SUPPLEMENTAL REPORT TO THE AUDITED · PDF filewere secured consisting of 2,353 residential...

SKYLINE APARTMENT

REAL ESTATE INVESTMENT TRUST

70 Fountain Street East Guelph, Ontario N1H 3N6 tel: (519) 826-0439 fax: (519) 836-2320 www.skylineonline.ca

June 4, 2009

SUPPLEMENTAL REPORT

TO THE AUDITED FINANCIAL STATEMENTS OF:

-SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUST-

-SKYLINE EQUITIES LIMITED PARTNERSHIP-

-SKYLINE REAL ESTATE LIMITED PARTNERSHIP-

On June 1st, 2006, Skyline Apartment REIT was created through the amalgamation of 16 corporations and the rollover of 27 properties with a market value of $83.9 million. Since that time, Skyline Incorporated has identified and acquired on behalf of the Trust an additional 67 properties worth an additional $379 million. Of this, in the 2008 year, 32 properties ($245 million) were secured. Today, the Trust has a presence in 33 Canadian communities across 4 provinces and holds 5,486 residential suites and 782,000 square feet of commercial space with a current value of $450 million. Since inception, Skyline Apartment REIT has closed three (3) Confidential Offering Memorandums, issuing 10,895,000 Trust Units. The Trust is currently under an Addendum to its third confidential offering to raise an additional 3,000,000 trust Units with a scheduled closing date of August 31, 2008. Since the first offering, the Trust Units have increased in market value from $10.00 per Unit to its present price of $11.00 per Unit. While the Trust is a private equity offering, much of its legal structure, reporting requirements and operating mandates are the same as public market REITs. It was our intention to create an alternative real estate investment opportunity for investors in the private market with similar governance policies that exist in the public market. In consideration of this, the Information Circular and financial statements enclosed for the Trust and its subsidiaries may appear complex in nature when compared to the financial statements of a typical corporate entity. The Trust is structured as a “Trust on Trust on Limited Partnership”, which was necessary in order to incorporate the old properties’ income streams for the benefit of the Trust’s Unitholders. We have included a flowchart of the overall structure of the Trust and its subsidiaries to assist in clarifying the enclosed reports. Skyline Equities Limited Partnership This entity was created on June 1st, 2006 and its holdings included the properties that were previously owned prior to creation of the Trust. At that time, it owned 27 properties worth $83.9

SKYLINE APARTMENT



million encompassing 1,296 units and 146,153 square feet of commercial space. Going forward, this Limited Partnership will not acquire any additional future properties and may dispose of properties as the Trust determines appropriate. As at May 31, 2009; Skyline Equities LP has sold 6 of these properties consisting of 139 total units for aggregate proceeds of $5.1 million. Under a ‘Sharing and Exchange Agreement’, this limited partnership provides beneficial ownership of the income generated by its properties to the Unitholders of the Trust. The year ended December 31, 2008 financial statements are enclosed and are highlighted by revenues of $12,644,246 and expenses (including depreciation of $2,276,944) of $12,777,999 for an operating loss of $133,753. Additionally, Skyline Equities LP recorded gains on property sales of $2,614,055 for the year ended December 31, 2007. Skyline Real Estate Limited Partnership This entity was created on June 1st, 2006 and it purchased its first building on June 30th, 2006. Through the remainder of 2006 and 2007, it took ownership of 25 buildings consisting of 1,893 residential suites and 120,917 square feet of commercial space. In 2008, a further 32 properties were secured consisting of 2,353 residential suites and 480,838 square feet of commercial space, for a total of 4,246 residential units and 601,755 square feet of commercial space in 29 Ontario communities. This limited partnership will be the only active entity in ongoing acquisitions of future properties. The year ended December 31, 2008 financial statements are enclosed and are highlighted by revenues of $25,281,570 and expenses (including depreciation of $6,003,934) of $26,330,435 for an operating loss of $1,048,865. Since the close of 2008, Skyline Real Estate LP has purchased an additional 3 buildings consisting of 82 apartment units and 31,490 square feet of commercial space worth $9.2 million. Sharing and Exchange Agreement An agreement was structured between the two limited partnerships to share the income generated by its properties with the partners of each; the shareholders of the old amalgamated corporations and the new Unitholders of the Trust. As a result of this agreement, Skyline Real Estate LP received income of $661,823 from Skyline Equities LP. Skyline Apartment Real Estate Investment Trust The Trust was created on June 1st, 2006 and is the investment entity that issues Units to new investors. It was established with the execution of a Declaration of Trust which is an in-depth document that regulates the operations of the Trust. It is a flow through entity that passes income from the limited partnerships through to its Unitholders. As a result of the financial positions of the two Limited Partnerships by way of the Sharing and Exchange

SKYLINE APARTMENT



Agreement, the Trust is in an overall loss position for 2008. The revenues reported on the financial statements for the year ended December 31, 2008 represent interest income earned on various short-term investments made by the Trust. A trust structure is designed to flow-through only profit income to Unitholders, any losses remain below the Trust to be applied against future profits. An in-depth Management Discussion & Analysis (MD&A) will be issued forthwith to provide our Unitholders with further insight into their investment. On behalf of the entire board of Skyline Apartment REIT, I would like to thank you for your continued support of our vision and real estate investment strategies. On behalf of the trustees of SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUST Jason Castellan Chief Executive Officer and Trustee

SKYLINEAPARTMENT

REIT

SKYLINEOperating Trust

SKYLINE EquitiesLimited Partnership

SKYLINE Real Estate

Limited Partnership

SKYLINE Equities Inc.

SKYLINE Real Estate

Holdings Inc.

SKYLINE INCORPORATED

“Old” Properties “New” Properties

“Nominee” Title Holder

“Nominee” Title Holder

Unitholders

Shareholders

General Partner

Sharing & Exchange Agreement

General Partner

SKYLINE EQUITIES INC

SKYLINE APARTMENT REIT

SKYLINE EQUITIES LIMITED PARTNERSHIP

FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2008

INDEX

AUDITORS’ REPORT

STATEMENT 1 - Balance Sheet

STATEMENT 2 - Earnings

STATEMENT 3 - Cash Flows

NOTES TO THE FINANCIAL STATEMENTS

Chartered Accountantsand Business Advisors

People Count.

AUDITORS’ REPORT

To the Partners of: Skyline Equities Limited Partnership

We have audited the balance sheet of Skyline Equities Limited Partnership as at December 31,2008 and the statements of earnings and cash flows for the year then ended. These financial statementsare the responsibility of the partnership’s management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards.Those standards require that we plan and perform an audit to obtain reasonable assurance whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation

Note 9 describes the change in accounting policy with respect to the capitalization of thepartnership’s stabilizing and value enhancing capital expenditures. The note also indicates that thepartnership did not make this change retroactively. In this respect, the financial statements are not inaccordance with Canadian generally accepted accounting principles. If the change in accounting policyhad been applied retroactively, amortization for the current year would have been increased by $13,099(2007 - $6,822), net earnings would have been increased by $13,099 (2007 - $334,286), the net bookvalue, of income producing properties would have decreased by $13,099 (2007 - $334,286) and theclosing balance of partners’ equity would have been reduced by $13,099 (2007 -increased by $334,286).

In our opinion, except for the effects of the failure to apply the accounting policy retroactively asdescribed in the preceding paragraph, these financial statements present fairly, in all material respects,the financial position of the partnership as at December 31, 2008 and the results of its operations and thechanges in its financial position for the year then ended in accordance with Canadian generally acceptedaccounting principles.

