Inovalis Real Estate Investment Trust Reports Financial Results for the Second Quarter of 2016

/NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED STATES/

TORONTO, Aug. 12, 2016 /CNW/ - Inovalis Real Estate Investment Trust (the "REIT") (TSX: INO.UN) today reported its financial results for the second quarter of 2016. Inovalis REIT's management team will be holding a conference call on August 16, 2016 at 2:00 pm EST to discuss the results. The dial-in numbers for the conference call are: in Toronto 1-416-764-8688; outside Toronto (toll free, within North America) 1-888-390-0546.

HIGHLIGHTS

• Inovalis REIT ("Inovalis REIT", or the "REIT" or "we") is a Canadian REIT managed by Inovalis S.A. ("Inovalis SA"), a local cross-border French and German real estate asset manager managing $10 billion of real estate and financial assets. As of June 30, 2016, Inovalis SA and Inovalis SA's founding partners had a 16.4% interest in the REIT's equity (directly and indirectly).
• 6.3% year-over-year growth in IFRS book equity per unit (which stands at $11.57 per Unit as at June 30, 2016), of which 3.0% comes from the addition of high quality properties and the cap rate compression in France and in Germany and 3.3% from the further appreciation of the Euro against the Canadian dollar since Q2 2015.
• Funds from operations (FFO) for the quarter ended June 30, 2016 of $3,648 or $0.20 per unit (fully diluted), with a FFO payout ratio of 104.3% compared to $0.21 per unit and payout ratio of 97.6% or the same period in 2015. FFO for the period from January 1, 2016 to June 30, 2016 of $7,403 or $0.41 per unit (fully diluted), with a FFO payout ratio of 100.3% compared to $0.43 per unit and payout ratio of 96.8% for the same period in 2015.
• Adjusted Funds from operations (FFO) for the quarter ended June 30, 2016 of $4,009 or $0.22 per unit (fully diluted), with an AFFO payout ratio of 93.2% compared to $0.27 per unit and payout ratio of 76.9% or the same period in 2015. AFFO for the period from January 1, 2016 to June 30, 2016 of $8,141 or $0.45 per unit (fully diluted), with an AFFO payout ratio of 90.3% compared to $0.48 per unit and payout ratio of 85.6% for the same period in 2015.
• Occupancy rate on the REIT's portfolio remained stable at 93.1% as at June 30, 2016 with a weighted average lease term of 6.0 years. During the quarter, a new lease was signed on the Sablière property with effect on July 1, 2016, approximately 4,000 sq.ft, increasing occupancy rate up to 93.5%. The signature of new leases on approximately 55,000 sq.ft on the Baldi, Courbevoie, Sablière and Bad Homburg properties since the beginning of 2016 reflects the good positioning of our properties in an improving letting market.
• Debt to book value of the REIT was 56.5% as at June 30, 2016. Net of the cash available, debt to book value was 55.6%.
• On May 6, 2016, the REIT reimbursed the $6.4 million equity bridge loan granted by the partner on the Cologne transaction to fund the REIT's 49% equity interest in the property.
• Subsequent to the quarter, on July 25, 2016, the REIT closed a $46.0 million equity offering (including the over-allotment, which was fully exercised) aimed at being used as an available source of funding for potential future acquisitions of office properties located in France and Germany and for potential capital expenditures relating to the re-positioning and/or re-development of currently owned properties. Until utilized for these purposes, the REIT intends to repay existing outstanding indebtedness in the amount of approximately $24.7 million with respect to the Baldi property, as well as for working capital and general trust purposes, including potential acquisitions.

About Inovalis Real Estate Investment Trust

Inovalis Real Estate Investment Trust is an unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT has been created for the purpose of acquiring and owning office properties primarily located in France and Germany but also opportunistically in other European countries where assets meet the REIT's investment criteria. The REIT currently owns an interest in eleven office properties in France and Germany, comprising approximately 1,083,000 square feet of gross leasable area (taking into account the interests in the properties owned in joint-ventures).

Management's discussion and analysis
(Dollar amounts in the MD&A are presented in thousands of Canadian dollars, except Unit or as otherwise stated)

OVERVIEW

The presentation of our operational information, financing information and operating results takes into account our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS Reconciliation" for a reconciliation to our condensed interim consolidated financial statements.

