MORGUARD REAL ESTATE INVESTMENT TRUST

Transcription

1 MORGUARD REAL ESTATE INVESTMENT TRUST SECOND QUARTER RESULTS 2015 MANAGEMENT S DISCUSSION AND ANALYSIS AND CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2 PART I BASIS OF PRESENTATION Financial data included in this Management s Discussion and Analysis ( MD&A ) for the three and six months ended June 30, 2015, includes material information up to August 5, Except as outlined below, financial data provided has been prepared in accordance with International Financial Reporting Standards ( IFRS ) IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ( IASB ). In this MD&A the discussion of the Morguard Real Estate Investment Trust s ( the Trust ) operating results is based on financial information developed using proportionate consolidation for all the Trust s joint arrangements, including those joint ventures accounted for using the equity method, as required by IFRS 11. Management believes that presenting the operating and financial results of the Trust s joint arrangements using proportionate consolidation provides more useful information to both current and prospective investors to assist them with their understanding of the Trust s financial performance. From time to time, the Trust will undertake to actively dispose of certain assets. In these circumstances management has determined that the performance of ongoing operations is of greatest importance to its stakeholders. As a result, in this MD&A the discussion of the Trust s property performance for the purpose of some measures is focused on income producing properties, which excludes properties held for sale. 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 condensed consolidated financial statements and accompanying notes for the three months and six months ended June 30, 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 X provides reconciliations between selected financial information from the Trust s condensed 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. Forwardlooking statements use the words believe, expect, anticipate, may, should, intend, estimate and other similar terms, which do not relate to historical matters. Such forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause the actual results to differ materially from those indicated. Such factors include, but are not limited to, general economic conditions, the availability of new competitive supply of commercial real estate that may become available either through construction or sublease, the Trust s ability to maintain occupancy and to lease or re-lease space on a timely basis at current or anticipated rates, tenant bankruptcies, financial difficulties and defaults, changes in interest rates, changes in operating costs, the Trust s ability to obtain adequate insurance coverage at a reasonable cost and the availability of financing. The Trust believes that the expectations reflected in forward-looking statements are based on reasonable assumptions; however, the Trust can give no assurance that actual results will be consistent with these forward-looking statements. Except as required by applicable law; the Trust disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers should be cautioned not to place undue reliance on the forward-looking statements. MORGUARD.COM 2

3 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 to 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 QUARTERLY INFORMATION The selected quarterly information highlights certain key metrics for the Trust, over the most recently completed eight quarters. 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. ADDITIONAL INFORMATION Additional information relating to the Trust, including the audited consolidated financial statements, Annual Information Form ( AIF ), Material Change Reports and all other continuous disclosure documents required by securities regulators, are filed on the System for Electronic Document Analysis and Retrieval ("SEDAR") and can be accessed electronically at 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 August 5, MORGUARD.COM 3

4 SUMMARY OF SELECTED QUARTERLY INFORMATION TABLE 1 In thousands of dollars, except per-unit amounts Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q Revenue from real estate properties $70,701 $74,542 $77,456 $72,876 $73,925 $74,204 $73,122 $68,945 Net operating income 39,991 42,388 43,844 41,566 42,718 41,611 42,283 39,634 Income before fair value (losses)/gains, (loss)/gain on sale of real estate properties and net income/(loss) from equity-accounted investments 24,223 26,363 27,356 24,423 25,951 24,970 26,195 23,544 Fair value (losses)/gains on real estate properties (45,295) (11,167) (894) (5,283) 7,168 10,248 26,512 6,888 Loss on sale of real estate properties (22) (15) Net income/(loss) from equity-accounted investments (2,953) 846 1,032 1, ,248 Net (loss)/income for the period (20,217) 16,023 23,487 19,971 34,151 36,273 53,560 31,680 Funds from operations 25,050 27,174 28,154 25,300 27,022 26,040 27,144 24,329 Adjusted funds from operations 18,754 20,414 21,314 18,573 20,192 19,193 19,777 10,955 Amount presented on a per unit basis Net (loss)/income for the period Basic ($0.33) $0.26 $0.38 $0.32 $0.55 $0.58 $0.86 $0.50 Diluted ($0.33) $0.25 $0.36 $0.31 $0.51 $0.54 $0.77 $0.46 Funds from operations Basic $0.40 $0.44 $0.45 $0.41 $0.43 $0.42 $0.44 $0.38 Diluted 1 $0.40 $0.42 $0.44 $0.40 $0.42 $0.41 $0.42 $0.38 Adjusted funds from operations Basic $0.30 $0.33 $0.35 $0.30 $0.32 $0.31 $0.32 $0.17 Diluted 1 $0.30 $0.33 $0.34 $0.30 $0.32 $0.31 $0.32 $0.17 Cash distributions per unit $0.24 $0.24 $0.24 $0.24 $0.24 $0.24 $0.24 $0.24 Payout ratio Adjusted funds from operations % 72.7% 68.6% 80.0% 75.0% 77.4% 75.0% 141.2% Weighted average number of unit as at quarter-end (in thousands) Basic 62,084 62,170 62,161 62,149 62,138 62,225 62,222 63,489 Diluted 1 68,181 68,267 68,258 68,246 68,235 68,322 68,319 69,586 Balance sheets Total assets $2,940,362 $2,996,592 $3,016,496 $3,022,315 $3,021,787 $2,964,912 $2,942,799 $2,790,114 Total liabilities $1,372,549 $1,388,025 $1,409,415 $1,424,282 $1,429,302 $1,390,444 $1,390,061 $1,269,460 Total equity $1,567,813 $1,608,567 $1,607,081 $1,598,033 $1,592,485 $1,574,468 $1,552,738 $1,520,654 Gross leasable area as at quarter-end (in thousands) 3 Retail 4,775 4,775 4,775 4,778 4,781 4,778 4,771 4,295 Office 3,516 3,525 3,526 3,520 3,482 3,471 3,466 3,468 Other Total 8,629 8,638 8,639 8,636 8,599 8,587 8,575 8,129 Occupancy as at the quarter-end date (%) 3 Retail 88% 96% 96% 96% 97% 97% 98% 97% Office 96% 96% 96% 96% 96% 96% 95% 95% Other 99% 99% 99% 99% 100% 100% 99% 99% Total 92% 96% 96% 96% 97% 97% 97% 96% 1. Includes the dilutive impact of convertible debentures. 2. Cash distributions per unit as a percentage of adjusted funds from operations. 3. Excludes properties held for sale. MORGUARD.COM 4

5 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 18, 2010 ( Declaration of Trust ). The Trust was formed on June 18, 1997, and began operations on October 14, 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 47.42% of the outstanding units, as at June 30, Morguard is a real estate company, which owns a diversified portfolio of multi-unit residential, retail, hotel, office and industrial properties in both Canada and the United States. SECOND QUARTER OVERVIEW The Trust s results for the second quarter reflect continuing activities around the re-leasing and repositioning of its Target Canada Corporation ("Target") locations. During the second quarter the Trust successfully re-negotiated its Target leases at Pine Centre, Southdale Shopping Centre and Aurora Centre. The replacement of the Target stores with Lowes, Walmart and Canadian Tire significantly improve the tenant strength and will help to drive increased traffic to these centres. The successful re-leasing of the Target space to Lowes at Pine Centre was especially beneficial to the Trust, as this one location did not have a rental guarantee from Target U.S. At The Centre at Circle and 8 th, the Trust successfully acquired the Target lease to maintain control of the space in light of internal discussions to improve the centre. At Cambridge Centre, Brandon Shoppers Mall and Prairie Mall, Target disclaimed these leases. The Trust is currently executing on re-merchandising the Target units into multi-unit space; demanding higher rents and improved returns on the funds to be re-invested. The space vacated by Target equates to the early termination of 379,500 square feet and as a result, the Trust s retail occupancy has decreased to 88%. Adjusting for the vacant Target space, the Trust's retail portfolio occupancy rate has held firm at 96%. The Trust has elected to stop recording revenue on the disclaimed leases until all outstanding amounts under the Target U.S. guarantee have been received. This has resulted in a negative impact on the Trust's second quarter net operating income of $0.4 million. The renovation of St. Laurent Centre is complete. During the term of the renovation, the centre experienced an increase in vacancy due to the early termination of some fashion tenants and the bankruptcy of Everest College. The timing of the renovation puts the Trust in a better position to replace these tenancies. During the second quarter of 2014 the Trust accelerated the recovery of certain maintenance items at the St. Laurent Centre to offset savings in other areas. This acceleration improved the Trust's net operating income in This same acceleration was not required during As a result, the Trust's quarter over quarter net operating income is lower by $0.9 million. Putting the Target and St. Laurent Centre challenges aside, the Trust s results for the second quarter 2015 versus the second quarter 2014 were largely unchanged. The exit of Target from our centres has had no impact on sales. In addition to the renegotiation of the Target spaces the Trust completed over 385,000 square feet of leasing. The Trust was also able to close on two more of the properties held for sale. These proceeds were largely used to buy back units of the Trust. During the second quarter the Trust repurchased 362,119 units. MORGUARD.COM 5

6 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 June 30, 2015, the Trust owned a diversified income producing property portfolio of 49 (excluding properties held for sale) retail, office and other properties consisting of approximately 8.6 million square feet of gross leasable area ( GLA ) located in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. Retail: The retail portfolio includes two broad categories of income producing properties: enclosed full-scale, regional shopping centres that are dominant in their respective markets; and neighbourhood and community shopping centres that are primarily anchored by food retailers, discount department stores and banking institutions. Investing across these two broad categories of retail assets allows the Trust to spread its tenant base reducing its exposure to a single category retailer. Office: The office portfolio is focused on well-located, high-quality properties in major Canadian urban centres. The portfolio is balanced between: single-tenant properties under long-term lease to government and large national tenants that work to secure the Trust s cash flow and multi-tenant properties with well-distributed lease expiries that allow the Trust to benefit from increased rental rates on lease renewal. Other: The Trust has an interest in four industrial properties located in Ontario and Quebec. PORTFOLIO COMPOSITION BY ASSET TYPE AND LOCATION TABLE 2 AT THE TRUST'S OWNERSHIP SHARE Location Number of Properties Retail Office Other Total GLA (000's) Number of Properties GLA (000's) Number of Properties GLA (000's) Number of Properties GLA (000's) British Columbia ,200 Alberta , ,137 Saskatchewan Manitoba Ontario 9 2, , ,327 Quebec Income producing properties 21 4, , ,629 Properties under development Properties held for sale Total real estate properties 21 4, , ,826 MORGUARD.COM 6

7 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. The Trust evaluates the performance of management by comparing the performance of the property portfolio adjusted for the effect of one-time items and acquisitions, dispositions and developments. NOI is an additional 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 six months ended June 30, 2015, the Trust s retail properties accounted for more than 50% of NOI from income producing properties (52%), with the office portfolio accounting for 47%. The Trust s other portfolio accounts for only 1% 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 Location Number of Properties Retail Office Other Total NOI (000's) Number of Properties NOI (000's) Number of Properties NOI (000's) Number of Properties British Columbia 3 $5,259 3 $6,331 $ 6 $11,590 Alberta 5 6, , ,729 Saskatchewan 1 4, ,013 Manitoba 3 5, ,414 Ontario 9 21, , ,241 Quebec 2 4, ,860 Income producing properties 21 43, , , ,847 Properties under development (50) (50) Properties held for sale Total real estate properties 21 $43, $39,510 5 $1, $84,589 NOI (000's) MORGUARD.COM 7

8 A complete reconciliation of NOI discussed in this MD&A to NOI per the condensed consolidated financial statements is provided in Part X. COMPARATIVE NET OPERATING INCOME ANALYSIS TABLE 4 AT THE TRUST'S OWNERSHIP SHARE Three months ended June 30 Six months ended June Variance % Variance % Revenue from real estate properties $70,951 $72,396 ($1,445) (2.0%) $144,181 $144,952 ($771) (0.5%) Property operating expenses 15,412 15, % 31,687 31,821 (134) (0.4%) Property taxes 12,959 12, % 25,967 25, % Property management fees 2,318 2,333 (15) (0.6)% 4,664 4,693 (29) (0.6%) Net operating income same assets $40,262 $42,096 ($1,834) (4.4%) $81,863 $83,141 ($1,278) (1.5%) The components of NOI 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. Property management fees are the direct result of the Trust s management agreement with Morguard Investments Limited. The property management agreement permits property management fees to be charged, at variable rates, on revenue from real estate properties based on asset type. Fees average 3.25% of revenue from real estate properties. With few exceptions, these fees are recoverable from tenants. COMPARATIVE NET OPERATING INCOME BY ASSET TYPE FOR INCOME PRODUCING PROPERTIES TABLE 5 AT THE TRUST'S OWNERSHIP SHARE Three months ended June 30 Six months ended June Variance % Variance % Retail $20,944 $23,083 ($2,139) (9.3%) $42,998 $44,775 ($1,777) (4.0%) Office 18,728 18, % 37,670 37, % Other (20) (3.3%) 1,195 1,211 (16) (1.3%) Net operating income - same assets $40,262 $42,096 ($1,834) (4.4%) $81,863 $83,141 ($1,278) (1.5%) RETAIL OVERVIEW As at June 30, 2015, the Trust s regional shopping centre portfolio totaled 3.5 million square feet of GLA which comprises a 100% interest in six regional centres totaling 3.4 million square feet and a 50% interest in one additional centre comprising 0.1 million square feet. As at June 30, 2015, the Trust's neighbourhood and community shopping centre portfolio totaled 1.3 million square feet of GLA comprising a 100% interest in 13 such properties totaling 1.2 million square feet, as well as a 50% interest in one additional property totaling 0.1 million square feet. MORGUARD.COM 8

