SKYLINE RETAIL REAL ESTATE INVESTMENT TRUST€¦ · SKYLINE RETAIL REAL ESTATE INVESTMENT TRUST...

SKYLINE RETAIL

REAL ESTATE INVESTMENT TRUST

ANNUAL REPORT 2014

SKYLINE RETAIL


ANNUAL REPORT

DECEMBER 31, 2014

SKYLINE RETAILREAL ESTATE INVESTMENT TRUST

May 1, 2015

ANNUAL REPORT TO THE UNITHOLDERSOF

SKYLINE RETAIL REAL ESTATE INVESTMENT TRUST

MANAGEMENT DISCUSSION & ANALYSIS

REPORT TO UNITHOLDERS

2014 closed our first full year of operation as the Skyline Retail REIT. I am very happyto report that this past year demonstrated that the demand for this asset class from ourUnitholders was strongly supported, proven by equity being available on a timely basis foracquisitions, and a keen interest by the lending community to finance these acquisitions.

While we have a full year of operations behind us, we still only have a full year’s worth ofperformance on a small portion of properties acquired since inception. With close monthly andquarterly monitoring of the existing properties, combined with layering in newly acquiredproperties, we have been able to show that the acquisitions and management targets aremeeting the expectations of the REIT’s performance hurdles. These are important andsignificant strides towards establishing a solid foundation of properties, representing thestrategy set by the Board of Trustees and Management, as well as what is expected byUnitholders. This clear vision of growing a Retail REIT portfolio of credit worthy tenants, and inmarkets that are away from the highly competitive primary markets, has defined our niche in themarketplace with vendors and the real estate community.

With the impressive foundation of retail real estate we amassed in 2014, it was alsoimperative that we put in place a first-class management team to provide the level ofprofessional management that these nationally recognized tenants command and deserve.During 2014, our management platform was bolstered with the introduction of Barbara Rodgersinto the team, bringing with her a wealth of retail real estate management and leasingexperience. Combined with the respected retail strength of the independent Trustee members,we have the depth to confidently pursue further retail real estate opportunities in this growingportfolio.

With an asset class such as Retail real estate, there are varying levels of sophisticationamongst owners, which is evident by the quality of their real estate, ultimately by way of theirtenant quality. In our strategy of targeting higher quality tenants with national recognition in theproperties we look to purchase, we are dealing with vendors who also continue to see this as agreat investment, but have made the decision to sell for varying reasons, such as succession, orto create better liquidity. This has proven to be an opportunity for Skyline Retail REIT to offerunit swaps, whereby vendors sell us the buildings in exchange for ownership units of the REITin lieu of cash. We have been successful on several transactions to negotiate such deals. Thisstrategy is not for lack of equity from investors; rather, it expands our ability to do deals withvendors over other entities that cannot offer such an opportunity. For vendors, the result isbeing removed from the day-to-day management of their real estate, and diversifies theirholdings throughout the whole REIT as opposed to their exposure to one property that theyowned.


By and large, the real estate brokerage community has taken notice of Skyline RetailREIT, which ensures that we see most retail deals available in the marketplace. Our strategy ofgoing into smaller markets, but still looking for that credit worthy tenant base, has awakened thebrokers to seek out those vendors, knowing that our appetite for growth will lead to a deal aslong as it passes the test. This has helped us develop a handful of external real estate agentsthat can go deep into communities and find deals that may not have proven fruitful before ourentrance into these markets. This increased market exposure, combined with the wealth ofrelationships that our Acquisition Trustees have, has now given Skyline access to manyopportunities to grow in the foreseeable future. I would like to reassure our unitholders that justbecause we get to see so many deals, we still choose only what is best for the REIT, havingdeclined many deals either right upon first review, or sometimes well into our due diligenceprocess. We feel we have established a solid foundation, and don’t want to put that at risk bypiling on mediocre deals that can negatively impact our performance.

I am very pleased to say that this past year was a very successful one for Skyline RetailREIT. It has been a very busy time managing the growth and digestion of so many properties.This has been made easier by the quality of assets and tenants that occupy our real estate. Wewill continue to service our tenants and work on keeping our properties full with the righttenants. The trust that our Unitholders have put in us is a strong signal that the demand forinvestment in this asset class is there, giving us the confidence to build on this success well intothe upcoming years.

Jason CastellanChief Executive Officer & TrusteeSkyline Retail REIT


SKYLINE GROUP OF COMPANIES PROUD TO BE RECOGNIZED AS ONE OFCANADA’S BEST MANAGED COMPANIES

In March 2015, the Skyline Group of Companies, which provides professional andmanagement services to Skyline Retail REIT, was named one of Canada’s Best ManagedCompanies in 2014 for excellence in business performance.

Sponsored by Deloitte, CIBC, National Post, Queen’s School of Business and MacKayCEO Forums, the Best Managed award recognizes Canadian owned and managed companieswith revenues over $10 million for sustained growth, financial performance, managementpractices and the efforts of the entire organization. Applicants are evaluated by an independentjudging panel on how they address various business challenges, including new technologies,globalization, brand management, leadership, leveraging and developing core competencies,designing information systems, and hiring the right talent to facilitate growth.

Skyline executives proudly accept the 2014 Best Managed Companies Award.

“We are incredibly proud and honoured to be designated one of Canada’s Best ManagedCompanies for the first time. Amongst the vast competition of Canada’s largest realestate entities, we have a unique business structure, a strong company culture, and apenchant for sustainability and giving back to our community. This recognition trulybelongs to all of the ‘Skyline Family’: the expertise of our staff, and the enthusiasm ofour investors and business partners, has brought us to where we are today.”

Jason Castellan, Co-Founder & CEO, Skyline Group of Companies


2014 ACQUISITIONS


SENIOR MANAGEMENT

Jason Castellan Martin Castellan Roy Jason Ashdown Wayne Byrd, CPA, CMACo-Founder & Chief Executive Co-Founder & Chief Administrative Co-Founder & Chief Operating Chief Financial OfficerOfficer, Skyline Group of Companies Officer, Skyline Group of Companies Officer, Skyline Group of Companies Skyline Group of CompaniesTrustee Trustee

Barbara Rodgers Marissa Teeter Mike BonneveldVice President Vice President Vice PresidentSkyline Commercial Management Inc. Skyline Wealth Management Inc. Skyline Asset Management Inc.

Karyn Sales Pete RodenGeneral Counsel Vice PresidentSkyline Group of Companies Skyline Mortgage Financing Inc.


INDEPENDENT TRUSTEES

James Bullock Donald Biback George Schott Andrew Alcock


MANAGEMENT STRATEGY

As managers to Skyline Retail REIT, both the Asset Manager and Property Manager willimplement their values and strategies as they fulfill their responsibilities. The REIT’s mandate isclear and focused on the following strategies:

Maximize Revenues - The ability to maximize revenues for Skyline Retail REIT isdependent upon four factors:

a. Increase base rental rates upon lease expiries and at lease renewal;

b. Improvement in occupancy percentages;

c. Reduction in operating expenses as it relates to overall affordability; and

d. Develop, remerchandise and/or expand rentable space

Reduce Expenses - Reducing expenses at the property level is critical for improving theefficiency of each property and of the portfolio as a whole. Skyline Retail REITmanagement has developed strategies to reduce expenses through a variety ofprograms, capital projects, and diligent consumption monitoring:

a) Reduce consumption;

b) Reduce maintenance costs through better costing from sub-contractors;

c) Aggressive negotiation and re-negotiation of critical service contracts withconstant consideration for economies of scale, along with diligent andresponsible tracking of billing;

d) Preventative and proactive maintenance and capital expenditure planning;

e) Future planning – Bulk purchasing, internalization of current supplier services,etc; and

f) Ongoing training of Portfolio Managers and Building Operators in an effort toeducate them on available cost saving measures, as well as on generalmaintenance.

It is the REIT’s strategy to aggressively work toward expense reduction. As a result, dueto the competitive marketplace in Canadian retail real estate, Management has been mandatedlook closely at expenses and reduce them wherever possible. Striving to reach this goal alsobegins the progress towards the third goal of improving portfolio quality and improving theoverall asset base.


Improve Portfolio Quality - To be a leader in the retail real estate industry landscape inCanada, simply owning a large number of buildings is not enough. The industry hasbecome more sophisticated and there is more competition to attract the pool of availabletenants. Real estate brokers maintain lists of detailed tenant expiries and contact themregularly to influence their location choices. Tenants are therefore better educated as tomarket conditions, rates and availability. With a focus on credit quality national tenants,our efforts are directed at attracting the most desirable tenants possible to the REIT.

KEY PERFORMANCE INDICATORS

To meet its objectives and evaluate the success of its strategies, Skyline Retail REIT usesseveral key operating and performance indicators:

Distributions. Skyline Retail REIT is currently paying monthly distributions toUnitholders of $0.0667 per unit, or $0.80 on an annual basis. At December 31, 2014,approximately 21.9% of the Investment Units (REIT and LP) were enrolled in theDistribution Re-Investment Plan (“DRIP”).

Occupancy. Management is focused on achieving occupancy levels that exceed theoverall averages for the geographic regions in which Skyline Retail REIT exists, withoutsacrificing the maximization of rental income. At December 31, 2014, overall occupancywas 95.4%.

In-Place Rental Rates. Through ongoing and active management, the portfolio’s in-place base rents will always be evaluated against market rents for similar assets, inorder to achieve the most accretive gain when space is renewed, remerchandisedand/or newly leased.

Leasing and Tenant Profile. Through the management of the key indicators of‘occupancy’ and ‘in place rental rates’; Management will evaluate and optimize theoverall average remaining lease term in order to spread vacancy risk over a longer term.

Net Operating Income (“NOI”). This is defined as operating revenues less operatingexpenses, and is a key measure of operating performance. It is a key non-InternationalFinancial Reporting Standards (“IFRS”) financial measure of the operating performanceof Skyline Retail REIT. Management is focused on maintaining or increasing same-asset NOI year over year. For the year 2014, Skyline Retail REIT’s NOI margin was70.9%.

Funds from Operations (“FFO”). FFO is a measure of operating performance basedon the funds generated by the business before reinvestment or provision for other capitalneeds. For the year 2014, Skyline Retail REIT generated $4.2 million in FFO.


Adjusted Funds From Operations (“AFFO”). AFFO is a measure of performancetaking into consideration regular maintenance capital expenditures and regular leasingexpenditures that a prudent owner must maintain from operating cash flows.

Payout Ratio. To ensure that Skyline Retail REIT retains sufficient cash to meet itscapital improvement and leasing objectives, Management strives to maintain appropriateFFO and AFFO payout ratios over the year. Management is targeting an 85% FFOpayout ratio and a 95% AFFO payout ratio. For the year 2014, Skyline Retail REIT’sFFO payout ratio was 106.7%. While in excess of Management’s targets, this excess isas a direct result of the significant acquisitions made through 2014 and the effect ofdilution as a result of equity raises in advance of such acquisitions. The forecast for 2015is a much more conservative 82% FFO payout ratio.

