Inovalis Real Estate Investment Trust : REIT Q1 2024 Financial Statements

INOVALIS REAL ESTATE INVESTMENT TRUST CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2024

(Unaudited)

Disclosure of non-review of interim condensed consolidated financial statements for the quarters ended March 31, 2024 and 2023

Pursuant to National Instrument 51-102, Part 4, subsection 4.3(3)(a) issued by the Canadian Securities Administrators, if the external auditors have not performed a review of the financial statements, the financial statements must be accompanied by a notice indicating that they have not been reviewed by the external auditors.

The accompanying unaudited interim condensed consolidated financial statements of the REIT for the quarters ended March 31, 2024 and 2023 have been prepared in accordance with International Accounting Standard 34, Interim Financial reporting, and are the responsibility of the REIT's management.

The REIT's external auditors, Ernst & Young Audit, have not performed a review of these interim condensed consolidated financial statements in accordance with the standards established by Chartered Professional Accountants Canada for a review of the financial statements by the external auditors of an entity.

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Inovalis Real Estate Investment Trust Interim Consolidated Balance Sheets (Unaudited)

(All dollar amounts in thousands of Canadian dollars)

Assets	Note	As at March 31, 2024	As at December 31, 2023
Non-current assets
Investment properties	5	400 892	412 967
Investments in joint ventures	6	42 464	41 632
Other financial assets		333	333
Restricted cash	8	4 659	4 973
Total non-current assets		448 348	459 905
Current assets
Trade receivables and other financial assets	7	8 277	7 134
Derivative financial instruments	21	105	527
Other current assets		3 416	3 809
Restricted cash	8	363	196
Cash	8	9 504	12 489
Total current assets		21 665	24 155
Total assets		470 013	484 060
Liabilities and equity	Note	As at March 31, 2024	As at December 31, 2023
Liabilities
Non-current liabilities
Interest-bearing loan		185	186
M ortgage loans	9	64 666	65 710
Lease liabilities	9	94 407	96 179
Tenant deposits		2 077	2 224
Derivative financial instruments	21	-	110
Deferred tax liabilities		1 294	1 295
Total non-current liabilities		162 629	165 704
Current liabilities
Interest-bearing loan		39	28
M ortgage loans	9	50 561	50 524
Lease liabilities	9	6 820	6 819
Tenant deposits		191	168
Derivative financial instruments	21	487	377
Exchangeable securities	10	1 210	1 595
Trade and other payables	11	11 011	7 356
Income tax payable		2 173	2 175
Deferred income		549	1 184
Provisions	12	764	765
Total current liabilities		73 805	70 991
Total liabilities		236 434	236 695
Equity
Trust units	17	288 156	288 156
Deficit retained earnings		(66 809)	(53 230)
Accumulated other comprehensive income	18	11 324	11 492
Total unitholders' equity		232 671	246 418
Non-controlling interest		908	947
Total equity		233 579	247 365
Total liabilities and equity		470 013	484 060

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

On behalf of the Board of Trustees of Inovalis Real Estate Investment Trust:

Jean-Daniel Cohen	Robert Waxman
Chairman and Trustee	Audit Chair and Trustee

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Inovalis Real Estate Investment Trust Interim Consolidated Statements of Earnings (Unaudited)

(All dollar amounts in thousands of Canadian dollars, except for per unit amounts)

				For the three		For the three
		Note		months ended		months ended
				March 31, 2024		March 31, 2023
Rental revenue	13	4 631	7 325
Property operating cost recoveries	13	1 192	1 481
Property operating costs	14	(5 104)	(4 849)
Other revenues			194	18
Other property operating expenses			(1)	(13)
Net rental income			912	3 962
General and administrative expenses	14	(1 782)	(1 853)
Foreign exchange loss			-	(6)
Share of net income from joint ventures	6	870	284
Operating earnings income			-	2 387
Net change in fair value of Investment properties
5	(11 985)	1 614
Net change in fair value of Financial derivatives			(405)	(1 552)
Net change in fair value of Exchangeable securities	10	385	(159)
Finance income	15	1 141	971
Finance costs	15	(2 710)	(1 333)
Distributions on Exchangeable securities	10	-	(96)
(Loss) Income before income taxes			(13 574)	1 832
Current income tax expense			(43)	(13)
Deferred income tax expense			-	(201)
Total income tax expense			(43)	(214)
Net (loss) income			(13 617)	1 618
Net (loss) income attributable to:
Non-controlling interest			(38)	(4)
Unitholders of the Trust			(13 579)	1 622
				(13 617)		1 618