9 RETAIL NET OPERATING INCOME TABLE 6 Three months ended June 30 Six months ended June Variance % Variance % Revenue from retail properties $36,114 $38,190 ($2,076) (5.4%) $74,305 $76,231 ($1,926) (2.5%) Property operating expenses 7,202 7,293 (91) (1.2%) 15,216 15,629 (413) (2.6%) Property taxes 6,746 6, % 13,586 13, % Property management fees 1,222 1,252 (30) (2.4%) 2,505 2,532 (27) (1.1%) Net operating income same assets $20,944 $23,083 ($2,139) (9.3%) $42,998 $44,775 ($1,777) (4.0%) The Trust s retail NOI from same assets for the three months ended June 30, 2015 was $20.9 million versus $23.1 million for the same period in This represents a decrease of 9.3%. The decrease derives from increased vacancy costs at four of the Trust s regional shopping centres impacted by either disclaimed or acquired Target leases, which has resulted in a negative impact on the Trust's net operating income of $0.4 million. The performance is also impacted by the 2014 acceleration of operating cost recoveries at the St. Laurent Centre, which amounted to $0.9 million. The Trust s retail NOI from same assets for the six months ended June 30, 2015 was $43.0 million versus $44.8 million for the same period in This represents a decrease of 4.0%. The decrease derives from increased vacancy costs at four of the Trust s regional shopping centres impacted by either disclaimed or acquired Target leases, which has resulted in a negative impact on the Trust's net operating income of $0.4 million. The performance is also impacted by the 2014 acceleration of operating cost recoveries at the St. Laurent Centre, which amounted to $0.9 million. RETAIL LEASE PROFILE TABLE 7 Sq.Ft. % of Portfolio Weighted Average Contract Rent (remainder of the year) , % $ , % , % , % Thereafter 2,436, % Current vacancy 571, % Total 4,774, % $21.18 Weighted average remaining lease term years 4.74 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 contract rent displayed in 2016 and thereafter are the result of anchor tenant maturities. The following table provides a quarterly summary of the remaining 2015 expiries net of committed renewals, along with the associated contract rents, for the Trust s retail portfolio. RETAIL REMAINING 2015 EXPIRIES (NET OF RENEWALS) TABLE 8 Total Remaining Q Q Gross leasable area 244, , ,388 Average net rent per sq ft $22.03 $21.64 $21.88 MORGUARD.COM 9

10 RETAIL 2015 LEASE ACTIVITY TABLE 9 Q YTD 2015 Opening Vacancy (sq ft) 209, ,767 Opening Occupancy 96% 96% EXPIRING LEASES: Square feet 127, ,599 Average net rent per sq ft $22.96 $24.09 EARLY TERMINATIONS: Square feet 398, ,462 Average net rent per sq ft $7.57 $9.51 RENEWALS: Square feet 115, ,489 Average net rent per sq ft $19.60 $22.79 Retention rate 90.4% 75.3% NEW LEASING: Square feet 48,718 93,797 Average net rent per sq ft $22.47 $26.49 Ending Vacancy (sq ft) 571, ,542 Ending Occupancy 88% 88% The table to the left provides a summary of the leasing activities accomplished during the three months and six months ended June 30, For the three months ended June 30, 2015, the Trust realized an average decrease of $3.36 per square foot on renewals, while maintaining a 90.4% retention rate for existing tenants. In addition, the Trust realized an average decrease of $0.49 per square foot on new leasing. For the six months ended June 30, 2015, the Trust realized an average decrease of $1.30 per square foot on renewals, while maintaining a 75.3% retention rate for existing tenants. In addition, the Trust realized an average uplift of $2.40 per square foot on new leasing. During the quarter, occupancy was impacted by the early termination of 379,500 square feet of either disclaimed or acquired Target leases at four of the Trust's regional shopping centres and has decreased to 88%. The impact of the Target early terminations on NOI is less than 1%. RETAIL GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING TABLE In thousands of square feet Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Retail portfolio GLA 4,295 4,771 4,778 4,781 4,778 4,775 4,775 4,775 % retail GLA occupied 97% 98% 97% 97% 96% 96% 96% 88% The retail portfolio square footage and quarterly occupancy for the past eight quarters are outlined in table 10. Occupancy levels, which have historically remained high with little volatility, were adjusted in the current quarter to fully reflect four of the Trust s regional shopping centres impacted by either disclaimed or acquired Target leases. The space vacated by Target equates to the early termination of 379,500 square feet and as a result, the Trust's retail occupancy has decreased to 88%. Adjusting for the vacant Target space, the Trust's retail portfolio occupancy rate has held firm at 96%. MORGUARD.COM 10

11 OFFICE OVERVEIW To maximize its office portfolio, the Trust leverages opportunities to co-invest with others who have similar strategic objectives. As at June 30, 2015, the Trust s office portfolio included 100% ownership interests in 16 office properties comprising 2.1 million square feet, 50% interests in seven properties and a 20% interest in one property. The Trust s office portfolio totals 3.5 million square feet. OFFICE NET OPERATING INCOME TABLE 11 Three months ended June 30 Six months ended June Variance % Variance % Revenue from office properties $33,987 $33,359 $ % $68,173 $67,017 $1, % Property operating expenses 8,128 7, % 16,324 16, % Property taxes 6,057 6, % 12,064 11, % Property management fees 1,074 1, % 2,115 2,117 (2) (0.1%) Net operating income same assets $18,728 $18,403 $ % $37,670 $37,155 $ % Office NOI from same assets increased by 1.8% to $18.7 million for the three months ended June 30, 2015, from $18.4 million for the same period in This increase in NOI is primarily due to continued modest uplifts in basic rents at several of the Trust s office properties for deals completed in late Office NOI from same assets increased by 1.4% to $37.7 million for the six months ended June 30, 2015, from $37.2 million for the same period in This increase in NOI is primarily due to continued modest uplifts in basic rents at several of the Trust s office properties for deals completed in late OFFICE LEASE PROFILE TABLE 12 Sq.Ft. % of Portfolio Weighted Average Contract Rent (remainder of the year) , % $ , % $ , % $ , % $22.58 Thereafter 2,550, % $22.87 Current vacancy 132, % Total 3,516, % $22.71 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. Weighted average remaining lease term years 7.32 The following table provides a quarterly summary of the remaining 2015 expiries net of committed renewals, along with the associated contract rents, for the Trust s office portfolio. OFFICE REMAINING 2015 EXPIRIES (NET OF RENEWALS) TABLE 13 Total Remaining Q Q Gross leasable area 17,855 34,375 52,230 Average net rent per sq ft $20.72 $19.45 $19.88 MORGUARD.COM 11

12 OFFICE 2015 LEASE ACTIVITY TABLE 14 Q YTD 2015 Opening Vacancy (sq ft) 125, ,721 Opening Occupancy 96% 96% EXPIRING LEASES: Square feet 58, ,961 Average net rent per sq ft $19.79 $18.55 EARLY TERMINATIONS: Square feet 9,341 11,197 Average net rent per sq ft $30.43 $27.29 RENEWALS: Square feet 46,206 77,621 Average net rent per sq ft $15.32 $17.20 Retention rate 79.1% 76.9% NEW LEASING: Square feet 14,629 34,705 Average net rent per sq ft $24.29 $19.66 The table to the left provides a summary of the leasing activities accomplished during the three months and six months ended June 30, For the three months ended June 30, 2015, the Trust realized an average decrease of $4.47 per square foot on renewals, while maintaining a 79.1% retention rate for existing tenants. In addition, the Trust realized an average uplift of $4.50 per square foot on new leasing. For the six months ended June 30, 2015, the Trust realized an average decrease of $1.35 per square foot on renewals, while maintaining a 76.9% retention rate for existing tenants. In addition, the Trust realized an average uplift of $1.11 per square foot on new leasing. Ending occupancy remained stable at 96%. Ending Vacancy (sq ft) 132, ,553 Ending Occupancy 96% 96% OFFICE GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING TABLE In thousands of square feet Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Office portfolio GLA 3,468 3,466 3,471 3,482 3,520 3,526 3,525 3,516 % office GLA occupied 95% 95% 96% 96% 96% 96% 96% 96% The office portfolio square footage and quarterly occupancy for the past eight quarters are outlined in table 15. Occupancy levels throughout the period remained high, with little volatility. The differential between the highest and lowest level of portfolio occupancy over this two-year period is only 100 basis points (96% being the highest and 95% being the lowest). MORGUARD.COM 12

13 OTHER OVERVIEW The Trust s other portfolio includes 100% interests in three industrial properties comprising 0.1 million square feet and a 50% interest in one industrial property comprising 0.2 million square feet. OTHER NET OPERATING INCOME TABLE 16 Three months ended June 30 Six months ended June Variance % Variance % Revenue from other properties $850 $847 $3 0.4% $1,703 $1,704 ($1) (0.1%) Property operating expenses % % Property taxes % (2) (0.6%) Property management fees % % Net operating income same assets $590 $610 ($20) (3.3%) $1,195 $1,211 ($16) (1.3%) Other NOI from same assets remained stable at $0.6 million and $1.2 million for the three months and six months ended June 30, 2015, and for the same periods in OTHER LEASE PROFILE TABLE 17 Sq. Ft. % of Portfolio Weighted Average Contract Rent (remainder of the year) , % $ , % , % , % Thereafter 267, % 5.97 Current vacancy 1, % Total 337, % $6.94 The table to the left provides a summary of the lease maturities net of committed renewals, over the next four years and thereafter along with the associated contract rents at maturity. Lower contract rent displayed in thereafter is mainly the result of a long-term lease at one of the Quebec industrial properties due to expire in The lease was originally entered into in Weighted average remaining lease term years 6.28 The following table provides a quarterly summary of the remaining 2015 expiries net of committed renewals, along with the associated contract rents, for the Trust s other portfolio. OTHER REMAINING 2015 EXPIRIES (NET OF RENEWALS) TABLE 18 Total Remaining Q Q Gross leasable area 3,821 4,699 8,520 Average net rent per sq ft $9.50 $9.11 $9.29 MORGUARD.COM 13

14 OTHER 2015 LEASE ACTIVITY TABLE 19 Q YTD 2015 Opening Vacancy (sq ft) 1,900 1,900 Opening Occupancy 99% 99% EXPIRING LEASES: Square feet 3,800 Average net rent per sq ft $ $9.00 EARLY TERMINATIONS: Square feet Average net rent per sq ft $ $ RENEWALS: Square feet 3,800 Average net rent per sq ft $ $10.00 Retention rate % 100.0% The table to the left provides a summary of the leasing activities accomplished during the three months and six months ended June 30, For the three months ended June 30, 2015, no leasing activity was achieved. For the six months ended June 30, 2015, the Trust realized an average uplift of $1.00 per square foot on renewals, while maintaining a 100.0% retention rate for existing tenants. No new leasing was achieved during this period. Ending occupancy remained stable at 99%. NEW LEASING: Square feet Average net rent per sq ft $ $ Ending Vacancy (sq ft) 1,900 1,900 Ending Occupancy 99% 99% OTHER GLA OCCUPIED, PREVIOUS EIGHT QUARTERS TRENDING TABLE In thousands of square feet Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Other portfolio GLA % other GLA occupied 99% 99% 100% 100% 99% 99% 99% 99% The other portfolio square footage and quarterly occupancy for the past eight quarters is outlined in table 20. Occupancy levels throughout the period remained very high, with little volatility. The differential between the highest and lowest level of portfolio occupancy over this two year period was 100 basis points (100% being the highest and 99% being the lowest). MORGUARD.COM 14