Financing. Management is continually managing and planning its financing strategiesfor the portfolio. This ensures that the portfolio is well positioned to mitigate interest rateuncertainty as well as to responsibly ladder the maturities of the portfolio’s mortgagesover the long-term.

Loan to Value. The portfolio is regularly evaluated based upon key leverage ratios,comprising of mortgage debt, total indebtedness, historical cost and IFRS value. Loanto value ratios are shown on both a historical cost and market value basis. TheDeclaration of Trust requires that the overall leverage ratio not exceed 70% Loan toIFRS Value. However, it is Management’s objective to keep the portfolio at a moreconservative level of approximately 60% leverage based upon IFRS. At the close of2014, Skyline Retail REIT’s portfolio leverage ratio was 69.8% including convertibledebentures (against historical cost).

FORWARD-LOOKING DISCLAIMER

The following Management’s Discussion and Analysis (“MD&A”) of the results ofoperations and financial conditions for the year ended December 31, 2014 should be read inconjunction with Skyline Retail REIT’s audited financial statements. Certain statements in thisMD&A could be considered forward-looking information within the meaning of applicablesecurities legislation. Forward-looking information is based on a number of assumptions and issubject to a number of risks and uncertainties, many of which are beyond the Trust’s control,which could cause actual results to differ materially from those disclosed in or implied by suchforward-looking information. These risks and uncertainties include, but are not limited to,general and local economic and business conditions; the financial condition of tenants; ourability to refinance maturing debt; leasing risks, including those associated with the ability tolease vacant space; our ability to source and complete accretive acquisitions; and interest rates.

The information in this MD&A is based on information available to management as ofApril 30, 2015, except where otherwise noted. Skyline Retail REIT does not undertake toupdate any such forward-looking information whether as a result of new information, futureevents or otherwise. Certain figures presented for comparative purposes have been reclassifiedto conform to the current year’s presentation.


OVERVIEW

Skyline Retail Real Estate Investment Trust (“Skyline Retail REIT”) is an unincorporatedopen-ended investment trust created by a Declaration of Trust effective as of October 8, 2013,amended and restated as of June 4, 2014 and December 1, 2014 (the “Declaration of Trust”)and governed by the laws of the Province of Ontario and the federal laws of Canada applicabletherein. Skyline Retail REIT earns income from investments in a diversified portfolio of retailproperties.

GOALS AND OBJECTIVES OF SKYLINE RETAIL REIT

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

1. to provide REIT Unitholders with stable and growing cash distributions, payable monthlyand, to the extent reasonably possible, tax deferred, from investments in a diversifiedportfolio of income-producing retail properties located in Canada;

2. to maximize REIT Unit value through the ongoing management of Skyline Retail REIT’sassets and through the acquisition of additional properties; and

3. to maintain a REIT that satisfies the REIT exception under the Specified Investment FlowThrough (“SIFT”) legislation in order provide certainty to Unitholders with respect to taxationof distributions.

PROPERTY PORTFOLIO

At December 31, 2014, through an active year of acquisitions, the portfolio included 39retail properties worth $265.3 million encompassing 1,133,082 rentable square feet, located in27 Ontario communities.

Skyline Retail REIT’s property portfolio represents retail properties located in strategiclocations that meet the investment strategy. The properties are currently well-maintained, closeto full occupancy, with a market level of tenant leases that expire over the next 20 years. The in-place rents are believed to be at or near current market levels. The REIT continues to look atfurther expanding and enhancing the portfolio in existing and new urban markets acrossCanada.


Portfolio Average Monthly Base Rent and Occupancy

CAPITAL INVESTMENTS

During 2014, Skyline Retail REIT acquired 1,080,847 rentable square feet of retail spacethrough the acquisition of 37 properties for a total investment of $254.1 million.

Skyline Retail REIT is purchasing income producing retail properties on an accretivebasis; and is committed to increasing the value of these assets by investing in capitalexpenditure initiatives and other programs in order to improve the overall quality of theproperties and ultimately to sustain and expand the overall portfolio’s future rental income-producing potential over its expected life span.

CAPITAL STRUCTURE

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

Skyline Retail REIT’s Declaration of Trust (“DOT”) permits the maximum amount of totaldebt to 70% of the gross book value of the REIT’s assets. Despite the REIT reporting underIFRS methods, Management continues to evaluate LTV ratios on both a market value basis anda traditional historical cost basis, whereby historical cost is defined as the acquisition cost of theproperties plus the capital improvements expended thereon.

During the year, Management invested $0.7 million in structural improvements. Thesecapital initiatives are completed with the intention of increasing revenues, reducing expenses,maintaining occupancy levels, and increasing overall tenant satisfaction.

As at December 31, 2014 %

Retail 1,133,082 95.4% 95.4% $16.11

Total 1,133,082 95.4%

Occupancy

RateBase Rent

GLA

(sq ft)


The total Capital of Skyline Retail REIT as at December 31, 2014 is summarized in the followingchart.

Mortgage Maturity Schedule

As at December 31, 2014

($ thousands, except where noted)

Mortgages Payable 7,993$ 152,542$

Bank Indebtedness (Line of Credit) -$ 6,313$

Convertible Debentures Payable -$ 27,000$

Mezzanine Debt -$ -$

Unitholder Equity 4,498$ 82,518$

Total Capital 12,491$ 268,373$

Mortgage Debt to Historical Cost 68.68% 57.26%

Mortgage Debt to IFRS Value 68.68% 57.50%

Total Debt to Historical Cost (excluding convertible debentures) 68.68% 59.63%

Total Debt to IFRS Value (excluding convertible debentures) 68.68% 59.88%

Total Debt to Historical Cost (including convertible debentures) 68.68% 69.76%

Total Debt to IFRS Value (including convertible debentures) 68.68% 70.06%

Weighted Average Mortgage Interest Rate 4.58% 4.07%

Weighted Average Mortgage Term to Maturity 8.02 yrs 5.08 yrs

2013 2014

Year Ending December 31, 2014

2015 $15,058 9.9%

2016 $11,205 7.3%

2017 $26,677 17.5%

2018 $5,947 3.9%

2019 $52,501 34.4%

Thereafter $41,154 27.0%

$152,542 100.0%

$ Thousands,

except where

noted

Percentage of

Total Mortgages


2014 OPERATING HIGHLIGHTS

Operating Results

Key Performance Indicators

As at December 31, 2014($ thousands, except where noted)

2013 % 2014 %

Operating Revenues $145 $16,094

Operating Expenses

Realty Taxes $27 18.6% $2,920 18.1%

Other direct property costs $12 8.3% $1,214 7.5%

Utilities $0 0.0% $228 1.4%

Management Fees $3 2.1% $322 2.0%

Total Operating Expenses $42 29.0% $4,684 29.1%

NOI $103 71.0% $11,410 70.9%

As at December 31, 2014 2013 2014

GLA (sq.ft) 52,235 1,133,082

Number of Tenants 9 158

Operating Revenues ($ in thousands) $145 $16,094

Occupancy Rate 100.0% 95.4%

Net Operating Income ($ in thousands) $103 $11,410

Recovery Ratio 98.3% 98.4%

Average Base Rent (per occupied sq.ft) $14.72 $16.11

Average Lease Term to Maturity 7.12 yrs 9.05 yrs

Funds from Operations ($ in thousands) ($51) $4,239


Occupancy/Vacancy Schedule

At the close of 2014, the Portfolio had 52,200 square feet of vacant space. Managementis working diligently to secure commitments for this vacant space. The following bar graphindicates the total occupied square footage of the properties subject to lease maturities and thepercentage of the total Gross Lease Area (“GLA”) relating to the properties represented bysuch maturities.


Leasing and Tenant Profile

The Retail REIT’s tenant profile consists of a diversified base of quality tenants. AtDecember 31, 2014; with 158 tenants, risk exposure to any single tenant was low (4.5%). Thefollowing chart shows the tenant mix for the Properties on the basis of percentage of grossrevenue.


Investment Summary

During 2014, the Wealth Manager issued Units of Skyline Retail REIT under threeseparate Confidential Offering Memorandums issued in December 2013, May 2014 andDecember 2014. During the year, the REIT received net proceeds of $38.1 million through newREIT investments and DRIP enrolment (net of all redemptions).

Investor Metrics

2014 # of Units Investment

Opening 458,835 $4,588,345

Retail REIT Investment - Cash 3,890,952 $38,909,520

Retail REIT Investment - DRIP Plan 94,114 $941,133

LP Investment 4,097,727 $40,977,273

Retail REIT Redemptions (170,619) ($1,706,198)

LP Redemptions (33,723) ($337,230)

Net 8,337,286 $83,372,843

Weighted Average Number of REIT Units 2,872,023

As of December 31, 2014

New Investments ($) 33,429,952

Repeat Investments ($) 5,438,844

Redemptions ($) (1,706,198)

Number of New Investors (Excl. EUPP) 268

Number of Repeat Investors (Excl. EUPP) 66

Number of Redemptions 11

New Investment Average ($) 124,739

Repeat Investment Average ($) 82,407

Redemption average ($) (155,109)


FUNDS FROM OPERATIONS (“FFO”)

FFO is a measure of operating performance based on the funds generated by thebusiness before reinvestment or provision for other capital needs. This non-IFRS measure is acommonly used performance measure for assessing real estate operations. However, it doesnot represent cash flow from operating activities, and is not necessarily indicative of cashavailable to fund Skyline Retail REIT’s needs. It also does not have a standardized industrydefinition; therefore, it may not be relied upon as a comparable indicator to other REITs that usea similar term.

ADJUSTED FUNDS FROM OPERATIONS (“AFFO”)

Management believes that AFFO is an important measure of the REIT’s economicperformance and is indicative of the ability to pay distributions. This non-IFRS measure is acommonly used performance measure for assessing real estate performance. However, it doesnot represent cash flow from operating activities, and is not necessarily indicative of cashavailable to fund Skyline Retail REIT’s needs.

PAYOUT RATIOS

Payout ratios compare total and net distributions declared to these non-IFRS measures.Management considers these ratios to also be important measures of the sustainability ofdistributions.

Distributions to Unitholders and Payout Ratio

Skyline Retail REIT currently pays monthly distributions to Unitholders of $0.0667 perUnit, or $0.80 per Unit on an annual basis. At December 31, 2014, approximately 40.2% of theREIT Units were enrolled in the Distribution Reinvestment Plan (“DRIP”). Distributions made toREIT Unitholders during 2014 amounted to $2.1 million of which $0.9 million was retainedthrough the DRIP.