BASIS OF PRESENTATION

The following management's discussion and analysis ("MD&A") of the financial condition and results of operations of Inovalis REIT should be read in conjunction with the REIT's condensed interim consolidated financial statements for the period from April 1, 2016 to June 30, 2016, and the notes thereto. This MD&A has been prepared taking into account material transactions and events up to and including August 12, 2016. Financial data provided in the condensed interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards. All amounts in this MD&A are in thousands of Canadian dollars, except per unit amounts and where otherwise stated. Historical results, including trends which might appear, should not be taken as indicative of future operations or results. Additional information about Inovalis REIT has been filed with applicable Canadian securities regulatory authorities and is available at www.sedar.com. The exchange rate used throughout this MD&A for statement of earnings items is the average rate during the said period, i.e. 1.4552 Canadian dollars per Euro for the three-month period ended June 30, 2016 and 1.4844 for the six-month period ended June 30, 2016. For balance sheet items, projections or market data, the exchange rate used is 1.4354 (exchange rate as at June 30, 2016).

FORWARD-LOOKING INFORMATION

Although we believe that the expectations reflected in the forward-looking information are reasonable, we can give no assurance that these expectations will prove to have been correct, and since forward-looking information inherently involves risks and uncertainties, undue reliance should not be placed on such information. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such forward-looking statements. The estimates and assumptions, which may prove to be incorrect, include, but are not limited to, the various assumptions set forth in this document as well as the following: (i) we will continue to receive financing on acceptable terms; (ii) our future level of indebtedness and our future growth potential will remain consistent with our current expectations; (iii) there will be no changes to tax laws adversely affecting our financing capability, operations, activities, structure or distributions; (iv) we will retain and continue to attract qualified and knowledgeable personnel as we expand our portfolio and business; (v) the impact of the current economic climate and the current global financial conditions on our operations, including our financing capability and asset value, will remain consistent with our current expectations; (vi) there will be no material changes to government and environmental regulations adversely affecting our operations; (vii) conditions in the international and, in particular, the French and German real estate markets, including competition for acquisitions, will be consistent with the current climate; and (viii) capital markets will provide us with readily available access to equity and/or debt financing.

The forward-looking statements are subject to inherent uncertainties and risks, including, but not limited to, the factors listed under the Risk and Uncertainties section of this MD&A. Consequently, actual results and events may vary significantly from those included in, contemplated or implied by such statements.

MARKET AND INDUSTRY DATA

This MD&A includes market and industry data and forecasts that were obtained from third-party sources, industry publications and publicly available information as well as industry data prepared by Inovalis SA on the basis of its knowledge of the commercial real estate industry in which we operate (including Inovalis SA estimates and assumptions relating to the industry based on that knowledge). Inovalis SA's knowledge of the real estate industry has been developed through its 18 years of experience and participation in the industry. Inovalis SA believes that its industry data is accurate and that its estimates and assumptions are reasonable, but there can be no assurance as to the accuracy or completeness of this data. Third-party sources generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although Inovalis SA believes it to be reliable, Inovalis SA has not verified any of the data from third-party sources referred to in this MD&A, or analyzed or verified the underlying studies or surveys relied upon or referred to by such sources, or ascertained the underlying assumptions relied upon by such sources.

NON-IFRS FINANCIAL MEASURES

Funds from Operations and Adjusted Funds from Operations
Funds from operations ("FFO") and adjusted funds from operations ("AFFO") are not measures recognized under IFRS and do not have standardized meanings prescribed by IFRS. FFO and AFFO are supplemental measures of performance for real estate businesses. We believe that AFFO is an important measure of economic performance and is indicative of our ability to pay distributions, while FFO is an important measure of operating performance and the performance of real estate properties. The IFRS measurement most directly comparable to FFO and AFFO is net earnings. See the Non-IFRS Reconciliation (FFO and AFFO) section for reconciliation of FFO and AFFO to net earnings.

FFO is defined as net earnings in accordance with IFRS, excluding: (i) acquisition costs, (ii) gain on bargain purchase, (iii) net change in fair value of investment properties, (iv) net change in fair value of financial instruments at fair value through profit and loss, (v) changes in fair value of Exchangeable securities, (vi) adjustment for property taxes accounted for under IFRIC 21, (vii) loss on exercise of lease option, (viii) adjustment for foreign exchange gains or losses on monetary items not forming part of an investment in a foreign operation, (ix) gain on disposal of an interest in a subsidiary and the non-cash portion of earnings from investments accounted for using the equity method, * finance income earned from loans to joint-ventures, (xi) non-recurring finance costs, (xii) deferred taxes and (xiii) gains or losses from non-recurring items. It has also been adjusted to exclude the distributions declared on Exchangeable securities. These distributions are recognized in profit and loss consistent with the classification of the Exchangeable securities as a liability. However, they are not to be considered when determining distributions for the Unitholders as indeed they are subordinated to the distributions to the Unitholders.

