Download fourth quarter results 2015

MORGUARD REAL ESTATE INVESTMENT TRUST
FOURTH QUARTER
RESULTS 2015
Q4
2015
MANAGEMENT’S DISCUSSION AND ANALYSIS
AND CONSOLIDATED FINANCIAL STATEMENTS
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART I
BASIS OF PRESENTATION
Financial data included in this Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2015,
includes material information up to February 17, 2016. Except as outlined below, financial data provided has been prepared
in accordance with International Financial Reporting Standards (“IFRS”) IAS 34, "Interim Financial Reporting", as issued by
the International Accounting Standards Board (“IASB”).
In this MD&A, the discussion of the operating results of Morguard Real Estate Investment Trust (“the Trust”) is based on
financial information developed using proportionate consolidation for all the Trust’s joint arrangements, including those joint
ventures accounted for using the equity method, as required by IFRS 11. Management believes that presenting the
operating and financial results of the Trust’s joint arrangements using proportionate consolidation provides more useful
information to both current and prospective investors to assist them with their understanding of the Trust’s financial
performance.
From time to time, the Trust will undertake to actively dispose of certain assets. In these circumstances management has
determined that the performance of ongoing operations is of greatest importance to its stakeholders. As a result, in this
MD&A, the discussion of the Trust’s property performance for the purpose of some measures is focused on income
producing properties ("IPP"), which exclude properties held for sale.
The following discussion and analysis is intended to provide readers with an assessment of the performance of the Trust
over the three months, as well as its financial position and future prospects. This discussion should be read in conjunction
with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2015.
Historical results, including trends that might appear, should not be taken as indicative of future operations or results. All
dollar references, unless otherwise stated, are in thousands of Canadian dollars, except per unit amounts.
PART XI provides reconciliations between selected financial information from the Trust’s consolidated financial statements
and the financial information used in this MD&A.
FORWARD-LOOKING DISCLAIMER
Certain information in this MD&A may constitute forward-looking statements that involve a number of risks and
uncertainties, including statements regarding the outlook for the Trust’s business results of operations. Forward-looking
statements use the words “believe,” “expect,” “anticipate,” “may,” “should,” “intend,” “estimate” and other similar terms, which
do not relate to historical matters. Such forward-looking statements involve known and unknown risks and uncertainties and
other factors that may cause the actual results to differ materially from those indicated. Such factors include, but are not
limited to, general economic conditions, the availability of new competitive supply of commercial real estate that may
become available either through construction or sublease, the Trust’s ability to maintain occupancy and to lease or re-lease
space on a timely basis at current or anticipated rates, tenant bankruptcies, financial difficulties and defaults, changes in
interest rates, changes in operating costs, the Trust’s ability to obtain adequate insurance coverage at a reasonable cost
and the availability of financing. The Trust believes that the expectations reflected in forward-looking statements are based
on reasonable assumptions; however, the Trust can give no assurance that actual results will be consistent with these
forward-looking statements. Except as required by applicable law, the Trust disclaims any intention or obligation to update
or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers
should be cautioned not to place undue reliance on the forward-looking statements.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
FINANCIAL MEASURES
The Trust uses supplemental measures such as net operating income (“NOI”), funds from operations (“FFO”) and adjusted
funds from operations (“AFFO”) to manage its financial performance. These measures are not defined by IFRS and
therefore should not be construed as substitutes for net income or cash flows from operating activities calculated in
accordance with IFRS. Furthermore, the Trust’s method of calculating these supplemental measures may differ from other
issuers’ methods and, accordingly, may not be comparable to measures reported by other issuers.
SUMMARY OF SELECTED ANNUAL INFORMATION
The selected annual information highlights certain key metrics for the Trust over the most recently completed five years.
These measures from time to time may reflect fluctuations caused by the underlying impact of seasonal or non-recurring
items, including acquisitions, divestitures, developments, leasing and maintenance expenditures, along with any associated
financing requirements. These items along with the ongoing financing activities for the existing portfolio can dramatically
affect the results.
ADOPTION OF ACCOUNTING STANDARDS
IAS 40, “INVESTMENT PROPERTY” (“IAS 40”)
On January 1, 2015, the Trust adopted an amendment with respect to the description of ancillary services in IAS 40, which
differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The
amendment is applied prospectively and clarifies that IFRS 3, Business Combinations, and not the description of ancillary
services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This
amendment did not result in a material impact to the consolidated financial statements.
IFRS 8, “OPERATING SEGMENTS” (“IFRS 8”)
On January 1, 2015, the Trust adopted the amendments to IFRS 8. The amendments are applied retrospectively and clarify
that:
• An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of
IFRS 8, including a brief description of operating segments that have been aggregated and the economic
characteristics (e.g., sales and gross margins) used to assess whether the segments are similar.
• The reconciliation of segment assets to total assets is required to be disclosed only if the reconciliation is reported to
the chief operating decision-maker, similar to the required disclosure for segment liabilities.
These amendments did not result in a material impact to the consolidated financial statements.
ADDITIONAL INFORMATION
Additional information relating to the Trust, including the audited consolidated financial statements, Annual Information Form
(“AIF”), Material Change Reports and all other continuous disclosure documents required by securities regulators, are filed
on the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed electronically at
www.sedar.com.
REVIEW AND APPROVAL BY THE BOARD OF TRUSTEES
The Board of Trustees (“Trustees”), upon the recommendation of its Audit Committee, approved the contents of this MD&A
on February 17, 2016.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
SUMMARY OF SELECTED ANNUAL INFORMATION
TABLE 1
2015
2014
2013
2012
2011
$290,982
$298,461
$279,651
$244,876
$235,460
Net operating income
165,930
169,739
161,336
136,964
133,628
Income before fair value (losses)/gains on real estate properties, loss/(gain) on sale of
real estate properties and net income/(loss) from equity-accounted investments
103,153
102,700
97,080
82,103
78,254
Fair value (losses)/gains on real estate properties
(78,977)
11,239
77,912
In thousands of dollars, except per unit amounts
Revenue from real estate properties
(Loss)/gain on sale of real estate properties
Net income/(loss) from equity-accounted investments
107,641
142,683
—
(37)
2,058
—
—
2,441
(20)
5,602
3,660
2,136
Net income for the year
26,617
113,882
212,381
228,446
158,302
Funds from operations
106,385
106,516
100,763
85,982
78,355
79,524
79,272
65,342
43,681
56,511
Basic
$0.43
$1.83
$3.35
$3.82
$2.77
Diluted
$0.43
$1.72
$3.01
$3.81
$2.62
$1.72
$1.71
$1.59
$1.44
$1.37
$1.67
$1.67
$1.55
$1.44
$1.33
Basic
$1.28
$1.28
$1.03
$0.73
$0.99
Diluted 1
$1.28
$1.27
$1.03
$0.73
$0.99
Cash distributions per unit
$0.96
$0.96
$0.96
$0.95
$0.90
Adjusted funds from operations
Amount presented on a per unit basis
Net income for the year
Funds from operations
Basic
Diluted
1
Adjusted funds from operations
Payout ratio – Adjusted funds from operations - basic 2
75.0 %
75.0 %
93.2 %
130.1 %
90.9 %
Weighted average number of units (in thousands)
Basic
61,779
62,168
63,456
59,778
57,079
Diluted 1
67,876
68,265
69,554
60,811
63,657
Total assets
$2,920,155
$3,016,496
$2,942,799
$2,663,321
$2,093,401
Total liabilities
$1,364,015
$1,409,415
$1,390,061
$1,232,538
$920,488
Total equity
$1,556,140
$1,607,081
$1,552,738
$1,430,783
$1,172,913
Retail
4,710
4,775
4,771
4,299
4,296
Office
3,517
3,526
3,466
3,466
2,819
534
534
534
534
534
8,761
8,835
8,771
8,299
7,649
Balance sheets
Gross leasable area as at December 31 (in thousands) 3
Industrial
Total
Occupancy as at the year-end date (%) 4
Retail
97 %
96 %
98 %
97 %
97 %
Office
97 %
96 %
95 %
95 %
93 %
Industrial
97 %
97 %
87 %
95 %
97 %
Total
97 %
96 %
96 %
96 %
96 %
1. Includes the dilutive impact of convertible debentures.
2. Cash distributions per unit as a percentage of adjusted funds from operations.
3. Gross leasable area for income producing properties only.
4. Excludes properties held for sale, and components of properties not available for occupancy due to redevelopment or remerchandising.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART II
BUSINESS OVERVIEW AND STRATEGY
The Trust’s primary business goal is to accumulate a Canadian portfolio of high-quality real estate assets and then deliver
the benefits of such real estate ownership to unitholders. The primary benefit is a reliable and, over time, increasing cash
distribution. The Trust manages distributions to ensure sufficient cash is retained to meet fixed obligations while ensuring a
stable cash flow to unitholders.
The Trust is an unincorporated “closed-end” trust, governed by the laws of the Province of Ontario, created and constituted
pursuant to an amended and restated Declaration of Trust dated May 5, 2015 (“Declaration of Trust”). The Trust was
formed on June 18, 1997, and began operations on October 14, 1997. The Trust units are publicly traded and listed on the
Toronto Stock Exchange (“TSX”) under the symbol MRT.UN.
Morguard Corporation (“Morguard”) is the parent company of the trust, owning 50.41% of the outstanding units as at
December 31, 2015. Morguard is a real estate company that owns a diversified portfolio of multi-unit residential, retail,
hotel, office and industrial properties in both Canada and the United States.
The Trust’s asset management team is focused on continually improving the returns from the assets currently owned and
making quality acquisitions that are accretive in the long term. As part of its strategy to continually improve the quality of its
property portfolio, the Trust undertakes the disposition of properties in cases where both the cash flows and values have
been maximized, where the properties no longer fit the Trust’s portfolio or where market trends indicate that superior
investment return opportunities are available elsewhere.
The Trust’s management team is incentivized to maintain occupancy levels and rents that outperform local markets. The
Trust has established standards for maintaining the quality of its portfolio and operating its properties at cost levels that are
competitive in their respective markets. These efforts are enhanced through a sustainability program that tracks utility
usage and savings over time. These savings are returned to our tenants through reduced operating costs, increasing the
Trust’s reputation as a responsible landlord.
The Trust’s management team is supported by contracted property management. The choice to contract for property
management provides the Trust with a day-to-day operating platform that is both “best-in-class” and cost-effective. Property
management services are delivered through a management agreement with Morguard Investments Limited (“MIL”). MIL is a
full-service real estate advisory company wholly owned by Morguard. MIL also provides advisory and management services
to institutional and other investors not related to Morguard or the Trust. The Trust’s agreement with MIL provides property
management services at predetermined rates based on a percentage of revenue. This provides predictability to a key
component of operating costs. In addition, MIL provides the Trust with leasing services across the full portfolio. With MIL
locations across the country, the Trust benefits from local market knowledge and local broker relationships. An annual
review of this agreement, combined with MIL’s institutional client base, ensures that rates for services reflect current market
conditions.
The Trust’s long-term debt strategy involves the use of conventional property-specific secured mortgages or bonds,
unsecured convertible debentures and secured floating-rate bank financing. The Trust currently targets a capital structure
with an overall indebtedness ratio of not more than 50% of gross assets. Through its Declaration of Trust, the Trust has the
ability to increase its overall indebtedness ratio to 60%.
FOURTH QUARTER OVERVIEW
The Trust’s fully diluted FFO for the three months ended December 31, 2015 of $0.45 is up $0.01 from the same period
ended 2014. The Trust's fully diluted FFO for the year ended December 31, 2015 of $1.67 is unchanged from the same
year ended 2014.
During the quarter the Trust benefited from reduced interest expense of $0.5 million and reduced general and administrative
expense of the same amount. These reductions were sufficient to offset a decrease in net operating income of $0.4 million
and a decrease in other income of $0.1 million.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
Lower interest expense is largely the result of properties sold during the year and regular amortizations on outstanding
mortgages. The reduction in general and administrative expense derives from additional compensation costs in 2014
compared to the same three months ended 2015.
The Trust’s net operating income continued to be challenged by the exit of Target Canada Corporation ("Target") from
Canada ($0.8 million) and the bankruptcy of Everest College ($0.2 million). During the quarter the Trust made a strategic
decision to redevelop the former Target space at Cambridge Centre, The Centre @ Circle & 8th, Brandon Shoppers Mall and
Prairie Mall, as well as the former Everest College space at St. Laurent Centre. The Trust now classifies these spaces as
under development.
After adjusting net operating income for the space under development as well as other one-time non-recurring items, net
operating income for the three months ended December 31, 2015 was $43.3 million which is up $0.7 million from the same
period ended 2014. Increases in the Trust’s same asset net operating income ($1.2 million) and properties under
development ($0.1 million) were offset by decreases to net operating income due to dispositions ($0.6 million).
The favourable result in same asset net operating income was largely due to improved performance within the enclosed
regional centres as a result of operating efficiencies. The recognition of these efficiencies in the fourth quarter allowed the
Trust to accelerate the recovery of capital expenditures made in previous quarters.
Occupancy levels improved during the quarter (excluding the area under development) with the Trust completing over
278,000 square feet of leasing.
The Trust’s ability to close the year ended December 31, 2015 with fully diluted FFO equal to the same period ended
December 31, 2014 demonstrates its strength. The challenges provided by Target and Everest College were overcome
through a determined effort to improve operating efficiencies which have allowed for the accelerated recovery of capital
expenditures and improvements in same asset net operating income. A strategic disposition program brought in additional
funds ($29.6 million), which the Trust used to repurchase just over 1.3 million units ($20.0 million) and complete the
revitalization project at St. Laurent Centre. As at December 31, 2015 the Trust had $26.3 million of cash available to:
repurchase additional units, reinvest in the development projects or reduce debt levels.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PORTFOLIO OVERVIEW
The risk and reliability characteristics of real estate asset classes are different, and delivering on the primary business goal
requires a mix of assets that balance risk and rewards. As at December 31, 2015, the Trust owned a diversified income
producing property portfolio of 49 retail, office and industrial properties consisting of approximately 8.8 million square feet of
gross leasable area (“GLA”) located in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and
Quebec.
Retail: The retail portfolio includes two broad categories of income producing properties: enclosed full-scale, regional
shopping centres that are dominant in their respective markets; and neighbourhood and community shopping centres that
are primarily anchored by food retailers, discount department stores and banking institutions. Investing across these two
broad categories of retail assets allows the Trust to spread its tenant base, reducing its exposure to a single category
retailer.
Office: The office portfolio is focused on well-located, high-quality properties in major Canadian urban centres. The
portfolio is balanced between single-tenant properties under long-term lease to government and large national tenants that
work to secure the Trust’s cash flow, and multi-tenant properties with well-distributed lease expiries that allow the Trust to
benefit from increased rental rates on lease renewal.
Industrial: The Trust has an interest in five industrial properties located in Ontario and Quebec.
PORTFOLIO COMPOSITION BY ASSET TYPE AND LOCATION
TABLE 2
AT THE TRUST'S OWNERSHIP SHARE
Retail
Number of
Properties
British Columbia
2
Alberta
Saskatchewan
Manitoba
Ontario
Location
Office
GLA (000's)
Number of
Properties
533
3
5
818
1
490
3
658
9
2,211
Industrial
Total
GLA (000's)
Number of
Properties
GLA (000's)
Number of
Properties
600
—
GLA (000's)
—
5
1,133
10
1,319
—
—
—
—
15
2,137
—
—
1
490
—
—
—
—
3
658
9
1,023
4
291
22
3,525
Quebec
—
—
2
575
1
243
3
818
Income producing properties
20
4,710
24
3,517
5
534
49
8,761
Properties under development
Total real estate properties
MORGUARD.COM
1
67
—
—
—
—
1
67
21
4,777
24
3,517
5
534
50
8,828
7
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART III
PROPERTY PERFORMANCE
NET OPERATING INCOME
NOI is used as a key indicator of performance as it represents a measure over which management has control.
NOI is an additional GAAP ("Generally Accepted Accounting Principles") measure and is defined by the Trust as revenue
from real estate properties less property operating expenses, property taxes and property management fees.
For the year ended December 31, 2015, the Trust’s retail properties accounted for more than 50% of NOI from income
producing properties (52%), with the office portfolio accounting for 46%. The Trust’s industrial portfolio accounts for only 2%
of the Trust’s NOI from income producing properties.
NET OPERATING INCOME BY ASSET TYPE AND LOCATION
TABLE 3
AT THE TRUST'S OWNERSHIP SHARE
Retail
Office
Number of
Properties
NOI
(000's)
British Columbia
2
Alberta
5
Saskatchewan
Manitoba
Industrial
Total
Number of
Properties
NOI
(000's)
Number of
Properties
NOI
(000's)
$9,682
3
$12,589
—
13,656
10
39,792
—
1
7,699
—
—
3
10,687
—
—
Ontario
9
45,617
9
Quebec
—
—
2
Income producing properties
20
87,341
24
1
846
—
Location
Properties under development
Number of
Properties
NOI
(000's)
$—
5
$22,271
—
15
53,448
—
—
1
7,699
—
—
3
10,687
17,998
4
1,630
22
65,245
8,309
1
1,393
3
9,702
78,688
5
3,023
49
169,052
—
—
1
839
(7)
Properties held for sale
—
—
—
136
—
292
—
428
Total real estate properties
21
$88,187
24
$78,824
5
$3,308
50
$170,319
A complete reconciliation of NOI discussed in this MD&A to NOI per the consolidated financial statements is provided in Part
XI (Table 60).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
COMPARATIVE NET OPERATING INCOME ANALYSIS
TABLE 4
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31
Revenue from real estate properties
2015
2014
Variance
$1,226
Year Ended December 31
%
2015
2014
Variance
%
1.7%
$74,824
$73,598
$287,221
$285,363
$1,858
0.7%
Property operating expenses
17,003
17,461
(458)
(2.6)%
63,941
63,538
403
0.6%
Property taxes
12,669
12,240
429
3.5 %
50,338
49,161
1,177
2,457
2,405
52
2.2 %
9,361
10,174
$42,695
$41,492
$1,203
$163,581
$162,490
Property management fees
Net operating income – same assets
2.9%
(813)
$1,091
2.4%
(8.0%)
0.7%
The components of net operating income – same assets are displayed in the table above. For comparability, the NOI is
focused on same assets. Assets acquired, disposed of and developed over the comparable periods are removed, along
with the impact of step rents, lease cancellation fees and other one-time events. In the fourth quarter, the Trust made a
strategic decision to redevelop the former Target space at Cambridge Centre, The Centre @ Circle & 8th, Brandon
Shoppers Mall and Prairie Mall, as well as the former Everest College space at St. Laurent Centre. The Trust now classifies
these spaces as under development. As a result, net operating income – same assets excludes net operating income
associated with the former Target and Everest College space.
Property management fees are the direct result of the Trust’s management agreement with MIL. The property management
agreement permits property management fees to be charged, at variable rates, on revenue from real estate properties
based on asset type. Fees average 3.25% of revenue from real estate properties. With few exceptions, these fees are
recoverable from tenants.
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR INCOME PRODUCING PROPERTIES
TABLE 5
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31
Year Ended December 31
2015
2014
Variance
%
2015
2014
Retail
$22,959
$21,867
$1,092
5.0%
$85,059
$85,181
($122)
Office
19,053
18,916
137
0.7%
75,488
74,623
865
1.2%
683
709
(26)
(3.7%)
3,034
2,686
348
13.0%
$42,695
$41,492
$163,581
$162,490
$1,091
0.7%
Industrial
Net operating income – same assets
$1,203
2.9%
Variance
%
(0.1%)
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR RETAIL PROPERTIES
TABLE 6
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31
Enclosed regional centres
Community strip centres
Net operating income – same assets
Year Ended December 31
2015
2014
Variance
%
2015
2014
$18,108
$16,953
$1,155
6.8%
$65,414
$66,134
4,851
4,914
$22,959
$21,867
(63)
$1,092
Variance
($720)
%
(1.1%)
(1.3%)
19,645
19,047
598
3.1%
5.0%
$85,059
$85,181
($122)
(0.1%)
The Trust's retail portfolio is diversified through the investment in enclosed regional centres and community strip centres.
ENCLOSED REGIONAL CENTRES OVERVIEW
At December 31, 2015, the Trust’s enclosed regional centres portfolio totalled 3.5 million square feet of GLA, which
comprises a 100% interest in six regional centres totalling 3.4 million square feet and a 50% interest in one additional centre
totalling 0.1 million square feet.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
The space tied to the former Target (approximately 380,000 square feet) and Everest College (approximately 32,000 square
feet) units will remain available for lease during the redevelopment; however, the space ("development space") will not be
available for occupancy until after the redevelopment concludes. As a result, the Trust excludes this area (412,000 square
feet) to track lease activity and current vacancy.