15 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 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 21 Three months ended June 30 Six months ended June 30 In thousands of dollars, except per-unit amounts Net (loss)/income for the period ($20,217) $34,151 ($4,194) $70,424 Add/(deduct) items not affecting cash: Fair value losses/(gains) on real estate properties 1 45,267 (7,129) 56,418 (17,362) Basic funds from operations 25,050 27,022 52,224 53,062 Interest expense on convertible debentures 1,813 1,814 3,607 3,608 Diluted funds from operations $26,863 $28,836 $55,831 $56,670 FUNDS FROM OPERATIONS PER UNIT Basic $0.40 $0.43 $0.84 $0.85 Diluted 2 $0.40 $0.42 $0.82 $0.83 WEIGHTED AVERAGE UNITS OUTSTANDING (IN THOUSANDS) Basic 62,084 62,138 62,127 62,181 Diluted 2 68,181 68,235 68,224 68, Includes fair value gains on real estate properties included in net income/(loss) from equity-accounted investments. 2. Includes the dilutive impact of convertible debentures. FFO was $0.40 per unit ($0.40 per unit - diluted) for the three months ended June 30, 2015, compared to $0.43 per unit ($0.42 per unit - diluted) for the same period in This represents a decrease of 7% or $0.03 per unit ($0.02 per unit - diluted). FFO was $0.84 per unit ($0.82 per unit - diluted) for the six months ended June 30, 2015, compared to $0.85 per unit ($0.83 per unit - diluted) for the same period in This represents a decrease of 1% or $0.01 per unit ($0.01 per unit - diluted). MORGUARD.COM 15

16 FFO derives from net income. The key components of net income are presented in the table below: NET INCOME TABLE 22 Three months ended June 30 Six months ended June Net operating income from total real estate properties $41,103 $44,155 $84,589 $87,196 Interest expense 14,807 15,334 29,848 30,746 General and administrative 1,128 1,433 2,287 2,662 Other income (167) (342) Income before fair value(losses)/gains and other expenses and fair value changes from equity-accounted investments 25,335 27,388 52,796 53,788 Fair value (losses/)/gains on real estate properties (45,295) 7,168 (56,462) 17,416 Other expenses and fair value changes from equity-accounted investments (257) (405) (528) (780) Net (loss)/income for the period ($20,217) $34,151 ($4,194) $70,424 NET OPERATING INCOME The analysis of property performance in Part III was focused on same asset NOI which is reconciled to NOI per the condensed consolidated financial statements in Part X. Same asset NOI for the three months ended June 30, 2015, was $40.3 million, a decrease of $1.8 million from the same period in Net operating income from all properties was $41.1 million for the three months ended June 30, 2015 versus $44.2 million for the same period in The remaining unfavorable change during the three months of $1.3 million is mainly the result of the Trust s disposition and acquisition programs. The Trust s disposition of Cedar Pointe Business Park in July 2014, 350 Sparks/361 Queen in February 2015, Finch in April 2015 and Lesmill in May 2015 resulted in a $1.1 million reduction in NOI. This was offset by a positive impact of $0.3 million from the Trust s acquisition of 301 Laurier Avenue in June 2014 and Citadel West in July Outside of the disposition and acquisition programs, during the three months ended June 30, 2015, the Trust was negatively impacted by $0.5 million from amortized step rents. Same asset NOI for the six months ended June 30, 2015, was $81.9 million, a decrease of $1.3 million from the same period in Net operating income from all properties was $84.6 million for the six months ended June 30, 2015 versus $87.2 million for the same period in The remaining unfavorable change during the six months of $1.3 million is mainly the result of the Trust s disposition and acquisition programs. The Trust s disposition of Cedar Pointe Business Park in July 2014, 350 Sparks/361 Queen in February 2015, Finch in April 2015 and Lesmill in May 2015 resulted in a $1.8 million reduction in NOI. This was offset by a positive impact of $0.7 million from the Trust s acquisition of 301 Laurier Avenue in June 2014 and Citadel West in July Outside of the disposition and acquisition programs, during the six months ended June 30, 2015, the Trust was negatively impacted by $0.7 million from amortized step rents, which was offset by $0.5 million in one-time lease cancellation fees. INTEREST EXPENSE Interest expense totaled $14.8 million for the three months ended June 30, 2015, compared to $15.3 million for the same period in For the three months ended June 30, 2015, $1.7 million of interest expense has been replaced with $1.1 million on same levels of financing and $0.6 million of interest expense on increased levels of financing. Other factors reducing interest expense during the period include interest capitalized to development projects of $0.2 million and mortgage amortizations of $0.4 million. Interest expense totaled $29.8 million for the six months ended June 30, 2015, compared to $30.7 million for the same period in For the six months ended June 30, 2015, $3.4 million of interest expense has been replaced with $2.2 million on same levels of financing and $1.2 million of interest expense on increased levels of financing. Other factors reducing interest expense during the period include interest capitalized to development projects of $0.4 million and mortgage amortizations of $0.7 million. MORGUARD.COM 16

17 The following table outlines, by quarter, the Trust s weighted average rates on mortgages payable in 2015 and The rates are calculated excluding mortgages tied to real estate properties held for sale. WEIGHTED AVERAGE RATES MORTGAGES PAYABLE TABLE March % 4.4% June % 4.2% September % December % The Trust has reduced the weighted average interest rate by more than 20 basis points from the start of 2014, which has held constant at 4.2%. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the three months ended June 30, 2015, was $1.1 million, a decrease of $0.3 million from the same period in This favorable decrease is mainly the result of higher SARs expenses incurred in General and administrative expenses for the six months ended June 30, 2015, was $2.3 million, a decrease of $0.4 million from the same period in This favorable decrease is mainly the result of higher SARs expenses incurred in ADJUSTED FUNDS FROM OPERATIONS AFFO is a non-gaap measure that is widely accepted as an alternative measure of cash generated from operations. AFFO per unit is calculated by adjusting FFO for accretion of convertible debentures, straight-line rent and productive capacity maintenance expenditures ( PCME ). PCME are expenditures on leasing, replacement or major repair of component parts of properties that are required to preserve the existing earning capacity of the Trust s real estate portfolio. The Trust categorizes these expenditures as leasing commissions, tenant allowances and recoverable and non-recoverable capital expenditures. Leasing Commissions and Tenant Allowances: The Trust requires ongoing capital spending on leasing commissions and tenant allowances pertaining to new and renewed tenant leases. These costs depend on many factors, including, but not limited to, tenant maturity profile, vacancies, asset type, prevailing market conditions and unforeseen tenant bankruptcies. Recoverable and Non-Recoverable Capital Expenditures: The Trust continually invests in major repair and replacement of component parts, such as, roof, parking lot, elevators and HVAC of the properties 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 expenditures (Table 25) in any given year may exceed the normalized estimation. There is no industry standard 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. MORGUARD.COM 17

18 ADJUSTED FUNDS FROM OPERATIONS TABLE 24 Three months ended June 30 Six months ended June Funds from operations $25,050 $27,022 $52,224 $53,062 Add/(deduct) Accretion of convertible debentures Amortized stepped rents (123) (652) (714) (1,326) Productive capacity maintenance expenditures (normalized) (6,250) (6,250) (12,500) (12,500) Adjusted funds from operations Basic 18,754 20,192 39,168 39,385 Interest expense on convertible debentures 1,813 1,814 3,607 3,608 Adjusted funds from operations Diluted $20,567 $22,006 $42,775 $42,993 The following table provides a breakdown of actual PCME for the three months and six months ended June 30, 2015 and for the same periods in ACTUAL PRODUCTIVE CAPACITY MAINTENANCE EXPENDITURES TABLE 25 Three months ended June 30 Six months ended June Leasing commissions $1,272 $1,005 $2,320 $1,735 Tenant allowances 2,070 2,291 5,252 4,026 Total leasing costs 3,342 3,296 7,572 5,761 Capital expenditures recoverable from tenants 2,026 1,054 3,511 2,013 Capital expenditures non-recoverable from tenants Total capital expenditures 2,163 1,208 3,773 2,306 Total productive capacity maintenance expenditures 5,505 4,504 11,345 8,067 Discretionary capital expenditures , Total leasing costs and capital expenditures $5,869 $5,194 $15,576 $8,920 Discretionary Capital Expenditures In addition to PCME the Trust invests in discretionary capital projects on the development of new space, redevelopment or retrofit of existing properties, and other capital expenditures to create additional long-term value for the Trust s real estate portfolio. These discretionary capital expenditures are not expected to occur on a consistent basis. These expenditures are included in the above table along with the recoverable and non-recoverable capital expenditures. The increase in discretionary capital expenditures during the three months and six months ended June 30, 2015 mainly relates to electrical and watermain replacements, as part of the overall revitalization program to refresh and modernize the St. Laurent Centre. DISTRIBUTIONS TO UNITHOLDERS The Trust s primary business goal is to accumulate a Canadian portfolio of high-quality real estate assets and then deliver the benefits of such real estate ownership to unitholders. The primary benefit is a reliable and, over time, increasing cash distribution. The Trust expects to distribute to its unitholders, in each year, an amount not less than the Trust s taxable income for the year, as calculated in accordance with the Canadian Income Tax Act ( the Act ). The Trust s monthly distribution to unitholders in 2015 was $0.08 per unit, representing $0.96 per unit on an annualized basis. In determining the annual level of distributions to unitholders, the Trust looks at forward-looking cash flow information, including forecasts and budgets, and the future prospects of the Trust. The Trust does not consider periodic cash flow fluctuations, resulting from items such as the timing of property operating costs, property tax installments or semi- MORGUARD.COM 18

19 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 the income producing properties, 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 26 Three months ended June 30 Six months ended June Adjusted funds from operations per unit - basic and diluted $0.30 $0.32 $0.63 $0.63 Cash distributions per unit $0.24 $0.24 $0.48 $0.48 Distributions paid as a percentage of adjusted funds from operations per unit - diluted 80.0% 75.0% 76.2% 76.2% The following table provides a reconciliation of AFFO to cash provided by operating activities per the condensed consolidated financial statements: TABLE 27 Three months ended June 30 Six months ended June Cash provided by operating activities $17,759 $22,690 $40,734 $43,725 Changes in working capital 5,112 2,569 7,257 6,494 Non-cash amortizations (700) (724) (585) (1,450) Net Income from equity-accounted investments before fair value adjustments 827 1,071 1,638 2,141 Contributions/(distributions) from equity-accounted investments 714 (166) 125 (843) Deferred leasing cost additions 1,273 1,002 2,321 1,732 Tenant Incentive additions Productive capacity maintenance expenditures (normalized) (6,250) (6,250) (12,500) (12,500) Adjusted funds from operations $18,754 $20,192 $39,168 $39,385 Adjusted funds from operations $18,754 $20,192 $39,168 $39,385 Cash distributions 14,768 14,713 29,560 29,507 Excess adjusted funds from operations after cash distributions $3,986 $5,479 $9,608 $9,878 The following table provides a summary of distributions relative to cash flow from operating activities per the condensed consolidated financial statements: TABLE 28 Three months ended June 30 Six months ended June Cash provided by operating activities $17,759 $22,690 $40,734 $43,725 Cash distributions 14,768 14,713 29,560 29,507 Excess of cash from operating activities over cash distributions $2,991 $7,977 $11,174 $14,218 MORGUARD.COM 19

20 PART V REAL ESTATE OVERVIEW The carrying value of the Trust s real estate properties decreased to $2.9 billion as at June 30, 2015 (December 31, 2014 $3.0 billion). This decrease is mainly resulting from the dispositions of 350 Sparks/361 Queen, Finch and Lesmill, as well as fair value losses during the period. Income producing properties were affected by additions from the Trust s capital investment programs (including PCME and completed development), which were offset by fair value losses. REAL ESTATE PROPERTIES TABLE 29 June 30, December 31, As at Income producing properties $2,848,635 $2,884,824 Properties under development 24,857 16,511 Land held for development 27,650 27,650 Total real estate properties (excluding properties held for sale) 2,901,142 2,928,985 Properties held for sale 9,600 63,190 Total real estate properties $2,910,742 $2,992,175 A complete reconciliation of real estate properties discussed in this MD&A to real estate properties per the condensed consolidated financial statements is provided in Part X. 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, re-development of an existing area, and retrofit opportunities. The following table details the Trust s active (in progress) development projects. DEVELOPMENT PROJECTS IN PROGRESS TABLE 30 Location Asset Type Trust Ownership % Cost to Date Cost to Complete Total Project Cost Completion Date St. Laurent Centre, Ottawa, ON Retail 100% $22,413 $1,252 $23,665 July 2015 Penn West Plaza, Calgary, AB Office 100% 54 5,946 6,000 December 2016 Heritage Place, Ottawa, ON Office 50% 1, ,800 August 2015 Parkland Mall, Red Deer, AB Retail 100% 15,200 15,200 August 2016 Developments in progress 23,674 22,991 46,665 Revitalization project to refresh and modernize the centre Addition of Plus 15 connection to the city's enclosed pedestrian skywalk system Reconfiguration of new space for Winners Anchor Tenant re-merchandising for Goodlife Fitness Centres Other Various 1,183 Pre-development costs Properties under development $24,857 $22,991 $46,665 MORGUARD.COM 20