AFFO is defined as FFO subject to certain adjustments, including adjustments for: (i) the non-cash effect of straight line rents, (ii) the cash effect of the lease equalization loans (equalizing the rent payments, providing the REIT with stable and predictable monthly cash flows over the term of the France Telecom leases in the Vanves property, the Smart & Co. lease in the Courbevoie property and the Rue du Commerce leases in the Baldi property), (iii) amortization of fair value adjustment on assumed debt, (iv) the non-cash portion of the asset management fees paid in Exchangeable securities, (v) capital expenditures, (vi) capital expenditures paid by the vendors of the leasehold interest in the properties and/or tenants and (vii) amortization of transaction costs on mortgage loans.

FFO and AFFO should not be construed as alternatives to net earnings or cash flow from operating activities, determined in accordance with IFRS, as indicators of our performance. Our method of calculating FFO and AFFO may differ from other issuers' methods and accordingly may not be comparable to measures used by them.

Debt-to-book value
Our debt-to-book value ratio is calculated on a look-through basis and takes into account the REIT's apportioned amount of indebtedness at the partnerships' level. Indebtedness at the REIT's level, as well as at the different partnerships' levels is calculated as the sum of (i) finance lease liabilities, (ii) mortgage loans, (iii) lease equalization loans, (iv) other long-term liabilities and (v) deferred tax liabilities. Indebtedness does not take into account the contribution from shareholders that are recorded as a liability, as is the case at the REIT's level for the Exchangeable securities and at the partnerships' level for the contribution from the REIT and its partners.

BUSINESS OVERVIEW AND STRATEGY

Inovalis REIT is an unincorporated open-ended real estate investment trust governed by the laws of the Province of Ontario. Inovalis REIT was founded and sponsored by Inovalis SA, our asset manager. Our Units have been listed on the Toronto Stock Exchange under the trading symbol INO.UN since April 10, 2013. Our head and registered office is located at 151 Yonge Street, 11^th floor, Toronto, Ontario, M5C 2W7.

Our long-term objectives are to:

• generate predictable and growing cash distributions on a tax-efficient basis from investments in income-producing office properties
• maximize the long-term value of both our properties and Units through active and efficient management
• grow our asset base, primarily in France and Germany, but also opportunistically in other European countries where assets meet our investment criteria
• increase the cash available for distribution to holders of Units ("Unitholders"), through an accretive acquisition program that successfully leverages Inovalis SA's extensive relationships and depth of commercial property and financing.

The REIT's Investment criteria encompasses office properties outside of Canada with an occupancy level above 80% (unless AFFO accretive), secured rental cash flows, a property value between €20 million ($29 million) to €60 million ($86 million) (unless AFFO accretive) and a potential future upside with respect to matters including rent and area development. According to management, this target investment size falls within a very liquid segment of the real estate market in Europe, and debt financing for such acquisitions is readily available from local lenders.

BUSINESS ENVIRONMENT

French commercial real estate investment market
Investment in commercial real estate in France reached €9.7 BN ($13.9 BN) in the first half of 2016, investment in commercial real estate has marked a slight dip of 3% compared to the same period in 2015 but remains 10.2% higher than the 2006-2015 average of €8.8 BN ($12.6 BN). Despite its slow economic growth, France is still much sought after, and enjoyed in 2015 its second best year ever for investment after 2007. The Greater Paris region accounted for the largest share of acquisitions (75%). Offices are still investors' favorite, attracting 56% of investment.

According to BNP Paribas Real Estate, the prime yield in the Central Business District has remained as low as 3.25% as at Q2 2016 (from 4.00% as at Q2 2015) and the prime yield in the Inner Rim has remained at 4.50% (from 5.25% as at Q2 2016). Investors have increasingly bought properties beyond Paris business districts, which are structurally incapable of supplying demand and which offer low yields. Non-prime office yields have also declined in the majority of markets in the Greater Paris Region and are increasingly sought after.