ENCLOSED REGIONAL CENTRES – NET OPERATING INCOME
TABLE 7
Three Months Ended December 31
Revenue from real estate properties
2015
2014
Variance
$1,500
Year Ended December 31
%
2015
2014
Variance
5.0%
%
$31,457
$29,957
$115,455
$115,409
$46
—%
Property operating expenses
7,111
7,178
(67)
(0.9%)
26,137
25,168
969
3.9%
Property taxes
5,227
4,817
410
8.5%
20,158
19,455
703
3.6%
Property management fees
1,011
1,009
2
0.2%
3,746
4,652
(906)
(19.5%)
$18,108
$16,953
$1,155
6.8%
$65,414
$66,134
($720)
(1.1%)
Net operating income – same assets
The Trust’s enclosed regional centres net operating income – same assets for the three months ended December 31, 2015,
was $18.1 million versus $17.0 million for the same period in 2014. This represents an increase of 6.8%. This increase was
largely the result of improved operating efficiencies at Parkland Mall, Brandon Shoppers Mall, and Cambridge Centre.
The Trust’s enclosed regional centres net operating income – same assets for the year ended December 31, 2015, was
$65.4 million versus $66.1 million for the same period in 2014. This represents a decrease of 1.1%. This decrease was
largely due to higher vacancy costs of $1.0 million at St. Laurent Centre, offset by reduced non-recoverable costs of $0.3
million during the year.
ENCLOSED REGIONAL CENTRES – LEASE PROFILE
TABLE 8
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2016
580,734
18.9%
$18.71
2017
206,039
6.7%
37.70
2018
241,219
7.8%
30.35
2019
94,789
3.1%
39.91
Thereafter
1,863,171
60.5%
21.36
Current vacancy
91,659
3.0%
—
3,077,611
100.0%
$23.25
Total
Weighted average remaining lease term (years)
4.55
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals, for the next four
years and thereafter, along with the associated contract
rents at maturity. Current vacancy excludes 412,000
square feet associated with the units under
redevelopment.
Lower weighted average contract rent displayed in 2016
and “thereafter” is the result of anchor tenant maturities.
The following table provides a quarterly summary of the 2016 expiries net of committed renewals, along with the associated
contract rents, for the Trust’s enclosed regional centres.
ENCLOSED REGIONAL CENTRES – 2016 EXPIRIES (NET OF RENEWALS)
TABLE 9
Total
Gross leasable area
Average net rent per SF
MORGUARD.COM
Q1
Q2
Q3
Q4
2016
327,570
50,758
103,532
98,874
580,734
$17.13
$26.09
$16.16
$21.31
$18.71
10
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
ENCLOSED REGIONAL CENTRES – 2015 LEASE ACTIVITY
TABLE 10
Opening vacancy (SF)
Q4 2015
YTD 2015
523,933
136,770
Opening occupancy
85%
The table to the left provides a summary of the leasing
activity for the three months and the year ended
December 31, 2015.
96%
EXPIRING LEASES:
Square feet
Average net rent per SF
142,651
489,706
$19.59
$22.08
5,953
431,592
$48.62
$10.13
135,067
386,232
$17.98
$21.52
For the three months ended December 31, 2015, the Trust
realized an average decrease of $1.61 per square foot on
renewals, while maintaining a 95.1% retention rate for
existing tenants.
EARLY TERMINATIONS:
Square feet
Average net rent per SF
For the year ended December 31, 2015, the Trust realized
an average decrease of $0.56 per square foot on
renewals, while maintaining a 79.5% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $6.44 per square foot on new leasing.
RENEWALS:
Square feet
Average net rent per SF
Retention rate
95.1%
79.5%
During the quarter, the enclosed regional centres portfolio
was adjusted to exclude 412,000 square feet of GLA
relating to former Target (380,000) and Everest College
(32,000) units not available for lease due to
redevelopment or remerchandising programs under way.
NEW LEASING:
Square feet
33,477
167,843
Average net rent per SF
$34.49
$28.52
(412,334)
(412,334)
91,659
91,659
OTHER ADJUSTMENTS:
Square feet
Ending vacancy (SF)
Ending occupancy
97%
At December 31, 2015, occupancy was 97%, (excluding
the development space) versus the opening occupancy
position of 96%.
97%
ENCLOSED REGIONAL CENTRES – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 11
2014
In thousands of SF
Enclosed regional centres GLA
% GLA occupied
2015
Q1
Q2
Q3
Q4
Q1
Q2
3,488
3,491
3,488
3,485
3,485
3,488
97%
97%
96%
96%
95%
85%
Q3
3,489
85%
Q4
3,078
97%
The enclosed regional centres square footage and quarterly occupancy for the past eight quarters are outlined in Table 11.
Occupancy levels, which have historically remained high with little volatility, were adjusted in the second quarter to fully
reflect four of the Trust’s regional shopping centres affected by either disclaimed or acquired Target leases. During the
quarter, the enclosed regional centres portfolio was adjusted to exclude development space (412,000 square feet of GLA).
As at December 31, 2015, this adjustment increased occupancy from 86% to 97%.
MORGUARD.COM
11
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
COMMUNITY STRIP CENTRES OVERVIEW
At December 31, 2015, the Trust's community strip centres portfolio totalled 1.2 million square feet of GLA comprising a
100% interest in 12 such properties totalling 1.1 million square feet, as well as a 50% interest in one additional property
totalling 0.1 million square feet.
COMMUNITY STRIP CENTRES – NET OPERATING INCOME
TABLE 12
Three Months Ended December 31
2015
2014
Variance
Year Ended December 31
%
2015
2014
Variance
$765
%
$8,014
$7,694
$320
4.2%
$31,093
$30,328
Property operating expenses
1,483
1,252
231
18.5%
4,799
4,884
(85)
(1.7%)
Property taxes
1,366
1,235
131
10.6%
5,443
5,238
205
3.9%
314
293
21
7.2%
1,206
1,159
47
4.1%
$4,851
$4,914
($63)
(1.3%)
$19,645
$19,047
$598
3.1%
Revenue from real estate properties
Property management fees
Net operating income – same assets
2.5%
The Trust’s community strip centres net operating income – same assets remained stable at $4.9 million for the three
months ended December 31, 2015, and for the same period in 2014.
The Trust’s community strip centres net operating income – same assets for the year ended December 31, 2015, was $19.6
million versus $19.0 million for the same period in 2014. This represents an increase of 3.1%. This increase was mainly
due to higher basic rents on 2015 renewals, which amounted to $0.4 million, and decreased vacancy costs of $0.2 million
during the early part of the year.
COMMUNITY STRIP CENTRES – LEASE PROFILE
TABLE 13
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2016
145,472
11.9%
$17.43
2017
182,705
15.0%
19.29
2018
115,738
9.5%
21.91
2019
84,952
7.0%
21.89
Thereafter
664,514
54.4%
15.54
Current vacancy
26,471
2.2%
—
1,219,852
100.0%
$17.42
Total
Weighted average remaining lease term (years)
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals for the next four
years and thereafter, along with the associated contract
rents at maturity.
Lower weighted average contract rent displayed in 2016
and thereafter is the result of anchor tenant maturities.
4.87
The following table provides a quarterly summary of the 2016 expiries net of committed renewals, along with the associated
contract rents, for the Trust’s community strip centres.
COMMUNITY STRIP CENTRES – 2016 EXPIRIES (NET OF RENEWALS)
TABLE 14
Total
Gross leasable area
Average net rent per SF
MORGUARD.COM
Q1
Q2
Q3
Q4
2016
101,761
5,212
9,977
28,522
145,472
$15.18
$23.61
$26.27
$21.22
$17.43
12
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
COMMUNITY STRIP CENTRES – 2015 LEASE ACTIVITY
TABLE 15
Q4 2015
Opening vacancy (SF)
YTD 2015
26,873
Opening occupancy
The table to the left provides a summary of the leasing
activity for the three months and the year ended
December 31, 2015.
36,997
98%
97%
EXPIRING LEASES:
Square feet
13,144
66,315
Average net rent per SF
$20.27
$21.42
1,375
7,008
$24.00
$23.96
Square feet
13,688
67,454
Average net rent per SF
$22.47
$23.90
For the three months ended December 31, 2015, the Trust
realized an average uplift of $2.20 per square foot on
renewals, while maintaining a 104.1% retention rate for
existing tenants. During the period an existing tenant
expanded within the centre.
EARLY TERMINATIONS:
Square feet
Average net rent per SF
For the year ended December 31, 2015, the Trust realized
an average uplift of $2.48 per square foot on renewals,
while maintaining a 90.5% retention rate for existing
tenants. In addition, the Trust realized an average uplift of
$0.77 per square foot on new leasing.
RENEWALS:
Retention rate
104.1%
90.5%
Ending occupancy improved by 1% over the same period
in 2014, closing at 98%.
NEW LEASING:
Square feet
Average net rent per SF
Ending vacancy (SF)
1,233
16,395
$35.50
$22.19
26,471
26,471
Ending occupancy
98%
98%
COMMUNITY STRIP CENTRES – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 16
2014
In thousands of SF
Community strip centres GLA
% GLA occupied
2015
Q1
Q2
Q3
Q4
Q1
Q2
1,290
1,290
1,290
1,290
1,290
1,287
97%
97%
97%
97%
98%
97%
Q3
1,287
97%
Q4
1,219
98%
The community strip centres square footage and quarterly occupancy for the past eight quarters are outlined in Table 16.
Occupancy levels throughout the period remained high, with little volatility. The differential between the highest and lowest
level of portfolio occupancy over this two-year period is only 100 basis points (98% being the highest and 97% being the
lowest).
MORGUARD.COM
13
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR OFFICE PROPERTIES
TABLE 17
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31
Single/dual tenant buildings
Multi-tenant buildings
Net operating income – same assets
2015
2014
Variance
$13,963
$14,206
($243)
5,090
4,710
380
$19,053
$18,916
$137
Year Ended December 31
%
2015
2014
Variance
%
(1.7%)
$56,439
$56,279
$160
0.3%
8.1%
19,049
18,344
705
3.8%
0.7%
$75,488
$74,623
$865
1.2%
The Trust's office portfolio is diversified through investment in single/dual tenant buildings and multi-tenant buildings.
SINGLE/DUAL TENANT BUILDINGS OVERVIEW
At December 31, 2015, the Trust’s single/dual tenant buildings portfolio totalled 2.4 million square feet of GLA, which
comprises a 100% interest in nine properties totalling 1.5 million square feet and a 50% interest in four properties totalling
0.9 million square feet.
SINGLE/DUAL TENANT BUILDINGS – NET OPERATING INCOME
TABLE 18
Three Months Ended December 31
2015
2014
2015
2014
$24,131
$25,382
($1,251)
(4.9%)
$97,754
$98,288
($534)
(0.5%)
Property operating expenses
5,314
6,005
(691)
(11.5%)
21,110
21,874
(764)
(3.5%)
Property taxes
4,095
4,393
(298)
(6.8%)
17,233
17,128
105
0.6%
(35)
(1.2%)
Revenue from real estate properties
Property management fees
Net operating income – same assets
Variance
Year Ended December 31
%
759
778
(19)
(2.4%)
2,972
3,007
$13,963
$14,206
($243)
(1.7%)
$56,439
$56,279
Variance
$160
%
0.3%
Single/dual tenant buildings net operating income – same assets decreased by 1.7% to $14.0 million for the three months
ended December 31, 2015, from $14.2 million for the same period in 2014.
Single/dual tenant buildings net operating income – same assets increased by 0.3% to $56.4 million for the year ended
December 31, 2015, from $56.3 million for the same period in 2014.
SINGLE/DUAL TENANT BUILDINGS – LEASE PROFILE
TABLE 19
SF
% of
Portfolio
Weighted
Average
Contract
Rent
2016
159,980
6.7%
$25.36
2017
92,054
3.8%
$35.78
2018
42,322
1.8%
$38.13
2019
70,273
2.9%
$31.96
Thereafter
2,012,471
83.9%
$23.12
Current vacancy
20,994
0.9%
—
Total
2,398,094
100.0%
$24.29
Weighted average remaining lease term (years)
MORGUARD.COM
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals over the next four
years and thereafter, along with the associated contract
rents at maturity.
8.06
14
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
The following table provides a quarterly summary of the 2016 expiries net of committed renewals, along with the associated
contract rents, for the Trust’s single/dual tenant buildings.
SINGLE/DUAL TENANT BUILDINGS – 2016 EXPIRIES (NET OF RENEWALS)
TABLE 20
Total
Q1
Q2
Q3
Q4
2016
Gross leasable area
45,527
Average net rent per SF
$16.04
44,513
4,274
65,666
159,980
$40.13
$30.23
$21.50
$25.36
SINGLE/DUAL TENANT BUILDINGS – 2015 LEASE ACTIVITY
TABLE 21
Q4 2015
Opening vacancy (SF)
Opening occupancy
31,080
99%
YTD 2015
23,323
99%
EXPIRING LEASES:
Square feet
Average net rent per SF
2,011
8,604
$21.50
$18.74
—
9,782
$—
$30.00
EARLY TERMINATIONS:
Square feet
Average net rent per SF
RENEWALS:
Square feet
Average net rent per SF
Retention rate
423
7,414
$21.50
$25.96
27.3%
56.1%
NEW LEASING:
Square feet
11,674
13,301
Average net rent per SF
$18.50
$20.24
20,994
20,994
Ending vacancy (SF)
Ending occupancy
MORGUARD.COM
99%
The table to the left provides a summary of the leasing
activity for the three months and the year ended
December 31, 2015.
For the three months ended December 31, 2015, there
was no change in average rental rates on renewals, while
maintaining a 27.3% retention rate for existing tenants. In
addition, the Trust realized an average decrease of $3.00
per square foot on new leasing.
For the year ended December 31, 2015, the Trust realized
an average uplift of $7.22 per square foot on renewals,
while maintaining a 56.1% retention rate for existing
tenants. In addition, the Trust realized an average uplift of
$1.50 per square foot on new leasing.
Ending occupancy remained stable at 99%.
99%
15
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
SINGLE/DUAL TENANT BUILDINGS – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 22
2014
In thousands of SF
Single/dual tenant buildings GLA
% GLA occupied
2015
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2,372
2,372
2,409
2,407
2,406
2,398
2,398
2,398
99%
99%
99%
99%
99%
99%
99%
99%
The single/dual tenant buildings square footage and quarterly occupancy for the past eight quarters are outlined in Table 22.
Occupancy levels throughout the period remained high and unchanged at 99%.
MULTI-TENANT BUILDINGS OVERVIEW
At December 31, 2015, the Trust’s multi-tenant buildings portfolio totalled 1.1 million square feet of GLA, which comprises a
100% interest in seven properties totalling 0.7 million square feet, a 50% interest in three properties totalling 0.3 million
square feet and a 20% interest in one property totalling 0.1 million square feet.
MULTI-TENANT BUILDINGS – NET OPERATING INCOME
TABLE 23
Three Months Ended December 31
2015
2014
Variance
$567
Year Ended December 31
%
2015
2014
Variance
%
$9,973
$9,406
6.0%
$37,919
$36,625
$1,294
3.5%
Property operating expenses
2,811
2,855
(44)
(1.5%)
11,072
10,729
343
3.2%
Property taxes
1,729
1,539
190
12.3%
6,497
6,316
181
2.9%
343
302
41
13.6%
1,301
1,236
65
5.3%
$5,090
$4,710
$380
8.1%
$19,049
$18,344
$705
3.8%
Revenue from real estate properties
Property management fees
Net operating income – same assets
Multi-tenant buildings net operating income – same assets increased by 8.1% to $5.1 million for the three months ended
December 31, 2015, from $4.7 million for the same period in 2014. This increase in NOI is mainly due to improved
operating efficiencies at 77 Bloor Street that allowed for the earlier recovery of capital costs.
Multi-tenant buildings net operating income – same assets increased by 3.8% to $19.0 million for the year ended December
31, 2015, from $18.3 million for the same period in 2014. This increase in NOI is mainly due to modest increases in basic
rent of $0.6 million coupled with a decrease in non-recoverable operating costs of $0.2 million.
MORGUARD.COM
16
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
MULTI-TENANT BUILDINGS – LEASE PROFILE
TABLE 24
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2016
124,227
11.1%
$18.00
2017
194,463
17.4%
$17.10
2018
154,601
13.8%
$17.68
2019
102,120
9.1%
$17.95
Thereafter
451,528
40.3%
$20.64
Current vacancy
92,412
8.3%
—
Total
1,119,351
100.0%
$18.94
Weighted average remaining lease term (years)
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals over the next four
years and thereafter, along with the associated contract
rents at maturity.
4.51
The following table provides a quarterly summary of the 2016 expiries net of committed renewals, along with the associated
contract rents, for the Trust’s multi-tenant buildings.
MULTI-TENANT BUILDINGS – 2016 EXPIRIES (NET OF RENEWALS)
TABLE 25
Total
Q1
Q2
Q3
Q4
2016
Gross leasable area
28,055
24,388
45,955
25,829
124,227
Average net rent per SF
$23.04
$17.40
$15.31
$17.90
$18.00
MORGUARD.COM
17
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
MULTI-TENANT BUILDINGS – 2015 LEASE ACTIVITY
TABLE 26
Q4 2015
Opening vacancy (SF)
YTD 2015
99,829
Opening occupancy
The table to the left provides a summary of the leasing
activity for the three months and the year ended
December 31, 2015.
106,892
91%
92%
EXPIRING LEASES:
Square feet
28,948
275,630
Average net rent per SF
$20.96
$18.77
6,393
17,540
$13.16
$22.22
Square feet
24,732
233,429
Average net rent per SF
$18.54
$17.96
For the three months ended December 31, 2015, the Trust
realized an average decrease of $2.42 per square foot on
renewals, while maintaining an 80.1% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $0.33 per square foot on new leasing.
EARLY TERMINATIONS:
Square feet
Average net rent per SF
For the year ended December 31, 2015, the Trust realized
an average decrease of $0.81 per square foot on
renewals, while maintaining an 83.7% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $0.47 per square foot on new leasing.
RENEWALS:
Retention rate
80.1%
83.7%
NEW LEASING:
Square feet
18,026
74,221
Average net rent per SF
$21.29
$19.24
92,412
92,412
Ending vacancy (SF)
Ending occupancy
92%
Ending occupancy remained stable at 92%.
92%
MULTI-TENANT BUILDINGS – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 27
2014
In thousands of SF
Multi-tenant buildings GLA
% GLA occupied
2015
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1,099
1,110
1,111
1,119
1,119
1,118
1,118
1,119
89%
90%
90%
90%
91%
90%
91%
92%
The multi-tenant buildings square footage and quarterly occupancy for the past eight quarters are outlined in Table 27.
Occupancy levels throughout the period remained high with little volatility. The differential between the highest and lowest
level of portfolio occupancy over this two-year period is only 300 basis points (92% being the highest and 89% being the
lowest).
MORGUARD.COM
18
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
INDUSTRIAL OVERVIEW
The Trust’s industrial portfolio includes 100% interests in four industrial properties comprising 0.3 million square feet and a
50% interest in one industrial property comprising 0.2 million square feet.
INDUSTRIAL – NET OPERATING INCOME
TABLE 28
Three Months Ended December 31
Revenue from real estate properties
2015
2014
Variance
Year Ended December 31
%
2015
2014
Variance
$287
%
$1,249
$1,159
$90
7.8%
$5,000
$4,713
Property operating expenses
284
171
113
66.1%
823
883
(60)
Property taxes
252
256
(4)
(1.6%)
1,007
1,024
(17)
(1.7%)
30
23
7
30.4%
136
120
16
13.3%
$683
$709
$3,034
$2,686
$348
13.0%
Property management fees
Net operating income – same assets
($26)
(3.7%)
6.1%
(6.8%)
Industrial net operating income – same assets remained stable at $0.7 million for the three months ended December 31,
2015, and for the same period in 2014.
Industrial net operating income – same assets increased by 13% to $3.0 million for the year ended December 31, 2015,
from $2.7 million for the same period in 2014. This increase was mainly due to decreased vacancy costs of $0.2 million
during the year. On September 30, 2015, the Trust revised its view on 2041-2141 McCowan as a long-term hold. As a
result, the property was reclassified to same assets as a part of the Trust's industrial portfolio.
INDUSTRIAL – LEASE PROFILE
TABLE 29
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2016
46,144
8.6%
$5.98
2017
73,438
13.7%
7.58
2018
61,775
11.6%
6.27
2019
7,472
1.4%
6.39
Thereafter
330,102
61.8%
5.68
Current vacancy
15,271
2.9%
—
Total
534,202
100.0%
$6.06
Weighted average remaining lease term (years)
The table to the left provides a summary of the lease
maturities net of committed renewals, over the next four
years and thereafter, along with the associated contract
rents at maturity.
Lower weighted average contract rent displayed in
thereafter is mainly the result of a long-term lease at one
of the Quebec industrial properties due to expire in 2022.