($ thousands, except where noted) 2013 2014

Distribution Declared (incl. LP Distributions) $25 $4,522

Less: Distributions Reinvested ($23) ($941)

Net Distributions Paid $2 $3,581

Percentage of Distributions Reinvested 94.6% 20.8%


A reconciliation of net income to FFO is as follows:

For year ended 2014, the FFO payout ratio of 106.7%; being in excess of 100% and inexcess of Management’s objectives, it is as a result of incredible asset growth throughacquisitions and the effect of dilution as a result of equity raise in advance of the acquisitions.The projection for 2015 is a more responsible FFO payout ratio of 82% after the positive effectof a full year of the 2014 acquisitions and equity issuance.

Management believes that cash generated from operations and refinancing ofmortgages maturing in 2015 and 2016 will be sufficient to meet its anticipated cashrequirements for operations, including distribution payouts, regular principal repayments andmaintenance capital requirements for the existing portfolio.


Income and Comprehensive Income $6 $4,317

Adjustments:

Fair value loss on investments $0 $1,113

Formation & Issuance Costs ($52) ($560)

Amortization of Straight-line Rents ($5) ($632)

Amortization of Financing Costs $0 $0

Amortization of Leasing Commissions $0 $1

Amortization of Tenant Inducement $0 $0

Funds From Operations (FFO) ($51) $4,239

Total Distributions Declared (incl. LP Distributions) $25 $4,522

FFO Payout Ratio -49.0% 106.7%


Total Distributions Declared (incl. LP Distributions) $25 $4,522

Less: Distributions Reinvested (DRIP) ($23) ($941)

Net Distribution Paid $2 $3,581

FFO Effective Payout Ratio (net of DRIP) -3.9% 84.5%


UNITHOLDER TAXATION

For taxable Canadian residents, 2014 REIT Unitholder distributions were treated 100% as taxdeferred return of capital distributions for tax purposes; while 2014 Limited Partner Unitholderdistributions were treated approximately 8% as other income and 92% as tax deferred CCA.

INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)

PURPOSE AND INTENDED USE OF INTERNAL VALUATION

The Board of Trustees elected to implement market value reporting of investmentproperties under IFRS. IFRS requires an entity to adopt IFRS in its first financial statementsprepared under IFRS by making an explicit and unreserved statement in those financialstatements of compliance with IFRS.

IFRS reporting impacts the financial statements of Skyline Retail REIT and its subsidiarymost significantly in the areas of Investment Properties and Amortization.

Investment Properties

Under IFRS, management considers its properties to be Investment Properties underIAS-40 – Investment Property. Investment Properties are properties held to earn rental incomeor for capital appreciation, or both. Management has elected the Fair Market Model to measureits investment properties on the balance sheet and record any unrealized gain (or loss) on theincome statement.

The following is Management’s approach to the Fair Market Value of the Portfolio’sinvestment properties:

Group the Portfolio into segments that identify geographic locations as well to group theportfolio by property characteristics. This will allow Management to apply the samemetrics to similar properties.

Engage third party market appraisals for a portion of its Portfolio which comprises atleast 20% of the number of properties which make up at least 25% of the gross bookvalue of the Portfolio. The balance of the properties will undergo an internal valuationwhich will be verified by a comparative appraisal and audited by RLB LLP (the RetailREIT’s auditors)

. Properties must be appraised at least once every five years.

Properties will not be appraised within 18 months of acquisition (unless it is necessaryfor mortgage financing).

Properties will not be required to be appraised in a year, if within the next 12 months it isscheduled for mortgage maturity.


In the Portfolio, for fiscal year 2014, the change in fair value adjustment on investmentproperties decreased $1.1 million predominately due to the additional closing costs incurred inthe acquisition of properties throughout 2014, whereby land transfer tax, additionalenvironmental reports for financing, legal costs on closing and financing were capitalized underaccounting principles; however, not considered “Value” from an appraisal standpoint. Insummary, since the real estate has not been owned for a sufficient period of time to increase invalue beyond the original APS price, these capitalized closing costs created the loss in fairvalue adjustment.

Amortization

With the implementation of IAS-40 – Investment Property; by recording investmentproperties at fair market value, the concept of amortization (depreciation) of the real estatecommon under GAAP is no longer presented on the financial statements. Capital CostAllowance is now only used for taxation purposes only.

The combination of the fair market value recognition of the properties and the exclusionof amortization from the financial statements represent the most significant change for thereader of these new financial statements. Under IFRS and the fair value approach, thestakeholder gets a more representative presentation of the financial position of Skyline RetailREIT.

EXECUTIVE COMPENSATION FROM THE RETAIL REIT

The Executive Officers of Skyline Retail REIT do not receive direct salary compensationfrom the REIT. Rather, Skyline Retail Real Estate GP Inc., as General Partner of the Trust hasa 20% deferred interest in the properties of the Trust’s subsidiary (“GP Sharing”). Additionally,

IFRS - Fair Market Value of Properties

($ thousands, except where noted)

Balance at beginning of the year $0 $11,638

Additions:

Results from acquisitions $11,638 $254,120

Results from subsequent expenditures recognized

in the carrying amount of an asset $0 $653

Results from disposals $0 $0

Change in fair value adjustments $0 ($1,113)

Balance at end of year $11,638 $265,298

2013 2014


the executive officers receive compensation from the management companies to the REIT andLimited Partnership. (“Management Services”).

GP Sharing

Distributions under the GP Sharing commence once the equivalent of the total investors’equity has been effectively distributed on a property by property basis. Once triggered, anyfuture cash-flows are shared at a ratio of 20% to the GP: 80% to the LP (which indirectly meansits investors). In addition, on any disposition, the GP is entitled to 20% of the equity growth ofthe property net of any outstanding amounts owing to investors. The GP Sharing calculation isdone on a per property basis, which incents management to ensure that each property isperforming optimally. To date, no GP Sharing distributions have triggered.

Management Services

Fees paid during 2014 are as follows:

The Property Management Agreement provides for the payment of an annual propertyManagement Fee to the Property Manager during the term in an amount up to 3% of the baserental income of the properties, which will be calculated and payable monthly. Under theProperty Management Agreement, the Property Manager will be responsible for employmentexpenses of its personnel, rent and other office expenses, and miscellaneous administrativeexpenses relating to its functions under the Property Management Agreement. The PropertyManager will not be responsible for costs of on-site offices and personnel dedicated to any oneor more of the properties (such as on-site superintendents and other support staff employed bySkyline Retail REIT).

The Asset Management Agreement provides for the payment of an annual assetManagement Fee to the Asset Manager during the term in an amount equal to 2% of theadjusted gross revenues of the properties, which will be calculated and payable monthly. Underthe Asset Management Agreement, the Asset Manager is responsible for employment expensesof its personnel, rent and other office expenses of the Asset Manager, and the expenses of the

General Partner Sharing on Income 2013 2014 2015F

$0 $0 $0

($ thousands, except where noted) 2013 2014 2015F

Property Management Fees $3 $322 $496

Asset Management Fees $3 $303 $479

Wealth Management Fees $2 $188 $290


non-Independent Trustees and officers of Skyline Retail REIT who are directors, officers oremployees of the Asset Manager or of an affiliate of the Asset Manager (except expensesincurred while attending meetings of the Board of Trustees).

The Wealth Management Agreement provides for the payment of a wealth managementfee, payable monthly, equal to 1/12 of 0.3% of Skyline Retail REIT’s equity under management(calculated as the product of the outstanding REIT Units multiplied by the then market value ofone REIT Unit). The Wealth Manager will also be entitled to an equity raise fee equal to amaximum of 1.0% on the capital raised in offerings of REIT Units, subject to adjustment. Underthe Wealth Management Agreement, the Wealth Manager is responsible for employmentexpenses of its personnel, rent and other office expenses of the Wealth Manager in connectionwith providing services to Skyline Retail REIT under the Wealth Management Agreement.

RISKS AND UNCERTAINTIES

Skyline Retail REIT must adhere to specific operating and investment guidelines as setout in the Declaration of Trust. These guidelines are established to limit to the best extentpossible the risks and uncertainties that exist.

Real Property Ownership

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

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

Real property investments tend to be relatively illiquid, with the degree of liquiditygenerally fluctuating in relation to demand for and the perceived desirability of suchinvestments. Such illiquidity may tend to limit Skyline Retail REIT’s ability to vary its portfoliopromptly in response to changing economic or investment conditions. If Skyline Retail REITwere required to liquidate its real property investments, the proceeds to Skyline Retail REITmight be significantly less than the aggregate value of its properties on a going concern basis.

Skyline Retail REIT will be subject to the risks associated with debt financing, includingthe risk that existing mortgage indebtedness secured by the Properties will not be able to berefinanced or that the terms of such refinancing.

Tenant Terminations and Financial Stability

Skyline Retail REIT’s distributable income would be adversely affected if a significantnumber of tenants were to become unable to meet their obligations under their leases or if asignificant amount of available space in the existing properties and/or properties under contractand any additional properties in which Skyline Retail REIT acquires an interest were not able to


be leased on economically favourable lease terms. Upon the expiry of any lease, there can beno assurance that the lease will be renewed or the tenant replaced. The terms of anysubsequent lease may be less favourable to Skyline Retail REIT than the existing lease. In theevent of default by a tenant, delays or limitations in enforcing rights as lessor may beexperienced and substantial costs in protecting Skyline Retail REIT’s investment may beincurred. Furthermore, at any time, a tenant of any of Skyline Retail REIT’s properties mayseek the protection of bankruptcy, insolvency or similar laws that could result in the rejectionand termination of such tenant’s lease and thereby cause a reduction in the cash flow availableto Skyline Retail REIT. The ability to rent unleased space in the properties in which SkylineRetail REIT will have an interest will be affected by many factors. Costs may be incurred inmaking improvements or repairs to property required by a new tenant. The failure to rentunleased space on a timely basis or at all would likely have an adverse effect on Skyline RetailREIT’s financial condition.

Future Property Acquisitions

While the acquisition by Skyline Retail REIT of properties under contract is notconditional upon completion of any Offering, financial forecasts assume the acquisition ofproperties under contract by Skyline Retail REIT to be completed during the year and will havean effect on financial results. Additionally, while Skyline Retail REIT may enter into non-bindingletters of intent with respect to future property acquisitions, there can be no assurance that suchproperties will be acquired. Accordingly, there can be no assurance that Skyline Retail REIT willacquire properties under contract or any future properties.

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 thetenant replaced. The terms of any subsequent lease may be less favourable to Skyline RetailREIT than the existing lease.

