MORGUARD REIT
FOURTH QUARTER
RESULTS 2016
MANAGEMENT’S DISCUSSION AND ANALYSIS
AND CONSOLIDATED FINANCIAL STATEMENTS
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART I
BASIS OF PRESENTATION
Financial data included in this Management's Discussion and Analysis ("MD&A") for the year ended December 31, 2016,
includes material information up to February 15, 2017. Except as outlined below, financial data provided has been prepared
in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting
Standards Board ("IASB").
In this MD&A, the discussion of the operating results of Morguard Real Estate Investment Trust ("the Trust") is based on
financial information developed using proportionate consolidation for all the Trust's joint arrangements, including those joint
ventures accounted for using the equity method, as required by IFRS 11, "Joint Arrangements" ("IFRS 11"). Management
believes that presenting the operating and financial results of the Trust's joint arrangements using proportionate
consolidation provides more useful information to both current and prospective investors to assist them with their
understanding of the Trust's financial performance.
In this MD&A, the discussion of the Trust's property performance for the purpose of some measures is focused on income
producing properties ("IPP"), excluding properties held for development, area under development, and properties held for
sale. The Trust defines these excluded areas as follows:
Properties held for development: These properties, while income producing, operate with future opportunity in mind. As a
result, management will enter into lease arrangements with shorter lease terms and options to exit the lease at the
landlord's request. As a result, these properties do not deliver the same results (rental rates) as other IPP.
Area under development: When circumstances warrant, the Trust will reposition component parts of its properties. When
this occurs, the associated area ("area under development") is not available for occupancy. As a result, this area is not
income producing.
Properties held for sale: The Trust will undertake to actively dispose of certain assets. In these circumstances,
management has determined that the performance of the ongoing operations is of the greatest importance to stakeholders.
The following discussion and analysis are intended to provide readers with an assessment of the performance of the Trust
over the three months, as well as its financial position and future prospects. This discussion should be read in conjunction
with the consolidated financial statements and accompanying notes for the year ended December 31, 2016. Historical
results, including trends that might appear, should not be taken as indicative of future operations or results. All dollar
references, unless otherwise stated, are in thousands of Canadian dollars, except per unit amounts.
Part XI provides reconciliations between selected financial information from the Trust's consolidated financial statements
and the financial information used in this MD&A.
FORWARD-LOOKING DISCLAIMER
Certain information in this MD&A may constitute forward-looking statements that involve a number of risks and
uncertainties, including statements regarding the outlook for the Trust's business results of operations. Forward-looking
statements use the words "believe," "expect," "anticipate," "may," "should," "intend," "estimate" and other similar terms that
do not relate to historical matters. Such forward-looking statements involve known and unknown risks and uncertainties and
other factors that may cause the actual results to differ materially from those indicated. Such factors include, but are not
limited to, general economic conditions, the availability of new competitive supply of commercial real estate that may
become available either through construction or sublease, the Trust's ability to maintain occupancy and to lease or re-lease
space on a timely basis at current or anticipated rates, tenant bankruptcies, financial difficulties and defaults, changes in
interest rates, changes in operating costs, the Trust's ability to obtain adequate insurance coverage at a reasonable cost
and the availability of financing. The Trust believes that the expectations reflected in forward-looking statements are based
on reasonable assumptions; however, the Trust can give no assurance that actual results will be consistent with these
forward-looking statements. Except as required by applicable law, the Trust disclaims any intention or obligation to update
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers
should be cautioned not to place undue reliance on the forward-looking statements.
FINANCIAL MEASURES
The Trust uses supplemental measures such as net operating income ("NOI"), funds from operations ("FFO") and adjusted
funds from operations ("AFFO") to manage its financial performance. These measures are not defined by IFRS and
therefore should not be construed as substitutes for net income or cash flows from operating activities calculated in
accordance with IFRS. Furthermore, the Trust's method of calculating these supplemental measures may differ from other
issuers' methods and, accordingly, may not be comparable to measures reported by other issuers.
SUMMARY OF SELECTED ANNUAL INFORMATION
The selected annual information highlights certain key metrics for the Trust over the most recently completed five years.
These measures from time to time may reflect fluctuations caused by the underlying impact of seasonal or non-recurring
items, including acquisitions, divestitures, developments, leasing and maintenance expenditures, along with any associated
financing requirements. These items along with the ongoing financing activities for the existing portfolio can dramatically
affect the results.
ADOPTION OF ACCOUNTING STANDARDS
AMENDMENTS TO IFRS 11, "JOINT ARRANGEMENTS": ACCOUNTING FOR ACQUISITIONS OF INTERESTS
On January 1, 2016, the Trust adopted the amendments to IFRS 11, which 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.
These amendments did not impact the consolidated financial statements.
AMENDMENTS TO IAS 1, "PRESENTATIONS OF FINANCIAL STATEMENTS" ("IAS 1"): DISCLOSURE INITIATIVE
On January 1, 2016, the Trust adopted the amendments to IAS 1, which clarify, rather than significantly change, existing IAS
1 requirements. The amendments clarify:
• The materiality requirements in IAS 1;
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be
disaggregated;
• That entities have flexibility as to the order in which they present the notes to financial statements; and
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in
aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to
profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement
of financial position(s) and the statement(s) of profit or loss and OCI.
These amendments did not impact the consolidated financial statements.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
ADDITIONAL INFORMATION
Additional information relating to the Trust, including the audited annual consolidated financial statements, Annual
Information Form ("AIF"), Material Change Reports and all other continuous disclosure documents required by securities
regulators, are filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed
electronically at www.sedar.com.
REVIEW AND APPROVAL BY THE BOARD OF TRUSTEES
The Board of Trustees ("the Trustees"), upon the recommendation of its Audit Committee, approved the contents of this
MD&A on February 15, 2017.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
SUMMARY OF SELECTED ANNUAL INFORMATION
TABLE 1
2016
2015
2014
2013
2012
$280,726
$290,982
$298,461
$279,651
$244,876
Net operating income
160,500
165,930
169,739
161,336
136,964
Income before fair value (losses)/gains, (loss)/gain on sale of real estate properties and
net (loss)/income from equity-accounted investments
110,408
103,153
102,700
97,080
82,103
Fair value (losses)/gains on real estate properties
(51,643)
(78,977)
11,239
107,641
142,683
In thousands of dollars, except per unit amounts
Revenue from real estate properties
(Loss)/gain on sale of real estate properties
—
—
(37)
2,058
—
(20)
5,602
3,660
Net (loss)/income from equity-accounted investments
(1,558)
2,441
Net income
57,207
26,617
113,882
212,381
228,446
113,500
106,385
106,516
100,763
85,982
76,445
79,524
79,272
65,342
43,681
Basic
$0.94
$0.43
$1.83
$3.35
$3.82
Diluted 2
$0.93
$0.43
$1.72
$3.01
$3.81
$1.87
$1.72
$1.71
$1.59
$1.44
$1.81
$1.67
$1.67
$1.55
$1.44
Basic
$1.26
$1.28
$1.28
$1.03
$0.73
Diluted 2
$1.25
$1.28
$1.27
$1.03
$0.73
Cash distributions per unit
$0.96
$0.96
$0.96
$0.96
$0.95
Funds from operations
Adjusted funds from operations 1, 6
Amount presented on a per unit basis
Net income
Funds from operations
Basic
Diluted
2
Adjusted funds from operations 1, 6
Payout ratio – Adjusted funds from operations 3
76.2 %
75.0 %
75.0 %
93.2 %
130.1 %
Weighted average number of units as at year-end (in thousands)
Basic
60,750
61,779
62,168
63,456
59,778
Diluted 2
66,780
67,876
68,265
69,554
60,811
Total assets
$3,034,190
$2,920,155
$3,016,496
$2,942,799
$2,663,321
Total liabilities
$1,479,007
$1,364,015
$1,409,415
$1,390,061
$1,232,538
Total equity
$1,555,183
$1,556,140
$1,607,081
$1,552,738
$1,430,783
Retail
4,721
4,710
4,775
4,771
4,299
Office
3,353
3,517
3,526
3,466
3,466
534
534
534
534
534
8,608
8,761
8,835
8,771
8,299
Balance sheets
Gross leasable area as at year-end (in thousands of square feet) 4
Industrial
Total
Occupancy as at year-end (%) 5
Retail
96 %
97 %
96 %
98 %
97 %
Office
97 %
97 %
96 %
95 %
95 %
Industrial
98 %
97 %
97 %
87 %
95 %
Total
96 %
97 %
96 %
96 %
96 %
1. Excludes Target settlement proceeds reported during Q2 2016.
2. Includes the dilutive impact of the outstanding convertible debentures.
3. Cash distributions per unit as a percentage of adjusted funds from operations – basic.
4. Gross leasable area for income producing properties only.
5. Excludes properties held for sale and area under development.
6. Commencing in 2014, the Trust uses normalized productive capacity maintenance expenditures to calculate adjusted funds from operations.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART II
BUSINESS OVERVIEW AND STRATEGY
The Trust's primary business goal is to accumulate a Canadian portfolio of high-quality real estate assets and then deliver
the benefits of such real estate ownership to unitholders. The primary benefit is a reliable and, over time, increasing cash
distribution. The Trust manages distributions to ensure sufficient cash is retained to meet fixed obligations while ensuring a
stable cash flow to unitholders.
The Trust is an unincorporated "closed-end" trust, governed by the laws of the Province of Ontario, created and constituted
pursuant to an amended and restated Declaration of Trust dated May 5, 2015 ("Declaration of Trust"). The Trust was
formed on June 18, 1997, and began operations on October 14, 1997. The Trust units are publicly traded and listed on the
Toronto Stock Exchange ("TSX") under the symbol MRT.UN.
Morguard Corporation ("Morguard") is the parent company of the Trust, owning 52.5% of the outstanding units as at
December 31, 2016. Morguard is a real estate company that owns a diversified portfolio of multi-unit residential, retail,
hotel, office and industrial properties in both Canada and the United States.
The Trust’s asset management team is focused on continually improving the returns from the assets currently owned and
making quality acquisitions that are accretive in the long term. As part of its strategy to continually improve the quality of its
property portfolio, the Trust undertakes the disposition of properties in cases where both the cash flows and values have
been maximized, where the properties no longer fit the Trust’s portfolio or where market trends indicate that superior
investment return opportunities are available elsewhere.
The Trust’s management team is incentivized to maintain occupancy levels and rents that outperform local markets. The
Trust has established standards for maintaining the quality of its portfolio and operating its properties at cost levels that are
competitive in their respective markets. These efforts are enhanced through a sustainability program that tracks utility
usage and savings over time. These savings are returned to our tenants through reduced operating costs, increasing the
Trust’s reputation as a responsible landlord.
The Trust’s management team is supported by contracted property management. The choice to contract for property
management provides the Trust with a day-to-day operating platform that is both “best-in-class” and cost-effective. Property
management services are delivered through a management agreement with Morguard Investments Limited (“MIL”). MIL is a
full-service real estate advisory company wholly owned by Morguard. MIL also provides advisory and management services
to institutional and other investors not related to Morguard or the Trust. The Trust’s agreement with MIL provides property
management services at predetermined rates based on a percentage of revenue. This provides predictability to a key
component of operating costs. In addition, MIL provides the Trust with leasing services across the full portfolio. With MIL
locations across the country, the Trust benefits from local market knowledge and local broker relationships. An annual
review of this agreement, combined with MIL’s institutional client base, ensures that rates for services reflect current market
conditions.
The Trust’s long-term debt strategy involves the use of conventional property-specific secured mortgages or bonds,
unsecured convertible debentures and secured floating-rate bank financing. The Trust currently targets a capital structure
with an overall indebtedness ratio of not more than 50% of gross assets. Through its Declaration of Trust, the Trust has the
ability to increase its overall indebtedness ratio to 60%.
FOURTH QUARTER OVERVIEW
The Trust's fully diluted FFO for the three months ended December 31, 2016, was $29.3 million or $0.44 per unit. This is a
decrease of $0.01 per unit over the same period in 2015. The decrease is largely the result of adjustments recorded to
interest expense as a result of the announced redemption of the 2012 convertible debentures. These adjustments
negatively impacted FFO $1.1 million or $0.02 per unit.
Total net operating income for the three months ended December 31, 2016, was $43.7 million, a decrease of $0.9 million
over the same period in 2015. The Trust's same asset NOI of $43.0 million for the three months ended December 31, 2016,
is favourable by $0.5 million compared to the same period in 2015.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
The increase in the Trust's same asset NOI derive largely from the office portfolio. In addition to higher rents ($0.4 million)
due to higher occupancy, lower operating expenses have allowed the Trust to accelerate the recovery of maintenance
projects completed in prior years ($0.3 million). During the quarter, the Trust completed over 155,000 square feet of leasing
in the office portfolio.
In the retail portfolio, the Trust has continued to advance lease commitments and construction contracts associated with the
vacated Target Canada space. Target Canada’s exit has ultimately reinforced the Trust’s overall rent roll with strong, well
established national retail operators. These include Walmart, Canadian Tire, Lowes, Sobeys, GoodLife Fitness, Marshall's,
Urban Planet, Ardene and Cara Foods (Harvey’s, Swiss Chalet, East Side Mario’s and Fionn MacCool’s).
As at January 1, 2017, the Trust has entered into binding contracts on nine leases that recycle 66% of the gross leasable
area previously occupied and replaced approximately 115% of the baseline revenue lost from the major retailer's departure.
The re-purposing of the rental space has resulted in the creation of expanded mall corridors and additional pro forma
commercial retail unit ("CRU") income generating bays that, coupled with enhanced operating cost contributions, will
improve the mall experience and strengthen the overall occupancy cost profile. Current pro forma projections suggest a
96% utilization factor on the former anchor premises and, moreover, replacement of almost 200% of the total base rent
contributed by Target Canada.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PORTFOLIO OVERVIEW
The risk and reliability characteristics of real estate asset classes are different, and delivering on the primary business goal
requires a mix of assets that balance risk and rewards. As at December 31, 2016, the Trust owned a diversified real estate
properties portfolio of 49 retail, office and industrial properties consisting of approximately 8.7 million square feet of gross
leasable area ("GLA") located in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec.
Included in this portfolio are two properties that the Trust has deemed as held for development.
Retail: The retail portfolio includes two broad categories of income producing properties: enclosed full-scale, regional
shopping centres that are dominant in their respective markets; and neighbourhood and community shopping centres that
are primarily anchored by food retailers, discount department stores and banking institutions. Investing across these two
broad categories of retail assets allows the Trust to spread its tenant base, reducing its exposure to a single category
retailer.
Office: The office portfolio is focused on well-located, high-quality properties in major Canadian urban centres. The
portfolio is balanced between single-tenant properties under long-term lease to government and large national tenants that
work to secure the Trust's cash flow, and multi-tenant properties with well-distributed lease expiries that allow the Trust to
benefit from increased rental rates on lease renewal.
Industrial: The Trust has an interest in five industrial properties located in Ontario and Quebec.
PORTFOLIO COMPOSITION BY ASSET TYPE AND LOCATION
TABLE 2
AT THE TRUST'S OWNERSHIP SHARE
Retail
Number of
Properties
British Columbia
2
Alberta
Saskatchewan
Manitoba
Ontario
Location
Quebec
IPP held for development
Income producing properties
MORGUARD.COM
Office
GLA (000's)
Number of
Properties
533
3
5
816
1
502
3
658
9
2,212
Industrial
Total
GLA (000's)
Number of
Properties
GLA (000's)
Number of
Properties
600
—
GLA (000's)
—
5
1,133
10
1,323
—
—
—
—
15
2,139
—
—
1
502
—
—
—
—
3
658
8
980
4
291
21
3,483
—
—
1
450
1
243
2
693
20
4,721
22
3,353
5
534
47
8,608
1
67
1
43
—
—
2
110
21
4,788
23
3,396
5
534
49
8,718
8
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART III
PROPERTY PERFORMANCE
NET OPERATING INCOME
NOI is used as a key indicator of performance as it represents a measure over which management has control.
NOI is an additional Generally Accepted Accounting Principles ("GAAP") measure and is defined by the Trust as revenue
from real estate properties less property operating expenses, property taxes and property management fees.
For the year ended December 31, 2016, the Trust's retail and office portfolios accounted for 51% and 47% of NOI from
income producing properties, respectively. The Trust's industrial portfolio accounts for only 2% of the Trust's NOI from
income producing properties.
NET OPERATING INCOME BY ASSET TYPE AND LOCATION
TABLE 3
AT THE TRUST'S OWNERSHIP SHARE
Retail
Office
Number of
Properties
NOI
(000's)
British Columbia
2
Alberta
5
Saskatchewan
Manitoba
Industrial
Total
Number of
Properties
NOI
(000's)
Number of
Properties
NOI
(000's)
$9,346
3
$13,181
—
12,724
10
38,267
—
1
7,532
—
—
3
10,143
—
—
Ontario
9
43,496
8
Quebec
—
—
1
20
83,241
22
77,158
1
726
1
Income producing properties
21
83,967
23
77,127
5
Properties held for sale/sold
—
—
—
641
—
Total real estate properties
21
$83,967
23
$77,768
5
Location
IPP held for development
Number of
Properties
NOI
(000's)
$—
5
$22,527
—
15
50,991
—
—
1
7,532
—
—
3
10,143
18,736
4
1,632
21
63,864
6,974
1
1,407
2
8,381
5
3,039
47
163,438
2
654
49
164,092
—
612
49
$164,704
(31)
—
(41)
2,998
(29)
$2,969
A complete reconciliation of NOI discussed in this MD&A to NOI per the consolidated financial statements is provided in Part
XI (Table 60).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
COMPARATIVE NET OPERATING INCOME ANALYSIS
TABLE 4
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31,
2016
2015
$72,450
$73,793
17,056
16,585
Property taxes
9,978
12,253
Property management fees
2,395
2,394
1
$43,021
$42,561
$460
Revenue from real estate properties
Property operating expenses
Net operating income – same assets
Variance
($1,343)
471
(2,275)
Year Ended December 31,
%
(1.8%)
2016
2015
Variance
($3,223)
%
$281,028
$284,251
2.8%
63,423
62,893
(1.1%)
(18.6%)
46,832
49,357
(2,525)
(5.1%)
—%
9,237
9,291
(54)
(0.6%)
1.1%
$161,536
$162,710
($1,174)
(0.7%)
530
0.8%
The components of net operating income – same assets are displayed in the table above. For comparability, the NOI is
focused on same assets. Assets acquired, disposed of and developed over the comparable periods are removed, along
with the impact of stepped rents, lease cancellation fees and area under development. At December 31, 2016, the total
area under development was 496,000 square feet.
Property management fees are the direct result of the Trust's management agreement with MIL. The property management
agreement permits property management fees to be charged, at variable rates, on revenue from real estate properties
based on asset type. Fees average 3.2% of revenue from real estate properties. With few exceptions, these fees are
recoverable from tenants.
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR INCOME PRODUCING PROPERTIES
TABLE 5
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31,
2016
2015
Retail
$22,585
$22,923
($338)
Office
19,680
18,958
756
680
$43,021
$42,561
Industrial
Net operating income – same assets
Variance
Year Ended December 31,
%
2016
2015
(1.5%)
$82,733
$84,710
Variance
722
3.8%
75,758
74,966
792
76
11.2%
3,045
3,034
11
$460
1.1%
$161,536
$162,710
($1,977)
($1,174)
%
(2.3%)
1.1%
0.4%
(0.7%)
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR RETAIL PROPERTIES
TABLE 6
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31,
Enclosed regional centres
Community strip centres
Net operating income – same assets
2016
2015
$17,335
$18,068
5,250
4,855
$22,585
$22,923
Variance
($733)
Year Ended December 31,
%
(4.1%)
2016
2015
$62,479
$65,033
395
8.1%
20,254
19,677
($338)
(1.5%)
$82,733
$84,710
Variance
($2,554)
577
($1,977)
%
(3.9%)
2.9%
(2.3%)
The Trust's retail portfolio is diversified through the investment in enclosed regional centres and community strip centres.
ENCLOSED REGIONAL CENTRES OVERVIEW
At December 31, 2016, the Trust's enclosed regional centres portfolio totalled 3.5 million square feet of GLA, which
comprises a 100% interest in six regional centres totalling 3.4 million square feet and a 50% interest in one additional centre
totalling 0.1 million square feet.
In the enclosed regional centres overview, the Trust excludes 496,000 square feet of area under development when
measuring net operating income – same assets and when tracking lease activity and current vacancy. This area is not
generating NOI and is not available for occupancy while under development.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
ENCLOSED REGIONAL CENTRES – NET OPERATING INCOME
TABLE 7
Three Months Ended December 31,
Revenue from real estate properties
2016
2015
Variance
Year Ended December 31,
%
2016
2015
Variance
$30,204
$31,010
($806)
(2.6%)
$112,998
$114,543
Property operating expenses
7,521
7,033
488
6.9%
27,437
26,127
Property taxes
4,345
4,942
(597)
(12.1%)
19,377
19,637
(260)
(1.3%)
Property management fees
1,003
967
36
3.7%
3,705
3,746
(41)
(1.1%)
$17,335
$18,068
$62,479
$65,033
($2,554)
(3.9%)
Net operating income – same assets
($733)
(4.1%)
($1,545)
%
(1.3%)
1,310
5.0%
The Trust's enclosed regional centres net operating income – same assets for the three months ended December 31, 2016,
was $17.3 million versus $18.1 million for the same period in 2015. This represents a decrease of 4.1%. This decrease
was largely due to an increase in non-recoverable operating costs of $0.3 million due to deal restructuring/abatements,
coupled with a decrease of $0.4 million in percentage rent at the Trust's fashion focused centres.