Guelph, OntarioMay 26, 2009

Chartered AccountantsLicensed Public Accountants

15 Lewis Road, Guelph ON N 1H 1 E9 ¯ (519) 822-9933 fax: (519) 822-9212 ° www.rlb.caPage 2

STATEMENT 1

SKYLINE EQUITIES LIMITED PARTNERSHIPBALANCE SHEET

AS AT DECEMBER 31, 2008

ASSETS

CURRENTCashAccounts receivablePrepaid expensesMortgage receivable (note 6)

2008

141,254210,427937,239

1,275,8862,564,806

INCOME PRODUCING PROPERTIES (note 5) 61,461,538

OTHERDeferred charges 711,513

MORTGAGE RECEIVABLE (note 6) 333,163

$ 65,071,020

LIABILITIES

CURRENTAccounts payable and accrued liabilitiesDue to related parties (note 8)Current portion of long term debt (note 11)

1,342,1548,750,795

19,785,99829,878,947

LONG TERM DEBT (note 11) 33,861,09163,740,038

2007

185,562317,668935,684

01,438,914

64,201,398

335,272

0

$ 65,975,584

1,419,1245,142,8461,494,3928,056,362

53,439,14761,495,509

Opening balanceNet earnings for the year

Distributions paid (note 13)Closing balance

PARTNERS’ CAPITAL

4,480,0751,818,4796,298,554

(4,967,572)1,330,982

$ 65,071,020

6,790,126301,753

7,091,879(2,611,804)4,480,075

$ 65,975,584

see accompanying notesPage 3

STATEMENT 2

SKYLINE EQUITIES LIMITED PARTNERSHIPSTATEMENT OF EARNINGS


RENTAL INCOMEResidential incomeCommercial income

2008

$ 10,888,4131.755.833

.......... !.2,644,246

OPERATING EXPENSESAdvertisingInsuranceInterest and bank chargesInterest on long term debtMiscellaneousOfficeProfessional feesEquipment rental (note 12)Repairs and maintenanceBuilding managers’ wagesManagement feesSuppliesProperty taxesTelephoneTravelUtilitiesBad debtAmortizationAmortization of deferred charges

208,256101,310

19,9323,064,694

0106,64355,126

109,105891,450470,188852,076

3,4022,066,146

37,8531,836

2,074,724299,717

2,276,944138,597

12,777,999

LOSS FROM OPERATIONS

OTHER INCOME (EXPENSES)Income sharing allocation (note 4)Gain on sale of properties

(133,753)

(661,823)2,614,0551,952,232

NET EARNINGS for the year $ 1,818,479

2007

$ 10,685,9231,751,789

12,437,712

173,61089,57719,418

3,171,8088,669

27,91530,155

117,6851,080,802

583,218851,432

13,3381,987,729

31,7571,299

2,132,26946,042

2,340,29618,053

12,725,072

(287,360)

(457,968).. 1,047,081

589,113

301,753


STATEMENT 3

SKYLINE EQUITIES LIMITED PARTNERSHIPSTATEMENT OF CASH FLOWS


CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESNet earnings for the yearItems not requiring an outlay of cash

AmortizationAmortization of deferred chargesGain on disposal of properties

Changes in non-cash working capitalAccounts receivablePrepaid expensesAccounts payable and accrued liabilities

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIESLong term debt (net repayments and advances)Advances from related partiesDistributions paid during the year

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIESAdditions to income producing propertiesDeferred chargesNotes receivableProceeds on disposition of income producing

properties less selling costs

2008

1,818,479

2,276,944138,597

(2,614,055)1,619,965

107,241(~,555)

(76,971)1,648,680

(1,286,450)3,607,950

(4,967,572)(2,646,072)

(2,025,579)(514,838)

(1,609,049)

5,102,550953,084

(DECREASE) INCREASE IN CASH for the year (44,308)

CASH (BANK INDEBTEDNESS), beginning of year 185,562

CASH, end of year $ 141,254

2007

$ 301,753

2,340,29618,053

(1,047,081)1,613,021

18,976(274,816)344,416

1,701,597

(1,755,216)1,332,261

(2,611,804)(3,034,759)

(1,029,839)(299,326)

0

3,039,0011,709,836

376,674

(191,112)

$ 185,562


,.

SKYLINE EQUITIES LIMITED PARTNERSHIPNOTES TO THE FINANCIAL STATEMENTS


NATURE OF BUSINESS

Skyline Equities Limited Partnership ("SELP") was created on June 1, 2006 as a limited partnershipunder the laws of the Province of Ontario. The general partner is Skyline Incorporated and the limitedpartner is Skyline Equities Inc. On June 1, 2006, Skyline Equities Inc. transferred twenty-seven revenueproducing real properties, all of which are located in Canada, to SELP on a tax deferred basis. Inexchange, SELP assumed the mortgages on these properties and issued one hundred partnership unitsin itself to Skyline Equities Inc. A total of six revenue producing properties have been sold sinceinception of the partnership, three in 2007 and three in 2008, leaving twenty-one revenue producingproperties.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) DEFERRED CHARGES

Deferred charges are for professional fees paid for the set up of the partnership and mortgagefinancing fees. The deferred charges are amortized over five years on a straight line basis.

(b) INCOME PRODUCING PROPERTIES

Amortization is taken on assets at the following rates:

BuildingsEquipment

- 4% declining balance basis- 20% declining balance basis

(c) IMPAIRMENT OF LONG LIVED ASSETS

Long lived assets are tested for recoverability whenever events or changes in circumstancesindicate that their carrying amount may not be recoverable. An impairment loss is recognizedwhen the carrying value exceeds the total undiscounted cash flows expected from their use andeventual disposition. The amount of the impairment loss is determined as the excess of thecarrying value of the asset over its fair value.

(d) REVENUE RECOGNITION

Revenue from income producing properties is recognized on a straight-line basis over the termof the lease.

(e) INCOME TAXES

These financial statements reflect the assets, liabilities, revenues and expenses of thepartnership and do not include any other assets, liabilities, revenues or expenses of the partnersor the liability of the partners for taxes on earnings of the partnership.

(f) USE OF ESTIMATES

The preparation of financial statements in conformity with Canadian generally acceptedaccounting principles requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expenses duringthe year. Actual results could differ from those estimates.

Page 6

m

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FINANCIAL INSTRUMENTS

Credit risk management

The partnership’s financial instruments consist of cash, accounts receivable, and accounts payable andaccrued liabilities. Unless otherwise noted, it is management’s opinion that the partnership is notexposed to significant interest, currency or credit risks arising from these financial instruments.

The partnership does not have a significant exposure to any individual customer or counterpart.

Interest Risk

The partnership is exposed to interest rate risk on floating rate loan obligations in the amount of$672,337.

Fair value of financial assets and financial liabilities

The carrying values of cash, accounts receivable, and accounts payable and accrued liabilitiesapproximate their fair value due to the relatively short periods to maturity of these items.

The carrying amount of the long term debt approximates its fair value because the interest rates areclose to market rates.

SHARING AND EXCHANGE AGREEMENT

Skyline Equities Limited Partnership ("SELP") is in a sharing and exchange agreement ("Agreement")with Skyline Apartment Real Estate Investment Trust, Skyline Real Estate Limited Partnership andSkyline Equities Inc. which has been effective since inception. Skyline Real Estate Limited Partnershipis indirectly controlled by Skyline Apartment Real Estate Investment Trust and, as of December 31,2008, is the owner of forty-one revenue producing multi-residential real properties and eight revenueproducing commercial real properties, all of which are located in Canada. The Agreement allows for thesharing between SELP and Skyline Real Estate Limited Partnership of the Property Net Income earnedon each individual property. The Property Net Income with respect to a particular property is the incomeearned from the operation thereof, net of all expenses without deducting amortization or capital costallowance. The allocation of the Property Net Income from one limited partnership to the other limitedpartnership is based on the estimated value of one limited partnership over the estimated value of thecombined limited partnerships.

INCOME PRODUCING PROPERTIESAccumulated Net Net

Cost Amortization 2008 2007

Land $ 8,299,449 $ 0 $ 8,299,449 $ 8,664,878Buildings 58,753,882 5,672,091 53,081,791 55,427,003Equipment 121,158 40,860 80,298 109,517

$ 67,174,489 $. 5,712,951 $ 61,461,538 $ 64,201,398

MORTGAGE RECEIVABLE

Mortgage receivable bearing interest at 9.00% perannum, payable in monthly instalments with principalmaturing from 2009 to 2010 and are secured byspecific charges against specific properties.

Less: Current portion

2008 2007

$ 1,609,049 $ 01,275,886 0

$ 333,163 $ 0

Page 7



,,MORTGAGE RECEIVABLE (continued)

On December 31, 2008, three revenue producing multi-residential properties were sold. The partnershiptook back the above mortgage receivable.

Future minimum repayments on notes receivable are as follows:

2009 $ 1,275,8862010 333,163

$ 1,609,049

7. RELATED PARTY TRANSACTIONS

Skyline Equities Limited Partnership ("SELP") has entered into an asset management agreement withSkyline Asset Management Inc. and a property management agreement with Skyline ManagementIncorporated. Skyline Asset Management Inc. and Skyline Management Incorporated are controlled bySkyline Incorporated. Skyline Incorporated is the general partner of SELP and is entitled to 20% ofdistributions after the limited partners have received their initial contribution value.