As at June 30, 2016, the vacancy rate in the Greater Paris Region declined to 6.6% (compared to 6.9% as at December 31, 2015) and inside Paris was close to 4.0%. This figure is mainly comprised of lower quality properties as, according to CBRE, new and redeveloped properties only accounted for 16% of the immediate supply.

German commercial real estate investment market
In the first half of 2016, investment in office properties in Germany reached €7.6 BN ($10.9 BN) which, despite being 18% lower than for the same period in 2015, was 27% above the ten-year average.

Office yields have declined throughout Germany over the last few years and, according to BNP Paribas Real Estate, prime office properties in the largest cities (Berlin, Cologne, Dusseldorf, Frankfurt, Hamburg, Munich) trade at a cap rate ranging between 3.60% and 4.30% and the average for the largest big 6 cities is circa 4.00%.

For investors, Germany continues to offer an extremely attractive and stable environment with interest rates still low, active consumers, upward-trending early indicators and a labor market that remains robust. BNP Paribas Real Estate expects demand for office properties during the second half of the year to remain strong and even to increase in the case of foreign market players, and therefore expects an above average turnover for the year as a whole.

Banks are competing for the financing of first class office properties with long-term leases in good locations. As competition increases, banks are increasingly financing slightly risker properties.

REAL ESTATE MANAGEMENT AND ADVISORY SERVICES

Pursuant to a management agreement, Inovalis SA is the manager of the REIT and provides the strategic, advisory, asset management, project management, construction management, property management and administrative services necessary to manage the operations of the REIT.

Upon the earlier of (i) the REIT achieving a market capitalization of $750 million (including any Exchangeable securities held by Inovalis SA) based on the volume weighted average price (VWAP) over a 20-day trading period and (ii) April 10, 2018, the Management Agreement will terminate and the management of the REIT will be internalized at no additional cost.

OUR OPERATIONS

Performance indicators⁽¹⁾

Portfolio
The REIT has an interest in 11 properties, of which 7 are wholly owned by the REIT (Baldi, Courbevoie, Jeuneurs, Metropolitan, Sablière and Vanves in France, Hanover in Germany) and 4 are held through partnerships with various global institutional funds (Arcueil in France, Bad Homburg, Cologne and Duisburg in Germany).

Occupancy
The overall weighted average occupancy rate across our portfolio was 93.1% at June 30, 2016. During the quarter, a new lease was signed on the Sablière property with effect on July 1, 2016, 4,000 sq.ft, increasing occupancy rate up to 93.5%. This new lease will generate annual net additional rental revenues of $150. The signature of new leases on approximately 55,000 sq.ft on the Baldi, Courbevoie, Sablière and Bad Homburg properties since the beginning of 2016 reflects the good positioning of our properties in an improving letting market. The REIT's portfolio occupancy rate of 93.5% is in line with the market vacancy rate of 6.6% in the Greater Paris Region.

The Vendor Lease on the Vanves property on 4,521 sq.ft (or 0.4% of total GLA) expired in April 2016. External brokers are working with the Inovalis SA team to lease remaining vacant premises on the REIT's portfolio.

Tenants
The tenant base in the portfolio is well diversified from an industry segment standpoint, with many tenants having large national or multinational footprints. 72% of 2016 estimated gross rental income come from French public agencies, are guaranteed by large German or international banks, or are signed with investment grade corporates or are affiliates of investment grade corporates.

The following table shows our five largest tenants, sorted out by contribution to gross leasable area (GLA). The GLA shown for these tenants reflects the percentage of ownership the REIT has in the underlying property.

Our largest tenant Orange is rated BBB+/Baa1/BBB+ by S&P/Moody's/Fitch and has leases in two of our properties, the Vanves property and the Arcueil property (held in partnership).

Leasing profile
Rental indexation
All leases have rental indexation based on either the French ICC (construction cost index) or ILAT (index averaging construction costs and CPI indexes) or the German Consumer Price Index, as applicable.

Lease rollover profile
The REIT has an average remaining lease term of 6.0 years (not including tenant early termination rights). Assuming all tenants leave at the earliest possible early termination rights, which is a highly improbable scenario, the average remaining lease term in our portfolio is 4.2 years.

The following graph sets out the amount of GLA and percentage of total GLA of the properties subject to leases expiring during the periods shown (excluding early lease terminations).