The Trust's enclosed regional centres net operating income – same assets for the year ended December 31, 2016, was
$62.5 million versus $65.0 million for the same period in 2015. This represents a decrease of 3.9%. This decrease was
largely due to an increase in non-recoverable operating costs of $1.4 million due to deal restructuring/abatements,
increased vacancy costs of $0.7 million, and a decrease of $0.7 million in percentage rent at the Trust's fashion focused
centres.
ENCLOSED REGIONAL CENTRES – LEASE PROFILE
TABLE 8
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2017
397,531
13.2%
$29.47
2018
275,353
9.2%
29.77
2019
106,510
3.5%
40.53
2020
386,459
12.9%
29.33
Thereafter
1,694,411
56.3%
19.37
Current vacancy
144,497
4.9%
—
Total
3,004,761
100.0%
$23.65
Weighted average remaining lease term (years)
4.53
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals for the next four
years and thereafter, along with the associated contract
rents at maturity. Current vacancy excludes 496,000
square feet of area under development.
Lower weighted average contract rent for the line
"Thereafter" is the result of anchor tenant maturities.
The following table provides a quarterly summary of the 2017 expiries net of committed renewals, along with the associated
contract rents, for the Trust's enclosed regional centres.
ENCLOSED REGIONAL CENTRES – 2017 EXPIRIES (NET OF COMMITTED RENEWALS)
TABLE 9
GLA (SF)
Average net rent per SF
MORGUARD.COM
Q1
Q2
Q3
Q4
Total
2017
214,286
56,639
93,734
32,872
397,531
$25.11
$32.40
$30.71
$50.15
$29.47
11
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
ENCLOSED REGIONAL CENTRES – 2016 LEASE ACTIVITY
TABLE 10
Q4 2016
Opening vacancy (SF)
YTD 2016
106,607
Opening occupancy
The table to the left provides a summary of the leasing
activity for the three months and year ended December
31, 2016.
91,659
96%
97%
EXPIRING LEASES:
Square feet
94,297
648,309
Average net rent per SF
$20.91
$14.64
Square feet
11,585
115,168
Average net rent per SF
$45.58
$23.12
Square feet
22,313
480,011
Average net rent per SF
$32.69
$11.33
For the three months ended December 31, 2016, the Trust
realized an average uplift of $11.78 per square foot on
renewals, while maintaining a 24% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $4.43 per square foot on new leasing.
EARLY TERMINATIONS:
For the year ended December 31, 2016, the Trust realized
an average decrease of $3.31 per square foot on
renewals, while maintaining a 74% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $7.56 per square foot on new leasing.
RENEWALS:
Retention rate
24%
74%
During the year, the enclosed regional centres portfolio
was adjusted by 84,000 square feet. In total, the enclosed
regional centres portfolio has been adjusted to exclude
496,000 square feet of GLA relating to area under
development.
NEW LEASING:
Square feet
45,679
146,327
Average net rent per SF
$25.34
$22.20
—
(84,301)
144,497
144,497
OTHER ADJUSTMENTS:
Square feet
Ending vacancy (SF)
Ending occupancy
95%
At December 31, 2016, ending occupancy decreased by
2% (compared to December 31, 2015, excluding area
under development) to 95%.
95%
ENCLOSED REGIONAL CENTRES – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 11
2015
In thousands of SF
Enclosed regional centres GLA
GLA occupied
2016
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
3,485
3,488
3,489
3,078
3,037
3,006
3,006
3,005
95%
85%
85%
97%
96%
97%
96%
95%
The enclosed regional centres square footage and quarterly occupancy for the past eight quarters are outlined in Table 11.
Occupancy levels were adjusted during December 2015 to exclude 412,000 square feet of area under development. During
the first quarter of 2016, the enclosed regional centres portfolio was adjusted to exclude an additional 41,000 square feet of
area under development relating to a former Safeway unit. During the second quarter of 2016, the enclosed regional
centres portfolio was adjusted to exclude an additional 43,000 square feet of area under development relating to a former
MORGUARD.COM
12
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
Sears unit. In total, the enclosed regional centres portfolio has been adjusted to exclude 496,000 square feet of GLA. As at
December 31, 2016, these adjustments have increased occupancy from 82% to 95%.
COMMUNITY STRIP CENTRES OVERVIEW
At December 31, 2016, the Trust's community strip centres portfolio totalled 1.2 million square feet of GLA, excluding IPP
held for development, comprising a 100% interest in 12 such properties totalling 1.1 million square feet, as well as a 50%
interest in one additional property totalling 0.1 million square feet.
In the community strip centres overview, the Trust excludes IPP held for development when measuring net operating income
– same assets and when tracking lease activity and current vacancy.
COMMUNITY STRIP CENTRES – NET OPERATING INCOME
TABLE 12
Three Months Ended December 31,
2016
2015
Variance
Year Ended December 31,
%
2016
2015
Variance
%
$8,195
$8,016
$179
2.2%
$31,993
$31,126
$867
2.8%
Property operating expenses
1,356
1,478
(122)
(8.3%)
4,974
4,829
145
3.0%
Property taxes
1,272
1,370
(98)
(7.2%)
5,532
5,414
118
2.2%
317
313
4
1.3%
1,233
1,206
27
2.2%
$5,250
$4,855
$395
8.1%
$20,254
$19,677
$577
2.9%
Revenue from real estate properties
Property management fees
Net operating income – same assets
The Trust's community strip centres net operating income – same assets for the three months ended December 31, 2016,
was $5.3 million versus $4.9 million for the same period in 2015. This represents an increase of 8.1%, largely due to
modest increases in basic rent.
The Trust's community strip centres net operating income – same assets for the year ended December 31, 2016, was $20.3
million versus $19.7 million for the same period in 2015. The increase was mainly due to continued modest increases in
basic rent.
COMMUNITY STRIP CENTRES – LEASE PROFILE
TABLE 13
SF
% of
Portfolio
Weighted
Average
Contract
Rent
2017
139,505
11.4%
$21.49
2018
114,029
9.3%
23.84
2019
84,952
7.0%
22.10
2020
120,624
9.9%
21.43
15.13
Thereafter
739,470
60.6%
Current vacancy
21,740
1.8%
—
Total
1,220,320
100.0%
$17.78
Weighted average remaining lease term (years)
MORGUARD.COM
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals for the next four
years and thereafter, along with the associated contract
rents at maturity.
Lower weighted average contract rent for the line
"Thereafter" is the result of anchor tenant maturities.
5.12
13
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
The following table provides a quarterly summary of the 2017 expiries net of committed renewals, along with the associated
contract rents, for the Trust's community strip centres.
COMMUNITY STRIP CENTRES – 2017 EXPIRIES (NET OF COMMITTED RENEWALS)
TABLE 14
Q1
Q2
Q3
Q4
Total
2017
GLA (SF)
37,917
9,062
7,954
84,572
139,505
Average net rent per SF
$26.16
$31.74
$29.44
$17.55
$21.49
COMMUNITY STRIP CENTRES – 2016 LEASE ACTIVITY
TABLE 15
Q4 2016
Opening vacancy (SF)
Opening occupancy
22,924
98%
YTD 2016
26,471
98%
EXPIRING LEASES:
Square feet
20,133
133,835
Average net rent per SF
$20.98
$16.84
4,917
19,337
$14.00
$19.76
EARLY TERMINATIONS:
Square feet
Average net rent per SF
RENEWALS:
Square feet
18,516
121,622
Average net rent per SF
$21.52
$14.45
Retention rate
92%
91%
NEW LEASING:
Square feet
Average net rent per SF
Ending vacancy (SF)
Ending occupancy
MORGUARD.COM
7,718
36,281
$19.61
$21.56
21,740
21,740
98%
The table to the left provides a summary of the leasing
activity for the three months and year ended December
31, 2016.
For the three months ended December 31, 2016, the Trust
realized an average uplift of $0.54 per square foot on
renewals, while maintaining a 92% retention rate for
existing tenants. In addition, the Trust realized an
average decrease of $1.37 per square foot on new
leasing.
For the year ended December 31, 2016, the Trust realized
an average decrease of $2.39 per square foot on
renewals, while maintaining a 91% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $4.72 per square foot on new leasing.
Ending occupancy remained stable at 98% (compared to
December 31, 2015).
98%
14
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
COMMUNITY STRIP CENTRES – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 16
2015
In thousands of SF
Community strip centres GLA
GLA occupied
2016
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1,290
1,287
1,287
1,219
1,220
1,220
1,220
1,220
98%
97%
97%
98%
98%
99%
98%
98%
The community strip centres square footage and quarterly occupancy for the past eight quarters are outlined in Table 16.
Occupancy levels throughout the period remained high with little volatility. The differential between the highest and lowest
level of portfolio occupancy over this two-year period is only 200 basis points (99% being the highest and 97% being the
lowest).
COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR OFFICE PROPERTIES
TABLE 17
AT THE TRUST'S OWNERSHIP SHARE
Three Months Ended December 31,
Single-/dual-tenant buildings
Multi-tenant buildings
Net operating income – same assets
Year Ended December 31,
2016
2015
Variance
%
2016
2015
Variance
%
$14,943
$14,111
$832
5.9%
$58,126
$56,960
$1,166
2.0%
(110)
(2.3%)
17,632
18,006
(374)
(2.1%)
$722
3.8%
$75,758
$74,966
$792
1.1%
4,737
4,847
$19,680
$18,958
The Trust's office portfolio is diversified through investment in single-/dual-tenant buildings and multi-tenant buildings.
SINGLE-/DUAL-TENANT BUILDINGS OVERVIEW
At December 31, 2016, the Trust's single-/dual-tenant buildings portfolio totalled 2.4 million square feet of GLA, excluding
IPP held for development, which comprises a 100% interest in eight properties totalling 1.5 million square feet and a 50%
interest in four properties totalling 0.9 million square feet.
SINGLE-/DUAL-TENANT BUILDINGS – NET OPERATING INCOME
TABLE 18
Three Months Ended December 31,
Revenue from real estate properties
2016
2015
Variance
2016
2015
Variance
%
(1.8%)
$96,804
$98,597
($1,793)
0.1%
20,002
20,931
(929)
(4.4%)
$23,868
$24,310
Property operating expenses
5,188
5,183
Property taxes
2,996
4,250
(1,254)
(29.5%)
15,677
17,705
(2,028)
(11.5%)
741
766
(25)
(3.3%)
2,999
3,001
(2)
(0.1%)
$14,943
$14,111
$58,126
$56,960
Property management fees
Net operating income – same assets
MORGUARD.COM
($442)
Year Ended December 31,
%
5
$832
5.9%
$1,166
(1.8%)
2.0%
15
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
Single-/dual-tenant buildings net operating income – same assets increased by 5.9% to $14.9 million for the three months
ended December 31, 2016, from $14.1 million for the same period in 2015. This increase was mainly due to an increase in
basic rent of $0.4 million, coupled with a decrease in recoverable operating costs of $0.3 million, which have increased the
Trust's recovery of maintenance expenditures made in prior periods.
Single-/dual-tenant buildings net operating income – same assets increased by 2% to $58.1 million for the year ended
December 31, 2016, from $57.0 million for the same period in 2015. This increase was mainly due to an increase in basic
rent of $0.9 million, coupled with a decrease in recoverable operating costs of $0.8 million, which have increased the Trust's
recovery of maintenance expenditures made in prior periods, offset by temporary vacancy costs of $0.6 million.
SINGLE-/DUAL-TENANT BUILDINGS – LEASE PROFILE
TABLE 19
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2017
96,605
4.1%
$35.80
2018
42,322
1.8%
38.13
2019
71,548
3.0%
31.96
2020
34,998
1.5%
19.30
Thereafter
2,096,227
88.9%
23.83
Current vacancy
16,977
0.7%
—
Total
2,358,677
100.0%
$24.76
Weighted average remaining lease term (years)
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals over the next four
years and thereafter, along with the associated contract
rents at maturity.
7.58
The following table provides a quarterly summary of the 2017 expiries net of committed renewals, along with the associated
contract rents, for the Trust's single-/dual-tenant buildings.
SINGLE-/DUAL-TENANT BUILDINGS – 2017 EXPIRIES (NET OF COMMITTED RENEWALS)
TABLE 20
GLA (SF)
Average net rent per SF
MORGUARD.COM
Q4
Total
2017
29,260
1,896
96,605
$22.67
$41.61
$35.80
Q1
Q2
Q3
4,692
60,757
$30.93
$42.31
16
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
SINGLE-/DUAL-TENANT BUILDINGS – 2016 LEASE ACTIVITY
TABLE 21
Q4 2016
Opening vacancy (SF)
YTD 2016
60,430
Opening occupancy
The table to the left provides a summary of the leasing
activity for the three months and year ended December
31, 2016.
20,994
97%
99%
EXPIRING LEASES:
Square feet
65,245
189,020
Average net rent per SF
$21.50
$24.94
—
—
$—
$—
Square feet
65,245
145,567
Average net rent per SF
$17.00
$21.25
For the three months ended December 31, 2016, the Trust
realized an average decrease of $4.50 per square foot on
renewals, while maintaining a 100% retention rate for
existing tenants.
EARLY TERMINATIONS:
Square feet
Average net rent per SF
For the year ended December 31, 2016, the Trust realized
an average decrease of $3.69 per square foot on
renewals, while maintaining a 77% retention rate for
existing tenants. In addition, the Trust realized an
average uplift of $7.65 per square foot on new leasing.
RENEWALS:
Retention rate
100%
77%
Ending occupancy remained stable at 99% (compared to
December 31, 2015).
NEW LEASING:
Square feet
43,453
47,470
Average net rent per SF
$34.00
$32.59
16,977
16,977
Ending vacancy (SF)
Ending occupancy
99%
99%
SINGLE-/DUAL-TENANT BUILDINGS – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 22
2015
In thousands of SF
Single-/dual-tenant buildings GLA
GLA occupied
2016
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2,406
2,398
2,398
2,398
2,358
2,359
2,359
2,359
99%
99%
99%
99%
99%
97%
97%
99%
The single-/dual-tenant buildings square footage and quarterly occupancy for the past eight quarters are outlined in Table
22. Occupancy levels throughout the period remained high with little volatility. The differential between the highest and
lowest level of portfolio occupancy over this two-year period is only 200 basis points (99% being the highest and 97% being
the lowest). The decrease in occupancy during the second and third quarters of 2016 is largely the result of the expiry of a
single lease at one of the Trust's Alberta properties, with National Bank taking occupancy in December 2016.
MORGUARD.COM
17
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
MULTI-TENANT BUILDINGS OVERVIEW
At December 31, 2016, the Trust's multi-tenant buildings portfolio totalled 1.0 million square feet of GLA, which comprises a
100% interest in six properties totalling 0.6 million square feet, a 50% interest in three properties totalling 0.3 million square
feet and a 20% interest in one property totalling 0.1 million square feet.
MULTI-TENANT BUILDINGS – NET OPERATING INCOME
TABLE 23
Three Months Ended December 31,
2016
2015
Variance
Year Ended December 31,
%
2016
2015
Variance
%
$8,912
$9,209
($297)
(3.2%)
$34,119
$34,985
($866)
(2.5%)
Property operating expenses
2,748
2,595
153
5.9%
10,078
10,173
(95)
(0.9%)
Property taxes
1,125
1,449
(324)
(22.4%)
5,248
5,604
(356)
(6.4%)
302
318
(16)
(5.0%)
1,161
1,202
(41)
(3.4%)
$4,737
$4,847
($110)
(2.3%)
$17,632
$18,006
($374)
(2.1%)
Revenue from real estate properties
Property management fees
Net operating income – same assets
Multi-tenant buildings net operating income – same assets decreased by 2.3% to $4.7 million for the three months ended
December 31, 2016, from $4.8 million for the same period in 2015. The decrease was mainly due to increased vacancy
costs of $0.1 million.
Multi-tenant buildings net operating income – same assets decreased by 2.1% to $17.6 million for the year ended
December 31, 2016, from $18.0 million for the same period in 2015. The decrease was mainly due to increased vacancy
costs, resulting primarily from the ground level retail space at 77 Bloor Street West, which is now fully occupied.
MULTI-TENANT BUILDINGS – LEASE PROFILE
TABLE 24
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2017
154,049
15.5%
$17.42
2018
123,037
12.4%
17.56
2019
91,392
9.2%
18.78
2020
128,638
12.9%
23.19
Thereafter
402,567
40.5%
20.80
Current vacancy
94,053
9.5%
—
Total
993,736
100.0%
$19.55
Weighted average remaining lease term (years)
The Trust has the opportunity to increase rental rates on
lease maturity where the current contract rent is less than
the going market rate.
The table to the left provides a summary of the lease
maturities net of committed renewals over the next four
years and thereafter, along with the associated contract
rents at maturity.
4.45
The following table provides a quarterly summary of the 2017 expiries net of committed renewals, along with the associated
contract rents, for the Trust's multi-tenant buildings.
MULTI-TENANT BUILDINGS – 2017 EXPIRIES (NET OF COMMITTED RENEWALS)
TABLE 25
Q1
Q2
Q3
Q4
Total
2017
GLA (SF)
25,958
57,635
52,364
18,092
154,049
Average net rent per SF
$16.39
$16.25
$17.69
$21.81
$17.42
MORGUARD.COM
18
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
MULTI-TENANT BUILDINGS – 2016 LEASE ACTIVITY
TABLE 26
Q4 2016
Opening vacancy (SF)
YTD 2016
103,067
Opening occupancy
The table to the left provides a summary of the leasing
activity for the three months and year ended December
31, 2016.
92,412
90%
92%
EXPIRING LEASES:
Square feet
36,106
196,275
Average net rent per SF
$31.11
$20.51
1,564
7,125
$18.60
$20.50
Square feet
25,368
138,691
Average net rent per SF
$15.61
$15.15
For the three months ended December 31, 2016, the Trust
realized an average decrease of $15.50 per square foot
on renewals, while maintaining a 70% retention rate for
existing tenants. In addition, the Trust realized a
significant decrease of $14.97 per square foot on new
leasing. This decrease is mainly due to the continuing
downturn in the Alberta office market.
EARLY TERMINATIONS:
Square feet
Average net rent per SF
RENEWALS:
Retention rate
70%
For the year ended December 31, 2016, the Trust realized
an average decrease of $5.36 per square foot on
renewals, while maintaining a 71% retention rate for
existing tenants. In addition, the Trust realized a
significant uplift of $11.15 per square foot on new leasing.
71%
NEW LEASING:
Square feet
21,316
50,409
Average net rent per SF
$16.14
$31.66
—
(12,659)
94,053
94,053
During the year, the multi-tenant buildings portfolio was
adjusted by 13,000 square feet (net). The sale of Centre
de la Cité in the second quarter of 2016 reduced vacancy
by 18,000 square feet, offset by an increase of 5,000
square feet due to the completion of the 77 Bloor Street
West lobby reconfiguration and retail expansion.
OTHER ADJUSTMENTS:
Square feet
Ending vacancy (SF)
Ending occupancy
91%
91%
Ending occupancy decreased by 1% (compared to
December 31, 2015) to 91%.
MULTI-TENANT BUILDINGS – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 27
2015
In thousands of SF
Multi-tenant buildings GLA
GLA occupied
2016
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
1,119
1,118
1,118
1,119
1,116
989
994
994
90%
90%
91%
91%
90%
91%
92%
91%
The multi-tenant buildings square footage and quarterly occupancy for the past eight quarters are outlined in Table 27.
Occupancy levels throughout the period remained high with little volatility. The differential between the highest and lowest
level of portfolio occupancy over this two-year period is only 200 basis points (92% being the highest and 90% being the
lowest).
MORGUARD.COM
19
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
INDUSTRIAL OVERVIEW
The Trust's industrial portfolio includes 100% interests in four industrial properties comprising 0.3 million square feet and a
50% interest in one industrial property comprising 0.2 million square feet.
INDUSTRIAL – NET OPERATING INCOME
TABLE 28
Three Months Ended December 31,
2016
2015
Variance
Year Ended December 31,
%
2016
2015
Variance
%
$1,271
$1,248
$23
1.8%
$5,114
$5,000
$114
2.3%
Property operating expenses
243
296
(53)
(17.9%)
932
833
99
11.9%
Property taxes
240
242
(2)
(0.8%)
998
997
1
0.1%
32
30
2
6.7%
139
136
3
2.2%
$756
$680
$76
11.2%
$3,045
$3,034
$11
0.4%
Revenue from real estate properties
Property management fees
Net operating income – same assets
Industrial net operating income – same assets increased by 11.2% to $0.8 million for the three months ended December 31,
2016, from $0.7 million in 2015. The increase was mainly due to modest increases in basic rent, coupled with decreased
vacancy.
Industrial net operating income – same assets remained stable at $3.0 million for the year ended December 31, 2016,
compared to the same period in 2015.
INDUSTRIAL – LEASE PROFILE
TABLE 29
SF
Weighted
Average
Contract
Rent
% of
Portfolio
2017
74,388
13.9%
$7.56
2018
68,797
12.9%
6.48
2019
11,413
2.1%
7.29
2020
4,679
0.9%
10.55
Thereafter
362,402
67.9%
5.67
Current vacancy
12,473
2.3%
—
Total
534,152
100.0%
$6.07
Weighted average remaining lease term (years)
The table to the left provides a summary of the lease
maturities net of committed renewals, over the next four
years and thereafter, along with the associated contract
rents at maturity.
4.43
The following table provides a quarterly summary of the 2017 expiries net of committed renewals, along with the associated
contract rents, for the Trust's industrial portfolio.