The lease was originally entered into in 2002.
5.04
The following table provides a quarterly summary of the 2016 expiries net of committed renewals, along with the associated
contract rents, for the Trust’s industrial portfolio.
INDUSTRIAL – 2016 EXPIRIES (NET OF RENEWALS)
TABLE 30
Total
Q1
Q2
Q3
Q4
2016
Gross leasable area
7,525
29,928
3,725
4,966
46,144
Average net rent per SF
$8.43
$4.41
$9.03
$9.40
$5.98
MORGUARD.COM
19
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
INDUSTRIAL – 2015 LEASE ACTIVITY
TABLE 31
Q4 2015
Opening vacancy (SF)
YTD 2015
15,016
Opening occupancy
1,900
97%
99%
EXPIRING LEASES:
Square feet
Average net rent per SF
39,908
48,482
$4.60
$5.37
—
—
35,205
43,779
$4.39
$5.39
EARLY TERMINATIONS:
Square feet
RENEWALS:
Square feet
Average net rent per SF
Retention rate
88.2%
90.3%
The table to the left provides a summary of the leasing
activity for the three months and the year ended
December 31, 2015.
For the three months ended December 31, 2015, the
Trust realized an average decrease of $0.21 per square
foot on renewals, while maintaining an 88.2% retention
rate for existing tenants. In addition, the Trust realized an
average uplift of $3.99 per square foot on new leasing.
For the year ended December 31, 2015, the Trust realized
an average uplift of $0.02 per square foot on renewals,
while maintaining a 90.3% retention rate for existing
tenants. In addition, the Trust realized an average uplift of
$3.22 per square foot on new leasing.
NEW LEASING:
Square feet
4,448
4,448
Average net rent per SF
$8.59
$8.59
—
13,116
15,271
15,271
OTHER ADJUSTMENTS:
Square feet
Ending vacancy (SF)
Ending occupancy
97%
On September 30, 2015, as part of the reclassification of
2041-2141 McCowan to same assets, the 13,116 vacant
square feet for this property were reclassified to the
Trust's industrial portfolio to form part of ending vacancy.
Ending occupancy remained stable at 97%.
97%
INDUSTRIAL – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 32
2014
In thousands of SF
2015
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Industrial GLA
534
534
534
534
534
534
534
534
% GLA occupied
87%
91%
93%
97%
97%
97%
97%
97%
The industrial square footage and quarterly occupancy for the past eight quarters are outlined in Table 32. The differential
between the highest and lowest level of portfolio occupancy over this two-year period was 1,000 basis points (97% being
the highest and 87% being the lowest). On September 30, 2015, as part of the reclassification of 2041-2141 McCowan to
same assets, the historical GLA and occupancy for this property were reclassified to the Trust's industrial portfolio for the
past eight quarters.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART IV
TRUST PERFORMANCE
FUNDS FROM OPERATIONS
The Trust presents FFO in accordance with the Real Property Association of Canada (“REALpac”) white paper on funds
from operations for IFRS issued April 2014. In accordance with such white paper, the Trust defines FFO as net income
adjusted for fair value changes on real estate properties and gains/(losses) on the sale of real estate properties.
FFO is a non-GAAP measure that is widely accepted as a supplemental measure of financial performance for real estate
entities; however, it does not represent amounts available for capital programs, debt service obligations, commitments or
uncertainties. FFO should not be interpreted as an indicator of cash generated from operating activities and is not indicative
of cash available to fund operating expenditures, or for the payment of cash distributions. FFO is simply one measure of
operating performance.
FUNDS FROM OPERATIONS
TABLE 33
Three Months Ended December 31
In thousands of dollars, except per unit amounts
Net income for the year
Year Ended December 31
2015
2014
2015
2014
$4,697
$23,487
$26,617
$113,882
23,985
4,645
79,768
Add/(deduct) items not affecting cash:
Fair value losses/(gains) on real estate properties1
Loss on sale of real estate properties
Basic funds from operations
(7,403)
—
22
—
37
28,682
28,154
106,385
106,516
1,833
1,834
7,274
7,275
$30,515
$29,988
$113,659
$113,791
Basic
$0.47
$0.45
$1.72
$1.71
Diluted2
$0.45
$0.44
$1.67
$1.67
Basic
61,212
62,161
61,779
62,168
Diluted2
67,309
68,258
67,876
68,265
Interest expense on convertible debentures
Diluted funds from operations
FUNDS FROM OPERATIONS PER UNIT
WEIGHTED AVERAGE UNITS OUTSTANDING (IN THOUSANDS)
1.
2.
Includes fair value gains on real estate properties included in net income/(loss) from equity-accounted investments.
Includes the dilutive impact of convertible debentures.
FFO was $0.47 per unit ($0.45 per unit - diluted) for the three months ended December 31, 2015, compared to $0.45 per
unit ($0.44 per unit - diluted) for the same period in 2014.
FFO was $1.72 per unit ($1.67 per unit - diluted) for the year ended December 31, 2015, compared to $1.71 per unit ($1.67
per unit - diluted) for the same period in 2014. This represents an increase of 1% or $0.01 per unit ($0.00 per unit - diluted).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
FFO derives from net income. The key components of net income are presented in the table below:
NET INCOME
TABLE 34
Three Months Ended December 31
Net operating income from total real estate properties
Interest expense
General and administrative
Other income
Income before fair value (losses)/gains, loss on sale of real estate
properties, and other expenses and fair value changes from equityaccounted investments
Fair value (losses)/gains on real estate properties
Loss on sale of real estate properties
Year Ended December 31
2015
2014
2015
2014
$44,597
$44,943
$170,319
$174,885
14,667
15,172
58,981
62,000
1,066
1,523
4,367
5,414
(113)
28,977
(23,178)
—
Other expenses and fair value changes from equity-accounted investments
(1,102)
Net income for the year
$4,697
(207)
28,455
(894)
(22)
(4,052)
$23,487
(571)
(375)
107,542
107,846
(78,977)
11,239
—
(1,948)
$26,617
(37)
(5,166)
$113,882
NET OPERATING INCOME
The analysis of property performance in Part III was focused on same asset NOI, which is reconciled to NOI per the
consolidated financial statements in Part XI (Table 60).
Same asset NOI for the three months ended December 31, 2015, was $42.7 million, an increase of $1.2 million from the
same period in 2014. Net operating income from all properties was $44.6 million for the three months ended December 31,
2015, versus $44.9 million for the same period in 2014, a decrease of $0.3 million. The remaining unfavourable change
during the three months is $1.5 million, including the Trust’s disposition programs. The Trust’s disposition of Cedar Pointe
Business Park in July 2014, 5591-5631 Finch in April 2015 and 20-24 Lesmill in May 2015 resulted in a $0.6 million
reduction in NOI. Outside of the disposition programs, during the three months ended December 31, 2015, there was a
reduction in one-time lease cancellation fees of $0.7 million versus the same period in 2014. The Trust was also negatively
impacted by a one-time adjustment of $0.5 million due to vacant target units. This was offset by $0.2 million from amortized
step rents.
Same asset NOI for the year ended December 31, 2015, was $163.6 million, an increase of $1.1 million from the same
period in 2014. Net operating income from all properties was $170.3 million for the year ended December 31, 2015 versus
$174.9 million for the same period in 2014. The remaining unfavourable change during the year of $5.7 million is mainly the
result of the Trust’s disposition and acquisition programs. The Trust’s disposition of Cedar Pointe Business Park in July
2014, 350 Sparks/361 Queen in February 2015, 5591-5631 Finch in April 2015 and 20-24 Lesmill in May 2015 resulted in a
$3.2 million reduction in NOI. This was offset by a positive impact of $0.8 million from the Trust’s acquisition of 301 Laurier
Avenue in June 2014 and Citadel West in July 2014. Outside of the disposition and acquisition programs, during the year
ended December 31, 2015, the Trust was negatively affected by a one-time adjustment of $2.9 million mainly due to vacant
Target units ($1.9 million) and Everest College ($0.5 million) units and by $0.4 million from amortized step rents.
INTEREST EXPENSE
Interest expense totalled $14.7 million for the three months ended December 31, 2015, compared to $15.2 million for the
same period in 2014. This decrease for the three months ended December 31, 2015, was mainly the result of the Trust's
disposition program, which eliminated $0.2 million of interest. Another factor reducing interest expense during the period
include scheduled mortgage amortizations of $0.5 million. During the period, the Trust's refinancing program replaced $2.2
million of interest expense on matured debt with $1.3 million of interest expense on the same level of financing. Increased
financing added $0.9 million of interest expense.
Interest expense totalled $59.0 million for the year ended December 31, 2015, compared to $62.0 million for the same
period in 2014. This decrease for the year ended December 31, 2015, was mainly the result of the Trust's disposition
program, which eliminated $1.6 million of interest. Other factors reducing interest expense during the period include interest
capitalized to development projects of $0.4 million and scheduled mortgage amortizations of $1.5 million. During the period,
the Trust's refinancing program replaced $7.3 million of interest expense on matured debt with $4.7 million of interest
expense on the same level of financing. Increased financing added $2.9 million of interest expense.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
The following table outlines, by quarter, the Trust’s weighted average rates on mortgages payable in 2015 and 2014. The
rates are calculated excluding mortgages tied to real estate properties held for sale.
WEIGHTED AVERAGE RATES – MORTGAGES PAYABLE
TABLE 35
2015
2014
March 31
4.2%
4.4%
June 30
4.2%
4.2%
September 30
4.1%
4.2%
December 31
4.1%
4.2%
The Trust has reduced the weighted average interest rate
by more than 30 basis points from the start of 2014.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended December 31, 2015, were $1.1 million, a decrease of $0.5
million from the same period in 2014. This favourable decrease is mainly due to higher compensation expenses incurred in
2014.
General and administrative expenses for the year ended December 31, 2015, were $4.4 million, a decrease of $1.0 million
from the same period in 2014. This favourable decrease is mainly due to higher stock appreciation rights and other
compensation expenses incurred in 2014.
ADJUSTED FUNDS FROM OPERATIONS
AFFO is a non-GAAP measure that is widely accepted as an alternative measure of cash generated from operations. AFFO
per unit is calculated by adjusting FFO for accretion of convertible debentures, straight-line rent and productive capacity
maintenance expenditures (“PCME”).
PCME are expenditures on leasing, replacement or major repair of component parts of properties that are required to
preserve the existing earning capacity of the Trust’s real estate portfolio. The Trust categorizes these expenditures as
leasing commissions, tenant allowances and recoverable and non-recoverable capital expenditures.
Leasing Commissions and Tenant Allowances: The Trust requires ongoing capital spending on leasing commissions
and tenant allowances pertaining to new and renewed tenant leases. These costs depend on many factors, including, but
not limited to, tenant maturity profile, vacancies, asset type, prevailing market conditions and unforeseen tenant
bankruptcies.
Recoverable and Non-Recoverable Capital Expenditures: The Trust continually invests in major repair and replacement
of component parts of the properties, such as roof, parking lot, elevators and HVAC, to physically maintain them. These
costs depend on many factors including, but not limited to, age and location of the property. Most of these capital
expenditure items are recovered from tenants, over time, as property operating costs.
Commencing in 2014, the Trust uses normalized PCME to calculate AFFO. These normalized expenditures are based on
expected average expenditures for the current property portfolio over a three-year horizon, with consideration to historical
and forecasted spending patterns. Actual PCME in any given year (Table 37) may exceed the normalized estimation.
There is no standard industry-defined measure of AFFO. As such, the Trust’s method of calculating AFFO may differ from
other issuers’ methods and, accordingly, may not be comparable to such amounts reported by other issuers.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
ADJUSTED FUNDS FROM OPERATIONS
TABLE 36
Three Months Ended December 31
Funds from operations
Year Ended December 31
2015
2014
2015
2014
$28,682
$28,154
$106,385
$106,516
Add/(deduct)
Accretion of convertible debentures
Amortized stepped rents
83
79
(865)
(669)
(2,177)
(2,543)
316
299
Productive capacity maintenance expenditures (normalized)
(6,250)
(6,250)
(25,000)
(25,000)
Adjusted funds from operations – basic
21,650
21,314
79,524
79,272
Interest expense on convertible debentures
1,833
1,834
7,274
7,275
$23,483
$23,148
$86,798
$86,547
Adjusted funds from operations – diluted
The following table provides a breakdown of actual PCME for the three months and year ended December 31, 2015, and for
the same period in 2014.
ACTUAL PRODUCTIVE CAPACITY MAINTENANCE EXPENDITURES
TABLE 37
Three Months Ended December 31
Year Ended December 31
2015
2014
2015
2014
$635
$1,321
$3,570
$3,900
Tenant allowances
819
1,822
10,355
7,632
Total leasing costs
1,454
3,143
13,925
11,532
Capital expenditures recoverable from tenants
2,319
6,478
8,915
12,835
47
453
337
792
Total capital expenditures
2,366
6,931
9,252
13,627
Total productive capacity maintenance expenditures
3,820
10,074
23,177
25,159
Discretionary capital expenditures
1,839
2,223
8,066
4,688
$5,659
$12,297
$31,243
$29,847
Leasing commissions
Capital expenditures non-recoverable from tenants
Total leasing costs and capital expenditures
Discretionary Capital Expenditures
In addition to PCME the Trust invests in discretionary capital projects on the development of new space, redevelopment or
retrofit of existing properties, and other capital expenditures to create additional long-term value for the Trust’s real estate
portfolio. These discretionary capital expenditures are not expected to occur on a consistent basis. These expenditures are
included in the above table, along with the recoverable and non-recoverable capital expenditures. The increase in
discretionary capital expenditures during the three months and year ended December 31, 2015, mainly relates to electrical
and water main replacements, as part of the overall revitalization program to refresh and modernize the St. Laurent Centre.
DISTRIBUTIONS TO UNITHOLDERS
The Trust’s primary business goal is to accumulate a Canadian portfolio of high-quality real estate assets and then deliver
the benefits of such real estate ownership to unitholders. The primary benefit is a reliable and, over time, increasing cash
distribution.
The Trust expects to distribute to its unitholders in each year an amount not less than the Trust’s taxable income for the
year, as calculated in accordance with the Canadian Income Tax Act (“the Act”). The Trust’s monthly distribution to
unitholders in 2015 was $0.08 per unit, representing $0.96 per unit on an annualized basis.
In determining the annual level of distributions to unitholders, the Trust looks at forward-looking cash flow information,
including forecasts and budgets, and the future prospects of the Trust. The Trust does not consider periodic cash flow
fluctuations resulting from items such as the timing of property operating costs, property tax instalments or semi-annual
debenture interest payments, in determining the level of distributions to unitholders in any particular quarter. Additionally, in
establishing the level of cash distributions to the unitholders, the Trust considers the impact of, among other items, the
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
future growth in IPP, the impact of future acquisitions and capital expenditures, and leasing costs. As a result, the Trust
compares distributions to AFFO to ensure sufficient funds are retained for reinvestment.
DISTRIBUTIONS TO UNITHOLDERS
TABLE 38
Three Months Ended December 31
2015
Year Ended December 31
2014
2015
2014
Adjusted funds from operations per unit - basic
$0.35
$0.35
$1.28
$1.28
Adjusted funds from operations per unit - diluted
$0.35
$0.34
$1.28
$1.27
Cash distributions per unit
$0.24
$0.24
$0.96
$0.96
Distributions paid as a percentage of AFFO per unit - basic
68.6%
68.6%
75.0%
75.0%
The following table provides a reconciliation of AFFO to cash provided by operating activities in the consolidated financial
statements:
TABLE 39
Three Months Ended December 31
Cash provided by operating activities
Changes in working capital
Non-cash amortizations
Net Income from equity-accounted investments before fair value adjustments
Distributions from equity-accounted investments
Deferred leasing cost additions
Tenant incentive additions
Productive capacity maintenance expenditures (normalized)
Year Ended December 31
2015
2014
2015
2014
$29,718
$31,969
$97,957
$104,617
(2,403)
(5,023)
2,056
(2,790)
(657)
(764)
(2,003)
(2,859)
816
798
3,232
(239)
(762)
3,816
(702)
(2,518)
635
1,320
3,586
3,892
30
26
398
114
(6,250)
(25,000)
(25,000)
Adjusted funds from operations
$21,650
$21,314
(6,250)
$79,524
$79,272
Adjusted funds from operations
$21,650
$21,314
$79,524
$79,272
Cash distributions
14,231
14,693
58,452
58,891
Excess adjusted funds from operations after cash distributions
$7,419
$6,621
$21,072
$20,381
The following table provides a summary of distributions relative to cash flow from operating activities in the consolidated
financial statements:
TABLE 40
Three Months Ended December 31
Cash provided by operating activities
Cash distributions
Excess of cash from operating activities over cash distributions
MORGUARD.COM
Year Ended December 31
2015
2014
2015
2014
$29,718
$31,969
$97,957
$104,617
14,231
14,693
58,452
58,891
$15,487
$17,276
$39,505
$45,726
25
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART V
REAL ESTATE OVERVIEW
The carrying value of the Trust’s real estate properties decreased to $2.9 billion as at December 31, 2015 (2014 – $3.0
billion). This decrease is mainly resulting from the dispositions of 350 Sparks/361 Queen, 5591-5631 Finch and 20-24
Lesmill, as well as fair value losses during the year.
Income producing properties were affected by additions from the Trust’s capital investment programs (including PCME and
completed development), which were offset by fair value losses.
REAL ESTATE PROPERTIES
TABLE 41
As at December 31
Income producing properties
Properties under development
Land held for development
Total real estate properties (excluding properties held for sale)
Properties held for sale
Total real estate properties
2015
2014
$2,878,074
$2,884,824
2,524
16,511
28,750
27,650
2,909,348
2,928,985
—
63,190
$2,909,348
$2,992,175
A complete reconciliation of real estate properties discussed in this MD&A to real estate properties per the consolidated
financial statements is provided in Part XI (Table 62).
PROPERTIES UNDER DEVELOPMENT
The Trust’s development program consists of projects identified by management to create additional long-term value for the
Trust’s real estate portfolio and align with the long-term strategic objectives. These may include development projects to
expand leasable area, redevelopment of an existing area and retrofit opportunities.
The following table details the Trust’s active (in progress) development projects.
DEVELOPMENT PROJECTS IN PROGRESS
TABLE 42
Total
Project
Cost
Cost
Incurred
to Date
Total
Properties
Transferred
Under
to IPP Development
Estimated
Cost to
Complete
Location
Asset
Type
Parkland Mall, Red Deer, AB
Retail $ 15,000 $
Penn West Plaza, Calgary, AB
Office
6,100
54
St. Laurent Centre, Ottawa, ON
Retail
25,156
25,156
(25,156)
—
Revitalization project to refresh and
— September 2015 modernize the centre – project complete
Heritage Place, Ottawa, ON
Office
1,972
1,972
(1,972)
—
Reconfiguration of new space for
— September 2015 Winners – project complete
48,228
28,128
(27,128)
1,000
—
1,524
Development – in progress
Other
Properties under development
Various
$ 48,228 $
946 $
29,652 $
— $
—
—
(27,128) $
946 $
54
1,524
2,524 $
14,054
6,046
Completion
Date
Anchor tenant remerchandising for
August 2016 Goodlife Fitness Centres
Addition of Plus 15 connection to the city's
December 2016 enclosed pedestrian skywalk system
20,100
—
Pre-development costs
20,100
The revitalization project to refresh and modernize St. Laurent Centre is now complete. The timing of these renovations
puts the Trust in a better position to attract new tenants. The reconfiguration of the new Winners location at Heritage Place
was also completed during the year, with the official store opening in mid-September.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
Other includes the former Target and Everest College units that are now under redevelopment. To date, no costs have been
incurred specifically for these projects.
ACQUISITION PROGRAM
The table below details acquisitions completed in 2014. There have been no acquisitions in 2015.
TABLE 43
In thousands of dollars, square feet
Transaction date
Asset class
Location
Trust ownership share
GLA
Purchase price
Capitalization rate
Associated debt
Interest rate on associated debt
Occupancy
Key tenants
2014
2014
Citadel West
301 Laurier Avenue
July 25
June 4
Office
Office
Calgary, AB
Ottawa, ON
50.0%
50.0%
39,000
17,500
$19,000
$4,037
5.7%
The acquisition of Citadel West provides the Trust with
100% ownership. This property has provided consistent
results since the Trust first purchased 50% of the asset in
2011.
301 Laurier Avenue was a strategic purchase required to
complete the Trust’s presence at the downtown
intersection of Slater, Laurier, Bank and Kent, providing
the flexibility to maximize long-term value opportunities.
7.0%
$7,581
None
3.3%
NA
100.0%
100.0%
CH2M Hill
Unifor
DISPOSITION PROGRAM
The table below details dispositions completed during the year ended December 31, 2015, and for the year ended
December 31, 2014.