Fees payable under the asset management agreement are 2% of adjusted gross revenue. Feespayable under the property management agreement are 5% of adjusted gross revenue. Fees paid areas follows:

2008 2007

Asset management feesProperty management fees

$ 245,165 $ 248,418606,911 603,014

8. DUE TO RELATED PARTIES

Amounts due to related parties are unsecured, non-interest bearing and have no set terms ofrepayment:

2008 2007

Skyline Real Estate Limited Partnership $ 8,750,795 $ 5,142,846

9 CHANGE IN ACCOUNTING POLICY

During 2008, the partnership changed its accounting policy for the capitalization of its stabilizing andvalue enhancing capital expenditures. Stabilizing and value enhancing capital expenditures aredetermined as investments in assets focused on improving the economic life and value of the propertiesand are mainly long term in nature. Management judges that the new policy is preferable as it isconsistent with industry practices.

These capital improvements have been capitalized and amortized at the same rate as the capital costsof the revenue producing properties.

This change in accounting policy has been implemented in 2008 and has not been applied retroactively.

10. COMPARATIVE FIGURES

The comparative figures presented have not been audited and we have not expressed an audit opinionon these figures. A review of the previous year’s financial statements was performed.

Page 8

11.

12.

13.



LONG TERM DEBT

Mortgages payable bearing interest rates ranging from4.39% to 6.60% per annum, payable in monthlyinstalments of principal and interest totaling $366,482maturing from 2009 to 2017 and are secured byspecific charges against specific properties. All interestrates, except for one of the mortgages, are fixed for theterm of the mortgage. The one mortgage total of$672,337 has a variable interest rate of prime plus.25%

Second mortgage payable is interest only at 5.95% perannum, payable in monthly instalments of $6,473, dueOctober 2009


2008

$ 52,452,089

1,195,00053,647,08919,785,998

2007

$ 53,738,539

1,195,00054,933,539

1,494,392

$ 33,861,091 $....5.3.,439,147

Future minimum payments on long term obligations are as follows

2009 $ 19,785,9982010 6,921,2902011 7,608,1942012 507,4792013 10,427,967

Thereafter 8,396,161

$ 53,647,089

LEASE OBLIGATIONS

The partnership leases various appliances and equipment for their properties. Future minimum leasepayments are as follows:

2009 $ 103,7212010 103,7212011 96,6892012 3,117

DISTRIBUTIONS

In 2008, the partnership paid the following distributions:

Regular distributionsSpecial distributions

$ 2,707,9512,259,621

$ 4,967,572

The partnership paid a special distribution to Skyline Equities Inc., the limited partner. The specialdistribution was paid in order for Skyline Equities Inc. to redeem a special class of preferred shares.

Page 9

SKYLINE REAL ESTATE LIMITED PARTNERSHIP

FINANCIAL STATEMENTS


INDEX

AUDITORS’ REPORT

STATEMENT 1 - Balance Sheet

STATEMENT 2 - Loss

STATEMENT 3 -Cash Flows

NOTES TO THE FINANCIAL STATEMENTS


People Count.

AUDITORS, REPORT

To the Partners .of: Skyline Real Estate Limited Partnership

We have audited the balance sheet of Skyline Real Estate Limited Partnership as at December31, 2008 and the statements of loss and cash flows for the year then ended. These financial statementsare the responsibility of the partnership’s management. Our responsibility is to express an opinion onthese financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards.Those standards require that we plan and perform an audit to obtain reasonable assurance Whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation.

Note 9 describes the change in accounting policy with respect to the capitalization of thepartnership’s stabilizing and value enhancing capital expenditures. The note also indicates that thepartnership did not make this change retroactively. In this respect, the financial statements are not inaccordance with Canadian generally accepted accounting principles. If the change in accounting policyhad been applied retroactively, amortization for the current year would have been increased by $20,558(2007 - $10,489), net earnings would have been increased by $20,588 (2007 - $524,448), the net bookvalue of income producing properties would have decreased by $20,588 (2007 - $524,448) and theclosing balance of partners’ equity would have been reduced by $20,588 (2007 -increased by $524,448).

In our opinion, except for the effects of the failure to apply the accounting policy retroactively asdescribed in the preceding paragraph, these financial statements present fairly, in all material respects,the financial position of the partnership as at December 31, 2008 and the results of its operations and thechanges in its financial position for the year then ended in accordance with Canadian generally acceptedaccounting principles.



15 Lewis Road, Guelph ON N1H 1E9 ¯ (519) 822-9933 fax: (519) 822-9212 ¯ www.rlb.caPage 2

STATEMENT 1

SKYLINE REAL ESTATE LIMITED PARTNERSHIPBALANCE SHEET


ASSETS

CURRENTAccounts receivableDeposits on income producing properties (note 14)Prepaid expensesDue from related parties (note 7)

2008

400,52216,487,171

1,663,3438,788,795

27,339,831

INCOME PRODUCING PROPERTIES (note 5) ,248,439,70,1,,,

OTHERDeferred chargesMortgages receivable (note 11 )Promissory notes receivable (note 11)

2,252,541253,303

26,4092,532,253

$ 278,,3!! ,78,5

LIABILITIES

CURRENTBank overdraft (note 8)Accounts payable and accrued liabilitiesCurrent portion of long term debt

1,636,0654,880,558

22,169,05728,685,680

LONG TERM DEBT (note 12) 141,843,727170,529,407

2007

224,338415,950388,246

5,130,8466,159,380

100,076,501

940,926258,56227,009

1,226,497

$ 107,462,378

28,2061,785,233

17,631,33119,444,770

43,294,46562,739,235

Opening balanceUnits issued during the yearNet loss for the year

Distributions paidClosing balance

PARTNERS’ ~CAPITAL

44,723,14372,372,346

(387,042)116,708,447

(8,926,069)107,782,378

$ 278,311,785

8,849,08537,722,647

(611,837)45,959,895(1,236,752)

44,723,143

$,, 107,462,378


STATEMENT 2

SKYLINE REAL ESTATE LIMITED PARTNERSHIPSTATEMENT OF LOSS


RENTAL INCOMEResidential incomeCommercial income

OPERATING EXPENSESAdvertisingInsuranceInterest and bank chargesInterest on long term debtOfficeProfessional feesLand lease (note 13)Repairs and maintenanceBuilding managers’ wagesManagement feesSuppliesProperty taxesTelephoneTravelUtilitiesBad debtAmortizationAmortization of deferred charges

LOSS FROM OPERATIONS

OTHER INCOMEIncome sharing allocation (note 4)

NET LOSS for the year

2008

$ 21,283,9733,997,597

25,281,570

283,442201,796

33,7196,683,481

160,28265,187

119,8651,118,3671,087,2151,863,547

12,4434,151,774

75,91020,827

3,732,214303,629

6,003,934412,803

26,330,435

(1,048,865)

661,823

$ (387,042)

2007

$ 10,408,213303,156

10,711,369

96,20277,69814,090

3,192,81817,895

129,64859,933

800,490459,017713,407

3,6481,910,950

36,1634,287

1,583,1671,954

2,476,780203,027

11,781,17~,

(1,069,805)

457,968

$ (611,837)


STATEMENT 3

SKYLINE REAL ESTATE LIMITED PARTNERSHIPSTATEMENT OF CASH FLOWS


CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESNet loss for the yearItems not requiring an outlay of cash

AmortizationAmortization of deferred charges

Changes in non-cash working capitalAccounts receivablePrepaid expensesAccounts payable and accrued liabilities

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIESLong term debt (net repayments and advances)Due from related partiesIssuance of partnership units

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIESAdditions to capital assetsMortgages receivablePromissory notes receivableDeposits on income producing propertiesDeferred chargesDistributions paid

2008

(387,042)

6,003,934412,803

6,029,695

(176,182)(1,275,097)3,095,3237,673,739

103,086,988(3,657,950)

72,372,346171,801,384

(154,367,134)5,259

600(16,071,221)

(1,724,417)(8,926,069)

(181,082,982)

NET (DECREASE) INCREASE IN CASH AND CASHEQUIVALENTS for the year (1,607,859)

BANK OVERDRAFT, beginning of year (28,206)

BANK OVERDRAFT, end of year $ (1,636,065)

2007

$ (611,837)

2,476,780203,027

2,067,970

(164,380)(279,647)

1,202,2312,826,174

37,898,391(1,512,686)37,722,64774,108,352

(74,439,635)(258,562)(27,009)150,200

(991,998)(1,236,752)

(76,803,756)

130,770

(158,976)

$ (28,206)


SKYLINE REAL ESTATE LIMITED PARTNERSHIPNOTES TO THE FINANCIAL STATEMENTS


=

NATURE OF BUSINESS

Skyline Real Estate Limited Partnership ("RELP") was created on June 1, 2006 as a limited partnershipunder the laws of the Province of Ontario. The general partner is Skyline Incorporated and the limitedpartner is Skyline Operating Trust.

