mrc fs q4 2015 - morguard home corporation/financial... · title: mrc fs q4 2015 created date:...

MORGUARD CORPORATION

DECEMBER 31, 2015

CONSOLIDATEDFINANCIAL STATEMENTS

MANAGEMENT’S REPORT TO SHAREHOLDERS

The consolidated financial statements of Morguard Corporation (the “Company” or ‘Morguard”) have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”). Management is responsible for the information contained in these consolidated financial statements and other sections of this annual report. Management maintains a system of internal controls to provide reasonable assurance that the Company’s assets are safeguarded and to facilitate the preparation of relevant, reliable and timely financial information. Where necessary, management uses its judgment to make estimates required to ensure fair and consistent presentation of this information. Management recognizes its responsibility for conducting the Company’s affairs in compliance with applicable laws and proper standards of conduct.

As at December 31, 2015, the Chief Executive Officer and Chief Financial Officer evaluated, or caused the evaluation under their direct supervision, the disclosure controls and procedures and the internal controls over financial reporting (as defined in Multilateral Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings) and, based on that assessment, determined that the disclosure controls and procedures were designed and operating effectively and the internal controls over financial reporting were designed and operating effectively.

The Audit Committee of the Board of Directors of the Company, consisting solely of independent directors, has reviewed the consolidated financial statements, the report to shareholders of the external auditors, Ernst & Young LLP, and the management’s discussion and analysis with management and recommended their approval to the Board of Directors. The Board of Directors has approved the consolidated financial statements.

Ernst & Young LLP, as independent auditor, has conducted the audits in accordance with Canadian generally accepted auditing standards and has had full access to the Audit Committee, with and without management being present.

(Signed) “K. (Rai) Sahi” (Signed) “Paul Miatello”

K. (Rai) Sahi Paul MiatelloChief Executive Officer Chief Financial Officer

INDEPENDENT AUDITORS’ REPORT

To the Shareholders of Morguard CorporationWe have audited the accompanying consolidated financial statements of Morguard Corporation, which comprise the consolidated balance sheets as at December 31, 2015 and 2014, and the consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial 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.

Auditors’ ResponsibilityOur 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.

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Morguard Corporation 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.

Chartered Professional Accountants Licensed Public Accountants Toronto, Canada February 25, 2016

“Ernst & Young LLP”

MORGUARD CORPORATIONCONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015

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BALANCE SHEETSIn thousands of Canadian dollars

As at December 31, Note 2015 2014ASSETSNon-current assetsReal estate properties 5 $7,925,645 $7,453,226Equity-accounted and other investments 7(a) 329,320 147,635Other assets 8 158,245 146,130

8,413,210 7,746,991Current assetsMortgages and loans receivable 9 26,579 62,949Amounts receivable 52,050 48,522Prepaid expenses and other 16,789 12,074Cash 93,504 123,148

188,922 246,693$8,602,132 $7,993,684

LIABILITIES AND SHAREHOLDERS’ EQUITYNon-current liabilities

Mortgages payable 10 $3,367,638 $3,016,549

Unsecured debentures 11 134,228 133,964

Convertible debentures 12 154,440 154,758

Morguard Residential REIT units 13 229,416 215,211

Deferred income tax liabilities 23 538,197 446,546

4,423,919 3,967,028

Current liabilities

Mortgages payable 10 231,916 316,170

Construction financing payable 14 143,489 165,271

Loans payable 15 9,568 2,320

Accounts payable and accrued liabilities 16 175,840 179,381

Bank indebtedness 17 135,403 4,927

696,216 668,069

Total liabilities 5,120,135 4,635,097

EQUITYShareholders’ equity 2,697,724 2,498,605

Non-controlling interest 784,273 859,982

Total equity 3,481,997 3,358,587

$8,602,132 $7,993,684

Commitments and contingencies 27

See accompanying notes to the consolidated financial statements.

On behalf of the Board:

(Signed) “K. (Rai) Sahi” (Signed) “Bruce K. Robertson”

K. (Rai) Sahi, Bruce K. Robertson, Director Director


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STATEMENTS OF INCOME In thousands of Canadian dollars, except per common share amounts

For the years ended December 31, Note 2015 2014

Revenue from real estate properties $808,595 $472,808

Property operating expenses

Property operating costs 195,548 137,519

Utilities 54,053 34,671

Realty tax expense 123,095 59,425

Net operating income 435,899 241,193

OTHER REVENUEManagement and advisory fees 59,536 73,440

Interest and other income 7,819 14,970

Sales of product and land 7,609 5,108

74,964 93,518

EXPENSESInterest 19 148,784 105,377

Property management and corporate 72,558 68,977

Cost of sales of product and land 5,130 3,541

Amortization of capital assets and other 8,276 5,375

234,748 183,270

OTHER INCOME (EXPENSE)Fair value gain (loss), net 20 (87,301) 24,277

Equity income from investments 7(b) 6,258 52,921

Loss on business combination, net — (16,254)

Other expense 22 (12,822) (8,488)

(93,865) 52,456

Income before income taxes 182,250 203,897

Provision for income taxes 23

Current 14,005 20,690

Deferred 64,725 45,950

78,730 66,640

Net income for the year $103,520 $137,257

Net income attributable to: Common shareholders $80,542 $136,703 Non-controlling interest 22,978 554

$103,520 $137,257

Net income per common share attributable to: Common shareholders - basic and diluted 24 $6.58 $10.92



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STATEMENTS OF COMPREHENSIVE INCOMEIn thousands of Canadian dollars


Net income for the year $103,520 $137,257

OTHER COMPREHENSIVE INCOMEItems that may be reclassified subsequently to net income:Unrealized gain on available-for-sale marketable securities 733 2,626Unrealized gain on investments in real estate funds 9,898 4,732Reclassification of gain (loss) on available-for-sale marketable securities (1,480) 8,417

Unrealized foreign currency translation gain 150,928 59,231

Loss on interest rate swap agreement (530) (538)

Amortization of cash flow hedge 845 854Amortization of cash flow hedge - Morguard REIT — 453

160,394 75,775

Deferred income tax provision (4,330) (3,084)

156,064 72,691

Items that will not be reclassified subsequently to net income:

Actuarial loss on defined benefit pension plans 26 (5,698) (1,401)

Deferred income tax recovery 1,494 349

(4,204) (1,052)

Other comprehensive income 151,860 71,639

Total comprehensive income for the year $255,380 $208,896

Total comprehensive income attributable to: Common shareholders $230,893 $208,216 Non-controlling interest 24,487 680

$255,380 $208,896



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STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

In thousands of Canadian dollars

NoteRetained Earnings

AccumulatedOther

ComprehensiveIncome

ShareCapital

TotalShareholders’

Equity

Non-Controlling

Interest Total

Shareholders’ equity, January 1, 2014 $2,166,631 $51,103 $112,238 $2,329,972 $15,538 $2,345,510

Changes during the period:

Net income 136,703 — — 136,703 554 137,257

Other comprehensive income — 71,513 — 71,513 126 71,639

Dividends (7,476) — — (7,476) — (7,476)

Distributions — — — — (1,372) (1,372)

Issuance of common shares — — 53 53 — 53

Repurchase of common shares (30,079) — (2,081) (32,160) — (32,160)

Business combination of Morguard REIT — — — — 845,136 845,136

Shareholders’ equity, December 31, 2014 2,265,779 122,616 110,210 2,498,605 859,982 3,358,587

Changes during the period:

Net income 80,542 — — 80,542 22,978 103,520Other comprehensive income — 150,351 — 150,351 1,509 151,860Dividends 18(a) (7,305) — — (7,305) — (7,305)Distributions — — — — (33,000) (33,000)Contribution from non-controlling interest — — — — 17,354 17,354Issuance of common shares 18(a) — — 1,201 1,201 — 1,201Repurchase of common shares 18(a) (50,387) — (3,314) (53,701) — (53,701)Change in ownership of Morguard REIT 18(b) 28,031 — — 28,031 (89,208) (61,177)Business combination 8 — — — — 4,658 4,658

Shareholders' equity, December 31, 2015 $2,316,660 $272,967 $108,097 $2,697,724 $784,273 $3,481,997



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STATEMENTS OF CASH FLOWSIn thousands of Canadian dollars


OPERATING ACTIVITIESNet income $103,520 $137,257Add (deduct) items not affecting cash 25(a) 138,046 (16,465)Distributions from equity-accounted investments 4,445 29,049Land held for residential development and sale 8 713 45Additions to tenant incentives and leasing commissions 5 (7,434) (2,198)Net change in operating assets and liabilities 25(b) (13,794) (5,694)Cash provided by operating activities 225,496 141,994

INVESTING ACTIVITIESAdditions to real estate properties and tenant improvements 5 (177,921) (60,726)Additions to capital assets (7,174) (1,863)Proceeds from sale of real estate properties 20,751 15,634Investment in properties under development 5 (21,004) (43,731)Contributions to equity-accounted investments, net (120,514) (20,190)Investment in publicly traded securities (26,051) (15,611)Decrease (increase) in mortgages and loans receivable, net 25(c) 34,313 (44,672)Proceeds from sale of publicly traded securities 310 71,781Business combination 8 (8,427) —Cash assumed on business combination 8 853 12,612Cash used in investing activities (304,864) (86,766)

FINANCING ACTIVITIESProceeds from new mortgages 405,749 467,593Financing costs on new mortgages (5,342) (7,100)Repayment of mortgages

Repayments on maturity (230,704) (332,492)Repayments due to early extinguishments — (75,670)Principal instalment repayments (85,880) (46,251)

Proceeds from (repayment of) bank indebtedness, net 25(c) 123,564 (111,157)Proceeds from (repayment of) construction financing, net 25(c) (21,782) 61,405Proceeds from loans payable 8,122 —Dividends paid 18(a) (7,277) (7,423)Contribution from non-controlling interest 15,762 —Distributions to non-controlling interests (33,000) (1,372)Payments from Morguard REIT, net 25(c) — 30,000Common shares repurchased for cancellation 18(a) (53,701) (32,160)Investment in Morguard REIT 18(b) (61,177) (8,362)Increase in restricted cash (10,527) (2,486)Cash provided by (used in) financing activities 43,807 (65,475)

Net decrease in cash during the year (35,561) (10,247)Net effect of foreign currency translation on cash balance 5,917 4,034Cash, beginning of year 123,148 129,361Cash, end of year $93,504 $123,148



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NOTESFor the years ended December 31, 2015 and 2014In thousands of Canadian dollars, except per common share and unit amounts and unless otherwise noted

NOTE 1NATURE AND DESCRIPTION OF COMPANYMorguard Corporation is a real estate investment and management corporation formed under the laws of Canada. Morguard’s principal activities include property ownership, development and investment advisory services. Property ownership encompasses interests in multi-suite residential, commercial and hotel properties. The common shares of the Company trade on the Toronto Stock Exchange (“TSX”) under the symbol “MRC”. The Company owns a diverse portfolio of properties in Canada and the United States. The Company’s head office is located at 55 City Centre Drive, Suite 1000, Mississauga, Ontario, L5B 1M3.

NOTE 2STATEMENT OF COMPLIANCE AND SIGNIFICANT ACCOUNTING POLICIESThese consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”).

The consolidated financial statements were approved and authorized for issue by the Board of Directors on February 25, 2016.

Basis of PresentationThe Company’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 ConsolidationThe consolidated financial statements include the financial statements of the Company, as well as the entities that are controlled by the Company (“subsidiaries”). The Company controls an entity when the Company 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 Company obtains control and are deconsolidated from the date that control ceases. Intercompany transactions, balances, unrealized losses and unrealized gains on transactions between the Company and its subsidiaries are eliminated.

Non-Controlling Interests and Convertible DebenturesNon-controlling interests represent equity interests in subsidiaries that are not attributable to the Company. For all of the Company’s subsidiaries, with the exception of Morguard North American Residential Real Estate Investment Trust (“Morguard Residential REIT” or “MRG”), the share of the net assets of the subsidiaries that is attributable to non-controlling interest is presented as a component of equity.

The units of Morguard Residential REIT are redeemable at the option of the holder and therefore are considered puttable instruments that meet the definition of a financial liability under International Accounting Standards (“IAS”) 32, Financial Instruments - Presentation (“IAS 32”). Whereas certain exceptions in IAS 32 allow Morguard Residential REIT to classify the units as equity in its own balance sheet, this exception is not available to the Company, and therefore the non-controlling interest that these units represent is classified as a liability in the consolidated financial statements of the Company and is measured at fair value, which is based on the units’ redemption amount, with changes in the redemption amount recorded in the consolidated statements of income in the period of the change.