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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Inovalis Real Estate Investment Trust

Interim Consolidated Statements of Comprehensive Income (Unaudited)

(All dollar amounts in thousands of Canadian dollars)

	Note	For the three months	For the three months
	ended March 31, 2024	ended March 31, 2023
Net (loss) income for the period		(13 617)	1 618
Other comprehensive (loss) income
Items that may be reclassified subsequently to (loss) income:
Change in cumulative translation adjustment account		(181)	3 077
Other comprehensive (loss) income		(181)	3 077
Total comprehensive (loss) income		(13 798)	4 695
Total comprehensive (loss) income attributable to:
Non-controlling interest		(51)	(6)
Unitholders of the Trust		(13 747)	4 701
Total comprehensive (loss) income		(13 798)	4 695

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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Inovalis Real Estate Investment Trust

Interim Consolidated Statements of Changes in Equity For the three months ended March 31, (Unaudited)

(All dollar amounts in thousands of Canadian dollars, unless otherwise stated)

		Number of Units		Retained	Accumulated	Total
			other	attributable to	Non-controlling
	Note	issued and	Trust Units	(deficit)	Total equity
	comprehensive	the Unitholders'	interest
		outstanding		earnings
			income (loss)	of the Trust
As at December 31, 2022		32 778 699	289 940	(12 327)	9 366	286 979	1 198	288 177
Distributions earned by or declared to Unitholders	16	-	-	(3 380)	-	(3 380)	-	(3 380)
Issuance of units for payment of Trustee Fees		-	9	-	-	9	-	9
Foreign exchange impact on Non-controlling interest		-	-	-	-	-	15	15
		-	9	(3 380)	-	(3 371)	15	(3 356)
Net income (loss) for the year		-	-	1 622	-	1 622	(4)	1 618
Other comprehensive income (loss)		-	-	-	3 079	3 079	(2)	3 077
Comprehensive income (loss)		-	-	1 622	3 079	4 701	(6)	4 695
As at March 31, 2023		32 778 699	289 949	(14 085)	12 445	288 309	1 207	289 516
As at December 31, 2023		32 594 711	288 156	(53 230)	11 492	246 418	947	247 365
Foreign exchange impact on Non-controlling interest		-	-	-	-	-	12	12
		-	-	-	-	-	12	12
Net loss for the period		-	-	(13 579)	-	(13 579)	(38)	(13 617)
Other comprehensive loss		-	-	-	(168)	(168)	(13)	(181)
Comprehensive loss		-	-	(13 579)	(168)	(13 747)	(51)	(13 798)
As at March 31, 2024	18	32 594 711	288 156	(66 809)	11 324	232 671	908	233 579

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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Inovalis Real Estate Investment Trust

Interim Consolidated Statements of Cash Flows (Unaudited)

(All dollar amounts in thousands of Canadian dollars)

Note

For the three months ended	For the three months ended
March 31, 2024	March 31, 2023

