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FOURTH QUARTER RESULTS 2015

MORGUARD NORTH AMERICAN RESIDENTIAL REIT

MANAGEMENT’S DISCUSSION AND ANALYSIS AND CONSOLIDATED FINANCIAL STATEMENTS

Q42015

MORGUARD NORTH AMERICAN RESIDENTIAL REAL ESTATE INVESTMENT TRUST

MANAGEMENT'S DISCUSSION AND ANALYSIS | DECEMBER 31, 2015

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MANAGEMENT’S DISCUSSION AND ANALYSIS OFRESULTS OF OPERATIONS AND FINANCIAL CONDITION

TABLE OF CONTENTS

Part I Part VChairman’s Report to Unitholders 3 Liquidity and Capital Resources 21

Forward-Looking Statements Disclaimer 3 Capital Structure and Debt Profile 22

Non-IFRS Financial Measures 3 Unitholders’ Equity, Special Voting Units and

Class B LP Units 25Part IIBusiness Overview and Strategy 6 Part VIFinancial and Operational Highlights 6 Related Party Transactions 28

Significant Events 7

Real Estate Properties 8 Part VIIAverage Monthly Rent and Occupancy by Region 9 Summary of Significant Accounting Policies

and Estimates 30Part III Critical Accounting Policies and Estimates 30

Review of Operational Results 10 Financial Instruments 30

Funds From Operations and Adjusted Funds Adoption of Accounting Standards 31

From Operations 15 Risks and Uncertainties 33

Distributions 17 Controls and Procedures Concerning

Financial Information 44Part IVIncome Producing Properties 18 Part VIII

Selected Annual and Quarterly Information 46

Subsequent Events 47

Part IXOutlook 48



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PART I

CHAIRMAN’S REPORT TO UNITHOLDERSMorguard North American Residential Real Estate Investment Trust (“Morguard Residential REIT” or the “REIT”) is pleased to provide this review of operations and update on our financial performance for the year ended December 31, 2015. Unless otherwise noted, dollar amounts are stated in thousands of Canadian dollars, except per suite and REIT trust unit (“Unit”) amounts.

The following Management’s Discussion and Analysis (“MD&A”) sets out the REIT’s strategies and provides an analysis of the financial performance for the year ended December 31, 2015, and significant risks facing the business. Historical results, including trends that might appear, should not be taken as indicative of future operations or results. This MD&A should be read in conjunction with the REIT’s audited consolidated financial statements and accompanying notes for the years ended December 31, 2015 and 2014. This MD&A is based on financial information prepared in accordance with International Financial Reporting Standards (“IFRS”) and is dated February 17, 2016. Disclosure contained in this document is current to that date unless otherwise noted.

Additional information relating to Morguard Residential REIT, including the REIT’s Annual Information Form, can be found at www.sedar.com and www.morguard.com.

FORWARD-LOOKING STATEMENTS DISCLAIMERStatements contained herein that are not based on historical or current fact, including without limitation statements containing the words “anticipates”, “believes”, “may”, “continue”, “estimate”, “expects” and “will” and words of similar expression, constitute “forward-looking statements”. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, events or developments to be materially different from any future results, events or developments expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, both nationally and in the regions in which the REIT operates; changes in business strategy or development/acquisition plans; environmental exposures; financing risk; existing governmental regulations and changes in, or the failure to comply with, governmental regulations; liability and other claims asserted against the REIT; and other factors referred to in the REIT’s filings with Canadian securities regulators. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Morguard Residential REIT does not assume the obligation to update or revise any forward-looking statements.

NON-IFRS FINANCIAL MEASURESMorguard Residential REIT reports its financial results in accordance with IFRS. However, this MD&A also uses certain financial measures that are not defined by IFRS. These measures do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other reporting issuers in similar or different industries. These measures should be considered as supplemental in nature and not as substitutes for related financial information prepared in accordance with IFRS. The REIT’s management uses these measures to aid in assessing the REIT’s underlying core performance and provides these additional measures so that investors may do the same. Management believes that the non-IFRS measures described below, which supplement the IFRS measures, provide readers with a more comprehensive understanding of management’s perspective on the REIT’s operating results and performance.



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The following discussion describes the non-IFRS measures the REIT uses in evaluating its operating results:

NET OPERATING INCOME (“NOI”) AND ADJUSTED NET OPERATING INCOME (“Adjusted NOI”)NOI is defined by the REIT as revenue from income producing properties less property operating costs, realty taxes and utilities as presented in the consolidated statement of income. NOI is an important measure in evaluating the operating performance of the REIT’s income producing properties and is a key input in determining the fair value of the REIT’s properties.

NOI includes the impact of realty taxes accounted for under the International Financial Reporting Interpretations Committee (“IFRIC”) Interpretation 21, “Levies” (“IFRIC 21”). IFRIC 21 states that an entity recognizes a levy liability in accordance with the relevant legislation. The obligating event for realty taxes for the U.S. municipalities in which the REIT operates is ownership of the property on January 1 of each year for which the tax is imposed and as a result, the REIT records the entire annual realty tax expense for its U.S. properties on January 1, except for U.S. properties acquired during the year in which the realty taxes are not recorded in the year of acquisition.

Adjusted NOI represents NOI adjusted to exclude the impact of realty taxes accounted for under IFRIC 21, noted above. Adjusted NOI records realty taxes for all properties on a pro rata basis over the entire fiscal year.

A reconciliation of NOI and Adjusted NOI from the IFRS financial statement presentation of revenue from income producing properties, property operating costs, realty taxes and utilities is provided herein at “Part III, Review of Operational Results”.