TABLE 44
In thousands of dollars, square feet
Transaction date
Asset class
Location
2015
2015
20-24 Lesmill
5591-5631 Finch
May 15
April 1
2015
2014
350 Sparks/361 Queen Cedar Pointe Business Park
February 17
July 2
Industrial
Industrial
Office/Hotel
Office
Toronto, ON
Toronto, ON
Ottawa, ON
Barrie, ON
Trust ownership share
100.0%
GLA
27,577
210,123
86,372
350,797
Sale price (000's)
$6,350
$10,000
$37,692
$41,900
Capitalization rate
Associated debt
Interest rate on associated debt
Occupancy
Key tenants
6.0%
None
n/a
100.0%
City of Toronto
100.0%
8.0%
$6,125
50.0%
n/a
$17,835
100.0%
6.0%
$13,747
5.14%
3.28%
5.1%
92.2%
85.4%
87.0%
Humbervale Machinery/
CTI Industries
CIRA
Municipal Services
On March 2, 2015, the Trust entered into an agreement to sell 5591-5631 Finch. On April 1, 2015, the Trust completed the
sale of this property for a total price of $10.0 million, less selling costs.
On December 10, 2014, the Trust entered into an agreement to sell 20-24 Lesmill. On May 15, 2015, the Trust completed
the sale of this property for a total price of $6.4 million, less selling costs.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
Funds from these two dispositions, along with proceeds from the 2014 disposition, remain available to the Trust to complete
approved projects.
On February 17, 2015, the Trust completed the sale of 350 Sparks and 361 Queen to Morguard for a total price of $37.7
million, which included an assumption of the existing mortgage debt of $17.8 million, less selling costs. At the time of sale,
361 Queen was vacant and not generating income. As a result, establishing an appropriate capitalization rate was deemed
indeterminable, and therefore this has been classified as not applicable.
The sale of Cedar Pointe Business Park removes the Trust from its exposure to ongoing leasing challenges at the property.
The proceeds from the sale were used to complete the large revitalization program at the St. Laurent Centre (see Table 42).
FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES RECOGNIZED IN NET INCOME
For the three months ended December 31, 2015, the Trust recorded fair value losses on real estate properties of $24.0
million, versus $4.6 million of fair value losses on real estate properties for the same period in 2014.
For the year ended December 31, 2015, the Trust recorded fair value losses on real estate properties of $79.8 million,
versus $7.4 million of fair value gains on real estate properties for the same period in 2014. The declines in fair values
during the year fully reflect four of the Trust’s regional shopping centres affected by either disclaimed or acquired Target
leases. The Trust was also affected by the current economic downturn in the Alberta office market.
Fair value adjustments are determined on a quarterly basis based on the movement of various parameters, including
changes in projected cash flows as a result of leasing, timing and changes in discount rates, and terminal capitalization
rates.
Fair value (losses)/gains on real estate properties consist of the following:
TABLE 45
Three Months Ended December 31
2015
Income producing properties
Properties under development
Land held for development
Total fair value (losses)/gains on real estate properties
($24,760)
Year Ended December 31
2014
($4,907)
42
(150)
733
412
($23,985)
($4,645)
2015
($80,502)
1
733
($79,768)
2014
$11,138
(4,005)
270
$7,403
A complete reconciliation of fair value (losses)/gains on real estate properties discussed in this MD&A to fair value (losses)/
gains on real estate properties per the consolidated financial statements is provided in Part XI (Table 63).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART VI
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from operating the real estate properties represents the primary source of liquidity to service debt, and
to fund planned maintenance expenditures, leasing costs and distributions to unitholders.
Cash flow from operations is dependent upon occupancy levels of properties owned, rental rates achieved, collection of
rents, efficiencies in operations, the costs involved to lease or renew rental space and planned maintenance expenditures,
as well as other factors.
CASH FLOWS
The following table details the changes in cash and cash equivalents for the following periods:
TABLE 46
Three Months Ended December 31
Year Ended December 31
2015
2014
2015
2014
Cash provided by operating activities
$30,296
$31,801
$98,774
$105,010
Cash used in financing activities
(43,956)
(23,898)
(107,131)
(60,044)
Cash provided by/(used in) investing activities
27,280
(16,816)
23,792
(45,997)
Net increase/(decrease) in cash
13,620
(8,913)
15,435
(1,031)
Cash and cash equivalents, beginning of year
14,536
21,634
12,721
13,752
$28,156
$12,721
$28,156
$12,721
Cash and cash equivalents, end of year
A complete reconciliation of cash flows discussed in this MD&A to cash flows per the consolidated financial statements is
provided in Part XI (Table 65).
DEBT STRATEGY
The Trust’s long-term debt strategy involves the use of three forms of debt: conventional property-specific secured
mortgages or bonds, unsecured convertible debentures and secured floating-rate bank financing.
The Trust is limited by its Declaration of Trust to an overall indebtedness ratio of 60% of the gross book value of the Trust’s
total assets determined in accordance with IFRS. The debt limitations are in relation to the assets of the Trust in aggregate.
There are no individual property debt limitations or constraints imposed by the Declaration of Trust.
The Trust’s current operating strategy involves maintaining debt levels up to 50% of the gross book value of total assets.
Accordingly, the Trust does not generally repay maturing debt from cash flow, but rather with proceeds from refinancing
such debt or financing unencumbered properties, and raising new equity or recycling equity through property dispositions to
finance investment activities.
The Trust has a revolving loan agreement with Morguard that provides for borrowings or advances of up to $50.0 million.
This loan agreement is meant to provide short-term financing and investing options. The promissory notes are interestbearing at the lender’s borrowing rate and are due on demand subject to available funds.
During the three months ended December 31, 2015, a gross amount of $6.0 million was advanced to Morguard, and $39.0
million was repaid. During the year ended December 31, 2015, a gross amount of $36.0 million was advanced to Morguard,
and $66.0 million was repaid. As at December 31, 2015, the total amount receivable from Morguard was $nil (2014 – $30.0
million). For the three months ended December 31, 2015, the Trust earned interest income in the amount of $110 (2014 –
$185). For the year ended December 31, 2015, the Trust earned interest income in the amount of $568 (2014 – $353). As
at December 31, 2015, the interest rate on the loan receivable from Morguard was 2.19% (2014 – 2.44%).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
DEBT STRUCTURE
TABLE 47
As at December 31
Conventional secured mortgages payable
Unsecured convertible debentures payable
Secured floating rate bank financing
2015
%
2014
%
$1,201,556
89.1%
$1,212,561
88.9%
147,698
10.9%
146,541
10.7%
—
—%
4,927
0.4%
$1,349,254
100.0%
$1,364,029
100.0%
To manage long-term interest rate risk, while providing flexibility in the execution of investment transactions, management
has historically utilized floating rate debt at less than 5% of the Trust’s total debt.
2012 CONVERTIBLE DEBENTURES PAYABLE
On October 31, 2012, the Trust issued a $150.0 million principal amount of 4.85% convertible unsecured subordinated
debentures (“2012 Debentures”), maturing on October 31, 2017 (the “Maturity Date”). Interest is payable semi-annually, not
in advance, on April 30 and October 31 of each year.
The 2012 debentures, with the exception of the value assigned to the holders’ conversion option, have been recorded as
debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related
issue costs of the 2012 Debentures at the date of original issue. The portion of issue costs attributable to the liability of
$4,182 has been capitalized and amortized over the term to maturity, while the remaining amount of $46 has been charged
to equity.
CONVERTIBLE DEBENTURES PAYABLE
TABLE 48
Principal
October 21, 2012
Issue costs
Convertible debentures payable
Issued
Liability
Equity
$150,000
$148,428
$1,572
(4,228)
$145,772
(4,182)
$144,246
(46)
$1,526
Conversion Rights: Each 2012 Debenture is convertible into freely tradable units of the Trust, at the option of the holder,
exercisable at any time prior to the close of business on the last business day preceding the maturity date at a conversion
price of $24.60 (the “Conversion Price”) per unit being a rate of approximately 40.6504 units per thousand principal amount
of 2012 Debentures, subject to adjustment.
As at December 31, 2015, $15 (2014 - $15) of the 2012 Debentures had been converted into 609 units. The liability and
equity component of these debentures has been included in unitholders’ equity under issue of units.
Redemption Rights: Each 2012 Debenture is redeemable any time from November 1, 2015, to the close of business on
October 31, 2016, in whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and
unpaid interest, at the Trust’s sole option, provided that the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not less
than 125% of the conversion price.
From November 1, 2016, to the close of business on October 31, 2017, the 2012 Debentures are redeemable, in whole or in
part, at par plus accrued and unpaid interest, at the Trust’s sole option.
Repayment Options Payment on Redemption or Maturity: The Trust may satisfy the obligation to repay the principal
amount of the 2012 Debentures, in whole or in part, by delivering units of the Trust. In the event that the Trust elects to
satisfy its obligation to repay principal with units of the Trust, the number of units issued is obtained by dividing the principal
amount of the 2012 Debentures by 95% of the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date fixed for redemption or the maturity date, as applicable.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
Interest Payment Election: The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the
Trust to the Debenture Trustee in order to raise funds to pay interest on the 2012 Debentures, in which event the holders of
the 2012 Debentures will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale
of such units.
MORTGAGES PAYABLE
TABLE 49
As at December 31
Mortgages payable before financing costs
2015
2014
$1,205,101
$1,216,585
Premium on acquired debt
1
(3,546)
Deferred financing costs
$1,201,556
Mortgages payable
11
(4,035)
$1,212,561
A complete reconciliation of mortgages payable discussed in this MD&A to mortgages payable per the consolidated financial
statements is provided in Part XI (Table 64).
DEBT MATURITY PROFILE
Management attempts to stagger the maturities of the Trust’s fixed-rate debt with the general objective of achieving even
annual maturities over a 10-year time horizon. The intention of this strategy is to reduce the Trust’s exposure to interest rate
fluctuations in any one period.
The following tables outline the aggregate principal repayment for mortgages payable and convertible debentures, as at
December 31, 2015, together with the weighted average contractual rate on debt maturing in the years indicated. Also
highlighted are the Trust’s primary sources of lending, by year of maturities, and the Trust’s up-financing opportunity in
relation to the fair value of encumbered properties relative to their respective maturing debt.
AGGREGATE MATURITIES
TABLE 50
Year
Mortgage
Maturity
Payments
Scheduled
Principal
Repayments
Weighted
Total Mortgages Average Interest
Payable
Rate
2016
$55,786
$35,373
$91,159
4.10%
$—
—%
$91,159
4.10%
2017
50,289
35,075
85,364
4.52%
149,985
4.85%
235,349
4.76%
2018
55,464
33,146
88,610
4.45%
—
—%
88,610
4.45%
2019
162,122
27,755
189,877
3.63%
—
—%
189,877
3.63%
Debentures
Payable
Weighted
Average Interest
Rate
Weighted
Total Debt Average Interest
Maturities
Rate
2020
139,019
26,427
165,446
4.46%
—
—%
165,446
4.46%
Thereafter
534,989
49,656
584,645
4.12%
—
—%
584,645
4.12%
Total
$997,669
$207,432
$1,205,101
4.13%
$149,985
4.85%
$1,355,086
4.21%
With weighted average interest rates of 4.10% on mortgages maturing in 2016, the Trust has an opportunity in 2016 to lower
the overall interest rate on approximately $56 million of maturing debt. The weighted average interest rate at December 31,
2015, was 4.13%.
At December 31, 2015, the Trust’s weighted average term to maturity for mortgages payable is 5.3 years.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PRINCIPAL MATURITIES BY TYPE OF LENDER, BY YEAR OF MATURITY
TABLE 51
Year
Banks
Insurance Industry
Pension Funds
Unsecured Debentures
Total
2016
$1,489
$40,234
2017
—
12,944
$14,063
$—
$55,786
37,345
149,985
2018
—
200,274
55,464
—
—
2019
129,640
55,464
32,482
—
—
162,122
139,019
2020
28,440
49,412
61,167
—
Thereafter
293,192
201,982
39,815
—
534,989
$452,761
$392,518
$152,390
$149,985
$1,147,654
The Trust maintains strategic relationships with banks, insurance companies and pension funds to reduce its exposure to
any one lending group.
The 2012 Debentures maturing in 2017 have certain redemption rights commencing November 2016 (see Table 48).
FAIR VALUE OF ENCUMBERED PROPERTIES RELATIVE TO MATURING DEBT
TABLE 52
Year
Mortgage Maturity
Payments
Scheduled Principal
Repayments
Total
Fair Value of
Encumbered Assets
2016
$55,786
$1,117
$56,903
$182,200
31%
2017
50,289
2,911
53,200
116,175
46%
2018
55,464
9,026
64,490
234,000
28%
2019
162,122
17,628
179,750
397,760
45%
2020
139,019
24,884
163,903
396,900
41%
Thereafter
534,989
151,866
686,855
1,361,190
50%
$997,669
$207,432
$1,205,101
$2,688,225
45%
Leverage
Given current real estate values, the Trust has an opportunity during 2016 to increase financing as debt matures and still
maintain the targeted loan to value ratio of 50%.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
DEBT AND LEVERAGE METRICS
TABLE 53
For the year ended December 31
2015
2014
Interest coverage ratio (i)
2.76
2.65
Debt service coverage ratio (ii)
Debt ratio (iii)
1.73
1.72
45.7%
45.7%
Weighted average rates on mortgages
4.1%
4.2%
Average term to maturity on mortgages (years)
5.32
5.95
Distributions as a percentage of adjusted funds from operations
75.0%
75.0%
Unencumbered assets to unsecured debt
79.6%
60.6%
Unencumbered assets
$119,400
$90,900
Unsecured debt
$149,985
$149,985
(i)
Interest coverage defined as: Net income before taxes, amortization and fair value changes for the period, divided by total interest expense at the Trust's share (including interest that has been
capitalized).
(ii)
Debt service coverage defined as: Net income before taxes, amortization and fair value changes for the period, divided by total interest expense at the Trust's share
(including interest that has been capitalized), and scheduled mortgage principal repayments.
(iii)
Debt ratio defined as: Total gross book value, divided by total indebtedness.
Improvements were shown in certain of the Trust’s key ratios and leverage metrics for the year ended December 31, 2015,
in comparison to the results for the year ended December 31, 2014. Both interest coverage and debt ratios showed modest
improvements during the year. This is primarily the continuing effects of the completed 2014 refinancing program. The
weighted average rate on mortgages reduced slightly to 4.1% during the year, with $56.2 million of refinancing on $28.5
million of maturing debt at significantly lower rates.
CREDIT FACILITIES
As at December 31, 2015, the Trust has secured floating rate bank financing availability totalling $70 million, which renews
annually and is secured by fixed charges on specific properties owned by the Trust. The bank credit agreements include
certain restrictive covenants and undertakings by the Trust. As at December 31, 2015, the Trust was in compliance with all
covenants and undertakings. The Trust has a revolving unsecured loan agreement with Morguard that provides for
borrowings or advances of up to $50 million.
CREDIT FACILITIES
TABLE 54
As at December 31
Bank credit facilities and operating lines
Revolving loan agreement with Morguard
Amounts drawn against credit facilities
2015
2014
$70,000
$70,000
50,000
50,000
120,000
120,000
(286)
$119,714
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$114,783
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART VII
RISKS AND UNCERTAINTIES
All real estate investments are subject to a degree of risk and uncertainty. Income producing property is affected by various
factors, including general economic conditions and local market circumstances. Local business conditions such as
oversupply of space or a reduction in demand particularly affect income property investments. Management attempts to
manage these risks through geographic and asset class diversification. At December 31, 2015, the Trust held 49 properties
in three assets classes (retail, office and industrial) and located in six provinces. The Trust is exposed to other risks as
outlined below.
INTEREST RATE AND FINANCING RISK
The Trust is exposed to financial risks that arise from its indebtedness, including fluctuations in interest rates. Interest rate
risk is managed by financing debt at fixed rates with maturities scheduled over a number of years. At December 31, 2015,
100.0% of the Trust’s debt was at fixed rates.
As outlined under “Part VI – Liquidity and Capital Resources,” the Trust has an ongoing requirement to access debt markets
to refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and
conditions acceptable to the Trust, or any terms at all.
The Declaration of Trust permits the Trust to incur indebtedness, provided that after giving effect to incurring or assuming
any indebtedness the amount of all indebtedness of the Trust is not more than 60% of the gross book value of the Trust’s
total assets.
The following table provides the Trust’s debt ratios compared to the borrowing limits established in the Declaration of Trust:
DEBT RATIOS
TABLE 55
As at December 31
Fixed-rate debt to gross book value of total assets
Borrowing Limits
—%
2015
2014
45.7%
45.5%
Floating-rate debt to gross book value of total assets
15.0%
—%
0.2%
Total indebtedness to gross book value of total assets
60.0%
45.7%
45.7%
CREDIT RISK
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. Management mitigates
this risk by ensuring that the Trust’s tenant mix is diversified and by limiting the Trust’s exposure to any one tenant.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
TOP TEN TENANTS
TABLE 56
Annualized
Rental
Revenue
Tenant
# of
Locations
Net Leasable
Area (000's)
% of Total
NLA
Weighted
Average
Remaining
Lease Term
1
Federal and provincial government
12.7%
12
945
10.7%
6.4
2
Penn West Petroleum Ltd.
11.7%
1
619
7.0%
9.1
3
Canadian chartered banks - Tier 1
4.5%
22
301
3.4%
5.5
4
Bombardier Inc.
2.9%
1
278
3.2%
15.3
5
Canadian Tire Corporation Ltd.
1.9%
8
283
3.2%
4.4
6
Amec Foster Wheeler
1.9%
1
145
1.6%
5.0
7
Loblaw Companies Ltd.
1.3%
8
117
1.3%
5.3
8
CH2M Hill Canada Ltd.
1.2%
2
87
1.0%
11.7
9
Sobeys Inc.
1.1%
4
194
2.2%
2.6
10
HBC
1.1%
3
324
3.7%
5.1
40.3%
62
3,293
37.3%
7.1
LEASE ROLLOVER RISK
Lease rollover risk arises from the possibility that the Trust may experience difficulty renewing leases as they expire or in releasing space vacated by tenants upon lease expiry. Management attempts to stagger the lease expiry profile so that the
Trust is not faced with disproportionate amounts of space expiring in any one year. Management further mitigates this risk
by maintaining a diversified portfolio mix by both asset type and geography.
LEASE PROFILE
TABLE 57
Retail
Sq. Ft.
Sq. Ft.
Industrial
% of
Portfolio
Weighted
Average
Contract
Rent
Sq. Ft.
% of
Portfolio
Weighted
Average
Contract
Rent
2016
726,206
16.9%
$18.43
284,207
8.1%
$22.15
46,144
8.6%
$5.98
2017
388,744
9.0%
28.39
286,517
8.1%
23.10
73,438
13.7%
7.58
2018
356,957
8.3%
27.58
196,923
5.6%
22.07
61,775
11.6%
6.27
2019
179,741
4.2%
31.39
172,393
4.9%
23.66
7,472
1.4%
6.39
Thereafter
2,527,685
58.9%
19.83
2,463,999
70.1%
22.66
330,102
61.8%
5.68
Current vacancy
Total
% of
Portfolio
Office
Weighted
Average
Contract
Rent
118,130
2.7%
—
113,406
3.2%
—
15,271
2.9%
—
4,297,463
100.0%
$21.54
3,517,445
100.0%
$22.67
534,202
100.0%
$6.06
2016 EXPIRIES BY LOCATION (NET OF RENEWALS):
TABLE 58
Retail
British Columbia
Alberta
Saskatchewan
Office
Sq. Ft.
Weighted Average
Contract Rent
—
Industrial
Sq. Ft.
Weighted Average
Contract Rent
Sq. Ft.
Weighted Average
Contract Rent
Total
$—
5,014
$32.49
—
$—
5,014
205,385
17.14
87,140
29.61
—
—
292,525
63,268
20.10
—
—
—
—
63,268
Manitoba
108,309
17.56
—
—
—
—
108,309
Ontario
349,244
19.27
176,240
18.89
46,144
5.98
571,628
Quebec
—
—
15,813
14.05
—
—
15,813
726,206
$18.43
284,207
$22.15
46,144
$5.98
1,056,557
Total
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
ENVIRONMENTAL RISK
The Trust is subject to various federal, provincial and municipal laws relating to the environment. The Trust’s ongoing
environmental management program includes regular review of tenant business uses and inspections of properties to
ensure compliance, as well as appropriate testing by qualified environmental consultants when required. A Phase I
environmental site assessment is performed on properties considered for acquisition. The Trust mitigates the cost of
remediation by carrying environmental insurance where available.
UNITHOLDER LIABILITY
The Declaration of Trust provides that no unitholder or annuitant under a plan of which a unitholder acts as trustee or carrier
will be held to have any personal liability as such and that no recourse may be had to the private property of any unitholder
or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of the
Trust. Only assets of the Trust are intended to be liable and subject to levy or execution.