Competition for Real Property Investments

Skyline Retail REIT competes for suitable real property investments with individuals,corporations and institutions (both Canadian and foreign) and other real estate investment trustswhich are presently seeking, or which may seek in the future, real property investments similarto those desired by Skyline Retail REIT. A number of these investors may have greaterfinancial resources than those of Skyline Retail REIT, or operate without the investment oroperating restrictions of Skyline Retail REIT or according to more flexible conditions. Anincrease in the availability of investment funds, and an increase in interest in real propertyinvestments, may tend to increase competition for real property investments, thereby increasingpurchase prices and reducing the yield on them.

Competition for Tenants

The real estate business is competitive. Numerous other developers, managers andowners of properties compete with Skyline Retail REIT in seeking tenants. The existence ofcompeting developers, managers and owners and competition for Skyline Retail REIT’s tenants


could have an adverse effect on Skyline Retail REIT’s ability to lease space in its properties andon the rents charged.

Interest Rates

It is anticipated that the market price for the REIT Units at any given time may beaffected by the level of interest rates prevailing at that time. A rise in interest rates may have anegative effect on the market price of the REIT Units. Changes in interest rates may also haveeffects on vacancy rates, rent levels, refurbishing costs and other factors affecting Skyline RetailREIT's business and profitability.

General Economic Conditions

Skyline Retail REIT is affected by general economic conditions, local real estatemarkets, competition from other available rental premises, including new developments, andvarious other factors. The existence of competing developers, managers and owners andcompetition for Skyline Retail REIT’s tenants could have an adverse effect on Skyline RetailREIT’s ability to lease space in its properties and on the rents charged, increased leasing andmarketing costs and increased refurbishing costs necessary to lease and release space, all ofwhich could adversely affect Skyline Retail REIT’s revenues and, consequently, its ability tomeet its obligations. In addition, any increase in the supply of available space in the markets inwhich Skyline Retail REIT operates or may operate could have an adverse effect on SkylineRetail REIT.

General Uninsured Losses

Skyline Retail REIT carries comprehensive general liability, fire, flood, extendedcoverage, rental loss and pollution insurance with policy specifications, limits and deductiblescustomarily carried for similar properties. There are, however, certain types of risks (generally ofa catastrophic nature such as from wars) which are either uninsurable or not insurable on aneconomically viable basis. Skyline Retail REIT has insurance for earthquake risks, subject tocertain policy limits, deductibles and self-insurance arrangements, and will continue to carrysuch insurance if economical to do so. Should an uninsured or underinsured loss occur, SkylineRetail REIT could lose its investment in, and anticipated profits and cash flows from, one ormore of its properties, but Skyline Retail REIT would continue to be obligated to repay anyrecourse mortgage indebtedness on such properties.

Availability of Funds From Operations

Funds From Operations (“FFO”) is calculated before deducting items such as principalrepayments and capital expenditures and, accordingly, may exceed actual cash available toSkyline Retail REIT from time to time. Skyline Retail REIT may be required to use part of itsdebt capacity or raise additional equity in order to accommodate such items, and there can beno assurance that funds from such sources will be available on favourable terms or at all. Insuch circumstances, distributions may be reduced, which may therefore also have an adverseimpact on the market price of the REIT Units. Accordingly, cash distributions are not guaranteedand cannot be assured. Further, FFOs can exceed net income and have the result of an erosionof adjusted Unitholder’s equity.


FFO is calculated in accordance with Skyline Retail REIT’s Declaration of Trust. FundsFrom Operations is a non- International Financial Reporting Standard (”IFRS”) financialmeasure used by most Canadian real estate investment trusts and should not be considered asan alternative to net income or comprehensive income, cash flow from operating activities oranother measure prescribed under IFRS. While FFO does not have any standardized meaningprescribed by IFRS, the Real Property Association of Canada (“REALpac”) established astandardized definition of FFO in its White Paper on FFO dated November 30, 2004.Essentially, the REALpac definition is net income with adjustments for non-cash andextraordinary items. Management of the REIT believes that this definition is followed by mostCanadian real estate investment trusts and that it is a useful measure of cash available fordistributions. A reconciliation of net income with FFO is presented in the REIT’s annual reportand management’s discussion and analyses.

Adjusted Funds From Operations (”AFFO”) is a non-IFRS financial measure used bymost Canadian real estate investment trusts and should not be considered as an alternative tonet income or comprehensive income, cash flow from operating activities or any other measureprescribed under IFRS. AFFO does not have any standardized meaning prescribed by IFRS. Ascomputed by the REIT, AFFO may differ from similar computations reported by other Canadianreal estate investment trusts and, accordingly, may not be comparable to similar computationsreported by such organizations. Management of the REIT considers AFFO to be a usefulmeasure of cash available for distributions. The principal advantage of AFFO is that it startsfrom the standardized definition of FFO and takes account of maintenance capital expendituresand regular leasing expenditures while ignoring the impact of non-cash revenue. Becausemaintenance capital expenditures and regular leasing expenditures are not incurred evenlythroughout a fiscal year, there can be volatility in AFFO on a quarterly basis. A reconciliation ofnet income with AFFO is presented in the REIT’s annual report and management’s discussionand analyses.

Access to Capital

The real estate industry is highly capital intensive. Skyline Retail REIT will requireaccess to capital to maintain its properties, as well as to fund its growth strategy and significantcapital expenditures from time to time. There is no assurance that capital will be available whenneeded or on favourable terms.

Environmental Matters

Environmental and ecological legislation and policies have become increasinglyimportant, and generally restrictive, in recent years. Under various laws, Skyline Retail REITcould become liable for the costs of removal or remediation of certain hazardous or toxicsubstances released on or in its properties or disposed of at other locations. The failure toremove or remediate such substances, if any, may adversely affect an owner’s ability to sellsuch real estate or to borrow using such real estate as collateral, and could potentially alsoresult in claims against the owner by private plaintiffs. Where a property is purchased and newfinancing is obtained, Phase I Environmental Assessments are performed by an independentand experienced environmental consultant. In the case of mortgage assumption, the vendor willbe asked to provide a satisfactory Phase I and/or Phase II Environmental Assessment that theAsset Manager will rely upon and/or determine whether an update is necessary.


Unitholder Liability

Because of uncertainties in the law relating to investment trusts, there is a risk, which isconsidered by counsel to be remote in the circumstance, that a REIT Unitholder could be heldpersonally liable for obligations of Skyline Retail REIT (to the extent that claims are not satisfiedby Skyline Retail REIT) in respect of contracts which Skyline Retail REIT enters into and forcertain liabilities arising other than out of contract including claims in tort, claims for taxes andpossibly certain other statutory liabilities. The Trustees intend to cause Skyline Retail REIT’soperations to be conducted in such a way as to minimize any such risk including by obtainingappropriate insurance and, where feasible, attempting to have every material written contract orcommitment of Skyline Retail REIT contain an express disavowal of liability against Unitholders.

In December 2004, a new statute, the Trust Beneficiaries’ Liability Act (Ontario), wasenacted to create a statutory limitation on the liability of unitholders of trusts such as SkylineRetail REIT. The legislation provides that a unitholder, such as a REIT Unitholder, will not, as abeneficiary, be liable for any act, default, obligation or liability of the trust or any of its trusteesafter the legislation comes into force. However, this legislation does not address potentialliabilities arising before the date of the legislation came into force. In addition, this legislation hasnot been judicially considered and it is possible that reliance on the legislation by a REITUnitholder could be successfully challenged on jurisdictional or other grounds.

Dependence on Key Personnel

The management of Skyline Retail REIT depends on the services of certain keypersonnel. The termination of employment by the Asset Manager, Property Manager andWealth Manager of any of these key personnel could have a material adverse effect on SkylineRetail REIT.

Potential Conflicts of Interest

Skyline Retail REIT may be subject to various conflicts of interest because of the factthat the Trustees and senior officers of Skyline Retail REIT and the senior officers of the AssetManager, the Property Manager and the Wealth Manager are engaged in a wide range of realestate and other business activities. Skyline Retail REIT may become involved in transactionswhich conflict with the interests of the foregoing.

The Trustees may from time to time deal with persons, firms, institutions or corporationswith which Skyline Retail REIT may be dealing, or which may be seeking investments similar tothose desired by Skyline Retail REIT. The interests of these persons could conflict with those ofSkyline Retail REIT. In addition, from time to time, these persons may be competing withSkyline Retail REIT for available investment opportunities.

The Skyline Retail REIT Declaration of Trust contains “conflicts of interest” provisionsrequiring Trustees to disclose material interests in material contracts and transactions and torefrain from voting thereon.

Tax Related Risks

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


REIT Unitholders may become subject to provincial taxes, such as Ontario LandTransfer Tax, in respect of their REIT Units.

If Skyline Retail REIT fails or ceases to qualify as a mutual fund trust for purposes of theTax Act, the tax consequences would in some respects be materially and adversely different.Such adverse differences would include that if Skyline Retail REIT did not qualify as a mutualfund trust throughout a taxation year, it will be subject to a special tax under Part XII.2 of theTax Act for such taxation year to the extent that its designated income (which includes incomefrom real property) is distributed to a designated beneficiary (which includes non-residentpersons and certain tax-exempt persons).

If investments in Skyline Retail REIT become publicly listed or traded, there can be noassurances that Skyline Retail REIT will not be subject to the Specified Investment FlowThrough (“SIFT”) Rules.

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

Since the net income of Skyline Retail REIT will be distributed on a monthly basis, apurchaser of a REIT Unit may become taxable on a portion of the net income of Skyline RetailREIT accrued or realized by Skyline Retail REIT in a month before the time the REIT Unit waspurchased but which was not paid or made payable to Unitholders until the end of the monthand after the time the REIT Unit was purchased. A similar result may apply on an annual basisin respect of a portion of capital gains accrued or realized in a year before the time the REITUnit was purchased, but which is paid or made payable to Unitholders at year-end and after thetime the REIT Unit was purchased.

The “loss restriction event” (“LRE”) Rules could potentially apply to Skyline Retail REIT ifa person (or group of persons) was to acquire more than 50% of the fair market value of theREIT Units.

Dilution

The number of REIT Units Skyline Retail REIT is authorized to issue is unlimited. TheSkyline Retail REIT Trustees have the discretion to issue additional REIT Units in othercircumstances, pursuant to Skyline Retail REIT’s various incentive plans. Any issuance ofadditional REIT Units may have a dilutive effect on the holders of REIT Units.

Restrictions on Potential Growth and Reliance on Credit Facilities

The payout by Skyline Retail REIT of a substantial part of its operating cash flow couldadversely affect Skyline Retail REIT’s ability to grow unless it can obtain additional financing.Such financing may not be available, or renewable, on attractive terms or at all. In addition, ifcurrent credit facilities were to be cancelled or could not be renewed at maturity on similarterms, Skyline Retail REIT could be materially and adversely affected.