21 ACQUISITION PROGRAM The table below details acquisitions completed in There have been no acquisitions in TABLE 31 In thousands of dollars, square feet Citadel West Laurier Avenue Transaction date July 25 June 4 Asset class Office Office Location Calgary, AB Ottawa, ON Trust ownership share 50.0% 50.0% GLA 39,000 17,500 Purchase price $19,000 $4,037 The acquisition of Citadel West provides the Trust with 100% ownership. This property has provided consistent results since the Trust first purchased 50% of the asset in Laurier Avenue was a strategic purchase required to complete the Trust s presence at the downtown intersection of Slater, Laurier, Bank and Kent providing the flexibility to maximize long-term value opportunities. Capitalization rate 5.7% 7.0% Associated debt $7,581 None Interest rate on associated debt 3.3% NA Occupancy 100.0% 100.0% Key tenants CH2M Hill Unifor DISPOSITION PROGRAM The table below details dispositions completed during the six months ended June 30, 2015 and for the year ended December 31, TABLE 32 In thousands of dollars, square feet Lesmill Finch Transaction date May 15 April 1 Asset class Other Other Location Toronto, ON Toronto, ON Trust ownership share 100.0% 100.0% GLA 27, ,123 Sale price (000's) $6,350 $10,000 On March 2, 2015 the Trust entered into an agreement to sell Finch. On April 1, 2015, the Trust completed the sale of this property for a total price of $10.0 million, less selling costs. On December 10, 2014 the Trust entered into an agreement to sell Lesmill. On May 15, 2015, the Trust completed the sale of this property for a total price of $6.4 million, less selling costs. Capitalization rate 6.0% 8.0% Associated debt None $6,125 Interest rate on associated debt NA 5.14% Occupancy 100.0% 92.2% Key tenants City of Toronto Humbervale Machinery/CTI Industries MORGUARD.COM 21

22 In thousands of dollars, square feet 350 Sparks/361 Queen Cedar Pointe Business Park Transaction date February 17 July 2 Asset class Office/Other Office Location Ottawa, ON Barrie, ON Trust ownership share 50.0% 100.0% GLA 86, ,000 Sale price (000's) $37,692 $41,900 Capitalization rate n/a 6.0% Associated debt $17,835 $13,747 Interest rate on associated debt 3.3% 5.1% Occupancy 85.4% 87.0% Key tenants CIRA Municipal Services On February 17, 2015, the Trust completed the sale of 350 Sparks and 361 Queen to Morguard, for a total price of $37.7 million, which included an assumption of the existing mortgage debt of $17.8 million, less selling costs. At the time of sale, 361 Queen was vacant and not generating income. As a result, establishing an appropriate capitalization rate was deemed indeterminable and therefore classified as not applicable. The sale of Cedar Pointe Business Park removes the Trust from its exposure to ongoing leasing challenges at the property. The proceeds from the sale will be used to complete the large revitalization program, in progress, at the St. Laurent Centre (see Development projects in-progress). FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES RECOGNIZED IN NET INCOME For the three months ended June 30, 2015, the Trust recorded fair value losses on real estate properties of $45.3 million, versus $7.1 million of fair value gains on real estate properties for the same period in The declines in fair values during the three months fully reflect four of the Trust s regional shopping centres impacted by either disclaimed or acquired Target leases. The Trust was also impacted by the current economic downturn in the Alberta office market. For the six months ended June 30, 2015, the Trust recorded fair value losses on real estate properties of $56.4 million, versus $17.4 million of fair value gains on real estate properties for the same period in The declines in fair values during the six months fully reflect four of the Trust s regional shopping centres impacted by either disclaimed or acquired Target leases. The Trust was also impacted by the current economic downturn in the Alberta office market. Fair value adjustments are determined on a quarterly basis based on the movement of various parameters, including changes in projected cash flows as a result of leasing, timing and changes in discount rates, and terminal capitalization rates. Fair value (losses)/gains on real estate properties consist of the following: TABLE 33 Three months ended June 30 Six months ended June Income producing properties ($45,267) $7,325 ($56,377) $21,505 Properties under development (149) (41) (3,906) Land held for development (47) (237) Total fair value (losses)/gains on real estate properties ($45,267) $7,129 ($56,418) $17,362 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 condensed consolidated financial statements is provided in Part X. MORGUARD.COM 22

23 PART VI LIQUIDITY AND CAPITAL RESOURCES Cash flow generated from operating the real estate properties represents the primary source of liquidity to service debt, and to fund planned maintenance expenditures, leasing costs and distributions to unitholders. Cash flow from operations is dependent upon occupancy levels of properties owned, rental rates achieved, collection of rents, efficiencies in operations, the costs involved to lease or renew rental space and planned maintenance expenditures, as well as other factors. CASH FLOWS The following table details the changes in cash and cash equivalents for the following periods: TABLE 34 Three months ended June 30 Six months ended June Cash provided by operating activities $18,366 $23,982 $40,322 $44,695 Cash (used in)/provided by financing activities (35,980) 19,133 (59,930) 1,321 Cash provided by/(used in) investing activities 19,769 (12,333) 22,332 (16,305) Net increase in cash 2,155 30,782 2,724 29,711 Cash and cash equivalents, beginning of period 13,290 12,681 12,721 13,752 Cash and cash equivalents, end of period $15,445 $43,463 $15,445 $43,463 A complete reconciliation of cash flows discussed in this MD&A to cash flows per the condensed consolidated financial statements is provided in Part X. 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 interest-bearing at the lender s borrowing rate and are due on demand subject to available funds. During the three months ended June 30, 2015, a gross amount of $nil was advanced to Morguard and $15.0 million was repaid. During the six months ended June 30, 2015, a gross amount of $5.0 million was advanced to Morguard and $15.0 million was repaid. As at June 30, 2015, the total amounts receivable from Morguard was $20.0 million (December 31, 2014 $30.0 million). For the three months ended June 30, 2015, the Trust earned interest income in the amount of $167 (June 30, 2014 $nil). For the six months ended June 30, 2015, the Trust earned interest income in the amount of $342 (June 30, 2014 $nil). As at June 30, 2015, the interest rate on the loan receivable from Morguard was 2.19% (December 31, %). MORGUARD.COM 23

24 DEBT STRUCTURE TABLE 35 June 30, December 31, As at 2015 % 2014 % Conventional secured mortgages payable $1,195, % $1,212, % Unsecured convertible debentures payable 147, % 146, % Secured floating rate bank financing % 4, % $1,342, % $1,364, % 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 CONVERTIBLE DEBENTURES PAYABLE On October 31, 2012, the Trust issued a $150.0 million principal amount of 4.85% convertible unsecured subordinated debentures ( 2012 Debentures ), maturing on October 31, 2017 (the Maturity Date ). Interest is payable semiannually, 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 $4,183 has been capitalized and amortized over the term to maturity, while the remaining amount of $45 has been charged to equity. TABLE 36 Principal Issued Liability Equity October 21, 2012 $150,000 $148,428 $1,572 Issue costs (4,228) (4,183) (45) Convertible debentures payable $145,772 $144,245 $1,527 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 units per $1,000 principal amount of 2012 Debentures, subject to adjustment. As at June 30, 2015, $15 (December 31, $15) of the 2012 Debentures had been converted into 609 units. The liability and equity component of these debentures has been included in unitholders equity under issue of units. Redemption Rights: Each 2012 Debenture is redeemable any time from November 1, 2015 to the close of business on October 31, 2016, in whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and unpaid interest, at the Trust s sole option, provided that the weighted average trading price of the units on the TSX for the 20 consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not less than 125% of the conversion price. From November 1, 2016, to the close of business on October 31, 2017, the 2012 Debentures are redeemable, in whole or in part, at par plus accrued and unpaid interest, at the Trust s sole option. Repayment Options Payment on Redemption or Maturity: The Trust may satisfy the obligation to repay the principal amount of the 2012 Debentures, in whole or in part, by delivering units of the Trust. In the event that the Trust elects to satisfy its obligation to repay principal with units of the Trust, the number of units issued is obtained by dividing the principal amount of the 2012 Debentures by 95% of the weighted average trading price of the units on the MORGUARD.COM 24

25 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. MORTGAGES PAYABLE TABLE 37 June 30, December 31, As at Mortgages payable before financing costs $1,198,707 $1,216,585 Premium on acquired debt 4 11 Deferred financing costs (3,650) (4,035) Mortgages payable $1,195,061 $1,212,561 A complete reconciliation of mortgages payable discussed in this MD&A to mortgages payable per the condensed consolidated financial statements is provided in Part X. 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 June 30, 2015, together with the weighted average contractual rate on debt maturing in the years indicated. Also highlighted are the Trust s primary sources of lending, by year of maturities, and the Trust s up-financing opportunity in relation to the fair value of encumbered properties relative to their respective maturing debt. AGGREGATE MATURITIES TABLE 38 Year Mortgage Maturity Payments Scheduled Principal Repayments Total Mortgages Payable Weighted Average Interest Rate Debentures Payable Weighted Average Interest Rate Total Debt Maturities Weighted Average Interest Rate 2015 $36,925 $17,927 $54, % $ % $54, % ,485 33,954 84, % % 84, % ,289 33,623 83, % 149, % 233, % ,464 31,639 87, % % 87, % ,122 26, , % % 188, % Thereafter 634,374 65, , % % 700, % Total $989,659 $209,048 $1,198, % $149, % $1,348, % With weighted average interest rates of 5.41% on mortgages maturing in 2015, the Trust has an opportunity in 2015 to lower the overall interest rate on approximately $37 million of maturing debt. The weighted average interest rate at June 30, 2015 was 4.19%. At June 30, 2015, the Trust s weighted average term to maturity for mortgages payable is 5.5 years. MORGUARD.COM 25

26 PRINCIPAL MATURITIES BY TYPE OF LENDER, BY YEAR OF MATURITY TABLE 39 Year Banks Insurance Industry Pension Funds Unsecured Debentures Total 2015 $28,531 $8,394 $ $ $36, ,489 34,933 14,063 50, ,944 37, , , ,464 55, ,640 32, ,122 Thereafter 281, , , ,374 $441,658 $395,610 $152,391 $149,985 $1,139,644 The Trust maintains strategic relationships with banks, insurance companies and pension funds to reduce its exposure to any one lending group. The 2012 Debentures maturing in 2017 have certain redemption rights commencing November 2016 (see Convertible Debentures Payable). FAIR VALUE OF ENCUMBERED PROPERTIES RELATIVE TO MATURING DEBT TABLE 40 Year Mortgage Maturity Payments Scheduled Principal Repayments Total Fair Value of Encumbered Assets Leverage 2015 $36,925 $461 $37,386 $120,000 31% ,485 2,651 53, ,200 31% ,289 3,755 54, ,850 47% ,464 10,726 66, ,000 28% ,122 20, , ,460 46% Thereafter 634, , ,599 1,673,930 48% $989,659 $209,048 $1,198,707 $2,713,440 44% Given current real estate values, the Trust has an opportunity during the remainder of 2015 to increase financing as debt matures and still maintain the targeted loan to value ratio of 50%. MORGUARD.COM 26

27 DEBT AND LEVERAGE METRICS TABLE 41 For the six months ended For the twelve months ended June 30, 2015 December 31, 2014 Interest coverage ratio (i) Debt service coverage ratio (ii) Debt ratio (iii) 45.3% 45.7% Weighted average rates on mortgages 4.2% 4.2% Average term to maturity on mortgages (years) Distributions as a percentage of Adjusted Funds From Operations 80.0% 68.6% Unencumbered assets to unsecured debt 57.6% 60.6% Unencumbered assets $86,370 $90,900 Unsecured debt $149,985 $149,985 (i) (ii) (iii) Interest coverage defined as: Net income before taxes, amortization and fair value changes for the period, divided by total interest expense at the Trust's share (including interest that has been capitalized). Debt service coverage defined as: Net income before taxes, amortization and fair value changes for the period, divided by total interest expense at the Trust's share (Including interest that has been capitalized), and scheduled mortgage principal repayments. Debt ratio defined as: Total gross book value, divided by total indebtedness. Improvements were shown in certain of the Trust s key ratios and leverage metrics for the six months ended June 30, 2015, in comparison to the results for the year ended December 31, Both interest coverage and debt ratios showed modest improvements during the period. This is the continuing effect of the completed 2014 refinancing program. The weighted average rate on mortgages remained stable at 4.2%, with no maturing debt or other financing activity occurring during the period. CREDIT FACILITIES As at June 30, 2015, the Trust has secured floating rate bank financing availability totaling $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 June 30, 2015, the Trust was in compliance with all covenants and undertakings. The Trust has a revolving unsecured loan agreement with Morguard that provides for borrowings or advances of up to $50 million. CREDIT FACILITIES TABLE 42 June 30, December 31, As at Bank credit facilities and operating lines $70,000 $70,000 Revolving loan agreement with Morguard 50,000 50, , ,000 Amounts drawn against credit facilities (290) (5,217) $119,710 $114,783 MORGUARD.COM 27

28 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 June 30, 2015, the Trust held 49 properties in three assets classes (retail, office and other) 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 June 30, 2015, 100.0% of the Trust s debt was at fixed rates. As outlined under 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 43 June 30, December 31, As at Borrowing Limits Fixed-rate debt to gross book value of total assets % 45.3% 45.5% Floating-rate debt to gross book value of total assets 15.0% % 0.2% Total indebtedness to gross book value of total assets 60.0% 45.3% 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. LEASE ROLLOVER RISK Lease rollover risk arises from the possibility that the Trust may experience difficulty renewing leases as they expire or in re-leasing 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. MORGUARD.COM 28