INDUSTRIAL – 2017 EXPIRIES (NET OF COMMITTED RENEWALS)
TABLE 30
Q1
Q2
Q3
Q4
Total
2017
GLA (SF)
4,750
—
950
68,688
74,388
Average net rent per SF
$9.94
$—
$5.25
$7.43
$7.56
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
INDUSTRIAL – 2016 LEASE ACTIVITY
TABLE 31
Q4 2016
Opening vacancy (SF)
YTD 2016
12,473
Opening occupancy
15,271
98%
97%
EXPIRING LEASES:
Square feet
4,966
71,590
Average net rent per SF
$9.40
$5.36
—
—
$—
$—
3,800
51,552
$10.75
$5.70
EARLY TERMINATIONS:
Square feet
Average net rent per SF
RENEWALS:
Square feet
Average net rent per SF
Retention rate
77%
72%
NEW LEASING:
Square feet
1,166
22,836
Average net rent per SF
$5.00
$5.75
12,473
12,473
Ending vacancy (SF)
Ending occupancy
98%
The table to the left provides a summary of the leasing
activity for the three months and year ended December
31, 2016.
For the three months ended December 31, 2016, the Trust
realized an average uplift of $1.35 per square foot on
renewals, while maintaining a 77% retention rate for
existing tenants.
For the year ended December 31, 2016, the Trust realized
an average uplift of $0.34 per square foot on renewals,
while maintaining a 72% retention rate for existing
tenants. In addition, the Trust realized an average uplift of
$0.39 per square foot on new leasing.
Ending occupancy increased by 1% (compared to
December 31, 2015) to 98%.
98%
INDUSTRIAL – GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING
TABLE 32
2015
In thousands of SF
2016
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Industrial GLA
534
534
534
534
534
534
534
534
GLA occupied
97%
97%
97%
97%
97%
94%
98%
98%
The industrial square footage and quarterly occupancy for the past eight quarters are outlined in Table 32. The differential
between the highest and lowest level of portfolio occupancy over this two-year period was 400 basis points (98% being the
highest and 94% being the lowest). The decrease in occupancy during the second quarter of 2016 is largely the result of
the expiry of a single lease at one of the Trust's industrial properties, with Comfort Wheelchair Manufacturing taking
occupancy in August 2016.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART IV
TRUST PERFORMANCE
FUNDS FROM OPERATIONS
The Trust presents FFO in accordance with the Real Property Association of Canada ("REALpac") white paper on funds
from operations for IFRS issued April 2014. In accordance with such white paper, the Trust defines FFO as net income
adjusted for fair value changes on real estate properties and gains/(losses) on the sale of real estate properties.
FFO is a non-GAAP measure that is widely accepted as a supplemental measure of financial performance for real estate
entities; however, it does not represent amounts available for capital programs, debt service obligations, commitments or
uncertainties. FFO should not be interpreted as an indicator of cash generated from operating activities and is not indicative
of cash available to fund operating expenditures or for the payment of cash distributions. FFO is simply one measure of
operating performance.
FUNDS FROM OPERATIONS
TABLE 33
Three Months Ended December 31,
In thousands of dollars, except per unit amounts
Net (loss)/income
2016
Year Ended December 31,
2015
2016
2015
($7,209)
$4,697
$57,207
$26,617
34,675
23,985
56,293
79,768
27,466
28,682
113,500
106,385
1,875
1,833
7,316
7,274
$29,341
$30,515
$120,816
$113,659
$0.45
$0.47
$1.87
$1.72
$0.44
$0.45
$1.81
$1.67
60,575
61,213
60,750
61,779
66,765
67,309
66,780
67,876
Add items not affecting cash:
Fair value losses on real estate properties 1
Basic funds from operations
Interest expense on convertible debentures
Diluted funds from operations
FUNDS FROM OPERATIONS PER UNIT
Basic
Diluted
2
WEIGHTED AVERAGE UNITS OUTSTANDING (IN THOUSANDS)
Basic
Diluted
2
1. Includes fair value gains on real estate properties included in net income from equity-accounted investments.
2. Includes the dilutive impact of convertible debentures.
FFO was $0.45 per unit ($0.44 per unit – diluted) for the three months ended December 31, 2016, compared to $0.47 per
unit ($0.45 per unit – diluted) for the same period in 2015. This represents a decrease of 4% or $0.02 per unit ($0.01 per
unit – diluted).
FFO was $1.87 per unit ($1.81 per unit – diluted) for the year ended December 31, 2016, compared to $1.72 per unit ($1.67
per unit – diluted) for the same period in 2015. This represents an increase of 9% or $0.15 per unit ($0.14 per unit –
diluted).
The significant increase in FFO during the year ended December 31, 2016, was largely due to the Target settlement
proceeds reported in other income during the second quarter of 2016. The impact of the settlement proceeds on FFO was
$0.19 per unit ($0.17 per unit – diluted).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
FFO derives from net income. The key components of net income are presented in the table below:
NET INCOME
TABLE 34
Three Months Ended December 31,
Net operating income from total real estate properties
Interest expense
General and administrative
Other income
Income before fair value losses and other expenses and fair value
changes from equity-accounted investments
Fair value losses on real estate properties
Other expenses and fair value changes from equity-accounted investments
Net (loss)/income
Year Ended December 31,
2016
2015
2016
2015
$43,720
$44,597
$164,704
$170,319
14,792
14,667
56,676
58,981
1,191
1,066
4,726
4,367
(10)
(113)
(11,310)
(571)
27,747
28,977
114,612
107,542
(29,655)
(23,178)
(51,643)
(78,977)
(5,301)
(1,102)
($7,209)
$4,697
(5,762)
$57,207
(1,948)
$26,617
NET OPERATING INCOME
The analysis of property performance in Part III was focused on same asset NOI, which is reconciled to NOI per the
consolidated financial statements in Part XI (Table 60).
Same asset NOI for the three months ended December 31, 2016, was $43.0 million, an increase of $0.5 million from the
same period in 2015. Net operating income from all properties was $43.7 million for the three months ended December 31,
2016, versus $44.6 million for the same period in 2015, a decrease of $0.9 million. The remaining unfavourable change
during the period was $1.3 million. The Trust's disposition of Centre de la Cité, Montreal, QC, in June 2016 resulted in a
$0.3 million reduction in NOI. The Trust was also negatively affected $0.3 million by the area under development, and $0.3
million by real estate properties held for development. During the three months ended December 31, 2016, there was a
reduction in stepped rent of $0.5 million, versus the same period in 2015.
Same asset NOI for the year ended December 31, 2016, was $161.5 million, a decrease of $1.2 million from the same
period in 2015. Net operating income from all properties was $164.7 million for the year ended December 31, 2016, versus
$170.3 million for the same period in 2015, a decrease of $5.6 million. The remaining unfavourable change during the year
was $4.4 million, including the Trust's disposition program. The Trust's disposition of 350 Sparks/361 Queen in February
2015, 5591-5631 Finch in April 2015, 20-24 Lesmill in May 2015 and Centre de la Cité in June 2016 resulted in a $1.1
million reduction in NOI. The Trust was also negatively affected $1.1 million by the area under development and $0.7 million
by real estate properties held for development. During the year ended December 31, 2016, there was a reduction in onetime lease cancellation fees of $0.6 million and in stepped rent of $0.8 million, versus the same period in 2015.
INTEREST EXPENSE
Interest expense totalled $14.8 million for the three months ended December 31, 2016, compared to $14.7 million for the
same period in 2015. This increase for the three months ended December 31, 2016, was mainly the result of the
acceleration of accretion and financing costs due to early redemption of the debentures of $1.1 million. The increase in
interest expense was offset by the payout of matured debt during 2016 and in the fourth quarter of 2015, which eliminated
$0.4 million of interest, scheduled mortgage amortizations of $0.3 million and increased capitalized interest on development
projects of $0.2 million.
Interest expense totalled $56.7 million for the year ended December 31, 2016, compared to $59.0 million for the same
period in 2015. This decrease for the year ended December 31, 2016, was mainly the result of the payout of matured debt
during 2016 and in the fourth quarter of 2015, which eliminated $1.7 million of interest. Other factors reducing interest
expense during the year include scheduled mortgage amortizations of $0.9 million, decreased cash flow hedge
amortizations of $0.7 million and the Trust's 2015 disposition program, which eliminated $0.4 million of interest. The
decrease in interest expense was offset by the acceleration of accretion and financing costs due to early redemption of the
debentures of $1.1 million and lower capitalized interest on development projects of $0.4 million.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
The following table outlines, by quarter, the Trust's weighted average rates on mortgages payable in 2016 and 2015. The
rates are calculated excluding mortgages tied to real estate properties held for sale.
WEIGHTED AVERAGE RATES – MORTGAGES PAYABLE
TABLE 35
2016
2015
March 31
4.1%
4.2%
June 30
4.1%
4.2%
September 30
4.1%
4.1%
December 31
4.1%
4.1%
The Trust has reduced the weighted average interest rate
by 10 basis points from the start of 2015.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three months ended December 31, 2016, were $1.2 million, an increase of
$0.1 million compared to the same period in 2015.
General and administrative expenses for the year ended December 31, 2016, were $4.7 million, an increase of $0.4 million
from the same period in 2015.
OTHER INCOME
On January 15, 2015, Target Corporation, the U.S. parent of Target Canada, announced plans to discontinue its Canadian
operations through its indirect wholly owned subsidiary, Target Canada. At the time of this announcement the Trust had
seven locations under lease to Target Canada. During 2015, Target Canada disclaimed leases for three properties owned
by the Trust and ceased paying rent at these locations. All three leases were guaranteed through an indemnity agreement
with Target Corporation for the remaining term of each lease. Additionally, three leases were assigned to new tenants who
assumed the payments of the rental obligations thereunder as of the closing date of the respective assignments. The
remaining lease was repurchased by the Trust for repositioning.
During the second quarter of 2016, the Trust entered into a binding agreement with Target Corporation concluding the terms
of settlement relating to the guarantees for the three leases that were disclaimed by Target Canada pursuant to the
Companies' Creditors Arrangement Act. Other income includes $11.3 million in settlement proceeds relating to the release
of Target Corporation from the indemnity agreements, which was net of $0.1 million of settlement costs.
ADJUSTED FUNDS FROM OPERATIONS
AFFO is a non-GAAP measure that is widely accepted as an alternative measure of cash generated from operations. AFFO
per unit is calculated by adjusting FFO for accretion of convertible debentures, straight-line rent, Target settlement proceeds
and productive capacity maintenance expenditures ("PCME").
PCME are expenditures on leasing, replacement or major repair of component parts of properties that are required to
preserve the existing earning capacity of the Trust's real estate portfolio. The Trust categorizes these expenditures as
leasing commissions, tenant allowances and recoverable and non-recoverable capital expenditures.
Leasing Commissions and Tenant Allowances: The Trust requires ongoing capital spending on leasing commissions,
tenant incentives and tenant improvements pertaining to new and renewed tenant leases. These costs depend on many
factors, including, but not limited to, tenant maturity profile, vacancies, asset type, prevailing market conditions and
unforeseen tenant bankruptcies.
Recoverable and Non-Recoverable Capital Expenditures: The Trust continually invests in major repair and replacement
of component parts of the properties, such as roof, parking lot, elevators and HVAC, to physically maintain them. These
costs depend on many factors including, but not limited to, age and location of the property. Most of these capital
expenditure items are recovered from tenants, over time, as property operating costs.
Commencing in 2014, the Trust uses normalized PCME to calculate AFFO. These normalized expenditures are based on
expected average expenditures for the current property portfolio over a three-year horizon, with consideration to historical
and forecasted spending patterns. Actual PCME in any given year (Table 37) may fluctuate relative to the normalized
estimation.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
There is no standard industry-defined measure of AFFO. As such, the Trust's method of calculating AFFO may differ from
other issuers' methods and, accordingly, may not be comparable to such amounts reported by other issuers.
ADJUSTED FUNDS FROM OPERATIONS
TABLE 36
Three Months Ended December 31,
Funds from operations
Year Ended December 31,
2016
2015
2016
2015
$27,466
$28,682
$113,500
$106,385
Add/(deduct):
Accretion of convertible debentures
Amortized stepped rents
Target settlement proceeds, net
382
83
(424)
(865)
5
—
628
(1,409)
(11,274)
316
(2,177)
—
Productive capacity maintenance expenditures (normalized)
(6,250)
(6,250)
(25,000)
(25,000)
Adjusted funds from operations – basic
21,179
21,650
76,445
79,524
Interest expense on convertible debentures
1,875
1,833
7,316
7,274
$23,054
$23,483
$83,761
$86,798
Adjusted funds from operations – diluted
The following table provides a breakdown of actual PCME for the year ended December 31, 2016, and for the same period
in 2015.
ACTUAL PRODUCTIVE CAPACITY MAINTENANCE EXPENDITURES
TABLE 37
Three Months Ended December 31,
Year Ended December 31,
2016
2015
2016
2015
Leasing commissions
$835
$635
$3,751
$3,570
Tenant allowances
2,893
819
6,110
10,355
Total leasing costs
3,728
1,454
9,861
13,925
Capital expenditures recoverable from tenants
4,810
2,319
11,888
8,915
47
7
337
Capital expenditures non-recoverable from tenants
(129)
Total capital expenditures
4,681
2,366
11,895
9,252
Total productive capacity maintenance expenditures
8,409
3,820
21,756
23,177
Discretionary capital expenditures
Total leasing costs and capital expenditures
499
1,839
300
8,066
$8,908
$5,659
$22,056
$31,243
Discretionary Capital Expenditures
In addition to PCME, the Trust invests in discretionary capital projects on the development of new space, redevelopment or
retrofit of existing properties, and other capital expenditures to create additional long-term value for the Trust's real estate
portfolio. These discretionary capital expenditures are not expected to occur on a consistent basis. These expenditures are
included in the above table, along with the recoverable and non-recoverable capital expenditures. The decrease in
discretionary capital expenditures during the year ended December 31, 2016, mainly relates to the 2015 completion of the
electrical and water main replacements as part of the overall revitalization program to refresh and modernize St. Laurent.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
DISTRIBUTIONS TO UNITHOLDERS
The Trust's primary business goal is to accumulate a Canadian portfolio of high-quality real estate assets and then deliver
the benefits of such real estate ownership to unitholders. The primary benefit is a reliable and, over time, increasing cash
distribution.
The Trust expects to distribute to its unitholders in each year an amount not less than the Trust's taxable income for the
year, as calculated in accordance with the Canadian Income Tax Act ("the Act"). The Trust's monthly distribution to
unitholders in 2016 was $0.08 per unit, representing $0.96 per unit on an annualized basis.
In determining the annual level of distributions to unitholders, the Trust looks at forward-looking cash flow information,
including forecasts and budgets, and the future prospects of the Trust. The Trust does not consider periodic cash flow
fluctuations resulting from items such as the timing of property operating costs, property tax instalments or semi-annual
debenture interest payments in determining the level of distributions to unitholders in any particular quarter. Additionally, in
establishing the level of cash distributions to the unitholders, the Trust considers the impact of, among other items, the
future growth in IPP, the impact of future acquisitions and capital expenditures, and leasing costs. As a result, the Trust
compares distributions to AFFO to ensure sufficient funds are retained for reinvestment.
DISTRIBUTIONS TO UNITHOLDERS
TABLE 38
Three Months Ended December 31,
2016
Year Ended December 31,
2015
2016
2015
Adjusted funds from operations per unit – basic
$0.35
$0.35
$1.26
$1.28
Adjusted funds from operations per unit – diluted
$0.34
$0.35
$1.25
$1.28
Cash distributions per unit
$0.24
$0.24
$0.96
$0.96
Distributions paid as a percentage of AFFO per unit – basic
68.6%
68.6%
76.2%
75.0%
The following table provides a reconciliation of AFFO to cash provided by operating activities in the consolidated financial
statements:
RECONCILIATION OF AFFO TO CASH PROVIDED BY OPERATING ACTIVITIES
TABLE 39
Three Months Ended December 31,
Cash provided by operating activities
Changes in working capital
Non-cash amortizations
Net Income from equity-accounted investments before fair value adjustments
Distributions from equity-accounted investments
Additions to tenant incentives and leasing commissions
Target settlement proceeds, net
Productive capacity maintenance expenditures (normalized)
Year Ended December 31,
2016
2015
2016
2015
$29,105
$29,717
$115,148
$97,947
(1,782)
(2,403)
(4,054)
2,056
(918)
(656)
(2,595)
(1,993)
3,232
763
816
3,092
(672)
(239)
(2,750)
928
665
3,878
5
—
(6,250)
—
(25,000)
(25,000)
Adjusted funds from operations
$21,179
$21,650
$76,445
$79,524
Adjusted funds from operations
$21,179
$21,650
$76,445
$79,524
Cash distributions
13,942
14,231
57,117
58,452
Excess adjusted funds from operations after cash distributions
$7,237
$7,419
$19,328
$21,072
MORGUARD.COM
(6,250)
(11,274)
(702)
3,984
26
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
The following table provides a summary of distributions relative to cash flow from operating activities in the consolidated
financial statements:
DISTRIBUTIONS RELATIVE TO CASH FLOW FROM OPERATING ACTIVITIES
TABLE 40
Three Months Ended December 31,
Cash provided by operating activities
Cash distributions
Excess of cash from operating activities over cash distributions
MORGUARD.COM
Year Ended December 31,
2016
2015
2016
2015
$29,105
$29,717
$115,148
$97,947
13,942
14,231
57,117
58,452
$15,163
$15,486
$58,031
$39,495
27
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART V
REAL ESTATE OVERVIEW
The carrying value of the Trust's real estate properties remained unchanged at $2.9 billion at December 31, 2016 (2015 –
$2.9 billion).
Income producing properties were affected by additions from the Trust's capital investment programs (including PCME and
completed development), which were offset by property dispositions and fair value losses.
REAL ESTATE PROPERTIES
TABLE 41
As at December 31,
Income producing properties
2016
2015
$2,824,215
$2,878,074
Properties under development
27,833
2,524
Held for development
30,950
28,750
$2,882,998
$2,909,348
Total real estate properties
A complete reconciliation of real estate properties discussed in this MD&A to real estate properties per the consolidated
financial statements is provided in Part XI (Table 62).
PROPERTIES UNDER DEVELOPMENT
The Trust's development program consists of projects identified by management to create additional long-term value for the
Trust's real estate portfolio and align with the long-term strategic objectives. These may include development projects to
expand leasable area, redevelopment of an existing area and retrofit opportunities.
The following table details the Trust's development projects.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
DEVELOPMENT PROJECTS
TABLE 42
Est. GLA
Location
New Offstream
Est.
Project
Cost
Cost Estimated
Incurred
Cost to
to Date Complete
Completion
Date Comments
RETAIL
—
—
$25,540
$25,540
$—
52,000
43,000
15,000
9,203
5,797
Q1 2017 Anchor tenant remerchandising of former Sears space
for GoodLife Fitness Centres
—
41,000
7,100
4,757
2,343
Q1 2017 Anchor tenant remerchandising of former Safeway
space for GoodLife Fitness Centres and Dollarama
5,000
—
1,700
423
1,277
Q2 2017 Construction of new freestanding pad space for Co-op
Liquor Store
Aurora Centre, Aurora, ON
16,000
—
5,500
2,445
3,055
Q2 2017 Construction of new freestanding pad space for
PetSmart
Shoppers Mall, Brandon, MB
13,000
—
3,800
69
3,731
Q2 2017 Construction of new freestanding pad space for Cara
brand restaurants
Shoppers Mall, Brandon, MB
—
62,500
7,900
4,969
2,931
Q3 2017 Anchor tenant remerchandising of portion of former
Target space for Sobeys
6,200
—
900
16
884
Q4 2017 Construction of new freestanding pad space for Boston
Pizza
—
56,000
8,200
836
7,364
Q4 2017 Anchor tenant remerchandising of former Target space
for Marshalls and Urban Planet
10,000
—
4,400
249
4,151
Q4 2017 Construction of new freestanding pad space
7,000
—
2,600
124
2,476
Q4 2017 Construction of new freestanding pad space
The Centre, Saskatoon, SK
—
101,000
11,100
1,419
9,681
Q2 2018 Anchor tenant remerchandising of former Target space
for GoodLife Fitness and new tenants
Shoppers Mall, Brandon, MB
—
46,500
10,800
188
10,612
Q2 2018 Anchor tenant remerchandising of remaining former
Target space
Cambridge Centre, Cambridge, ON
—
114,000
19,800
513
19,287
Q3 2018 Anchor tenant remerchandising of former Target space
St. Laurent Centre, Ottawa, ON
—
32,000
—
—
—
109,200
496,000
124,340
50,751
73,589
5,500
—
3,375
3,375
—
Penn West Plaza, Calgary, AB
—
—
6,200
68
6,132
Heritage Place, Ottawa, ON
—
—
3,900
965
2,935
St. Laurent, Ottawa, ON
Parkland Mall, Red Deer, AB 1
Shoppers Mall, Brandon, MB
Airdrie Co-op, Airdrie, AB
Charleswood Centre, Winnipeg, MB
Prairie Mall, Grande Prairie, AB
Market Square, Kanata, ON
Pine Centre Mall, Prince George, BC
Q3 2015 Revitalization project to refresh and modernize the
centre – project completed
TBD Former Everest College space
OFFICE
77 Bloor Street West, Toronto, ON
Q3 2016 Reconfiguration of lobby and new space for Sephora project completed
TBD Addition of Plus 15 connection to the city's enclosed
pedestrian skywalk system
Q4 2018 Lobby renovation and construction of LRT station
entrance
5,500
—
13,475
4,408
9,067
114,700
496,000
137,815
55,159
82,656
Other
—
—
1,589
1,589
—
Pre-development costs
Transferred to IPP
—
—
(28,915)
(28,915)
—
Transfers for completed projects
114,700
496,000
Development projects
Properties under development
$110,489
$27,833
$82,656
1. New GLA of 52,000 SF is existing GLA that was taken off-stream in April 2010 and is included in the remerchandising of former Sears space for GoodLife Fitness Centres.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
DISPOSITION PROGRAM
The table below details dispositions completed during the year ended December 31, 2016, and the year ended
December 31, 2015.