FUNDS FROM OPERATIONS (“FFO”)FFO is a non-IFRS measure widely used as a real estate industry standard that supplements net income and evaluates operating performance but is not indicative of funds available to meet the REIT’s cash requirements. FFO can assist with comparisons of the operating performance of the REIT’s real estate between periods and relative to other real estate entities. FFO is computed by the REIT in accordance with the current definition of the Real Property Association of Canada (“REALpac”) and is defined as net income attributable to unitholders adjusted for fair value adjustments, distributions on the Class B LP Units, realty taxes accounted for under IFRIC 21, deferred income taxes (on the REIT’s U.S. properties), gains/losses on the sale of real estate properties and other non-cash items. FFO payout ratio compares distributions declared to FFO. Distributions declared is calculated based on the monthly distribution per Unit of $0.05 multiplied by the weighted average number of Units outstanding (including Class B LP Units) during the period. The REIT considers FFO to be a useful measure for reviewing its comparative operating and financial performance.

A reconciliation of net income attributable to unitholders (an IFRS measure) to FFO is presented under the section Part III, “Funds From Operations and Adjusted Funds From Operations”.

ADJUSTED FUNDS FROM OPERATIONS (“AFFO”)AFFO is a non-IFRS measure widely used in the real estate industry to measure cash available for distributions. AFFO is defined as FFO adjusted by: (i) adding amortization of deferred financing costs assumed by the REIT on the 17 properties that were acquired concurrent with the completion of the initial public offering (the “Initial Properties”), amortization of tenant incentives and amortization of cash flow hedges; (ii) deducting a reserve for maintenance capital expenditures and the amortization of mark-to-market adjustments on mortgages; and (iii) making such other adjustments as may be determined by the Trustees in their discretion. Included in the calculation of AFFO is a provision for maintenance capital expenditures estimated by management which represents capital expenditures that are required to maintain the existing earning potential of a property. Significant judgment is required to classify capital investments. AFFO payout ratio compares distributions declared to AFFO. Distributions declared is calculated based on the monthly distribution per Unit of $0.05 multiplied by the weighted average number of Units outstanding (including Class B LP Units) during the period. AFFO should not be interpreted as an indicator of cash generated from operating activities as it does not consider changes in working capital.



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A reconciliation of cash provided by operating activities (an IFRS measure) to AFFO is presented under the section Part III, “Funds From Operations and Adjusted Funds From Operations”.

INDEBTEDNESSIndebtedness (as defined in the Declaration of Trust) is a measure of the amount of debt financing utilized by the REIT. Indebtedness is presented in this MD&A because management considers this non-IFRS measure to be an important measure of the REIT’s financial position.

GROSS BOOK VALUEGross book value (as defined in the Declaration of Trust) is a measure of the value of the REIT’s assets. Gross book value is presented in this MD&A because management considers this non-IFRS measure to be an important measure of the REIT’s asset base and financial position.

INDEBTEDNESS TO GROSS BOOK VALUE RATIOIndebtedness to gross book value ratio is a compliance measure in the Declaration of Trust and establishes the limit for financial leverage of the REIT. Indebtedness to gross book value ratio is presented in this MD&A because management considers this non-IFRS measure to be an important measure of the REIT’s financial position.

INTEREST COVERAGE RATIOInterest coverage ratio measures the amount of cash flow available to meet annual interest payments on the REIT’s indebtedness. Generally, the higher the interest coverage ratio, the lower the credit risk. Interest coverage ratio is presented in this MD&A because management considers this non-IFRS measure to be an important measure of the REIT’s operating performance and financial position.

INDEBTEDNESS COVERAGE RATIOIndebtedness coverage ratio measures the amount of cash flow available to meet annual principal and interest payments on the REIT’s indebtedness. Generally, the higher the indebtedness coverage ratio, the higher the capacity for additional debt. Indebtedness coverage ratio is presented in this MD&A because management considers this non-IFRS measure to be an important measure of the REIT’s operating performance and financial position.



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PART II

BUSINESS OVERVIEW AND STRATEGYThe REIT is an unincorporated open-ended real estate investment trust established pursuant to a declaration of trust dated March 1, 2012, and as amended and restated on April 18, 2012 (the “Declaration of Trust”), under and governed by the laws of the Province of Ontario. The Units of the REIT trade on the Toronto Stock Exchange (“TSX”) under the symbol “MRG.UN”.

The REIT has been formed to own multi-suite residential rental properties across Canada and the United States. The objectives of the REIT are to: (i) generate stable and growing cash distributions on a tax-efficient basis; (ii) enhance the value of the REIT’s assets and maximize long-term value of the Units through active asset and property management; and (iii) expand the asset base of the REIT and increase AFFO per Unit primarily through acquisitions and improvement of its properties through targeted and strategically deployed capital expenditures.

The REIT’s internal growth strategy will focus on maximizing cash flow from its portfolio. The REIT intends to increase cash flows by maximizing occupancy and average monthly rent (“AMR”), taking into account local conditions in each of its geographic markets, managing its operating costs as a percentage of revenues and strengthening its asset base through its building infrastructure improvement and capital expenditure programs.

The REIT’s external growth strategy is focused on opportunities to acquire additional multi-suite residential properties located in urban centres and major suburban regions in Canada and the United States that satisfy the REIT’s investment criteria, as well as generating greater cash flow from its properties. The REIT will seek to leverage its relationship with Morguard Corporation (“Morguard”) to access acquisition opportunities that satisfy the REIT’s investment criteria. Additionally, subject to limited exceptions, the REIT has the right of first opportunity to acquire the existing interests in Morguard’s multi-suite residential properties prior to any disposition by Morguard to a third party.