The following provinces have legislation relating to unitholder liability protection: British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario and Quebec. Certain of these statutes have not yet been judicially considered, and it is possible that
reliance on such statute by a unitholder could be successfully challenged on jurisdictional or other grounds. The Trustees
will cause the operations of the Trust to be conducted, with the advice of counsel, in a manner and in such jurisdictions so
as to avoid, as far as practicable, any material risk of liability to the unitholders for claims against the Trust. The Trustees
will also cause the Trust to carry insurance, to the extent to which they determine to be possible and reasonable, for the
benefit of unitholders and annuitants in such amounts as they consider adequate to cover non-contractual or non-excluded
liability.
GENERAL UNINSURED LOSSES
The Trust has in place blanket comprehensive general liability, fire, flood, extended coverage and rental loss insurance with
policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of
risks (generally of a catastrophic nature such as from wars or environmental contamination) that are either uninsurable or
not insurable on an economically viable basis. The Trust also carries insurance for earthquake risks, where appropriate,
subject to certain policy limits, deductibles and self-insurance arrangements, and will continue to carry such insurance if it is
economical to do so. Should an insured or underinsured loss occur, the Trust could lose its investment in, and anticipated
profits and cash flows from, one or more of its properties.
AVAILABILITY OF CASH FLOW
From time to time, because of items such as debt repayments and discretionary capital expenditures incurred to enhance
the real estate portfolio, adjusted funds from operations may be less than the actual cash required by the Trust. In these
situations, The Trust may use part of its debt capacity or reduce distributions in order to meet its obligations.
UNITS OUTSTANDING
Under the Declaration of Trust, the Trust is authorized to issue an unlimited number of units. Each unit represents an equal
interest in the Trust together with all outstanding units. All units have equal voting rights at meetings held by the Trust. As
at February 17, 2016, the Trust had 60,895,912 units outstanding (62,167,654 – December 31, 2014). There have been no
units repurchased for cancellation during 2016 as a part of the Trust's participation in the normal course issuer bid.
UNITHOLDER TAXATION
The Trust is taxed as a “mutual fund trust” for income tax purposes. Under Part I of the Act, a Trust is not subject to income
taxes to the extent that the income for tax purposes in a given year does not exceed the amount distributed to unitholders
and deducted by the Trust for tax purposes. The Trustees intend to distribute or designate all taxable income directly
earned by the Trust to unitholders of the Trust and to deduct such distributions and designations for income tax purposes.
Accordingly, in prior years the Trust has not been required to record a provision for income taxes.
During the year, the Trust realized capital gains as a result of the disposal of one office/hotel property and two industrial
properties, 50% of which are included in computing income for tax purposes.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
Distributions are broken down into four categories: taxable capital gains, non-taxable capital gains, return of capital and
other income. Distributions by category for the last two years are as follows:
DISTRIBUTIONS BY CATEGORY
TABLE 59
2015
2014
Capital gains – taxable
2.1%
5.4%
Capital gains – non-taxable
2.1%
5.4%
Return of capital
27.3%
26.2%
Other income – taxable
68.5%
63.0%
100.0%
100.0%
Legislation relating to the federal income taxation of a “specified investment flow-through” (“SIFT”) trust or partnership was
enacted in 2007. Under the SIFT rules, certain distributions attributable to a SIFT will not be deductible in computing the
SIFT’s taxable income, and the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to
the general tax rate applicable to Canadian corporations. Distributions paid by a SIFT as returns of capital will not be
subject to this tax. The SIFT tax regime did not apply to the Trust prior to 2011 due to transitional relief available to certain
SIFTs that were publicly listed before November 1, 2006.
The SIFT tax does not apply to a trust that meets prescribed conditions relating to the nature of its income and investments
(“the REIT exception”). The Trust has reviewed its status under the legislation and has determined that it is not subject to
this tax as it met the REIT exception at December 31, 2015, and throughout the year. Accordingly, no net additional current
income tax expense or future income tax assets or liabilities have been recorded in the December 31, 2015, consolidated
financial statements.
The REIT exception is applied annually. As such, it will not be possible to determine if the Trust will satisfy the conditions of
the REIT exception for 2016 or any subsequent year until the end of the particular year.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART VIII
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Trust’s critical accounting policies are those that management believes are the most important in portraying the Trust’s
financial condition and results and that require the most subjective judgment and estimates on the part of management.
REAL ESTATE PROPERTIES
Real estate properties include retail, office and industrial properties held to earn rental income (income producing
properties) and properties or land that are being constructed or developed for future use as income producing properties.
Real estate properties are recorded at fair value, determined based on available market evidence, at the balance sheet
date. The Trust determined the fair value of each real estate property based upon, among other things, rental income from
current leases and assumptions about rental income from future leases reflecting market conditions at the applicable
balance sheet date, less future cash outflow pertaining to the respective leases. The real estate properties are appraised
using a number of approaches that typically include a discounted cash flow analysis, direct capitalization method and a
direct comparison approach. The discounted cash flow analysis is primarily based on discounting the expected future cash
flows, generally over a term of 10 years and including a terminal value based on the application of a capitalization rate to
estimated year 11 cash flows.
In applying the accounting policies to the real estate properties, judgment is required in determining whether certain costs
are additions to the carrying amount of the property, in distinguishing between tenant incentives and tenant improvements
and, for properties under development, identifying the point at which practical completion of the property occurs and
identifying the directly attributable borrowing costs to be included in the carrying value of the development property.
Judgment is also applied in determining the extent and frequency of independent appraisals.
REVENUE RECOGNITION
The computation of cost reimbursements from tenants for realty taxes, insurance and common area maintenance charges is
complex and involves a number of judgments, including the interpretation of terms and other tenant lease provisions.
Tenant leases are not consistent in dealing with such cost reimbursements, and variations in computations can exist.
Adjustments are made throughout the year to these cost recovery revenues based upon the Trust’s best estimate of the
final amounts to be billed and collected.
LEASES
The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms
where the lessee is the sole tenant in a property, and long-term ground leases where the Trust is the lessee, are operating
or finance leases. The Trust has determined that all of its tenant leases and long-term ground leases are operating leases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management reports on a quarterly basis the fair value of financial instruments. The fair value of financial instruments
approximates amounts at which these instruments could be exchanged between knowledgeable and willing parties. The
estimated fair value may differ in amount from that which could be realized on an immediate settlement of the instruments.
Management estimates the fair value of mortgages payable by discounting the cash flows of these financial obligations
using December 31, 2015, market rates for debts of similar terms. The fair value of the convertible debentures payable is
based on their market trading price (TSX: MRT.DB.A).
MORGUARD.COM
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART IX
CONTROLS AND PROCEDURES CONCERNING FINANCIAL INFORMATION
The financial certification process project team has documented and assessed the design and effectiveness of the internal
controls in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS. This undertaking has enabled the Chief Executive
Officer and Chief Financial Officer to attest that the design and effectiveness of the internal controls with regard to financial
information are effective using the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") Internal
Control - Integrated Framework (2013). In order to ensure that the consolidated financial statements and MD&A present
fairly, in all material aspects, the financial position of the Trust and the results of its operations, management is responsible
for establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting.
The Trust's management has evaluated the effectiveness of the Trust's disclosure controls and procedures and, based on
such evaluation, has concluded that their design and operation are adequate and effective as of the year ended
December 31, 2015. The Trust's management has also evaluated the effectiveness of the internal controls over financial
reporting and has concluded that the design and operation are effective as of the year ended December 31, 2015.
An information disclosure policy constitutes the framework for the information disclosure process with regard to the annual
and interim filings, as well as to the other reports filed or submitted under securities legislation. This policy aims in particular
at identifying material information and validating the related reporting. Morguard’s Disclosure Committee is responsible for
ensuring compliance with this policy for both Morguard and the Trust. Morguard’s and the Trust’s senior management act
as the Disclosure Committee, ensuring compliance with this policy and reviewing main documents to be filed with regulatory
authorities to ensure that all significant information regarding operations is communicated in a timely manner.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART X
OUTLOOK
The Canadian property market exhibited continued progression throughout 2015, against a backdrop of rising risk. In most
segments of the market, owners of commercial income producing property generated income growth and stability. The
exception to this rule was in metros both north and south of the 49th Parallel where performance was tied directly to the
energy sector. The relative ease with which investors were able to access low-cost debt and equity capital fueled the flow of
capital into the North American commercial property sector. The resulting demand depth ensured property values largely
held at the peak for the cycle in Canada. Pension funds, private capital, and foreign groups were all active purchasers of
assets in the past year, as publicly-traded entities were often challenged to raise funds at the retail level. The progression
witnessed in the Canadian investment markets occurred during a period of capital market volatility, socio-political unrest,
and increased economic uncertainty in both the developed and developing countries of the world. This resulted in an
environment of increased property market risk. However despite this backdrop in 2015, the overall Canadian commercial
property market performance was mostly positive.
Looking to 2016, a similar performance to that of 2015 is anticipated for the Canadian commercial real estate markets.
Economic output will continue to increase, with the US outperforming. In Canada, the continued oil sector malaise should
reduce growth rates in certain regions. However, the broader economic picture is expected to be one of moderate
expansion. In Canada, property values should stabilize for ‘core’ assets, with slight reductions for riskier properties.
Aggressive bidding on properties made available for acquisition will likely persist, although the number of bids should fall
short of the cycle peak. Oil prices are expected to continue to disappoint, which will impact the economic and real estate
outlook across the continent. The hope is that a more stable outlook unfolds in the global commodities market as 2016
progresses, signaling a new growth trend. If not, the Canadian property market will perform in 2016 much as it did in 2015,
against a backdrop of similar levels of risk.
In 2016, the environment for acquisitions will continue to be extremely competitive. The Trust remains disciplined in
exploring new investment opportunities. Management will continue to seek acquisition opportunities, focusing on properties
that are accretive in the long-term. In addition to acquisitions, the Trust also expects growth to come organically from within
the existing portfolio and from intensification opportunities. Target’s exit from the Canadian market place provides the Trust
with the opportunity to remerchandise four of its enclosed regional centres.
The Trust’s strength stems from conservative financial leverage, a moderate payout ratio and diversification.
MORGUARD.COM
40
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART XI
RECONCILIATIONS TO THE ISSUED FINANCIAL STATEMENTS
Part XI provides the reader with reconciliations of the key performance measures used in this MD&A to the Trust’s
consolidated financial statements.
RECONCILIATION OF NET INCOME PER THE FINANCIAL STATEMENTS
TABLE 60
Three Months Ended December 31
Year Ended December 31
2015
2014
Variance
2015
2014
Variance
Retail
$22,959
$21,867
$1,092
$85,059
$85,181
($122)
Office
19,053
18,916
137
75,488
74,623
865
Net operating income
Industrial
683
709
42,695
41,492
Real estate properties acquisitions
347
Real estate properties held for development
285
Net operating income – same assets
Real estate properties held for sale
3,034
2,686
348
1,203
(26)
163,581
162,490
1,091
331
16
1,377
620
757
173
112
839
705
134
(627)
9
636
428
3,610
(3,182)
43,336
42,632
704
166,225
167,425
(1,200)
Step rents
858
656
202
2,131
2,591
(460)
Lease cancellation fees
168
871
(703)
945
998
(53)
One-time adjustment
235
784
(549)
1,018
3,871
(2,853)
44,597
44,943
(346)
170,319
174,885
(4,566)
Net operating income before other adjustments
OTHER ADJUSTMENTS
Net operating income from total real estate properties
Equity-accounted investments
Net operating income per the financial statements
(1,111)
$43,486
(1,099)
(12)
$43,844
($358)
(4,389)
$165,930
(5,146)
$169,739
757
($3,809)
RECONCILIATION OF NET INCOME FROM EQUITY-ACCOUNTED INVESTMENTS
TABLE 61
Three Months Ended December 31
Net operating income
Year Ended December 31
2015
2014
Variance
2015
2014
Variance
$1,111
$1,099
$12
$4,389
$5,146
($757)
Other expenses
(295)
(301)
6
(1,157)
(1,330)
173
Fair value losses on real estate properties
(807)
(3,751)
2,944
(791)
(3,836)
3,045
(1,102)
(4,052)
2,950
(1,948)
(5,166)
3,218
($2,953)
$2,962
$2,441
($20)
$2,461
Net income/(loss) from equity-accounted investments
MORGUARD.COM
$9
41
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
RECONCILIATION OF REAL ESTATE PROPERTIES
TABLE 62
As at December 31, 2015
Income producing properties
Properties under development
Land held for development
Total real estate properties
As at December 31, 2014
Income producing properties
Properties under development
Land held for development
Total real estate properties
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$2,816,124
$61,950
$2,878,074
2,524
—
2,524
28,750
—
28,750
$2,847,398
$61,950
$2,909,348
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$2,822,074
$62,750
$2,884,824
16,511
—
16,511
27,650
—
27,650
$2,866,235
$62,750
$2,928,985
Equity-Accounted
Investments
All Properties
RECONCILIATION OF FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES
TABLE 63
For the three months ended December 31, 2015
Income producing properties
Per Financial
Statements
($24,017)
($807)
Land held for development
733
—
Properties held for sale
106
—
Total fair value losses on real estate properties
For the three months ended December 31, 2014
Income producing properties
Properties under development
Land held for development
Total fair value losses on real estate properties
For the year ended December 31, 2015
Income producing properties
Land held for development
Properties held for sale
Total fair value losses on real estate properties
For the year ended December 31, 2014
Income producing properties
Properties under development
Land held for development
Total fair value gains/(losses) on real estate properties
MORGUARD.COM
($23,178)
Per Financial
Statements
($1,156)
($807)
Equity-Accounted
Investments
($3,751)
(150)
—
412
—
($894)
Per Financial
Statements
($79,513)
($3,751)
Equity-Accounted
Investments
($791)
($24,824)
733
106
($23,985)
All Properties
($4,907)
(150)
412
($4,645)
All Properties
($80,304)
733
—
733
(197)
—
(197)
($78,977)
Per Financial
Statements
$14,974
(4,005)
270
$11,239
($791)
Equity-Accounted
Investments
($3,836)
—
—
($3,836)
($79,768)
All Properties
$11,138
(4,005)
270
$7,403
42
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
RECONCILIATION OF MORTGAGES PAYABLE
TABLE 64
As at December 31, 2015
Mortgages payable before financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
As at December 31, 2014
Mortgages payable before financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
MORGUARD.COM
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$1,175,880
$29,221
$1,205,101
1
—
(3,546)
—
1
(3,546)
$1,172,335
$29,221
$1,201,556
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$1,186,480
$30,105
$1,216,585
11
—
11
(4,035)
$1,182,456
—
$30,105
(4,035)
$1,212,561
43
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
RECONCILIATION OF CASH FLOWS
TABLE 65
Per Financial
Statements
Equity-Accounted
Investments
All Properties
Cash provided by operating activities
$29,718
$578
$30,296
Cash used in financing activities
(43,731)
(225)
(43,956)
Cash provided by investing activities
26,598
682
27,280
Net increase in cash
12,585
1,035
13,620
Cash and cash equivalents, beginning of year
13,697
839
14,536
$26,282
$1,874
$28,156
Per Financial
Statements
Equity-Accounted
Investments
All Properties
For the three months ended December 31, 2015
Cash and cash equivalents, end of year
For the three months ended December 31, 2014
Cash provided by/(used in) operating activities
$31,887
($86)
$31,801
Cash used in financing activities
(23,682)
(216)
(23,898)
Cash (used in)/provided by investing activities
(16,835)
19
(16,816)
(8,630)
(283)
(8,913)
Net decrease in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For the year ended December 31, 2015
Cash provided by operating activities
Cash used in financing activities
21,242
392
21,634
$12,612
$109
$12,721
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$97,957
$817
$98,774
(884)
(107,131)
(106,247)
Cash provided by investing activities
21,960
1,832
23,792
Net increase in cash
13,670
1,765
15,435
Cash and cash equivalents, beginning of year
12,612
109
12,721
$26,282
$1,874
$28,156
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$104,617
$393
$105,010
Cash and cash equivalents, end of year
For the year ended December 31, 2014
Cash provided by operating activities
Cash used in financing activities
(59,062)
Cash (used in)/provided by investing activities
(46,020)
Net decrease in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
MORGUARD.COM
(982)
(60,044)
23
(45,997)
(566)
(1,031)
13,077
675
13,752
$12,612
$109
$12,721
(465)
44
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART XII
SUMMARY OF QUARTERLY RESULTS
TABLE 66
The following table provides a summary of quarterly operating results for the last eight quarters.
Revenue from real estate properties
Property operating expenses
Property management fees
December 31,
September 30,
June 30,
March 31,
2015
2015
2015
2015
$76,838
$72,193
$71,851
$74,730
29,736
28,709
28,602
29,483
2,496
2,332
2,337
2,362
Net operating income
44,606
41,152
40,912
42,885
Interest expense
14,948
14,756
14,810
15,068
1,080
1,014
1,128
1,159
General and administrative
Other income
Income before fair value (losses)/gains on real estate properties, and net (loss)/income
from real estate properties held for sale
Fair value (losses)/gains on real estate properties
Net (loss)/income from real estate properties held for sale
Net income/(loss) for the period
(113)
28,691
(23,880)
(114)
(116)
25,498
635
(19)
(167)
(175)
25,141
26,833
(45,229)
(11,047)
(129)
237
$4,697
$26,114
($20,217)
$16,023
December 31,
September 30,
June 30,
March 31,
2014
2014
2014
2014
$77,215
$72,966
$73,233
$73,255
30,578
28,445
27,993
29,164
2,446
2,333
2,334
2,361
Net operating income
44,191
42,188
42,906
41,730
Interest expense
15,159
15,265
15,200
15,274
1,530
1,230
1,443
1,225
—
—
Revenue from real estate properties
Property operating expenses
Property management fees
General and administrative
Other income
(207)
(168)
Income before fair value (losses)/gains on real estate properties, loss on sale of real
estate properties and net income/(loss) from real estate properties held for sale
27,709
25,861
26,263
25,231
Fair value (losses)/gains on real estate properties
(6,043)
(5,038)
4,163
10,079
Loss on sale of real estate properties
Net income/(loss) from real estate properties held for sale
Net income for the period
MORGUARD.COM
(22)
1,843
$23,487
(15)
—
—
(837)
3,725
963
$34,151
$36,273
$19,971
45
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
PART XIII
FUTURE ACCOUNTING POLICY CHANGES
AMENDMENTS TO IFRS 11, “JOINT ARRANGEMENTS” (“IFRS 11”): ACCOUNTING FOR ACQUISITIONS OF
INTERESTS
The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in
which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business
combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured
on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope
exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control,
including the reporting entity, are under common control of the same ultimate controlling party.
The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional
interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1,
2016, with early adoption permitted. These amendments are not expected to have any impact on the Trust.
AMENDMENTS TO IAS 1, “PRESENTATION OF FINANCIAL STATEMENTS” (“IAS 1”): DISCLOSURE INITIATIVE
The amendments to IAS 1, clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify:
• The materiality requirements in IAS 1;
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be
disaggregated;
• That entities have flexibility as to the order in which they present the notes to financial statements; and
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in
aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to
profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement
of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods
beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any
impact on the Trust.
IFRS 15, “REVENUE FROM CONTRACTS WITH CUSTOMERS” (“IFRS 15”)
In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with
customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to
users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a
contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled
in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or
after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact of IFRS 15 on its
consolidated financial statements.
IFRS 9 (2014), “FINANCIAL INSTRUMENTS” (“IFRS 9”)
The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, “Financial Instruments:
Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and
liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely
recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the
requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss and to
measure equity-based financial assets either as held for trading or as fair value through other comprehensive income
("FVTOCI"). No amounts are reclassified out of other comprehensive income if the FVTOCI option is elected. Additionally,
embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The
standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application
permitted. The Trust is currently assessing the impact of IFRS 9 on its consolidated financial statements.
MORGUARD.COM
46
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015
IFRS 16, “LEASES”
In January 2016, the IASB issued IFRS 16, "Leases". The new standard requires that for most leases, lessees must initially
recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to
use the underlying asset for the lease term. Lessor accounting, however, remains largely unchanged, and the distinction
between operating and finance leases is retained. This standard will be effective for annual periods beginning after January
1, 2019, with early adoption permitted so long as IFRS 15 has been adopted. The Trust is currently assessing the impact
this new standard will have on its consolidated financial statements.
MORGUARD.COM
47
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
INDEPENDENT AUDITORS' REPORT
TO THE UNITHOLDERS OF MORGUARD REAL ESTATE INVESTMENT TRUST
We have audited the accompanying consolidated financial statements of Morguard Real Estate Investment Trust, which
comprise the consolidated balance sheets as at December 31, 2015 and 2014, and the consolidated statement of income
and comprehensive income, unitholders’ equity and cash flows for the years then ended and a summary of significant
accounting policies and other explanatory information.
