide Street entrance), Toronto, Ontario. 32 > CREIT 2006 Annual Report Concept and Design: THE WORKS www.worksdesign.com Analysts, Unitholders and others seeking financial data should contact: Archna Sharma, Director, Finance: 416-628-7865 asharma@creit.ca Tim McSorley, Vice President & Chief Financial Officer: 416-628-7790 tmcsorley@creit.ca INDUSTRY ASSOCIATIONS CREIT is a member of the International Council of Shopping Centers (ICSC) and the Real Property Association of Canada (RealPac). Printing: grafikom.MIL Investors are encouraged to contact our Registrar and Transfer Agent, CIBC Mellon Trust Company, for information regarding their security holdings. They can be reached at: CIBC Mellon Trust Company P.O. Box 7010, Adelaide Street Postal Station Toronto, Ontario M5C 2W9 AnswerlineTM: 416-643-5500 or 1-800-387-0825 (Toll-free throughout North America) Fax: 416-643-5501 Website: www.cibcmellon.ca E-mail: inquiries@cibcmellon.ca FOR INFORMATION ON THE 2007 DROP ZONE EVENT IN YOUR COMMUNITY, PLEASE VISIT THE CREIT WEBSITE AT WWW.CREIT.CA. CALGARY MONTREAL HALIFAX C O M M UN ITY INVES TMENT Many investors view a REIT as a flow-through vehicle, meaning that all profits generated – except for a certain percentage held back in the business as a providence factor – should flow to investors. Included in this view is the belief that CREIT should not be involved directly in charitable giving – that in a REIT this is the responsibility of the individual Unitholders. CREIT, however, wants to support the communities in which we operate our business. As a creative way to deal with this issue, CREIT has teamed up with Easter SealsTM Canada to create the “Drop Zone Event”. Easter Seals is dedicated to helping children and adults with physical disabilities achieve their full individual potential and independence. Easter Seals delivers award-winning programs and services to Canadians of all ages with physical disabilities, offering them the support they need to live full and active lives. Max Beck, Chief Executive Officer of Easter Seals Canada, commented: “CREIT has developed a creative fundraising initiative that has brought increased awareness and significant new funding to help Easter Seals promote active, healthy living for Canadians with physical disabilities. We are proud to be associated with CREIT and the Drop Zone Events.” The CREIT–Easter Seals Drop Zone Event is a simple three-step program: 1. CREIT makes one high-rise office building, in selected cities across Canada, available for the Drop Zone Event, for one day in each calendar year. 2. On the selected day, Easter Seals Canada invites individuals to rappel off the exterior of the office building in their city. 3. Each rappeller is required to find financial sponsors for their individual rappel; all sponsorship money raised goes directly to Easter Seals Canada. CREIT paid a fee of approximately $8,500 per office property to Easter Seals, for a total of approximately $50,000 in 2006. In exchange, each specific CREIT office property receives high-profile exposure up to, during and after the event. This exposure is valuable to CREIT, from both a building identity and a leasing perspective. Since 2004, CREIT and Easter Seals Canada have raised over $1.5 million through the Drop Zone Events. Canadian Real Estate Investment Trust 175 Bloor Street East, North Tower – Suite N500 Toronto, Ontario M4W 3R8 Tel: 416-628-7771 Fax: 416-628-7777 www.creit.ca CREIT is a public real estate investment trust (REIT) trading on the Toronto Stock Exchange under the symbol REF.UN. CREIT owns a portfolio of more than 140 retail, industrial and office properties. Our primary business objective is to deliver the benefits of real estate ownership to our investors. With a disciplined approach, CREIT has consistently delivered reliable monthly distributions to our Unitholders. As well, with a relentless focus on steady growth in earnings, CREIT has provided attractive long-term returns for investors.