Financing

Skyline Retail REIT is subject to the risks associated with debt financing, including therisk that Skyline Retail REIT may be unable to make interest or principal payments or meet loancovenants, the risk that defaults under a loan could result in cross defaults or other lender rightsor remedies under other loans, and the risk that existing indebtedness may not be able to berefinanced or that the terms of such refinancing may not be as favourable as the terms ofexisting indebtedness.

Nature of REIT Units

The REIT Units are not the same as shares of a corporation. As a result, the Unitholderswill not have the statutory rights and remedies normally associated with share ownership, suchas the right to bring “oppression” or “derivative” actions.

Unexpected Costs or Liabilities Related to Acquisitions

A risk associated with acquisitions is that there may be an undisclosed or unknownliability concerning the acquired property, and Skyline Retail REIT may not be indemnified forsome or all of these liabilities. Following an acquisition, Skyline Retail REIT may discover that ithas acquired undisclosed liabilities, which may be material. The due diligence proceduresperformed by the Asset Manager are designed to address this risk. The Asset Managerperforms what it believes to be an appropriate level of investigation in connection with theacquisition of properties by Skyline Retail REIT and seeks through contract to ensure that riskslie with the appropriate party.

SUBSEQUENT EVENTS

Since January 1, 2015, Management has made the following investment propertyacquisitions:

1380 Lasalle Boulevard is a retail plazacomprised of six tenants and anchored byCaisse Populaire and Bulk Barn. Theproperty is located in Sudbury, ON with atotal of 25,060 square feet of retailcommercial space. The property wasdeveloped in circa 1975 and 1989 on 1.82acres of land.The acquisition cost was $6.7 million.


33 & 55 Josephine Street is a retail plazaanchored by a Loblaws, Rexall Pharma Plusand Tim Hortons. The property is located inWingham, ON with a total of 38,264 squarefeet of retail commercial space. The propertywas developed in circa 1978 and 1999 andrenovated/expanded in 2012.The acquisition cost was $7.2 million.

To fund the investment property acquisitions, subsequent to year end, Skyline RetailREIT issued an additional 759,765 REIT Units at $10 per Unit and redeemed 21,600 REIT Unitsat $10 per Unit.

FUTURE OUTLOOK

As Skyline Retail REIT moves into its second year of operations, our outlook can beeven more optimistic on our strategy, simply by looking back on what we have done. Besideshaving a great strategy, modelling, and the valuable experiences of our Trustees, being able tosee actual performance of properties in our portfolio gives us a much clearer picture of thefuture.

Not having a crystal ball into the future has helped us decide on a continued strategy toladder mortgages long into the future. From what I hear, I personally believe that rates will stayreasonably low for the near future; however, this is one risk that I am not willing to take basedsolely on my beliefs. So, we will continue to maximize our leverage as per the Declaration ofTrust, only if matched with long term debt such as 5, 7 and preferred 10 year debt at what arehistorically low rates. I don’t want the term maximum leverage to alarm you; as a relativelyyoung REIT, new deals with leverage closer to what our Declaration of Trust allows us (70%overall to the REIT) can weigh heavier to keep our ratios up in that range. However, as the

As of April 30, 2015 # of Units Investment

Opening - Retail REIT Units 4,273,282 $42,732,800

Opening - LP Units 4,064,004 $40,640,043

Retail REIT Investment - Cash 711,241 $7,112,408

Retail REIT Investment - DRIP Plan 48,524 $485,244

Retail REIT Redemptions (21,600) ($216,000)

Net 9,075,451 $90,754,495

Weighted Average Number of REIT Units 4,428,921


repayment, or amortization of these loans grind down across a larger and growing portfolio, anewly leveraged deal will not have the size to keep the overall leverage higher against theshrinking principal. We will continue with this leverage strategy, and watch closely as our debtto value begins to come down.

As we go through various stages of growth, the management team is growing aswell. Operations are scaling up in areas that are already established while driving efficiencies atthe property level through an expanding portfolio. With this growth, the volume and complexityof leases, and tenants, increases as well. This has created an opportunity for Barbara Rodgersand her management group to enhance the quality and efficiency of services deliveredexclusively for Skyline Retail REIT’s needs, for both internal and external stakeholders. This isa process we are very familiar with through other parts of our business, and we know to bepatient, but mindful, of what needs to be done here.

With a number of deals already completed and in the middle of the due diligence phase,we expect 2015 to be a year of continued growth. Our commitment to you is that we willcontinue to stay disciplined. As much as 2014 was a year of remarkable growth, it does notbecome the measuring stick of our success. We maintain our philosophy to grow only whenopportunities worthy of being purchased by the REIT come available. I want to emphasize thisto our existing Unitholders, who become exposed to those new acquisitions. But I also want tomake it clear to new Unitholders, or those continuing to add to their holdings, that the next dealwe call on you to possibly invest in will be as strictly scrutinized, and as valuable an asset to ourportfolio, as those we have already acquired so far.

Jason CastellanChief Executive Officer & TrusteeSkyline Retail REIT


From left to right: Jason Castellan, Chief Executive Officer & Co-Founder; Roy Jason Ashdown, Chief Operating Officer & Co-Founder; Wayne Byrd, Chief Financial Officer & Martin Castellan, Chief Administrative Officer & Co-Founder.


BOARD OF TRUSTEES INVESTOR INFORMATION

Jason Castellan Unitholders and others seekingChief Executive Officer financial data should visit Skyline’s

website at www.skylineonline.ca orWayne Byrd, CPA, CMA contact:Chief Financial Officer

Wayne Byrd, CPA, CMAJames Bullock Chief Financial OfficerIndependent Trustee Tel: 519-826-0439

E-mail: [email protected] BibackChairman of the BoardIndependent Trustee AUDITORS

RLB LLP Chartered AccountantsGeorge SchottIndependent Trustee LEGAL COUNSEL

Aird & Berlis LLPAndrew AlcockIndependent Trustee MONTHLY DISTRIBUTION PER UNIT

January 2014 – December 2014: $0.0667

EXECUTIVE OFFICERS ANNUAL MEETING OF UNITHOLDERSThe Annual Meeting of Unitholders will be

Jason Castellan held at 1:30 p.m. on Wednesday,Chief Executive Officer June 3rd, 2015 at:

R. Jason Ashdown Cambridge Hotel and Conference CentreChief Operating Officer 700 Hespeler Road

Cambridge, ON N3H 5L8Martin Castellan www.cambridgehotel.caChief Administrative Officer

Wayne Byrd, CPA, CMAChief Financial Officer

HEAD OFFICE5 Douglas Street, Suite 301

Guelph, ON N1H 2S8Phone: (519) 826-0439 Fax: (519) 766-8474

http://www.skylineonline.ca/

SKYLINE RETAIL


2014 CONSOLIDATED FINANCIAL

STATEMENTS OF

SKYLINE RETAIL REIT


CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED DECEMBER 31, 2014


INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2014

Page

INDEPENDENT AUDITOR'S REPORT 3

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheet 4

Consolidated Statement of Changes in Unitholders' Equity 5

Consolidated Statement of Income and Comprehensive Income 6

Consolidated Statement of Cash Flows 7

Notes to the Consolidated Financial Statements 8 - 22

INDEPENDENT AUDITOR'S REPORT

To the Unitholders of: Skyline Retail Real Estate Investment Trust:

We have audited the accompanying consolidated financial statements of Skyline Retail Real Estate InvestmentTrust, which comprise the consolidated balance sheet as at December 31, 2014 and the consolidatedstatements of changes in unitholders' equity, income and comprehensive income, and cash flows for the yearended December 31, 2014 and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statementsin accordance with International Financial Reporting Standards and for such internal control as Managementdetermines is necessary to enable the preparation of consolidated financial statements that are free frommaterial misstatement, whether due to fraud or error.

Auditor's ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. Weconducted our audit in accordance with Canadian generally accepted auditing standards. Those standardsrequire that we comply with ethical requirements and plan and perform the audit to obtain reasonable assuranceabout whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in theconsolidated financial statements. The procedures selected depend on the auditor's judgment, including theassessment of the risks of material misstatement of the consolidated financial statements, whether due to fraudor error. In making those risk assessments, the auditor considers internal control relevant to the entity'spreparation and fair presentation of the consolidated financial statements in order to design audit proceduresthat are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectivenessof the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies usedand the reasonableness of accounting estimates made by Management, as well as evaluating the overallpresentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audit is sufficient and appropriate to provide a basisfor our audit opinion.

OpinionIn our opinion, these consolidated financial statements present fairly, in all material respects, the financialposition of Skyline Retail Real Estate Investment Trust as at December 31, 2014 and its financial performancefor the year ended December 31, 2014 in accordance with International Financial Reporting Standards.

Guelph, Ontario Chartered AccountantsMarch 24, 2015 Licensed Public Accountants

Page 3


CONSOLIDATED BALANCE SHEET

AS AT DECEMBER 31, 2014

(in thousands of Canadian dollars)

2014 2013(note 17)

A S S E T SInvestment properties (note 6) $ 265,298 $ 11,638Other assets (note 7) 1,069 539Deposits on investment properties 300 580Note receivable (note 11) 1,650 0Tenant loan receivable (note 8) 1,161 0Accounts receivable 1,203 12Investors' deposits in trust 0 75Cash 0 525

$ 270,681 $ 13,369

L I A B I L I T I E S A N D U N I T H O L D E R S' E Q U I T Y

Mortgages payable (notes 9, 12) $ 152,542 $ 7,993Debentures payable (note 10) 27,000 0Due to related parties (note 11) 7 739Accounts payable and accrued liabilities 1,843 64Tenant deposits 458 0Investors' deposits in trust 0 75Bank overdraft (notes 11, 12) 6,313 0

188,163 8,871

Unitholders' equity (page 5) 82,518 4,498

$ 270,681 $ 13,369

_____________________________ _____________________________ Trustee Trustee

See notes to the consolidated financial statementsPage 4


CONSOLIDATED STATEMENT OF CHANGES IN UNITHOLDERS' EQUITY



2014 2013

OPENING BALANCE $ 4,498 $ 0

Proceeds from units issued (note 15) 39,851 4,588Proceeds from Class B and C limited partnership units (note 15) 40,977 0

Issuance costs (560) (71)Redemptions (note 15) (1,706) 0Redemptions of Class B limited partnership units (note 15) (337) 0Income and comprehensive income for the year 4,317 6Distributions paid (2,077) (25)Distributions paid on Class B limited partnership units (2,445) 0

CLOSING BALANCE $ 82,518 $ 4,498



CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME



2014 2013(note 17)

(3 months)

PROPERTY REVENUESMinimum rent $ 11,838 $ 110Cost recoveries from tenants 4,256 35