FINANCIAL AND OPERATIONAL HIGHLIGHTSAs at December 31,(In thousands of dollars, except as noted otherwise) 2015 2014

Operational InformationNumber of properties 45 44Total suites 13,102 12,850Occupancy percentage 94.8% 96.0%AMR - Canada (in actual dollars) $1,272 $1,246AMR - U.S. (in actual U.S. dollars) US$1,002 US$945

Summary of Financial InformationGross book value(1) $2,160,015 $1,832,287

Indebtedness(2) $1,186,131 $1,022,555Indebtedness to gross book value ratio 55% 56%Weighted average mortgage interest rate(3) 3.8% 3.9%Weighted average term to maturity on mortgages payable (years) 5.1 5.6Exchange rates - Canadian dollar to United States dollar $0.72 $0.86Exchange rates - United States dollar to Canadian dollar $1.38 $1.16

(1) Gross book value (as defined in the Declaration of Trust) includes the impact of any fair value adjustments.

(2) Indebtedness (as defined in the Declaration of Trust) represents the outstanding principal amount of mortgages payable, Class C LP Units (including the present

value of tax payment), Debentures (defined below) of $60,000 and borrowings from the Morguard Facility.

(3) Represents the contractual interest rates on mortgages payable and the Retained Debt (defined below).



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FINANCIAL AND OPERATIONAL HIGHLIGHTS (CONTINUED)

For the years ended December 31,(In thousands of dollars, except per Unit amounts) 2015 2014

Summary of Financial InformationInterest coverage ratio(1) (2) 1.96 1.85

Indebtedness coverage ratio(1) (3) 1.33 1.33

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

NOI $104,182 $90,217

Adjusted NOI(1) $103,710 $90,217

Net operating margin(1) 52% 52%

FFO - basic $51,112 $44,726

FFO - diluted $53,902 $47,516

FFO per Unit - basic $1.10 $0.96

FFO per Unit - diluted $1.07 $0.94

AFFO - basic $39,627 $31,031

AFFO - diluted $42,417 $33,821

AFFO per Unit - basic $0.85 $0.67

AFFO per Unit - diluted $0.84 $0.67

Distributions per Unit $0.60 $0.60

FFO payout ratio 54.6% 62.5%

AFFO payout ratio 70.5% 89.6%

Weighted average number of Units outstanding (in thousands):

Basic(4) 46,545 46,522

Diluted(4) (5) 50,416 50,393

Average exchange rates - Canadian dollar to United States dollar $0.78 $0.91

Average exchange rates - United States dollar to Canadian dollar $1.28 $1.10

(1) Excludes realty taxes accounted for under IFRIC 21, which have been adjusted on a pro rata basis over the entire fiscal year.

(2) Interest coverage ratio is defined as net income before interest expense, income taxes, fair value adjustments, foreign exchange loss (gain), and the impact of the

realty taxes accounted for under IFRIC 21, divided by interest expense excluding distributions on Class B LP Units and fair value adjustments but including interest

on the Debentures.

(3) Indebtedness coverage ratio is defined as net income before interest expense, income taxes, fair value adjustments, foreign exchange loss (gain), and the impact

of realty taxes accounted for under IFRIC 21, divided by interest expense including the contractual payments on mortgages payable and Class C LP Units and

interest on the Debentures and excluding distributions on Class B LP Units and any fair value adjustments.

(4) For purposes of calculating FFO and AFFO per Unit, Class B LP Units are included as Units outstanding on both a basic and diluted basis.

(5) Includes dilutive impact of the Debentures.

SIGNIFICANT EVENTSACQUISITIONOn September 1, 2015, the REIT acquired a 51% interest in a garden-style property comprising 252 suites located in Cooper City, Florida (the “Monterra Acquisition”), for a purchase price of $73,862 (US$56,045), including closing costs.



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REAL ESTATE PROPERTIESAs at December 31, 2015, the REIT’s property portfolio consists of 14 Canadian multi-suite residential properties consisting of 12 high-rise, three mid-rise and 56 low-rise buildings and 31 U.S. multi-suite residential low-rise properties consisting of 305 two-storey buildings and 226 three-storey buildings, comprising a total of 13,102 residential suites. The properties are primarily located in urban centres and major suburban regions in Ontario, Alberta, Alabama, Colorado, Florida, Georgia, Louisiana, North Carolina and Texas.

The following table details the geographic distribution of the REIT’s portfolio as at December 31, 2015:

Geographic Region (In thousands of dollars, except as otherwise noted)

Number ofProperties

Total Suites(1)

% of thePortfolio

(based onsuites)

IFRS Valueof IncomeProducingProperties

Adjusted NOIfor the Year

EndedDecember 31,

2015Canadian propertiesToronto 5 1,937 14.8% $258,310 $11,082Mississauga 7 2,219 16.9% 451,000 19,797Kitchener 1 472 3.6% 78,500 4,122Edmonton 1 277 2.1% 63,000 3,260

14 4,905 37.4% 850,810 38,261U.S. propertiesU.S. - Southeast(2) 24 5,858 44.7% 878,134 41,936

U.S. - Other(3) 7 2,339 17.9% 453,399 23,51331 8,197 62.6% 1,331,533 65,449

Total 45 13,102 100.0% $2,182,343 $103,710

(1) Total suites include non-controlling interest; the REIT, on a proportionate basis, has ownership of 12,845 suites.

(2) Represents properties located in Alabama, Florida, Georgia and Louisiana.

(3) Represents properties located in Colorado, North Carolina and Texas.

Approximately 85% of the suites in Canada are located in Toronto and Mississauga, both of which form part of the Greater Toronto Area (“GTA”). The GTA is Canada’s most significant economic cluster and contains the largest concentration of people. The geographic distribution of the remaining suites serves to add stability to the REIT’s cash flows as it reduces the REIT’s vulnerability to economic fluctuations affecting any particular region.



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AVERAGE MONTHLY RENT AND OCCUPANCY BY REGIONThe following table details AMR (in actual dollars), stated in local currency, and occupancy of the REIT’s portfolio for the following periods:

.

.AMR/Suite at

.

.AMR/Suite at

.

.%

.

.Occupancy at

.