DISPOSITIONS
TABLE 43
In thousands of dollars, square feet
Transaction date
Asset class
Location
Trust ownership share
2016
2015
2015
2015
Centre de la Cité
20-24 Lesmill
5591-5631 Finch
350 Sparks/361 Queen
February 17
June 10
May 15
April 1
Office
Industrial
Industrial
Office/Hotel
Montreal, QC
Toronto, ON
Toronto, ON
Ottawa, ON
100.0%
100.0%
100.0%
50.0%
GLA
127,366
27,577
210,123
86,372
Sale price
$22,750
$6,350
$10,000
$37,692
Capitalization rate
Associated debt
Interest rate on associated debt
Occupancy
Key tenants
7.0%
None
n/a
89.2%
On-Line Executive Centre/
Sun Life Assurance
6.0%
None
n/a
100.0%
City of Toronto
8.0%
$6,125
n/a
$17,835
5.14%
3.28%
92.2%
85.4%
Humbervale Machinery/
CTI Industries
CIRA
On June 10, 2016, the Trust completed the sale of Centre de la Cité for a total price of $22.8 million before selling costs.
On May 15, 2015, the Trust completed the sale of 20-24 Lesmill for a total price of $6.4 million before selling costs.
On April 1, 2015, the Trust completed the sale of 5591-5631 Finch for a total price of $10.0 million before selling costs.
On February 17, 2015, the Trust completed the sale of 350 Sparks and 361 Queen to Morguard for a total price of $37.7
million, which included an assumption of the existing mortgage debt of $17.8 million, before selling costs. At the time of
sale, 361 Queen was vacant and not generating income. As a result, establishing an appropriate capitalization rate was
deemed indeterminable, and therefore this has been classified as not applicable.
FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES RECOGNIZED IN NET INCOME
For the three months ended December 31, 2016, the Trust recorded fair value losses on real estate properties of $34.7
million, versus $24.0 million of fair value losses on real estate properties for the same period in 2015. The decreases in fair
values during the period are mainly the result of decreased NOI projections in the enclosed regional centre market, coupled
with the current economic downturn in the Alberta office market.
For the year ended December 31, 2016, the Trust recorded fair value losses on real estate properties of $56.3 million,
versus $79.8 million of fair value losses on real estate properties for the same period in 2015. The decreases in fair values
during the year are mainly the result of decreased NOI projections in the enclosed regional centre market and increased
development costs, coupled with the current economic downturn in the Alberta office market, offset by the progression of the
area under development remerchandising plans and by overall growth in the British Columbia market.
Fair value adjustments are determined on a quarterly basis based on the movement of various parameters, including
changes in projected cash flows as a result of leasing, timing and changes in discount rates, and terminal capitalization
rates.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
Fair value (losses)/gains on real estate properties consist of the following:
FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES
TABLE 44
Three Months Ended December 31,
2016
Income producing properties
Properties under development
Held for development
Total fair value (losses)/gains on real estate properties
($35,675)
Year Ended December 31,
2015
($24,760)
2016
($58,493)
2015
($80,502)
—
42
—
1
1,000
733
2,200
733
($34,675)
($23,985)
($56,293)
($79,768)
A complete reconciliation of fair value (losses)/gains on real estate properties discussed in this MD&A to fair value (losses)/
gains on real estate properties per the consolidated financial statements is provided in Part XI (Table 63).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART VI
LIQUIDITY AND CAPITAL RESOURCES
Cash flow generated from real estate operations represents the primary source of liquidity to service debt and to fund
planned maintenance expenditures, tenant improvements and distributions to unitholders.
Cash flow from operations is dependent upon occupancy levels, rental rates achieved, collection of rents, efficiencies in
operations and the cost to lease, as well as other factors.
CASH FLOWS
The following table details the changes in cash and cash equivalents for the following periods:
CHANGE IN CASH AND CASH EQUIVALENTS
TABLE 45
Three Months Ended December 31,
Year Ended December 31,
2016
2015
2016
2015
$29,780
$30,295
$115,818
$98,764
Cash provided by/(used in) financing activities
85,423
(43,955)
(4,563)
(107,121)
Cash (used in)/provided by investing activities
(17,402)
27,280
(25,113)
23,792
Net increase in cash
97,801
13,620
86,142
15,435
Cash and cash equivalents, beginning of period
15,955
14,536
27,614
12,721
$113,756
$28,156
$113,756
$28,156
Cash provided by operating activities
Cash and cash equivalents, end of year
A complete reconciliation of cash flows discussed in this MD&A to cash flows per the consolidated financial statements is
provided in Part XI (Table 65).
DEBT STRATEGY
The Trust's long-term debt strategy involves the use of three forms of debt: conventional property-specific secured
mortgages or bonds, unsecured convertible debentures and secured floating-rate bank financing.
The Trust is limited by its Declaration of Trust to an overall indebtedness ratio of 60% of the gross book value of the Trust's
total assets determined in accordance with IFRS. The debt limitations are in relation to the assets of the Trust in aggregate.
There are no individual property debt limitations or constraints imposed by the Declaration of Trust.
The Trust's current operating strategy involves maintaining debt levels up to 50% of the gross book value of total assets.
Accordingly, the Trust does not generally repay maturing debt from cash flow, but rather with proceeds from refinancing
such debt or financing unencumbered properties, and raising new equity or recycling equity through property dispositions to
finance investment activities.
The Trust has a revolving loan agreement with Morguard that provides for borrowings or advances of up to $50.0 million.
This loan agreement is meant to provide short-term financing and investing options. The promissory notes are interestbearing at the lender's borrowing rate and are due on demand subject to available funds.
Loan Payable To Morguard: During the year ended December 31, 2016, a gross amount of $17,000 was advanced from
Morguard and was fully repaid. As at December 31, 2016 and 2015, there was no loan payable to Morguard. For the year
ended December 31, 2016, the Trust incurred interest expense in the amount of $55 (2015 – $nil) at an interest rate of 2.6%
(2015 – nil%).
Loan Receivable From Morguard: During the year ended December 31, 2016, a gross amount of $50,000 was advanced
to Morguard and remains receivable as at December 31, 2016 (2015 – $nil). For the year ended December 31, 2016, the
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
Trust earned interest income in the amount of $7 (2015 – $568) at an interest rate of 2.6% (2015 – 2.19%). On January 9,
2017, the outstanding receivable from Morguard as at December 31, 2016, was fully repaid.
DEBT STRUCTURE
TABLE 46
As at December 31,
Conventional secured mortgages payable
Unsecured convertible debentures
2016
%
$1,140,796
78.3%
2015
$1,201,556
%
89.1%
315,248
21.7%
147,698
10.9%
$1,456,044
100.0%
$1,349,254
100.0%
To manage long-term interest rate risk while providing flexibility in the execution of investment transactions, management
has historically utilized floating rate debt at less than 5% of the Trust's total debt.
2012 CONVERTIBLE DEBENTURES
On October 31, 2012, the Trust issued a $150.0 million principal amount of 4.85% convertible unsecured subordinated
debentures ("2012 Debentures"), maturing on October 31, 2017 ("the Maturity Date"). Interest is payable semi-annually, not
in advance, on April 30 and October 31 of each year.
The 2012 Debentures, with the exception of the value assigned to the holders' conversion option, have been recorded as
debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related
issue costs of the 2012 Debentures at the date of original issue. The portion of issue costs attributable to the liability of
$4,182 has been capitalized and amortized over the term to maturity, while the remaining amount of $46 has been charged
to equity.
2012 CONVERTIBLE DEBENTURES
TABLE 47
Transaction date – October 31, 2012
Issue costs
Convertible debentures
Principal Amount
Issued
Liability
Equity
$150,000
$148,428
$1,572
(4,228)
$145,772
(4,182)
$144,246
(46)
$1,526
Conversion Rights: Each 2012 Debenture is convertible into freely tradable units of the Trust, at the option of the holder,
exercisable at any time prior to the close of business on the last business day preceding the Maturity Date at a conversion
price of $24.60 ("the Conversion Price") per unit being a rate of approximately 40.6504 units per thousand principal amount
of 2012 Debentures, subject to adjustment.
At December 31, 2016, $25 (2015 – $15) of the 2012 Debentures have been converted into 1,015 units (2015 – 609 units).
The liability and equity component of these debentures has been included in unitholders' equity under issue of units.
On December 9, 2016, the Trust announced that it would redeem all of its outstanding 2012 Debentures on January 9, 2017
("the Redemption Date"). The redemption price is paid in cash and is $1,000 per debenture together with accrued and
unpaid interest on the debentures up to, but not including, the Redemption Date. On January 6, 2017, $18 of the 2012
Debentures were converted into 731 units. The remaining $149,957 of the 2012 Debentures were redeemed on the
Redemption Date.
Redemption Rights: Each 2012 Debenture is redeemable any time from November 1, 2015, to the close of business on
October 31, 2016, in whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and
unpaid interest, at the Trust's sole option, provided that the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not less
than 125% of the Conversion Price.
From November 1, 2016, to the close of business on October 31, 2017, the 2012 Debentures are redeemable, in whole or in
part, at par plus accrued and unpaid interest, at the Trust's sole option.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
Repayment Options Payment on Redemption or Maturity: The Trust may satisfy the obligation to repay the principal
amount of the 2012 Debentures, in whole or in part, by delivering units of the Trust. In the event that the Trust elects to
satisfy its obligation to repay principal with units of the Trust, the number of units issued is obtained by dividing the principal
amount of the 2012 Debentures by 95% of the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date fixed for redemption or the Maturity Date, as applicable.
Interest Payment Election: The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the
Trust to the Debenture Trustee in order to raise funds to pay interest on the 2012 Debentures, in which event the holders of
the 2012 Debentures will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale
of such units.
2016 CONVERTIBLE DEBENTURES
On December 30, 2016, the Trust issued a $175.0 million principal amount of 4.50% convertible unsecured subordinated
debentures ("2016 Debentures"), maturing on December 31, 2021 ("the 2016 Debenture Maturity Date"). Interest is payable
semi-annually, not in advance, on June 30 and December 31 of each year.
The 2016 Debentures, with the exception of the value assigned to the holders' conversion option, have been recorded as
debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related
issue costs of the 2016 Debentures at the date of original issue. The portion of issue costs attributable to the liability of
$4,998 has been capitalized and amortized over the term to maturity, while the remaining amount of $139 has been charged
to equity.
2016 CONVERTIBLE DEBENTURES
TABLE 48
Transaction date – December 30, 2016
Issue costs
Convertible debentures
Principal Amount
Issued
Liability
Equity
$175,000
$170,267
$4,733
(5,137)
$169,863
(4,998)
$165,269
(139)
$4,594
Conversion Rights: Each 2016 Debenture is convertible into freely tradable units of the Trust, at the option of the holder,
exercisable at any time prior to the close of business on the last business day preceding the Maturity Date at a conversion
price of $20.40 per unit being a rate of approximately 40.0196 units per thousand principal amount of 2016 Debentures,
subject to adjustment.
Redemption Rights: Each 2016 Debenture is redeemable any time from January 1, 2020, to the close of business on
December 31, 2020, in whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and
unpaid interest, at the Trust's sole option, provided that the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not less
than 125% of the Conversion Price.
From January 1, 2021, to the close of business on December 31, 2021, the 2016 Debentures are redeemable, in whole or in
part, at par plus accrued and unpaid interest, at the Trust's sole option.
Repayment Options Payment on Redemption or Maturity: The Trust may satisfy the obligation to repay the principal
amount of the 2016 Debentures, in whole or in part, by delivering units of the Trust. In the event that the Trust elects to
satisfy its obligation to repay principal with units of the Trust, the number of units issued is obtained by dividing the principal
amount of the 2016 Debentures by 95% of the weighted average trading price of the units on the TSX for the 20
consecutive trading days ending five trading days prior to the date fixed for redemption or the Maturity Date, as applicable.
Interest Payment Election: The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the
Trust to the Debenture Trustee in order to raise funds to pay interest on the 2016 Debentures, in which event the holders of
the 2016 Debentures will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale
of such units.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
MORTGAGES PAYABLE
TABLE 49
As at December 31,
Mortgages payable before financing costs
2016
2015
$1,143,793
$1,205,101
Premium on acquired debt
—
1
(2,997)
Deferred financing costs
$1,140,796
Mortgages payable
(3,546)
$1,201,556
A complete reconciliation of mortgages payable discussed in this MD&A to mortgages payable per the consolidated financial
statements is provided in Part XI (Table 64).
DEBT MATURITY PROFILE
Management attempts to stagger the maturities of the Trust's fixed-rate debt with the general objective of achieving even
annual maturities over a 10-year time horizon. The intention of this strategy is to reduce the Trust's exposure to interest rate
fluctuations in any one period.
The following tables outline the aggregate principal repayment for mortgages payable and convertible debentures as at
December 31, 2016, together with the weighted average contractual rate on debt maturing in the years indicated. Also
highlighted are the Trust's primary sources of lending, by year of maturities, and the Trust's up-financing opportunity in
relation to the fair value of encumbered properties relative to their respective maturing debt.
AGGREGATE MATURITIES
TABLE 50
Year
Mortgage
Maturity
Payments
Scheduled
Principal
Repayments
Weighted
Total Mortgages Average Interest
Payable
Rate
2017
$50,289
$35,997
$86,286
4.52%
$149,975
4.85%
$236,261
4.76%
2018
55,464
34,100
89,564
4.35%
—
—%
89,564
4.35%
2019
162,122
28,741
190,863
3.63%
—
—%
190,863
3.63%
2020
139,019
27,446
166,465
4.46%
—
—%
166,465
4.46%
Debentures
Payable
Weighted
Average Interest
Rate
Weighted
Total Debt Average Interest
Maturities
Rate
2021
153,525
21,047
174,572
4.19%
175,000
4.5%
349,572
4.34%
Thereafter
399,755
36,288
436,043
4.07%
—
—%
436,043
4.07%
Total
$960,174
$183,619
$1,143,793
4.11%
$324,975
4.66%
$1,468,768
4.23%
The weighted average interest rate on mortgages maturing in 2017 is 4.52%, while the weighted average interest rate on
total mortgages payable at December 31, 2016, is 4.11%. At December 31, 2016, the Trust's weighted average term to
maturity for mortgages payable is 4.7 years.
PRINCIPAL MATURITIES BY TYPE OF LENDER, BY YEAR OF MATURITY
TABLE 51
Year
Banks
Insurance Industry
Pension Funds
Unsecured Debentures
Total
2017
$—
$12,944
$37,345
$149,975
$200,264
2018
—
55,464
—
—
55,464
2019
129,640
32,482
—
—
162,122
2020
28,440
49,412
61,167
—
139,019
2021
65,098
81,085
7,342
175,000
328,525
Thereafter
236,694
123,500
39,561
—
399,755
$459,872
$354,887
$145,415
$324,975
$1,285,149
The Trust maintains strategic relationships with banks, insurance companies and pension funds to reduce its exposure to
any one lending group.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
The 2016 Debentures maturing in 2021 have certain redemption rights commencing January 2021 (see Table 48).
FAIR VALUE OF ENCUMBERED PROPERTIES RELATIVE TO MATURING DEBT
TABLE 52
Year
Mortgage Maturity
Payments
Scheduled Principal
Repayments
Total
Fair Value of
Encumbered Assets
2017
$50,289
$1,165
$51,454
$123,750
42%
2018
55,464
5,481
60,945
235,100
26%
2019
162,122
12,282
174,404
379,880
46%
2020
139,019
20,072
159,091
403,750
39%
2021
153,525
25,346
178,871
447,000
40%
Thereafter
399,755
119,273
519,028
958,470
54%
$960,174
$183,619
$1,143,793
$2,547,950
45%
Leverage
Given current real estate values, the Trust has an opportunity during 2017 to increase financing as debt matures and still
maintain the targeted loan to value ratio of 50%.
DEBT AND LEVERAGE METRICS
TABLE 53
For the year ended December 31,
Interest coverage ratio
1
Debt service coverage ratio 2
Debt ratio 3
Weighted average rates on mortgages
Average term to maturity on mortgages (years)
Distributions as a percentage of adjusted funds from operations – basic
Unencumbered assets to unsecured debt
2016
2015
2.91
2.76
1.81
1.73
47.5%
45.7%
4.1%
4.1%
4.7
5.3
76.2%
75.0%
73.1%
79.6%
Unencumbered assets
$237,550
$119,400
Unsecured debt
$324,975
$149,985
1.
Interest coverage defined as: Net income before taxes, amortization and fair value changes, divided by total interest expense at the Trust's share (including interest that has been capitalized).
2.
Debt service coverage defined as: Net income before taxes, amortization and fair value changes, divided by total interest expense at the Trust's share (including interest that has been capitalized), and
scheduled mortgage principal repayments.
3.
Debt ratio defined as: Total indebtedness, divided by gross book value of total assets.
Modest improvements were shown in certain of the Trust's key ratios and leverage metrics for the year ended December 31,
2016. Total unencumbered assets increased by $118.2 million with the Trust opting to pay out several mortgages maturing
during the year rather than securing long-term refinancing at this time.
CREDIT FACILITIES
As at December 31, 2016, the Trust has secured floating rate bank financing availability totalling $70 million, which renews
annually and is secured by fixed charges on specific properties owned by the Trust. The bank credit agreements include
certain restrictive covenants and undertakings by the Trust. As at December 31, 2016, the Trust was in compliance with all
covenants and undertakings. The Trust has a revolving unsecured loan agreement with Morguard that provides for
borrowings or advances of up to $50 million.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
CREDIT FACILITIES
TABLE 54
As at December 31,
Bank credit facilities and operating lines
Revolving loan agreement with Morguard
Amounts drawn against credit facilities
2016
2015
$70,000
$70,000
50,000
50,000
120,000
120,000
(841)
$119,159
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(286)
$119,714
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART VII
RISKS AND UNCERTAINTIES
All real estate investments are subject to a degree of risk and uncertainty. Income producing property is affected by various
factors, including general economic conditions and local market circumstances. Local business conditions such as
oversupply of space or a reduction in demand particularly affect income property investments. Management attempts to
manage these risks through geographic and asset class diversification. At December 31, 2016, the Trust held 49 properties
in three assets classes (retail, office and industrial) and located in six provinces. The Trust is exposed to other risks as
outlined below.
INTEREST RATE AND FINANCING RISK
The Trust is exposed to financial risks that arise from its indebtedness, including fluctuations in interest rates. Interest rate
risk is managed by financing debt at fixed rates with maturities scheduled over a number of years. At December 31, 2016,
100.0% of the Trust's debt was at fixed rates.
As outlined in "Part VI – Liquidity and Capital Resources," the Trust has an ongoing requirement to access debt markets to
refinance maturing debt as it comes due. There is a risk that lenders will not refinance such maturing debt on terms and
conditions acceptable to the Trust or any terms at all.
The Declaration of Trust permits the Trust to incur indebtedness, provided that after giving effect to incurring or assuming
any indebtedness the amount of all indebtedness of the Trust is not more than 60% of the gross book value of the Trust's
total assets.
The following table provides the Trust's debt ratios compared to the borrowing limits established in the Declaration of Trust:
DEBT RATIOS
TABLE 55
As at December 31,
Fixed-rate debt to gross book value of total assets
Borrowing Limits
—%
2016
2015
47.5%
45.7%
Floating-rate debt to gross book value of total assets
15.0%
—%
—%
Total indebtedness to gross book value of total assets
60.0%
47.5%
45.7%
CREDIT RISK
Credit risk arises from the possibility that tenants may be unable to fulfill their lease commitments. Management mitigates
this risk by ensuring that the Trust's tenant mix is diversified and by limiting the Trust's exposure to any one tenant.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
TOP TEN TENANTS
TABLE 56
As at December 31, 2016
Annualized
Rental
Revenue
Tenant
# of
Locations
GLA (000's)
% of Total
GLA
Weighted
Average
Remaining
Lease Term
1
Federal and provincial government
12.3%
11
901
11.0%
6.0
2
Penn West Petroleum Ltd.
11.6%
1
619
7.5%
8.1
3
Canadian chartered banks - Tier 1
4.3%
19
253
3.1%
5.8
4
Bombardier Inc.
3.0%
1
278
3.4%
14.3
5
Amec Foster Wheeler
2.0%
1
145
1.8%
4.0
6
Canadian Tire Corporation Ltd.
1.6%
7
261
3.2%
4.1
7
Loblaw Companies Ltd.
1.5%
8
117
1.4%
4.3
8
CH2M Hill Canada Ltd.
1.3%
2
87
1.1%
10.7
9
HBC
1.1%
3
324
3.9%
4.1
10
Stantec Consulting Ltd.
1.1%
2
75
0.9%
4.0
39.8%
55
3,060
37.3%
6.7
LEASE ROLLOVER RISK
Lease rollover risk arises from the possibility that the Trust may experience difficulty renewing leases as they expire or in releasing space vacated by tenants upon lease expiry. Management attempts to stagger the lease expiry profile so that the
Trust is not faced with disproportionate amounts of space expiring in any one year. Management further mitigates this risk
by maintaining a diversified portfolio mix by both asset type and geography.