CONSOLIDATED FINANCIAL INFORMATION

Our discussion of results of operations includes our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS section" for a reconciliation to our condensed interim consolidated financial statements.

Net rental earnings
Rental income for the three-month period ended June 30, 2016 of $7,797 increased by $1,791 compared to the same period in 2015, of which $547 was coming from the properties wholly owned by the REIT ($371 increase due to FX change and $176 increase of rental income, accounted for by the combination of an increase due to the Metropolitan acquisition and the signature of new leases and of a decrease due to tenant departures and the expiry of the Vendor leases) and $1,244 from the properties held in partnership ($49 increase due to FX change and $1,195 increase of rental income due to the addition of the Arcueil and Cologne properties).

Rental income for the six-month period ended June 30, 2016 of $15,231 increased by $3,360 compared to the same period in 2015, of which $937 was coming from the properties wholly owned by the REIT ($819 increase due to FX change and $118 increase of rental income, accounted for by the combination of an increase due to the Metropolitan acquisition and the signature of new leases and of a decrease due to tenant departures and the expiry of the Vendor leases) and $2,423 from the properties held in partnership ($99 increase due to FX change and $2,324 increase of rental income due to the addition of the Arcueil, Bad Homburg and Cologne properties).

Service charge income for the three-month period ended June 30, 2016 of $1,562 decreased by $519 compared to the same period in 2015, of which a decrease of $745 was coming from the properties wholly owned by the REIT ($135 positive FX impact and $880 decrease of service charge income, explained by charges not recovered on premises previously vacated by tenants and by the settlement with in-place tenants of operating charges effectively due for previous years as actual operating expenses were lower than as budgeted) and an increase of $226 from the properties held in partnership ($11 increase due to FX change and $215 increase of service charge income due to the addition of the Arcueil and Cologne properties). The above-mentioned elements also explain the $561 decrease for the six-month period ended June 30, 2016 compared to the previous year.

Service charge expenses for the three-month period ended June 30, 2016 of $900 decreased by $584 compared to the same period in 2015 due actual operating expenses being lower than budgeted as described above. The increase for the six-month period ended June 30, 2016 compared to 2015 is the combination of lower actual operating expenses and higher property taxes due to the addition of the Arcueil, Cologne and Metropolitan properties (such taxes being fully taken into account in Q1 2016 as per IFRIC 21 accounting rule).

The decrease in other revenues of $1,198 for the three-month and six-month periods ended June 30, 2016 is explained by the fact that the amount of $1,240 recorded in 2015 was a non-recurring item (gain of $1,240 on the recovery of an indemnity paid at the time of the purchase of the Vanves property for possible repairs that were no longer required).

Administration expenses
Administration expenses are primarily comprised of asset management fees paid to Inovalis SA and of other general administrative expenses such as trustee fees, directors' and officers' liability insurance, professional fees (including accounting fees), legal fees, filing fees, shareholders related expenses and other expenses. Administration expenses for the quarter ended June 30, 2016 amounted to $1,708 vs. $1,269 for the quarter ended June 30, 2015. $846 is related to the asset management fees paid to Inovalis SA (vs. $598 for the same period in 2015) and $862 to other expenses (vs. $671 for the same period in 2015). The $191 increase in other general administrative expenses (from $671 to $862) is the combination of FX change ($47) and a 21.5% year on year increase ($144), while at the same time the assets under management increased by 25.0%.

Administration expenses for the six-month period ended June 30, 2016 amounted to $3,174 vs. $2,355 for the same period in 2015. $1,600 is related to the asset management fees paid to Inovalis SA (vs. $1,180 for the same period in 2015) and $1,574 to other expenses (vs. $1,175 for the same period in 2015). The $399 increase in other general administrative expenses (from $1,175 to $1,574) is the combination of FX change ($82) and a 27.0% year on year increase ($317), while at the same time the assets under management increased in the same range.

Net change in fair value of investment properties
During the three-month period ended June 30, 2016, the net change in fair value of investment properties recognized in profit or loss was a $3,039 increase, further to an appreciation of the French properties. This increase in value almost entirely offset the $3,261 decrease recorded in the first quarter of the year to reflect anticipated higher transfer taxes for the French properties, resulting in a $222 decrease for the six-month period ended June 30, 2016.