16,094 145

DIRECT PROPERTY EXPENSESProperty taxes 2,920 27Other direct property costs 1,214 12Utilities 228 0Management fees (note 11) 322 3

4,684 42

NET PROPERTY INCOME 11,410 103

Financing costs 5,046 75Administrative expenses 443 17Asset management fees (note 11) 303 3Wealth management fees (note 11) 188 2

5,980 97

INCOME BEFORE UNDERNOTED 5,430 6

Fair value loss on investment properties (note 6) (1,113) 0

INCOME AND COMPREHENSIVE INCOME for the year $ 4,317 $ 6



CONSOLIDATED STATEMENT OF CASH FLOWS



2014 2013(note 17)

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIESIncome and comprehensive income for the year $ 4,317 $ 6Items not requiring an outlay of cash Amortization of straight line rent (632) (5)

Financing costs in operations 4,883 52Fair value loss on investment properties (note 6) 1,113 0

9,681 53Changes in non-cash working capital

Accounts receivable (559) (8)Prepaid expenses (530) (59)Accounts payable and accrued liabilities 1,779 64Tenant deposits 458 0

10,829 50

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES Mortgages payable (net repayments and advances) 144,549 7,993Advances from related parties (732) 740Interest on mortgages payable (4,883) (52)Proceeds from issuance of debentures payable 27,000 0Proceeds from units issued 80,828 4,588Distributions paid (4,522) (25)Redemptions (2,043) 0Issuance costs (note 11) (560) (71)

239,637 13,173

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES Additions to investment properties (254,773) (11,638)Tenant loans receivable (1,161) 0Note receivable (1,650) 0Deposits on investment properties 280 (1,060)

(257,304) (12,698)

(DECREASE) INCREASE IN CASH for the year (6,838) 525

CASH, beginning of year 525 0

(BANK OVERDRAFT) CASH, end of year $ (6,313) $ 525



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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

1. NATURE OF BUSINESS

Skyline Retail Real Estate Investment Trust (‘‘Skyline Retail 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 October 8, 2013. During the year,Skyline Retail REIT issued 3,985,065 (2013 - 458,835) units for an aggregate issue price of$39,851 (2013 - $4,588). The issue price per unit was $10.00. The proceeds were used toinvest in Skyline Retail Real Estate Limited Partnership (‘‘RRELP’’). RRELP used part of theproceeds it received on the subscription of its partnership units together with mortgage financingto invest in retail investment properties. As of December 31, 2014 RRELP owned thirty-nine(2013 - two) retail investment properties, all of which are located in Canada.

RRELP was created on October 8, 2013 as a limited partnership under the laws of the Provinceof Ontario. The general partner is Skyline Retail Real Estate GP Inc. and the limited partner isSkyline Retail REIT.

Skyline Retail REIT is domiciled in Ontario, Canada. The address of Skyline Retail REIT'sregistered office and its principal place of business is 5 Douglas Street, Suite 301, Guelph,Ontario, N1H 2S8.

2. BASIS OF PRESENTATION

(a) STATEMENT OF COMPLIANCE

The consolidated financial statements of Skyline Retail REIT for the year endingDecember 31, 2014 are prepared in accordance with International Financial ReportingStandards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

The preparation of consolidated financial statements in accordance with IFRS requiresthe use of certain critical accounting estimates. It also requires Management to exercisejudgment in applying Skyline Retail REIT's accounting policies.

The consolidated financial statements are presented in accordance with IAS 1 -Presentation of Financial Statements. Skyline Retail REIT has elected to present theStatement of Income and Comprehensive Income in one statement.

The consolidated financial statements for the year ending December 31, 2014 wereapproved for issue by the Board of Trustees on March 24, 2015.

(b) BASIS OF MEASUREMENT

The consolidated financial statements have been prepared on a historical cost basis, asmodified by the revaluation of investment properties.

(c) FUNCTIONAL CURRENCY AND PRESENTATION

The consolidated financial statements are presented in Canadian dollars, which is alsoSkyline Retail REIT's functional currency.

Skyline Retail REIT presents its consolidated balance sheet based on the liquiditymethod, where all assets and liabilities are presented in the ascending order of liquidity.

Page 8





2. BASIS OF PRESENTATION (continued)

(d) USE OF ESTIMATES

The preparation of these consolidated financial statements requires Skyline Retail REITto make estimates and assumptions that affect the reported amounts of assets andliabilities at the date of the consolidated financial statements and reported amounts ofrevenue and expenses during the reporting period. Actual outcomes could differ fromthese estimates. These consolidated financial statements include estimates, which, bytheir nature, are uncertain. The impact of such estimates is pervasive throughout theconsolidated financial statements and may require accounting adjustments based onfuture occurrences. Revisions to accounting estimates are recognized in the period inwhich the estimates are revised and the revision affects both current and future periods.

Significant estimates and assumptions include the fair values assigned to investmentproperties and allowances for doubtful accounts. Valuation of investment properties isone of the principal estimates and uncertainties of these consolidated financialstatements. Refer to note 6 for further information on estimates and assumptions madein the determination of the fair value of investment properties.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with InternationalFinancial Reporting Standards and include the following significant accounting policies:

(a) INVESTMENT PROPERTIES

Investment properties are properties held to earn rental income and are accounted forusing the fair value model. Rental income and operating expenses from investmentproperties are reported within 'revenue' and 'expenses' respectively.

Properties that are held for long term rental yields or for capital appreciation or both, andthat are not occupied by Skyline Retail REIT, are classified as investment properties.

Investment property is measured initially at its cost, including related transaction costs.After initial recognition, investment property is carried at fair value. For propertiespurchased within one year of the reporting date, the purchase price is considered fairvalue, unless significant events or changes have occurred to the property that wouldsignificantly alter its fair value. Properties appraised by qualified third party appraiserswithin the past twelve months are not revalued, unless significant changes or eventshave occurred to the property since the appraisal date. All other properties are valuedinternally, using market supported financial metrics, a relevant appraisal model, andcurrent property details including, among other things, rent rolls from current leases andassumptions about rental income from future leases in light of current market conditions,and, any cash outflows that could be expected in respect of the property except for thoseoutflows that relate to liabilities recognized on the balance sheet. Skyline Retail REITalso uses extensive market comparable sales to support valuation capitalization rates fordifferent types of assets in different markets. These valuations form the basis for thecarrying amounts in the consolidated financial statements.

The fair value of investment property does not reflect future capital expenditure that willimprove or enhance the property and does not reflect the related future benefits from thisfuture expenditure other than those a rational market participant would take into accountwhen determining the value of the property.

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3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(a) INVESTMENT PROPERTIES (continued)

Investment properties that are being redeveloped for continuing use as investmentproperty or for which the market has become less active continue to be measured at fairvalue.

Subsequent expenditure is capitalized to the asset’s carrying amount only when it isprobable that future economic benefits associated with the expenditure will flow toSkyline Retail REIT and the cost of the item can be measured reliably. All other repairsand maintenance costs are expensed when incurred. When part of an investmentproperty is replaced, the carrying amount of the replaced part is derecognized.

Changes in fair values are recognized in the consolidated statement of income andcomprehensive income. Investment properties are derecognized when they have beendisposed.

Where Skyline Retail REIT disposes of a property at fair value in an arm’s lengthtransaction, the carrying value immediately prior to the sale is adjusted to the transactionprice, and the adjustment is recorded in income within the fair value adjustment oninvestment property.

If an investment property becomes owner-occupied, it is reclassified as property, plantand equipment. Its fair value at the date of reclassification becomes its cost forsubsequent accounting purposes.

As investments are measured at fair value, they are implicitly tested for impairmentannually. There is no specific impairment test relating to investment properties other thanthe fair value methodology.

The initial cost of properties under development includes the acquisition cost of theproperty, direct development costs, realty taxes and borrowing costs attributable to thedevelopment. Borrowing costs associated with direct expenditures on properties underdevelopment are capitalized. The amount of capitalized borrowing costs is determinedby reference to borrowings specific to the project. Borrowing costs are capitalized fromthe commencement of the development until the date of practical completion where theproperty is substantially ready for its intended use. The capitalization of borrowing costsis suspended if there are prolonged periods when development activity is interrupted.Practical completion is when the property is capable of operating in the manner intendedby Management. Generally, this occurs upon completion of construction and receipt ofall necessary occupancy and other material permits. If Skyline Retail REIT has pre-leased space at or prior to the property being substantially ready for its intended use, andthe lease requires tenant improvements which enhance the value of the property,practical completion is considered to occur when such improvements are completed.

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(b) ASSETS HELD FOR SALE

Non-current assets comprising assets and liabilities, that are expected to be recoveredprimarily through sale rather than through continuing use, are classified as held for sale.For this purpose, a sale is highly probable if Management is committed to a plan toachieve the sale; there is an active program to find a buyer; the non-current asset isbeing actively marketed at a reasonable price; the sale is anticipated to be completedwithin one year from the date of classification; and it is unlikely there will be changes tothe plan. Assets held for sale are measured using the fair value model.

(c) REVENUE RECOGNITION

Rental revenue includes rents from tenants under leases, property tax and operating costrecoveries, parking income and incidental income. Revenue from leases is recognized ona straight line basis over the term of the lease.

Tenant inducements are recognized as financial assets at fair value at the inception ofthe lease and are amortized through revenue on a straight line basis over the life of thelease.

(d) FINANCIAL INSTRUMENTS

Skyline Retail REIT's financial instruments and their respective classification andmeasurement characteristics, are as follows:

Asset/Liability Classification MeasurementCash Loans and receivables Amortized costAccounts receivable Loans and receivables Amortized costTenant loan receivable Loans and receivables Amortized costMortgages payable Other financial liabilities Amortized costDebentures payable Other financial liabilities Amortized costBank overdraft Other financial liabilities Amortized costAccounts payable and accrued liabilities Other financial liabilities Amortized cost

Financial AssetsFinancial assets are classified at initial recognition, as either financial assets at fair valuethrough profit or loss, loans and receivables, held-to-maturity financial assets oravailable-for-sale financial assets. When financial assets are recognized initially, theyare measured at fair value through profit or loss, plus directly attributable transactioncosts.

Skyline Retail REIT’s financial assets are derecognized only when the contractual rightsto the cash flows from the financial asset expire or substantially all of the risks andrewards of ownership transferred.

Skyline Retail REIT’s financial assets are all classified as loans and receivables andinclude cash, accounts receivable and tenant loan receivable. They are initiallyrecognized at fair value and subsequently measured at fair value less provision forimpairment.