Operating activities
(Loss) income before income taxes		(13 574)	1 832
Interest received		465	1 386
Interest paid		(2 710)	(793)
Distributions in respect of exchangeable securities paid in cash	10	(64)	(96)
Adjustments for non-cash items and other reconciling items	22	13 092	240
		(2 791)	2 569
Working capital adjustments	22	2 675	(5 167)
Net cash flows related to operating activities		(116)	(2 598)
Investing activities
Additions to investment properties and capitalized letting fees	5	(276)	(276)
Additional loan advances to joint ventures	6	(615)	(363)
Loan repayments received from joint ventures	6	615	285
Net change in restricted cash	8	147	1 455
Net cash flows related to investing activities		(129)	1 101
Financing activities
Distributions to unitholders	16	-	(3 380)
Issuance of interest bearing loans		10	78
Repayment of mortgage loans	22	(1 032)	(1 082)
Repayment of lease liabilities	22	(1 697)	(1 112)
Net cash flows related to financing activities		(2 719)	(5 496)
Decrease in cash		(2 964)	(6 993)
Effects of foreign exchange adjustments on cash		(21)	377
Cash at the beginning of the period		12 489	45 176
Cash at the end of the period		9 504	38 560

The accompanying notes are an integral part of these interim condensed consolidated financial statements.

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Inovalis Real Estate Investment Trust

Notes to the condensed interim consolidated financial statements

March 31, 2024

Note 1 - Organization

The Inovalis Real Estate Investment Trust (the "Trust") is an open-ended real estate investment trust created pursuant to a Declaration of Trust dated February 8, 2013, under the laws of the Province of Ontario, Canada. These condensed interim consolidated financial statements include the accounts of the Trust and its subsidiaries (together the "REIT"). The REIT's investment property portfolio, owned directly or through joint arrangements, is comprised of office rental properties located in France, Germany, and Spain.

The REIT's head and registered office is located at 151 Yonge Street, 11th floor, Toronto, Ontario, M5C 2W7. The REIT's units are listed on the Toronto Stock Exchange ("TSX") under the symbol INO.UN.TO.

The REIT's condensed interim consolidated financial statements as at and for the three months ended March 31, 2024, were authorized for issuance by the Board of Trustees on May 8, 2024.

The REIT has hired Inovalis S.A. ("Inovalis SA"), a real estate asset manager having operations in France, Germany, and Spain to manage certain functions. Refer to Note 1 of the 2023 annual consolidated financial statements for more information about the relationship between Inovalis SA and the REIT, and to Note 20 in these condensed interim consolidated financial statements, for information regarding the services provided by Inovalis SA to the REIT.

Inovalis SA is considered as a related party of the REIT as they share the same management. The founder and Chairman of Inovalis SA is the President of the REIT, the Chief Executive Officer ("CEO") of Inovalis SA is also a part of the management team of the REIT, and the Deputy Chief Executive Officer of Inovalis SA is Chief Investment Officer ("CIO") and Chief Financial Officer ("CFO") of the REIT.

Note 2 - Basis of presentation and statement of compliance

These unaudited condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB"), and thus do not contain all the disclosures applicable to the 2023 annual audited consolidated financial statements.

The Group has prepared the financial statements on the basis that it will continue to operate as a going concern. Management considers that there are no material uncertainties that may cast significant doubt over this assumption. They have formed a judgement that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, and not less than 12 months from the end of the reporting period.

These unaudited condensed interim consolidated financial statements use the same accounting policies and methods of their application as the REIT's most recent annual consolidated financial statements and should be read in conjunction with the 2023 annual audited consolidated financial statements, which have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the IASB.

Comparative figures for the period ended March 31, 2023 have been reclassified to conform to the presentation adopted for the periods ended March 31,2024 and December 31, 2023.

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Note 3 - Recent accounting pronouncements adopted

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2023, except for the adoption of new standards effective as of 1 January 2024.

The REIT has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

Several amendments apply for the first time in 2024, but do not have an impact on the interim condensed consolidated financial statements of the Group.

Amendments to IFRS 16, Leases - Leases Arising from Sale and Leaseback Transactions:

In September 2022, the IASB issued amendments to IFRS 16 which specify the requirements that a seller-lessee uses in measuring the lease liability arising in a sale and leaseback transaction, to ensure the seller-lessee does not recognize any amount of the gain or loss that relates to the right of use it retains. The amendments are effective for annual reporting periods beginning on or after January 1, 2024 and must applied retrospectively to sale and leaseback transactions entered into after the date of initial application of IFRS 16.

These amendments had no impact on the condensed interim consolidated financial statements of the REIT, as no sale-leaseback transactions occurred after date of initial application of IFRS 16 by the REIT.