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Similarly, the conversion feature component of the convertible debentures issued by Morguard Residential REIT also meets the definition of a financial liability and is recorded in the consolidated balance sheet as a liability, measured at fair value based on the Black-Scholes option pricing model, with changes in fair value recognized in the consolidated statements of income. Any directly attributable transaction costs were allocated to the debt and conversion components of the convertible debentures in proportion to their initial carrying amounts with the portion allocated to the conversion component expensed immediately.

Investments in AssociatesAssociates are entities over which the Company has significant influence but not control or joint control, generally accompanying an ownership of between 20% and 50% of the voting rights. However, determining significant influence is a matter of judgment and specific circumstances and, from time to time, the Company may hold an interest of less than 20% and exert significant influence through representation on the board of directors, through direction of management or through contractual agreements.

Investments in associates are accounted for using the equity method, whereby the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee. The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognizes the amount in the consolidated statement of income and comprehensive income.

Interests in Joint ArrangementsThe Company reviews its interests in joint arrangements and accounts for those joint arrangements in which the Company is entitled only to the net assets of the arrangement as joint ventures using the equity method of accounting and for those joint arrangements in which the Company is entitled to its share of the assets and liabilities as joint operations and recognizes its rights to and obligations of the assets, liabilities, revenue and expenses of the joint operation.

Real Estate PropertiesReal estate properties include residential, retail and commercial properties held to earn rental income and for capital appreciation (income producing properties), hotel properties and properties or land that are being constructed or developed for future use as income producing properties.

Income Producing PropertiesIncome producing property that is acquired as an asset purchase and not as a business combination is recorded initially at cost, including transaction costs. Transaction costs include transfer taxes, professional fees and initial leasing commissions, of which transfer tax and professional fees represent the majority of the costs.

Subsequent to initial recognition, income producing properties are recorded at fair value. The changes in fair value for each reporting period will be recorded in the consolidated statements of income. In order to avoid double counting, the carrying value of income producing properties includes straight-line rent receivable, tenant improvements, tenant incentives, capital expenditures and direct leasing costs since these amounts are incorporated in the appraised values of the real estate properties. Fair value is based on external and internal valuations using recognized valuation techniques, including the direct capitalization of income and discounted cash flow methods. Recent real estate transactions with characteristics and location similar to the Company’s assets are also considered.

Tenant improvements include costs incurred to meet the Company’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 in the consolidated balance sheets.

Leasing costs include incremental costs associated with leasing activities such as external leasing commissions. These costs are included in the carrying amount of income producing properties in the consolidated balance sheets.


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Hotel PropertiesThe land and building components of the hotel properties are classified as real estate properties in the consolidated balance sheets to reflect their nature, which is to be held to earn cash flows and earn capital appreciation. The Company's hotel properties are stated at cost and are amortized using the straight-line method over their estimated useful lives of 40 years. The revenue and operating expenses of the hotel properties are included within net operating income in the consolidated statements of income.

Properties Under DevelopmentThe cost of properties under development includes all expenditures incurred in connection with the acquisition, including all direct development costs, realty taxes and other costs to prepare it for its productive use 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. 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 Company considers practical completion to have occurred when the property is capable of operating in the manner intended by management. Generally, this consideration occurs on completion of construction and receipt of all necessary occupancy and other material permits. Where the Company has pre-leased space as of or prior to the start of the development and the lease requires the Company 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 when fair value can be reliably determined.

Financial InstrumentsRecognition and Measurement of Financial InstrumentsFinancial instruments must be classified into one of the following specified categories: at fair value through profit or loss (“FVTPL”), held-to-maturity investments, available-for-sale (“AFS”) financial assets, loans and receivables and other liabilities. Initially, all financial assets and financial liabilities are recorded in the consolidated balance sheet at fair value. After initial recognition, financial instruments are measured at their fair values, except for held-to-maturity investments, loans and receivables and other financial liabilities, which are measured at amortized cost. The effective interest related to financial assets and liabilities measured at amortized cost and the gain or loss arising from the change in the fair value of financial assets or liabilities classified as FVTPL are included in net income for the year in which they arise. AFS financial instruments are measured at fair value through other comprehensive income (“FVTOCI”) until the financial asset is derecognized or it becomes impaired. All cumulative gains or losses are then recognized in net income.


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The following summarizes the Company’s classification and measurement of financial assets and liabilities:

Classification MeasurementFinancial AssetsInvestment in real estate funds AFS FVTOCI

Investment in publicly traded securities AFS FVTOCI

Investment in convertible debentures FVTPL FVTPL

Mortgages and loans receivable Loans and receivables Amortized cost

Amounts receivable Loans and receivables Amortized cost

Restricted cash Loans and receivables Amortized cost

Cash Loans and receivables Amortized cost

Financial LiabilitiesMortgages payable Other financial liabilities Amortized cost

Unsecured debentures Other financial liabilities Amortized cost

Convertible debentures, excluding conversion option Other financial liabilities Amortized cost

Conversion option of MRG convertible debentures FVTPL FVTPL

Morguard Residential REIT units FVTPL FVTPL

Construction financing payable Other financial liabilities Amortized cost

Loans payable Other financial liabilities Amortized cost

Accounts payable and accrued liabilities Other financial liabilities Amortized cost

Bank indebtedness Other financial liabilities Amortized cost

Transaction CostsTransaction costs are incremental costs directly related to the acquisition of a financial asset or the issuance of a financial liability.

Financing costs that are attributable to the issue of financial liabilities not at FVTPL 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 agents, brokers and advisers and transfer taxes and duties that are incurred in connection with the arrangement of borrowings.

Transaction costs associated with asset acquisitions are capitalized, and those associated with business acquisitions are expensed as incurred.

Derivatives and Embedded DerivativesAll 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.

The Company enters into interest rate swaps to hedge its risk associated with interest rates. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Hedge accounting is discontinued prospectively when the hedging relationship is terminated, when the instrument no longer qualifies as a hedge or when the hedging item is sold or terminated. In cash flow hedging relationships, the portion of the change in the fair value of the hedging derivative that is considered to be effective is recognized in other comprehensive income (“OCI”), while the portion considered to be ineffective is recognized in net income. Unrealized hedging gains and losses in accumulated other comprehensive income are reclassified to net income in the years when the hedged item affects net income. Gains and losses on derivatives are immediately reclassified to net income when the hedged item is sold or terminated.


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Fair ValueThe fair value of a financial instrument is the price that would 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 measurement is categorized based on the lowest-level input that is significant to the fair value measurement in its entirety.

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.

GoodwillOn acquisition of a business, the underlying fair value of net identifiable tangible and intangible assets is determined, and goodwill is recognized as the excess of the purchase price over this amount. Goodwill is not amortized. Goodwill is tested for impairment on an annual basis to determine whether the fair value of the cash-generating unit to which goodwill has been attributed is less than the carrying value of the cash-generating unit’s net assets including goodwill, thus indicating impairment. Any impairment is then recorded as a separate charge against income and a reduction of the carrying value of goodwill.

Capital AssetsCapital assets include the following assets, which are stated at cost and amortized over their estimated useful lives using the following rates and methods:

Building (owner-occupied property and hotels) Straight-line over 40 yearsCondominium Straight-line over 40 yearsLeasehold improvements Straight-line over the term of the leaseFurniture, fixtures, office and computer equipment Straight-line ranging from 10% to 20%

Intangible AssetsThe Company’s intangible assets comprise:

The value assigned to an acquired investment advisory contract, amortized over an estimated 10-year useful life on a straight-line basis; and

The value assigned to an acquired asset management agreement, amortized on a straight-line basis over the remaining term of the contract expiring on December 31, 2018.

Inventory - Land Held for Residential DevelopmentLand for residential development properties that is acquired or improved for sale in the ordinary course of business is recorded at the lower of cost or estimated net realizable value and is classified in the consolidated balance sheets as residential inventory properties, which are included as part of “other assets” (see Note 8). Costs are allocated to the saleable acreage of each project or subdivision in proportion to the anticipated revenue and include borrowing costs directly attributable to projects under active development. Residential developments are reviewed for impairment whenever events or changes in circumstances indicate the carrying value may exceed net realizable value. An


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impairment loss is recognized in income when the carrying value of the land exceeds its net realizable value. Net realizable value represents the amount of estimated net sales proceeds, taking into account management’s assumptions and projections for the development of the property and market conditions.

Business CombinationsThe purchase method of accounting is used for acquisitions meeting the definition of a business combination. A business combination is an acquisition where an integrated set of activities is acquired. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred to the acquirer and the liabilities incurred by the acquirer. For each business combination, the Company elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Any transaction costs incurred with respect to the business combination are expensed in the period incurred.

ProvisionsA provision is a liability of uncertain timing or amount. Provisions are recognized when the Company 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 the passage of time is recognized as interest expense.

Revenue RecognitionRevenue 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. The Company has not transferred 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 real estate properties recorded in the consolidated statements of 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 on a straight-line basis over the initial term of the lease. The Company accounts for stepped rents on a straight-line basis. Rents recorded in advance of cash received are included in amounts receivable. Tenant incentives are deducted from rental revenue on a straight-line basis over the term of the tenant’s lease.

Management and advisory fees and sales of product are recognized when the service is performed or goods are shipped and ownership is legally transferred.

Income TaxesThe Company uses the liability method of accounting for income taxes. Under the liability method of tax allocation, current income tax assets and liabilities are based on the amount expected to be paid to tax authorities, net of recoveries, based on the tax rates and laws enacted or substantively enacted at the consolidated balance sheet dates. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted or substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses to the extent that it is probable that deductions, tax credits and tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each consolidated balance sheet date and reduced to the extent it is no longer probable that the income tax asset will be recovered. In accordance with IAS 12, Income Taxes, the Company measures deferred tax assets and liabilities on its real estate properties based on the rebuttable presumption that the carrying amount of the real estate property is recovered through sale, as opposed to presuming that the economic benefits of the real estate property will be substantially consumed through use over time. This presumption is rebutted if the real estate property is held within a business


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model whose objective is to consume substantially all of the economic benefits embodied in the real estate property over time, rather than through sale, which is not the case for the Company.

Employee Future BenefitsThe Company provides pensions to certain of its employees under two defined benefit arrangements and recognizes the cost of the defined benefit plans in the period in which the employee has rendered services. The cost of benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service, compensation increases, retirement ages of employees and future termination levels. No past service costs have been incurred under these plans. Actuarial gains and losses are recognized in full in the period in which they occur and are presented in the consolidated statements of comprehensive income. The current service cost and gains and losses on settlement and curtailments are charged to operating income. The discount rate used to calculate net pension obligations or assets is determined on the basis of current market rates for high-quality corporate bonds and is re-evaluated at each year-end.

Stock-Based CompensationThe Company has a stock appreciation rights (“SARs”) plan, which entitles specified officers and directors of Morguard 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 grant-date price of the right. The Company accounts for the SARs plan using the fair value method. Under this method, compensation expense for the SARs plan is measured at the fair value of the vested portion using the Black-Scholes option pricing model at each balance sheet date. The liability is measured at each reporting date at fair value, with changes in the liability recorded in the consolidated statements of income.

Foreign ExchangeThe operations of the Company’s U.S. based subsidiaries are conducted in U.S. dollars, which are the functional currency of the foreign subsidiaries. Accordingly, the assets and liabilities of these foreign subsidiaries are translated into Canadian dollars at the exchange rate on the consolidated balance sheet dates. Revenues and expenses are translated at the average rate of exchange for the period. The resulting gains and losses are recorded in OCI. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars at the exchange rate in effect at the reporting date. Exchange differences are recognized in profit or loss except for exchange differences arising from a monetary item receivable from or payable to a foreign subsidiary, the settlement of which is neither planned nor likely to occur in the foreseeable future and which in substance is considered to form part of the net investment in the foreign subsidiary. These exchange differences are recognized in OCI until the disposal of the net investment, at which time they are reclassified to profit or loss.

2015 2014Canadian dollar to United States dollar exchange rates: - As at December 31 $0.7225 $0.8620 - Average during the year 0.7822 0.9053United States dollar to Canadian dollar exchange rates: - As at December 31 1.3840 1.1601 - Average during the year 1.2785 1.1046

Income Per Common ShareBasic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding in each respective period. Diluted income per common share is calculated by dividing net income, adjusted for the effect of dilutive securities, by the weighted average number of diluted shares outstanding.

Reportable Operating SegmentsReportable operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Company has determined that its chief operating decision-maker is the Chairman and Chief Executive Officer.