29 TABLE 44 Sq. Ft. Retail Office Other % of Portfolio Weighted Average Contract Rent Sq. Ft. % of Portfolio Weighted Average Contract Rent Sq. Ft. % of Portfolio Weighted Average Contract Rent (remainder of the year) , % $ , % $ , % $ , % , % , % , % , % , % , % , % , % Thereafter 2,436, % ,550, % , % 5.97 Current vacancy 571, % 132, % 1, % Total 4,774, % $ ,516, % $ , % $6.94 REMAINING 2015 EXPIRIES BY GEOGRAPHY (NET OF RENEWALS): TABLE 45 Sq. Ft. Retail Office Other Weighted Average Contract Rent Sq. Ft. Weighted Average Contract Rent Sq. Ft. Weighted Average Contract Rent British Columbia 9,408 $ $15.00 $ 9,671 Alberta 65, , ,016 Saskatchewan 82, ,175 Manitoba 63, ,123 Ontario 132, , , ,749 Quebec 6, ,404 Total 352,388 $ ,230 $ ,520 $ ,138 Total ENVIRONMENTAL RISK The Trust is subject to various federal, provincial and municipal laws relating to the environment. The Trust s ongoing environmental management program includes regular review of tenant business uses and inspections of properties to ensure compliance, as well as appropriate testing by qualified environmental consultants when required. A Phase I environmental site assessment is performed on properties considered for acquisition. The Trust mitigates the cost of remediation by carrying environmental insurance where available. UNITHOLDER LIABILITY The Declaration of Trust provides that no unitholder or annuitant under a plan of which a unitholder acts as trustee or carrier will be held to have any personal liability as such and that no recourse may be had to the private property of any unitholder or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of the Trust. Only assets of the Trust are intended to be liable and subject to levy or execution. The following provinces have legislation relating to unitholder liability protection: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. Certain of these statutes have not yet been judicially considered, and it is possible that reliance on such statute by a unitholder could be successfully challenged on jurisdictional or other grounds. The Trustees will cause the operations of the Trust to be conducted, with the advice of counsel, in a manner and in such jurisdictions so as to avoid, as far as practicable, any material risk of liability to the unitholders for claims against the Trust. The Trustees will also cause the Trust to carry insurance, to the extent to which they determine to be possible and reasonable, for the benefit of unitholders and annuitants in such amounts as they consider adequate to cover non-contractual or non-excluded liability. MORGUARD.COM 29

30 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 August 5, 2015, the Trust had 61,823,925 units outstanding (62,167,654 December 31, 2014). This includes the Trust s participation as part of the Normal Course Issuer Bid for 2015 of 362,119 units, which were purchased for cancellation. 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. Legislation relating to the federal income taxation of a specified investment flow-through ( SIFT ) trust or partnership passed third reading on June 12, 2007, and was subsequently enacted June 22, 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 new taxation 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, Under the SIFT rules, the new taxation regime will 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, 2014 and throughout the year. Accordingly, no net additional current income tax expense or future income tax assets or liabilities have been recorded in the June 30, 2015, condensed 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 2015 or any subsequent year until the end of the particular year. MORGUARD.COM 30

31 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 other properties held to earn rental income (income producing properties) and properties or land that are being constructed or developed for future use as income producing properties. Real estate properties are recorded at fair value, determined based on available market evidence, at the balance sheet date. The Trust determined the fair value of each real estate property based upon, among other things, rental income from current leases and assumptions about rental income from future leases reflecting market conditions at the applicable balance sheet date, less future cash outflow pertaining to the respective leases. The real estate properties are appraised using a number of approaches that typically include a discounted cash flow analysis, direct capitalization method and a direct comparison approach. The discounted cash flow analysis is primarily based on discounting the expected future cash flows, generally over a term of 10 years and including a terminal value based on the application of a capitalization rate to estimated year 11 cash flows. In applying the accounting policies to the real estate properties, judgment is required in determining whether certain costs are additions to the carrying amount of the property, in distinguishing between tenant incentives and tenant improvements and for properties under development, identifying the point at which practical completion of the property occurs and identifying the directly attributable borrowing costs to be included in the carrying value of the development property. Judgment is also applied in determining the extent and frequency of independent appraisals. REVENUE RECOGNITION The computation of cost reimbursements from tenants for realty taxes, insurance and common area maintenance charges is complex and involves a number of judgments, including the interpretation of terms and other tenant lease provisions. Tenant leases are not consistent in dealing with such cost reimbursements, and variations in computations can exist. Adjustments are made throughout the year to these cost recovery revenues based upon the Trust s best estimate of the final amounts to be billed and collected. LEASES The Trust makes judgments in determining whether certain leases, in particular those leases with long contractual terms where the lessee is the sole tenant in a property, and long-term ground leases where the Trust is the lessee, are operating or finance leases. The Trust has determined that all of its tenant leases and long-term ground leases are operating leases. FAIR VALUE OF FINANCIAL INSTRUMENTS Management reports on a quarterly basis the fair value of financial instruments. The fair value of financial instruments approximates amounts at which these instruments could be exchanged between knowledgeable and willing parties. The estimated fair value may differ in amount from that which could be realized on an immediate settlement of the instruments. Management estimates the fair value of mortgages payable and convertible debentures payable by discounting the cash flows of these financial obligations using June 30, 2015 market rates for debts of similar terms. MORGUARD.COM 31

32 PART IX CONTROLS AND PROCEDURES CONCERNING FINANCIAL INFORMATION The Trust s management has evaluated the effectiveness of the Trust s disclosure controls and procedures and based on such evaluation, has concluded that their design and operation are adequate and effective as at and for the three and six months ended June 30, The financial certification process has been documented and internal controls have effectively been designed 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. In order to ensure that the condensed consolidated financial statements and MD&A present fairly, in all material respects, 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. 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 acts 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. MORGUARD.COM 32

33 PART X RECONCILIATIONS TO THE ISSUED FINANCIAL STATEMENTS Part X provides the reader with reconciliations of the key performance measures used in this MD&A to the Trust s condensed consolidated financial statements. RECONCILIATION OF NET INCOME PER THE FINANCIAL STATEMENTS TABLE 46 Three months ended June 30 Six months ended June Variance Variance Net operating income Retail $20,944 $23,083 ($2,139) $42,998 $44,775 ($1,777) Office 18,728 18, ,670 37, Other (20) 1,195 1,211 (16) Net operating income - same assets 40,262 42,096 (1,834) 81,863 83,141 (1,278) Real estate properties acquisitions Real estate properties held for development (23) (8) (15) (50) (50) Real estate properties held for sale 191 1,249 (1,058) 792 2,559 (1,767) Net operating income before other adjustments 40,770 43,355 (2,585) 83,287 85,718 (2,431) OTHER ADJUSTMENTS Step rents (556) 694 1,351 (657) Lease cancellation fees Net operating income from total real estate properties 41,103 44,155 (3,052) 84,589 87,196 (2,607) Equity-accounted investments (1,112) (1,437) 325 (2,210) (2,867) 657 Net operating income per the financial statements $39,991 $42,718 ($2,727) $82,379 $84,329 ($1,950) RECONCILIATION OF NET INCOME FROM EQUITY-ACCOUNTED INVESTMENTS TABLE 47 Three months ended June 30 Six months ended June Variance Variance Net operating income $1,112 $1,437 ($325) $2,210 $2,867 ($657) Other expenses (285) (366) 81 (572) (726) 154 Fair value gains/(losses) on real estate properties 28 (39) (54) 98 (257) (405) 148 (528) (780) 252 Net income from equity-accounted investments $855 $1,032 ($177) $1,682 $2,087 ($405) MORGUARD.COM 33

34 RECONCILIATION OF REAL ESTATE PROPERTIES TABLE 48 As at June 30, 2015 Per Financial Statements Equity-Accounted Investments All Properties Income producing properties $2,785,885 $62,750 $2,848,635 Properties under development 24,857 24,857 Land held for development 27,650 27,650 Total real estate properties $2,838,392 $62,750 $2,901,142 As at December 31, 2014 Per Financial Statements Equity-Accounted Investments All Properties Income producing properties $2,822,074 $62,750 $2,884,824 Properties under development 16,511 16,511 Land held for development 27,650 27,650 Total real estate properties $2,866,235 $62,750 $2,928,985 RECONCILIATION OF FAIR VALUE (LOSSES)/GAINS ON REAL ESTATE PROPERTIES TABLE 49 As at June 30, 2015 Per Financial Statements Equity-Accounted Investments All Properties Income producing properties ($56,320) $44 ($56,276) Properties held for sale (142) (142) Total fair value (losses)/gains on real estate properties ($56,462) $44 ($56,418) As at December 31, 2014 Per Financial Statements Equity-Accounted Investments All Properties Income producing properties $14,974 ($3,836) $11,138 Properties under development (4,005) (4,005) Land held for development Total fair value gains/(losses) on real estate properties $11,239 ($3,836) $7,403 RECONCILIATION OF MORTGAGES PAYABLE TABLE 50 As at June 30, 2015 Per Financial Statements Equity-Accounted Investments All Properties Mortgages payable before financing costs $1,169,040 $29,667 $1,198,707 Premium on acquired debt 4 4 Deferred financing costs (3,650) (3,650) Mortgages payable $1,165,394 $29,667 $1,195,061 As at December 31, 2014 Per Financial Statements Equity-Accounted Investments All Properties Mortgages payable before financing costs $1,186,480 $30,105 $1,216,585 Premium on acquired debt Deferred financing costs (4,035) (4,035) Mortgages payable $1,182,456 $30,105 $1,212,561 MORGUARD.COM 34

35 RECONCILIATION OF CASH FLOWS TABLE 51 For the three months ended June 30, 2015 Per Financial Statements Equity-Accounted Investments All Properties Cash provided by operating activities $17,759 $607 $18,366 Cash used in financing activities (35,760) (220) (35,980) Cash provided by/(used in) investing activities 19,773 (4) 19,769 Net increase in cash 1, ,155 Cash and cash equivalents, beginning of period 13, ,290 Cash and cash equivalents, end of period $14,974 $471 $15,445 For the three months ended June 30, 2014 Per Financial Statements Equity-Accounted Investments All Properties Cash provided by operating activities $22,690 $1,292 $23,982 Cash provided by/(used in) financing activities 19,401 (268) 19,133 Cash used in investing activities (12,327) (6) (12,333) Net increase in cash 29,764 1,018 30,782 Cash and cash equivalents, beginning of period 12, ,681 Cash and cash equivalents, end of period $42,342 $1,121 $43,463 For the six months ended June 30, 2015 Per Financial Statements Equity-Accounted Investments All Properties Cash provided by/(used in) operating activities $40,734 ($412) $40,322 Cash used in financing activities (59,492) (438) (59,930) Cash provided by investing activities 21,120 1,212 22,332 Net increase in cash 2, ,724 Cash and cash equivalents, beginning of period 12, ,721 Cash and cash equivalents, end of period $14,974 $471 $15,445 For the six months ended June 30, 2014 Per Financial Statements Equity-Accounted Investments All Properties Cash provided by operating activities $43,725 $970 $44,695 Cash provided by/(used in) financing activities 1,854 (533) 1,321 Cash (used in)/provided by investing activities (16,314) 9 (16,305) Net increase in cash 29, ,711 Cash and cash equivalents, beginning of period 13, ,752 Cash and cash equivalents, end of period $42,342 $1,121 $43,463 MORGUARD.COM 35

36 PART XI SUMMARY OF QUARTERLY RESULTS TABLE 52 The following table provides a summary of quarterly operating results for the last eight quarters. June 30, March 31, December 31, September 30, Revenue from real estate properties $71,851 $74,730 $77,215 $72,966 Property operating expenses 28,602 29,483 30,578 28,445 Property management fees 2,337 2,362 2,446 2,333 Net operating income 40,912 42,885 44,191 42,188 Interest expense 14,810 15,068 15,159 15,265 General and administrative 1,128 1,159 1,530 1,230 Other income (167) (175) (207) (168) Income before fair value (loss)/gains on real estate properties, loss on sale of real estate properties and net income/(loss) from real estate properties held for sale 25,141 26,833 27,709 25,861 Fair value (losses)/gains on real estate properties (45,229) (11,047) (6,043) (5,038) Loss on sale of real estate properties (22) (15) Net income/(loss) from real estate properties held for sale (129) 237 1,843 (837) Net income for the period ($20,217) $16,023 $23,487 $19,971 June 30, March 31, December 31, September 30, Revenue from real estate properties $73,233 $73,255 $69,646 $67,193 Property operating expenses 27,993 29,164 27,676 26,102 Property management fees 2,334 2,361 1,965 2,138 Net operating income 42,906 41,730 40,005 38,953 Interest expense 15,200 15,274 15,014 14,548 General and administrative 1,443 1, ,382 Amortization expense 7 10 Other income (3) (1) Income before fair value gains on real estate properties and net income from real estate properties held for sale 26,263 25,231 24,029 23,014 Fair value gains on real estate properties 4,163 10,079 25,927 8,158 Net income from real estate properties held for sale 3, , Net income for the period $34,151 $36,273 $53,560 $31,680 MORGUARD.COM 36