Skyline Operating Trust has issued 100% of its units to Skyline Apartment Real Estate Investment Trust("Skyline Apt. REIT"). Skyline Apt. REIT is an unincorporated, open-ended private real estateinvestment trust established under the laws of the Province of Ontario.

As of December 31, 2008, RELP owned forty-one revenue producing multi-residential real propertiesand eight revenue producing commercial real properties, all of which are located in Canada. RELPacquired these properties through proceeds raised on the issuance of its partnership units to SkylineOperating Trust, mortgages on the properties and a line of credit secured by the properties.


(a) DEFERRED CHARGES

Deferred charges are for professional fees paid for the set up of the partnership and mortgagefinancing fees paid. Deferred charges are amortized on a straight line basis over five years.

(b) INCOME PRODUCING PROPERTIES

Amortization is taken on assets at the following rates:

BuildingsParking lotsEquipmentComputer

- 4% declining balance basis8% declining balance basis

- 20% declining balance basis- 55% declining balance basis

(c) IMPAIRMENT OF LONG LIVED ASSETS

Long lived assets are tested for recoverability whenever events or changes in circumstancesindicate that their carrying amount may not be recoverable. An impairment loss is recognizedwhen the carrying value exceeds the total undiscounted cash flows expected from their use andeventual disposition. The amount of the impairment loss is determined as the excess of thecarrying value of the asset over its fair value.

(d) REVENUE RECOGNITION

Revenue from income producing properties is recognized on a straight-line basis over the termof the lease.

(e) INCOME TAXES

These financial statements reflect the assets, liabilities, revenues and expenses of thepartnership and do not include any other assets, liabilities, revenues or expenses of the partnersor the liability of the partners for taxes on earnings of the partnership.

(f) USE OF ESTIMATES

The preparation of financial statements in conformity with Canadian generally acceptedaccounting principles requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenues and expenses duringthe year. Actual results could differ from those estimates.

Page 6

.,

=

=

=





The partnership’s financial instruments consist of cash, accounts receivables, and accounts payable andaccrued liabilities. Unless otherwise noted, it is management’s opinion that the partnership is notexposed to significant interest, currency or credit risks arising from these financial instruments.

The partnership does not have a significant exposure to any individual customer or counterpart.


The carrying values of cash, accounts receivable and accounts payable approximate their fair value dueto the relatively short periods to maturity of these items.

The carrying amount of the long term debt approximates its fair value because the interest rates areclose to market rates.


Skyline Real Estate Limited Partnership ("RELP") is in a sharing and exchange agreement("Agreement") with Skyline Apartment Real Estate Investment Trust, Skyline Equities LimitedPartnership and Skyline Equities Inc., which has been effective since inception. Skyline Equities LimitedPartnership is controlled by Skyline Equities Inc. and, as of December 31, 2008, is the owner of twenty-one revenue producing multi-residential real properties, which could have a small commercialcomponent, all of which are located in Canada. The Agreement allows for the sharing between RELPand Skyline Equities Limited Partnership of the Property Net Income earned on each individual property.The Property Net Income with respect to a particular property is the income earned from the operationthereof, net of all expenses without deducting amortization or capital cost allowance. The allocation ofthe Property Net Income from one limited partnership to the other limited partnership is based on theestimated value of one limited partnership over the estimated value of the combined limitedpartnerships.

INCOME PRODUCING PROPERTIESAccumulated Net Net

Cost Amortization 2008 2007

Land $ 28,542,514 $ 0 $ 28,542,514 $ 11,825,400Buildings 227,886,914 8,742,407 219,144,507 88,186,812Parking lots 271,624 10,865 260,759 0Equipment 558,207 68,678 489,529 64,289Computer 3,300 908 2,392 0

$257,262,559 $ 8,822,858 $248,439,701 $100,076,501

RELATED PARTY TRANSACTIONS

Skyline Real Estate Limited Partnership ("RELP") has entered into an asset management agreementwith Skyline Asset Management Inc. and a property management agreement with Skyline ManagementIncorporated. Skyline Asset Management Inc. and Skyline Management Incorporated are controlled bySkyline Incorporated. Skyline Incorporated is the general partner of RELP and is entitled to 20% ofdistributions after the limited partners have received their initial contribution value.

Fees payable under the asset management agreement are 2% of adjusted gross revenue. Feespayable under the property management agreement are 5% of adjusted gross revenue. Fees paid in2008 are as follows:

2008 2007

Asset management feesProperty management fees

$ 501,305 $ 206,8381,362,242 506,569

Page 7

1

m

1

10.

11.

12.



DUE FROM RELATED PARTIES

The advances (to)/from related parties are non-interest bearing with no set terms of repayment and areunsecured. The advances consist of the following:

2008 2007

Skyline Equities Limited PartnershipSkyline Equities Inc.

BANK OVERDRAFT

$ 8,750,795 $ 5,142,846...... .3.8,000 (12,000)

$ 8,788,795 $ 5,130.846

The bank overdraft is secured by a general security agreement over some of the income producingproperties of the partnership and of Skyline Equities Limited Partnership.

CHANGE IN ACCOUNTING POLICY

During 2008, the partnership changed its accounting policy for the capitalization of its stabilizing andvalue enhancing capital expenditures. Stabilizing and value enhancing capital expenditures aredetermined as investments in assets focused on improving the economic life and value of the propertiesand are mainly long term in nature. Management judges that the new policy is preferable as it isconsistent with industry practices.

These capital improvements have been capitalized and amortized at the same rate as the capital costsof the revenue producing properties.

This change in accounting policy has been implemented in 2008 and has not been applied retroactively.

COMPARATIVE FIGURES

The comparative figures presented have not been audited and we have not expressed an audit opinionon these figures. A review of the previous year’s financial statements was performed.

MORTGAGES AND PROMISSORY NOTES RECEIVABLE

During the 2007 fiscal year, Skyline Real Estate Limited Partnership purchased a building with four pre-existing life lease agreements whereby tenants have purchased their specific unit within the building.The four mortgages and two promissory notes on the units were transferred to the partnership at thetime of purchase. The mortgages and promissory notes are being amortized over 25 years at 6% andare due in 2031.

LONG TERM DEBT

Mortgages payable bearing interest rates ranging from 3.89%and 6.88% per annum, payable in monthly instalments ofprincipal and interest, maturing from 2009 to 2024, and aresecured by specific charges against specific properties. Allinterest rates are fixed for the term of the respectivemortgage.

Second mortgages payable bearing interest at rates rangingfrom 4.38% to 8%, payable in monthly instalments of principaland interest, maturing from 2009 to 2017, and are secured byspecific charges against specific properties. All interest ratesare fixed for the term of the respective mortgage.


2008 2007

$134,386,701 $ 52,971,489

29,626,083 ... 7,954,307164,012,784 60,925,79622,169,057 17,631,331

$141,843,727 $ 43,294,465

Page 8

12.

13.

14.



LONG TERM DEBT (continued)

Future minimum payments on long term obligations are as follows:

2009 $ 22,169,0572010 23,753,7782011 34,397,9012012 9,484,0532013 26,561,337

Thereafter 47,646,658

$164,012,784

LEASE OBLIGATIONS

Skyline Real Estate Limited Partnership leases the land relating to two of its income producingproperties. The operating leases are for 99 years, expiring in 2065 and 2066. Future minimum leasepayments for the next five years are as follows:

2OO9 $ 119,8652010 119,8652011 119,8652012 119,8652013 119,865

COMMITMENTS

During the year, the partnership committed to purchasing seventeen revenue producing real propertiesfor an approximate amount of $108,000,000. As at the year end, only three of the revenue producingreal properties had transferred ownership to the partnership. The remaining fourteen revenue producingreal properties were held in escrow at the year end. As part of the commitment, the partnership wasentitled to the revenue and was required to pay all expenses, including the interest cost on themortgages, of the revenue producing real properties that were still held in escrow. The net rental incomefrom the revenue producing real properties that were held in escrow for the period from the originalcommitment to the year end was $251,990. As at the year end, the partnership had deposits of$16,488,882 on the revenue producing real properties that were held in escrow.

Subsequent to year end, the ownership of the remaining revenue producing real properties held inescrow have been transferred to the partnership. The partnership assumed mortgages totaling$42,437,036 and vendor take back mortgages of $49,362,964 on the revenue producing real properties.The balance of the purchase was financed through issuance of partnership units.