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Critical Judgments in Applying Accounting PoliciesThe following are the critical judgments that have been made in applying the Company’s accounting policies and that have the most significant effect on the amounts in the consolidated financial statements:

De Facto ControlThe Company’s basis of consolidation is described above in the “Basis of Consolidation” section. Judgment is applied in determining when the Company controls an investment even if the Company holds less than a majority of the investee’s voting rights (the existence of de facto control). The key assumptions are further defined in Note 4.

Real Estate PropertiesThe Company’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 defined in Note 5.

Business CombinationsAccounting for business combinations under IFRS 3, Business Combinations, (“IFRS 3”) applies only if it is considered that a business has been acquired. Under IFRS 3, a business is defined as an integrated set of activities and assets conducted and managed for the purposes of providing a return to investors or lower costs or other economic benefits directly and proportionately to the Company. A business generally consists of inputs, processes applied to those inputs and resulting outputs that are, or will be, used to generate revenues. Judgment is used by management in determining if the acquisition of an individual property qualifies as a business combination in accordance with IFRS 3 or as an asset acquisition.

When determining whether the acquisition of a real estate property or a portfolio of properties is a business combination or an asset acquisition, the Company applies judgment when considering whether the real estate property or properties are capable of producing outputs, whether the market participant could produce outputs if missing elements exist and whether significant processes were acquired.

Joint ArrangementsThe Company applies judgment to determine whether the joint arrangements provided it with joint control, significant influence or no influence, and whether the arrangements are joint operations or joint ventures.

LeasesThe Company applies judgment in determining whether certain leases, in particular those tenant leases with long contractual terms and long-term ground leases where the Company is the lessor, are operating or finance leases. The Company has determined that all of its leases are operating leases. Available-for-Sale InvestmentsAt each reporting period, the Company assesses whether there is objective evidence that an available-for-sale equity investment is impaired. Objective evidence would include a significant or prolonged decline in the fair value of the investment below its cost. A significant decline is evaluated against the original cost of the investment, and a prolonged decline is evaluated against the period in which the fair value has been below its original cost. The determination of what is significant or prolonged requires judgment. In making this judgment, the Company evaluates, among other factors, the duration or extent to which the fair value of an investment is less than its cost.

Critical Accounting Estimates and AssumptionsThe 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 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 and net realizable values for the Company’s real estate properties, the assumptions underlying estimated values are limited 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


MORGUARD.COM 16

estimated amounts. The critical estimates and assumptions underlying the valuation of real estate properties are outlined in Note 5.

The fair value of financial instruments approximates amounts at which these instruments could be exchanged between market participants at the measurement date. The estimated fair value may differ in amount from that which could be realized on an immediate settlement of the instruments. The Company estimates the fair value of mortgages payable by discounting the cash flows of these financial obligations using market rates for debts of similar terms.

NOTE 3ADOPTION OF ACCOUNTING STANDARDSCurrent Accounting Policy ChangesIAS 40, Investment Property (“IAS 40”)On January 1, 2015, the Company adopted an amendment with respect to the description of ancillary services in IAS 40, which differentiates between investment property and owner-occupied property (for example, 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 Company 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 (for example, sales and gross margins) used to assess whether the segments are ‘similar’.

• The reconciliation of segment assets to total assets is only required to be disclosed if a measure of segment assets 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.

Future Accounting Policy ChangesAmendments to IFRS 11, Joint Arrangements (“IFRS 11”): Accounting for Acquisitions of InterestsThe 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 a material impact on the Company.

Amendments to IAS 1, Presentation of Financial Statements (“IAS 1”): Disclosure InitiativeThe 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.


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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 a material impact on the Company.

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 Company 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 FVTPL and to measure equity-based financial assets either as held-for-trading or as 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 Company is currently assessing the impact of IFRS 9 on its consolidated financial statements.

IFRS 16, LeasesIn 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 Company is currently assessing the impact this new standard will have on its consolidated financial statements.

NOTE 4SUBSIDIARIES WITH NON-CONTROLLING INTERESTMorguard Residential REIT As at December 31, 2015, the Company owned a 48.7% (December 31, 2014 - 48.7%) effective interest in Morguard Residential REIT through its ownership of 5,445,166 units and 17,223,090 Class B LP Units. The Company continues to consolidate its investment in Morguard Residential REIT on the basis of de facto control in accordance with IFRS 10, Consolidated Financial Statements, (“IFRS 10”). The basis for concluding that the Company continues to control Morguard Residential REIT is as follows: (i) the Company holds a significant interest in Morguard Residential REIT’s voting rights as at December 31, 2015; (ii) there is a wide dispersion of the public holdings of Morguard Residential REIT’s remaining units; (iii) the Company has the ability to nominate a minimum number of Morguard Residential REIT’s trustees based on the Company's ownership interest; (iv) all of Morguard Residential REIT’s senior management are employees of the Company; and (v) Morguard Residential REIT is significantly dependent on the Company as a result of existing service agreements that cover property management, asset management, debt financing and acquisitions.

Morguard Real Estate Investment Trust (“Morguard REIT” or “MRT”)As at December 31, 2015, the Company owned 30,693,053 units (December 31, 2014 - 28,138,875 units) of Morguard REIT, which represents a 50.4% (December 31, 2014 - 45.3%) ownership.


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During the year ended December 31, 2014, the Company determined that it met the definition of control as defined under IFRS 10 with respect to its investment in Morguard REIT. In making this determination, the Company considered both its direct ownership and the direct and indirect ownership of the Company’s controlling shareholder, K. (Rai) Sahi (the “Company’s collective ownership interest”). The Company’s collective ownership interest had grown from 45.0% to 46.3% over the course of the year ended December 31, 2014. The Company also considered: (i) the wide dispersion of the remaining Morguard REIT units; (ii) that no investors hold more than 10% of the remaining units; (iii) the voting history at Morguard REIT’s annual meetings; and (iv) the changes during the year in the roles of management common between the two entities. This acquisition of control has been reflected as a business combination occurring on December 31, 2014, and the Company commenced consolidating its investment in Morguard REIT effective December 31, 2014.

The Company’s acquisition of control of Morguard REIT on December 31, 2014, was recorded as follows:

1. The Company’s previously held equity interest in Morguard REIT of $713,787 was remeasured to its fair market value based on the TSX closing price of Morguard REIT’s units on December 31, 2014. This resulted in a revalued equity investment in Morguard REIT of $511,002. The remeasurement of the investment resulted in the Company recording a non-cash loss of $202,785 in the consolidated statements of income.

2. The revalued equity of $511,002 then represented the consideration paid by the Company for the fair value of the net identifiable assets acquired and liabilities assumed of Morguard REIT, which resulted in the Company recording a non-cash gain of $186,531 in the consolidated statements of income.

As a result of the above, the Company recognized a net loss of $16,254 on the acquisition of control of Morguard REIT.

The following table details the recognized amounts of the identifiable assets acquired and liabilities assumed, measured at their respective fair values on December 31, 2014 (“net assets”):

Real estate properties $2,929,425

Equity-accounted investment 30,770

Cash 12,612

Mortgages payable (1,271,386)

Convertible debentures payable (152,999)

Bank indebtedness (4,927)

Deferred income tax asset, net 1,246

Net working capital (2,072)

Non-controlling interest (845,136)

Fair value of net assets acquired 697,533

Carrying value of equity investment in Morguard REIT (713,787)

Loss on business combination ($16,254)

The deferred income tax asset of $1,246 recognized on the acquisition of control represents the differential of the deferred tax liability previously recorded on the equity held interest in Morguard REIT of $115,310 and the deferred tax liability as a result of the Company consolidating its investment of Morguard REIT of $114,064.

The non-controlling interest in Morguard REIT has been measured at its proportionate share of Morguard REIT’s net identifiable assets and includes a portion of the fair value of the conversion option on Morguard REIT’s convertible debentures. The total fair value of the conversion option of the convertible debentures is $2,742, of which $1,501 has been allocated to non-controlling interest and the remaining $1,241 is included in convertible debentures payable of $152,999. The Company has a $50,000 investment in Morguard REIT’s convertible debentures, and the aforementioned $1,241 represents the conversion option attributable to Morguard’s $50,000 investment. Upon consolidation of Morguard REIT, both the $1,241 conversion option and the $50,000 investment are required to be eliminated (see Note 12).


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The following summarizes the results of Morguard REIT and Morguard Residential REIT before any intercompany eliminations and the corresponding non-controlling interest in the equity of Morguard REIT and Morguard Residential REIT. The units issued by Morguard Residential REIT that are not held by the Company are classified as equity on Morguard Residential REIT's balance sheet but are classified as a liability on the Company's balance sheet (see Note 13).

December 31, 2015 December 31, 2014As at MRT MRG MRT MRGNon-current assets $2,879,907 $2,105,514 $2,897,005 $1,786,827Current assets 40,248 54,501 119,491 45,460Total assets 2,920,155 2,160,015 3,016,496 1,832,287

Non-current liabilities 1,234,014 1,378,147 1,262,012 1,158,137Current liabilities 130,001 96,901 147,403 100,549

Total liabilities 1,364,015 1,475,048 1,409,415 1,258,686

Equity $1,556,140 $684,967 $1,607,081 $573,601

Non-controlling interest $747,460 $351,470 $845,136 $294,171

The following summarizes the results of the operations and cash flows for the following periods as presented in Morguard REIT’s and Morguard Residential REIT’s financial statements and the corresponding non-controlling interest in their net income:

For the years ended December 31, 2015 2014MRT MRG MRG

Revenue from income producing properties $290,982 $198,442 $174,815

Expenses (185,388) (186,371) (165,206)

Fair value gain (loss) on real estate properties, net (78,977) 38,804 40,104

Fair value loss on Class B LP Units — (11,195) (10,506)

Net income for the year $26,617 $39,680 $39,207

Non-controlling interest $13,585 $20,361 $20,107

For the years ended December 31, 2015 2014MRT MRG MRG

Cash provided by operating activities $97,957 $42,584 $36,210

Cash provided by (used in) investing activities 21,960 (91,704) (24,232)

Cash provided by (used in) financing activities (106,247) 23,957 13,665

Net increase (decrease) in cash during the year $13,670 ($25,163) $25,643

During the year ended December 31, 2015, Morguard Residential REIT recorded distributions of $17,594 or $0.60 per unit (2014 - $17,579 or $0.60 per unit), of which $3,268 was paid to the Company (2014 - $3,268) and $14,326 was paid to the remaining unitholders (2014 - $14,311). In addition, during the year ended December 31, 2015, Morguard Residential REIT paid distributions to Morguard on the Class B LP Units of $10,333 (2014 - $10,333).

During the year ended December 31, 2015, Morguard REIT recorded distributions of $59,240 or $0.96 per unit, of which $28,371 was paid to the Company and $30,869 was paid to the remaining unitholders.


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NOTE 5REAL ESTATE PROPERTIESReal estate properties consist of the following:

As at December 31, 2015 2014

Income producing properties $7,752,919 $7,146,569Hotel properties 92,088 91,265Properties under development 26,628 166,514Land held for development 54,010 48,878

$7,925,645 $7,453,226

Reconciliations of the carrying amounts for real estate properties at the beginning and end of the current financial period are set out below:

IncomeProducingProperties

Hotel Properties (1)

Properties Under

Development

Land Held for

Development TotalBalance as at December 31, 2014 $7,146,569 $91,265 $166,514 $48,878 $7,453,226Additions:

Acquisitions and investments 84,194 — — — 84,194Capital expenditures 72,568 3,056 — 381 76,005Development expenditures — — 21,004 — 21,004Tenant improvements, incentives andleasing commissions 25,156 — — — 25,156

Transfers 150,332 — (150,332) — —Dispositions (20,186) — — — (20,186)Fair value gain (loss), net (Note 20) (49,907) — (10,558) 1,752 (58,713)Foreign currency translation 339,639 — — 2,999 342,638Amortization of hotels — (2,233) — — (2,233)Other 4,554 — — — 4,554Balance as at December 31, 2015 $7,752,919 $92,088 $26,628 $54,010 $7,925,645

(1) The hotels are stated at cost in accordance with IAS 16, Property, Plant and Equipment, net of accumulated amortization of $5,551 as at December 31, 2015.

Transactions Completed During the Year Ended December 31, 2015AcquisitionsOn December 17, 2015, the Company acquired a 20% co-ownership interest in 400 St. Mary Avenue, an office property consisting of 134,500 square feet in Winnipeg, Manitoba, for a purchase price of $6,100.

On September 25, 2015, the Company acquired an office property consisting of 9,000 square feet in Florida, for a purchase price of $2,669 (US$2,000).