37 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 BALANCE SHEETS In thousands of Canadian dollars June 30, December 31, As at Notes ASSETS Non-current assets Real estate properties 3 $2,838,392 $2,866,235 Equity-accounted investments 4 32,577 30,770 2,870,969 2,897,005 Current assets Amounts receivable 10(b) 33,516 42,635 Prepaid expenses and other assets 11,303 1,054 Cash and cash equivalents 14,974 12,612 59,793 56,301 Real estate properties held for sale 17 9,600 63,190 Total assets $2,940,362 $3,016,496 LIABILITIES AND UNITHOLDERS EQUITY Non-current liabilities Mortgages payable 6 $1,061,070 $1,111,360 Convertible debentures payable 7 147, ,541 Other liabilities 3,526 4,111 1,211,714 1,262,012 Current liabilities Mortgages payable 6 104,324 71,096 Accounts payable and accrued liabilities 51,078 41,650 Bank indebtedness 8 4, , ,673 Mortgages payable on real estate properties held for sale 17 5,433 29,730 Total liabilities 1,372,549 1,409,415 Unitholders' equity 12 1,567,813 1,607,081 $2,940,362 $3,016,496 Commitments and contingencies 14 See accompanying notes to the condensed consolidated financial statements. On behalf of the Trustees: David King, Chairman of the Board of Trustees Edward Kress, Trustee MORGUARD.COM 37

38 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 STATEMENT OF INCOME AND COMPREHENSIVE INCOME In thousands of Canadian dollars, except per-unit amounts Three months ended Six months ended June 30, June 30, June 30, June 30, Notes Revenue from real estate properties $70,701 $73,925 $145,243 $148,129 Property operating expenses 11(a) 28,402 28,832 58,194 59,016 Property management fees 10(a) 2,308 2,375 4,670 4,784 Net operating income 39,991 42,718 82,379 84,329 Interest expense 9 14,807 15,334 29,848 30,746 General and administrative 11(b) 1,128 1,433 2,287 2,662 Other income (167) (342) Income before fair value (losses)/gains and net income from equity-accounted investments 24,223 25,951 50,586 50,921 Fair value (losses)/gains on real estate properties, net 3 (45,295) 7,168 (56,462) 17,416 Net income from equity-accounted investments ,032 1,682 2,087 Net (loss)/income for the period (20,217) 34,151 (4,194) 70,424 OTHER COMPREHENSIVE INCOME Items to be reclassified to profit or loss in subsequent periods: Amortization cash flow hedges Comprehensive (loss)/income ($19,961) $34,403 ($3,683) $70,927 NET (LOSS)/INCOME PER-UNIT 12(d) Basic ($0.33) $0.55 ($0.07) $1.13 Diluted ($0.33) $0.51 ($0.07) $1.05 See accompanying notes to the condensed consolidated financial statements. MORGUARD.COM 38

39 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 STATEMENT OF UNITHOLDERS' EQUITY In thousands of Canadian dollars, except number of units Number of Units Issue of Units Retained Earnings Equity Component of Convertible Debentures Contributed Surplus Accumulated Other Comprehensive Loss Total Unitholders Equity Balance, at January 1, ,221,836 $625,824 $927,184 $1,526 $338 ($2,134) $1,552,738 Net income for the period 36,273 36,273 Distributions to unitholders (14,794) (14,794) Issue of units DRIP 8, (140) Amortization cash flow hedges Balance, at March 31, ,230, , ,523 1, (1,883) 1,574,468 Repurchase of units (100,000) (1,006) (667) (1,673) Net income for the period 34,151 34,151 Distributions to unitholders (14,713) (14,713) Issue of units DRIP 12, (208) Amortization cash flow hedges Balance, at June 30, ,142, , ,086 1, (1,631) 1,592,485 Debentures converted Net income for the period 43,458 43,458 Distributions to unitholders (29,384) (29,384) Issue of units DRIP 24, (443) Amortization cash flow hedges Balance, at December 31, ,167, , ,717 1, (1,124) 1,607,081 Net income for the period 16,023 16,023 Distributions to unitholders (14,792) (14,792) Issue of units DRIP 6, (125) Amortization cash flow hedges Balance, at March 31, ,174, , ,823 1, (869) 1,608,567 Repurchase of units (362,119) (3,641) (2,384) (6,025) Net loss for the period (20,217) (20,217) Distributions to unitholders (14,768) (14,768) Issue of units DRIP 8, (144) Amortization cash flow hedges Balance, at June 30, ,820,935 $622,252 $944,310 $1,526 $338 ($613) $1,567,813 See accompanying notes to the condensed consolidated financial statements. MORGUARD.COM 39

40 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 STATEMENT OF CASH FLOW In thousands of Canadian dollars Three months ended Six months ended June 30, June 30, June 30, June 30, Notes OPERATING ACTIVITIES Net (loss)/income for the period ($20,217) $34,151 ($4,194) $70,424 Items not affecting cash 13(a) 45,094 (8,056) 54,809 (19,230) (Contributions)/distributions from equity-accounted investments 4 (714) 166 (125) 843 Deferred leasing cost additions (1,273) (1,002) (2,321) (1,732) Tenant incentive additions (19) (178) (86) Net change in non-cash operating assets and liabilities 13(b) (5,112) (2,569) (7,257) (6,494) Cash provided by operating activities 17,759 22,690 40,734 43,725 FINANCING ACTIVITIES Proceeds from new mortgages 206, ,177 Repayment of principal Repayments on maturity (96,629) (219,157) Repayment due to early extinguishment of mortgage (6,125) (6,125) Principal instalment repayments (8,839) (8,174) (17,818) (15,879) Amortization of fair value adjustments (3) (33) (7) (122) Financing cost on new mortgages (830) (964) Decrease in bank indebtedness 8 (15,333) (4,927) (5,000) Issue of loan payable 10(b) 60,000 Repayment of loan payable 10(b) (50,000) (60,000) Distributions to unitholders (14,768) (14,713) (24,590) (24,528) Units repurchased for cancellation (6,025) (1,673) (6,025) (1,673) Cash (used in)/provided by financing activities (35,760) 19,401 (59,492) 1,854 INVESTING ACTIVITIES Acquisition of loan receivable 10(b) (5,000) Settlement of loan receivable 10(b) 15,000 15,000 Capital expenditures on real estate properties (9,653) (8,152) (23,061) (12,139) Acquisition of real estate properties (1,474) (4,175) (1,474) (4,175) Net proceeds from sale of real estate properties 13(b) 15,900 35,655 Cash provided by/(used in) investing activities 19,773 (12,327) 21,120 (16,314) Net change in cash and cash equivalents during the period 1,772 29,764 2,362 29,265 Cash and cash equivalents, beginning of period 13,202 12,578 12,612 13,077 Cash and cash equivalents, end of period $14,974 $42,342 $14,974 $42,342 See accompanying notes to the condensed consolidated financial statements. MORGUARD.COM 40

41 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 NOTES For the three months and six months ended June 30, 2015 In thousands of Canadian dollars, except unit, per-unit amounts and where otherwise noted NOTE 1 NATURE AND DESCRIPTION OF THE TRUST Morguard Real Estate Investment Trust ( the Trust ) is a closed-end real estate investment trust established on June 18, 1997, under the laws of the Province of Ontario. The Trust commenced active operations on October 14, The Trust owns a diverse portfolio of retail, office and other commercial 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 47.42% of the outstanding units, as at June 30, Morguard is a real estate company, which owns a diversified portfolio of multi-unit residential, retail, hotel, office and industrial properties. Morguard also provides advisory and management services to institutional and other investors. NOTE 2 STATEMENT OF COMPLIANCE AND SIGNIFICANT ACCOUNTING POLICIES These condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB") and thus do not contain all of the disclosures applicable to the annual audited consolidated financial statements. These condensed consolidated financial statements use the same accounting policies and methods of their application as the most recent annual consolidated financial statements and should be read in conjunction with the most recent annual audited consolidated financial statements. The condensed consolidated financial statements were approved and authorized for issue by the Board of Trustees on August 5, NOTE 3 REAL ESTATE PROPERTIES Real estate properties consist of the following: June 30, December 31, As at Income producing properties $2,785,885 $2,822,074 Properties under development 24,857 16,511 Land held for development 27,650 27,650 $2,838,392 $2,866,235 MORGUARD.COM 41

42 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 Reconciliations of the carrying amounts for real estate properties at the beginning and end of the current financial period are set out below: As at June 30, 2015 Income Producing Properties Properties Under Development Land Held for Development Total Real Estate Properties Balance as at December 31, 2014 $2,822,074 $16,511 $27,650 $2,866,235 Additions: Acquisitions and investments 1,474 1,474 Capital expenditures/capitalized costs 7,998 9,950 17,948 Tenant improvements, tenant incentives and commissions 7,572 7,572 Reclassifications 1,604 (1,604) Fair value losses (56,320) (56,320) Other changes 1,483 1,483 Balance as at June 30, 2015 $2,785,885 $24,857 $27,650 $2,838,392 As at December 31, 2014 Income Producing Properties Properties Under Development Land Held for Development Total Real Estate Properties Balance as at December 31, 2013 $2,831,269 $20,839 $17,250 $2,869,358 Additions: Acquisitions and investments 23,935 23,935 Capital expenditures/capitalized costs 15,228 17,937 33,165 Tenant improvements, tenant incentives and commissions 11,512 11,512 Reclassifications (6,520) (3,610) 10,130 Reclassification to properties held for sale (48,540) (14,650) (63,190) Reclassification from equity-accounted investments 19,000 19,000 Disposition (41,042) (41,042) Fair value gains/(losses) 14,974 (4,005) ,239 Other changes 2,258 2,258 Balance as at December 31, 2014 $2,822,074 $16,511 $27,650 $2,866,235 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. MORGUARD.COM 42

43 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 The table below provides further details of the average discount rate and terminal cap rate by business segments: Maximum June 30, 2015 December 31, 2014 Minimum Weighted Average Maximum Minimum Weighted Average RETAIL Discount rate 8.3% 6.0% 6.8% 8.5% 6.0% 6.8% Terminal cap rate 7.8% 5.3% 6.0% 7.8% 5.3% 6.0% OFFICE Discount rate 8.0% 6.0% 6.8% 7.8% 6.0% 6.8% Terminal cap rate 7.5% 5.3% 6.1% 7.5% 5.3% 6.0% OTHER Discount rate 7.8% 7.0% 7.5% 7.5% 7.0% 7.4% Terminal cap rate 7.5% 6.5% 7.0% 7.3% 6.5% 6.9% Using the direct capitalization income approach to corroborate the discounted cash flow method, the properties were valued using capitalization rates in the range of 5.0% to 7.5% applied to a stabilized net operating income (December 31, % to 7.5%), resulting in an overall weighted average capitalization rate of 5.9% (December 31, %). The total stabilized annual net operating income as at June 30, 2015, was $164,571 (December 31, 2014 $165,736). Values are most sensitive to changes in discount rates, capitalization rates and timing or variability of cash flow. Excluded from the above analysis is a retail property located in British Columbia, where the highest and best use is a redevelopment to mixed residential and commercial use that has been valued accordingly. As at June 30, 2015, the discount rate for this property was 3.5% (December 31, %) and the terminal cap rate was 3.0% (December 31, %). Dispositions The following table provides details of dispositions completed by the Trust during the reporting period: Date Property Sale Mortgage Operating Property Name Sold Type GLA Price Payable Income Lesmill, ON May 15, 2015 Other 27,577 $6,350 $ $ Finch, ON April 1, 2015 Other 210,123 $10,000 $6,125 $ Sparks/361 Queen, ON February 17, 2015 Office/Other 86,372 $37,692 $17,835 $150 Cedar Pointe Business Park, ON July 2, 2014 Office 350,797 $41,900 $13,800 $1,218 Net Acquisitions On June 4, 2014, the Trust and a major Canadian pension fund, each acquired a 50% interest in a 35,000 square foot office building, located in Ottawa, Ontario for a total purchase price of $4,037 plus other acquisition costs of $128. The Trust accounted for the purchase as an asset acquisition. The allocation of the total cost for the Trust s 50% acquisition is as follows: Total acquisition costs: Purchase price cash $4,037 Transaction costs 128 Total purchase price $4,165 MORGUARD.COM 43