LEASE PROFILE
TABLE 57
Retail
SF
% of
Portfolio
Office
Weighted
Average
Contract
Rent
SF
Industrial
% of
Portfolio
Weighted
Average
Contract
Rent
SF
% of
Portfolio
Weighted
Average
Contract
Rent
2017
537,036
12.7%
$26.98
250,654
7.5%
$24.50
74,388
13.9%
$7.56
2018
389,382
9.2%
27.92
165,359
4.9%
22.83
68,797
12.9%
6.48
2019
191,462
4.5%
32.09
162,940
4.9%
24.57
11,413
2.1%
7.29
2020
507,083
12.0%
27.45
163,636
4.9%
22.36
4,679
0.9%
10.55
5.67
Thereafter
2,433,881
57.7%
18.08
2,498,794
74.5%
23.34
362,402
67.9%
Current vacancy
166,237
3.9%
—
111,030
3.3%
—
12,473
2.3%
—
Total
4,225,081
100.0%
$21.90
3,352,413
100.0%
$23.22
534,152
100.0%
$6.07
2017 EXPIRIES BY LOCATION (NET OF COMMITTED RENEWALS)
TABLE 58
Retail
Location
British Columbia
Alberta
Office
SF
Weighted Average
Contract Rent
8,487
Industrial
SF
Weighted Average
Contract Rent
SF
Weighted Average
Contract Rent
Total
$40.80
2,159
$38.37
—
$—
10,646
118,407
23.92
74,636
21.48
—
—
193,043
Saskatchewan
56,088
20.96
—
—
—
—
56,088
Manitoba
30,205
28.15
—
—
—
—
30,205
Ontario
323,849
28.67
173,859
25.62
74,388
7.56
572,096
Total
537,036
$26.98
250,654
$24.50
74,388
$7.56
862,078
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
ENVIRONMENTAL RISK
The Trust is subject to various federal, provincial and municipal laws relating to the environment. The Trust's ongoing
environmental management program includes regular review of tenant business uses and inspections of properties to
ensure compliance, as well as appropriate testing by qualified environmental consultants when required. A Phase I
environmental site assessment is performed on properties considered for acquisition. The Trust mitigates the cost of
remediation by carrying environmental insurance where available.
UNITHOLDER LIABILITY
The Declaration of Trust provides that no unitholder or annuitant under a plan of which a unitholder acts as trustee or carrier
will be held to have any personal liability as such and that no recourse may be had to the private property of any unitholder
or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of the
Trust. Only assets of the Trust are intended to be liable and subject to levy or execution.
The following provinces have legislation relating to unitholder liability protection: British Columbia, Alberta, Saskatchewan,
Manitoba, Ontario and Quebec. Certain of these statutes have not yet been judicially considered, and it is possible that
reliance on such statutes by a unitholder could be successfully challenged on jurisdictional or other grounds. The Trustees
will cause the operations of the Trust to be conducted, with the advice of counsel, in a manner and in such jurisdictions so
as to avoid, as far as practicable, any material risk of liability to the unitholders for claims against the Trust. The Trustees
will also cause the Trust to carry insurance, to the extent to which they determine to be possible and reasonable, for the
benefit of unitholders and annuitants in such amounts as they consider adequate to cover non-contractual or non-excluded
liability.
GENERAL UNINSURED LOSSES
The Trust has in place blanket comprehensive general liability, fire, flood, extended coverage and rental loss insurance with
policy specifications, limits and deductibles customarily carried for similar properties. There are, however, certain types of
risks (generally of a catastrophic nature such as from wars or environmental contamination) that are either uninsurable or
not insurable on an economically viable basis. The Trust also carries insurance for earthquake risks, where appropriate,
subject to certain policy limits, deductibles and self-insurance arrangements, and will continue to carry such insurance if it is
economical to do so. Should an insured or underinsured loss occur, the Trust could lose its investment in, and anticipated
profits and cash flows from, one or more of its properties.
AVAILABILITY OF CASH FLOW
From time to time, because of items such as debt repayments and discretionary capital expenditures incurred to enhance
the real estate portfolio, adjusted funds from operations may be less than the actual cash required by the Trust. In these
situations, The Trust may use part of its debt capacity or reduce distributions in order to meet its obligations.
UNITS OUTSTANDING
Under the Declaration of Trust, the Trust is authorized to issue an unlimited number of units. Each unit represents an equal
interest in the Trust together with all outstanding units. All units have equal voting rights at meetings held by the Trust. As
at February 15, 2017, the Trust had 60,600,707 units outstanding (60,891,654 – December 31, 2015). There have been no
units repurchased for cancellation during 2017 as a part of the Trust's participation in the normal course issuer bid.
UNITHOLDER TAXATION
The Trust is taxed as a "mutual fund trust" for income tax purposes. Under Part I of the Act, a Trust is not subject to income
taxes to the extent that the income for tax purposes in a given year does not exceed the amount distributed to unitholders
and deducted by the Trust for tax purposes. The Trustees intend to distribute or designate all taxable income directly
earned by the Trust to unitholders of the Trust and to deduct such distributions and designations for income tax purposes.
Accordingly, in prior years the Trust has not been required to record a provision for income taxes.
During the year, the Trust realized capital gains as a result of the disposal of one office property, 50% of which are included
in computing income for tax purposes.
Distributions are broken down into four categories: taxable capital gains, non-taxable capital gains, return of capital and
other income. Distributions by category for the last two years are as follows:
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
DISTRIBUTIONS BY CATEGORY
TABLE 59
For the year ended December 31,
Capital gains – taxable
Capital gains – non-taxable
Return of capital
Other income – taxable
2016
5.6%
2015
2.1%
5.6%
2.1%
15.5%
27.3%
73.3%
68.5%
100.0%
100.0%
Legislation relating to the federal income taxation of a "specified investment flow-through" ("SIFT") trust or partnership was
enacted in 2007. Under the SIFT rules, certain distributions attributable to a SIFT will not be deductible in computing the
SIFT's taxable income, and the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to
the general tax rate applicable to Canadian corporations. Distributions paid by a SIFT as returns of capital will not be
subject to this tax. The SIFT tax regime did not apply to the Trust prior to 2011 due to transitional relief available to certain
SIFTs that were publicly listed before November 1, 2006.
The SIFT tax does not apply to a trust that meets prescribed conditions relating to the nature of its income and investments
("the REIT exception"). The Trust has reviewed its status under the legislation and has determined that it is not subject to
this tax as it met the REIT exception at December 31, 2016, and throughout the year. Accordingly, no net additional current
income tax expense or future income tax assets or liabilities have been recorded in the December 31, 2016, consolidated
financial statements.
The REIT exception is applied annually. As such, it will not be possible to determine if the Trust will satisfy the conditions of
the REIT exception for 2017 or any subsequent year until the end of the particular year.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART VIII
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Trust's critical accounting policies are those that management believes are the most important in portraying the Trust's
financial condition and results and that require the most subjective judgment and estimates on the part of management.
REAL ESTATE PROPERTIES
Real estate properties include retail, office and industrial properties held to earn rental income (income producing
properties) and properties or land that are being constructed or developed for future use as income producing properties.
Real estate properties are recorded at fair value, determined based on available market evidence, at the balance sheet
date. The Trust determined the fair value of each real estate property based upon, among other things, rental income from
current leases and assumptions about rental income from future leases reflecting market conditions at the applicable
balance sheet date, less future cash outflow pertaining to the respective leases. The real estate properties are appraised
using a number of approaches that typically include a discounted cash flow analysis, direct capitalization method and direct
comparison approach. The discounted cash flow analysis is primarily based on discounting the expected future cash flows,
generally over a term of 10 years and including a terminal value based on the application of a capitalization rate to
estimated year 11 cash flows.
In applying the accounting policies to the real estate properties, judgment is required in determining whether certain costs
are additions to the carrying amount of the property, in distinguishing between tenant incentives and tenant improvements,
and, for properties under development, identifying the point at which practical completion of the property occurs and
identifying the directly attributable borrowing costs to be included in the carrying value of the development property.
Judgment is also applied in determining the extent and frequency of independent appraisals.
REVENUE RECOGNITION
The computation of cost reimbursements from tenants for realty taxes, insurance and common area maintenance charges is
complex and involves a number of judgments, including the interpretation of terms and other tenant lease provisions.
Tenant leases are not consistent in dealing with such cost reimbursements, and variations in computations can exist.
Adjustments are made throughout the year to these cost recovery revenues based upon the Trust's best estimate of the final
amounts to be billed and collected.
LEASES
The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms
where the lessee is the sole tenant in a property and long-term ground leases where the Trust is the lessee, are operating or
finance leases. The Trust has determined that all of its tenant leases and long-term ground leases are operating leases.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management reports on a quarterly basis the fair value of financial instruments. The fair value of financial instruments
approximates amounts at which these instruments could be exchanged between knowledgeable and willing parties. The
estimated fair value may differ in amount from that which could be realized on an immediate settlement of the instruments.
Management estimates the fair value of mortgages payable by discounting the cash flows of these financial obligations
using December 31, 2016, market rates for debts of similar terms. The fair value of the convertible debentures is based on
their market trading price (TSX: MRT.DB.A & MRT.DB).
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART IX
CONTROLS AND PROCEDURES CONCERNING FINANCIAL INFORMATION
The financial certification process project team has documented and assessed the design and effectiveness of the internal
controls in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS. This undertaking has enabled the Chief Executive
Officer and Chief Financial Officer to attest that the design and effectiveness of the internal controls with regard to financial
information are effective using the Committee of Sponsoring Organizations of the Treadway Commission Internal Control –
Integrated Framework (2013). In order to ensure that the consolidated financial statements and MD&A present fairly, in all
material aspects, the financial position of the Trust and the results of its operations, management is responsible for
establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting.
The Trust's management has evaluated the effectiveness of the Trust's disclosure controls and procedures and, based on
such evaluation, has concluded that their design and operation are adequate and effective for the year ended December 31,
2016. The Trust's management has also evaluated the effectiveness of the internal controls over financial reporting and has
concluded that the design and operation are effective for the year ended December 31, 2016.
An information disclosure policy constitutes the framework for the information disclosure process with regard to the annual
and interim filings, as well as to the other reports filed or submitted under securities legislation. This policy aims in particular
at identifying material information and validating the related reporting. Morguard's Disclosure Committee is responsible for
ensuring compliance with this policy for both Morguard and the Trust. Morguard's and the Trust's senior management act
as the Disclosure Committee, ensuring compliance with this policy and reviewing main documents to be filed with regulatory
authorities to ensure that all significant information regarding operations is communicated in a timely manner.
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART X
OUTLOOK
Canada’s commercial property market generated largely stable and positive trends during 2016 despite continued
weakness in resource-driven regions. Across much of the sector, owners continued to experience healthy income growth
patterns and stable values. Toronto and Vancouver outperformed as demand for office, industrial, retail and multi-suite
residential space surpassed most forecasts. By contrast, the erosion of rental market fundamentals continued in resourcedriven metros, including Calgary and Edmonton, despite a modest recovery in oil prices. Continued access to low-cost debt
and equity capital pushed capital flows into the commercial property sector to a record high during 2016, with foreign buyers
adding to the strength of the demand cycle. The relative safety of Canada’s property sector was a major driver of offshore
demand. The resulting demand pressure pushed core values to new benchmark highs, with the balance of the market
stabilizing at the peak. A range of capital structures, both public and private, actively pursued Canadian commercial
property as a source of stable yield. Capital allocated for the sector outdistanced the supply of core-quality assets. Against
this backdrop, 2016 was marked by generally stable and positive investment market fundamentals. The successes of 2016
occurred during a period of heightened risk.
Looking to 2017, Canada’s commercial property sector should register progress while investors monitor risks that may have
an impact on performance. A modest strengthening of the economic growth cycle is forecast for 2017, with annual real GDP
to expand by between 1.6% and 1.8%. Coincidentally, the nation’s resource sector is expected to slowly stabilize. The
byproduct of an improved economic outlook is stable space market demand, supporting income growth for investors. Core
property values are expected to hold at current levels, with the potential for slight increases given relatively high levels of
competition for yield, a deep buyer pool and ongoing access to low-cost debt and equity capital. While the outlook is
broadly positive, investors will monitor performance risks that could affect values and performance. The main areas of
sector risk include the potential for sharp increases in borrowing costs, the possibility of instituted protectionist trade
measures in the U.S. and a prolonged commodities crisis.
In 2017, the environment for acquisitions should continue to be extremely competitive. The Trust remains disciplined in
exploring new investment opportunities. Management will continue to seek acquisition opportunities, focusing on properties
that are accretive in the long term. In addition to acquisitions, the Trust also expects growth to come organically from within
the existing portfolio and from intensification opportunities.
The Trust's strength stems from conservative financial leverage, a moderate payout ratio and diversification.
MORGUARD.COM
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART XI
RECONCILIATIONS TO THE ISSUED FINANCIAL STATEMENTS
Part XI provides the reader with reconciliations of the key performance measures used in this MD&A to the Trust's
consolidated financial statements.
RECONCILIATION OF NET OPERATING INCOME PER THE FINANCIAL STATEMENTS
TABLE 60
Three Months Ended December 31,
Year Ended December 31,
2016
2015
Variance
2016
2015
Variance
Retail
$22,585
$22,923
($338)
$82,733
$84,710
($1,977)
Office
19,680
18,958
722
75,758
74,966
Net operating income/(loss)
Industrial
792
756
680
76
3,045
3,034
43,021
42,561
460
161,536
162,710
101
407
(306)
654
1,385
(731)
319
(321)
612
1,735
(1,123)
43,120
43,287
(167)
162,802
165,830
(3,028)
Stepped rents
393
858
(465)
1,313
2,162
(849)
Lease cancellation fees
207
169
38
441
1,032
(591)
Net operating income – same assets
Real estate properties held for development
Real estate properties held for sale/sold
Net operating income before other adjustments
(2)
11
(1,174)
OTHER ADJUSTMENTS
One-time adjustment
—
283
(283)
148
1,295
(1,147)
Net operating income from total real estate properties
43,720
44,597
(877)
164,704
170,319
(5,615)
Equity-accounted investments
(1,044)
(1,111)
67
Net operating income per the financial statements
$42,676
$43,486
($810)
(4,204)
$160,500
(4,389)
$165,930
185
($5,430)
RECONCILIATION OF NET (LOSS)/INCOME FROM EQUITY-ACCOUNTED INVESTMENTS
TABLE 61
Three Months Ended December 31,
Net operating income
Other expenses
Fair value losses on real estate properties
Net (loss)/income from equity-accounted investments
MORGUARD.COM
Year Ended December 31,
2016
2015
Variance
2016
2015
Variance
$1,044
$1,111
($67)
$4,204
$4,389
($185)
14
(1,112)
(1,157)
(4,650)
(791)
(281)
(295)
(5,020)
(807)
(5,301)
(1,102)
($4,257)
$9
(4,213)
45
(3,859)
(4,199)
(5,762)
(1,948)
(3,814)
($4,266)
($1,558)
$2,441
($3,999)
45
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
RECONCILIATION OF REAL ESTATE PROPERTIES
TABLE 62
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$2,767,315
$56,900
$2,824,215
Properties under development
27,833
—
27,833
Held for development
30,950
—
30,950
$2,826,098
$56,900
$2,882,998
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$2,816,124
$61,950
$2,878,074
2,524
—
2,524
28,750
—
28,750
$2,847,398
$61,950
$2,909,348
Equity-Accounted
Investments
All Properties
As at December 31, 2016
Income producing properties
Total real estate properties
As at December 31, 2015
Income producing properties
Properties under development
Held for development
Total real estate properties
RECONCILIATION OF FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES
TABLE 63
For the three months ended December 31, 2016
Income producing properties
Properties under development
Held for development
Properties held for sale/sold
Total fair value (losses)/gains on real estate properties
For the three months ended December 31, 2015
Income producing properties
Properties under development
Held for development
Properties held for sale/sold
Total fair value gains/(losses) on real estate properties
For the year ended December 31, 2016
Income producing properties
Properties under development
Held for development
Properties held for sale/sold
Total fair value (losses)/gains on real estate properties
For the year ended December 31, 2015
Income producing properties
Properties under development
Held for development
Properties held for sale/sold
Total fair value (losses)/gains on real estate properties
MORGUARD.COM
Per Financial
Statements
($30,655)
($5,020)
($35,675)
—
—
—
1,000
—
1,000
—
($29,655)
Per Financial
Statements
($24,017)
—
($5,020)
Equity-Accounted
Investments
($807)
—
($34,675)
All Properties
($24,824)
—
—
—
733
—
733
106
($23,178)
Per Financial
Statements
($53,843)
—
($807)
Equity-Accounted
Investments
($4,650)
106
($23,985)
All Properties
($58,493)
—
—
—
2,200
—
2,200
—
($51,643)
Per Financial
Statements
($79,513)
—
($4,650)
Equity-Accounted
Investments
($791)
—
($56,293)
All Properties
($80,304)
—
—
—
733
—
733
(197)
($78,977)
—
($791)
(197)
($79,768)
46
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
RECONCILIATION OF MORTGAGES PAYABLE
TABLE 64
As at December 31, 2016
Mortgages payable before financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
As at December 31, 2015
Mortgages payable before financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
MORGUARD.COM
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$1,115,491
$28,302
$1,143,793
—
—
(2,997)
—
—
(2,997)
$1,112,494
$28,302
$1,140,796
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$1,175,880
$29,221
$1,205,101
1
—
(3,546)
$1,172,335
—
$29,221
1
(3,546)
$1,201,556
47
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
RECONCILIATION OF CASH FLOWS
TABLE 65
For the three months ended December 31, 2016
Cash provided by operating activities
Cash provided by/(used in) financing activities
Cash used in investing activities
Net increase in cash
Cash and cash equivalents, beginning of period
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$29,105
$675
$29,780
85,656
(233)
85,423
(17,326)
(76)
(17,402)
97,435
366
97,801
15,261
694
15,955
$112,696
$1,060
$113,756
Per Financial
Statements
Equity-Accounted
Investments
All Properties
Cash provided by operating activities
$29,717
$578
$30,295
Cash used in financing activities
(43,730)
(225)
(43,955)
Cash provided by investing activities
26,598
682
27,280
Net increase in cash
12,585
1,035
13,620
Cash and cash equivalents, beginning of period
13,697
839
14,536
$26,282
$1,874
$28,156
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$115,148
$670
$115,818
Cash and cash equivalents, end of year
For the three months ended December 31, 2015
Cash and cash equivalents, end of year
For the year ended December 31, 2016
Cash provided by operating activities
Cash used in financing activities
(3,644)
(919)
(4,563)
Cash used in by investing activities
(25,090)
(23)
(25,113)
Net increase/(decrease) in cash
86,414
(272)
86,142
Cash and cash equivalents, beginning of year
26,282
1,332
27,614
$112,696
$1,060
$113,756
Per Financial
Statements
Equity-Accounted
Investments
All Properties
$97,947
$817
$98,764
(884)
(107,121)
Cash and cash equivalents, end of year
For the year ended December 31, 2015
Cash provided by operating activities
Cash used in financing activities
(106,237)
Cash provided by investing activities
21,960
1,832
23,792
Net increase in cash
13,670
1,765
15,435
Cash and cash equivalents, beginning of year
12,612
109
12,721
$26,282
$1,874
$28,156
Cash and cash equivalents, end of year
MORGUARD.COM
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MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART XII
SUMMARY OF QUARTERLY RESULTS
SUMMARY OF QUARTERLY RESULTS
TABLE 66
The following table provides a summary of quarterly operating results for the last eight quarters.
Revenue from real estate properties
Property operating expenses
Property management fees
December 31,
September 30,
June 30,
March 31,
2016
2016
2016
2016
$73,729
$69,582
$70,165
$72,912
27,586
28,034
27,610
29,347
2,421
2,278
2,307
2,357
Net operating income
43,722
39,270
40,248
41,208
Interest expense
15,064
14,025
14,211
14,479
1,200
1,119
1,173
1,243
General and administrative
Other income
Income before fair value (losses)/gains on real estate properties and net (loss)/income
from real estate properties held for sale/sold
Fair value (losses)/gains on real estate properties
Net (loss)/income from real estate properties held for sale/sold
Net (loss)/income
(10)
(50)
(11,230)
(20)
27,468
24,176
36,094
25,506
(34,675)
(14,654)
(17,489)
10,514
(2)
6
294
($7,209)
$9,528
$18,899
$35,989
(31)
December 31,
September 30,
June 30,
March 31,
2015
2015
2015
2015
$76,838
$72,193
$71,851
$74,730
29,736
28,709
28,602
29,483
2,496
2,332
2,337
2,362
Net operating income
44,606
41,152
40,912
42,885
Interest expense
14,948
14,756
14,810
15,068
1,080
1,014
1,128
1,159
Revenue from real estate properties
Property operating expenses
Property management fees
General and administrative
Other income
Income before fair value (losses)/gains on real estate properties and net (loss)/income
from real estate properties held for sale/sold
Fair value (losses)/gains on real estate properties
Net (loss)/income from real estate properties held for sale/sold
Net income/(loss)
MORGUARD.COM
(113)
28,691
(23,880)
(114)
$4,697
(116)
25,498
635
(19)
$26,114
(167)
(175)
25,141
26,833
(45,229)
(11,047)
(129)
237
($20,217)
$16,023
49
MORGUARD REAL ESTATE INVESTMENT TRUST
MANAGEMENT’S DISCUSSION AND ANALYSIS | DECEMBER 31, 2016
PART XIII
FUTURE ACCOUNTING POLICY CHANGES
IFRS 15, "REVENUE FROM CONTRACTS WITH CUSTOMERS" ("IFRS 15")
In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with
customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to
users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a
contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled
in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or
after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact of IFRS 15 on its
consolidated financial statements.