On September 1, 2015, the Company acquired a 51% interest in a garden-style multi-suite residential property comprising 252 suites located in Cooper City, Florida, for a purchase price of $73,862 (US$56,045), including closing cost.

DispositionsOn December 15, 2015, the Company sold an industrial property consisting of 12,156 square feet located in Sault Ste. Marie, Ontario, for $460.

On September 29, 2015, the Company sold a retail property consisting of 45,032 square feet located in Louisiana, for $4,444 (US$3,330).


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On May 15, 2015, the Company sold an industrial property consisting of 27,577 square feet in Toronto, Ontario, for $6,350.

On April 1, 2015, the Company sold an industrial property consisting of 210,123 square feet in Toronto, Ontario, for $10,000.

Reconciliation of the carrying amounts for real estate properties for the year ended December 31, 2014, is set out below:

IncomeProducingProperties

Hotel Properties (1)

PropertiesUnder

Development

LandHeld for

Development Total

Balance as at December 31, 2013 $3,882,043 $91,893 $253,820 $18,544 $4,246,300Additions:

Consolidation of Morguard REIT 2,870,614 — 31,161 27,650 2,929,425Acquisitions and investments 1,293 — 982 — 2,275Capital expenditures 26,830 1,291 — — 28,121Development expenditures 16,693 — 42,552 — 59,245Tenant improvements, incentives andleasing commissions 9,154 — — — 9,154

Transfers 160,826 — (160,826) — —Dispositions (16,643) — — — (16,643)Fair value gain (loss), net 50,694 — (1,175) 1,498 51,017Foreign currency translation 142,694 — — 1,186 143,880Amortization of hotels — (1,919) — — (1,919)Other 2,371 — — — 2,371Balance as at December 31, 2014 $7,146,569 $91,265 $166,514 $48,878 $7,453,226

(1) The hotels are stated at cost in accordance with IAS 16, Property, Plant and Equipment, and have an accumulated amortization of $3,318 as at December 31, 2014.

Transactions Completed During the Year Ended December 31, 2014DispositionsOn December 22, 2014, the Company sold a retail property consisting of 40,000 square feet in Louisiana, for $3,596 (US$3,100).

On August 13, 2014, the Company sold a multi-suite residential property consisting of 12 suites in New Jersey, for $8,901 (US$8,150).

On April 25, 2014, the Company sold approximately 0.7 acres of land adjacent to a multi-suite residential property in Edmonton, Alberta, for $4,000.

Properties Under DevelopmentDuring the three months ended March 31, 2015, the Company substantially completed the development of the second building (the “South Tower”) at The Heathview, a twin-tower, 30-storey, 587 suite rental development in Toronto, Ontario. On March 31, 2015, the South Tower was transferred from properties under development to income producing properties and all revenues and expenses pertaining to the South Tower, including borrowing costs, are recorded in the consolidated statements of income commencing April 1, 2015.

During the three months ended September 30, 2014, the Company substantially completed the development of one building (the “North Tower”) at The Heathview, a twin-tower, 30-storey, 587-suite rental development in Toronto, Ontario. On July 1, 2014, the North Tower was transferred from properties under development to income producing properties. All revenues and expenses pertaining to the North Tower, including borrowing costs, were recorded in the consolidated statements of income commencing July 1, 2014.


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During the three months ended March 31, 2014, the Company substantially completed the development of an office building in Ottawa, Ontario. On January 1, 2014, the development project was transferred from properties under development to income producing properties. All revenue and expenses pertaining to the property, including borrowing costs, were recorded in the consolidated statements of income commencing January 1, 2014.

During the year ended December 31, 2015, borrowing costs of $1,115 (2014 - $2,339) were incurred on development projects and were capitalized to the development projects (see Note 19).

Capitalization RatesFor the years ended December 31, 2015 and 2014, the Company’s Canadian portfolio was predominantly appraised internally by its appraisal division, and the U.S. portfolio was predominantly externally appraised by national U.S. real estate appraisal firms. Approximately 27% of the Company’s portfolio was externally appraised as at December 31, 2015 (December 31, 2014 - 24%).

The Company’s internal 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 ongoing professional development. The Company’s valuation team is responsible for determining the fair value of investment properties every quarter, which include co-owned properties and properties classified as equity-accounted investments. The team reports directly to a senior executive, and the internal valuation team's valuation processes and results are reviewed by management at least once every quarter, in line with the Company’s quarterly reporting dates.

The Company determined the fair value of each income producing 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 consolidated balance sheet dates, less future cash outflow pertaining to the respective leases. The Company’s multi-suite residential properties are appraised using the direct capitalization of income method. The retail, office and industrial properties are appraised using a number of approaches that typically include a discounted cash flow analysis, a direct capitalization of income 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, including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows.

Using the direct capitalization approach, the multi-suite residential, retail, office and industrial properties were valued using capitalization rates in the range of 4.5% to 9.5% (December 31, 2014 - 4.3% to 9.3%), resulting in an overall weighted average capitalization rate of 5.5% (December 31, 2014 - 5.7%).

The stabilized capitalization rates by asset type are set out in the following table:

December 31, 2015 December 31, 2014

As atOccupancy

RatesCapitalization

RatesOccupancy

RatesCapitalization

Rates

Max. Min. Max. Min.Weighted

Average Max. Min. Max. Min.WeightedAverage

Multi-suite residential 98.1% 92.0% 8.0% 4.5% 5.1% 98.0% 91.0% 8.3% 4.3% 5.0%

Retail 100.0% 80.0% 9.5% 5.0% 5.9% 100.0% 82.0% 9.3% 5.0% 6.0%

Office and industrial 100.0% 90.0% 9.0% 4.8% 6.0% 100.0% 90.0% 9.0% 5.0% 6.0%


MORGUARD.COM 23

The key valuation metrics used in the discounted cash flow method for the retail, office and industrial properties are set out in the following table:

As at December 31, 2015 December 31, 2014

Maximum MinimumWeighted

Average Maximum MinimumWeightedAverage

Retail

Discount rate 10.8% 6.0% 7.1% 10.5% 6.3% 6.9%

Terminal cap rate 9.8% 5.3% 6.3% 9.5% 5.3% 6.1%

Office/industrial Discount rate 9.3% 5.8% 6.8% 9.3% 6.0% 6.9%

Terminal cap rate 8.5% 5.0% 6.0% 8.5% 5.3% 6.2%

Fair values are most sensitive to changes in discount rates, capitalization rates and stabilized or forecast net operating income. Generally, an increase in stabilized 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 stabilized net operating income, with a lower capitalization rate resulting in a greater impact on the fair value of the property than a higher capitalization rate. If the weighted average stabilized capitalization rates were to increase or decrease by 25 basis points, the value of the income producing properties as at December 31, 2015, would decrease by $350,114 and increase by $384,607, respectively.

The sensitivity of the fair values of the Company’s income producing properties as at December 31, 2015, and December 31, 2014, is a set out in the table below:

As at December 31, 2015 December 31, 2014Change in capitalization rate: 0.25% (0.25%) 0.25% (0.25%)Multi-suite residential ($170,760) $189,488 ($134,342) $148,570

Retail (100,469) 109,396 (97,975) 106,710

Office and industrial (78,885) 85,723 (82,888) 90,088

($350,114) $384,607 ($315,205) $345,368


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NOTE 6CO-OWNERSHIP INTERESTSThe Company is a co-owner in several properties that are subject to joint control based on the Company’s decision-making authority with regards to the relevant activities of the properties. These co-ownerships have been classified as joint operations and, accordingly, the Company recognizes its rights to and obligation for these assets, liabilities, revenue and expenses of these co-ownerships in the respective lines in the consolidated financial statements.

The following are the Company’s significant co-ownerships as at December 31, 2015 and 2014:

Company’s OwnershipJointly-Controlled Asset Location Asset Type December 31, 2015 December 31, 2014

Bramalea City Centre Brampton, ON Retail 20.7% 20.7%Woodbridge Square Woodbridge, ON Retail 50.0% 50.0%Performance Court Ottawa, ON Office 50.0% 50.0%77 Bloor Street Toronto, ON Office 50.0% 50.0%Mississauga City Centre Mississauga, ON Office 50.0% 50.0%Standard Life Centre Ottawa, ON Office 50.0% 50.0%65 Overlea Blvd Toronto, ON Office 95.0% 95.0%Heritage Place Ottawa, ON Office 50.0% 50.0%Scotia Place Edmonton, AB Office 20.0% 20.0%505 Third Street Calgary, AB Office 50.0% 50.0%2920 Matheson Blvd Mississauga, ON Office 50.0% 50.0%7474 McLean Road Puslinch, ON Industrial 50.0% 50.0%825 Des Erables Salaberry-de-Valleyfield, QC Industrial 50.0% 50.0%Toronto Airport Marriott Toronto, ON Hotel 94.8% 94.8%

The following amounts, included in these consolidated financial statements, represent the Company’s proportionate share of the assets and liabilities of the Company’s co-ownership interests as at December 31, 2015 and 2014, and the results of operations for the years ended December 31, 2015 and 2014:


Assets $849,254 $825,346

Liabilities $279,044 $300,520

For the years ended December 31, 2015 2014

Revenues $105,468 $90,817

Expenses 75,087 65,204

Income before fair value adjustments 30,381 25,613

Fair value gain (loss) on real estate properties (1,134) 7,385

Net income $29,247 $32,998


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NOTE 7EQUITY-ACCOUNTED AND OTHER INVESTMENTS

(a) Equity-accounted and other real estate fund investments consist of the following:


Joint ventures $40,108 $44,290Associates 193,361 31,662Equity-accounted investments 233,469 75,952Other real estate fund investments 95,851 71,683Equity-accounted and other investments $329,320 $147,635

Equity-accounted investmentsOn August 25, 2015, the Company acquired a 59.13% ownership interest in a 299 multi-suite residential building including 47,500 square feet of commercial area in Los Angeles, California, for $77,406 (US$58,004). The Company accounts for its associate investment using the equity method since the Company does not control the investment but does have a significant ownership interest in the investment. The total investment as at December 31, 2015, is $80,246 (US$57,981).

On October 27, 2015, the Company purchased 18,252,516 common shares of Temple Hotels Inc. (“Temple”) for cash consideration of $20,951, increasing the Company’s ownership of common shares in Temple from 12.1% at September 30, 2015 to 29.9%. As a result of the Company increasing its ownership in Temple, the Company has significant influence and is accounting for its associate investment in Temple using the equity method. On December 31, 2015, the Company purchased an additional 7,000,000 common shares of Temple for cash consideration of $7,490. As at December 31, 2015, the Company owned a 38.9% interest in Temple through its ownership of 30,237,889 common shares. The total investment as at December 31, 2015, is $31,736.

During the year ended December 31, 2015, the Company contributed capital of $38,208 (US$29,962) to an associate investment in a U.S. multi-suite residential development project in Chicago, Illinois, in which the Company has a 49% ownership interest. The development project, a 34-storey, 691 suite residential tower is expected to commence occupancy in the second quarter of 2016. The Company’s investment in the project, currently estimated to be approximately $60,000 at completion, is subject to the normal risks associated with development, including but not limited to, cost overruns and interest rate risk. The total investment as at December 31, 2015, is $65,468 (US$47,276) (December 31, 2014 - $16,239 (US$13,998)).

As a result of the consolidation of Morguard REIT, the Company’s equity-accounted investments include a limited partnership in which Morguard REIT has a 50% ownership interest. The partnership owns a 304,000 square-foot Class A office complex located in Edmonton, Alberta. The total investment in the partnership as at December 31, 2015, is $32,509 (December 31, 2014 - $30,770). The Company has committed up to $15,000 for the investment in the MIL Industrial Fund II Limited Partnership (the “MIL Fund”), a real estate fund whereby an indirect wholly-owned subsidiary of the Company is the general partner. The Company’s commitment represents an 18.75% ownership in the MIL Fund, and the Company accounts for its investment using the equity method since the Company has the ability to exercise significant influence as a result of its role as general partner; however, it does not control the MIL Fund. The total investment in the MIL Fund as at December 31, 2015, is $15,911 (December 31, 2014 - $15,423).

On December 20, 2012, the Company entered into an agreement to participate in a limited partnership whereby the Company has committed up to $10,000, which represents a 50% ownership interest in the limited partnership. As at December 31, 2015, the Company advanced $nil to the partnership (December 31, 2014 - $5,371).

On May 24, 2011, the Company entered into a partnership agreement to undertake a development project. The development project was completed on July 31, 2013. The Company has joint control over the partnership and accounts for its investment using the equity method. The total investment in the partnership as at December 31, 2015 is $7,599 (2014 - $8,149).