Amendments to IAS 1, Presentation of Financial Statements - Classification of Liabilities as Current and Non-current:

In January 2020 and October 2022, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify:

• What is meant by a right to defer settlement
• That a right to defer must exist at the end of the reporting period
• That classification is unaffected by the likelihood that an entity will exercise its deferral right
• That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification

In addition, a requirement has been introduced to require disclosure when a liability arising from a loan agreement is classified as non-current and the entity's right to defer settlement is contingent on compliance with future covenants within twelve months. The amendments are effective for annual reporting periods beginning on or after January 1, 2024 and must be applied retrospectively.

As a result of the amendments, the REIT reassessed the classification of its liabilities arising from loan agreements based on the updated criteria for classification as current or non-current. No changes to classification of liabilities arising from loan agreements were determined to be required as a result of the amendments. Additional disclosures will be made as required by the amendments in the consolidated financial statements for the year ended December 31, 2024.

Amendments to IAS 7 and IFRS 7, Statement of Cash Flows and Financial Instruments - Disclosures for Supplier Finance Arrangements:

In May 2023, the IASB issued amendments to IAS 7 Statement of Cash Flows and IFRS 7 Financial Instruments to require additional disclosures regarding the characteristics of supplier finance arrangements. The disclosure requirements in the amendments are intended to assist users of financial statements in understanding the effects of supplier finance arrangements on an entity's liabilities, cash flows and exposure to liquidity risk. The amendments are effective for annual reporting periods beginning on or after January 1, 2024.

These amendments had no impact on the condensed interim consolidated financial statements of the REIT, as no supplier finance arrangements have been signed by the REIT.

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Note 4 - Critical accounting judgments and estimates

In preparing these condensed interim consolidated financial statements, the significant judgments made by management in applying the REIT's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended December 31, 2023.

Going concern analysis

The REIT has prepared a cash flow forecast which involves judgements and estimations based on management's input of key variables and market conditions, including the future economic conditions and ongoing discussions with third parties, notably financing institutions. The twelve-month cash flow forecast has been determined based on projected income and expenses of the business and working capital needs. Further details on going concern analysis and liquidity risk are disclosed in Note 21.

The REIT has prepared the financial statements on the basis that it will continue to operate as a going concern.

Management considers that there are no material uncertainties that may cast significant doubt over this going concern assumption. They have formed a judgement that there is a reasonable expectation that the REIT has adequate resources to continue in operational existence for the foreseeable future, and not less than 12 months from the end of the reporting period.

Note 5 - Investment properties

Reconciliations of the carrying amounts of investment properties at the beginning and end of the current financial period are as follow:

	For the three months ended	For the year ended
	March 31, 2024	December 31, 2023
Balance, beginning of the period	412 967	437 422
Capex	327	633
Change in capitalized letting fees	(51)	(72)
Rent free periods	(74)	(443)
Net change in fair value of investment properties	(11 985)	(28 117)
Foreign currency translation adjustment	(292)	3 544
Balance, end of the period	400 892	412 967

All of the REIT's investment properties with a fair value of $400,892 (December 31, 2023 - $412,967) are pledged as security for an amount of $216,455 (December 31, 2023 - $219,233) in mortgage loans and lease liabilities.

Appraisal capitalization and discount rates

The fair value of investment properties is determined by real estate valuation experts using recognized valuation techniques and the principles of IFRS 13. The REIT used the Direct Capitalization Method ("DC") to measure the fair value of its investment property.

Under the Direct Capitalization Method, the cash generated during the term of the lease as well as the cash generated at reversion, as estimated based on the normalized net operating income generated by the property, are capitalized using the same capitalization (discount) rate. The capitalization rates are determined based on recent real estate transactions with similar characteristics and location to those of the REIT assets. The group that determines the REIT's valuation policies and procedures for property valuations comprises the CEO, CIO and CFO. Each year, Inovalis SA appoints an independent real estate valuation expert who is responsible for the valuation of the REIT's properties. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained.

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