IFRS 9 (2014), "FINANCIAL INSTRUMENTS" ("IFRS 9")
The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, "Financial Instruments:
Recognition and Measurement" ("IAS 39"). IFRS 9 addresses the classification and measurement of all financial assets and
liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely
recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the
requirements to measure debt-based financial assets at either amortized cost or FVTPL and to measure equity-based
financial assets either as held-for-trading or as fair value through other comprehensive income ("FVTOCI"). No amounts are
reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no
longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual
periods beginning on or after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact
of IFRS 9 on its consolidated financial statements.
IFRS 16, "LEASES" ("IFRS 16")
In January 2016, the IASB issued IFRS 16. The new standard requires that for most leases, lessees must initially recognize
a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to use the
underlying asset for the lease term. Lessor accounting, however, remains largely unchanged, and the distinction between
operating and finance leases is retained. This standard will be effective for annual periods beginning after January 1, 2019,
with early adoption permitted so long as IFRS 15 has been adopted. The Trust is currently assessing the impact of IFRS 16
on its consolidated financial statements.
IAS 40, "INVESTMENT PROPERTY" ("IAS 40")
In December 2016, the IASB issued an amendment to IAS 40 clarifying certain existing IAS 40 requirements. The
amendment requires that an asset be transferred to or from investment property only when there is a change in use. A
change in use occurs when the property meets or ceases to meet the definition of investment property and there is evidence
of the change in use. In isolation, a change in management's intentions for the use of a property does not provide evidence
of a change in use. These amendments are effective for annual periods beginning on or after January 1, 2018, with earlier
adoption permitted. The Trust is currently assessing the impact of IAS 40 on its consolidated financial statements.
MORGUARD.COM
50
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
INDEPENDENT AUDITORS' REPORT
TO THE UNITHOLDERS OF MORGUARD REAL ESTATE INVESTMENT TRUST
We have audited the accompanying consolidated financial statements of Morguard Real Estate Investment Trust, which
comprise the consolidated balance sheets as at December 31, 2016 and 2015, and the consolidated statement of income
and comprehensive income, unitholders' equity and cash flows for the years then ended, and a summary of significant
accounting policies and other explanatory information.
MANAGEMENTS' RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether
due to fraud or error.
AUDITORS' RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating
the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
OPINION
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Morguard
Real Estate Investment Trust as at December 31, 2016 and 2015, and its financial performance and its cash flows for the
years then ended in accordance with International Financial Reporting Standards.
"Ernst & Young LLP"
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Canada
February 15, 2017
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
BALANCE SHEETS
In thousands of Canadian dollars
As at December 31,
Note
2016
2015
4
5
$2,826,098
28,201
2,854,299
$2,847,398
32,509
2,879,907
11(b)
65,172
2,023
112,696
179,891
$3,034,190
13,011
955
26,282
40,248
$2,920,155
Non-current liabilities
Mortgages payable
Convertible debentures
Other liabilities
7
8
$1,027,841
165,273
3,663
1,196,777
$1,082,799
147,698
3,517
1,234,014
Current liabilities
Mortgages payable
Convertible debentures
Accounts payable and accrued liabilities
7
8
84,653
149,975
47,602
282,230
1,479,007
1,555,183
$3,034,190
89,536
—
40,465
130,001
1,364,015
1,556,140
$2,920,155
ASSETS
Non-current assets
Real estate properties
Equity-accounted investment
Current assets
Amounts receivable
Prepaid expenses and other
Cash and cash equivalents
Total assets
LIABILITIES AND UNITHOLDERS' EQUITY
Total liabilities
Unitholders' equity
Commitments and contingencies
17
See accompanying notes to the consolidated financial statements.
On behalf of the Trustees:
(Signed) "David King"
(Signed) "Paul Cobb"
David King,
Chairman of the Board of Trustees
Paul Cobb,
Trustee
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
STATEMENT OF INCOME AND COMPREHENSIVE INCOME
In thousands of Canadian dollars, except per unit amounts
For the year ended December 31,
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
Interest expense
General and administrative
Other income
Income before fair value losses and net (loss)/income from equityaccounted investment
Fair value losses on real estate properties
Net (loss)/income from equity-accounted investment
Net income
Note
12(a)
10
12(b)
13
4
5
2016
2015
$280,726
111,025
9,201
160,500
$290,982
115,646
9,406
165,930
56,676
4,726
(11,310)
58,981
4,367
(571)
110,408
103,153
(51,643)
(1,558)
57,207
(78,977)
2,441
26,617
189
$57,396
935
$27,552
$0.94
$0.93
$0.43
$0.43
OTHER COMPREHENSIVE INCOME
Items to be reclassified to profit or loss in subsequent periods:
Amortization of cash flow hedges
Comprehensive income
NET INCOME PER UNIT
Basic
Diluted
14(d)
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
STATEMENT OF UNITHOLDERS' EQUITY
In thousands of Canadian dollars, except number of units
Number
of Units
Issue
of Units
Unitholders' equity, January 1, 2015
62,167,654
$625,624
Repurchase of units
(1,328,022)
Net income
Distributions to unitholders
Issue of units – DRIP
Amortization of cash flow hedges
Unitholders' equity, December 31, 2015
Repurchase of units
2012 Debentures converted
$980,717
$1,526
$338
($1,124)
Total
Unitholders'
Equity
$1,607,081
(6,673)
—
—
—
(20,041)
—
26,617
—
—
—
26,617
—
—
(58,452)
—
—
—
(58,452)
52,022
788
(788)
—
—
—
935
—
(13,368)
Equity
Accumulated
Component
Other
Retained of Convertible Contributed Comprehensive
Earnings
Debentures
Surplus
Loss
—
—
—
—
—
60,891,654
613,044
941,421
1,526
338
—
—
—
(371,769)
(3,744)
(2,096)
(189)
—
935
1,556,140
(5,840)
406
10
—
—
—
—
10
2016 Debentures issued
—
—
—
4,594
—
—
4,594
Net income
—
—
57,207
—
—
—
57,207
Distributions to unitholders
—
—
(57,117)
—
—
—
(57,117)
80,416
1,189
(1,189)
—
—
—
—
—
—
—
—
—
189
189
60,600,707
$610,499
$938,226
$6,120
$338
$—
$1,555,183
Issue of units – DRIP
Amortization of cash flow hedges
Unitholders' equity, December 31, 2016
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
STATEMENT OF CASH FLOW
In thousands of Canadian dollars
For the year ended December 31,
Note
2016
2015
$57,207
$26,617
OPERATING ACTIVITIES
Net income
Add items not affecting cash
Distributions from equity-accounted investment
Additions to tenant incentives and leasing commissions
Net change in non-cash operating assets and liabilities
Cash provided by operating activities
15(a)
5
15(b)
55,015
2,750
(3,878)
4,054
115,148
76,668
702
(3,984)
(2,056)
97,947
30,063
(161)
56,155
(278)
(55,749)
—
(34,703)
119,863
—
17,000
(17,000)
(57,117)
(5,840)
(3,644)
(36,925)
(6,125)
(35,644)
—
(4,927)
—
—
(58,452)
(20,041)
(106,237)
—
—
(47,415)
(61)
22,386
(25,090)
(36,000)
66,000
(42,327)
(1,474)
35,761
21,960
FINANCING ACTIVITIES
Proceeds from new mortgages
Financing cost on new mortgages
Repayment of mortgages
Repayments on maturity
Repayment due to early extinguishments
Principal instalment repayments
Net proceeds from 2016 Debentures
Repayment of bank indebtedness
Proceeds from loan payable
Repayment of loan payable
Distributions to unitholders
Units repurchased for cancellation
Cash used in financing activities
8
9
11(b)
11(b)
INVESTING ACTIVITIES
Increase in loan receivable
Decrease in loan receivable
Capital expenditures on real estate properties
Acquisition of real estate properties
Proceeds from sale of real estate properties, net
Cash (used in)/provided by investing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
11(b)
11(b)
86,414
26,282
$112,696
13,670
12,612
$26,282
See accompanying notes to the consolidated financial statements.
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
NOTES
For the year ended December 31, 2016
In thousands of Canadian dollars, except units, per unit amounts and where otherwise noted
NOTE 1
NATURE AND FORMATION OF THE TRUST
Morguard Real Estate Investment Trust ("the Trust") is a "closed-end" real estate investment trust governed pursuant to an
amended and restated declaration of trust dated May 5, 2015 ("the Declaration of Trust"), under, and governed by, the laws
of the Province of Ontario. The Trust commenced active operations on October 14, 1997. The Trust units trade on the
Toronto Stock Exchange ("TSX") under the symbol "MRT.UN". The Trust owns a diverse portfolio of retail, office and
industrial properties located in six Canadian provinces. The Trust's head office is located at 55 City Centre Drive, Suite
1000, Mississauga, Ontario, L5B 1M3.
The Trust has a property management agreement with Morguard Investments Limited ("MIL"), a subsidiary of Morguard
Corporation ("Morguard"). Morguard is the parent company of the Trust, owning 52.50% of the outstanding units as at
December 31, 2016. Morguard is a real estate company, that owns a diversified portfolio of multi-suite residential, retail,
hotel, office and industrial properties. Morguard also provides advisory and management services to institutional and other
investors.
NOTE 2
STATEMENT OF COMPLIANCE AND SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").
The consolidated financial statements were approved and authorized for issue by the Board of Trustees ("the Trustees") on
February 15, 2017.
Basis of Presentation
The Trust's consolidated financial statements are prepared on a going-concern basis and have been presented in Canadian
dollars rounded to the nearest thousand unless otherwise indicated. The consolidated financial statements are prepared on
a historical cost basis, except for real estate properties and certain financial instruments that are measured at fair value.
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial
statements unless otherwise indicated.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Trust, as well as the entities that are controlled
by the Trust ("subsidiaries"). The Trust controls an entity when the Trust is exposed to, or has rights to, variable returns
from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries
are fully consolidated from the date of acquisition or the date on which the Trust obtains control and are deconsolidated from
the date that control ceases. Inter-company transactions, balances, unrealized losses and unrealized gains on transactions
between the Trust and its subsidiaries are eliminated.
Real Estate Properties
Income Producing Properties
Income producing properties include retail, office and industrial properties held to earn rental income and for capital
appreciation.
Income producing properties, where not acquired in a business combination, are measured initially at cost including
transaction costs. Transaction costs include transfer taxes and professional fees for legal and other services.
Subsequent to initial recognition, income producing properties are recorded at fair value, determined based on available
market evidence, at the consolidated balance sheet date. The changes in fair value during each reporting period are
recorded in the consolidated statements of income and comprehensive income. In order to avoid double counting, the
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carrying value of income producing properties includes straight-line rent receivable, tenant improvements, tenant incentives
and direct leasing costs since these amounts are incorporated in the appraised values of real estate properties.
Tenant improvements include costs incurred to meet the Trust's lease obligations and are classified as either tenant
improvements owned by the landlord or tenant incentives. When the obligation is determined to be an improvement that
benefits the landlord and is owned by the landlord, the improvement is accounted for as a capital expenditure and included
in the carrying amount of income producing properties on the consolidated balance sheets.
Tenant incentives are inducements given to prospective tenants to move into the Trust's properties or to existing tenants to
extend the lease term. Tenant incentive receivables are included in the carrying value of real estate properties and are
deducted from rental revenue on a straight-line basis over the term of the tenant's lease.
Properties Under Development
The cost of properties under development includes all expenditures incurred in connection with the acquisition, including all
direct development costs, realty taxes and other costs of the building to prepare it for its productive use, the applicable
portion of general and administrative expenses and borrowing costs directly attributable to the development. Borrowing
costs associated with direct expenditures on properties under development or redevelopment are capitalized. Borrowing
costs are also capitalized on the purchase cost of a site or property acquired specifically for redevelopment in the short term
if the activities necessary to prepare the asset for development or redevelopment are in progress. The amount of borrowing
costs capitalized is determined by reference to interest incurred on debt specific to the development project. Borrowing
costs are capitalized from the commencement of the development until the date of practical completion. The capitalization
of borrowing costs is suspended if there are prolonged periods when development activity is interrupted. The Trust
considers practical completion to have occurred when the property is capable of operating in the manner intended by
management. Generally, this consideration occurs upon completion of construction and receipt of all necessary occupancy
and other material permits. Where the Trust has pre-leased space as at, or prior to, the start of the development and the
lease requires the Trust to construct tenant improvements that enhance the value of the property, practical completion is
considered to occur on completion of such improvements.
Properties under development are measured at fair value with changes in fair value being recognized in the consolidated
statements of income and comprehensive income.
Interests in Joint Arrangements
The Trust views its interests in joint arrangements and those for which the Trust is entitled to only the net assets as joint
ventures, which are accounted for using the equity method of accounting. Those joint arrangements in which the Trust is
entitled to its share of the assets and liabilities are accounted for as joint operations, and the Trust recognizes its rights to
and obligations for the assets, liabilities, revenue and expenses of the joint operation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with remaining maturities at
the time of acquisition of three months or less. Bank borrowings are considered to be financing activities.
Provisions
A provision is a liability of uncertain timing or amount. Provisions are recognized when the Trust has a present legal or
constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the
obligation and the amount can be reliably estimated. Provisions are measured at the present value for the expenditures
expected to be required to settle the obligation using a discount rate that reflects current market assessment of the time
value of money and the risks specific to the obligation. Provisions are remeasured at each consolidated balance sheet date
using the current discount rate. The increase in the provision due to passage of time is recognized as interest expense.
Revenue Recognition
The Trust has retained substantially all of the risks and benefits of ownership of its real estate properties and, therefore,
accounts for leases with its tenants as operating leases. Revenue from properties includes rents from tenants under leases,
percentage participation rents, property tax and operating cost recoveries, lease cancellation fees, leasing concessions,
parking income and incidental income. Percentage participation rents are accrued based on sales estimates submitted by
tenants if the tenant anticipates attaining the minimum sales level stipulated in the tenant lease. All other rental revenue is
recognized in accordance with each lease.
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Revenue from real estate properties recorded in the consolidated statements of income and comprehensive income during
free rent periods represents future cash receipts and is reflected in the consolidated balance sheets in the carrying value of
real estate properties and recognized in the consolidated statement of income and comprehensive income on a straight-line
basis over the initial term of the lease. The Trust accounts for stepped rents on a straight-line basis, which are reflected in
the consolidated balance sheets in the carrying value of real estate properties, and recognized in the consolidated
statement of income and comprehensive income over the initial term of the lease. Rents recorded in advance of cash
received are included in amounts receivable.
Revenue from properties under development is recognized upon substantial completion of the development project and
when the property is capable of operating in the manner intended by management, which generally occurs upon
completion of construction and receipt of all necessary occupancy and other material permits.
Assets Held for Sale
Real estate properties held for sale are assets that the Trust intends to sell rather than hold on a long-term basis and meet
the criteria established in IFRS 5, "Non-Current Assets Held For Sale and Discontinued Operations", for separate
classification. Non-current assets and groups of assets and liabilities, that comprise disposal groups are categorized as
assets held for sale where the asset or disposal group is available for immediate sale in its present condition and the sale is
highly probable.
Comprehensive Income
Comprehensive income is defined as the change in equity from transactions and other events from non-owner sources.
Other comprehensive income ("OCI") refers to items recognized in comprehensive income that are excluded from net
income. Accordingly, the Trust prepares consolidated statements of comprehensive income and includes accumulated other
comprehensive income as a component of the unitholders' equity within the consolidated balance sheets.
Per Unit Calculation
Basic net income per unit is calculated by dividing net income by the weighted average number of units outstanding for the
year. The dilutive effect of the convertible debentures is determined by considering both the holders' option to convert these
debentures into units and the issuer's option to redeem these debentures by issuing units. The diluted net income per unit
calculation considers both of these options and discloses the more dilutive of the two options.
Financial Instruments
Recognition and Measurement of Financial Instruments
Financial assets must be classified into one of the following categories: held to maturity, loans and receivables, fair value
through profit or loss ("FVTPL") or available-for-sale assets. Financial liabilities, including FVTPL, are classified as other
financial liabilities. All financial instruments, including derivatives, are measured in the consolidated balance sheets at fair
value except for held-to-maturity loans and receivables and other financial liabilities that are measured at amortized cost
using the effective interest rate method.
The Trust classifies its cash and cash equivalents and amounts receivable as loans and receivables, which are measured at
amortized cost. Bank indebtedness, accounts payable and accrued liabilities and mortgages payable and convertible
debentures are classified as other financial liabilities, which are measured at amortized cost.
Derivatives and Embedded Derivatives
All derivative instruments, including embedded derivatives, are recorded in the consolidated balance sheets at fair value
unless exempted from derivative treatment as a normal purchase and sale. All changes in their fair value are recorded in
income unless cash flow hedge accounting is used, in which case changes in fair value are recorded in OCI to the extent of
hedge effectiveness. Financial guarantees are recorded at their inception date fair value and reversed as the Trust is
relieved of its guarantee obligations.
Hedges
Derivative financial instruments are utilized to reduce interest rate risk on the Trust's debt. Interest rate swap agreements
are used to manage the fixed and floating interest rate mix of the Trust's total debt portfolio and related overall cost of
borrowing. Such instruments are designated, and are effective, as hedges of certain of the Trust's interest rate risk
exposures. The interest rate swap agreements involve the periodic exchange of payments without the exchange of the
notional principal amount upon which the payments are based. The net receipt or payment of interest will be recorded as
an adjustment to interest expense in each period.
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Gains and losses on termination of interest rate swap agreements that were designated, and were effective, as hedges of
certain interest rate risk exposures are included in accumulated other comprehensive income and are amortized in interest
expense over the remaining term of the original contract life of the terminated swap agreement. Interest expense on the
related debt obligation together with this amortization reflects the overall costs of such borrowing.
Transaction Costs
Direct and indirect financing costs that are attributable to the issue of financial liabilities are presented as a reduction from
the carrying amount of the related debt and are amortized using the effective interest rate method over the terms of the
related debt. These costs include interest, amortization of discounts or premiums relating to borrowings, fees and
commissions paid to lenders, agents, brokers and advisers, and transfer taxes and duties that are incurred in connection
with the arrangement of borrowings.
Fair Value
The fair value of a financial instrument is the consideration that could be received to sell an asset, or paid to transfer a
liability, in an orderly transaction between market participants at the measurement date. The fair value measurement is
based on the presumption that the transaction to sell the asset or transfer the liability takes place either (i) in the principal
market for the asset or liability or (ii) in the absence of a principal market, in the most advantageous market for the asset or
liability.
Fair value measurements recognized in the consolidated balance sheets are categorized using a fair value hierarchy that
reflects the significance of inputs used in determining the fair values:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are
based on observable market data.
Level 3: Valuation techniques for which any significant input is not based on observable market data.
Each type of fair value is categorized based on the lowest-level input that is significant to the fair value measurement in its
entirety.
Critical Judgments in Applying Accounting Policies
The following are the critical judgments that have been made in applying the Trust's accounting policies and that have the
most significant effect on the amounts in the consolidated financial statements:
Real Estate Properties
The Trust's accounting policies relating to real estate properties are described above. In applying these policies, judgment
has been applied in determining whether certain costs are additions to the carrying amount of the property, in distinguishing
between tenant incentives and tenant improvements and, for properties under development, identifying the point at which
practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the
carrying value of the development property. Judgment is also applied in determining the extent and frequency of
independent appraisals. The key assumptions are further described in Note 4.
Leases
The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms
where the lessee is the sole tenant in a property and long-term ground leases where the Trust is the lessee, are operating or
finance leases. The Trust has determined that all of its tenant leases and long-term ground leases are operating leases.
Critical Accounting Estimates and Assumptions
The preparation of the consolidated financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the
consolidated financial statements and reported amounts of revenue and expenses during the reporting periods. In
determining estimates of fair market value for its real estate assets, the assumptions underlying estimated values are limited
by the availability of comparable data and the uncertainty of predictions concerning future events. Should the underlying
assumptions change, actual results could differ from the estimated amounts. In addition, the computation of cost
reimbursements from tenants for realty taxes, insurance and common area maintenance charges is complex and involves a
number of estimates, including the interpretation of terms and other tenant lease provisions. Tenant leases are not
consistent in dealing with such cost reimbursements, and variations in computations can exist. Adjustments are made
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throughout the year to these cost recovery revenues based upon the Trust's best estimate of the final amounts to be billed
and collected.
NOTE 3
ADOPTION OF ACCOUNTING STANDARDS
Current Accounting Policy Changes
Amendments to IFRS 11, "Joint Arrangements" ("IFRS 11"): Accounting for Acquisitions of Interests
On January 1, 2016, the Trust adopted the amendments to IFRS 11, which 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.
These amendments did not impact the consolidated financial statements.
Amendments to International Accounting Standards ("IAS") IAS 1, "Presentation of Financial Statements" ("IAS 1"):
Disclosure Initiative
On January 1, 2016, the Trust adopted the amendments to IAS 1, which clarify rather than significantly change existing IAS
1 requirements. The amendments clarify:
• The materiality requirements in IAS 1;
• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position may be
disaggregated;
• That entities have flexibility as to the order in which they present the notes to financial statements; and
• That the share of OCI of associates and joint ventures accounted for using the equity method must be presented in
aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to
profit or loss.
Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement
of financial position(s) and the statement(s) of profit or loss and OCI.
These amendments did not impact the consolidated financial statements.
Future Accounting Policy Changes
IFRS 15, "Revenue from Contracts with Customers" ("IFRS 15")
In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with
customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to
users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a
contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled
in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or
after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact of IFRS 15 on its
consolidated financial statements.