Subsequent to year end, the partnership has also committed to purchase a further three revenueproducing real properties for an approximate amount of $9,150,000. These revenue producing realproperties were financed or will be financed by long term debt financing and issuance of partnershipunits. One of these properties was purchased from Skyline Incorporated. The revenue producing realproperty purchased from Skyline Incorporated was purchased for an amount, that in the opinion of theBoard of Trustees, estimated market value of the revenue producing real property. The purchase priceof this revenue producing real property was $2,950,000.

Page 9

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUST

NON-CONSOLIDATED FINANCIAL STATEMENTS


INDEX

AUDITORS’ REPORT

STATEMENT 1 - Non-Consolidated Balance Sheet

STATEMENT 2 - Non-Consolidated Unitholders’ Equity

STATEMENT 3 - Non-Consolidated Loss

STATEMENT 4 - Non-Consolidated Cash Flows

NOTES TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS


People Count.

AUDITORS’ REPORT

To the Unitholders of: Skyline Apartment Real Estate Investment Trust

We have audited the non-consolidated balance sheet of Skyline Apartment Real EstateInvestment Trust as at December 31, 2008 and the non-consolidated statements of unitholders’ equity,loss and cash flows for the year then ended. These financial statements are the responsibility of thetrust’s management. Our responsibility is to express an opinion on these financial statements based onour audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards.Those standards require that we plan and perform an audit to obtain reasonable assurance whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financialposition of the trust as atDecember 31, 2008 and the results of its operations and the changes in itsfinancial position for the year then ended in accordance with Canadian generally accepted accountingprinciples.



Page 215 Lewis Road, Guelph ON N I H I E9 ¯ (519) 822-9933 fax: (519) 822-9212 ¯ www.rlb.ca

STATEMENT 1

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNON-CONSOLIDATED BALANCE SHEET


ASSETS

CURRENTCashAccounts receivableLoan receivable (note 5)Due from Skyline Real Estate Holdings Inc.Prepaid expenses

2008

014,945

3,262,30620,141

, 23,5233,320,9!,5

109,052,734

1,852,805

INVESTMENT IN SKYLINE OPERATING TRUST

OTHERDeferred charges

$114,226,454

LIABILITIES

CURRENTBank indebtedness (note 6)Accounts payable and accrued liabilities

$ 12,479,122565,560

13,044,682

2007

$ 10,504,69419,790

1,700,00000

12,224,484

45,606,457

977,977

$ 58,808,918

0209,130209,130

UNITHOLDERS’ EQUITY

UNITHOLDERS’ EQUITY (statement 2) 101,181,772

$114,226,454

58,599,788

$ 58,808,9!,8


STATEMENT 2

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNON-CONSOLIDATED STATEMENT OF UNITHOLDERS’ EQUITY


2008 2007

BALANCE, beginning of year $ 58,599,788 $ 9,328,377

Units issued during the year (note 1) 52,275,724 51,885,993

Distributions to unitholders (7,599,944) (2,272,510)

Redemption of units (note 1) (1,400,034) (142,800)

101,875,534 58,799,060

Loss for the year (statement 3) (693,762) (199,272)

BALANCE, end of year $101,181,772 $ 58,599,788


STATEMENT 3

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNON-CONSOLIDATED STATEMENT OF LOSSFOR THE YEAR ENDED DECEMBER 31, 2008

2008

REVENUE $ 381,354

EXPENSESAdvertisingInsuranceInterest and bank chargesProfessional feesSuppliesSecurities filing feesDeferred charges amortization

104,5243,477

392,716189,141

28638,331

346,6411,075,116

LOSS for the year $ (693,762)

2007

$ 62,468

18,5330

6,715101,174

3070

135,011261,740

$ (199,272)


STATEMENT 4

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNON-CONSOLIDATED STATEMENT OF CASH FLOWS


CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESNet loss for the yearItems not requiring an outlay of cash

Deferred charges amortization

Changes in non-cash working capitalAccounts receivablePrepaid expensesAccounts payable and accrued liabilitiesDue to related party

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIESUnits issued on private offeringRedemption of unitsIssuance costsDistributions paid

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIESPurchase of units of Skyline Operating TrustDistributions receivedLoan to Skyline Incorporated

2008

$ (693,762)

346,641(347,121)

4,845(23,523)

356,431(20,141)(29,509)

52,275,724(1,400,034)(1,221,470)(7,599,944)42,054,276

(72,372,346)8,926,069

(1,562,306)(65,008,583)

(DECREASE) INCREASE IN CASH for the year (22,983,816)

NET CASH, beginning of year 10,504,694

NET (BANK INDEBTEDNESS) CASH, end of year $ (12,479,122)

2007

$ (199,272)

135,011(64,261)

(19,790)0

204,371(38,382)81,938

51,885,992(142,800)(894,839)

(2,272,510)48,575,843

(37,722,657)1,236,752

(1,700,000)(38,185,905)

10,471,876

32,818

$ 10,504,694


=

=

,,

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNOTES TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS


BASIS OF PRESENTATION

Skyline Apartment Real Estate Investment Trust ("Skyline Apt. REIT") is an unincorporated, open-ended private real estate investment trust established under the laws of the Province of Ontariothat was created pursuant to a Declaration of Trust dated June 1, 2006. During 2008, Skyline Apt.REIT issued an additional 4,847,431 REIT Units for an aggregate issue price of $52,275,724.The issue price per unit was $10.40 until October 2008 when it was increased to an issue priceper unit of $11.00. Skyline Apt. REIT used some of the proceeds it received to redeem 130,649units for an aggregate redemption price of $1,400,034. The remaining proceeds were used toinvest in Skyline Operating Trust. Skyline Operating Trust then used the proceeds to invest inSkyline Real Estate Limited Partnership ("RELP"). RELP used part of the proceeds it received onthe subscription of its partnership units together with mortgage financing to invest in forty onerevenue producing multi-residential real properbj and eight revenue producing commercial realproperty investments all located in Canada.


(a) INVESTMENT

The investment in Skyline Operating Trust has been recorded at original cost lessdistributions received during the period.

(b) DEFERRED CHARGES

Deferred charges are for professional fees paid for the set up of the income trust as wellas for the private offering and commission and referral fees. Deferred charges areamortized on a straight line basis over five years. Amortization is taken at 50% in the yearof addition.

(c) USE OF ESTIMATES

The preparation of financial statements in conformity with Canadian generally acceptedaccounting principles requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure of contingent assetsand liabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the year. Actual results could differ from those estimates.



The trust’s financial instruments consist of cash, accounts payable and accrued liabilities. Unlessotherwise noted, it is management’s opinion that the trust is not exposed to significant interest,currency or credit risks arising from these financial instruments.

The trust does not have a significant exposure to any individual customer or counterpart.


The carrying values of cash, accounts payable and accrued liabilities approximate their fair valuedue to the relatively short periods to maturity of these items.

Page 7

,.

,.

=

=

=

SKYLINE APARTMENT REAL ESTATE INVESTMENT TRUSTNOTES TO THE NON-CONSOLIDATED FINANCIAL STATEMENTS



Skyline Apartment Real Estate Investment Trust ("Skyline Apt. REIT") is in a sharing andexchange agreement ("Agreement") with Skyline Equities Limited Partnership, Skyline Real EstateLimited Partnership and Skyline Equities Inc., which has been effective since inception. SkylineEquities Limited Partnership is the owner of twenty-one revenue producing multi-residential realproperties, which could have a small commercial component, all of which are located in Canada.The Agreement allows for the sharing between Skyline Equities Limited Partnership and SkylineReal Estate Limited Partnership of the Property Net Income earned on each individual property.The Property Net Income with respect to a particular property is the net income earned from theoperation thereof, net of all expenses, without deducting amortization or capital cost allowance.The allocation of the Property Net Income from one limited partnership to the other limitedpartnership is based on the estimated value of one limited partnership over the estimated value ofthe combined limited partnerships.

Skyline Equities Inc. has the right to transfer its partnership units in Skyline Equities LimitedPartnership to Skyline Apt. REIT for units of Skyline Apt. REIT.

LOAN RECEIVABLE

The loan receivable is a loan to Skyline Incorporated, a related company. Interest is charged at12% per annum and the loan is due on demand. The loan is secured by a Share PledgeAgreement with respect to all of the shares held in the capital stock of Skyline Equities Inc., apersonal guarantee and postponement of claims from each of the principals, and a guarantee andpostponement of claims by Skyline Management Incorporated.

BANK INDEBTEDNESS

The bank indebtedness is secured by a general security agreement, as well as collateralmortgages over some of the income producing properties of Skyline Real Estate LimitedPartnership and Skyline Equities Limited Partnership. Interest is charged at Prime + 1% perannum.