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(d) FINANCIAL INSTRUMENTS (continued)

Financial Assets (continued)Provision for impairment is made when there is objective evidence, such as theprobability of insolvency or significant arrears, that Skyline Retail REIT will not be able tocollect the amounts due under the original terms. Impaired receivables are derecognizedwhen they become uncollectible. If in a subsequent period the impairment lossdecreases and the decrease can be related objectively to an event occurring in thesubsequent period, the impairment loss is reversed to no more than its previous carryingamount. The reversal is recognized through profit and loss.

Financial LiabilitiesFinancial liabilities are classified at initial recognition as either financial liabilities at fairvalue through profit and loss, or other financial liabilities, as appropriate. A financialliability is derecognized when the obligation under the liability is discharged, cancelled orexpires.

Skyline Retail REIT’s financial liabilities are all classified as other financial liabilities, andinclude mortgages payable, debentures payable, accounts payable and accrued liabilitiesand bank overdraft. These financial liabilities are measured initially at fair value andsubsequently at amortized cost. The fair value of a non-interest bearing liability is itsdiscounted payment amount. If the due date of the liability is less than one year,discounting is omitted.

Skyline Retail REIT's mortgages payable consist of the legal liabilities owing pursuant toloans secured by mortgages and premiums and discounts recognized on loans assumedon acquisition of properties, netted against the transaction costs, and the effectiveinterest method of amortization is applied to the premiums, discounts and transactioncosts.

(e) INCOME TAXES

Skyline Retail REIT is taxed as a 'Mutual Fund Trust' for income tax purposes. SkylineRetail REIT, pursuant to its Declaration of Trust, distributes substantially all of its taxableincome to unitholders and does not deduct such distributions or designations for incometax purposes. Accordingly, no provision for income taxes has been made. Income taxobligations relating to the distributions of Skyline Retail REIT are the obligation ofunitholders.

(f) DISTRIBUTION REINVESTMENT PLAN

Unitholders may elect to participate in a distribution reinvestment plan wherebydistribution payments are invested in additional units of Skyline Retail REIT. There are nospecial terms such as premiums on distribution rates for plan participants.

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(g) JOINT OPERATIONS

Skyline Retail REIT considers investments in joint arrangements to be a joint operationwhen they jointly make operating, financial and strategic decisions over one or moreinvestment property with another party, and have direct rights to the assets andobligations for the liabilities relating to the arrangement. When the arrangement isconsidered to be a joint operation, Skyline Retail REIT will include their share of theunderlying assets, liabilities, revenue and expenses in their financial results.

(h) PROVISIONS

Provisions are recognized when Skyline Retail REIT has a present legal or constructiveobligation as a result of past events, it is probable that an outflow of resources will berequired to settle the obligation, and the amount can be reliably estimated. Provisions arenot recognized for future operating losses. The amount recognized as a provision is thebest estimate of the consideration required to settle the present obligation at the reportingdate. Provisions are measured at their present value by discounting the future cash flowsfrom the expected date the obligation is to be settled. The discount rate used reflectscurrent market assessments of the time value of money adjusted by the risk factorspecific to the obligation. The unwinding of the discount due to the passage of time isrecognized as interest expense.

4. STANDARDS ISSUED BUT NOT YET EFFECTIVE

The standards and interpretations that are issued, but not yet effective, up to the date of issuanceof Skyline Retail REIT’s consolidated financial statements are disclosed below. Skyline RetailREIT intends to adopt these standards, if applicable, when they become effective.

IFRS 9 – Financial Instruments: IFRS 9 replaces the existing guidance in IAS 39. IFRS 9provides revised guidance on the classification and measurement of financial assets and financialliabilities as defined in IAS 39. It also introduces a new expected credit loss model for themeasurement of the impairment of financial assets. In addition, it carries forward the guidanceon recognition and measurement of financial instruments from IAS 39. IFRS 9 is effective forannual reporting periods beginning on or after 1 January 2018, with early adoption permitted.Skyline Retail REIT is assessing the potential impact on its consolidated financial statements butdoes not expect it to have a significant impact.

IFRS 15 – Revenue from contracts with customers: IFRS 15 introduces a five step process forrevenue recognition with the core principle of the new Standard being for entities to recognizerevenue to depict the transfer of goods or services to customers in amounts that reflect theconsideration (that is, payment) to which the entity expects to be entitled in exchange for thosegoods or services. IFRS 15 will also result in enhanced disclosures about revenue, provideguidance for transactions that were not previously addressed comprehensively (for example,service revenue and contract modifications) and improve guidance for multiple-elementarrangements. These are effective for annual periods beginning on or after 1 January 2017.These amendments are not expected to be relevant to Skyline Retail REIT.

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4. STANDARDS ISSUED BUT NOT YET EFFECTIVE (continued)

Annual improvements 2012 – 2014 cycle: The following amendments / clarifications (applicableto annual reporting periods beginning on or after 1 July 2016) are made: IFRS 5 – reclassification from held for sale to held for distribution to owners or from held fordistribution to owners to held for sale is considered to the continuation of the original plan ofdisposal; IFRS 7 – additional guidance to clarify whether a servicing contract is continuing involvement in atransferred asset, and clarification on offsetting disclosures in condensed interim financialstatements.IAS 9 – confirms that high quality corporate bonds or national government bonds used todetermine discount rates must be in the same currency as the benefits paid to the employee; IAS 34 – clarifies information about cross references in the interim financial report. These amendments are effective for annual periods beginning on or after 1 July 2016.

5. PRINCIPLES OF CONSOLIDATION

The consolidated financial statements comprise the financial statements of Skyline Retail REITand its subsidiary, RRELP.

Subsidiaries are entities over which Skyline Retail REIT has control, where control is defined asthe power to govern financial and operating policies of an entity so as to obtain benefit from itsactivities. Subsidiaries are fully consolidated from the date control is transferred to Skyline RetailREIT, and are de-consolidated from the date control ceases. Intercompany transactions betweensubsidiaries are eliminated on consolidation. All subsidiaries have a reporting date of December31.

Skyline Retail REIT carries out a portion of its activities through joint operations and records itsproportionate share of assets, liabilities, revenues, expenses and cash flows of all jointoperations in which it participates.

6. INVESTMENT PROPERTIES

Changes to the carrying amounts of investment properties presented in the consolidated balancesheet can be summarized as follows:

2014 2013

Balance at beginning of the year $ 11,638 $ 0Acquisitions through purchase of assets 254,120 11,638Additions through capital expenditures on

existing investment properties 653 0Fair value adjustment on investment properties (1,113) 0

Balance at end of the year $ 265,298 $ 11,638

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6. INVESTMENT PROPERTIES (continued)

Asset acquisitions:

During the year ended December 31, 2014, Skyline Retail REIT acquired thirty-seven (2013 -two) investment properties. The results of these acquisitions are included in these consolidatedfinancial statements from the date of acquisition. The following table outlines the cost, plus thetransaction costs of the assets acquired and the associated liabilities entered into as a result ofthese acquisitions:

2014 2013

Acquisition cost of investment properties $ 254,120 $ 11,638Mortgages (149,601) (8,000)Debentures payable (27,000) 0

Total identifiable net assets settled by cash $ 77,519 $ 3,638

Future rental income:

Investment properties are subject to operating leases with tenants. Lease contracts are alltypically non-cancelable for periods ranging from one to fifteen years from the commencement ofthe lease. Future minimum rental income from these agreements is as follows:

2014 2013

Less than one year $ 17,941 $ 809Between one and three years 34,812 1,612More than three years 127,653 4,140

$ 180,406 $ 6,561

Fair value disclosure:

Skyline Retail REIT uses an income approach to perform internal valuation calculations for thepurposes of determining the fair market value of investment properties. The same approach isused for those properties with independent third party appraisals. Significant assumptions usedfor the valuation of the properties include the capitalization rate and the revenue and expensesfor each property.

Skyline Retail REIT categorizes its investment properties by region, and each region has adifferent range of capitalization rates, depending on the specific risk factors for each property inthat region. No internal or external valuations were required in 2013 as all the properties werepurchased during the year. Overall, the capitalization rates for the retail properties for 2014 fallbetween:

2014 2013

Maximum 6.28% N/AMinimum 6.74% N/A

Assumptions related to property revenue and expenses are based on the most recent annualresults of each property, and where necessary, industry benchmarks.

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6. INVESTMENT PROPERTIES (continued)

In 2014, RRELP valued $11,750 of its investment properties internally (2013 - nil). No internal orexternal valuations were required in 2014 as all the properties were purchased during the year.Actual results may differ from these estimates and may be subject to material adjustment withinthe next year.

7. OTHER ASSETS

The components of other assets are as follows:2014 2013

Funds held in trust $ 522 $ 480Escrow realty taxes 21 0Prepaid expenses 122 59Tenant inducements 404 0

$ 1,069 $ 539

8. TENANT LOAN RECEIVABLE

The tenant loan receivable is receivable in blended monthly instalments of $11 with interestcharged at 6.62%. The loan is due in November 2028. The portion receivable within one year is$53.

9. MORTGAGES PAYABLE

The mortgages payable are secured by real estate assets and letters of credit, in some cases.Mortgages bearing fixed interest with a contractual weighted average rate of 4.11% (2013 -4.72%) per annum are $141,542 (2013 - $7,993). One mortgage for $11,000 (2013 - nil) bears avariable interest rate of prime + 2.00%. Mortgages have maturity dates ranging between 2015and 2025. Included in mortgages payable is $12,959 (2013 - nil) of second mortgages. Allmortgages are denominated in Canadian dollars.

Future minimum payments on mortgage obligations are as follows:

2015 $ 15,0582016 11,2052017 26,6772018 5,9472019 52,501

Thereafter 41,154

$ 152,542

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10. DEBENTURES PAYABLE

The following table summarizes the key terms of the debentures that were issued on August 1,2014:

As of December 31, 2014

ConvertibleDebentures

MaturityDate

ContractualInterest

Rate

EffectiveInterest

RateConversion

PriceFaceValue

CarryingValue

2017 ConvertibleDebentures

August 1,2019

5.35% 5.35% $ 10.00 $ 27,000 $ 27,000

The Debentures are convertible into Skyline Retail REIT Units at the option of the holder orSkyline Retail REIT at any time on or after August 1, 2017 and prior to the maturity date at aconversion price of $10.00. Interest expense is recorded as a charge to net income and iscalculated at an effective interest rate of 5.35%.

11. RELATED PARTY TRANSACTIONS

Skyline Retail Real Estate GP Inc. is the general partner of RRELP and is entitled to 20% ofdistributions after the limited partners have received returns equivalent to their adjustedcontribution value. Transactions are measured at fair value.

Skyline Retail REIT has an asset management agreement with Skyline Asset Management Inc.,a property management agreement with Skyline Commercial Management Incorporated, and awealth management agreement with Skyline Wealth Management Inc. Skyline Retail Real EstateGP Inc., Skyline Asset Management Inc., Skyline Commercial Management Incorporated, andSkyline Wealth Management Inc. are controlled by the same shareholders.