.Occupancy at

December 31, December 31, Inc/ December 31, December 31,Geographic Region 2015 2014 Dec 2015 2014Canadian Properties (in Canadian dollars)Toronto $1,154 $1,136 1.6% 98.0% 96.8%Mississauga 1,379 1,349 2.2% 97.7% 98.4% (1)

Kitchener 1,196 1,168 2.4% 98.5% 98.1%Edmonton 1,374 1,359 1.1% 97.8% 98.9%

Canada (in Canadian dollars) 1,272 1,246 2.1% 97.9% 97.7%

U.S. Properties (in U.S. dollars)U.S. - Southeast(2) 962 895 7.5% 92.5% 94.8%U.S. - Others(3) 1,102 1,065 3.5% 93.8% 95.1%U.S. (in U.S. dollars) 1,002 945 6.0% 92.9% 94.9%

Total in local currencies $1,103 $1,058 4.3% 94.8% 96.0%

(1) During the second quarter of 2014, 12 suites damaged in a fire that occurred at a property located in Mississauga, Ontario, which had been excluded from the

comparative analysis, became operational starting September 1, 2015.

(2) Represents properties located in Alabama, Florida, Louisiana and Georgia, and includes the Monterra Acquisition having an AMR/suite at December 31, 2015 of

US$1,629 and occupancy of 97.0%.


As at December 31, 2015, AMR per suite in Canada increased by 2.1% compared to December 31, 2014, mainly due to rental rate increases in line with the Ontario guideline rate in 2015 and rental rate increases on suite turnover.

As at December 31, 2015, AMR per suite in the U.S. increased by 6.0% compared to December 31, 2014, mainly due to rental rate increases in 2015 and higher AMR of US$1,629 from the Monterra Acquisition. Excluding the Monterra Acquisition, AMR over the same period increased by 3.9%.

As at December 31, 2015, occupancy in Canada increased to 97.9% from 97.7% at December 31, 2014, reflecting stable demand predominantly in the Ontario region.

As at December 31, 2015, occupancy in the U.S. decreased to 92.9% from 94.9% at December 31, 2014. The decrease in occupancy was attributable to seasonality, current economic conditions, and the REIT’s focus on achieving rental rate growth. Markets remain strong, and the REIT continues to rent with minimal incentives. Market rents are constantly monitored and increased where appropriate, with the objective of maximizing revenue growth while maintaining stable occupancy.



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PART III

REVIEW OF OPERATIONAL RESULTSThe REIT’s operational results for the years ended December 31, 2015 and 2014, are summarized below:

For the years ended December 31,(In thousands of dollars) 2015 2014

Revenue from income producing properties $198,442 $174,815Property operating expenses

Property operating costs 55,068 48,824Realty taxes 22,162 20,014Utilities 17,030 15,760

Net operating income 104,182 90,217Other expenses (income)

Interest expense 51,291 48,298Trust expenses 10,160 8,463Foreign exchange gain (2,882) (830)Other expense (income) 183 (1,543)

Income before fair value changes and income taxes 45,430 35,829Fair value gain on income producing properties, net 38,804 40,104Fair value loss on Class B LP Units (11,195) (10,506)Income before income taxes 73,039 65,427

Income taxes (current and deferred) 33,359 26,220

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

Net income attributable to:Unitholders $38,784 $38,157

Non-controlling interest 896 1,050

$39,680 $39,207

REVENUE FROM INCOME PRODUCING PROPERTIESThe higher rental revenue mainly due to rental increases and the positive impact of foreign exchange fluctuations resulted in increases in operating results for the year ended December 31, 2015, compared to 2014.

NET OPERATING INCOMEThe following tables provide the NOI for the REIT’s consolidated Canadian and U.S. operations.

The Monterra Acquisition generated NOI of $1,681 (US$1,266) for the period from September 1, 2015 to December 31, 2015. NOI includes the Monterra Acquisition and all properties owned by the REIT as there were no other changes in the property portfolio owned by the REIT throughout the current and prior periods which impacted the NOI.



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Consolidated Net Operating IncomeThe following table provide the consolidated NOI for the REIT’s Canadian and U.S. properties:

For the years ended December 31,(In thousands of dollars) 2015 2014Revenue from income producing properties $198,442 $174,815Property operating expenses

Operating costs 55,068 48,824Realty taxes 22,162 20,014Utilities 17,030 15,760

Total property operating expenses 94,260 84,598NOI $104,182 $90,217Realty taxes accounted for under IFRIC 21 (472) —Adjusted NOI $103,710 $90,217

For the year ended December 31, 2015, consolidated Adjusted NOI increased by $13,493 (or 15.0%) to $103,710, compared to $90,217 in 2014. The increase was due to an increase in Adjusted NOI in Canada and the U.S. of $2,035 (or 5.6%) and US$2,294 (or 4.7%), respectively, and the change in the U.S. foreign exchange rate, which increased Adjusted NOI by $9,164. The increase in Adjusted NOI was due to higher rental revenue as well as lower overall operating expenses in Canada and the Monterra Acquisition, partially offset by an increase in operating costs in the U.S.

Canadian Properties Net Operating IncomeThe following table provide the NOI for the REIT’s Canadian properties:

For the years ended December 31,(In thousands of dollars) 2015 2014Revenue from income producing properties $74,406 $72,535Property operating expenses

Operating costs 17,035 17,312Realty taxes 8,330 8,448Utilities 10,780 10,549

Total property operating expenses 36,145 36,309NOI $38,261 $36,226

For the year ended December 31, 2015, NOI from the Canadian properties increased by $2,035 (or 5.6%) to $38,261, compared to $36,226 in 2014. The increase in NOI is primarily due to an increase in rental revenue of $1,871, resulting from an increase in AMR and an increase in occupancy mainly from the completion of the balcony restoration project at a property in Toronto and a decrease in operating expenses of $164 due from lower repairs and maintenance costs, and lower realty taxes as a result of successful tax appeals, partially offset by higher utilities resulting from rate increases.