IFRS 9 (2014), "Financial Instruments" ("IFRS 9")
The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, "Financial Instruments:
Recognition and Measurement" ("IAS 39"). IFRS 9 addresses the classification and measurement of all financial assets and
liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely
recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the
requirements to measure debt-based financial assets at either amortized cost or FVTPL and to measure equity-based
financial assets either as held-for-trading or as fair value through other comprehensive income ("FVTOCI"). No amounts are
reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no
longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual
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periods beginning on or after January 1, 2018, with earlier application permitted. The Trust is currently assessing the impact
of IFRS 9 on its consolidated financial statements.
IFRS 16, "Leases" ("IFRS 16")
In January 2016, the IASB issued IFRS 16. The new standard requires that for most leases, lessees must initially recognize
a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to use the
underlying asset for the lease term. Lessor accounting, however, remains largely unchanged and the distinction between
operating and finance leases is retained. This standard will be effective for annual periods beginning after January 1, 2019,
with early adoption permitted so long as IFRS 15 has been adopted. The Trust is currently assessing the impact of IFRS 16
on its consolidated financial statements.
IAS 40, "Investment Property" ("IAS 40")
In December 2016, the IASB issued an amendment to IAS 40, clarifying certain existing IAS 40 requirements. The
amendment requires that an asset be transferred to, or from, investment property only when there is a change in use. A
change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is
evidence of the change in use. In isolation, a change in management's intentions for the use of a property does not provide
evidence of a change in use. These amendments are effective for annual periods beginning on or after January 1, 2018,
with earlier adoption permitted. The Trust is currently assessing the impact of IAS 40 on its consolidated financial
statements.
NOTE 4
REAL ESTATE PROPERTIES
Real estate properties consist of the following:
As at December 31,
Income producing properties
Properties under development
Held for development
2016
2015
$2,767,315
27,833
30,950
$2,816,124
2,524
28,750
$2,826,098
$2,847,398
Reconciliations of the carrying amounts for real estate properties at the beginning and end of the current financial period are
set out below:
As at December 31, 2016
Balance as at December 31, 2015
Additions:
Acquisitions and investments
Capital expenditures/capitalized costs
Tenant improvements, tenant incentives and commissions
Reclassifications
Disposition
Fair value (losses)/gains
Other changes
Balance as at December 31, 2016
MORGUARD.COM
Income
Producing
Properties
Properties
Under
Development
Held for
Development
Total
Real Estate
Properties
$2,816,124
$2,524
$28,750
$2,847,398
61
12,102
9,861
4,021
(22,386)
(53,843)
1,375
$2,767,315
—
29,330
—
(4,021)
—
—
—
$27,833
—
—
—
—
—
2,200
—
$30,950
61
41,432
9,861
—
(22,386)
(51,643)
1,375
$2,826,098
61
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
As at December 31, 2015
Balance as at December 31, 2014
Additions:
Acquisitions and investments
Capital expenditures/capitalized costs
Tenant improvements, tenant incentives and commissions
Reclassifications
Reclassification from properties held for sale
Fair value (losses)/gains
Other changes
Balance as at December 31, 2015
Income
Producing
Properties
Properties
Under
Development
Held for
Development
Total
Real Estate
Properties
$2,822,074
$16,511
$27,650
$2,866,235
1,474
17,210
13,925
28,735
9,450
(79,513)
2,769
$2,816,124
—
14,748
—
(28,735)
—
—
—
$2,524
—
367
—
—
—
733
—
$28,750
1,474
32,325
13,925
—
9,450
(78,780)
2,769
$2,847,398
MIL (Note 11) provides appraisal services to the Trust. MIL's valuation team consists of Appraisal Institute of Canada
("AIC") designated Accredited Appraiser Canadian Institute ("AACI") members who are qualified to offer valuation and
consulting services and expertise for all types of real property, all of whom are knowledgeable and have recent experience
in the fair value techniques for investment properties. AACI designated members must adhere to AIC's Canadian Uniform
Standards of Professional Appraisal Practice and undertake ongoing professional development. Management reviews both
the valuation processes and results at least once every quarter, in line with the Trust's quarterly reporting dates.
Generally, the Trust's real estate properties are appraised using a number of approaches that typically include a discounted
cash flow analysis, a direct capitalization approach and a direct comparison approach. The primary method of valuation
used by the Trust is discounted cash flows. This approach involves determining the fair value of each income producing
property based on, among other things, rental income from current leases and assumptions about rental income from future
leases reflecting market conditions at the applicable consolidated balance sheet dates, less future cash outflows pertaining
to the respective leases. Fair values are primarily determined by discounting the expected future cash flows, generally over
a term of 10 years and including a terminal value based on the application of a capitalization rate to estimated year 11 net
operating income.
The table below provides further details of the discount rates and terminal cap rates used in the discounted cash flow
method by business segments:
December 31, 2016
Maximum
Minimum
December 31, 2015
Weighted
Average
Maximum
Minimum
Weighted
Average
RETAIL
Discount rate
Terminal cap rate
Stabilized occupancy
8.0%
7.5%
100.0%
6.0%
5.3%
90.0%
6.8%
6.0%
—%
8.3%
7.8%
100.0%
6.0%
5.3%
90.0%
6.8%
6.0%
—%
7.8%
7.3%
100.0%
5.8%
4.8%
94.3%
6.6%
5.8%
—%
8.0%
7.5%
100.0%
6.0%
5.0%
94.3%
6.7%
5.9%
—%
7.3%
7.0%
100.0%
6.8%
6.3%
95.0%
7.1%
6.6%
—%
7.5%
7.0%
100.0%
7.0%
6.5%
95.0%
7.2%
6.8%
—%
OFFICE
Discount rate
Terminal cap rate
Stabilized occupancy
INDUSTRIAL
Discount rate
Terminal cap rate
Stabilized occupancy
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
Using the direct capitalization income approach to corroborate the discounted cash flow method, the properties were
valued using capitalization rates in the range of 4.8% to 7.5% applied to a stabilized net operating income (2015 – 5.0% to
7.5%), resulting in an overall weighted average capitalization rate of 6.2% (2015 – 6.1%). The total stabilized annual net
operating income at December 31, 2016, was $170,638 (2015 – $168,248). Values are most sensitive to changes in
discount rates, capitalization rates and timing or variability of cash flow.
Excluded from the above analysis is a retail property located in British Columbia where the highest and best use is a
redevelopment to mixed residential and commercial use. As at December 31, 2016, the value of the property is in the
underlying land value with minimal holding income, and it has been valued using recent comparable land sales.
Fair values are most sensitive to changes in discount rates, capitalization rates and stabilized or forecast net operating
income. Generally, an increase in net operating income will result in an increase in the fair value of the income producing
properties, and an increase in capitalization rates will result in a decrease in the fair value of the properties. The
capitalization rate magnifies the effect of a change in net operating income, with a lower capitalization rate resulting in a
greater impact to the fair value of the property than a higher capitalization rate. If the weighted average stabilized
capitalization rate were to increase or decrease by 25 basis points, the value of the income producing properties as at
December 31, 2016, would decrease by $105,017 or increase by $113,768, respectively.
Dispositions
The following table provides details of dispositions completed by the Trust during the reporting period:
Gross
Leasable
Area
Sale Price
Mortgage
Payable
Net
Operating
Income
Property Name
Date Sold
Property
Type
825 Des Érables, QC
December 12, 2016
Land
—
$3
$—
$—
Woodbridge Square, ON
October 4, 2016
Land
—
$33
$—
$—
Centre de la Cité, QC
June 10, 2016
Office
127,366
$22,750
$—
$638
20-24 Lesmill, ON
May 15, 2015
Industrial
27,577
$6,350
$—
$127
5591-5631 Finch, ON
April 1, 2015
Industrial
210,123
$10,000
$6,125
$177
350 Sparks/361 Queen, ON
February 17, 2015
Office/Hotel
86,372
$37,692
$17,835
$150
NOTE 5
EQUITY-ACCOUNTED INVESTMENT
On December 22, 2011, the Trust and a major Canadian pension fund each acquired a 50% interest in a limited partnership
that owns and operates a 304,000 square foot Class A office complex located in downtown Edmonton, Alberta, in which the
Trust has a total original net investment of $28,008. The Trust has joint control over the limited partnership and accounts for
its investment using the equity method.
As at December 31,
2016
2015
Balance, beginning of year
$32,509
$30,770
Equity (loss)/income
Distributions to partners
Contributions (returned to)/from partners
Balance, end of year
(1,558)
(2,420)
(330)
$28,201
2,441
(2,360)
1,658
$32,509
The following details the Trust's share of the limited partnership's aggregated assets, liabilities and results of operations
accounted for under the equity method for the following periods:
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
As at December 31,
2016
2015
Real estate properties
Current assets
Total assets
$56,900
1,101
$58,001
$61,950
1,392
$63,342
Non-current liabilities
Current liabilities
Total liabilities
$27,351
2,449
$29,800
$28,306
2,527
$30,833
2016
2015
$6,335
2,131
4,204
$6,561
2,172
4,389
(1,112)
(4,650)
($1,558)
(1,157)
(791)
$2,441
For the year ended December 31,
Revenue from real estate properties
Property operating expenses
Net operating income
Other expenses
Fair value losses on real estate properties
Net (loss)/income
The real estate properties included above in the Trust's equity-accounted investment are appraised using a number of
approaches that typically include a discounted cash flow analysis, a direct capitalization approach and a direct comparison
approach. At December 31, 2016, the property was valued using a discount rate of 7.0% (2015 – 7.0%), a terminal cap rate
of 6.3% (2015 – 6.3%) and a stabilized cap rate of 7.5% (2015 – 7.0%). The stabilized annual net operating income as at
December 31, 2016, was $4,379 (2015 – $4,384).
NOTE 6
CO-OWNERSHIP INTERESTS
The Trust is a co-owner in several properties, listed below, that are subject to joint control based on the Trust's decisionmaking authority with regards to the relevant activities of the properties. These co-ownerships have been classified as joint
operations and, accordingly, the Trust recognizes its rights to and obligations for the assets, liabilities, revenue and
expenses of these co-ownerships in the respective lines in the consolidated financial statements.
Trust's Ownership Share
Jointly-Controlled Operations
Location
Property Type
505 Third Street
Scotia Place
Prairie Mall
Heritage Place
Standard Life Centre
77 Bloor
Woodbridge Square
825 Des Érables
Place Innovation
Calgary, AB
Edmonton, AB
Grande Prairie, AB
Ottawa, ON
Ottawa, ON
Toronto, ON
Woodbridge, ON
Salaberry-de-Valleyfield, QC
Saint-Laurent, QC
Office
Office
Retail
Office
Office
Office
Retail
Industrial
Office
MORGUARD.COM
2016
50%
20%
50%
50%
50%
50%
50%
50%
50%
2015
50%
20%
50%
50%
50%
50%
50%
50%
50%
64
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
The following amounts, included in these consolidated financial statements, represent the Trust's proportionate share of the
assets and liabilities of the nine co-ownerships as at December 31, 2016 and 2015, and the results of operations for the
years ended December 31, 2016 and 2015:
As at December 31,
Assets
Liabilities
For the year ended December 31,
Revenue
Expenses
Income before fair value adjustments
Fair value losses on real estate properties
Net income
2016
2015
$496,584
$190,615
$490,910
$198,149
2016
2015
$53,169
29,304
23,865
(6,627)
$17,238
$55,270
34,223
21,047
(3,749)
$17,298
NOTE 7
MORTGAGES PAYABLE
Mortgages payable consist of the following:
As at December 31,
2016
2015
Mortgages payable before deferred financing costs
Premium on acquired debt
Deferred financing costs
Mortgages payable
$1,115,491
—
(2,997)
$1,112,494
$1,175,880
1
(3,546)
$1,172,335
Mortgages payable – non-current
Mortgages payable – current
Mortgages payable
$1,027,841
84,653
$1,112,494
$1,082,799
89,536
$1,172,335
The aggregate principal repayments and balances maturing on the mortgages payable as at December 31, 2016, together
with the weighted average contractual rate on debt maturing in the year indicated, are as follows:
2017
2018
2019
2020
2021
Thereafter
Principal
Instalment
Repayments
Balances
Maturing
$35,042
33,108
27,710
26,647
21,047
36,288
$179,842
$50,289
55,464
162,122
114,493
153,525
399,756
$935,649
Weighted Average
Contractual Rate on
Total
Balance Maturing
$85,331
88,572
189,832
141,140
174,572
436,044
$1,115,491
4.5%
4.3%
3.6%
4.6%
4.2%
4.1%
4.1%
Substantially all of the Trust's rental properties and related rental revenue have been pledged as collateral for the mortgages
payable.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
NOTE 8
CONVERTIBLE DEBENTURES
2012 Debentures
On October 31, 2012, the Trust issued a $150,000 principal amount of 4.85% convertible unsecured subordinated
debentures ("2012 Debentures") maturing on October 31, 2017 ("the Maturity Date"), of which a $50,000 principal amount
was purchased by Morguard at the offering price.
Interest is payable semi-annually, not in advance, on April 30 and October 31 of each year.
The 2012 Debentures, with the exception of the value assigned to the holders' conversion option, have been recorded as
debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related
issue costs of the 2012 Debentures at the date of original issue. The portion of issue costs attributable to the liability of
$4,182 has been capitalized and will be amortized over the term to maturity, while the remaining amount of $46 has been
charged to equity.
Principal
Amount Issued
Transaction date – October 31, 2012
Issue costs
$150,000
(4,228)
$145,772
Liability
Equity
$148,428
(4,182)
$144,246
$1,572
(46)
$1,526
Each 2012 Debenture is convertible into freely tradable units of the Trust at the option of the holder, exercisable at any time
prior to the close of business on the last business day preceding the Maturity Date at a conversion price of $24.60 ("the
Conversion Price") per unit being a rate of approximately 40.6504 units per thousand principal amount of 2012 Debentures,
subject to adjustment.
As at December 31, 2016, $25 (2015 – $15) of the 2012 Debentures have been converted into 1,015 (2015 – 609) units.
The liability and equity component of these debentures has been included in unitholders' equity under issue of units.
On December 9, 2016, the Trust announced that it would redeem all of its outstanding 2012 Debentures on January 9, 2017
("the Redemption Date"). The redemption price will be paid in cash and is $1,000 per debenture together with accrued and
unpaid interest on the debentures up to, but not including, the Redemption Date. On January 6, 2017, $18 of the 2012
Debentures were converted into 731 units. The remaining $149,957 of the 2012 Debentures were redeemed on the
Redemption Date.
The 2012 Debentures payable consist of the following:
As at December 31,
2016
Convertible debentures – liability
Convertible debentures – accretion
Debentures converted
Convertible debentures before issue costs
Issue costs
Convertible debentures
$148,428
1,572
(25)
149,975
—
$149,975
2015
$148,428
946
(15)
149,359
(1,661)
$147,698
Interest and principal payments on the 2012 Debentures are as follows:
2017
Interest
Principal
Total
$1,395
$1,395
$149,975
$149,975
$151,370
$151,370
Redemption Rights
Each 2012 Debenture was redeemable any time from November 1, 2015, to the close of business on October 31, 2016, in
whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and unpaid interest at the
Trust's sole option provided that the weighted average trading price of the units on the TSX for the 20 consecutive trading
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66
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
days ending five trading days prior to the date on which the notice of redemption is given is not less than 125% of the
Conversion Price.
From November 1, 2016, to the close of business on October 30, 2017, the 2012 Debentures were redeemable, in whole or
in part, at par plus accrued and unpaid interest at the Trust's sole option.
Repayment Options
Payment Upon Redemption or Maturity
The Trust may satisfy its obligation to repay the principal amounts of the 2012 Debentures, in whole or in part, by delivering
units of the Trust. In the event that the Trust elects to satisfy its obligation to repay principal with units of the Trust, the
number of units issued is obtained by dividing the principal amount of the 2012 Debentures by 95% of the weighted average
trading price of the units on the TSX for the 20 consecutive trading days ending five trading days prior to the date fixed for
redemption or the Maturity Date, as applicable.
Interest Payment Election
The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the Trust to the Debenture
Trustee in order to raise funds to pay interest on the 2012 Debentures, in which event the holders of the 2012 Debentures
will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale of such units.
2016 Debentures
On December 30, 2016, the Trust issued a $175,000 principal amount of 4.50% convertible unsecured subordinated
debentures ("2016 Debentures") maturing on December 31, 2021 ("the 2016 Debenture Maturity Date"), of which a $50,000
principal amount was purchased by Morguard at the offering price.
Interest is payable semi-annually, not in advance, on June 30 and December 31 of each year, commencing on June 30,
2017.
The 2016 Debentures, with the exception of the value assigned to the holders' conversion option, have been recorded as
debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related
issue costs of the 2016 Debentures at the date of original issue. The portion of issue costs attributable to the liability of
$4,998 has been capitalized and will be amortized over the term to maturity, while the remaining amount of $139 has been
charged to equity.
Principal
Amount Issued
Transaction date – December 30, 2016
Issue costs
$175,000
(5,137)
$169,863
Liability
Equity
$170,267
(4,998)
$165,269
$4,733
(139)
$4,594
Each 2016 Debenture is convertible into freely tradable units of the Trust at the option of the holder, exercisable at any time
prior to the close of business on the last business day preceding the Maturity Date at a conversion price of $20.40 per unit
being a rate of approximately 49.0196 units per thousand principal amount of 2016 Debentures, subject to adjustment.
The 2016 Debentures payable consist of the following:
As at December 31,
Convertible debentures – liability
Convertible debentures – accretion
Convertible debentures before issue costs
Issue costs
Convertible debentures
MORGUARD.COM
2016
$170,267
2
170,269
(4,996)
$165,273
67
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
Interest and principal payments on the 2016 Debentures are as follows:
2017
2018
2019
2020
2021
Interest
Principal
Total
$7,875
7,875
7,875
7,875
7,875
$39,375
$—
—
—
—
175,000
$175,000
$7,875
7,875
7,875
7,875
182,875
$214,375
Redemption Rights
Each 2016 Debenture is redeemable any time from January 1, 2020, to the close of business on December 31, 2020, in
whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and unpaid interest at the
Trust's sole option provided that the weighted average trading price of the units on the TSX for the 20 consecutive trading
days ending five trading days prior to the date on which the notice of redemption is given is not less than 125% of the
Conversion Price.
From January 1, 2021, to the close of business on December 31, 2021, the 2016 Debentures are redeemable, in whole or in
part, at par plus accrued and unpaid interest at the Trust's sole option.
Repayment Options
Payment Upon Redemption or Maturity
The Trust may satisfy its obligation to repay the principal amounts of the 2016 Debentures, in whole or in part, by delivering
units of the Trust. In the event that the Trust elects to satisfy its obligation to repay principal with units of the Trust, the
number of units issued is obtained by dividing the principal amount of the 2016 Debentures by 95% of the weighted average
trading price of the units on the TSX for the 20 consecutive trading days ending five trading days prior to the date fixed for
redemption or the Maturity Date, as applicable.
Interest Payment Election
The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the Trust to the Debenture
Trustee in order to raise funds to pay interest on the 2016 Debentures, in which event the holders of the 2016 Debentures
will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale of such units.
NOTE 9
BANK INDEBTEDNESS
The Trust has credit facilities and operating lines of credit totalling $70,000 (2015 – $70,000), which renew annually and are
secured by fixed charges on specific properties owned by the Trust.
As at December 31, 2016 and 2015, the Trust has no borrowings on its credit facilities and issued letters of credit in
the amount of $841 (2015 – $286) related to these facilities. During the year, the Trust borrowed on its credit facilities and
operating lines to satisfy its short-term cash requirements. Although the balance of the Trust's bank indebtedness is $nil at
the consolidated balance sheets date, there were borrowing and repayments during the year.
The bank credit agreements include certain restrictive covenants and undertakings by the Trust. At December 31, 2016 and
2015, the Trust was in compliance with all covenants and undertakings. As the bank indebtedness is current and at
prevailing market rates, the carrying value of the debt as at December 31, 2016, approximates fair value.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
NOTE 10
INTEREST EXPENSE
The components of interest expense are as follows:
For the year ended December 31,
Interest on mortgages payable
Amortization of deferred financing costs – mortgages
Amortization of premium on acquired debt
Interest on mortgages payable
Interest on convertible debentures
Accretion on convertible debentures, net
Amortization of deferred financing costs – convertible debentures
Interest on convertible debentures
Interest on bank indebtedness
Amortization of cash flow hedges
Interest on loan payable and other
Capitalized interest
Interest on loans payable and other
2016
$46,222
710
(1)
46,931
2015
$49,262
811
(10)
50,063
7,316
628
1,663
9,607
7,274
316
841
8,431
162
32
189
55
(268)
(24)
$56,676
935
155
(635)
455
$58,981
NOTE 11
RELATED PARTY TRANSACTIONS
Related party transactions are summarized as follows:
(a) Agreement With Morguard Investments Limited
Under the property management agreement, the Trust pays MIL fees for property management services, capital expenditure
administration, information system support activities and risk management administration. Property management fees
average approximately 3.2% of gross revenue from the income producing properties owned by the Trust. The management
agreement is renewed annually to ensure fees paid reflect fair value for the services provided. Under a leasing services
arrangement, the Trust may, at its option, use MIL for leasing services. Leasing fees range from 2% to 6% of the total
minimum rent of new leases. Fees for the renewal of a lease are half of the fees for a new lease. Leasing services include
lease documentation.
The Trust has employed the services of MIL for both the acquisition and disposition of properties on a case-by-case basis.