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(b) Income recognized from equity-accounted and other investments:

Equity-accounted investmentsFor the years ended December 31, 2015 2014Joint ventures $3,524 $410

Associates 2,734 1,489

Morguard REIT — 51,022

Total equity income from investments $6,258 $52,921

Other real estate fund investments For the years ended December 31, 2015 2014Distribution income $2,646 $2,145

Other comprehensive income for the period 20,520 4,442

Total income from other real estate fund investments $23,166 $6,587

The Company holds investments in two U.S. real estate funds. The funds are classified as AFS financial instruments and are measured at FVTOCI. Gains or losses arise from the change in the fair value of the underlying real estate properties held by the funds (category Level 3) and from foreign exchange currency translation. Distributions received from these funds are recorded to other income (expense) on the consolidated statements of income.

NOTE 8OTHER ASSETS Other assets consist of the following:

As at December 31, 2015 2014Investments in publicly traded securities $3,005 $16,542

Accrued pension benefit asset (Note 26) 57,790 63,896

Goodwill 24,488 24,488

Capital assets, net 23,125 19,156

Intangible assets, net 17,123 —

Inventory 1,431 1,584

Inventory - land held for residential development 5,641 6,354

Restricted cash 24,393 12,740

Other 1,249 1,370

$158,245 $146,130

On February 3, 2015, the Company acquired a 60% ownership interest in a privately held asset manager, Lincluden Investment Management Limited (“Lincluden”), and the purchase price was settled with a cash payment and the issuance of 8,079 of the Company’s common shares (Note 18). The assets acquired and liabilities assumed were recognized at their respective fair values on the date of acquisition. The acquisition resulted in the recognition of intangible assets of $17,188 and capital assets of $165, a deferred tax liability of $3,862, non-controlling interest of $4,658 and the remaining balance of the consideration paid was attributable to the net working capital acquired. The intangible assets acquired represent the value assigned to Lincluden’s investment advisory contracts, which will be amortized over a 10-year period and is included in amortization of capital assets and other.

On December 31, 2015, the Company entered into an asset management assignment and transition agreement pursuant to which Shelter Canadian Properties Limited (“Shelter”) agreed to assign to Morguard the amended and restated asset management agreement dated December 31, 2012, between Temple and Shelter, and all of Shelter’s rights and duties thereunder, effective April 1, 2016. The acquisition resulted in the recognition of intangible assets of $1,500. The intangible assets acquired represent the value assigned to the asset management agreement, which will be amortized over the remaining term of the contract expiring on December 31, 2018, and is included in amortization of capital assets and other.


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NOTE 9MORTGAGES AND LOANS RECEIVABLEMortgages and loans receivable consist of the following:

As at December 31, 2015 2014Mortgages receivable $5,419 $7,949Loans receivable - TWC Enterprises Limited 21,160 50,000Loans receivable - other — 5,000Total mortgages and loans receivable $26,579 $62,949

The classification of mortgages and loans receivable is as follows:

Current $26,579 $57,949Non-current — 5,000

$26,579 $62,949

TWC Enterprises Limited (“TWC”)The Company has a revolving demand loan agreement with TWC, a related party, that provides for either party to borrow up to $50,000 at either the prime rate or the bankers' acceptance rate plus applicable stamping fees. The total loan receivable outstanding as at December 31, 2015 is $21,160 (December 31, 2014 - $50,000). During the year ended December 31, 2015, the Company earned net interest of $404 (2014 - $496).

NOTE 10MORTGAGES PAYABLEMortgages payable consist of the following:

As at December 31, 2015 2014Mortgage payable $3,570,656 $3,288,833Mark-to-market adjustment, net 48,926 61,648Deferred financing costs (20,028) (17,762)

$3,599,554 $3,332,719

Current $231,916 $316,170Non-current 3,367,638 3,016,549

$3,599,554 $3,332,719

Range of interest rates 2.25% - 8.67% 2.85% - 8.67%

Weighted average interest rate 3.91% 4.17%

Estimated fair value of mortgages payable $3,703,712 $3,446,985


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The aggregate principal repayments and balances maturing of the mortgages payable in the next five years and thereafter are as follows:

Principal Instalment

RepaymentsBalances Maturing Total

WeightedAverage

ContractualRate

2016 $93,682 $126,216 $219,898 3.75%

2017 89,678 455,897 545,575 4.30%

2018 80,089 290,217 370,306 4.57%

2019 72,201 268,248 340,449 3.47%

2020 71,936 156,297 228,233 4.76%

Thereafter 192,809 1,673,386 1,866,195 3.72%

$600,395 $2,970,261 $3,570,656 3.91%

Substantially all of the Company’s rental properties and related rental revenues have been pledged as collateral for the mortgages payable.

The Company’s first mortgages are registered against specific real estate assets. As at December 31, 2015, mortgages payable bear interest at rates ranging between 2.25% and 8.67% per annum (December 31, 2014 - 2.85% and 8.67%) with a weighted average interest rate of 3.91% (December 31, 2014 - 4.17%) and mature between 2016 and 2026 with a weighted average term to maturity of 5.5 years (December 31, 2014 - 5.7 years). Approximately 98.8% of the Company’s mortgages have fixed interest rates.

The Company entered into an interest rate swap transaction to mitigate the interest rate risk on the floating-rate mortgage secured by five hotel properties. The swap transaction matures on June 14, 2018, and as at December 31, 2015, the outstanding balance of the floating rate mortgage is $44,560 (December 31, 2014 - $45,520).

NOTE 11UNSECURED DEBENTURES Unsecured debentures consist of the following:

As at December 31, 2015 20144.099% unsecured debentures $135,000 $135,000

Unamortized financing costs (772) (1,036)

$134,228 $133,964

On December 10, 2013, the Company issued $135,000 (net proceeds including issuance costs - $134,315) of 4.099% senior unsecured debentures (“Unsecured Debentures”) due on December 10, 2018. Paros Enterprises Limited (“Paros”) (see Note 21(b)) acquired $10,000 aggregate principal amount of the Unsecured Debentures.

The Company has the option to redeem the Unsecured Debentures at a redemption price equal to the greater of the Canada yield price or par plus any accrued and unpaid interest. The Canada yield price is defined as the amount that would return a yield on investment for the remaining term to maturity equal to the Canada bond yield with equal term to maturity plus a spread of 0.56%.

Interest is payable semi-annually, not in advance, on June 10 and December 10 of each year commencing on June 10, 2014. For the year ended December 31, 2015, $5,534 (2014 - $5,534) is included in interest expense (see Note 19).


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NOTE 12CONVERTIBLE DEBENTURES Convertible debentures consist of the following:

As at Maturity DateConversion

Price

CouponInterest

Rate Principal

BalanceDecember 31,

2015December 31,

2014

Morguard REIT (1) October 31, 2017 $24.60 4.85% $149,985 $100,763 $101,494

Morguard Residential REIT (2) March 30, 2018 $15.50 4.65% $60,000 53,677 53,264

$154,440 $154,758(1) The liability reflects the intercompany elimination of $50,000 owned by the Company. (2) The liability reflects the intercompany elimination of $5,000 owned by the Company and includes the fair value of the conversion option of $41

(December 31, 2014 - $94).

(a) Morguard REIT On October 31, 2012, Morguard REIT issued $150,000 principal amount of 4.85% convertible unsecured subordinated debentures, of which Morguard owns $50,000, and incurred issue costs of $4,228 for net proceeds of $145,772. Interest is payable semi-annually, not in advance, on April 30 and October 31 of each year. As at December 31, 2015, $15 of the convertible debentures had been converted into 609 units of Morguard REIT. For the year ended December 31, 2015, interest on convertible debentures net of accretion, of $4,118 is included in interest expense (see Note 19).

(b) Morguard Residential REITOn March 15, 2013, Morguard Residential REIT issued $60,000 principal amount of 4.65% convertible unsecured subordinated debentures, of which Morguard owns $5,000, and incurred issue costs of $2,062, which have been capitalized and are being amortized over their term to maturity. Interest is payable semi-annually, not in advance, on March 31 and September 30 of each year. For the year ended December 31, 2015, interest on convertible debentures of $2,558 (2014 - $2,558) is included in interest expense (see Note 19).

NOTE 13MORGUARD RESIDENTIAL REIT UNITSAs at December 31, 2015, the Company owned a 48.7% (December 31, 2014 - 48.7%) effective interest in Morguard Residential REIT. The units of Morguard Residential REIT trade on the TSX under the symbol “MRG.UN”. Although the Company owns less than 50% of Morguard Residential REIT, it continues to consolidate its investment in MRG on the basis of de facto control (see Note 4).

The units issued by Morguard Residential REIT that are not held by the Company are classified as equity on Morguard Residential REIT’s balance sheet but are classified as a liability on the Company’s consolidated balance sheets. Morguard Residential REIT units are redeemable at any time, in whole or in part, on demand by the holders. Upon receipt of the redemption notice by Morguard Residential REIT, all rights to and under the units tendered for redemption shall be surrendered, and the holder shall be entitled to receive a price per unit equal to the lesser of: (i) 90% of the market price of the units on the principal exchange market on which the units are listed or quoted for trading during the 10 consecutive trading days ending immediately prior to the date on which the units were surrendered for redemption; or (ii) 100% of the closing market price on the principal exchange market on which the units are listed or quoted for trading on the redemption date.

As at December 31, 2015, the Company valued the non-controlling interest in the Morguard Residential REIT units at $229,416 (December 31, 2014 - $215,211) and classified the units as a liability on the consolidated balance sheets. Due to the change in the market value of the units and the distributions paid to external unitholders, the Company recorded a fair value loss for the year ended December 31, 2015, of $28,270 (2014 - $27,377) in the consolidated statements of income (see Note 20).


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The components of the loss on Morguard Residential REIT units are as follows:

For the years ended December 31, 2015 2014Fair value loss on Morguard Residential REIT units ($13,944) ($13,066)

Distributions to external unitholders (Note 4) (14,326) (14,311)

Fair value loss on Morguard Residential REIT units ($28,270) ($27,377)

NOTE 14CONSTRUCTION FINANCING PAYABLEAs at December 31, 2015, the Company has a construction financing facility available totalling $145,000 (December 31, 2014 - $206,500) collateralized by two properties under development (Note 5) that bear floating rates of interest at the bankers’ acceptance rate plus 1.75% and that mature on March 19, 2016.

Upon maturity in December 2015, one of the Company’s construction loans was repaid by mortgage financing bearing interest at 3.10% for a term of 10 years.

As at December 31, 2015, the Company had borrowed $143,489 (December 31, 2014 - $165,271) in construction financing.

NOTE 15LOANS PAYABLEThe Company entered into a demand loan agreement with Paros, a related party, that provides for the Company to borrow up to $22,000. The balance owing as at December 31, 2015 was $9,568 (December 31, 2014 - $2,320). During the year ended December 31, 2015, the Company incurred interest expense of $54 (2014 - $47).

NOTE 16ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities consist of the following:

As at December 31, 2015 2014Accounts payable and accrued liabilities $138,898 $146,053

Tenant deposits 20,732 18,296

SARs liability 10,670 10,885

Income taxes payable 2,183 304Other 3,357 3,843

$175,840 $179,381

NOTE 17BANK INDEBTEDNESS As at December 31, 2015, the Company has credit facilities and operating lines totalling $349,000 (December 31, 2014 - $335,000), the majority that can be borrowed in either Canadian or U.S. dollars and are subject to floating interest rates based on bankers’ acceptance or LIBOR rates. The Company’s investments in Morguard REIT and Morguard Residential REIT, marketable securities, amounts receivable, inventory, capital assets and a fixed-charge security on specific properties have been pledged as collateral on these credit facilities and operating lines. As at December 31, 2015, the Company had borrowed $135,403 (December 31, 2014 - $4,927) and issued letters of credit in the amount of $7,128 (December 31, 2014 - $14,337) related to these facilities.

The bank credit agreements include certain restrictive undertakings by the Company. As at December 31, 2015, the Company is in compliance with all undertakings.


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NOTE 18SHAREHOLDERS’ EQUITY(a) Share Capital AuthorizedUnlimited common shares, no par value.Unlimited preference shares, no par value, issuable in series.