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U.S. Properties Net Operating IncomeThe following table provide the NOI results for the U.S. properties:

For the years ended December 31,(In thousands of U.S. dollars, except as otherwise noted) 2015 2014Revenue from income producing properties $96,920 $92,583Property operating expenses

Operating costs 29,697 28,510

Realty taxes 10,804 10,462

Utilities 4,878 4,719

Total property operating expenses 45,379 43,691

NOI (in U.S. dollars) 51,541 48,892Realty taxes accounted for under IFRIC 21 (355) —

Adjusted NOI (in U.S. dollars) 51,186 48,892

Exchange amount to Canadian dollars 14,263 5,099Adjusted NOI (in Canadian dollars) $65,449 $53,991

For the year ended December 31, 2015, Adjusted NOI from U.S. properties increased by US$2,294 (or 4.7%) to US$51,186, compared to US$48,892 in 2014. Excluding the Monterra Acquisition, Adjusted NOI increased by US$1,383 or (2.8%). The increase in Adjusted NOI (excluding the Monterra Acquisition) is primarily due to an increase in revenue of US$2,641 resulting from rental rate increases, partially offset by higher vacancy, as well as an increase in operating expenses due to higher property taxes and repairs and maintenance costs. The strengthening of the U.S. dollar also increased Adjusted NOI by $9,164.

INTEREST EXPENSEInterest expense consists of the following:

For the years ended December 31,(In thousands of dollars) 2015 2014Interest on mortgages $37,065 $33,979Distributions on Class C LP Units - interest 3,645 3,754Interest on mortgages and Retained Debt 40,710 37,733Distributions on Class C LP Units - tax payment 517 485Interest on the Debentures 2,790 2,790Interest on indebtedness and other — 499Amortization of mark-to-market adjustment on mortgages (6,740) (7,457)Amortization of deferred financing costs:

Initial Properties 440 818Remaining properties 2,544 2,490Debentures 466 446

Amortization of cash flow hedge 284 218Fair value gain on conversion option on the Debentures (53) (57)Interest expense before distributions on Class B LP Units 40,958 37,965Distributions on Class B LP Units 10,333 10,333

$51,291 $48,298

Total interest expense increased by $2,993 during the year ended December 31, 2015, to $51,291, compared to $48,298 in 2014. The increase for the year ended December 31, 2015, is predominantly due to an increase in interest on mortgages of $3,086, mainly due to foreign exchange rate fluctuation of $3,558 on the REIT’s U.S. mortgages.



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Morguard retained the mortgages on the four Canadian properties (the "Retained Debt") that were sold to the REIT and also retained the deferred financing costs associated with the Retained Debt. Morguard remains responsible for the interest and principal payments on the Retained Debt, and the Retained Debt is secured by a charge on the related properties. In consideration of the Retained Debt, Morguard received Class C LP Units on which distribution payments are made in an amount sufficient to permit Morguard to satisfy amounts payable with respect to principal and interest of the Retained Debt and the tax payment that is attributable to any distributions on the Class C LP Units. The portion of the distributions that represents the interest and tax components associated with the Retained Debt that had been classified as interest expense for the year ended December 31, 2015, amounted to $4,162 (2014 - $4,239).

Total interest payment on the mortgages and Retained Debt amounted to $40,710 for the year ended December 31, 2015 (2014 - $37,733). As at December 31, 2015, the weighted average interest rate on the mortgages and Class C LP Units amounted to 3.82% (December 31, 2014 - 3.91%).

Under IFRS, the Class B LP Units are classified as financial liabilities, and the corresponding distributions paid to the unitholders are classified as interest expense under IFRS. The REIT believes these distribution payments do not represent financing charges because these amounts are payable only if the REIT declares distributions and only for the amount of any distributions declared, both of which are at the discretion of the Board of Trustees as outlined in the Declaration of Trust. For the year ended December 31, 2015, total distributions paid and accrued to Class B LP unitholders amounted to $10,333 (2014 - $10,333).

TRUST EXPENSESTrust expenses consist of the following:

For the years ended December 31,(In thousands of dollars) 2015 2014Asset management fees and distributions $8,128 $6,691Professional fees 1,159 1,125Public company expenses 595 461Other 278 186

$10,160 $8,463

Trust expenses increased by $1,697 during the year ended December 31, 2015, to $10,160, compared to $8,463 in 2014. The increase is predominantly due to an increase in asset management fees and distributions (see Part VI, “Related Party Transactions”) as well as an increase in public company and other trust expenses.

FOREIGN EXCHANGE GAINThe foreign exchange gain increased by $2,052 during the year ended December 31, 2015, to $2,882, compared to $830 in 2014. The increase is predominantly due to the strengthening of the U.S. dollar against the Canadian dollar as well as the U.S. dollar advances to Morguard during the year.

OTHER EXPENSE (INCOME)Other expense (income) represents interest income earned from the Morguard Facility on advances made to Morguard during the year, net of other expenses. The details of net interest income during the year ended December 31, 2015, are discussed herein under the section Part V, “Capital Structure and Debt Profile”.

Other income during the year ended December 31, 2014, mainly represents a gain from early extinguishment of mortgages payable (see Part V, “Capital Structure and Debt Profile”).

NET FAIR VALUE GAIN ON INCOME PRODUCING PROPERTIESThe REIT elected to adopt the fair value model to account for its income producing properties, and changes in fair value each period have been recognized as fair value gain or (loss) in the consolidated statement of income.



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Fair value adjustments are determined based on the movement of various parameters on a quarterly basis, including stabilized NOI and capitalization rates. For the year ended December 31, 2015, the REIT recognized a net fair value gain of $38,804 (2014 - $40,104). The net fair value gain comprises an increase of $39,030 at the U.S. properties, which was predominantly due to an increase in stabilized NOI and a slight decrease in capitalization rates at certain U.S. properties. The overall net fair value gain was reduced by a $226 fair value loss at the Canadian properties as stabilized NOI increases were offset by capital investments.