MANAGEMENTS' RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
AUDITOR'S RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audits to obtain reasonable assurance about 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 the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
OPINION
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Morguard
Real Estate Investment Trust as at December 31, 2015 and 2014, and its financial performance and its cash flows for the
years then ended in accordance with International Financial Reporting Standards.
“Ernst & Young LLP”
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 17, 2016
MORGUARD.COM
48
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
BALANCE SHEETS
In thousands of Canadian dollars
As at December 31
Notes
2015
2014
5
6
$2,847,398
32,509
2,879,907
$2,866,235
30,770
2,897,005
12(b),(e)
13,011
955
26,282
40,248
—
$2,920,155
42,635
1,054
12,612
56,301
63,190
$3,016,496
$1,082,799
147,698
3,517
1,234,014
$1,111,360
146,541
4,111
1,262,012
89,536
40,465
—
130,001
—
71,096
41,650
4,927
117,673
29,730
1,364,015
1,556,140
$2,920,155
1,409,415
1,607,081
$3,016,496
ASSETS
Non-current assets
Real estate properties
Equity-accounted investments
Current assets
Amounts receivable
Prepaid expenses and other assets
Cash and cash equivalents
Real estate properties held for sale
Total assets
20
LIABILITIES AND UNITHOLDERS’ EQUITY
Non-current liabilities
Mortgages payable
Convertible debentures payable
Other liabilities
8
9
Current liabilities
Mortgages payable
Accounts payable and accrued liabilities
Bank indebtedness
8
12(a)
10
Mortgages payable on real estate properties held for sale
20
Total liabilities
Unitholders' equity
14
Commitments and contingencies
17
See accompanying notes to the consolidated financial statements.
On behalf of the Trustees:
David King,
Chairman of the Board of Trustees
MORGUARD.COM
Paul Cobb,
Trustee
49
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
In thousands of Canadian dollars, except per unit amounts
For the year ended December 31
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
Interest expense
General and administrative
Other income
Income before fair value (losses)/gains, loss on sale of real estate
properties and net income/(loss) from equity-accounted investments
Fair value (losses)/gains on real estate properties
Loss on sale of real estate properties
Net income/(loss) from equity-accounted investments
Net income for the year
Notes
2015
2014
13(a)
12(a)
$290,982
115,646
9,406
165,930
$298,461
119,139
9,583
169,739
11
13(b)
5
6
58,981
4,367
(571)
62,000
5,414
(375)
103,153
102,700
(78,977)
—
2,441
26,617
11,239
(37)
(20)
113,882
OTHER COMPREHENSIVE INCOME
Items to be reclassified to profit or loss in subsequent periods:
Amortization – cash flow hedges
Comprehensive income
NET INCOME PER UNIT
Basic
Diluted (1)
935
$27,552
1,010
$114,892
$0.43
$0.43
$1.83
$1.72
14(d)
(1) The calculation of diluted net income per unit excludes the impact of the convertible debentures for the year ended December 31, 2015, as their inclusion would be anti-dilutive.
See accompanying notes to the consolidated financial statements.
MORGUARD.COM
50
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
STATEMENT OF UNITHOLDERS' EQUITY
In thousands of Canadian dollars, except number of units
Balance, at January 1, 2014
Repurchase of units
Debentures converted
Number
of Units
Issue
of Units
62,221,836
$625,824
(100,000)
609
(1,006)
Equity
Accumulated
Component
Other
Retained of Convertible Contributed Comprehensive
Earnings
Debentures
Surplus
Loss
$927,184
(667)
15
—
($2,134)
Total
Unitholders’
Equity
$1,526
$338
$1,552,738
—
—
—
—
—
—
15
(1,673)
Net income for the year
—
—
113,882
—
—
—
113,882
Distributions to unitholders
—
—
(58,891)
—
—
—
(58,891)
(791)
45,209
791
—
—
—
—
Amortization – cash flow hedges
—
—
—
—
—
1,010
1,010
Balance, at December 31, 2014
62,167,654
625,624
980,717
1,526
338
Repurchase of units
(1,328,022)
(13,368)
Issue of units – DRIP
Net income for the year
Distributions to unitholders
Issue of units – DRIP
Amortization – cash flow hedges
Balance, at December 31, 2015
(1,124)
1,607,081
(6,673)
—
—
—
(20,041)
—
26,617
—
—
—
26,617
—
—
(58,452)
—
—
—
(58,452)
52,022
788
(788)
—
—
—
935
—
—
—
—
—
—
60,891,654
$613,044
$941,421
$1,526
$338
($189)
—
935
$1,556,140
See accompanying notes to the consolidated financial statements.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
STATEMENT OF CASH FLOW
In thousands of Canadian dollars
For the year ended December 31
Notes
2015
2014
$26,617
$113,882
OPERATING ACTIVITIES
Net income for the year
Items not affecting operating cash
Distributions from equity-accounted investments
Deferred leasing cost additions
Tenant incentive additions
Net change in non-cash operating assets and liabilities
Cash provided by operating activities
15(a)
6
15(b)
76,678
702
(3,586)
(398)
(2,056)
97,957
(10,567)
2,518
(3,892)
(114)
2,790
104,617
56,155
269,177
(36,925)
(6,125)
(35,644)
(10)
(278)
(4,927)
—
—
(58,452)
(20,041)
(106,247)
(219,157)
(13,747)
(33,677)
(131)
(890)
(73)
60,000
(60,000)
(58,891)
(1,673)
(59,062)
(36,000)
66,000
(42,327)
(1,474)
35,761
21,960
(30,000)
—
(40,671)
(16,354)
41,005
(46,020)
13,670
12,612
$26,282
(465)
13,077
$12,612
FINANCING ACTIVITIES
Proceeds from new mortgages
Repayment of principal
Repayments on maturity
Repayment due to early extinguishment of mortgage
Principal instalment repayments
Amortization of fair value adjustments
Financing cost on new mortgages
Decrease in bank indebtedness
Issue of loan payable
Repayment of loan payable
Distributions to unitholders
Units repurchased for cancellation
Cash used in financing activities
10
12(b)
12(b)
INVESTING ACTIVITIES
Acquisition of loan receivable
Settlement of loan receivable
Capital expenditures on real estate properties
Acquisition of real estate properties
Net proceeds from sale of real estate properties
Cash provided by/(used in) investing activities
Net change in cash and cash equivalents during the year
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
12(b)
12(b)
15(b)
See accompanying notes to the consolidated financial statements.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
NOTES
For the year ended December 31, 2015
In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted
NOTE 1
NATURE AND DESCRIPTION OF THE TRUST
Morguard Real Estate Investment Trust (“the Trust”) is a “closed-end” real estate investment trust established on June 18,
1997, under the laws of the Province of Ontario. The Trust commenced active operations on October 14, 1997. The Trust
owns a diverse portfolio of retail, office and industrial properties located in six Canadian provinces. The Trust’s head office
is located at 55 City Centre Drive, Suite 1000, Mississauga, Ontario, L5B 1M3.
The Trust has a property management agreement with Morguard Investments Limited (“MIL”), a subsidiary of Morguard
Corporation (“Morguard”). Morguard is the parent company of the Trust, owning 50.41% of the outstanding units, as at
December 31, 2015. Morguard is a real estate company, which owns a diversified portfolio of multi-unit residential, retail,
hotel, office and industrial properties. Morguard also provides advisory and management services to institutional and other
investors.
NOTE 2
STATEMENT OF COMPLIANCE AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Trust have been prepared in accordance with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting Standards Board.
The consolidated financial statements were approved and authorized for issue by the Board of Trustees on February 17,
2016.
Basis of Presentation
The Trust's consolidated financial statements are prepared on a going-concern basis and have been presented in Canadian
dollars rounded to the nearest thousand unless otherwise indicated. The consolidated financial statements are prepared on
a historical cost basis, except for real estate properties and certain financial instruments that are measured at fair value.
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements unless otherwise indicated.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Trust, as well as the entities that are controlled
by the Trust ("subsidiaries"). The Trust controls an entity when the Trust is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries
are fully consolidated from the date of acquisition or the date on which the Trust obtains control and are deconsolidated from
the date that control ceases. Inter-company transactions, balances, unrealized losses and unrealized gains on transactions
between the Trust and its subsidiaries are eliminated.
Real Estate Properties
Income Producing Properties
Income producing properties include retail, office and industrial properties held to earn rental income and for capital
appreciation.
Income producing properties, where not acquired in a business combination, are measured initially at cost including
transaction costs. Transaction costs include transfer taxes and professional fees for legal and other services.
Subsequent to initial recognition, income producing properties are recorded at fair value, determined based on available
market evidence, at the consolidated balance sheet date. The changes in fair value during each reporting period are
recorded in the consolidated statements of income and comprehensive income. In order to avoid double counting, the
carrying value of income producing properties includes straight-line rent receivable, tenant improvements, tenant incentives
and direct leasing costs since these amounts are incorporated in the appraised values of real estate properties.
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Tenant improvements include costs incurred to meet the Trust’s lease obligations and are classified as either tenant
improvements owned by the landlord or tenant incentives. When the obligation is determined to be an improvement that
benefits the landlord and is owned by the landlord, the improvement is accounted for as a capital expenditure and included
in the carrying amount of income producing properties on the consolidated balance sheets.
Tenant incentives are inducements given to prospective tenants to move into the Trust's properties or to existing tenants to
extend the lease term. Tenant incentive receivables are included in the carrying value of real estate properties and are
deducted from rental revenue on a straight-line basis over the term of the tenant’s lease.
Properties Under Development
The cost of properties under development includes all expenditures incurred in connection with the acquisition, including all
direct development costs, realty taxes and other costs of the building to prepare it for its productive use, the applicable
portion of general and administrative expenses and borrowing costs directly attributable to the development. Borrowing
costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing
costs are also capitalized on the purchase cost of a site or property acquired specifically for redevelopment in the short term
if the activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing
costs capitalized is determined by reference to interest incurred on debt specific to the development project. Borrowing
costs are capitalized from the commencement of the development until the date of practical completion. The capitalization
of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. The Trust
considers practical completion to have occurred when the property is capable of operating in the manner intended by
management. Generally, this consideration occurs upon completion of construction and receipt of all necessary occupancy
and other material permits. Where the Trust has pre-leased space as at, or prior to, the start of the development and the
lease requires the Trust to construct tenant improvements that enhance the value of the property, practical completion is
considered to occur on completion of such improvements.
Properties under development are measured at fair value with changes in fair value being recognized in the consolidated
statements of income and comprehensive income.
Interests in Joint Arrangements
The Trust views its interests in joint arrangements and those for which the Trust is entitled to only the net assets as joint
ventures, which are accounted for using the equity method of accounting. Those joint arrangements in which the Trust is
entitled to its share of the assets and liabilities are accounted for as joint operations, and the Trust recognizes its rights to
and obligations for the assets, liabilities, revenue and expenses of the joint operation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with remaining maturities at
the time of acquisition of three months or less. Bank borrowings are considered to be financing activities.
Provisions
A provision is a liability of uncertain timing or amount. Provisions are recognized when the Trust has a present legal or
constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the
obligation and the amount can be reliably estimated. Provisions are measured at the present value for the expenditures
expected to be required to settle the obligation using a discount rate that reflects current market assessment of the time
value of money and the risks specific to the obligation. Provisions are remeasured at each consolidated balance sheet date
using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense.
Revenue Recognition
The Trust has retained substantially all of the risks and benefits of ownership of its real estate properties and, therefore,
accounts for leases with its tenants as operating leases. Revenue from properties includes rents from tenants under leases,
percentage participation rents, property tax and operating cost recoveries, lease cancellation fees, leasing concessions,
parking income and incidental income. Percentage participation rents are accrued based on sales estimates submitted by
tenants if the tenant anticipates attaining the minimum sales level stipulated in the tenant lease. All other rental revenue is
recognized in accordance with each lease.
Revenue from real estate properties recorded in the consolidated statements of income and comprehensive income during
free rent periods represents future cash receipts and is reflected in the consolidated balance sheets in the carrying value of
real estate properties and recognized in the consolidated statements of income and comprehensive income on a straightMORGUARD.COM
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line basis over the initial term of the lease. The Trust accounts for stepped rents on a straight-line basis, which are reflected
in the consolidated balance sheets in the carrying value of real estate properties and recognized in the consolidated
statements of income and comprehensive income over the initial term of the lease. Rents recorded in advance of cash
received are included in amounts receivable.
Revenue from properties under development is recognized upon substantial completion of the development project and
when the property is capable of operating in the manner intended by management, which generally occurs upon
completion of construction and receipt of all necessary occupancy and other material permits.
Assets Held for Sale
Real estate properties held for sale are assets that the Trust intends to sell rather than hold on a long-term basis and meet
the criteria established in IFRS 5 for separate classification. Non-current assets and groups of assets and liabilities, that
comprise disposal groups, are categorized as assets held for sale where the asset or disposal group is available for
immediate sale in its present condition and the sale is highly probable.
Comprehensive Income
Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources.
Other comprehensive income ("OCI") refers to items recognized in comprehensive income that are excluded from net
income. Accordingly, the Trust prepares consolidated statements of comprehensive income and includes accumulated other
comprehensive income as a component of unitholders’ equity within the consolidated balance sheets.
Per Unit Calculation
Basic net income per unit is calculated by dividing net income by the weighted average number of units outstanding for the
year. The dilutive effect of the convertible debentures is determined by considering both the holders' option to convert these
debentures into units and the issuer’s option to redeem these debentures by issuing units. The diluted net income per unit
calculation considers both of these options and discloses the more dilutive of the two options.
Stock-Based Compensation
Morguard has granted certain officers of the Trust stock appreciation rights (“SARs”), which entitle these officers to receive a
cash payment equal to the excess of the market price of Morguard’s common shares at the time of exercise over the exercise
price of the right. The SARs granted generally vest over 10 years. The Trust accounts for the SARs plan using the fair value
method. Under this method, compensation expense for the SARs plan is measured at fair value at the grant date using the
Black-Scholes option pricing model and recognized over the vesting period. The liability is measured at each reporting period
at fair value with changes in fair value recorded in the consolidated statements of income and comprehensive income.
Financial Instruments
Recognition and Measurement of Financial Instruments
Financial assets must be classified into one of the following categories: held to maturity, loans and receivables, fair value
through profit or loss ("FVTPL") or available-for-sale assets. Financial liabilities, including FVTPL, are classified as other
financial liabilities. All financial instruments, including derivatives, are measured in the consolidated balance sheets at fair
value except for held-to-maturity loans and receivables and other financial liabilities that are measured at amortized cost
using the effective interest rate method.
The Trust classifies its cash and cash equivalents and amounts receivable as loans and receivables, which are measured at
amortized cost. Bank indebtedness, accounts payable and accrued liabilities and mortgages payable and convertible
debentures are classified as other financial liabilities, which are measured at amortized cost.
Derivatives and Embedded Derivatives
All derivative instruments, including embedded derivatives, are recorded in the consolidated balance sheets at fair value
unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in
income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in OCI to the extent of
hedge effectiveness. Financial guarantees are recorded at their inception date fair value and reversed as the Trust is
relieved of its guarantee obligations.
Hedges
Derivative financial instruments are utilized to reduce interest rate risk on the Trust’s debt. Interest rate swap agreements
are used to manage the fixed and floating interest rate mix of the Trust’s total debt portfolio and related overall cost of
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
borrowing. Such instruments are designated, and are effective, as hedges of certain of the Trust’s interest rate risk
exposures. The interest rate swap agreements involve the periodic exchange of payments without the exchange of the
notional principal amount upon which the payments are based. The net receipt or payment of interest will be recorded as
an adjustment to interest expense in each period.
Gains and losses on termination of interest rate swap agreements that were designated, and were effective, as hedges of
certain interest rate risk exposures are included in accumulated other comprehensive income and are amortized in interest
expense over the remaining term of the original contract life of the terminated swap agreement. Interest expense on the
related debt obligation together with this amortization reflects the overall costs of such borrowing.
Transaction Costs
Direct and indirect financing costs that are attributable to the issue of financial liabilities are presented as a reduction from
the carrying amount of the related debt and are amortized using the effective interest rate method over the terms of the
related debt. These costs include interest, amortization of discounts or premiums relating to borrowings, fees and
commissions paid to lenders, agents, brokers and advisers, and transfer taxes and duties that are incurred in connection
with the arrangement of borrowings.
Fair Value
The fair value of a financial instrument is the consideration that could be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The fair value measurement is
based on the presumption that the transaction to sell the asset or transfer the liability takes place either (i) in the principal
market for the asset or liability or (ii) in the absence of a principal market, in the most advantageous market for the asset or
liability.
Fair value measurements recognized in the consolidated balance sheets are categorized using a fair value hierarchy that
reflects the significance of inputs used in determining the fair values:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are
based on observable market data.
Level 3: Valuation techniques for which any significant input is not based on observable market data.
Each type of fair value is categorized based on the lowest-level input that is significant to the fair value measurement in its
entirety.
Critical Judgments in Applying Accounting Policies
The following are the critical judgments that have been made in applying the Trust’s accounting policies and that have the
most significant effect on the amounts in the consolidated financial statements:
Real Estate Properties
The Trust’s accounting policies relating to real estate properties are described above. In applying these policies, judgment
has been applied in determining whether certain costs are additions to the carrying amount of the property, in distinguishing
between tenant incentives and tenant improvements and, for properties under development, identifying the point at which
practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the
carrying value of the development property. Judgment is also applied in determining the extent and frequency of
independent appraisals. The key assumptions are further described in Note 5.
Leases
The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms
where the lessee is the sole tenant in a property and long-term ground leases where the Trust is the lessee, are operating or
finance leases. The Trust has determined that all of its tenant leases and long-term ground leases are operating leases.
Critical Accounting Estimates and Assumptions
The preparation of the consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the
consolidated financial statements and reported amounts of revenue and expenses during the reporting periods. In
determining estimates of fair market value for its real estate assets, the assumptions underlying estimated values are limited
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
by the availability of comparable data and the uncertainty of predictions concerning future events. Should the underlying
assumptions change, actual results could differ from the estimated amounts. In addition, the computation of cost
reimbursements from tenants for realty taxes, insurance and common area maintenance charges is complex and involves a
number of estimates, including the interpretation of terms and other tenant lease provisions. Tenant leases are not
consistent in dealing with such cost reimbursements, and variations in computations can exist. Adjustments are made
throughout the year to these cost recovery revenues based upon the Trust’s best estimate of the final amounts to be billed
and collected.
NOTE 3
ADOPTION OF ACCOUNTING STANDARDS
IAS 40, “Investment Property” (“IAS 40”)
On January 1, 2015, the Trust adopted an amendment with respect to the description of ancillary services in IAS 40, which
differentiates between investment property and owner-occupied property (i.e., property, plant and equipment). The
amendment is applied prospectively and clarifies that IFRS 3, Business Combinations, and not the description of ancillary
services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This
amendment did not result in a material impact to the consolidated financial statements.
IFRS 8, “Operating Segments” (“IFRS 8”)
On January 1, 2015, the Trust adopted the amendments to IFRS 8. The amendments are applied retrospectively and clarify
that:
• An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of
IFRS 8, including a brief description of operating segments that have been aggregated and the economic
characteristics (e.g., sales and gross margins) used to assess whether the segments are similar.
• The reconciliation of segment assets to total assets is required to be disclosed only if the reconciliation is reported to
the chief operating decision-maker, similar to the required disclosure for segment liabilities.
These amendments did not result in a material impact to the consolidated financial statements.
NOTE 4
FUTURE ACCOUNTING POLICY CHANGE
Amendments to IFRS 11, “Joint Arrangements” (“IFRS 11”): Accounting for Acquisitions of Interests
The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in
which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business
combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured
on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope
exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control,
including the reporting entity, are under common control of the same ultimate controlling party.
The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional
interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1,
2016, with early adoption permitted. These amendments are not expected to have any impact on the Trust.
Amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1”): Disclosure Initiative
The amendments to IAS 1 clarify rather than significantly change existing IAS 1 requirements. The amendments clarify:
• The materiality requirements in IAS 1;
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be
disaggregated;
• That entities have flexibility as to the order in which they present the notes to financial statements; and
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in
aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to
profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement
of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods
MORGUARD.COM
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any
impact on the Trust.
IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”)
In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with
customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to
users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a
contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled
in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or
after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact of IFRS 15 on its
consolidated financial statements.
IFRS 9 (2014), “Financial Instruments” (“IFRS 9”)
The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, “Financial Instruments:
Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and
liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely
recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the
requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss and to
measure equity-based financial assets either as held for trading or as fair value through other comprehensive income
("FVTOCI"). No amounts are reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in
financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory
effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The Trust is
currently assessing the impact of IFRS 9 on its consolidated financial statements.