Issued and fully paid common shares Number

(000's) Amount

Balance, December 31, 2013 12,586 $112,238Common shares repurchased through the Company’s NCIB (233) (2,081)Dividend reinvestment plan — 53Balance, December 31, 2014 12,353 110,210Common shares repurchased through the Company’s NCIB (368) (3,314)Issuance of common shares (Note 8) 8 1,173Dividend reinvestment plan — 28Balance, December 31, 2015 11,993 $108,097

The Company had the approval of the TSX under its normal course issuer bid (“NCIB”) to purchase up to 624,445 common shares. The program expired on September 21, 2015. On September 15, 2015, the Company obtained the approval of the TSX under its NCIB to purchase up to 602,752 common shares, being approximately 5% of the issued and outstanding common shares; the program expires on September 21, 2016. During the year ended December 31, 2015, 368,051 common shares were purchased for cash consideration of $53,701 at a weighted average price of $145.91 per common share.

Total dividends declared during the year ended December 31, 2015, amounted to $7,305 or $0.60 per common share (2014 - $7,476 or $0.60 per common share). On February 25, 2016, the Company declared a common share dividend of $0.15 per common share, to be paid in the first quarter of 2016.

(b) Contributed SurplusDuring the year ended December 31, 2015, the Company acquired 2,554,178 units of Morguard REIT for cash consideration of $41,136, increasing the Company’s ownership interest in Morguard REIT from 45.3% as at December 31, 2014, to 50.4% as at December 31, 2015. The difference between the cash paid and the carrying value of the non-controlling interest acquired amounted to $28,031, and the amount has been recorded within retained earnings.

During the year ended December 31, 2015, Morguard REIT purchased for cancellation 1,382,022 units for cash consideration of $20,041, the amount has been recorded within retained earnings.

(c) Stock Appreciation Rights PlanThe SARs granted vest equally over 10 years. On March 20, 2008, 200,000 SARs were granted at an exercise price of $30.74; on November 2, 2010, 55,000 SARs were granted at an exercise price of $43.39; on May 13, 2014, 25,000 SARs were granted at an exercise price of $137.90; and on May 13, 2015, 10,000 SARs were granted at an exercise price of $152.82.

During the year ended December 31, 2015, the Company recorded a fair value adjustment to reduce compensation expense of $215 (2014 - expense of $4,372). The reduction in expense is included in property management and corporate expense in the consolidated statements of income, and the liability is classified as accounts payable and accrued liabilities in the consolidated balance sheets. As at December 31, 2015, 191,500 SARs (December 31, 2014 - 181,500) are outstanding that relate to the Company’s Directors and Officers.


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The fair value for the SARs was calculated using the Black-Scholes option pricing model. In determining the fair value of the SARs, management is required to make assumptions that could have a material impact on the valuation. The following are the assumptions that were used in determining the fair value as at December 31, 2015: a dividend yield of 0.45% (2014 - 0.40%), expected volatility of approximately 21.34% (2014 – 22.43%), a vesting period of 10 years and the 10-year Bank of Canada bond yield of 1.40% (2014 - 1.79%).

(d) Accumulated Other Comprehensive IncomeAs at December 31, 2015 and 2014, accumulated other comprehensive income consists of the following amounts:

As at December 31, 2015 2014Actuarial gain on defined benefit pension plans $29,832 $34,036

Unrealized gain on financial instruments and other 7,965 2,037

Loss on interest rate swap agreement (1,143) (758)

Unamortized balance of cash flow hedge — (55)

Unrealized foreign currency translation gain 236,313 87,356

$272,967 $122,616

NOTE 19INTEREST EXPENSEThe components of interest expense are as follows:

For the years ended December 31, 2015 2014Interest on mortgages $137,051 $88,172

Interest on bank indebtedness 3,004 2,311

Interest on construction loans 6,557 5,381

Interest on Unsecured Debentures (Note 11) 5,534 5,534

Interest on convertible debentures, net of accretion (Note 12) 6,676 2,558

Interest on loans payable and other 433 976

Amortization of mark-to-market adjustments on mortgages, net (15,244) (3,193)

Amortization of deferred financing costs 5,043 5,123

Amortization of cash flow hedge 845 854

149,899 107,716

Less: Interest capitalized to properties under development (Note 5) (1,115) (2,339)

$148,784 $105,377

NOTE 20FAIR VALUE GAIN (LOSS)The components of fair value gain (loss) are as follows:

For the years ended December 31, 2015 2014Fair value gain (loss) on real estate properties, net (Note 5) ($58,713) $51,017

Financial assets (liabilities):

Fair value gain on conversion option of MRG convertible debentures (Note 12) 53 57

Fair value loss on MRG units (Note 13) (28,270) (27,377)

Fair value gain (loss) on convertible debenture investments (371) 580

Total fair value gain (loss), net ($87,301) $24,277


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NOTE 21RELATED PARTY TRANSACTIONSIn addition to the related party transactions disclosed in Notes 7, 9 and 15, related party transactions also include the following:

(a) Morguard REIT Management and Advisory FeesIn the ordinary course of business, the Company derives management fees and other revenues from Morguard REIT which, prior to December 31, 2014, was an equity-accounted investment. Effective December 31, 2014, the Company commenced consolidating its investment in Morguard REIT and, as a result, all fees earned from Morguard REIT are now eliminated on consolidation. During the year ended December 31, 2014, transactions with Morguard REIT were recorded at the exchange amount, which is based on the consideration given for the service provided.

Such transactions with Morguard REIT for the year ended December 31, 2014, are summarized as follows:

For the year ended December 31, 2014

Consolidated statements of income:

Property management and other fees $9,713

Leasing fees 3,274

Property administration fees 4,858

Rental expense (338)

$17,507

In addition, during the year ended December 31, 2014, the Company received interest income of $764 and incurred interest expense of $353.

(b) Paros Enterprises LimitedParos is the majority shareholder and ultimate parent of the Company. Paros is owned by the Company’s Chairman and Chief Executive Officer, Mr. K. (Rai) Sahi. On December 10, 2013, Paros acquired and currently owns $10,000 aggregate principal amount of the Company’s Unsecured Debentures.

(c) TWC Enterprises LimitedThe Company provides TWC with managerial and consulting services for its business and the business of its subsidiaries. Mr. K. (Rai) Sahi is Chairman and Chief Executive Officer and the majority shareholder of TWC through his personal holding companies, which include Paros. Pursuant to contractual agreements between the Company and TWC, during the year ended December 31, 2015, the Company received a management fee of $240 (2014 - $240) and paid rent and operating expenses of $114 (2014 - $127).

(d) Share/Unit Purchase LoansAs at December 31, 2015, share/unit purchase loans to officers and employees of the Company and its subsidiaries of $6,095 (December 31, 2014 - $6,212) are outstanding. The loans are collateralized by their common shares of the Company, the units of Morguard REIT and the units of Morguard Residential REIT and are interest-bearing computed at the Canadian prime interest rate and are due on January 8, 2019. The loans are classified as amounts receivable in the consolidated balance sheets. As at December 31, 2015, the fair market value of the common shares/units held as collateral is $71,077.

(e) Renasant Financial Partners Ltd.On June 30, 2014, the Company terminated its management and consulting agreement with Renasant Financial Partners Ltd., a subsidiary of Paros. As per the terms of the agreement, the Company received a management fee for year ended December 31, 2015, of $nil (2014 - $60).


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(f) Key Management CompensationKey management personnel are those having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. The Company’s key management personnel include the Chairman and Chief Executive Officer, President (MIL), Chief Financial Officer, Executive Vice President Retail Asset Management (MIL) and Executive Vice President Office/Industrial Asset Management (MIL).

The compensation paid or payable to key management for employee services is shown below:

For the years ended December 31, 2015 2014Salaries and other short-term employee benefits $4,167 $4,179

SARs (150) 1,316

$4,017 $5,495

NOTE 22OTHER EXPENSEThe components of other expense are as follows:

For the years ended December 31, 2015 2014Foreign exchange gain (loss) ($1,965) $765

Impairment provision for investment in publicly traded securities (11,504) (8,761)

Other income (expense) 647 (492)

($12,822) ($8,488)

For the year ended December 31, 2015, the Company’s investment in publicly traded securities incurred a significant decline in fair value and, as a result, the Company recorded an impairment provision of $11,504 (2014 - $8,761) to reflect the investment on the consolidated balance sheets at its fair value. The investment’s cumulative unrealized gains previously recorded in the statements of other comprehensive income have been reclassified to the consolidated statements of income.


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NOTE 23INCOME TAXES (a) The following are the major components of income tax expenses:

For the years ended December 31, 2015 2014Current income tax expense (recovery)Based on taxable income of the current year $20,787 $23,598Adjustments to current income tax estimates (6,782) (2,908)

14,005 20,690Deferred income tax expense (benefit)Origination and reversal of temporary differences 65,363 40,941Adjustments to deferred income tax estimates (638) 5,009

64,725 45,950Income tax expense recorded in the statements of income 78,730 66,640

Deferred income tax expense (other comprehensive income)Actuarial loss on defined benefit pension plans (1,494) (349)Loss on interest rate swap agreement (145) (146)Amortization of cash flow hedge 155 390Unrealized foreign currency translation gain 1,013 251Unrealized gain on financial instruments and other 3,307 2,589Income tax expense recorded in the statements of comprehensive income 2,836 2,735Total provision for income taxes $81,566 $69,375

(b) The Company’s income tax expense is derived as follows:

For the years ended December 31, 2015 2014Income before income taxes $182,250 $203,897

Statutory rate (%) 26.50 26.50

Income taxes at statutory rate 48,296 54,033

Capital losses (gains) 17,921 (1,024)

Non-taxable income of MRT and MRG (6,079) (2,454)

Rate changes 11,191 4,445

Increase in Morguard REIT ownership 12,979 —

Losses not benefited 4,760 4,912

Permanent differences (3,221) 257

Adjustments to income tax estimates (7,420) 2,101

Morguard REIT consolidation — 4,307

Other 303 63

$78,730 $66,640


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(c) The components of the deferred income tax liabilities are as follows:

December 31, 2015 December 31, 2014

As at Canada U.S. Total Canada U.S. Total

Real estate properties $367,439 $147,265 $514,704 $337,755 $87,648 $425,403

Investments 1,473 2,853 4,326 2,619 — 2,619

Accumulated other comprehensive income 11,361 4,101 15,462 11,953 620 12,573

Deferred financing costs 1,588 — 1,588 2,707 — 2,707

Pension asset 6,097 — 6,097 10,384 — 10,384

Other 217 (4,197) (3,980) (1,791) (5,349) (7,140)

Total net deferred income tax liabilities $388,175 $150,022 $538,197 $363,627 $82,919 $446,546

(d) The following are the components of the movement in deferred income tax expense:

For the years ended December 31, 2015 2014Real estate properties $70,159 $27,486Investments 1,138 11,070Deferred financing costs (1,119) 2,765Pension asset (4,287) 408Other (1,166) 4,221

$64,725 $45,950

(e) Reconciliation of the deferred income tax liabilities at the beginning and end of the current financial period is as follows:

2015 2014Balance as at January 1 $446,546 $392,815Provision reflected in consolidated statements of income 64,725 45,950Provision reflected in consolidated statements of other comprehensive income 2,834 2,735Foreign currency translation 20,230 6,292Business combination 3,862 (1,246)Balance as at December 31 $538,197 $446,546

(f) The Company has U.S. net operating losses of approximately US$31,843 (December 31, 2014 - US$19,903) that expire in various years commencing in 2026, the benefits of which have not been recognized. The Company has other U.S. temporary differences for which no deferred tax assets are recognized of approximately US$1,724 (2014 - US$3,273). These other temporary differences have no expiration date.

(g) The temporary differences associated with investments in subsidiaries and joint ventures, for which the deferred tax liability has not been recognized, amount to $186,021 (2014 - $159,117).

(h) The Company regularly assesses the status of open tax examinations and its historical tax filing positions for the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. The Company believes that it has adequately provided for any tax adjustments that are more likely than not to occur as a result of ongoing tax examinations or historical filing positions.