SUBSEQUENT EVENT

Subsequent to the date of the non-consolidated financial statements, the trust issued an additional1,152,215 units at $11 per unit.

COMPARATIVE FIGURES

The comparative figures presented have not been audited and we have not expressed an auditopinion on these figures. A review of the previous year’s financial statements was performed.

Page 8

SKYLINE APARTMENT



June 25, 2009

MANAGEMENT DISCUSSION & ANALYSIS Skyline Apartment Real Estate Investment Trust (“Skyline Apartment REIT”) is an unincorporated open-end investment trust created by a declaration of trust made as of June 1, 2006 (the “Declaration of Trust”) and governed by the laws of the Province of Ontario and the federal laws of Canada applicable therein. Skyline Apartment REIT earns income from investments in a diversified portfolio of multi-unit residential properties and a complement of commercial properties located in Canada. At December 31, 2008, Skyline Apartment REIT’s portfolio reached 5,404 residential suites and 768,159 square feet of commercial space; well diversified geographically across 33 Canadian communities. The year 2008 was a milestone year for Skyline Apartment REIT, both in terms of properties and in investors… Due diligence was conducted on numerous buildings and during the year, Skyline had secured $245 million in real estate; highlighted with the acquisition of 2 portfolios: the $81.4 million office portfolio from the Co-operators Insurance companies, and the $108 million residential portfolio from Conundrum Capital Corporation. In total, 32 properties were committed to being added to the portfolio comprised of 2,353 suites and 501,089 square feet of commercial space. The close of 2008 saw the REIT portfolio reach 5,404 residential suites and 768,159 square feet of commercial space in 33 communities across 4 provinces. The market value of Skyline Apartment REIT at the close of 2008 was estimated at $450 million. Skyline Apartment REIT also reached out to over 400 new Unitholders and crossed the $100 million mark raised on a private equity basis. Skyline Apartment REIT now has over 800 investors in 9 Canadian provinces.

Goals and Objectives of Skyline Apartment REIT

In accordance with the Declaration of Trust, the goals and objectives of Skyline Apartment REIT are:

1. To provide REIT Unitholders with stable and growing cash distributions, payable monthly and, to the extent reasonably possible, tax deferred, from investments in a diversified portfolio of income-producing multi-unit residential properties located in Canada; and

2. To maximize REIT Unit value through the ongoing management of Skyline Apartment REIT’s assets and through the future acquisition of additional properties.

MANAGEMENT STRATEGY

Core Purpose: We exist to surface value in Real Estate

SKYLINE APARTMENT



Vision: To be the very best at pursuing steady, calculated Real Estate growth grounded in fundamentally sound properties, to create a superior opportunity for long term investors and accommodations of choice. Mission: Identify opportunities and surface value. Values: We are practical, driven, efficient, reliable, and respectful. We act with integrity and have pride in ownership.

As managers to Skyline Apartment REIT; the Asset Manager and Property Manager will implement its values and strategies as it fulfills its responsibilities. The Skyline mandate is clear and focused on the following strategies:

Customer Satisfaction. The Asset Manager strives to keep all customers satisfied and as long-term tenants by creating an environment that is clean and comfortable. By developing a sense of community within the properties through various programs, it will reduce turnover and vacancy which will create demand for people wanting to live in Skyline Apartment REIT’s buildings. Through the reduction in costs associated with turnover and through higher demand allowing increasing rents, net income will grow accordingly.

Maintenance and Repair Programs. The Asset Manager is fundamentally driven by efficiencies and cost effective programs that are accretive to Skyline Apartment REIT’s short-term and long-term value. Through the portfolio’s conversion to a real estate investment trust, the Asset Manager has positioned Skyline Apartment REIT to take full advantage of efficiency programs and capital investments that will attract customers and enhance the value of the portfolio.

Quality On-Site Building Staff. The Asset Manager believes that success of a property from both financial and customer satisfaction standpoints starts with the attitudes and work ethic from the on-site building staff. From being the first point of contact, to the ongoing attention to the customer’s needs, the building staff represents Skyline Apartment REIT. As well as being attentive and dedicated, the Property Manager will seek on-site staff that is skilled in many areas in order to reduce the requirement for outside trades to be required for ordinary day-to-day repairs and maintenance.

Detailed Financial Reporting. The Asset Manager utilizes sophisticated financial tools to maximize Skyline Apartment REIT’s income and measure the effectiveness of cost control and efficiency programs. The Property Manager and the Asset Manager disclose financial reporting to those involved who have a direct impact on the financial success and control of those particular incomes and expenses.

Strategic Debt Management. The Asset Manager will work diligently to seek out financing opportunities to optimize Skyline Apartment REIT’s leveraged returns. Attention to staggered maturities and terms, at leverage amounts set out by the Declaration of Trust, will ensure Skyline Apartment REIT’s exposure to fluctuating interest rates over the short and long term are both minimized and utilized to benefit

SKYLINE APARTMENT



Skyline Apartment REIT. The Asset Manager will make use of operating lines for capital expenditures and acquisitions to improve the returns of Skyline Apartment REIT.

Enhancement of Skyline Apartment REIT’s Portfolio. The Asset Manager is always looking at opportunities to maximize Skyline Apartment REIT’s portfolio. Properties that are “mature” and are no longer adding value to Skyline Apartment REIT, may be sold or repositioned if there is a market for an enhanced property. The Asset Manager will continue to diversify the portfolio by purchasing properties in thriving communities that will continue to strengthen and insulate Skyline Apartment REIT from concerns that may arise in any one community.

Communications. The Asset Manager will deliver concise and current information to existing Unitholders with respect to the activities within Skyline Apartment REIT’s portfolio.

KEY PERFOMANCE INDICATORS To meet its objectives and evaluate the success of its strategies, Skyline Apartment REIT uses several key operating and performance indicators:

Occupancy. Management is focused on achieving occupancy levels that exceed the overall averages for the geographic regions in which Skyline Apartment REIT exists, while not sacrificing the maximization of rental income.

Average Monthly Rents. Through ongoing and active management, the highest possible average monthly rents will be targeted in each geographic region.

Loss to Lease. With management of the key indicators of ‘occupancy’ and ‘average monthly rents’; Management also monitors Loss to Lease which is defined as the net positive or negative variance of actual rents against market rents. Management strives to minimize the Loss to Lease margin.

Net Operating Income (“NOI”). This is defined as operating revenues less operating expenses, and is a key performance measure of operating performance. Management is focused on achieving an NOI margin of 55% of operating revenues.

Distributable Income (“DI”), Funds From Operations (“FFO), Adjusted Funds From Operations (“AFFO”), Normalized Funds From Operations (“NFFO”). These terms are non-GAAP terms and are industry standard measures for real estate investment trusts. As Skyline Apartment REIT’s portfolio matures, Management will move towards reporting and governance in accordance with these terms. In the interim, Management and the Board of Trustees have determined that during a period where greater than 50% of the portfolio consists of un-stabilized properties, that performance and distributions will be evaluated on Earnings Before Income Taxes, Depreciation, and Amortization (“EBITDA”). During this period, it is considered a normal course of business for Management to be refinancing properties for operating cash flows and capital

SKYLINE APARTMENT



investment funds; additionally, a normal course of business includes the selling of mature assets for income and value crystallization.

Payout Ratio. As a result of Skyline Apartment REIT’s portfolio being very active in its youth, management has targeted a payout ratio of 100% of distributable income

Portfolio Growth. Insofar as good opportunities exist that are accretive, Management will continue to acquire income-producing real estate for the portfolio. The inverse is also true, where properties are deemed mature and non-accretive and value enhancing improvements will not improve the properties; they will be positioned for sale.

Financing. Management is continually managing and planning its financing strategies for the portfolio. This ensures that the Skyline Apartment REIT portfolio is well positioned to mitigate interest rate uncertainty as well as to responsibly ladder the maturities of the portfolio’s mortgages over the long-term.

REIT PORTFOLIO

Skyline Apartment REIT’s property portfolio is a well balanced mix of residential and commercial properties, diversified geographically and demographically. The REIT continues to look at further expanding and enhancing the portfolio in non-metropolitan markets in Canada.

Following industry practices, Management has defined properties in the Skyline Apartment REIT as either Core, Un-stabilized, or Repositioning. Core properties are those that have been owned under the REIT for greater than 24 months Un-stabilized properties are those that have been owned under the REIT for less than 24 months. Repositioning properties are properties that have been identified by Management as extensive renovation projects that will be very capital intensive and will be characterized by high vacancy during the retrofit project.