44 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 On July 25, 2014, the Trust acquired the remaining 50% interest in a limited partnership that owns and operates a 78,000 square-foot class A office complex located in Calgary, Alberta, for a total purchase price of $19,000 plus other costs of $77. The Trust accounted for the purchase as a business combination. The allocation of the total cost for the Trust s acquisition is as follows: Total acquisition costs: Purchase price cash $11,549 Purchase price assumed working capital 7,451 Other costs 77 Total purchase price $19,077 NOTE 4 EQUITY-ACCOUNTED INVESTMENTS On December 22, 2011, the Trust and a major Canadian pension fund each acquired a 50% interest in a limited partnership that owns and operates a 304,000 square foot class A office complex located in downtown Edmonton, Alberta, in which the Trust has a total original net investment of $28,008. The Trust has joint control over the limited partnership and accounts for its investment using the equity method. On December 22, 2011, the Trust and a major Canadian pension fund each acquired a 50% interest in a limited partnership that owns and operates a 78,000 square foot class A office complex located in Calgary, Alberta, in which the Trust had a total original net investment of $8,666. The Trust had joint control over the limited partnership and accounted for its investment using the equity method. The Trust acquired the remaining 50% interest in this limited partnership on July 25, 2014, and consolidates its 100% interest. June 30, December 31, As at Balance, beginning of period $30,770 $44,857 Equity income/(loss) 1,682 (20) Distributions to partners (1,095) (2,518) Contributions from partners 1,220 Reclassification adjustments on purchase: Real estate properties (19,000) Mortgages payable 7,581 Working capital (130) Balance, end of period $32,577 $30,770 The following details the Trust s share of the limited partnerships' aggregated assets, liabilities and results of operations accounted for under the equity method for the following periods: June 30, December 31, As at Real estate properties $62,750 $62,750 Current assets Total assets $63,472 $63,044 Non-current liabilities $28,770 $29,225 Current liabilities 2,125 3,049 Total liabilities $30,895 $32,274 MORGUARD.COM 44

45 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 Three months ended Six months ended June 30, June 30, June 30, June 30, Revenue from real estate properties $1,623 $2,192 $3,274 $4,293 Property operating expenses ,064 1,426 Net operating income 1,112 1,437 2,210 2,867 Other expenses (285) (366) (572) (726) Fair value gains/(losses) on real estate properties 28 (39) 44 (54) Net income for the period $855 $1,032 $1,682 $2,087 NOTE 5 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 decision-making 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 condensed consolidated financial statements. Property Trust's Ownership Share Jointly Controlled Operations Location Type Third Street Calgary, AB Office 50% 50% Scotia Place Edmonton, AB Office 20% 20% Prairie Mall Grande Prairie, AB Retail 50% 50% Heritage Place Ottawa, ON Office 50% 50% Standard Life Centre Ottawa, ON Office 50% 50% 77 Bloor Toronto, ON Office 50% 50% Woodbridge Square Woodbridge, ON Retail 50% 50% 825 Des Erables Salaberry-de-Valleyfield, QC Other 50% 50% Place Innovation St. Laurent, QC Office 50% 50% Dispositions (see note 3 and 17) 350 Sparks Ottawa, ON Office 50% 361 Queen Ottawa, ON Other 50% The following amounts, included in these condensed consolidated financial statements, represent the Trust s proportionate share of the assets and liabilities of the 9 co-ownerships as at June 30, 2015, and the 11 co-ownerships as at December 31, 2014, and the results of operations for the three and six months ended June 30, 2015, and June 30, 2014: June 30, December 31, As at Assets $485,766 $483,792 Assets properties held for sale 38,531 Liabilities 198, ,192 Liabilities properties held for sale 18,803 MORGUARD.COM 45

46 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 Three months ended Six months ended June 30, June 30, June 30, June 30, Revenue $13,383 $14,161 $27,624 $28,186 Expenses 8,363 8,860 17,301 17,727 Income before fair value adjustments 5,020 5,301 10,323 10,459 Fair value (losses)/gains on real estate properties (7,612) 41 (7,251) (2,857) Net (loss)/income for the period ($2,592) $5,342 $3,072 $7,602 NOTE 6 MORTGAGES PAYABLE Mortgages payable consist of the following: June 30, December 31, As at Mortgages payable before deferred financing costs $1,169,040 $1,186,480 Premium on acquired debt 4 11 Deferred financing costs (3,650) (4,035) Mortgages payable $1,165,394 $1,182,456 Mortgages payable non-current $1,061,070 $1,111,360 Mortgages payable current 104,324 71,096 Mortgages payable $1,165,394 $1,182,456 The aggregate principal repayments and balances maturing on the mortgages payable as at June 30, 2015, together with the weighted average contractual rate on debt maturing in the year indicated, are as follows: Principal Instalment Repayments Balances Maturing Total Weighted Average Contractual Rate on Balance Maturing 2015 (remainder of year) $17,481 $36,925 $54, % ,035 50,485 83, % ,668 50,289 82, % ,648 55,464 86, % , , , % Thereafter 64, , , % $203,907 $965,133 $1,169, % Substantially all of the Trust s rental properties and related rental revenues have been pledged as collateral for the mortgages payable. NOTE 7 CONVERTIBLE DEBENTURES PAYABLE 2012 Debentures On October 31, 2012, the Trust issued a $150,000 principal amount of 4.85% convertible unsecured subordinated Debentures ( 2012 Debentures ) maturing on October 31, 2017 (the Maturity Date ), of which a $50,000 principal amount was purchased by Morguard at the offering price. Interest is payable semi-annually, not in advance, on April 30 and October 31 of each year, commencing on April 30, MORGUARD.COM 46

47 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 The Trust s convertible debentures, with the exception of the value assigned to the holders conversion option, have been recorded as debt on the consolidated balance sheets. The following table summarizes the allocation of the principal amount and related issue costs of the debentures at the date of original issue. The portion of issue costs attributable to the liability of $4,183 has been capitalized and will be amortized over the term to maturity, while the remaining amount of $45 has been charged to equity. Transaction Date Principal Amount Issued Liability Equity October 31, 2012 $150,000 $148,428 $1,572 Issue costs (4,228) (4,183) (45) $145,772 $144,245 $1,527 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 units per $1,000 principal amount of 2012 Debentures, subject to adjustment. As at June 30, 2015, $15 (December 31, 2014 $15) of the 2012 Debentures had been converted into units. The liability and equity component of these debentures has been included in unitholders equity under issue of units. As at June 30, 2015, the 2012 Debentures payable consist of the following: June 30, December 31, As at Convertible debentures payable liability $148,428 $148,428 Convertible debentures payable accretion Debentures converted (15) (15) Convertible debentures payable before issue costs 149, ,043 Issue costs (2,083) (2,502) Convertible debentures payable $147,118 $146,541 Interest and principal payments on the 2012 Debentures are as follows: Interest Principal Total 2015 $7,274 $ $7, ,274 7, , , ,259 $21,822 $149,985 $171,807 Redemption Rights Each 2012 Debenture is redeemable any time from November 1, 2015, to the close of business on October 31, 2016, in whole or in part, on at least 30 days' prior notice at a redemption price equal to par plus accrued and unpaid interest, at the Trust s sole option provided that the weighted average trading price of the units on the Toronto Stock Exchange ("TSX") for the 20 consecutive trading days ending five trading days prior to the date on which the notice of redemption is given is not less than 125% of the conversion price. 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. MORGUARD.COM 47

48 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 Repayment Options Payment Upon Redemption or Maturity The Trust may satisfy its obligation to repay the principal amounts of the 2012 Debentures, in whole or in part, by delivering units of the Trust. In the event that the Trust elects to satisfy its obligation to repay principal with units of the Trust, the number of units issued is obtained by dividing the principal amount of the 2012 Debentures by 95% of the weighted average trading price of the units on the TSX for the 20 consecutive trading days ending five trading days prior to the date fixed for redemption or the maturity date, as applicable. Interest Payment Election The Trust may elect, subject to applicable regulatory approval, to issue and deliver units of the Trust to the Debenture Trustee in order to raise funds to pay interest on the 2012 Debentures in which event the holders of the 2012 Debentures will be entitled to receive a cash payment equal to the interest payable from the proceeds of the sale of such units. NOTE 8 BANK INDEBTEDNESS The Trust has credit facilities and operating lines of credit totalling $70,000 (December 31, 2014 $70,000), which renew annually and are secured by fixed charges on specific properties owned by the Trust. As at June 30, 2015, the Trust had borrowed $nil (December 31, 2014 $4,927) and issued letters of credit in the amount of $290 (December 31, 2014 $290) related to these facilities. The bank credit agreements include certain restrictive covenants and undertakings by the Trust. As at June 30, 2015, and December 31, 2014, the Trust was in compliance with all covenants and undertakings. As the bank indebtedness is current and at prevailing market rates, the carrying value of the debt as at June 30, 2015, approximates fair value. MORGUARD.COM 48

49 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 NOTE 9 INTEREST EXPENSE The components of interest expense are as follows: Three months ended Six months ended June 30, June 30, June 30, June 30, Interest on mortgages payable $12,455 $12,480 $24,958 $24,941 Amortization of deferred financing costs mortgages Amortization of premium on acquired debt (3) (33) (7) (122) Interest on mortgages payable 12,651 12,629 25,377 25,176 Interest on convertible debentures payable 1,813 1,814 3,607 3,608 Accretion on convertible debentures payable, net Amortization of deferred financing costs convertible debentures Interest on convertible debentures payable 2,094 2,080 4,184 4,154 Interest on bank indebtedness Amortization of cash flow hedges Interest on loan payable and other Capitalized interest (216) (16) (383) (23) Interest on loans payable and other ,284 $14,807 $15,334 $29,848 $30,746 NOTE 10 RELATED PARTY TRANSACTIONS With the exception of Note 17, all related party transactions are summarized as follows: (a) Agreement With Morguard Investments Limited Under the property management agreement, the Trust pays MIL fees for property management services, capital expenditure administration, information system support activities and risk management administration. Property management fees average approximately 3.3% of gross revenue from the income producing properties owned by the Trust. The management agreement is renewed annually to ensure fees paid reflect fair value for the services provided. Under a leasing services arrangement, the Trust may, at its option, use MIL for leasing services. Leasing fees range from 2% to 6% of the total minimum rent of new leases. Fees for the renewal of a lease are half of the fees for a new lease. Leasing services include lease documentation. The Trust has employed the services of MIL for the acquisition of properties on a case-by-case basis. Fees are generally based on the acquisition price of the properties and are capitalized in the case of an asset acquisition. MIL is a tenant at three of the Trust s properties. The Trust has employed the services of MIL for the appraisal of its real estate properties as required for IFRS reporting purposes. Fees are generally based on the size and complexity of each property and are expensed as part of the Trust s professional and compliance fees. MORGUARD.COM 49

50 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 During the period, the Trust incurred/(earned) the following: Three months ended Six months ended June 30, June 30, June 30, June 30, Property management fees $2,325 $2,414 $4,735 $4,859 Acquisition fee Disposition fee Appraisal/valuation fees Information services Leasing fees ,616 1,146 Project administration fees Project management fees Risk management fees Internal audit fees Off-site administrative charges Rental revenue (53) (85) (124) (169) $4,297 $4,041 $8,549 $7,761 The following amounts relating to MIL are included in the consolidated balance sheets: June 30, December 31, As at Accounts payable and accrued liabilities, net $581 $1,149 (b) Revolving Loan With Morguard The Trust has a revolving loan agreement with Morguard that provides for borrowings or advances of up to $50,000. The promissory notes are interest-bearing at the lender s borrowing rate and are due on demand subject to available funds. On December 10, 2013, the revolving loan agreement was temporarily amended for a period of 60 days for either party to borrow up to $90,000 at the same interest rate terms. The temporary amendment expired on February 10, Loan Payable to Morguard During the three and six months ended June 30, 2015, there were no advances or repayments, and as at June 30, 2015, and December 31, 2014, there was no loan payable owing to Morguard. During the three and six months ended June 30, 2015, the Trust did not incur interest expense on loans payable to Morguard (June 30, 2014 $287 and $764, respectively). Loan Receivable From Morguard During the three months ended June 30, 2015, a gross amount of $nil was advanced to Morguard, and $15,000 was repaid. During the six months ended June 30, 2015, a gross amount of $5,000 was advanced to Morguard, and $15,000 was repaid. As at June 30, 2015, the total amount receivable from Morguard was $20,000 (December 31, 2014 $30,000). For the three months ended June 30, 2015, the Trust earned interest income in the amount of $167 (June 30, 2014 $nil), and for the six months ended June 30, 2015 interest income amounted to $342 (June 30, $nil). As at June 30, 2015, the interest rate on the loan receivable from Morguard was 2.19% (December 31, %). MORGUARD.COM 50