Option cost related to the acquisition of the Metropolitan property
The amount of $664 in the three-month period ended June 30, 2016 was an adjustment made further to the acquisition by the REIT of the Metropolitan property on March 21, 2016 and the related $9,877 gain in fair value of the purchase option recorded in the first quarter of the year.

For the six-month period ended June 30, 2016, the total gain in fair value of the purchase option was $9,213. As per the Acquisition loan that the REIT granted to Inovalis SA in 2014, the REIT was entitled to receive a portion of the profit generated on the stabilization of the property that would translate into a discount to the purchase price in the event the REIT elected to exercise its right of first offer for the purchase of the property once the latter met the investment criteria of the REIT.

Acquisition costs
The acquisition costs of $25 in the three-month period ended June 30, 2016 was an adjustment made further to the acquisition by the REIT of the Metropolitan property.

For the six-month period ended June 30, 2016, the acquisition costs stood at $689, of which $463 is accounted for by the Metropolitan acquisition (notary and transfer taxes), $141 by the Hanover refinancing and $85 by other costs.

Gain (loss) on financial instruments at fair value through profit and loss
The REIT recognized a loss on financial instruments at fair value through profit and loss for the three-month period ended June 30, 2016 of $2,125. For the same period in 2015, the REIT recognized a loss of $123. These gains and losses are mostly the result of the variation in value realized on the foreign exchange ("FX") contracts.

Gain (loss) on exercise of early payment option on finance leases
The amount of $678 recorded in the three-month period ended June 30, 2016 was an adjustment to the amount of $(1,920) recorded in the previous quarter further to the exercise by the REIT of its option to purchase the Metropolitan property that was leased and concomitantly closed a new finance lease contract to replace the finance lease assumed as part of the transaction. For the six-month period ended June 30, 2016, the net amount recorded for the loss on exercise of early payment option on finance leases was $1,242.

Loss on refinancing of a debt
This element appears only in the six-month period ended June 30, 2016 and has no impact on the three-month period ended June 30, 2016. During the quarter ended March 31, 2016, the REIT refinanced its debt on the Hanover property. The finance lease in place was terminated and replaced with a mortgage financing. The impact of de-recognition of the finance lease amounted to $605.

Finance income
Until March 21, 2016, finance income was almost entirely comprised of the interests perceived by the REIT on the Acquisition loan (Metropolitan transaction). The REIT stopped receiving such interests on March 21, 2016 when it completed the acquisition of the Metropolitan property.

Finance costs
For the three-month period ended June 30, 2016, the finance costs amounted to $1,947 including approximately $1,680 for interests costs related to finance leases, mortgage loans, the lease equalization loans and the loan granted by the partner on the Cologne transaction, $423 of other finance costs (mainly amortization of fair value adjustment on finance leases assumed at a discount at the time of a business acquisition and amortization of transaction costs on mortgage loans) and finally $(156) as fair value variance of the FX derivative contracted for the benefit of the joint venture partner in the Arcueil transaction.

For the six-month period ended June 30, 2016, the finance costs amounted to $4,247 including approximately $3,256 for interests costs related to finance leases, mortgage loans, the lease equalization loans and the loan granted by the partner on the Cologne transaction, $579 of other finance costs (mainly amortization of fair value adjustment on finance leases assumed at a discount at the time of a business acquisition and amortization of transaction costs on mortgage loans) and finally $138 as fair value variance of the FX derivative contracted for the benefit of the joint venture partner in the Arcueil transaction.

Additional income (loss) from Arcueil's JV
For the Arcueil joint venture, an interest of 25% in the partnership was taken into account in the proportionate consolidation presentation, in line with the apportioned investment in the transaction by the REIT of 25% while, as per the joint venture agreement and as reflected in the condensed interim consolidated financial statements, is entitled to receive a 25% share of the net earnings and, upon asset disposal, 75% of the variance of fair value of investment properties, netted from FX derivative costs. This additional income from Arcueil's joint venture of $1,365 and $144 for the three-month and six-month periods ended June 30, 2016 is the bridge between both presentations. It includes, inter alia, $308 for 75% of the variation of the potential indemnity to the joint venture partner during the three-month period ending June 30, 2016 (the remaining 25% being already taken into account in the Finance costs above) and $(277) for the six-month period ended June 30, 2016.

Distributions on Exchangeable securities
Distributions to the holders of Exchangeable securities are calculated in a manner to provide a return that is economically equivalent to the distributions received by the Unitholders. During the three-month period ended June 30, 2016 the distribution recognized on Exchangeable securities was $482 while it was $438 for the same period in 2015. The increase is the result of the additional Exchangeable securities received by Inovalis SA in lieu of asset management fees.