Portfolio by Asset Type

As at December 31, 2008 # of Units %

Residential

Core 1,723 31.9%

Un-stabilized 3,373 62.4%

Repositioning 308 5.7%

Total Residential Suites 5,404 100.0%

Commercial 747,931 sf

SKYLINE APARTMENT



Portfolio Average Monthly rents and Occupancy (By Asset Type)

As at December 31, 2008 Average Monthly Rents

Occupancy %

Residential

Core $715.61 95.4%

Un-stabilized $754.71 92.4%

Repositioning $795.43 51.9%

Total Residential Suites $742.97 91.0%

Commercial $1.00 psf 95.5%

CAPITAL INVESTMENTS

During 2008, Skyline Apartment REIT acquired and/or secured 2,353 residential units and 501,089 square feet of commercial space for total cost of $245 million and sold 82 residential suites for $5.1 million.

In general, Skyline Apartment REIT is purchasing property at substantially less that current replacement costs, and is committed to increasing the value of these assets by investing in capital expenditure initiatives and programs in order to improve the overall quality of the portfolio in order to sustain and expand the portfolio’s future rental income-producing potential over its expected life.

In correlation with industry peers, Skyline Apartment REIT has two types of capital expenditures: maintenance capital expenditures, and stabilizing and value-enhancing capital expenditures. The main differentiation between these two types of capital expenditures is whether the costs incurred are to maintain the existing cash flows from the properties or whether they were to achieve the longer term goal of produce enhanced cash flows and Unit distributions.

Maintenance capital expenditures vary with market conditions are partially related to unit turnover. Management projects that its annual overall maintenance capital expenditures are $450 per residential suite. These expenditures are in addition to normal repairs and maintenance expenditures which are typically in the range of $650 per residential suite.

Stabilizing and value-enhancing capital expenditures are with the intent of increasing the productivity of the property portfolio. These expenditures are primarily related to acquisitions completed since the creation of the REIT. They improve the economic life and value of the properties, and are mainly long-term in nature. The timing of these expenditures varies according to management’s capital plans and is funded with credit facilities, mortgage advances, refinancing and equity issues.

SKYLINE APARTMENT



CAPITAL STRUCTURE

‘Capital’ is defined as the aggregate of debt and Unitholder’s equity. Management’s objectives with respect of Capital is to maintain its ongoing ability to fund its distributions to Unitholders, to meet its repayment obligations under mortgages and other credit facilities, and to ensure there are sufficient funds available to meet the capital requirements of the portfolio.

Skyline Apartment REIT’s Declaration of Trust (“DOT”) permits the maximum amount of total ldebt to 70% of the gross book value of the REIT’s assets. Gross book value is defined as the acquisition cost of the properties plus the capital improvements expended on the properties.

The total Capital of Skyline Apartment REIT as at December 31, 2008 is summarized below:

Year Ended December 31, 2008 ($ Thousands, except where noted)

Mortgages Payable 217,660

Bank indebtedness 13,971

Unitholders’ Equity 124,876

Total Capital 356,507

Mortgage Debt to Gross Book Value 63.8%

Total Debt to Gross Book Value 67.9%

Total Debt to Market Value 65.8%

Weighted Average Mortgage Interest Rate 5.44%

Weighted Average Mortgage Term to Maturity (years) 3.78

UNITHOLDER TAXATION

For taxable Canadian residents, Unitholder distributions are treated as follows for tax purposes:

2008

Taxable to Unitholders as Other Income ---

Taxable to Unitholders as Capital Gain Income ---

Tax Deferral 100%

TOTAL 100%

SKYLINE APARTMENT



DISTRIBUTABLE INCOME and NET INCOME FOR DISTRIBUTIONS

Distributable Income (“DI”) is not a measure defined by Generally Accepted Accounting Principles (“GAAP”), nor does it have a standard industry definition, and therefore cannot be relied upon as a comparable to other REITs that use a similar term. While Management considers DI to be a key cash flow measure for determining Skyline Apartment REIT’s capacity to pay cash distributions to Unitholders, it does not solely rely upon DI as the source of income for distributions. Rather, the Board of Trustees is currently using EBITDA to pay distributions to its Unitholders.

Distributions to Unitholders/Shareholders and Payout Ratio

Year ended December 31, 2008 ($ Thousands, except where noted)

Distributions Declared 10,308

Distributions Declared per Unit $0.945

Net Income (Before Amortization) 9,912

Payout Ratio 104.0%

Less: Distributions Reinvested 1,833

Effective Payout Ratio 85.5%

RISKS AND UNCERTAINTIES

Skyline Apartment REIT must adhere to specific operating and investment guidelines as set out in the DOT. These guidelines are established to limit to the best extent possible the risks and uncertainties that exist.

Real Property Ownership

All real property investments are subject to elements of risk. Such investments are affected by general economic conditions, local real estate markets, demand for multi-unit residential premises, competition from other available residential premises and various other factors.

Certain significant expenditures, including property taxes, capital repair and replacement costs, maintenance costs, mortgage payments, insurance costs and related charges must be made throughout the period of ownership of real property regardless of whether the property is producing any income. If Skyline Apartment REIT is unable to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or sale.

SKYLINE APARTMENT



Real property investments tend to be relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may tend to limit Skyline Apartment REIT’s ability to vary its portfolio promptly in response to changing economic or investment conditions. If Skyline Apartment REIT were required to liquidate its real property investments, the proceeds to Skyline Apartment REIT might be significantly less than the aggregate value of its properties on a going concern basis.

Skyline Apartment REIT will be subject to the risks associated with debt financing, including the risk that existing mortgage indebtedness secured by the Properties will not be able to be refinanced or that the terms of such refinancing will not be as favourable as the terms of existing indebtedness.

Future Property Acquisitions

While the acquisition by Skyline Apartment REIT of the Properties under Contract is not conditional upon completion of this Offering, the Financial Forecast assumes the acquisition of the Properties under Contract by Skyline Apartment REIT to be completed on or about August 31, 2007. Additionally, while Skyline Apartment REIT may enter into non-binding letters of intent with respect to properties under review, there can be no assurance that such properties will be acquired. Accordingly, there can be no assurance that Skyline Apartment REIT will acquire the Properties under Contract or be able to acquire, at the rates of return assumed in the Financial Forecast, other properties with the net proceeds to Skyline Apartment REIT of this Offering allocated for such purpose. No forecast has been made for the acquisition of properties under review.

Revenue Producing Properties

The Properties generate income through rental payments made by the tenants thereof. Upon the expiry of any lease, there can be no assurance that such lease will be renewed or the tenant replaced. The terms of any subsequent lease may be less favourable to Skyline Apartment REIT than the existing lease. Unlike commercial leases which generally are “net” leases and allow a landlord to recover expenditures, residential leases are generally “gross” leases and the landlord is not able to pass on costs to its tenants.

Competition for Real Property Investments

Skyline Apartment REIT competes for suitable real property investments with individuals, corporations and institutions (both Canadian and foreign) and other real estate investment trusts which are presently seeking, or which may seek in the future, real property investments similar to those desired by Skyline Apartment REIT. A number of these investors may have greater financial resources than those of Skyline Apartment REIT, or operate without the investment or operating restrictions of Skyline Apartment REIT or according to more flexible conditions. An increase in the availability of investment funds, and an increase in interest in real property investments, may tend to increase competition for real property investments, thereby increasing purchase prices and reducing the yield on them.

Competition for Tenants

The real estate business is competitive. Numerous other developers, managers and owners of properties compete with Skyline Apartment REIT in seeking tenants. The existence of

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competing developers, managers and owners and competition for Skyline Apartment REIT’s tenants could have an adverse effect on Skyline Apartment REIT’s ability to lease suites in its properties and on the rents charged.

Interest Rates

It is anticipated that the market price for the REIT Units at any given time may be affected by the level of interest rates prevailing at that time. A rise in interest rates may have a negative effect on the market price of the REIT Units. A decrease in interest rates may encourage tenants to purchase condominiums or other types of housing, which could result in a reduction in demand for rental properties. Changes in interest rates may also have effects on vacancy rates, rent levels, refurbishing costs and other factors affecting Skyline Apartment REIT's business and profitability.

General Economic Conditions

Skyline Apartment REIT is affected by general economic conditions, local real estate markets, competition from other available rental premises, including new developments, and various other factors. The competition for tenants also comes from opportunities for individual home ownership, including condominiums, which can be particularly attractive when home mortgage loans are available at relatively low interest rates. The existence of competing developers, managers and owners and competition for Skyline Apartment REIT’s tenants could have an adverse effect on Skyline Apartment REIT’s ability to lease suites in its properties and on the rents charged, increased leasing and marketing costs and increased refurbishing costs necessary to lease and release suites, all of which could adversely affect Skyline Apartment REIT’s revenues and, consequently, its ability to meet its obligations. In addition, any increase in the supply of available space in the markets in which Skyline Apartment REIT operates or may operate could have an adverse effect on Skyline Apartment REIT.