51 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 (c) Sublease With Morguard The Trust subleases office space from Morguard. For the three months ended June 30, 2015, the Trust incurred rent expense in the amount of $52 (June 30, 2014 $48). For the six months ended June 30, 2015, the Trust incurred rent expense in the amount of $102 (June 30, 2014 $92). (d) Stock-Based Compensation With Morguard Morguard has granted certain officers of the Trust Stock Appreciation Rights ("SARs"), which entitle such officers to receive a cash payment equal to the excess of the market price of Morguard s common shares at the time of exercise over the exercise price of the right. The SARs granted generally vest over 10 years. The fair values of these SARs are charged to the Trust by Morguard and are recorded as compensation expense by the Trust over their respective vesting periods. On March 20, 2008, 30,000 SARs were granted at an exercise price of $ As at June 30, 2015, no further SARs have been granted. As at June 30, 2015 and December 31, 2014, there were no SARs payable outstanding. For the three months ended June 30, 2015, the compensation expense amounted to $nil (June 30, 2014 $351). For the six months ended June 30, 2015, the compensation expense amounted to $nil (June 30, 2014 $397). (e) Amounts Receivable From and Accounts Payable to Morguard Other than the revolving loan, the following additional amounts relating to Morguard are included in the consolidated balance sheets: June 30, December 31, As at Amounts receivable $7 $ Accounts payable $11 $8 (f) Rental Revenue From Morguard Morguard is a tenant in one of the Trust s properties. For the three months ended June 30, 2015, the Trust earned rental revenue in the amount of $28 (June 30, 2014 $26), and for the six months ended June 30, 2015, the Trust earned rental revenue in the amount of $55 (June 30, 2014 $52). NOTE 11 EXPENSES (a) Property Operating Expenses Property operating expenses consist of the following: Three months ended Six months ended June 30, June 30, June 30, June 30, Property taxes $13,213 $12,908 $26,715 $26,219 Repairs and maintenance 6,703 6,952 14,047 14,270 Utilities 3,923 3,845 8,222 8,769 Other operating expenses 4,563 5,127 9,210 9,758 $28,402 $28,832 $58,194 $59,016 MORGUARD.COM 51

52 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 (b) General and Administrative General and administrative expenses consist of the following: Three months ended Six months ended June 30, June 30, June 30, June 30, Trustees fees and expenses $62 $62 $130 $120 Professional and compliance fees Other administrative expenses 641 1,005 1,326 1,790 $1,128 $1,433 $2,287 $2,662 NOTE 12 UNITHOLDERS' EQUITY (a) Units Outstanding The Trust is authorized to issue an unlimited number of units. The following table summarizes the changes in units for the period from January 1, 2014, to June 30, 2015: Year ended June 30, December 31, As at Balance, beginning of period 62,167,654 62,221,836 Distribution reinvestment plan 15,400 45,209 Debentures converted 609 Repurchase of units (362,119) (100,000) Balance, end of period 61,820,935 62,167,654 Total distributions recorded, accrued and paid during the six months ended June 30, 2015, amounted to $29,560 (December 31, 2014 $58,891). On June 15, 2015, the Trust declared a distribution in the amount of $0.08 per unit for the month of June This distribution was paid to unitholders on July 15, 2015, prior to the date the condensed consolidated financial statements were authorized for issue by the Board of Trustees of the Trust. On July 15, 2015, the Trust declared a distribution of $0.08 per unit payable on August 14, (b) Normal Course Issuer Bids On January 22, 2015, the Trust announced that the TSX had accepted notice filed by the Trust of its intention to make a normal course issuer bid. The notice provided that during the 12-month period commencing January 28, 2015, and ending January 27, 2016, the Trust may purchase for cancellation on the TSX up to 3,247,282 units in total, being approximately 10% of the public float of outstanding units. The daily repurchase restriction for the units is 6,953. 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 daily repurchase restriction for the 2012 Debentures is $6. 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 six months ended June 30, 2015, the Trust purchased for cancellation 362,119 units (December 31, ,000 units) for cash consideration of $6,025 (December 31, 2014 $1,673). The excess of the purchase price of the units over the average carrying value was $2,384 (December 31, 2014 $667). (c) Distribution Reinvestment Plan Under the Trust s Distribution Reinvestment Plan (the DRIP ), unitholders can elect to reinvest cash distributions into additional units at a weighted average trading price of the units on the TSX for the 20 trading days immediately preceding the applicable date of distribution. During the six months ended June 30, 2015, the Trust issued 15,400 units under the DRIP (December 31, ,209 units). MORGUARD.COM 52

53 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 (d) Net Income Per-Unit The following table sets forth the computation of basic and diluted net income per unit: Three months ended Six months ended June 30, June 30, June 30, June 30, Net (loss)/income basic ($20,217) $34,151 ($4,194) $70,424 Net (loss)/income diluted ($18,122) $36,231 ($18) $74,578 Weighted average number of units outstanding basic 62,084 62,138 62,127 62,181 Weighted average number of units outstanding diluted 68,181 71,166 68,224 71,210 Net (loss)/income per unit basic ($0.33) $0.55 ($0.07) $1.13 Net (loss)/income per unit diluted ($0.33) $0.51 ($0.07) $1.05 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 weighted average number of units outstanding for the calculation of diluted income per unit is calculated as if all convertible debentures outstanding as at June 30, 2015, had been converted into units of the Trust at the beginning of the period. NOTE 13 CONSOLIDATED STATEMENT OF CASH FLOWS (a) Items Not Affecting Operating Cash Three months ended Six months ended June 30, June 30, June 30, June 30, Fair value losses/(gains) on real estate properties, excluding properties held for sale $45,257 ($7,168) $56,320 ($17,416) Fair value losses on real estate properties held for sale Net income from equity-accounted investments (855) (1,032) (1,682) (2,087) Amortized stepped rent (104) (619) (677) (1,261) Amortized free rent (63) (10) (979) (19) Amortization cash flow hedges Amortization deferred financing Amortization tenant incentive Amortization deferred financing costs convertible debentures Accretion of convertible debentures $45,094 ($8,056) $54,809 ($19,230) MORGUARD.COM 53

54 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 (b) Net Change in Non-Cash Operating Assets and Liabilities Three months ended Six months ended June 30, June 30, June 30, June 30, Amounts receivable ($193) ($1,776) ($881) ($869) Prepaid expenses and other assets (3,930) (3,415) (10,249) (10,928) Accounts payable, accrued and other liabilities (989) 2,622 3,873 5,303 Net change in non-cash operating assets and liabilities ($5,112) ($2,569) ($7,257) ($6,494) Other supplemental cash flow information consists of the following: Interest paid $16,187 $16,472 $28,908 $29,088 Issue of units DRIP $144 $208 $269 $348 Mortgage payable transferred on sale of real estate properties $ $ $17,835 $ NOTE 14 COMMITMENTS AND CONTINGENGIES (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 June 30, 2015, committed capital expenditures in the next 12 months are estimated at $17,500. The Trust has various other contractual obligations in the normal course of operations. These contracts can be generally cancelled with 30 days' notice. (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 15 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. 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. MORGUARD.COM 54

55 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 The total managed capital for the Trust is summarized below: June 30, December 31, As at Note Total mortgages payable (including held for sale) $1,170,827 $1,212,186 Convertible debentures payable 147, ,541 Bank indebtedness 4,927 Cash and cash equivalents (14,974) (12,612) Loan receivable 10(b) (20,000) (30,000) Unitholders equity 1,567,813 1,607,081 $2,850,784 $2,928,123 The Trust s Declaration of Trust permits the Trust to incur indebtedness, provided that after giving effect to incurring or assuming any indebtedness (as defined in the Declaration of Trust), the amount of all indebtedness of the Trust is not more than 60% of the gross book value of the Trust s total assets as defined in the Declaration of Trust. The Declaration of Trust 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: June 30, December 31, As at Borrowing Limits Fixed-rate debt to gross book value of total assets 44.8% 45.0% Floating-rate debt to gross book value of total assets 15% % 0.2% Total indebtedness to gross book value of total assets 60% 44.8% 45.2% As at June 30, 2015, the Trust met all externally imposed ratios and minimum equity requirements. Mortgages Payable All mortgages payable in place for the Trust are secured against the real property assets and, as a result, have been relieved from having restrictive financial covenant requirements. Convertible Debentures Payable The Trust s unsecured subordinated convertible debentures payable have no restrictive covenants. Bank Indebtedness The Trust s loan agreements permit the Trust to incur indebtedness. The loan agreements are fixed amounts that renew annually and are secured by fixed charges on specific properties owned by the Trust. NOTE 16 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Trust s financial assets and liabilities comprise cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities, bank indebtedness, mortgages payable and convertible debentures payable. Fair values of financial assets and liabilities and discussion of risks associated with financial assets and liabilities are presented as follows. Fair Value of Financial Assets and Liabilities The fair values of cash and cash equivalents, amounts receivable, accounts payable and accrued liabilities, bank indebtedness and loan payable approximate their carrying values due to the short-term maturities of these instruments. MORGUARD.COM 55

56 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 (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 periodend. The fair value of the mortgages payable has been determined by discounting the cash flows of these financial obligations using June 30, 2015, market rates for debts of similar terms (Level 2). Based on these assumptions, the fair value as at June 30, 2015, of the mortgages payable has been estimated at $1,237,407 (December 31, 2014 $1,241,108), compared with the carrying value before deferred financing costs and premium on acquired debt of $1,169,040 (December 31, 2014 $1,186,480). The fair value of the mortgages payable varies from the carrying value due to fluctuations in interest rates since their issue. (b) Convertible Debentures Payable The fair value of the convertible debentures payable is based on its market trading price (MRT.DB.A:TSX) (Level 1). As at June 30, 2015, the convertible debentures payable before deferred financing cost has been estimated at $154,110 (December 31, 2014 $154,500), compared with the carrying value before deferred financing costs of $149,201 (December 31, 2014 $149,043). (c) Fair Value Hierarchy of Real Estate Properties The fair value hierarchy of income producing properties, properties under development and land held for development measured at fair value in the consolidated balance sheets is as follows: As at ASSETS: June 30, 2015 December 31, 2014 Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 Income producing properties $ $ $2,785,885 $ $ $2,822,074 Properties under development $ $ $24,857 $ $ $16,511 Land held for development $ $ $27,650 $ $ $27,650 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. NOTE 17 REAL ESTATE PROPERTIES HELD FOR SALE Real estate properties held for sale are assets that the Trust intends to sell rather than hold on a long-term basis and meet the criteria established in IFRS 5 for separate classification. As at December 31, 2014, the Trust's properties held for sale comprised a 50% interest in a mixed-use office and hotel complex, 350 Sparks and 361 Queen, located in downtown Ottawa, and three industrial properties, Finch, McCowan and Lesmill, all located in Toronto. On November 4, 2014, the Trust, upon the recommendation of a special committee comprised of independent trustees, executed an agreement to sell its 50% interest in 350 Sparks and 361 Queen, to Morguard, the existing 50% co-owner of these properties. On February 17, 2015, the Trust completed the sale to Morguard, for a total price of $37,692. The transaction included an assumption of the existing mortgage debt of $17,835. On December 10, 2014, the Trust entered into an agreement to sell Lesmill. On May 15, 2015, the Trust completed the sale of this property, for a total price of $6,350, less selling costs. MORGUARD.COM 56

57 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 On March 2, 2015, the Trust entered into an agreement to sell Finch. On April 1, 2015, the Trust completed the sale of this property for a total price of $10,000, less selling costs. The Trust's plan is to dispose of the remaining industrial property in MORGUARD.COM 57

58 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 NOTE 18 SEGMENTED INFORMATION The Trust aggregates its operations into two reportable business segments. Other commercial leasing activities that do not fall into these segments are presented as "Other" in the table below. Business Segments The following presents financial information for these segments: For the six months ended June 30, 2015 Retail Office Other Total Revenue from real estate properties $74,612 $67,385 $3,246 $145,243 Property operating expenses 28,802 28,017 1,375 58,194 Property management fees 2,505 2, ,670 Net operating income 43,305 37,300 1,774 82,379 Net income from equity-accounted investments (1,682) (1,682) Interest expense direct 13,979 10, ,505 Fair value losses on real estate properties 26,196 30, ,462 Segment profit/(loss) 3,130 (1,989) 953 2,094 Interest expense indirect 2,231 2, ,343 General and administrative 1,174 1, ,287 Other Income (342) (342) Net (loss)/income for the period ($275) ($5,066) $1,147 ($4,194) Real estate properties $1,604,277 $1,197,115 $37,000 $2,838,392 Additions to real estate properties $17,097 $9,886 $11 $26,994 Mortgages payable $662,307 $492,475 $10,612 $1,165,394 MORGUARD.COM 58

59 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2015 For the six months ended June 30, 2014 Retail Office Other Total Revenue from real estate properties $76,760 $67,737 $3,632 $148,129 Property operating expenses 28,923 28,298 1,795 59,016 Property management fees 2,533 2, ,784 Net operating income 45,304 37,295 1,730 84,329 Net income from equity-accounted investments (2,087) (2,087) Interest expense direct 14,575 10, ,660 Fair value (gains)/losses on real estate properties (15,164) (5,728) 3,476 (17,416) Segment profit/(loss) 45,893 34,672 (2,393) 78,172 Interest expense indirect 2,635 2, ,086 General and administrative 1,380 1, ,662 Net income/(loss) for the period $41,878 $31,129 ($2,583) $70,424 Real estate properties $1,584,923 $1,204,712 $75,382 $2,865,017 Additions to real estate properties $8,036 $9,060 $1,036 $18,132 Mortgages payable $681,856 $509,522 $22,916 $1,214,294 MORGUARD.COM 59