Net change in fair value of Exchangeable securities
The net change in value of the Exchangeable securities, as well as the cost of distributions recognized on Exchangeable securities, are recognized in profit and loss because, for financial reporting purposes, the Exchangeable securities have been classified as a liability at fair value through profit or loss.

For the three-month period ended June 30, 2016, the REIT reported a loss of $403 which is the result of the change in the closing price of Units on the TSX which was $9.94 on June 30, 2016 compared to $9.70 as at March 31, 2016. For the six-month period ended June 30, 2016, the REIT reported a loss of $1,019 which is the result of the change in the closing price of Units on the TSX which was $9.94 on June 30, 2016 compared to $9.37 as at December 31, 2015.

Current income tax expense
The current income tax expense incurred of $23 and $123 for the three-month and six-month periods ended June 30, 2016 amount to a withholding tax paid by the REIT's Luxemburg holding company on the dividends it received from affiliates.

Last 24 Months Key Financial Information
The information provided in this section includes our proportionate share of income from investments in joint ventures. Please refer to "Non IFRS section" for a reconciliation to our condensed interim consolidated financial statements.

NON-IFRS RECONCILIATION

Investments in joint ventures
The REIT's proportionate share of the financial position and results of operation of its investment in joint ventures, which are accounted for using the equity method under IFRS in the condensed interim consolidated financial statements, are presented below using the proportionate consolidation method (with the exception of Arcueil), which is a non-GAAP measure. For the purpose of the proportionate consolidation, the initial investment of both partners in the joint ventures were considered as being equity investments as opposed to a combination of equity and loans and accordingly, the related proportionate consolidation balance sheet items were eliminated as well as the associated finance income and finance costs. For the Arcueil joint venture, an interest of 25% in the partnership was taken into account in the proportionate consolidation presentation, in line with the apportioned investment in the transaction by the REIT of 25% while, as per the joint venture agreement and as reflected in the condensed interim consolidated financial statements, the REIT is entitled to receive a 75% share of the net profit. A line entitled "additional gain or loss from Arcueil's joint venture" in the Consolidated statement of earnings reconciliation to consolidated financial statements bridges both presentations. A reconciliation of the financial position and results of operations to the condensed interim balance sheets and consolidated statements of earnings is included in the tables showed in the Non-IFRS Reconciliation section. 

For the quarter ended June 30, 2016, the proportional financial results include the following proportion of the revenues and expenses of each one of the joint ventures: 50% for Duisburg and Walpur, 49% for Cologne and 25% for Arcueil.

FFO and AFFO

Management believes FFO is an important measure of our operating performance and is indicative of our ability to pay distributions. However, it does not represent cash flow from operating activities as defined by IFRS and is not necessarily indicative of cash available to fund Inovalis REIT's needs. This non-IFRS measurement is commonly used for assessing real estate performance. Our FFO and AFFO calculations are based on the average foreign exchange rate for the period (1.4552 Canadian dollars per Euro for the quarter ended June 30, 2016) and does not take into account our foreign currency hedging arrangements (100% of our monthly cash distributions are covered until April 2019 at an average rate of 1.4930).

Our AFFO calculation for the quarter ended June 30, 2015 takes into account an amount of $423 that was payable as of March 31, 2015 by Inovalis SA and that was not taken into account in the previous quarter. Excluding this item, AFFO per Unit for the quarter ended June 30, 2015 would have been $0.24 and the AFFO payout ratio for the same period would have been 84.5%.

Balance sheet reconciliation to consolidated financial statements

Consolidated statement of earnings reconciliation to consolidated financial statements

PROPERTY CAPITAL INVESTMENTS       

Fair value
The fair value of our investment property portfolio as at June 30, 2016 was $515.6 million including the REIT's interests in the properties held in partnerships (vs. $456.1 million as at December 31, 2015). The fair value of the French properties was $416.1 million (80.7% of total value) and the fair value of the German properties was       $99.5 million (19.3% of total value).

Management principally uses discounted cash flows to determine the fair value of the investment properties. These values are supported by third party appraisals in conformity with the requirements of the Royal Institution of Chartered Surveyors Standards, and for the French properties also in conformity with the Charte de l'expertise immobilière, European Valuation Standards of TEGoVA (the European Group of Valuers' Association) and IFRS 13.