IFRS 16, “Leases”
In January 2016, the IASB issued IFRS 16, "Leases". The new standard requires that for most leases, lessees must initially
recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to
use the underlying asset for the lease term. Lessor accounting, however, remains largely unchanged, and the distinction
between operating and finance leases is retained. This standard will be effective for annual periods beginning after January
1, 2019, with early adoption permitted so long as IFRS 15 has been adopted. The Trust is currently assessing the impact
this new standard will have on its consolidated financial statements.
NOTE 5
REAL ESTATE PROPERTIES
Real estate properties consist of the following:
As at December 31
Income producing properties
Properties under development
Land held for development
MORGUARD.COM
2015
2014
$2,816,124
2,524
28,750
$2,822,074
16,511
27,650
$2,847,398
$2,866,235
58
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
Reconciliations of the carrying amounts for real estate properties at the beginning and end of the current financial period are
set out below:
As at December 31, 2015
Balance as at December 31, 2014
Additions:
Acquisitions and investments
Capital expenditures/capitalized costs
Tenant improvements, tenant incentives and commissions
Reclassifications
Reclassification from properties held for sale
Fair value (losses)/gains
Other changes
Balance as at December 31, 2015
As at December 31, 2014
Balance as at December 31, 2013
Additions:
Acquisitions and investments
Capital expenditures/capitalized costs
Tenant improvements, tenant incentives and commissions
Reclassifications
Reclassification to properties held for sale
Reclassification from equity-accounted investments
Disposition
Fair value gains/(losses)
Other changes
Balance as at December 31, 2014
Income
Producing
Properties
Properties
Under
Development
Land
Held for
Development
Total
Real Estate
Properties
$2,822,074
$16,511
$27,650
$2,866,235
1,474
17,210
13,925
28,735
9,450
(79,513)
2,769
$2,816,124
—
14,748
—
(28,735)
—
—
—
$2,524
—
367
—
—
—
733
—
$28,750
1,474
32,325
13,925
—
9,450
(78,780)
2,769
$2,847,398
Income
Producing
Properties
Properties
Under
Development
Land
Held for
Development
Total
Real Estate
Properties
$2,831,269
$20,839
$17,250
$2,869,358
23,935
15,228
11,512
(6,520)
(48,540)
19,000
(41,042)
14,974
2,258
$2,822,074
—
17,937
—
(3,610)
(14,650)
—
—
(4,005)
—
$16,511
—
—
—
10,130
—
—
—
270
—
$27,650
23,935
33,165
11,512
—
(63,190)
19,000
(41,042)
11,239
2,258
$2,866,235
Morguard Investments Limited (Note 12) provides appraisal services to the Trust. MIL’s valuation team consists of Appraisal
Institute of Canada (“AIC”) designated Accredited Appraiser Canadian Institute (“AACI”) members who are qualified to offer
valuation and consulting services and expertise for all types of real property, all of whom are knowledgeable and have
recent experience in the fair value techniques for investment properties. AACI designated members must adhere to AIC’s
Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) and undertake on-going professional
development. Management reviews both the valuation processes and results at least once every quarter, in line with the
Trust's quarterly reporting dates.
Generally, the Trust’s real estate properties are appraised using a number of approaches that typically include a discounted
cash flow analysis, a direct capitalization approach and a direct comparison approach. The primary method of valuation
used by the Trust is discounted cash flows. This approach involves determining the fair value of each income producing
property based on, among other things, rental income from current leases and assumptions about rental income from future
leases reflecting market conditions at the applicable consolidated balance sheet dates, less future cash outflows pertaining
to the respective leases. Fair values are primarily determined by discounting the expected future cash flows, generally over
a term of 10 years and including a terminal value based on the application of a capitalization rate to estimated year 11 net
operating income.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
The table below provides further details of the average discount rate and terminal cap rate by business segments:
December 31, 2015
Maximum
Minimum
December 31, 2014
Weighted
Average
Maximum
Minimum
Weighted
Average
RETAIL
Discount rate
Terminal cap rate
Stabilized occupancy
8.3%
7.8%
100.0%
6.0%
5.3%
90.0%
6.8%
6.0%
—%
8.5%
7.8%
100.0%
6.0%
5.3%
90.0%
6.8%
6.0%
—%
8.0%
7.5%
100.0%
6.0%
5.0%
94.3%
6.7%
5.9%
—%
7.8%
7.5%
100.0%
6.0%
5.3%
94.3%
6.8%
6.0%
—%
7.5%
7.0%
100.0%
7.0%
6.5%
95.0%
7.2%
6.8%
—%
7.5%
7.3%
100.0%
7.0%
6.5%
95.0%
7.4%
6.9%
—%
OFFICE
Discount rate
Terminal cap rate
Stabilized occupancy
INDUSTRIAL
Discount rate
Terminal cap rate
Stabilized occupancy
Using the direct capitalization income approach to corroborate the discounted cash flow method, the properties were
valued using capitalization rates in the range of 5.0% to 7.5% applied to a stabilized net operating income (2014 – 5.0% to
7.5%), resulting in an overall weighted average capitalization rate of 5.8% (2014 – 5.8%). The total stabilized annual net
operating income as at December 31, 2015, was $161,118 (2014 – $165,736). Values are most sensitive to changes in
discount rates, capitalization rates and timing or variability of cash flow.
Excluded from the above analysis is a retail property located in British Columbia where the highest and best use is a
redevelopment to mixed residential and commercial use. As at December 31, 2015, the value of the property is in the
underlying land value with minimal holding income, and it has been valued using recent comparable land sales.
Fair values are most sensitive to changes in discount rates, capitalization rates and stabilized or forecasted net operating
income. Generally an increase in net operating income will result in an increase in the fair value of the income producing
properties, and an increase in capitalization rates will result in a decrease in the fair value of the properties. The
capitalization rate magnifies the effect of a change in net operating income, with a lower capitalization rate resulting in a
greater impact to the fair value of the property than a higher capitalization rate. If the weighted average stabilized
capitalization rate were to increase or decrease by 25 basis points, the value of the income producing properties as at
December 31, 2015, would decrease by $114,789 or increase by $125,131, respectively.
Dispositions
The following table provides details of dispositions completed by the Trust during the reporting period:
Net
Date
Property
Property Name
Sold
Type
20-24 Lesmill, ON
May 15, 2015
Industrial
5591-5631 Finch, ON
April 1, 2015
Industrial
350 Sparks/361 Queen, ON
February 17, 2015
Office/Hotel
Cedar Pointe Business Park, ON
July 2, 2014
Industrial
MORGUARD.COM
Sale
Mortgage
Operating
GLA
Price
Payable
Income
27,577
$6,350
$—
$127
210,123
$10,000
$6,125
$177
86,372
$37,692
$17,835
$150
350,797
$41,900
$13,747
$1,218
60
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
Acquisitions
On June 4, 2014, the Trust and a major Canadian pension fund each acquired a 50% interest in a 35,000 square foot office
building located in Ottawa, Ontario, for a total purchase price of $4,037 plus other acquisition costs of $128. The Trust
accounted for the purchase as an asset acquisition.
The allocation of the total cost for the Trust’s 50% acquisition is as follows:
Total acquisition costs:
Purchase price – cash
Transaction costs
Total purchase price
$4,037
128
$4,165
On July 25, 2014, the Trust acquired the remaining 50% interest in a limited partnership that owns and operates a 78,000
square foot Class A office complex located in Calgary, Alberta, for a total purchase price of $19,000 plus other costs of $77.
The Trust accounted for the purchase as a business combination.
The allocation of the total cost for the Trust’s acquisition is as follows:
Total acquisition costs:
Purchase price – cash
Purchase price – assumed working capital
Other costs
Total purchase price
$11,549
7,451
77
$19,077
NOTE 6
EQUITY-ACCOUNTED INVESTMENTS
On December 22, 2011, the Trust and a major Canadian pension fund each acquired a 50% interest in a limited partnership
that owns and operates a 304,000 square foot Class A office complex located in downtown Edmonton, Alberta, in which the
Trust has a total original net investment of $28,008. The Trust has joint control over the limited partnership and accounts for
its investment using the equity method.
On December 22, 2011, the Trust and a major Canadian pension fund each acquired a 50% interest in a limited partnership
that owns and operates a 78,000 square foot Class A office complex located in Calgary, Alberta, in which the Trust had a
total original net investment of $8,666. The Trust had joint control over the limited partnership and accounted for its
investment using the equity method. The Trust acquired the remaining 50% interest in this limited partnership on July 25,
2014, and consolidates its 100% interest.
As at December 31
Balance, beginning of year
Equity income/(loss)
Distributions to partners
Contributions from partners
Reclassification adjustments on purchase:
Real estate properties
Mortgages payable
Other working capital
Balance, end of year
MORGUARD.COM
2015
2014
$30,770
$44,857
2,441
(2,360)
1,658
—
—
—
$32,509
(20)
(2,518)
—
(19,000)
7,581
(130)
$30,770
61
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
The following details the Trust’s share of the limited partnerships' aggregated assets, liabilities and results of operations
accounted for under the equity method for the following periods:
As at December 31
2015
2014
Real estate properties
Current assets
Total assets
$61,950
1,392
$63,342
$62,750
294
$63,044
Non-current liabilities
Current liabilities
Total liabilities
$28,306
2,527
$30,833
$29,225
3,049
$32,274
For the year ended December 31
2015
2014
Revenue from real estate properties
Property operating expenses
Net operating income
$6,561
2,172
4,389
$7,759
2,613
5,146
Other expenses
Fair value losses on real estate properties
Net income/(loss) for the year
(1,157)
(791)
$2,441
(1,330)
(3,836)
($20)
The real estate properties included above in the Trust's equity-accounted investments are appraised using a number of
approaches that typically include a discounted cash flow analysis, a direct capitalization approach and a direct comparison
approach. As at December 31, 2015, the property was valued using a discount rate of 7.0% (2014 – 7.0%), a terminal cap
rate of 6.3% (2014 – 6.3%) and a stabilized cap rate of 7.0% (2014 – 6.8%). The stabilized annual net operating income as
at December 31, 2015, was $4,337 (2014 – $4,236).
NOTE 7
CO-OWNERSHIP INTERESTS
The Trust is a co-owner in several properties, listed below, that are subject to joint control based on the Trust's decisionmaking authority with regards to the relevant activities of the properties. These co-ownerships have been classified as joint
operations and, accordingly, the Trust recognizes its rights to and obligations for the assets, liabilities, revenue and
expenses of these co-ownerships in the respective lines in the consolidated financial statements.
Property
Trust's Ownership Share
Jointly-Controlled Operations
Location
Type
505 Third Street
Scotia Place
Calgary, AB
Edmonton, AB
Grande Prairie, AB
Ottawa, ON
Ottawa, ON
Toronto, ON
Woodbridge, ON
Salaberry-de-Valleyfield, QC
St. Laurent, QC
Office
Office
Retail
Office
Office
Office
Retail
Industrial
Office
50%
20%
50%
50%
50%
50%
50%
50%
50%
50%
20%
50%
50%
50%
50%
50%
50%
50%
Ottawa, ON
Ottawa, ON
Office
Hotel
—
—
50%
50%
Prairie Mall
Heritage Place
Standard Life Centre
77 Bloor
Woodbridge Square
825 Des Erables
Place Innovation
2015
2014
Dispositions (see Notes 5 and 20)
350 Sparks
361 Queen
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
The following amounts, included in these consolidated financial statements, represent the Trust’s proportionate share of the
assets and liabilities of the nine co-ownerships as at December 31, 2015, and the 11 co-ownerships as at December 31,
2014, and the results of operations for the years ended December 31, 2015, and 2014:
As at December 31
Assets
Assets – properties held for sale
Liabilities
Liabilities – properties held for sale
For the year ended December 31
Revenue
Expenses
Income before fair value adjustments
Fair value losses on real estate properties
Net income for the year
2015
2014
$490,910
—
198,149
—
$483,792
38,531
199,192
18,803
2015
2014
$55,270
34,223
21,047
(3,749)
$17,298
$57,151
35,924
21,227
(10,434)
$10,793
NOTE 8
MORTGAGES PAYABLE
Mortgages payable consist of the following:
As at December 31
2015
2014
Mortgages payable before deferred financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
$1,175,880
1
(3,546)
$1,172,335
$1,186,480
11
(4,035)
$1,182,456
Mortgages payable – non-current
Mortgages payable – current
Mortgages payable
$1,082,799
89,536
$1,172,335
$1,111,360
71,096
$1,182,456
The aggregate principal repayments and balances maturing on the mortgages payable as at December 31, 2015, together
with the weighted average contractual rate on debt maturing in the year indicated, are as follows:
2016
2017
2018
2019
2020
Thereafter
Principal
Instalment
Repayments
Balances
Maturing
$34,454
34,121
32,155
26,724
25,627
49,656
$202,737
$55,786
50,289
55,464
162,122
114,493
534,989
$973,143
Weighted Average
Contractual Rate on
Total
Balance Maturing
$90,240
84,410
87,619
188,846
140,120
584,645
$1,175,880
4.1%
4.5%
4.4%
3.6%
4.6%
4.1%
4.1%
Substantially all of the Trust’s rental properties and related rental revenues have been pledged as collateral for the
mortgages payable.
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63
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
NOTE 9
CONVERTIBLE DEBENTURES PAYABLE
2012 Debentures
On October 31, 2012, the Trust issued a $150,000 principal amount of 4.85% convertible unsecured subordinated
Debentures (“2012 Debentures”) maturing on October 31, 2017 (the “Maturity Date”), of which a $50,000 principal amount
was purchased by Morguard at the offering price.
Interest is payable semi-annually, not in advance, on April 30 and October 31 of each year, commencing on April 30, 2013.
The Trust’s convertible debentures, with the exception of the value assigned to the holders’ conversion option, have been
recorded as debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount
and related issue costs of the debentures at the date of original issue. The portion of issue costs attributable to the liability
of $4,182 has been capitalized and will be amortized over the term to maturity, while the remaining amount of $46 has been
charged to equity.
Principal
Amount Issued
Transaction date – October 31, 2012
Issue costs
$150,000
(4,228)
$145,772
Liability
Equity
$148,428
(4,182)
$144,246
$1,572
(46)
$1,526
Each 2012 Debenture is convertible into freely tradable units of the Trust at the option of the holder, exercisable at any time
prior to the close of business on the last business day preceding the maturity date at a conversion price of $24.60 (the
“Conversion Price”) per unit being a rate of approximately 40.6504 units per thousand principal amount of 2012 Debentures,
subject to adjustment.
As at December 31, 2015, $15 (2014 – $15) of the 2012 Debentures had been converted into 609 (2014 – 609) units. The
liability and equity component of these debentures has been included in unitholders’ equity under issue of units.
As at December 31, 2015, the 2012 Debentures payable consist of the following:
As at December 31
2015
Convertible debentures payable – liability
Convertible debentures payable – accretion
Debentures converted
Convertible debentures payable before issue costs
Issue costs
Convertible debentures payable
$148,428
946
(15)
149,359
(1,661)
$147,698
2014
$148,428
630
(15)
149,043
(2,502)
$146,541
Interest and principal payments on the 2012 Debentures are as follows:
2016
2017
Interest
Principal
Total
$7,274
7,274
$14,548
$—
149,985
$149,985
$7,274
157,259
$164,533
Redemption Rights
Each 2012 Debenture is redeemable any time from November 1, 2015, to the close of business on October 31, 2016, in
whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and unpaid interest, at the
Trust’s sole option provided that the weighted average trading price of the units on the Toronto Stock Exchange ("TSX") for
the 20 consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not
less than 125% of the conversion price.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
From November 1, 2016, to the close of business on October 31, 2017, the 2012 Debentures are redeemable, in whole or in
part, at par plus accrued and unpaid interest, at the Trust’s sole option.
Repayment Options
Payment Upon Redemption or Maturity
The Trust may satisfy its obligation to repay the principal amounts of the 2012 Debentures, in whole or in part, by delivering
units of the Trust. In the event that the Trust elects to satisfy its obligation to repay principal with units of the Trust, the
number of units issued is obtained by dividing the principal amount of the 2012 Debentures by 95% of the weighted average
trading price of the units on the TSX for the 20 consecutive trading days ending five trading days prior to the date fixed for
redemption or the maturity date, as applicable.
Interest Payment Election
The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the Trust to the Debenture
Trustee in order to raise funds to pay interest on the 2012 Debentures, in which event the holders of the 2012 Debentures
will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale of such units.
NOTE 10
BANK INDEBTEDNESS
The Trust has credit facilities and operating lines of credit totalling $70,000 (2014 – $70,000), that renew annually and are
secured by fixed charges on specific properties owned by the Trust.
As at December 31, 2015, the Trust had borrowed $nil (2014 – $4,927) and issued letters of credit in the amount of $286
(2014 – $290) related to these facilities.
The bank credit agreements include certain restrictive covenants and undertakings by the Trust. As at December 31, 2015,
and 2014, the Trust was in compliance with all covenants and undertakings. As the bank indebtedness is current and at
prevailing market rates, the carrying value of the debt as at December 31, 2015, approximates fair value.
NOTE 11
INTEREST EXPENSE
The components of interest expense are as follows:
For the year ended December 31
Interest on mortgages payable
Amortization – deferred financing costs – mortgages
Amortization – premium on acquired debt
Interest on mortgages payable
Interest on convertible debentures payable
Accretion on convertible debentures payable, net
Amortization – deferred financing costs – convertible debentures
Interest on convertible debentures payable
Interest on bank indebtedness
Amortization – cash flow hedges
Interest on loan payable and other
Capitalized interest
Interest on loans payable and other
MORGUARD.COM
2015
$49,262
811
(10)
50,063
2014
$51,178
767
(131)
51,814
7,274
316
841
8,431
7,275
299
797
8,371
32
134
935
155
(635)
455
$58,981
1,010
878
(207)
1,681
$62,000
65
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
NOTE 12
RELATED PARTY TRANSACTIONS
With the exception of Note 20, all related party transactions are summarized as follows:
(a) Agreement With Morguard Investments Limited
Under the property management agreement, the Trust pays MIL fees for property management services, capital expenditure
administration, information system support activities and risk management administration. Property management fees
average approximately 3.3% of gross revenue from the income producing properties owned by the Trust. The management
agreement is renewed annually to ensure fees paid reflect fair value for the services provided. Under a leasing services
arrangement, the Trust may, at its option, use MIL for leasing services. Leasing fees range from 2% to 6% of the total
minimum rent of new leases. Fees for the renewal of a lease are half of the fees for a new lease. Leasing services include
lease documentation.
The Trust has employed the services of MIL for the acquisition of properties on a case-by-case basis. Fees are generally
based on the acquisition price of the properties and are capitalized in the case of an asset acquisition. MIL is a tenant at
three of the Trust’s properties. The Trust has employed the services of MIL for the appraisal of its real estate properties as
required for IFRS reporting purposes. Fees are generally based on the size and complexity of each property and are
expensed as part of the Trust’s professional and compliance fees.
During the year, the Trust incurred/(earned) the following:
For the year ended December 31
Property management fees
Acquisition fees
Disposition fees
Appraisal/valuation fees
Information services
Leasing fees
Project administration fees
Project management fees
Risk management fees
Internal audit fees
Off-site administrative charges
Rental revenue
2015
$9,522
—
97
370
220
2,880
1,087
491
282
110
1,761
(230)
$16,590
2014
$9,713
85
240
388
220
3,274
1,060
596
283
149
1,837
(338)
$17,507
The following amounts relating to MIL are included in the consolidated balance sheets:
December 31,
December 31,
As at December 31
2015
2014
Accounts payable and accrued liabilities, net
$898
$1,149
(b) Revolving Loan With Morguard
The Trust has a revolving loan agreement with Morguard that provides for borrowings or advances of up to $50,000. The
promissory notes are interest-bearing at the lender’s borrowing rate and are due on demand subject to available funds. On
December 10, 2013, the revolving loan agreement was temporarily amended for a period of 60 days for either party to
borrow up to $90,000 at the same interest rate terms. The temporary amendment expired on February 10, 2014.
Loan Payable to Morguard
During the year ended December 31, 2015, there were no advances or repayments, and as at December 31, 2015 and
2014, there was no loan payable owing to Morguard. During the year ended December 31, 2015, the Trust did not incur
interest expense on loans payable to Morguard (2014 – $764).
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
Loan Receivable From Morguard
During the year ended December 31, 2015, a gross amount of $36,000 was advanced to Morguard, and $66,000 was
repaid. As at December 31, 2015, the total amount receivable from Morguard was $nil (2014 – $30,000). For the year
ended December 31, 2015, interest income amounted to $568 (2014 – $353), at an interest rate of 2.19% (2014 – 2.44%).