FAIR VALUE LOSS ON CLASS B LP UNITSThe Class B LP Units are classified as financial liabilities in accordance with IFRS and, as a result, are recorded at their fair value at each reporting date. As at December 31, 2015, the REIT valued the Class B LP Units based on the closing price of the TSX-listed Units which resulted in a fair value liability of $183,770 (December 31, 2014 - $172,575) and for the year ended December 31, 2015, a corresponding fair value loss of $11,195 (2014 - $10,506) (see Part V, “Capital Structure and Debt Profile”).

INCOME TAXESThe REIT is a “mutual fund trust and a real estate investment trust” pursuant to the Income Tax Act (Canada) and, accordingly, is not taxable on its income earned on its Canadian properties to the extent that the income is distributed to its unitholders. However, this exemption does not extend to the REIT’s U.S. properties, which are held by U.S. subsidiaries that are taxable legal entities.

Income taxes consist of the following:

For the years ended December 31,(In thousands of dollars) 2015 2014Current $166 $109

Deferred 33,193 26,111

Income taxes $33,359 $26,220



MORGUARD.COM 15

FUNDS FROM OPERATIONS AND ADJUSTED FUNDS FROM OPERATIONSThe following table provides a reconciliation of FFO and AFFO to their closely related financial statement measurement for the following periods:

For the years ended December 31,(In thousands of dollars, except per Unit amounts) 2015 2014

Net income attributable to unitholders $38,784 $38,157Add (deduct):Realty taxes accounted for under IFRIC 21(1) (241) —Fair value gain on conversion option on the Debentures (53) (57)Distributions on Class B LP Units recorded as interest expense(2) 10,333 10,333Foreign exchange gain (2,882) (830)Fair value gain on income producing properties, net (38,804) (40,104)Non-controlling interests’ share of fair value gain on income producing properties (413) 610Fair value loss on Class B LP Units 11,195 10,506Deferred income tax provision 33,193 26,111FFO - basic $51,112 $44,726Interest expense on the Debentures 2,790 2,790FFO - diluted $53,902 $47,516FFO per Unit - basic $1.10 $0.96FFO per Unit - diluted $1.07 $0.94

FFO - basic $51,112 $44,726Add (deduct):Amortization of mark-to-market adjustments on mortgages (6,740) (7,457)Amortization of deferred financing costs assumed on the Initial Properties 440 818Non-controlling interests’ share of amortization of deferred financing costs assumed onthe Initial Properties (8) (35)Gain from early extinguishment of mortgages payable — (1,517)Amortization of tenant incentive and cash flow hedge 565 218Maintenance capital expenditures(3) (5,742) (5,722)AFFO - basic 39,627 31,031Interest expense on the Debentures 2,790 2,790AFFO - diluted $42,417 $33,821AFFO per Unit - basic $0.85 $0.67AFFO per Unit - diluted $0.84 $0.67Weighted average number of Units outstanding (in thousands):Basic(4) 46,545 46,522Diluted(4) (5) 50,416 50,393

(1) Realty taxes accounted for under IFRIC 21 and excludes non-controlling interests’ share.

(2) Under IFRS, the Class B LP Units are considered financial liabilities and, as a result of this classification, their corresponding distribution amounts are considered

interest expense. The REIT believes these distribution payments do not truly represent financing charges because these amounts are payable only if the REIT

declares distributions and only for the amount of any distributions declared, both of which are at the discretion of the Board of Trustees as outlined in the Declaration

of Trust. Therefore, these distributions are excluded from the calculation of FFO.

(3) Included in AFFO is a provision made to estimate the level of capital expenditures required to sustain the earning capacity of the REIT’s properties based on

management’s estimate of $450 (in actual dollars) per suite annually multiplied by the weighted average number of residential suites owned during the period.

(4) For purposes of calculating FFO and AFFO per Unit, Class B LP Units are included as Units outstanding on both a basic and diluted basis.

(5) Includes dilutive impact of the Debentures.



MORGUARD.COM 16

Basic FFO for the year ended December 31, 2015, increased by $6,386, or 14.3%, to $51,112 ($1.10 per Unit), compared to $44,726 ($0.96 per Unit) in 2014. The increase is mainly due to an increase in Adjusted NOI of $13,493, partially offset by an increase in interest expense of $2,989 (excluding distributions on Class B LP Units and fair value adjustments), an increase in trust expenses of $1,697, and a decrease in other income resulting from the 2014 gain on early extinguishment of mortgage payable of $1,517. The change in foreign exchange rates had a positive impact on FFO of $4,932, an amount that is predominantly included in the increase to NOI and interest expense.

Basic AFFO for the year ended December 31, 2015, increased by $8,596 or 27.7%, to $39,627 ($0.85 per Unit), compared to $31,031 ($0.67 per Unit) in 2014. The increase was primarily driven by the increase in FFO and the 2014 deduction included in AFFO from the gain on early extinguishment of mortgage payable of $1,517.