Building improvements
The REIT is committed to improving its operating performance by incurring appropriate capital expenditures in order to replace and maintain the productive capacity of its property portfolio so as to sustain its rental income generating potential over the portfolio's useful life.

Since the IPO in April 2013, a total of $1.7 million has been spent on the properties, funded by a reserve that was set aside by the vendors of the four initial properties.

Guarantees, commitments and contingencies
The REIT and its subsidiaries have provided guarantees in connection with the finance lease liabilities and the mortgage loans, including pledge of affiliates of the REIT, first mortgages and assignment of receivables and future receivables. As at June 30, 2016, guarantees provided by the REIT with respect to its long-term debts include a preferential claim held by mortgage lenders on the Jeuneurs, Véronèse, Sablière and Hanover properties in the amount of $85,702.

Further to the reimbursement by the REIT of the $6.4 million equity bridge granted by the partner on the Cologne transaction, the pledge granted by the REIT on its 49% equity commitment to the partner as guarantee was also released.

OTHER SIGNIFICANT ASSETS

Restricted cash
As at June 30, 2016, the REIT had no restricted cash. Restricted cash of $1,680 as at December 31, 2015 was comprised of a collateral for the foreign exchange currency contracts entered into with a Canadian bank. In the course of the quarter ended June 30, 2016, the REIT terminated all these contracts and replaced them with a new series of 36 monthly forward contracts provided by a French bank that has no cash collateral requirements.

Investments accounted for using the equity method
This section encompasses the 50% interest the REIT (through its subsidiaries) has in the Duisburg property, the 50% interest in the Walpur property, the 25% interest in the Arcueil property and the 49% interest in the Cologne property. Our share of fair value of the investment properties accounted for using the equity method was $43,376 as at June 30, 2016 compared to $40,337 as at December 31, 2015.

Acquisition loan
The Acquisition loan on the Metropolitan property ($18,786 as at December 31, 2015) was repaid by Inovalis SA to Inovalis REIT when the latter purchased the property on March 21, 2016. There was no cash payment, as compensation was made with other amounts due by the REIT to Inovalis SA for the purchase of the Metropolitan property.

Trade and other receivables
Trade and other receivables as at June 30, 2016 amounted to $4,852 taking into account the REIT's interests in the properties held in partnerships compared to $5,619 as at December 31, 2015.

Other current Assets
Other current assets as at December 31, 2015 amounted to $1,601 compared to $1,372 as at December 31, 2015. This amount is mainly composed of sales tax receivables.     

PRESENTATION OF OUR CAPITAL

Liquidity and capital resources
Inovalis REIT's primary sources of capital are cash generated from operating activities, credit facilities, sharing the ownership of actual assets owned entirely and equity issues. Our primary uses of capital include property acquisitions, payment of distributions, costs of attracting and retaining tenants, recurring property maintenance, major property improvements and debt interest payments. We expect to meet all of our ongoing obligations through current cash, cash flows from operations, debt refinancing and, as growth requires and when appropriate, new equity or debt issues. We can also sell some portion of assets owned in order to get access to capital but also in the perspective of diversification of our portfolio.

The REIT's cash available remained stable at $7.7 million as at June 30, 2016 compared to $6.9 million as at December 31, 2015. Including the REIT's interest in the joint ventures, cash available totals $10.7 million as at June 30, 2016, compared to $10.9 million as at December 31, 2015.

Financing activities
Our debt strategy is to have secured mortgage financing with a term to maturity that is appropriate in relation to the lease maturity profile of our portfolio and then to put in place, when appropriate, interest-only financings. We intend to search for fixed rate financings or floating rate financings with a cap. As such, 91.8% of the REIT's senior debt benefits from an interest rate protection (75.1% in the form of a swap and 16.7% in the form a cap). Our preference is to have staggered debt maturities to mitigate interest rate risk and limit refinancing exposure in any particular period. With no financial institution representing more than 20% of our senior debt commitment, we also make sure that the REIT has a diversified base of senior debt providers. Our debt to book value stands at 56.5% and net of the $10.7 million of cash available as at June 30, 2016 (including the REIT's interest in the joint ventures), this debt to book value stands at 55.6%.

Key performance indicators in the management of our debt are summarized in the following table (taking into account the interest the REIT has in the properties held in partnerships).