(c) Sublease With Morguard (Excluding MIL)
The Trust subleases office space from Morguard. For the year ended December 31, 2015, the Trust incurred rent expense
in the amount of $195 (2014 – $181).
(d) Stock-Based Compensation With Morguard
Morguard has granted certain officers of the Trust SARs, which entitle such officers to receive a cash payment equal to the
excess of the market price of Morguard’s common shares at the time of exercise over the exercise price of the right. The
SARs granted generally vest over 10 years. The fair values of these SARs are charged to the Trust by Morguard and are
recorded as compensation expense by the Trust over their respective vesting periods. On March 20, 2008, 30,000 SARs
were granted at an exercise price of $30.74. As at December 31, 2015, no further SARs have been granted.
As at December 31, 2015 and 2014, there were no SARs payable outstanding. For the year ended December 31, 2015, the
compensation expense amounted to $nil (2014 – $397).
(e) Amounts Receivable From and Accounts Payable to Morguard (Excluding MIL)
Other than the revolving loan, the following additional amounts relating to Morguard are included in the consolidated
balance sheets:
As at December 31
2015
2014
Amounts receivable
Accounts payable and accrued liabilities
$271
$4
$—
$8
(f) Rental Revenue From Morguard (Excluding MIL)
Morguard is a tenant in one of the Trust’s properties. For the year ended December 31, 2015, the Trust earned rental
revenue in the amount of $109 (2014 – $104).
NOTE 13
EXPENSES
(a) Property Operating Expenses
Property operating expenses consist of the following:
For the year ended December 31
Property taxes
Repairs and maintenance
Utilities
Other operating expenses
2015
2014
$53,157
28,078
15,354
19,057
$115,646
$52,813
28,700
17,027
20,599
$119,139
2015
2014
$268
1,518
2,581
$4,367
$289
1,716
3,409
$5,414
(b) General and Administrative
General and administrative expenses consist of the following:
For the year ended December 31
Trustees’ fees and expenses
Professional and compliance fees
Other administrative expenses
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
NOTE 14
UNITHOLDERS' EQUITY
(a) Units Outstanding
The Trust is authorized to issue an unlimited number of units. The following table summarizes the changes in units for the
period from January 1, 2014, to December 31, 2015:
As at December 31
Balance, beginning of year
Distribution Reinvestment Plan
Debentures converted
Repurchase of units
Balance, end of year
2015
62,167,654
52,022
—
(1,328,022)
60,891,654
2014
62,221,836
45,209
609
(100,000)
62,167,654
Total distributions recorded, accrued and paid during the year ended December 31, 2015, amounted to $58,452 (2014 –
$58,891). On January 15, 2016, the Trust declared a distribution in the amount of $0.08 per unit for the month of January
2016. This distribution was paid to unitholders on February 16, 2016, prior to the date the consolidated financial statements
were authorized for issue by the Board of Trustees of the Trust. On February 16, 2016, the Trust declared a distribution of
$0.08 per unit payable on March 15, 2016.
(b) Normal Course Issuer Bids
On January 22, 2015, the Trust announced that the TSX had accepted notice filed by the Trust of its intention to make a
normal course issuer bid. The notice provided that during the 12-month period commencing January 28, 2015, and ending
January 27, 2016, the Trust may purchase for cancellation on the TSX up to 3,247,282 units in total, being approximately
10% of the public float of outstanding units. Additionally, the Trust may purchase for cancellation up to $9,999 principal
amount of the 2012 Debentures due on the maturity date, 10% of the public float of outstanding 2012 Debentures. The
price that the Trust would pay for any such units or debentures would be the market price at the time of acquisition.
During the year ended December 31, 2015, the Trust purchased for cancellation 1,328,022 units (2014 –100,000 units) for
cash consideration of $20,041 (2014 – $1,673). The excess of the purchase price of the units over the average carrying
value was $6,673 (2014 – $667).
(c) Distribution Reinvestment Plan
Under the Trust’s Distribution Reinvestment Plan (the “DRIP”), unitholders can elect to reinvest cash distributions into
additional units at a weighted average trading price of the units on the TSX for the 20 trading days immediately preceding
the applicable date of distribution. During the year ended December 31, 2015, the Trust issued 52,022 units under the
DRIP (2014 – 45,209 units).
(d) Net Income Per Unit
The following table sets forth the computation of basic and diluted net income per unit:
For the year ended December 31
2015
2014
$26,617
$26,617
$113,882
$122,253
61,779
61,779
62,168
71,093
Net income per unit – basic
$0.43
$1.83
Net income per unit – diluted
$0.43
$1.72
Net income – basic
Net income – diluted
Weighted average number of units outstanding – basic
Weighted average number of units outstanding – diluted
To calculate net income for the calculation of diluted income per unit, interest, accretion and the amortization of financing
costs on convertible debentures outstanding that were expensed during the year are added back to net income. The
calculation of diluted net income per unit excludes the impact of the convertible debentures for the year ended
December 31, 2015, as their inclusion would be anti-dilutive. The weighted average number of units outstanding for the
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
calculation of diluted income per unit is calculated as if all convertible debentures outstanding as at December 31, 2014,
had been converted into units of the Trust at the beginning of the period.
NOTE 15
CONSOLIDATED STATEMENT OF CASH FLOWS
(a) Items Not Affecting Operating Cash
For the year ended December 31
2015
2014
Fair value losses/(gains) on real estate properties, excluding properties held for sale
Fair value losses on real estate properties held for sale
Net income/(loss) from equity-accounted investments
Loss on sale of real estate properties
Amortized stepped rent
Amortized free rent
Amortization – cash flow hedges
Amortization – deferred financing costs – mortgages
$78,780
197
(2,441)
—
(2,104)
(1,025)
935
811
($11,239)
—
20
37
(2,440)
(126)
1,010
767
Amortization – tenant incentive
Amortization – deferred financing costs – convertible debentures
Accretion of convertible debentures
368
841
316
$76,678
308
797
299
($10,567)
(b) Net Change in Non-Cash Operating Assets and Liabilities
For the year ended December 31
Amounts receivable
Prepaid expenses and other assets
Accounts payable, accrued and other liabilities
Other supplemental cash flow information consists of the following:
Interest paid
Issue of units – DRIP
Issue of units – conversion of debentures
Mortgage payable transferred on sale of real estate properties
2015
2014
($376)
99
(1,779)
($2,056)
$2,024
31
735
$2,790
$56,913
$788
$—
$17,835
$59,006
$791
$15
$—
NOTE 16
INCOME TAXES
The Trust has reviewed its status under the legislation and has determined that it is not subject to income tax as it met the
REIT exception throughout 2015. Accordingly, no current income tax expense or future income tax assets or liabilities have
been recorded in these consolidated financial statements.
NOTE 17
COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Trust has entered into various agreements relating to capital expenditures for its properties. These expenditures
include development of new space, redevelopment or retrofit of existing space, and other capital expenditures. Should all
conditions be met, as at December 31, 2015, committed capital expenditures in the next 12 months are estimated at
$29,900.
The Trust has various other contractual obligations in the normal course of operations. These contracts can be generally
cancelled with 30 days' notice.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
The Trust is committed to making the following annual payments under a ground lease to the year 2065 for the land upon
which one of the properties is situated:
March 1, 2011, to February 28, 2021
Subsequent to February 28, 2021
$714
Fair market value of land in February 2021 multiplied by 8.5% per annum
Effective November 17, 2013, the Trust entered into an operating sublease agreement with Morguard, expiring on
November 15, 2023. Annual rent agreement amounts to approximately $193.
In addition to the above-mentioned contractual obligations, the Trust has entered into equipment operating leases with
terms ranging to 2020. The remaining payments for the leases are as follows:
2016
2017
2018
2019
2020
$115
42
23
22
9
(b) Contingencies
The Trust is contingently liable with respect to litigation, claims and environmental matters that arise from time to time,
including those that could result in mandatory damages or other relief, which could result in significant expenditures. While
the outcome of these matters cannot be predicted with certainty, in the opinion of management, any liability that may arise
from such contingencies would not have a material adverse effect on the financial position or results of operations of the
Trust. Any expected settlement of claims in excess of amounts recorded will be charged to operations as and when such
determination is made.
NOTE 18
MANAGEMENT OF CAPITAL
The Trust defines capital that it manages as the aggregate of its unitholders’ equity and interest-bearing debt less cash and
cash equivalents and interest-bearing receivables. The Trust’s objective when managing capital is to ensure that the Trust
will continue as a going concern so that it can sustain daily operations and provide adequate returns to its unitholders.
The Trust is subject to risks associated with debt financing, including the possibility that existing mortgages may not be
refinanced or may not be refinanced on as favourable terms or with interest rates as favourable as those of the existing
debt. The Trust mitigates these risks by its continued efforts to stagger the maturity profile of its long-term debt, to enhance
the value of its real estate properties and to maintain high occupancy levels. The Trust manages its capital structure and
makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.
The total managed capital for the Trust is summarized below:
As at December 31
Total mortgages payable (including held for sale)
Convertible debentures payable
Bank indebtedness
Cash and cash equivalents
Loan receivable
Unitholders’ equity
Note
12(b)
2015
$1,172,335
147,698
—
(26,282)
—
1,556,140
$2,849,891
2014
$1,212,186
146,541
4,927
(12,612)
(30,000)
1,607,081
$2,928,123
The Trust’s Declaration of Trust permits the Trust to incur indebtedness, provided that after giving effect to incurring or
assuming any indebtedness (as defined in the Declaration of Trust), the amount of all indebtedness of the Trust is not more
than 60% of the gross book value of the Trust’s total assets as defined in the Declaration of Trust. The Declaration of Trust
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
also permits the Trust to incur floating-rate debt, provided that the total amount of all floating-rate debt of the Trust is not
more than 15% of the gross book value of the Trust’s total assets.
The Trust’s debt ratios compared to its borrowing limits established in the Declaration of Trust are outlined in the table
below:
As at December 31
Fixed-rate debt to gross book value of total assets
Floating-rate debt to gross book value of total assets
Borrowing Limits
—%
15%
60%
2015
2014
45.2%
—%
45.2%
45.0%
0.2%
45.2%
As at December 31, 2015, the Trust met all externally imposed ratios and minimum equity requirements.
Mortgages Payable
All mortgages payable in place for the Trust are secured against the real property assets and, as a result, have been
relieved from having restrictive financial covenant requirements.
Convertible Debentures Payable
The Trust’s unsecured subordinated convertible debentures payable have no restrictive covenants.
Bank Indebtedness
The Trust’s loan agreements permit the Trust to incur indebtedness. The loan agreements are fixed amounts that renew
annually and are secured by fixed charges on specific properties owned by the Trust.
NOTE 19
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Trust’s financial assets and liabilities comprise cash and cash equivalents, amounts receivable, accounts payable and
accrued liabilities, bank indebtedness, mortgages payable and convertible debentures payable. Fair values of financial
assets and liabilities and discussion of risks associated with financial assets and liabilities are presented as follows.
Fair Value of Financial Assets and Liabilities
The fair values of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities, bank
indebtedness and loan payable approximate their carrying values due to the short-term maturities of these instruments.
(a) Mortgages Payable
Mortgages payable are carried at amortized cost using the effective interest rate method of amortization. The estimated fair
values of long-term borrowings are based on market information, where available, or by discounting future payments of
interest and principal at estimated interest rates expected to be available to the Trust at period-end.
The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations
using December 31, 2015, market rates for debts of similar terms (Level 2). Based on these assumptions, the fair value as
at December 31, 2015, of the mortgages payable has been estimated at $1,246,560 (2014 – $1,241,108), compared with
the carrying value before deferred financing costs and premium on acquired debt of $1,175,880 (2014 – $1,186,480). The
fair value of the mortgages payable varies from the carrying value due to fluctuations in interest rates since their issue.
(b) Convertible Debentures Payable
The fair value of the convertible debentures payable is based on their market trading price (TSX: MRT.DB.A) (Level 1). The
fair value as at December 31, 2015, of the convertible debentures payable has been estimated at $152,235 (2014 –
$154,500), compared with the carrying value before deferred financing costs of $149,359 (2014 – $149,043).
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
(c) Fair Value Hierarchy of Real Estate Properties
The fair value hierarchy of income producing properties, properties under development and land held for development
measured at fair value in the consolidated balance sheets is as follows:
December 31, 2015
As at
December 31, 2014
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$—
$—
$—
$—
$—
$—
$2,816,124
$2,524
$28,750
$—
$—
$—
$—
$—
$—
$2,822,074
$16,511
$27,650
ASSETS:
Income producing properties
Properties under development
Land held for development
Risks Associated With Financial Assets and Liabilities
The Trust is exposed to financial risks arising from its financial assets and liabilities. The financial risks include interest rate
risk, credit risk and liquidity risk. The Trust’s overall risk management program focuses on establishing policies to identify
and analyze the risks faced by the Trust, to set appropriate risk limits and controls, and to monitor risks and adherence to
limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the
Trust’s activities. The Trust aims to develop a disciplined control environment in which all employees understand their roles
and obligations.
Market Risk
Market risk, the risk that the fair value or future cash flows of financial assets or liabilities will fluctuate due to movements in
market prices, comprises the following:
(i) Interest Rate Risk
The Trust is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not
be able to be refinanced on terms as favourable as those of the existing indebtedness. Interest on the Trust's bank
indebtedness is subject to floating interest rates. The Trust mitigates these risks by its continued efforts to enhance the
value of its real estate properties, to maintain high occupancy levels to meet its debt obligations and to foster excellent
relations with its lenders. For the year ended December 31, 2015, the average increase or decrease in net income for each
1% change in interest rates paid on floating debt amounts to $nil.
The Trusts objective in managing interest rate risk is to minimize the volatility of the Trust's earnings. As at December 31,
2015, interest rate risk has been minimized because all long-term debt is financed at fixed interest rates with maturities
scheduled over a number of years.
(ii) Credit Risk
Credit risk arises from the possibility that tenants and/or debtors may experience financial difficulty and be unable or
unwilling to fulfill their lease commitments. The Trust mitigates the risk of loss by investing in well-located properties in
urban markets that attract quality tenants, by ensuring that its tenant mix is diversified and by limiting its exposure to any
one tenant. A tenant's success over the term of its lease and its ability to fulfill its obligations are subject to many factors.
There can be no assurance that a tenant will be able to fulfill all of its existing commitments and leases up to the expiry
date.
The Trust's commercial leases typically have a lease term between five and 10 years, and may include clauses to enable
periodic upward revision of the rental rates, and contractual extensions at the option of the lessee.
Future minimum annual rental receipts on non-cancellable tenant operating leases are as follows:
For the year ended December 31
Not later than one year
Later than 1 year and not later than 5 years
Later than 5 years
2015
2014
$155,298
493,959
354,582
$1,003,839
$161,903
498,862
402,139
$1,062,904
The objective in managing credit risk is to mitigate exposure through the use of approved policies governing the Trust's
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
credit practices that limit transactions according to counterparties' credit quality.
The carrying value of amounts receivable is reduced through the use of an allowance account, and the amount of the loss is
recognized in the consolidated statement of income within property operating expenses. When a receivable balance is
considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts
previously written off are credited against operating expenses in the consolidated statement of income.
The following table sets forth details of amounts receivable and related allowance for doubtful accounts:
As at December 31
2015
2014
AMOUNTS RECEIVABLE:
Trade receivables
Less: Allowance for doubtful accounts
Trade receivables, net
Loans receivable
Total amounts receivable, net
$13,784
(773)
$13,011
—
$13,011
$13,377
(742)
$12,635
30,000
$42,635
(iii) Liquidity Risk
Liquidity risk is the risk that the Trust will encounter difficulties in meeting its financial obligations. The Trust will be subject
to the risks associated with debt financing, including the risk that mortgages, convertible debentures and credit facilities will
not be able to be refinanced. The Trust's objectives in minimizing liquidity risk are to maintain appropriate levels of leverage
of its real estate assets and to stagger its debt maturity profile. As at December 31, 2015, the Trust was holding cash and
cash equivalents in the amount of $26,282 (2014 – $12,612). The Trust also had undrawn lines of credit available in the
amount of $69,714 (2014 – $64,783).
NOTE 20
REAL ESTATE PROPERTIES HELD FOR SALE
Real estate properties held for sale are assets that the Trust intends to sell rather than hold on a long-term basis and meet
the criteria established in IFRS 5 for separate classification. As at December 31, 2014, the Trust's properties held for sale
comprised a 50% interest in a mixed-use office and hotel complex, 350 Sparks and 361 Queen, located in downtown
Ottawa, and three industrial properties, 5591-5631 Finch, 2041-2141 McCowan and 20-24 Lesmill, all located in Toronto.
On November 4, 2014, the Trust, upon the recommendation of a special committee comprising independent trustees,
executed an agreement to sell its 50% interest in 350 Sparks and 361 Queen, to Morguard, the existing 50% co-owner of
these properties. On February 17, 2015, the Trust completed the sale to Morguard, for a total price of $37,692. The
transaction included an assumption of the existing mortgage debt of $17,835.
On December 10, 2014, the Trust entered into an agreement to sell 20-24 Lesmill. On May 15, 2015, the Trust completed
the sale of this property for a total price of $6,350, less selling costs.
On March 2, 2015, the Trust entered into an agreement to sell 5591-5631 Finch. On April 1, 2015, the Trust completed the
sale of this property for a total price of $10,000, less selling costs.
On September 30, 2015, the Trust revised its view on 2041-2141 McCowan to a long-term hold. As a result, the property no
longer met the criteria established in IFRS 5 for separate classification as real estate properties held for sale and,
accordingly, was reclassified to the Trust's core income producing property portfolio.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
NOTE 21
SEGMENTED INFORMATION
IFRS 8, "Operating Segments", requires operating segments to be determined based on internal reports that are regularly
reviewed by the chief operating decision-makers for the purpose of allocating resources to the segment and assessing its
performance. The Trust has applied judgment by aggregating its operating segments according to the nature of the
property operations. Such judgment considers the nature of operations, types of customers and an expectation that
operating segments within a reportable segment have similar long-term economic characteristics. As at December 31,
2015, the Trust has the following three reportable segments: retail, office and industrial.
Business Segments
The following presents financial information for these segments:
For the year ended December 31, 2015
Retail
Office
Industrial
Total
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
$151,803
58,534
$133,463
54,866
4,162
74,435
$5,716
2,246
162
3,308
$290,982
115,646
9,406
165,930
Net income from equity-accounted investments
Interest expense – direct
Fair value losses/(gains) on real estate properties
Segment profit
Interest expense – indirect
General and administrative
Other income
Net income for the year
Real estate properties
Additions to real estate properties
Mortgages payable
MORGUARD.COM
5,082
88,187
—
27,821
30,943
29,423
(2,441)
21,321
48,305
7,250
—
1,221
(271)
2,358
(2,441)
50,363
78,977
39,031
4,496
2,278
—
$22,649
3,953
2,003
—
$1,294
169
86
(571)
$2,674
8,618
4,367
(571)
$26,617
$1,614,789
$1,185,284
$47,325
$2,847,398
$31,793
$15,487
$444
$47,724
$643,778
$512,798
$15,759
$1,172,335
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015
For the year ended December 31, 2014
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
Net loss from equity-accounted investments
Interest expense – direct
Fair value (gains)/losses on real estate properties
Segment profit/(loss)
Interest expense – indirect
General and administrative
Other income
Loss on sale of real estate properties
Net income/(loss) for the year
Real estate properties
Additions to real estate properties
Mortgages payable
Retail
Office
Industrial
Total
$155,481
58,792
5,130
91,559
$135,764
56,939
4,253
74,572
$7,216
3,408
200
3,608
$298,461
119,139
9,583
169,739
—
28,979
20
22,353
6,860
45,339
—
1,289
2,611
(292)
20
52,621
(11,239)
128,337
—
—
$75,584
4,266
2,463
—
37
$38,573
227
131
(375)
—
($275)
9,379
5,414
(375)
37
$113,882
$1,613,592
$1,215,718
$36,925
$2,866,235
$30,941
$35,714
$1,957
$68,612
$672,246
$499,430
$10,780
$1,182,456
(20,710)
83,290
4,886
2,820
NOTE 22
SUBSEQUENT EVENTS
On January 21, 2016, the Trust announced that the TSX had accepted notice filed by the Trust of its intention to make a
normal course issuer bid. The notice provided that during the 12-month period commencing January 28, 2016, and ending
January 27, 2017, the Trust may purchase for cancellation on the TSX up to 3,044,583 units in total, being approximately
5% of the outstanding units. Additionally, the Trust may purchase for cancellation up to $9,999 principal amount of the 2012
Debentures due on the maturity date, 10% of the public float of outstanding 2012 Debentures. The price that the Trust
would pay for any such units or debentures would be the market price at the time of acquisition.
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