The following table provides a reconciliation of AFFO to cash provided by operating activities:

For the years ended December 31,(In thousands of dollars) 2015 2014

Cash provided by operating activities $42,584 $36,210Add/(deduct):Additions to tenant incentives 259 456Net change in non-cash operating assets and liabilities 160 (5,236)Net income attributable to non-controlling interest (896) (1,050)Amortization of deferred financing cost, excluding Initial Properties (2,544) (2,490)Amortization of deferred financing costs on the Debentures (466) (446)Amortization of tenant incentive — (284)Distributions on Class B LP Units recorded as interest expense(1) 10,333 10,333Distributions on Class C LP Units - present value of tax payment (517) (485)Foreign exchange gain (2,882) (830)Non-controlling interests’ share of fair value gain on income producing properties (413) 610Non-controlling interests’ share of amortization of deferred financing costs assumedon the Initial Properties (8) (35)Maintenance capital expenditures(2) (5,742) (5,722)Non-controlling interests’ share of realty taxes accounted for under IFRIC 21 231 —AFFO - basic $39,627 $31,031

(1) Under IFRS, the Class B LP Units are considered financial liabilities and, as a result of this classification, their corresponding distribution amounts are considered

interest expense. The REIT believes these distribution payments do not truly represent financing charges because these amounts are payable only if the REIT

declares distributions and only for the amount of any distributions declared, both of which are at the discretion of the Board of Trustees as outlined in the Declaration

of Trust. Therefore, these distributions are excluded from the calculation of AFFO.

(2) Included in AFFO is a provision made to estimate the level of capital expenditures required to sustain the earning capacity of the REIT’s properties based on

management’s estimate of $450 (in actual dollars) per suite annually multiplied by the weighted average number of residential suites owned during the period.

Management believes that AFFO is an important measure of the REIT’s economic performance. As an alternate measure of cash flows from operations, AFFO is indicative of the REIT’s ability to pay distributions to unitholders. AFFO is a non-IFRS measure that does not have a standard meaning as defined by IFRS, and therefore it may not be comparable to AFFO as presented by other entities.



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DISTRIBUTIONSThe REIT currently pays monthly distributions to unitholders of $0.05 per Unit or $0.60 per Unit on an annual basis. The Trustees have discretion with respect to the timing and amounts of distributions. For the year ended December 31, 2015, total distributions amounted to $27,927 (2014 - $27,912).

2015 2014

For the years ended December 31,(In thousands of dollars) Units

Class B LPUnits Total Units

Class B LPUnits Total

Distributions paid and declared $17,333 $10,333 $27,666 $17,365 $10,333 $27,698Distributions – DRIP 261 — 261 214 — 214Total $17,594 $10,333 $27,927 $17,579 $10,333 $27,912

The following table summarizes distributions paid to holders of Units in relation to net income and cash provided by operating activities:

For the years ended December 31,(In thousands of dollars) 2015 2014 2013

Net income $39,680 $39,207 $57,543

Cash provided by operating activities 42,584 36,210 38,697

Distributions - Units(1) 17,594 17,579 16,740

Excess of net income over distributions 22,086 21,628 40,803

Excess of cash provided by operating activities over distributions $24,990 $18,631 $21,957

(1) Excludes distributions on Class B LP Units since these were recorded as interest expense and, therefore, were deducted in calculating net income and cash provided

by operating activities.

In determining the annual level of distributions to unitholders, the REIT looks at forward-looking cash flow information, including forecasts and budgets, and the future prospects of the REIT. Furthermore, the REIT does not consider periodic cash flow fluctuations resulting from items such as the timing of property operating costs, property tax instalments or semi-annual Debenture interest payments in determining the level of distributions to unitholders in any particular quarter. Additionally, in establishing the level of distributions to the unitholders, the REIT considers the impact of, among other items, the future growth in the income producing properties, the impact of future acquisitions and capital expenditures related to the income producing properties. As a result, the REIT compares distributions to AFFO, a non-IFRS measure, to ensure sufficient funds are retained for reinvestment.

The following table summarizes distributions paid to holders of Units and Class B LP Units in relation to AFFO:


AFFO $39,627 $31,031 $26,135Distributions

Units 17,594 17,579 16,740Class B LP Units 10,333 10,333 10,333

27,927 27,912 27,073

Excess (shortfall) of AFFO over distributions $11,700 $3,119 ($938)



MORGUARD.COM 18

PART IV

INCOME PRODUCING PROPERTIESThe REIT has selected the fair value model to account for its income producing properties. The following table provides the geographic allocation of the income producing properties for the following periods:

As at December 31,(In thousands of Canadian dollars, unless otherwise stated) 2015 2014Canadian PropertiesOntario $787,810 $780,990Alberta 63,000 62,000Total Canadian Properties 850,810 842,990U.S. Properties (in U.S. dollars)Southeast Alabama 78,700 73,803 Florida 320,800 250,800 Georgia 103,800 99,400 Louisiana 75,490 73,170Other Colorado 78,700 72,600 North Carolina 113,100 111,400 Texas 135,800 131,100Total U.S. Properties (in U.S. dollars) 906,390 812,273Exchange amount to Canadian dollars 348,054 130,045Total U.S. Properties (in Canadian dollars) 1,254,444 942,318Total income producing properties $2,105,254 $1,785,308

The value of income producing properties increased by $319,946 as at December 31, 2015, to $2,105,254, compared to $1,785,308 at December 31, 2014. The increase is mainly the result of the following:

• Net fair value gain on the properties of $38,804;• Acquisition of investment property of $73,862;• Capitalization of property enhancements of $17,842; and• An increase of $189,460 due to the change in U.S. dollar foreign exchange rates.

APPRAISAL CAPITALIZATION RATESMorguard’s appraisal division consists of Appraisal Institute of Canada (“AIC”) designated Accredited Appraiser Canadian Institute (“AACI”) members who are qualified to offer valuation and consulting services and expertise for all types of real property, all of whom are knowledgeable and have recent experience in the fair value techniques for investment properties. AACI designated members must adhere to AIC’s Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) and undertake ongoing professional development. Morguard’s appraisal division is responsible for determining the fair value of investment properties every quarter. The team reports directly to a senior executive, and the internal valuation team's valuation processes and results are reviewed by management at least once every quarter, in line with the REIT’s quarterly reporting dates.