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NOTE 24NET INCOME PER COMMON SHARE


Net income attributable to common shareholders $80,542 $136,703

Weighted average common shares outstanding - basic and diluted 12,239 12,521

Net income per common share - basic and diluted $6.58 $10.92

NOTE 25CONSOLIDATED STATEMENTS OF CASH FLOWS (a) Items Not Affecting Cash


Fair value loss (gain) on real estate properties, net (Note 20) $58,713 ($51,017)

Fair value gain on conversion option of MRG convertible debentures (Note 20) (53) (57)

Fair value loss (gain) on convertible debenture investments (Note 20) 371 (580)

Fair value loss on MRG units (Note 13) 13,944 13,066

Equity income from investments (Note 7(b)) (6,258) (52,921)

Impairment provision for investment in publicly traded securities (Note 22) 11,504 8,761

Amortization of capital assets and other 8,276 5,375

Amortization of cash flow hedge (Note 19) 845 854

Amortization of deferred financing costs (Note 19) 5,043 5,123

Amortization of mark-to-market adjustments on mortgages, net (Note 19) (15,244) (3,193)

Amortization of tenant incentive 1,184 148

Stepped rent - adjustment for straight-line method (5,739) (2,515)

Deferred income taxes 64,725 45,950

Gain from early extinguishment of mortgages payable — (1,517)

Loss on business combination (Note 4) — 16,254

Accretion of Morguard REIT convertible debentures (Note 12 (a)) (731) —

Loss (gain) on sale of real estate properties (565) 152

Impairment provision for mortgages and loans receivable 2,000 —

Other 31 (348)

$138,046 ($16,465)

(b) Net Change in Operating Assets and Liabilities

For the years ended December 31, 2015 2014Amounts receivable ($6,841) ($4,854)

Prepaid expenses and other (4,661) (7,606)

Accounts payable and accrued liabilities (2,292) 6,766

Net change in operating assets and liabilities ($13,794) ($5,694)


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(c) Supplemental Cash Flow Information

For the years ended December 31, 2015 2014Interest paid $156,336 $98,246Income taxes paid 14,578 22,253

Decrease in mortgages and loans receivable $50,417 $29,232Increase in mortgages and loans receivable (16,104) (73,904)

$34,313 ($44,672)

Proceeds from bank indebtedness $330,847 $162,278Repayment of bank indebtedness (207,283) (273,435)

$123,564 ($111,157)

Proceeds from construction loan $37,144 $61,405Repayment of construction loan (58,926) —

($21,782) $61,405

Payments from Morguard REIT $36,000 $90,000Advances to Morguard REIT (36,000) (60,000)

$— $30,000

During the year ended December 31, 2015, the Company issued non-cash dividends under a dividend reinvestment plan of $28 (2014 - $53).

NOTE 26EMPLOYEE FUTURE BENEFITSThe Company maintains a non-contributory defined benefit pension plan covering certain employees under the Morguard Corporation Employee Retirement Plan (the “Morguard Plan”). This plan provides benefits based on length of service and final average earnings. There is only one active member since the majority of members were employed in the Company’s industrial products distribution business, which was sold in 1996. The pension obligations and related assets for the former employees remain part of the Company’s defined benefit pension plan. The most recent actuarial valuation for the Morguard Plan was as at December 31, 2014.

Effective January 1, 2008, the Morguard Plan was amended and restated in its entirety to consist of the existing defined benefit provisions and new defined contribution provisions. Employees who accrued benefits under the Morguard Plan on December 31, 2007, will continue to participate in the defined benefit provisions of the Morguard Plan on and after January 1, 2008, and are not eligible to participate in the new defined contribution provisions. Employees of the Company participate under the defined contribution provisions upon completion of the applicable waiting period effective January 1, 2008.

Morguard Investments Limited Employees’ Retirement Plan (the “MIL Plan”) is a defined benefit plan that provides benefits based on years of service, years of contributions and annual earnings. Effective January 1, 2008, all members of the MIL Plan ceased to accrue future benefits under the MIL Plan and commenced participation under the new defined contribution provisions of the Morguard Plan. No assets or liabilities will transfer from the MIL Plan to the new Morguard Plan with respect to benefits accrued to December 31, 2007, with respect to MIL Plan members. Accrued benefits under the MIL Plan will be determined using credited service and benefit entitlement as at December 31, 2007.

Membership is a requirement after a defined term of employment and age. Funding of the MIL Plan is provided by contributions from Morguard Investments Limited (“MIL”). Certain employees who commenced employment prior to


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January 1, 1997, elected to contribute to the MIL Plan and receive a higher benefit. The most recent actuarial valuation for the MIL Plan was as at December 31, 2013.

The significant actuarial assumptions adopted in measuring the Company’s defined benefit pension plans for the years ended December 31, 2015 and 2014, are as follows:

For the years ended December 31, 2015 2014Morguard MIL Morguard MIL

Assumptions for defined benefit pension obligationDiscount rate 4.05% 4.05% 3.90% 3.90%Rate of price inflation 1.50% 1.50% 1.95% 1.95%Rate of compensation increase 2.50% 2.50% 2.95% 2.95%Rate of pension increases - pre-retirement — 1.85% — 2.20%Rate of pension increases - post-retirement — 1.50% — 1.95%Assumptions for defined benefit expenseDiscount rate 3.90% 3.90% 4.75% 4.75%Rate of price inflation 1.95% 1.95% 2.15% 2.15%Rate of compensation increase 2.95% 2.95% 3.15% 3.15%Rate of pension increases - pre-retirement — 2.20% — 2.50%Rate of pension increases - post-retirement — 1.95% — 2.15%

Information about the Company’s defined benefit pension plans is as follows:

As at December 31, 2015 2014Morguard MIL Total Morguard MIL Total

Accrued benefit obligationsBalance at beginning of year ($63,092) ($41,557) ($104,649) ($59,376) ($36,458) ($95,834)Current service cost (66) — (66) (58) — (58)Interest cost (2,381) (1,603) (3,984) (2,723) (1,712) (4,435)Benefits paid 4,170 1,328 5,498 4,277 1,010 5,287Changes in:

Demographic assumptions — — — (572) (329) (901)Financial assumptions 867 4,064 4,931 (4,644) (4,197) (8,841)

Experience adjustments 241 8 249 4 129 133Balance at end of year (60,261) (37,760) (98,021) (63,092) (41,557) (104,649)Plan assetsFair value at beginning of year 129,018 39,527 168,545 123,764 37,146 160,910Expected return on plan assets 4,901 1,520 6,421 5,722 1,741 7,463Administration expenses (395) (170) (565) (277) (247) (524)Return on plan assets (8,276) (2,587) (10,863) 6,285 1,897 8,182Employer contributions (2,229) — (2,229) (2,199) — (2,199)Benefits paid (4,170) (1,328) (5,498) (4,277) (1,010) (5,287)Balance at end of year 118,849 36,962 155,811 129,018 39,527 168,545Net assets $58,588 ($798) $57,790 $65,926 ($2,030) $63,896

In 2015 Morguard contributed $2,229 to the defined contribution plan (2014 - $2,199).


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Details of the defined benefit expense (income) recorded in the consolidated statements of other comprehensive income for the years ended December 31, 2015 and 2014, are provided below:

For the years ended December 31, 2015 2014Morguard MIL Total Morguard MIL Total

Components of defined benefit costCurrent service cost $66 $— $66 $58 $— $58Interest cost 2,381 1,603 3,984 2,723 1,712 4,435Expected return on plan assets (4,901) (1,520) (6,421) (5,722) (1,741) (7,463)Administrative expenses and taxes 375 175 550 375 175 550Net benefit plan (income) expense ($2,079) $258 ($1,821) ($2,566) $146 ($2,420)

Details of the defined benefit pension plan recorded in the consolidated statements of other comprehensive income are provided below:


Changes in:Demographic assumptions $— $— $— $572 $329 $901Financial assumptions (867) (4,064) (4,931) 4,644 4,197 8,841

Experience adjustments (241) (8) (249) (4) (129) (133)Return of plan assets 8,296 2,582 10,878 (6,383) (1,825) (8,208)Net actuarial loss (gain) on defined benefitpension plans $7,188 ($1,490) $5,698 ($1,171) $2,572 $1,401

Reconciliation of net accrued pension assets for the years ended December 31, 2015 and 2014, is as follows:


Net defined benefit asset, beginning of the year $65,926 ($2,030) $63,896 $64,388 $688 $65,076Net benefit plan income (expense) 2,079 (258) 1,821 2,566 (146) 2,420Net actuarial gain (loss) (7,188) 1,490 (5,698) 1,171 (2,572) (1,401)Employer contribution (2,229) — (2,229) (2,199) — (2,199)Net defined benefit asset, end of the year $58,588 ($798) $57,790 $65,926 ($2,030) $63,896

Details of the defined benefit obligation by participant status as at December 31, 2015 and 2014, are as follows:


Actives, suspended and long-term disability $16,091 $26,688 $42,779 $19,002 $28,677 $47,679Vested deferreds 4,563 2,804 7,367 5,484 3,002 8,486Retirees 39,607 8,268 47,875 38,606 9,878 48,484Total $60,261 $37,760 $98,021 $63,092 $41,557 $104,649


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The Morguard Plan and the MIL Plan have a sole investment in the Morguard Master Trust Fund (the “Master Trust”), and the assets of the Morguard Plan and the MIL Plan are combined in the Master Trust. The fair value of the investments in the Master Trust is as follows:


Cash and cash equivalents $4,137 $2,931

Fixed-income securities 13,261 495

Convertible securities 15,318 14,064

Canadian equities 102,845 133,122

Canadian pooled funds 19,575 17,778

Other 675 155

Total investments $155,811 $168,545

The following is a quantitative sensitivity analysis of the impact on the accrued pension benefits obligation as a result of the following changes in the significant pension assumptions:

Increase (Decrease) in

Pension Benefit ObligationYear ended December 31, 2015 Morguard MIL TotalDiscount rate

Discount rate -100 basis points $6,516 $6,830 $13,346Discount rate +100 basis points (5,386) (5,402) (10,788)

Pension increase rate

Pension increase rate -50 basis points — (3,092) (3,092)Pension increase rate +50 basis points — 3,446 3,446

Mortality

Mortality - life expectancy for member age 65 -1 year (2,207) (1,324) (3,531)Mortality - life expectancy for member age 65 +1 year 2,161 1,291 3,452

The following are the expected benefits payments to be made in the next 10 years from the defined benefit plan obligations:

Year ended December 31, 2015 Morguard MIL TotalYear 1 $4,131 $1,054 $5,185Year 2 4,098 1,103 5,201Year 3 4,032 1,143 5,175Year 4 3,985 1,215 5,200Year 5 4,161 1,437 5,598Next 5 years 18,931 8,648 27,579

The Morguard Plan holds directly 336,618 shares of the Company and 80,962 units of Morguard REIT. Net benefit plan income is recorded in property management and corporate expenses.


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NOTE 27COMMITMENTS AND CONTINGENCIES(a) CommitmentsFuture minimum annual rental payments for land leases, office premises and equipment operating leases that expire at various dates ending in 2069 are payable over the next five years and thereafter as follows:

2016 $14,2632017 14,0462018 13,8082019 13,7112020 13,658Thereafter 486,842

The Company is a lessee under four ground leases that expire at various dates ending in 2069. Annual rental expenses for each of the ground leases are as follows:

Ground Lease #1 Annual rental expenseFrom July 1, 1990, to June 30, 2010 $2,779From July 1, 2010, to June 30, 2030 $10,962 (see Note 27(b))From July 1, 2030, to June 30, 2050 Fair market value of land at June 2030 multiplied by 6%From July 1, 2050, to June 30, 2060 Fair market value of land at June 2050 multiplied by 6%

Ground Lease #1 represents the lease associated with the land underlying a mixed-use property located in Toronto, Ontario. Since the lessor and the Company were not able to reach an agreement on the fair market value of the land on the last scheduled reset date of July 1, 2010, the matter was appointed to an arbitration tribunal (the "Arbitrators"). On June 21, 2013, a majority of the Arbitrators awarded their decision and concluded on a land value that resulted in the annual land rent increasing from $2,779 to $10,962 (the “Majority Decision”). In accordance with the Majority Decision, the Company has recorded the land rent based on the increased annual rent of $10,962.

Ground Lease #2 Annual rental expenseFrom March 1, 2011, to February 28, 2021 $714From March 1, 2021, to February 28, 2065 Fair market value of land at February 2021 multiplied by 8.5%

The Company has two other ground leases that expire between June 30, 2022, and July 21, 2069. The Company is required to pay an annual base rent totalling $319. In addition, the Company has a commitment to purchase the land of one of the ground leases that expires on May 31, 2022. The purchase price of the land will be based on the market value of the land at the end of the lease term.

The Company has entered into various leasing agreements and contracts for the development of properties. As at December 31, 2015, committed leasing costs, capital and development expenditures are estimated to be $36,750.

(b) ContingenciesAs indicated above, the Majority Decision for Ground Lease #1 was an annual land rent of $10,962, compared to the decision delivered by the minority of the Arbitrators, which would have resulted in an annual land rent of $3,600. The Company appealed the Majority Decision, and on December 23, 2014, the appeal decision determined that the Majority Decision, was to be set aside, and a new arbitration has been ordered in accordance with instructions provided by the court. A further appeal by the landlord was heard in early February 2016 and the decision is outstanding. The Company will continue to accrue the land rent based on the Majority Decision until the new arbitration decision is issued.