Government Regulation

Skyline Apartment REIT currently has an interest in properties located in the Province of Ontario. The Tenant Protection Act, 1997 (Ontario) (the ‘‘TPA’’), which came into force on June 17, 1998, provides restrictions upon the ability of a landlord to increase rents above a prescribed guideline, which is established annually. In order to increase rents above the maximum guideline increase of 1.8% per annum for 2009, a landlord must make an application based on an extraordinary increase in the cost for municipal or utility levies and charges and/or capital expenditures incurred with respect to a residential complex or suite therein. As a result, Skyline Apartment REIT may, in the future, incur capital expenditures which may not be fully recoverable from tenants. The TPA also permits tenants to bring proceedings to reduce rent due to reductions or discontinuances in services or facilities or due to a reduction in the applicable municipal taxes. The TPA provides tenants of residential rental properties with a high level of security of tenure and prescribes certain procedures, including mandatory notice periods, which must be followed by a landlord in order to terminate a residential tenancy. As certain proceedings may need to be brought before the Ontario Rental Housing Tribunal, it may take several months to terminate a residential lease, even where the tenant’s rent is in arrears. The applicable legislation may be subject to further regulations or may be amended, repealed or enforced, or new legislation may be enacted, in a manner which will materially adversely affect the ability of Skyline Apartment REIT to maintain the historical level of earnings of its properties.

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The Government of Ontario has finalized new residential tenancy legislation which it has characterized as ‘‘effective tenant protection.’’ The Residential Tenancies Act, 2006 ("RTA") received Royal Assent June 22, 2006. The RTA is now law, but not yet in effect. When proclaimed into force on a date to be decided upon in the future, it will replace the TPA. The effect of changes to existing legislation and other policy initiatives in the residential rental sector is difficult to predict. However, to the extent that such legislation prevents, among other things, landlords from charging market rents or otherwise recovering building improvement costs, there could be a material adverse effect on Skyline Apartment REIT, Skyline Apartment REIT’s distributable income and its growth prospects.

The nature of high rise apartment construction and operation is such that refurbishment and structural repairs are required periodically, in addition to regular on going maintenance. In addition, legislation relating to, among other things, environmental and fire safety standards is continuously evolving and changes thereto may give rise to ongoing financial and other obligations of Skyline Apartment REIT, the costs of which may not be fully recoverable from tenants.

Environmental Matters

Environmental and ecological legislation and policies have become increasingly important, and generally restrictive, in recent years. Under various laws, Skyline Apartment REIT could become liable for the costs of removal or remediation of certain hazardous or toxic substances released on or in its properties or disposed of at other locations. The failure to remove or remediate such substances, if any, may adversely affect an owner’s ability to sell such real estate or to borrow using such real estate as collateral, and could potentially also result in claims against the owner by private plaintiffs. Where a property is purchased and new financing is obtained, Phase I Environmental Assessments are performed by an independent and experienced environmental consultant. In the case of mortgage assumption, the vendor will be asked to provide a satisfactory Phase I and/or Phase II Environmental Assessment that the Asset Manager will rely upon and/or determine whether an update is necessary.

Dependence on Key Personnel

The management of Skyline Apartment REIT depends on the services of certain key personnel. The termination of employment by the Asset Manager or the Property Manager of any of these key personnel could have a material adverse effect on Skyline Apartment REIT.

Tax Related Risks

There can be no assurance that income tax laws and the treatment of mutual fund trusts will not be changed in a manner which adversely affects Skyline Apartment REIT or the Unitholders.

If Skyline Apartment REIT fails or ceases to qualify as a “mutual fund trust” for the purposes of the Tax Act, the tax consequences described under “Canadian Federal Income Tax Considerations” and “Eligibility for Investment” would in some respects be materially and adversely different. In addition, REIT Unitholders may become subject to provincial taxes, such as Ontario Land Transfer Tax, in respect of their REIT Units.

If investments in the Skyline Apartment REIT become publicly listed or traded, there can be no assurances that the Skyline Apartment REIT will not be subject to the SIFT Rules, as described under “Canadian Federal Income Tax Considerations – SIFT Rules”, at that time.

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Skyline Apartment REIT or its subsidiaries may be reassessed for taxes from time to time. Such reassessments together with associated interest and penalties could adversely affect Skyline Apartment REIT.

Financing

Skyline Apartment REIT is subject to the risks associated with debt financing, including the risk that Skyline Apartment REIT may be unable to make interest or principal payments or meet loan covenants, the risk that defaults under a loan could result in cross defaults or other lender rights or remedies under other loans, and the risk that existing indebtedness may not be able to be refinanced or that the terms of such refinancing may not be as favourable as the terms of existing indebtedness. A portion of Skyline’s Acquisition and Operating Facility is at floating interest rates, and accordingly, changes in short-term borrowing will affect Skyline Apartment REIT’s costs of borrowing.

FUTURE OUTLOOK

In stronger and weaker economic times there are both opportunities to benefit from, but reasons to be cautious. With the narrow pendulum of risk and reward that the multi-unit residential market swings within, Skyline Apartment REIT will capitalize on present opportunities and mitigate the present risks to continue to offer stable growth of net operating income and overall value of the properties within the portfolio. Skyline Apartment REIT will continue to grow in 2009 not only by expanding the portfolio, but by increasing the revenues of the current portfolio. These 2 areas of growth are not dependant upon one another for success, and while Skyline Apartment REIT will seek new acquisitions, it will only act on those opportunities that will be accretive to the Unitholders. Due to tighter credit markets, the competition for assets in the markets in which we seek property in will not be as competitive in 2009 allowing us to move on properties that will enhance the performance of Skyline Apartment REIT. With the existing portfolio, Skyline Apartment REIT will see its geographical and demographical diversification mitigate the risks of slowing economies while capitalizing on the strong and growing economies. A close eye will be kept on the potential for an increase in bad debt. 2009 is a year where Skyline Apartment REIT will continue to build relationship communities within the properties that create an environment where people want to live and will invite others to live in as well. This is done by continuing to invest in properties where value will attract and retain residents through delivering a Skyline Apartment REIT property as a superior experience and place to live. By being in communities where the cost of home ownership is in most cases at least double the cost of renting; this economy makes Skyline Apartment REIT a wise alternative to home ownership. It means that significant opportunity exists to increase monthly rents on lease turnovers while exercising guideline increases to existing residents. By repositioning certain properties in markets to better reflect the demand of the demographics for that community and location, a dramatic increase in cash flow and property value can also be achieved. From this,

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we expect to see rental revenues grow in 2009 as well as continuing to have revenues enhanced through ancillary sources such as parking, cable, laundry and other sources. Portfolio efficiency programs will continue to be executed on properties where these cost saving measures will continue to strengthen the net operating income of the portfolio. Low interest rates in 2009 will result in lower interest costs on long term financing and refinancing of new and existing properties. CMHC insured mortgages will ensure that Skyline Apartment REIT will have mitigated renewal risk on these mortgages that have been fixed in 2009 through to 2014 and 2019 on 5 and 10 year terms that meet the mortgage laddering strategy employed. Skyline Apartment REIT will continue to seek new opportunities to acquire accretive properties, drive revenues and attack costs. In a year where doom and gloom sells media, 2009 brings with it optimism for Skyline Apartment REIT that it can continue to deliver stable and growing monthly distributions while enhancing Unitholder value.

TRUSTEES, OFFICERS AND SENIOR MANAGEMENT

Board of Trustees

Jason Castellan Chief Executive Officer Roy (Jason) Ashdown Chief Operating Officer Martin Castellan Chief Development Officer Frank Valeriote Chairman of the Board Jonathan Halpern, C.A. Chair – Finance Committee Douglas Gamsby Independent Trustee

Ronald Durst Independent Trustee Robert Breadner Independent Trustee (Incoming) Officers Jason Castellan Chief Executive Officer Roy (Jason) Ashdown Chief Operating Officer Martin Castellan Vice President Wayne Byrd, CMA Chief Financial Officer

SUPPLEMENTAL REPORT TO THE AUDITED · PDF filewere secured consisting of 2,353 residential...

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Transcript of SUPPLEMENTAL REPORT TO THE AUDITED · PDF filewere secured consisting of 2,353 residential...