Fees payable under the asset management agreement are 2% of adjusted gross revenue. Feespayable under the property management agreement average 2% to 3% of base rental income.Fees payable under the wealth management agreement include wealth management fees of0.3% of unitholders' equity, and equity raise fees ranging from 0.5% to 1% of contributions duringthe year. Equity raise fees of $435 (2013 - $52) were paid during the year and are included inissuance costs. Fees paid during the year are as follows:

2014 2013

Asset management fees $ 303 $ 3Property management fees 322 3Wealth management fees 188 2

$ 813 $ 8

During 2014, no investment properties were purchased from related parties.

Due to related partiesAmounts due to related parties are unsecured, non-interest bearing (2013 - 10%), and are due ondemand. The balance consists of the following:

2014 2013

Skyline Commercial Real Estate Limited Partnership $ 7 $ 739

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11. RELATED PARTY TRANSACTIONS (continued)

The general partner of RRELP and Skyline Commercial Real Estate Limited Partnership arecontrolled by the same shareholders.

Note receivableDuring 2014, Skyline Retail REIT advanced $1,650 (2013 - nil) to Glengate Investments Inc. inorder to partially finance two projects under development in Port Elgin. This loan finances theconstruction of two properties and gives RRELP the right to purchase the retail properties after itis developed by Glengate Investments Inc. These loans bear interest at 8% per annum. Twotrustees of Skyline Retail REIT have an interest in Glengate Investments Inc.

12. FINANCIAL RISK MANAGEMENT

Financial risks are risks arising from the financial instruments to which Skyline Retail REIT isexposed during or at the end of the reporting period. Financial risk comprises market risk, creditrisk, and liquidity risk. Skyline Retail REIT considers real estate risk as a financial risk as well,even though investment property is not classified as a financial instrument.

Risk management is carried out by Management and the Board of Trustees of Skyline RetailREIT. Management identifies and evaluates financial risks and the Board provides oversight onoverall risk management, including specific areas such as interest rate risk, liquidity, andinvesting policies.

Key financial risk management reports are produced on a monthly basis and key indicators arereviewed by Management and the Board of Trustees of Skyline Retail REIT.

i) Market riskMarket risk is the risk that the fair value of future cash flows of a financial instrument willfluctuate because of changes in market prices. Skyline Retail REIT’s market risks arisefrom open positions in interest bearing assets and liabilities, to the extent that these areexposed to market fluctuations.

a. Interest rate riskAll of Skyline Retail REIT’s mortgages payable at December 31, 2014 are atfixed interest rates during the term of the debt. However, there is interest raterisk associated with Skyline Retail REIT’s fixed interest rate term debt, due to theexpected requirement to refinance such debts upon maturity. As fixed rate debtmatures and as Skyline Retail REIT uses additional floating rate debt underrevolving credit facilities, Skyline Retail REIT will be further exposed to changesin interest rates.

As part of its risk management policies, Skyline Retail REIT uses fixed ratemortgages for the majority of its borrowings to allow for better cash flow planning.Skyline Retail REIT attempts to stagger mortgage renewals at appropriateintervals to mitigate significant interest rate shocks in a given year.

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12. FINANCIAL RISK MANAGEMENT (continued)

i) Market risk (continued)

a. Interest rate risk (continued)The following table illustrates the sensitivity of income and equity to a reasonablypossible change in interest rates of +/- 1%.

As of December 31, 2014Partners' Partners'

Carrying Income Equity Income EquityAmount -1% -1% +1% +1%

Bank overdraft $ 6,313 $ (63) $ (63) $ 63 $ 63Long term debt, maturing within 1 year 11,367 (114) (114) 114 114

$ 17,680 $ (177) $ (177) $ 177 $ 177

b. Price riskSkyline Retail REIT has no significant exposure to price risk with respect tofinancial instruments as it does not hold any equity securities or commodities.

c. Foreign exchange riskSkyline Retail REIT is not subject to foreign exchange risk. All of its financialinstruments are denominated in Canadian dollars.

ii) Credit riskCredit risk is a risk that one party to a financial instrument will cause a financial loss forthe other party by failing to discharge an obligation. Credit risk arises from the possibilitythat Skyline Retail REIT's tenants may experience financial difficulty and be unable tomeet their lease obligations.

An allowance for doubtful accounts is recognized for estimated losses resulting fromtenant default on lease obligations. Skyline Retail REIT actively reviews receivables anddetermines the potentially uncollectible accounts on a per-tenant basis. An accountsreceivable is written down to its estimated recoverable value when there is reason tobelieve that the tenant will not be able to fulfil their obligations under the leaseagreement. There is no amount in the allowance for doubtful accounts at December 31,2014.

Credit risk is managed by reviewing the credit quality of the tenant through credit ratingsand references. The maximum exposure to credit risk at the reporting date is equal tothe carrying value of each class of financial asset.

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12. FINANCIAL RISK MANAGEMENT (continued)

iii) Liquidity riskLiquidity risk management entails maintaining sufficient cash and credit facilities availableto close out market positions. Skyline Retail REIT ensures flexibility in funding bykeeping committed credit lines available and raising capital from partners when needed.

Skyline Retail REIT’s liquidity position is monitored on a regular basis by Management. Asummary table with maturity of financial assets and liabilities presented below is used bykey management personnel to manage liquidity risks and is derived from managerialreports at company level. The amounts disclosed in the tables below are the contractualundiscounted cash flows. Undiscounted cash flows in respect of the balances due withintwelve months generally equal their carrying amounts in the balance sheet as the impactof discounting is not significant.

Skyline Retail REIT has access to an operating line of credit to a maximum of $10,000with interest charged at prime + 2.0%, of which $8,743 is utilized at December 31, 2014(2013 - nil). The line of credit is secured by a general security agreement over some ofthe income producing properties of Skyline Retail REIT.

Under a financing agreement, Skyline Retail REIT was required to maintain a debtservice ratio of 1.20 or better. At December 31, 2014, they are in compliance with thefinancing agreement.

Skyline Retail REIT's long term debt consists of mortgages payable bearing interest ratesranging from 3.25% to 8.00% per annum (2013 - 4.25% to 4.95%), payable in monthlyinstalments of principal and interest of approximately $778 (2013 - $43), maturing from2015 to 2025, and are secured by specific charges against specific properties. All interestrates are fixed for the term of the respective mortgage, except for one mortgage asdescribed in note 9.

Financial liabilities and their maturities are as follows:

Less than One to five More thanDecember 31, 2014 On demand one year years five years Total

Mortgages payable $ 0 $ 11,367 $ 94,940 $ 46,235 $ 152,542Debentures payable 0 0 27,000 0 27,000Accounts payable and

accrued liabilities 0 1,843 0 0 1,843Bank overdraft 6,313 0 0 0 6,313

$ 6,313 $ 13,210 $ 121,940 $ 46,235 $ 187,698

iv) Real estate riskSkyline Retail REIT has identified risks associated with the real estate portfolio. Thegreatest risk is with respect to the fair values of the portfolio due to changes in real estatemarket conditions, the macro economic climate, and overall financial health of its tenants.

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13. CAPITAL RISK MANAGEMENT

Skyline Retail REIT’s objectives when managing capital are to safeguard the entity’s ability tocontinue as a going concern in order to provide returns for unitholders, and to maintain anoptimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, Skyline Retail REIT has the ability to adjust theamount of distributions paid to partners, return capital to partners, issue additional units,refinance existing debt, or sell investment property to reduce debt.

Skyline Retail REIT monitors capital primarily using a loan to value ratio, which is calculated asthe amount of outstanding debt divided by the valuation of the investment property portfolio. As ofDecember 31, 2014, the loan to value ratio was 68% (2013 - 69%), which is within Skyline RetailREIT’s stated policy of 70% or better. Subsequent to December 31, 2014, Skyline Retail REIT isin compliance with the policy.

During the year, Skyline Retail REIT did not breach any of its loan covenants, nor did it default onany other of its obligations under its loan agreements. Skyline Retail REIT did not change itsdistribution rates paid to unitholders in the year.

14. SEGMENTED DISCLOSURE

All of Skyline Retail REIT's assets and liabilities are in, and its revenues are derived from,Canadian retail real estate. Skyline Retail REIT's investment properties are, therefore, consideredby Management to have similar economic characteristics. One tenant represents 19% andanother represents 15% (2013 - 36%) of Skyline Retail REIT's property revenue.

15. UNITHOLDERS' EQUITY

Skyline Retail REIT is authorized to issue unlimited number of units. Skyline Retail REIT unitsare entitled to distributions as and when declared by the Board of Trustees. The units issued andoutstanding are as follows:

2014 Units 2013 Units

Units outstanding, beginning of year 458,835 0Units issued 7,988,680 456,500Units issued (Distribution reinvestment plan) 94,113 2,335Redemptions during the year (204,343) 0

Units outstanding, end of year 8,337,285 458,835

Included in units outstanding at December 31, 2014 are 3,215,634 Class B and 848,371 Class Cexchangeable partnership units of RRELP. RRELP’s Class B LP units, representing anaggregate fair value of $32,156 at December 31, 2014 (2013 – nil) and Class C LP units,representing an aggregate fair value of $8,484 at December 31, 2014 (2013 – nil), areexchangeable on a one-for-one basis, into Skyline Retail REIT units at any time at the option ofthe holder. Prior to such exchange, distributions will be made on these exchangeable units in anamount equivalent to the distributions which would have been made had the units beenexchanged for Skyline Retail REIT units. Each Class B and C LP unit entitles the holder to attendbut not vote at all meetings of the Limited Partners.

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16. SUBSEQUENT EVENTS

Subsequent to the year end, Skyline Retail REIT issued an additional 480,846 units at $10 perunit, and redeemed 21,600 units at $10 per unit.

Subsequent to year end, Skyline Retail REIT has made the following retail investment propertyacquisitions:

i) A property in Wingham, Ontario at a cost of $7,202. The property was partially financed witha mortgage of $5,050, with a fixed interest rate of 3.31% and maturing in 2025. There is adeposit of $100 on the property at year end.

ii) A property in Sudbury, Ontario at a cost of $6,700. The property was partially financed with amortgage of $4,850, with a fixed interest rate of 3.44% and maturing in 2025. There is adeposit of $150 on the property at year end.

Subsequent to the year end, Skyline Retail REIT refinanced two properties with a mortgage of$5,975 with a fixed interest rate of 3.03% and maturing in 2022.

Skyline Retail REIT has committed to purchasing one property in Port Elgin, Ontario as ofDecember 31, 2014. There is a deposit on the property of $50 at year end.

17. COMPARATIVE FIGURES

Certain figures presented for comparative purposes have been reclassified to conform to thecurrent year's presentation.

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