The Company has issued irrevocable letters of credit relating to normal course development activity amounting to $11,066 as at December 31, 2015 (2014 - $18,234).


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In addition, the Company 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 final outcome of these matters cannot be predicted with certainty, in the opinion of management, any uninsured liability that may arise from such contingencies would not have a material adverse effect on the financial position or results of operations of the Company. Any settlement of claims in excess of amounts recorded will be charged to operations as and when such determination is made.

NOTE 28MANAGEMENT OF CAPITALThe Company defines capital that it manages as the aggregate of its shareholders’ equity, mortgages payable, Unsecured Debentures, convertible debentures, construction financing payable, loans payable and bank indebtedness. The Company’s objective when managing capital is to ensure that the Company will continue as a going concern so that it can sustain daily operations and provide adequate returns to its shareholders.

The Company 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 Company mitigates these risks by its continued efforts to stagger the maturity profile of its long-term debt, enhance the value of its real estate properties, maintain high occupancy levels and foster excellent relations with its lenders. The Company 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 Company as at December 31, 2015 and 2014, is summarized below:

As at December 31, 2015 2014Mortgages payable, principal balance $3,570,656 $3,288,833

Unsecured Debentures, principal balance 135,000 135,000

Convertible debentures, principal balance 154,985 154,985

Construction financing payable 143,489 165,271

Loans payable 9,568 2,320

Bank indebtedness 135,403 4,927

Shareholders’ equity 2,697,724 2,498,605

$6,846,825 $6,249,941

The Company monitors its capital structure based on an interest coverage ratio and a debt to gross book value ratio. These ratios are used by the Company to manage an acceptable level of leverage and are calculated in accordance with the terms of the specific agreements with creditors and are not considered measures in accordance with IFRS nor is there an equivalent IFRS measure.

The Company’s Unsecured Debentures contain covenants that are calculated on a non-consolidated basis, which represents the Company’s consolidated results prepared in accordance with IFRS as shown on the Company’s most recently published annual consolidated financial statements, adjusted, as required, to account for the Company’s investments in Morguard Residential REIT and Morguard REIT using the equity method. The covenants that the Company must maintain are a non-consolidated interest coverage ratio above 1.65 times, a non-consolidated debt to gross book value ratio not to exceed 65% and a minimum non-consolidated equity requirement of at least $300,000. If the Company does not meet these covenants, the Unsecured Debentures will become immediately due and payable unless the Company is able to remedy the default or obtain a waiver from lenders. The Company is in compliance with the covenants as at December 31, 2015.


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NOTE 29FINANCIAL INSTRUMENTS AND RISK MANAGEMENTThe Company’s financial assets and financial liabilities comprise cash, restricted cash, amounts receivable, mortgages and loans receivable, accounts payable and accrued liabilities, bank indebtedness, construction financing payable, mortgages payable, loans payable, Unsecured Debentures and convertible debentures, excluding any conversion option. Fair values of financial assets and financial liabilities and a discussion of risks associated with financial assets and liabilities are presented as follows.

Fair Value of Financial Assets and Financial LiabilitiesThe fair values of cash, restricted cash, amounts receivable, accounts payable and accrued liabilities and bank indebtedness approximate their carrying values due to the short-term maturity of those instruments. The fair value of construction financing payable and mortgages and loans receivable is based on the current market conditions for financing loans with similar terms and risks. The loans payable are reflected at fair value since they are based on a floating interest rate and reflect the terms of current market conditions.

Mortgages payable, Unsecured Debentures and convertible debentures are carried at amortized cost using the effective interest method of amortization. The estimated fair values of long-term borrowings have been determinedbased on market information, where available, or by discounting future payments of interest and principal at estimated interest rates expected to be available to the Company. 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 (category Level 2). Based on these assumptions, the fair value as at December 31, 2015, of the mortgages payable before deferred financing costs and mark-to-market adjustments is estimated at $3,703,712 (December 31, 2014 - $3,446,985), compared with the carrying value of $3,570,656 (December 31, 2014 - $3,288,833). The fair value of the mortgages payable varies from the carrying value due to fluctuations in interest rates since their issue.

The fair value of the Unsecured Debentures liability is based on its closing bid price (category Level 1). As at December 31, 2015, the fair value of the Unsecured Debentures has been estimated at $138,714 (December 31, 2014 - $139,132).

The fair value of the convertible debentures liability is based on their market trading prices (category Level 1). As at December 31, 2015, the fair value of the convertible debentures before deferred financing costs has been estimated at $156,785 (December 31, 2014 - $159,135), compared with the carrying value of $154,985 (December 31, 2014 - $154,985).

The fair value hierarchy of financial instruments and real estate properties measured at fair value in the consolidated balance sheets is as follows:

December 31, 2015 December 31, 2014As at Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

Assets:Real estate properties (1) $— $— $7,833,557 $— $— $7,361,961

Investments in publicly traded securities 3,005 — — 16,542 — —

Investments in real estate funds — — 95,851 — — 71,683

Financial liabilities:Morguard Residential REIT units — 229,416 — — 215,211 —

Conversion option on MRG convertible debentures — 41 — — 94 —

Interest rate swap liability — 1,568 — — 1,038 —(1) Excluding hotel properties recorded at cost, net of accumulated amortization.


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Risks Associated With Financial Assets and Financial LiabilitiesThe Company is exposed to financial risks arising from its financial assets and financial liabilities. The financial risks include market risk relating to interest rates and foreign exchange rates, credit risk and liquidity risk. The Company’s overall risk management program focuses on establishing policies to identify and analyze the risks faced by the Company, 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 Company’s activities. The Company aims to develop a disciplined control environment in which all employees understand their roles and obligations.

(a) Market RiskMarket risk is the risk that the fair value or future cash flows of financial assets or financial liabilities will fluctuate due to movements in market prices, comprises the following:

Interest Rate RiskThe Company is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not be refinanced on terms as favourable as those of the existing indebtedness. Interest on the Company’s bank indebtedness and certain mortgages is subject to floating interest rates. For the year ended December 31, 2015, the increase or decrease in annual net income for each one percent change in interest rates on floating rate debt amounts to $1,425.

The Company’s objective in managing interest rate risk is to minimize the volatility of the Company’s income. As at December 31, 2015, interest rate risk has been minimized because the majority of long-term debt is financed at fixed interest rates with maturities scheduled over a number of years. A mortgage totalling $44,560 is subject to a floating interest rate; however, the Company's risk has been minimized because the Company entered into an interest rate swap transaction to acquire a fixed rate in substitution for the floating rate secured by five hotel properties. The swap matures on June 14, 2018.

Foreign Exchange RiskThe Company is exposed to foreign exchange risk as it relates to its U.S. investments due to fluctuations in the exchange rate between the Canadian and U.S. dollars. Changes in the exchange rate may result in a reduction or an increase of reported earnings and other comprehensive income. For the year ended December 31, 2015, a $0.05 change in the U.S. to Canadian dollar exchange rate would have resulted in a $2,364 change to net income or loss and a $35,168 change to comprehensive income or loss.

The Company’s objective in managing foreign exchange risk is to mitigate the exposure from fluctuations in the exchange rate by maintaining U.S. denominated debt against its U.S. assets. The Company currently does not hedge translation exposures.

(b) Credit RiskCredit 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 Company 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 Company’s commercial leases typically have lease terms 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.


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Future minimum rentals under non-cancellable tenant operating leases are as follows:

As at December 31, 2015 2014Not later than one year $333,408 $281,002Later than one year and not longer than five years 971,947 822,843Later than five years 804,472 698,795

$2,109,827 $1,802,640

The objective in managing credit risk is to mitigate exposure through the use of approved credit policies governing the Company's credit practices that limit transactions according to counterparties' credit quality.

The carrying amount of amounts receivable is reduced through the use of an allowance account, and the amount of the loss is recognized in the consolidated statements 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 statements of income.

The following table sets forth details of trade receivables and the related allowance for doubtful accounts:

As at December 31, 2015 2014Trade receivables $11,224 $8,617Less: Allowance for doubtful accounts (2,175) (2,415)Trade receivables, net $9,049 $6,202

(c) Liquidity RiskLiquidity risk is the risk the Company will encounter difficulties in meeting its financial liability obligations. The Company will be subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not be able to be refinanced. The Company’s objectives in minimizing liquidity risk are to maintain appropriate levels of leverage on its real estate assets and to stagger the debt maturity profile. As at December 31, 2015, the Company was holding cash of $93,504 and had undrawn lines of credit available to it of $205,724.

The fair value of the interest rate swap for the year ended December 31, 2015, is a loss position of $1,568 (2014 - $1,038), which is included in accounts payable and accrued liabilities in the consolidated balance sheets. Included in other comprehensive income for the year ended December 31, 2015, is a loss net of deferred taxes of $385 (2014 - $391); deferred taxes amount to $145 (2014 - $147), which relates to the effective portion of the net change in fair value of the interest rate swaps.

NOTE 30SEGMENTED INFORMATION (a) Operating SegmentsThe consolidation of Morguard REIT effective December 31, 2014, gave rise to changes in external and internal financial reporting of the Company and resulted in a change in the Company’s reportable segments. IFRS 8, requires operating segments to be determined based on internal reports that are regularly reviewed by the chief operating decision-maker for the purpose of allocating resources to the segment and assessing its performance. As a result of the consolidation of Morguard REIT, the Company realigned its reportable segments accordingly, and as of January 1, 2015, the Company has the following four reportable segments after aggregation: (i) multi-suite residential; (ii) retail; (iii) office; and (iv) other, which represents industrial and hotel properties. The Company 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.


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The following summary presents certain financial information regarding the Company’s operating segments for the years ended December 31, 2015 and 2014:

For the year ended December 31, 2015Multi-suite

Residential Retail Office Other Total

Revenue from real estate properties $274,977 $256,126 $219,668 $57,824 $808,595

Property operating expenses 125,202 108,241 97,761 41,492 372,696Net operating income $149,775 $147,885 $121,907 $16,332 $435,899

For the year ended December 31, 2014Multi-suite

Residential Retail Office Other Total

Revenue from real estate properties $241,813 $99,444 $79,885 $51,666 $472,808

Property operating expenses 111,970 44,164 36,860 38,621 231,615

Net operating income $129,843 $55,280 $43,025 $13,045 $241,193

Multi-suiteResidential Retail Office Other Total

As at December 31, 2015Real estate properties $3,262,325 $2,532,127 $1,915,048 $216,145 $7,925,645Mortgages payable $1,593,540 $1,083,659 $840,276 $82,079 $3,599,554

For the year ended December 31, 2015Additions to real estate properties $122,430 $47,708 $29,759 $6,462 $206,359

Fair value gain (loss) on real estate properties $41,000 ($38,350) ($47,672) ($13,691) ($58,713)

Multi-suiteResidential Retail Office Other Total

As at December 31, 2014

Real estate properties $2,825,165 $2,457,303 $1,928,434 $242,324 $7,453,226

Mortgages payable $1,363,439 $1,080,677 $821,448 $67,155 $3,332,719

For the year ended December 31, 2014

Additions to real estate properties $77,038 $1,621,824 $1,312,442 $16,916 $3,028,220

Fair value gain (loss) on real estate properties $54,458 ($6,878) $7,595 ($4,158) $51,017

(b) Geographic Segments:The following summary presents financial information by the geographic regions in which the Company operates:


Real estate propertiesCanada $5,715,237 $5,721,663

United States 2,210,408 1,731,563

$7,925,645 $7,453,226


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Revenue from real estate propertiesCanada $607,543 $301,624

United States 201,052 171,184

$808,595 $472,808

NOTE 31COMPARATIVE AMOUNTSCertain prior year comparative amounts have been reclassified to conform to the current year’s presentation.

NOTE 32SUBSEQUENT EVENTSOn February 1, 2016, the Company acquired three hotel properties located in Toronto, Ontario, for a purchase price of $33,500. The acquisition was partially financed by a $20,000 credit facility for a term of three years.

On February 1, 2016, the Company acquired a multi-suite residential property located in Ottawa, Ontario, for a purchase price of approximately $67,000. The acquisition was partially financed by a new mortgage of $38,589 at an interest rate of 2.88% for a term of 10 years.

During February 2016, the Company repurchased 37,500 common shares under its NCIB for cash consideration of $4,810 at a weighted average price of $128.27 per common share.

mrc fs q4 2015 - morguard home corporation/financial... · title: mrc fs q4 2015 created date:...

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