Fees are generally based on the sale price of the properties and are capitalized in the case of an asset acquisition. MIL is a
tenant at three of the Trust's properties. The Trust has employed the services of MIL for the appraisal of its real estate
properties as required for IFRS reporting purposes. Fees are generally based on the size and complexity of each property
and are expensed as part of the Trust's professional and compliance fees.
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MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
During the year, the Trust incurred/(earned) the following:
For the year ended December 31,
1
Property management fees
Disposition fees
Appraisal/valuation fees
Information services
Leasing fees
Project administration fees
Project management fees
Risk management fees
Internal audit fees
Off-site administrative charges
Rental revenue
2016
$9,318
—
361
220
3,349
800
814
294
136
1,782
(204)
$16,870
2015
$9,522
97
370
220
2,880
1,087
491
282
110
1,761
(230)
$16,590
1. Includes property management fees on equity-accounted investment.
The following amounts relating to MIL are included in the consolidated balance sheets:
As at December 31,
2016
2015
Accounts payable and accrued liabilities, net
$733
$898
(b) Revolving Loan With Morguard
The Trust has a revolving loan agreement with Morguard that provides for borrowings or advances of up to $50,000. The
promissory notes are interest-bearing at the lender's borrowing rate and are due on demand subject to available funds.
Loan Payable to Morguard
During the year ended December 31, 2016, a gross amount of $17,000 was advanced from Morguard and was fully repaid.
At December 31, 2016 and 2015, there was no loan payable to Morguard. For the year ended December 31, 2016, the
Trust incurred interest expense in the amount of $55 (2015 – $nil) at an interest rate of 2.6% (2015 – nil%).
Loan Receivable From Morguard
During the year ended December 31, 2016, a gross amount of $50,000 was advanced to Morguard and remains receivable
as at December 31, 2016 (2015 – $nil). For the year ended December 31, 2016, the Trust earned interest income in the
amount of $7 (2015 – $568). On January 9, 2017, the outstanding receivable from Morguard as at December 31, 2016, was
fully repaid.
(c) Sublease With Morguard (Excluding MIL)
The Trust subleases office space from Morguard. For the year ended December 31, 2016, the Trust incurred rent expense
in the amount of $190 (2015 – $195).
(d) Amounts Receivable From and Accounts Payable to Morguard (Excluding MIL)
Other than the revolving loan, the following additional amounts relating to Morguard are included in the consolidated
balance sheets:
As at December 31,
Amounts receivable
Accounts payable and accrued liabilities
2016
2015
$—
$9
$271
$4
(e) Rental Revenue From Morguard (Excluding MIL)
Morguard is a tenant in one of the Trust's properties. For the year ended December 31, 2016, the Trust earned rental
revenue in the amount of $109 (2015 – $109).
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70
MORGUARD REAL ESTATE INVESTMENT TRUST
CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
NOTE 12
EXPENSES
(a) Property Operating Expenses
Property operating expenses consist of the following:
For the year ended December 31,
Property taxes
Repairs and maintenance
Utilities
Other operating expenses
2016
2015
$49,037
27,474
14,540
19,974
$111,025
$53,157
28,078
15,354
19,057
$115,646
2016
2015
$298
1,506
2,922
$4,726
$268
1,518
2,581
$4,367
(b) General and Administrative
General and administrative expenses consist of the following:
For the year ended December 31,
Trustees' fees and expenses
Professional and compliance fees
Other administrative expenses
NOTE 13
OTHER INCOME
On January 15, 2015, Target Corporation, the U.S. parent of Target Canada Corporation ("Target Canada"), announced
plans to discontinue its Canadian operations through its indirect wholly owned subsidiary, Target Canada. At the time of this
announcement the Trust had seven locations under lease to Target Canada. During 2015, Target Canada disclaimed leases
for three properties owned by the Trust and ceased paying rent at these locations. All three leases were guaranteed
through an indemnity agreement with Target Corporation for the remaining term of each lease. Additionally, three leases
were assigned to new tenants who assumed the payments of the rental obligations thereunder as of the closing date of the
respective assignments. The remaining lease was repurchased by the Trust for repositioning.
During the second quarter of 2016, the Trust entered into a binding agreement with Target Corporation, concluding the
terms of settlement relating to the guarantees for the three leases that were disclaimed by Target Canada pursuant to the
Companies' Creditors Arrangement Act. Other income includes $11.3 million in settlement proceeds relating to the release
of Target Corporation from the indemnity agreements, which was net of $0.1 million of settlement costs. During the third
quarter of 2016, all settlement proceeds were paid in full.
NOTE 14
UNITHOLDERS' EQUITY
(a) Units Outstanding
The Trust is authorized to issue an unlimited number of units. The following table summarizes the changes in units from
January 1, 2015, to December 31, 2016:
As at December 31,
Balance, beginning of year
Distribution Reinvestment Plan
Debentures converted
Repurchase of units
Balance, end of year
2016
60,891,654
80,416
406
(371,769)
60,600,707
2015
62,167,654
52,022
—
(1,328,022)
60,891,654
Total distributions recorded and paid during the year ended December 31, 2016, amounted to $57,117 or $0.96 per unit
(2015 – $58,452 or $0.96 per unit). On January 13, 2017, the Trust declared a distribution in the amount of $0.08 per unit
for the month of January 2017. This distribution was paid to unitholders on February 15, 2017. On February 15, 2017, the
Trust declared a distribution of $0.08 per unit payable on March 15, 2017.
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(b) Normal Course Issuer Bid
On January 21, 2016, the Trust announced that the TSX had accepted notice filed by the Trust of its intention to make a
normal course issuer bid. The notice provided that during the 12-month period commencing January 28, 2016, and ending
January 27, 2017, the Trust may purchase for cancellation on the TSX up to 3,044,583 units in total, being approximately
5% of the outstanding units. Additionally, the Trust may purchase for cancellation up to $9,999 principal amount of the 2012
Debentures due on the Maturity Date, 10% of the public float of outstanding 2012 Debentures. The price that the Trust
would pay for any such units or debentures would be the market price at the time of acquisition.
During the year ended December 31, 2016, the Trust purchased for cancellation 371,769 units (2015 – 1,328,022 units) for
cash consideration of $5,840 (2015 – $20,041). The excess of the purchase price of the units over the average carrying
value was $2,096 (2015 – $6,673).
(c) Distribution Reinvestment Plan
Under the Trust's Distribution Reinvestment Plan ("DRIP"), unitholders can elect to reinvest cash distributions into additional
units at a weighted average trading price of the units on the TSX for the 20 trading days immediately preceding the
applicable date of distribution. During the year ended December 31, 2016, the Trust issued 80,416 units under the DRIP
(2015 – 52,022 units).
(d) Net Income Per Unit
The following table sets forth the computation of basic and diluted net income per unit:
For the year ended December 31,
Net income – basic
Net income – diluted
Weighted average number of units outstanding – basic
Weighted average number of units outstanding – diluted
Net income per unit – basic
Net income per unit – diluted
2016
2015
$57,207
$66,814
$26,617
$26,617
60,750
71,886
61,779
61,779
$0.94
$0.93
$0.43
$0.43
To calculate net income for the calculation of diluted income per unit, interest, accretion and the amortization of financing
costs on convertible debentures outstanding that were expensed during the year are added back to net income. The
calculation of diluted net income per unit excludes the impact of the convertible debentures for the year ended December
31, 2015, as their inclusion would be anti-dilutive. The weighted average number of units outstanding for the calculation of
diluted income per unit is calculated as if all convertible debentures outstanding as at December 31, 2016, had been
converted into units of the Trust at the beginning of the year.
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CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2016
NOTE 15
CONSOLIDATED STATEMENT OF CASH FLOWS
(a) Items Not Affecting Cash
For the year ended December 31,
Fair value losses on real estate properties, excluding properties held for sale
Fair value losses on real estate properties held for sale
Net loss/(income) from equity-accounted investment
Amortized stepped rent
Amortized free rent
Amortization of cash flow hedges
Amortization of deferred financing costs – mortgages
Amortization of fair value adjustments
Amortization of tenant incentives
Amortization of deferred financing costs – convertible debentures
Write off of unamortized deferred financing costs due to redemption of debentures
Accretion of convertible debentures
2016
$51,643
—
1,558
(1,481)
(206)
189
710
(1)
312
891
772
628
$55,015
2015
$78,780
197
(2,441)
(2,104)
(1,025)
935
811
(10)
368
841
—
316
$76,668
(b) Net Change in Non-Cash Operating Assets and Liabilities
For the year ended December 31,
Amounts receivable
Prepaid expenses and other
Accounts payable, accrued and other liabilities
Other supplemental cash flow information consists of the following:
Interest paid
Issue of units – DRIP
Issue of units – conversion of debentures
Mortgage payable transferred on sale of real estate properties
2016
2015
($2,161)
(1,068)
7,283
$4,054
($376)
99
(1,779)
($2,056)
$53,929
$1,189
$10
$—
$56,913
$788
$—
$17,835
NOTE 16
INCOME TAXES
The Trust is taxed as a "mutual fund trust" for income tax purposes. Under Part I of the Canadian Income Tax Act, a Trust is
not subject to income taxes to the extent that the income for tax purposes in a given year does not exceed the amount distributed
to unitholders and deducted by the Trust for tax purposes. The Trustees intend to distribute or designate all taxable income
directly earned by the Trust to unitholders of the Trust and to deduct such distributions and designations for income tax purposes.
Accordingly, no current income tax expense or future income tax assets or liabilities have been recorded in these consolidated
financial statements.
NOTE 17
COMMITMENTS AND CONTINGENCIES
(a) Commitments
The Trust has entered into various agreements relating to capital expenditures for its properties. These expenditures
include development of new space, redevelopment or retrofit of existing space, and other capital expenditures. Should all
conditions be met, as at December 31, 2016, committed capital expenditures in the next 12 months are estimated at
$71,700.
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The Trust has various other contractual obligations in the normal course of operations. These contracts can be generally
cancelled with 30 days' notice.
The Trust is committed to making the following annual payments under a ground lease to the year 2065 for the land upon
which one of its properties is situated:
March 1, 2011, to February 28, 2021
Subsequent to February 28, 2021
$714
Fair market value of land in February 2021 multiplied by 8.5% per annum
Effective November 17, 2013, the Trust entered into an operating sublease agreement with Morguard expiring on
November 15, 2023. The annual rent amounts to an expense of approximately $193.
In addition to the above-mentioned contractual obligations, the Trust has entered into equipment operating leases with
terms ranging to 2021. The remaining payments for the leases are as follows:
$67
2017
2018
2019
2020
2021
48
46
34
—
(b) Contingencies
The Trust is contingently liable with respect to litigation, claims and environmental matters that arise from time to time,
including those that could result in mandatory damages or other relief, which could result in significant expenditures. While
the outcome of these matters cannot be predicted with certainty, in the opinion of management, any liability that may arise
from such contingencies would not have a material adverse effect on the financial position or results of operations of the
Trust. Any expected settlement of claims in excess of amounts recorded will be charged to operations as and when such
determination is made.
NOTE 18
MANAGEMENT OF CAPITAL
The Trust defines capital that it manages as the aggregate of its unitholders' equity and interest-bearing debt less cash and
cash equivalents and interest-bearing receivables. The Trust's objective when managing capital is to ensure that the Trust
will continue as a going concern so that it can sustain daily operations and provide adequate returns to its unitholders.
The Trust is subject to risks associated with debt financing, including the possibility that existing mortgages may not be
refinanced or may not be refinanced on as favourable terms or with interest rates as favourable as those of the existing
debt. The Trust mitigates these risks by its continued efforts to stagger the maturity profile of its long-term debt, to enhance
the value of its real estate properties and to maintain high occupancy levels. The Trust manages its capital structure and
makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.
The total managed capital for the Trust is summarized below:
As at December 31,
Mortgages payable
Convertible debentures
Cash and cash equivalents
Loan receivable
Unitholders' equity
Note
7
8
11(b)
2016
$1,112,494
315,248
(112,696)
(50,000)
1,555,183
$2,820,229
2015
$1,172,335
147,698
(26,282)
—
1,556,140
$2,849,891
The Trust's Declaration of Trust permits the Trust to incur indebtedness, provided that after giving effect to incurring or
assuming any indebtedness (as defined in the Declaration of Trust), the amount of all indebtedness of the Trust is not more
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than 60% of the gross book value of the Trust's total assets as defined in the Declaration of Trust. The Declaration of Trust
also permits the Trust to incur floating-rate debt, provided that the total amount of all floating-rate debt of the Trust is not
more than 15% of the gross book value of the Trust's total assets.
The Trust's debt ratios compared to its borrowing limits established in the Declaration of Trust are outlined in the table
below:
As at December 31,
Fixed-rate debt to gross book value of total assets
Floating-rate debt to gross book value of total assets
Borrowing Limits
—%
15%
60%
2016
2015
47.0%
—%
47.0%
45.2%
—%
45.2%
As at December 31, 2016, the Trust met all externally imposed ratios and minimum equity requirements.
Mortgages Payable
All mortgages payable in place for the Trust are secured against the real property assets and, as a result, have been
relieved from having restrictive financial covenant requirements.
Convertible Debentures
The Trust's unsecured subordinated convertible debentures have no restrictive covenants.
Bank Indebtedness
The Trust's loan agreements permit the Trust to incur indebtedness. The loan agreements are fixed amounts that renew
annually and are secured by fixed charges on specific properties owned by the Trust.
NOTE 19
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Trust's financial assets and liabilities comprise cash and cash equivalents, amounts receivable, accounts payable and
accrued liabilities, bank indebtedness, mortgages payable and convertible debentures. Fair values of financial assets and
liabilities and discussion of risks associated with financial assets and liabilities are presented as follows.
Fair Value of Financial Assets and Liabilities
The fair values of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities, bank
indebtedness and loan payable approximate their carrying values due to the short-term maturities of these instruments.
(a) Mortgages Payable
Mortgages payable are carried at amortized cost using the effective interest rate method of amortization. The estimated fair
values of long-term borrowings are based on market information, where available, or by discounting future payments of
interest and principal at estimated interest rates expected to be available to the Trust at period-end.
The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations
using December 31, 2016, market rates for debts of similar terms (Level 2). Based on these assumptions, the fair value as
at December 31, 2016, of the mortgages payable has been estimated at $1,154,217 (2015 – $1,246,560), compared with
the carrying value before deferred financing costs and premium on acquired debt of $1,115,491 (2015 – $1,175,880). The
fair value of the mortgages payable varies from the carrying value due to fluctuations in interest rates since their issue.
(b) Convertible Debentures
The fair value of the 2012 Debentures is based on their market trading price (TSX: MRT.DB.A) (Level 1). The fair value as
at December 31, 2016, of the 2012 Debentures has been estimated at $149,990 (2015 – $152,235), compared with the
carrying value before deferred financing costs of $149,975 (2015 – $149,359).
The fair value of the 2016 Debentures is based on their market trading price (TSX: MRT.DB) (Level 1). The fair value as at
December 31, 2016, of the 2016 Debentures has been estimated at $174,913 (2015 – $nil), compared with the carrying
value before deferred financing costs of $170,269 (2015 – $nil).
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(c) Fair Value Hierarchy of Real Estate Properties
The fair value hierarchy of income producing properties, properties under development and held for development measured
at fair value in the consolidated balance sheets is as follows:
December 31, 2016
As at
December 31, 2015
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
$—
$—
$—
$—
$—
$—
$2,767,315
$27,833
$30,950
$—
$—
$—
$—
$—
$—
$2,816,124
$2,524
$28,750
ASSETS:
Income producing properties
Properties under development
Held for development
Risks Associated With Financial Assets and Liabilities
The Trust is exposed to financial risks arising from its financial assets and liabilities. The financial risks include interest rate
risk, credit risk and liquidity risk. The Trust's overall risk management program focuses on establishing policies to identify
and analyze the risks faced by the Trust, to set appropriate risk limits and controls and to monitor risks and adherence to
limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the
Trust's activities. The Trust aims to develop a disciplined control environment in which all employees understand their roles
and obligations.
Market Risk
Market risk, the risk that the fair value or future cash flows of financial assets or liabilities will fluctuate due to movements in
market prices, comprises the following:
(i) Interest Rate Risk
The Trust is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not
be able to be refinanced on terms as favourable as those of the existing indebtedness. Interest on the Trust's bank
indebtedness is subject to floating interest rates. The Trust mitigates these risks by its continued efforts to enhance the
value of its real estate properties, to maintain high occupancy levels to meet its debt obligations and to foster excellent
relations with its lenders. For the year ended December 31, 2016, the average increase or decrease in net income for each
1% change in interest rates paid on floating debt amounts to $82.
The Trust's objective in managing interest rate risk is to minimize the volatility of the Trust's earnings. As at December 31,
2016, interest rate risk has been minimized because all long-term debt is financed at fixed interest rates with maturities
scheduled over a number of years.
(ii) Credit Risk
Credit risk arises from the possibility that tenants and/or debtors may experience financial difficulty and be unable or
unwilling to fulfill their lease commitments. The Trust mitigates the risk of loss by investing in well-located properties in
urban markets that attract quality tenants, by ensuring that its tenant mix is diversified and by limiting its exposure to any
one tenant. A tenant's success over the term of its lease and its ability to fulfill its obligations are subject to many factors.
There can be no assurance that a tenant will be able to fulfill all of its existing commitments and leases up to the expiry
date.
The Trust's commercial leases typically have a lease term between five and 10 years and may include clauses to enable
periodic upward revision of the rental rates and contractual extensions at the option of the lessee.
Future minimum annual rental receipts on non-cancellable tenant operating leases are as follows:
As at December 31,
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2016
2015
$151,958
488,259
331,450
$971,667
$155,298
493,959
354,582
$1,003,839
The objective in managing credit risk is to mitigate exposure through the use of approved policies governing the Trust's
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credit practices that limit transactions according to counterparties' credit quality.
The carrying value of amounts receivable is reduced through the use of an allowance account, and the amount of the loss is
recognized in the consolidated statement of income within property operating expenses. When a receivable balance is
considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts
previously written off are credited against operating expenses in the consolidated statement of income.
The following table sets forth details of amounts receivable and related allowance for doubtful accounts:
As at December 31,
2016
2015
AMOUNTS RECEIVABLE:
Trade receivables
Less: Allowance for doubtful accounts
Trade receivables, net
Loan receivable
Total amounts receivable, net
$15,574
(402)
15,172
50,000
$65,172
$13,784
(773)
13,011
—
$13,011
(iii) Liquidity Risk
Liquidity risk is the risk that the Trust will encounter difficulties in meeting its financial obligations. The Trust will be subject
to the risks associated with debt financing, including the risk that mortgages, convertible debentures and credit facilities will
not be able to be refinanced. The Trust's objectives in minimizing liquidity risk are to maintain appropriate levels of leverage
of its real estate assets and to stagger its debt maturity profile. As at December 31, 2016, the Trust was holding cash and
cash equivalents in the amount of $112,696 (2015 – $26,282). The Trust also had undrawn lines of credit available in the
amount of $69,159 (2015 – $69,714).
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NOTE 20
SEGMENTED INFORMATION
IFRS 8, "Operating Segments", requires operating segments to be determined based on internal reports that are regularly
reviewed by the chief operating decision-makers for the purpose of allocating resources to the segment and assessing its
performance. The Trust has applied judgment by aggregating its operating segments according to the nature of the
property operations. Such judgment considers the nature of operations, types of customers and an expectation that
operating segments within a reportable segment have similar long-term economic characteristics. As at December 31,
2016, the Trust has the following three reportable segments: retail, office and industrial.
Business Segments
The following presents financial information for these segments:
For the year ended December 31, 2016
Retail
Office
Industrial
Total
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
$147,854
58,858
5,029
$83,967
$127,763
50,166
4,033
$73,564
$5,109
2,001
139
$2,969
$280,726
111,025
9,201
$160,500
Retail
Office
Industrial
Total
$151,803
58,534
5,082
$88,187
$133,463
54,866
4,162
$74,435
$5,716
2,246
162
$3,308
$290,982
115,646
9,406
$165,930
Retail
Office
Industrial
Total
$1,625,807
$1,149,087
$498,493
$51,204
$10,079
$2,826,098
$1,112,494
For the year ended December 31, 2015
Revenue from real estate properties
Property operating expenses
Property management fees
Net operating income
As at December 31, 2016
Real estate properties
Mortgages payable
$603,922
For the year ended December 31, 2016
Additions to real estate properties
Fair value (losses)/gains on real estate properties
$37,017
($25,892)
$14,102
($29,389)
$235
$3,638
$51,354
($51,643)
Retail
Office
Industrial
Total
$1,614,789
$1,185,284
$512,798
$47,325
$15,759
$2,847,398
$1,172,335
As at December 31, 2015
Real estate properties
Mortgages payable
$643,778
For the year ended December 31, 2015
Additions to real estate properties
Fair value (losses)/gains on real estate properties
$31,793
($30,943)
$15,487
($48,305)
$444
$271
$47,724
($78,977)
NOTE 21
SUBSEQUENT EVENTS
On February 3, 2017, the Trust announced that the TSX had accepted notice filed by the Trust of its intention to make a
normal course issuer bid. The notice provided that during the 12-month period commencing February 7, 2017, and ending
February 6, 2018, the Trust may purchase for cancellation on the TSX up to 3,030,072 units in total, being approximately
5% of the outstanding units. Additionally, the Trust may purchase for cancellation up to $11,500 principal amount of the
2016 Debentures due on the Maturity Date, 10% of the public float of outstanding 2016 Debentures. The price that the
Trust would pay for any such units or debentures would be the market price at the time of acquisition.
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