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The REIT utilizes the direct capitalization income method to determine the fair value of its income producing properties. This method requires that rental income from current leases and key assumptions about rental income, vacancies and inflation rates, among other factors, are used to determine a one-year stabilized net operating income forecast for each individual property within the REIT’s portfolio and also considers any capital expenditures anticipated within the year. A capitalization rate was also determined for each property based on market information related to the external sale of similar properties within a similar location. These factors were used to determine the fair value of investment properties at each reporting period.

As at December 31, 2015, using the direct capitalization income approach, the properties were valued using capitalization rates in the range of 4.8% to 8.0% (December 31, 2014 - 4.8% to 8.3%), applied to a stabilized net operating income of $107,869 (December 31, 2014 - $93,649), resulting in an overall weighted average capitalization rate of 5.3% (December 31, 2014 - 5.4%).

The stabilized occupancy and average capitalization rates by location are set out in the following table:

December 31, 2015 December 31, 2014Occupancy Capitalization Rates Occupancy Capitalization Rates

Max. Min. Max. Min.Weighted

Average Max. Min. Max. Min.WeightedAverage

CanadaOntario 97.0% 97.0% 5.0% 4.8% 4.9% 97.0% 97.0% 5.0% 4.8% 4.9%Alberta 97.7% 97.7% 5.0% 5.0% 5.0% 97.7% 97.7% 5.0% 5.0% 5.0%

United StatesSoutheast

Alabama 94.0% 93.0% 6.3% 6.3% 6.3% 94.0% 94.0% 6.5% 6.5% 6.5%Florida 95.0% 93.5% 7.0% 5.0% 5.7% 95.0% 93.5% 7.0% 5.3% 5.8%Georgia 96.0% 95.0% 5.8% 5.3% 5.6% 96.0% 95.0% 5.8% 5.5% 5.7%Louisiana 98.1% 91.0% 8.0% 5.8% 7.1% 97.6% 91.0% 8.3% 5.8% 7.2%

OtherColorado 95.0% 95.0% 5.5% 5.5% 5.5% 95.0% 95.0% 5.8% 5.5% 5.6%North Carolina 94.0% 94.0% 5.5% 5.3% 5.4% 95.0% 94.0% 5.8% 5.5% 5.6%Texas 95.0% 95.0% 5.5% 5.3% 5.3% 95.0% 95.0% 5.5% 5.3% 5.3%

Fair values are most sensitive to changes in capitalization rates and stabilized net operating income. Generally, an increase in stabilized net operating income will result in an increase in the fair value of the income producing properties, and an increase in capitalization rates will result in a decrease in the fair value of the properties. The capitalization rate magnifies the effect of a change in stabilized net operating income, with a lower capitalization rate resulting in a greater impact on the fair value of the property than a higher capitalization rate. If the weighted average stabilized capitalization rate were to increase or decrease by 25 basis points, the value of the income producing properties as at December 31, 2015, would decrease by $93,968 or increase by $103,259, respectively.

PROPERTY CAPITAL INVESTMENTSThe REIT has a continuous capital improvement program with respect to its investment properties. The program is designed to maintain and improve the operating performance of the properties and has enhanced the value of the properties by allowing the REIT to charge higher rents or by enabling it to lower operating costs. The capital investments have also increased resident retention by ensuring that the properties retain their attractiveness to both existing and prospective tenants. In accordance with IFRS, the REIT capitalizes all capital improvement expenditures on its properties, which enhances the service potential of the property and extends the useful lives of the assets.



MORGUARD.COM 20

The REIT allocates capital expenditures to maintenance capital expenditures and value-enhancing expenditures. Maintenance capital expenditures are funded from operating cash flows and are deducted from FFO in order to estimate a sustainable amount that could be distributed to unitholders (AFFO). Maintenance capital expenditures are characterized as items that are required to maintain the existing earning potential of a property, and the REIT’s estimate of the annual maintenance capital expenditures is $450 (in actual dollars) per suite. Value-enhancing expenditures are characterized as expenditures that generate growth in the property’s NOI either by allowing the REIT to charge higher rents or by enabling it to lower operating expenses.



MORGUARD.COM 21

PART V

LIQUIDITY AND CAPITAL RESOURCESLIQUIDITYNet cash flows from operating activities represent the primary source of liquidity to fund distributions and maintenance capital expenditures. The REIT’s net cash flows from operating activities depend on the occupancy level of its rental properties, rental rates on its leases, collectibility of rent from its tenants, level of operating expenses and other factors. Material changes in these factors may adversely affect the REIT’s cash flows from operating activities and liquidity (see Part VII, “Risks and Uncertainties”).

The REIT expects to be able to meet all of its obligations, including distributions to unitholders, maintenance and property capital expenditure commitments as they become due, and to provide for the future growth of the business. The REIT expects to have sufficient liquidity as a result of cash flows from operating activities and financing available through the Morguard Facility. Accordingly, the REIT does not intend to repay maturing debt from cash flow but rather with proceeds from refinancing such debt, subject to certain conditions (see “Capital Structure and Debt Profile”).

CASH FLOWSThe following table details the changes in cash for the following periods:

For the years ended December 31,(In thousands of dollars) 2015 2014Cash provided by operating activities $42,584 $36,210

Cash used in investing activities (91,704) (24,232)

Cash provided by financing activities 23,957 13,665

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

Net effect of foreign currency translation on cash balance 1,209 1,660

Cash, beginning of year 32,553 5,250

Cash, end of year $8,599 $32,553

Cash Provided by Operating Activities Cash provided by operating activities during the year ended December 31, 2015, was $42,584, compared to $36,210 in 2014. The change during the year mainly relates to an increase in NOI of $13,965 and an increase in foreign exchange gain of $2,052, partially offset by a decrease in non-cash operating assets and liabilities of $5,396, an increase in interest on mortgages of $3,086 and an increase in trust expenses of $1,697.

Cash Used in Investing Activities Cash used in investing activities during the year ended December 31, 2015, totalled $91,704, compared to $24,232 in 2014. The cash used during the year consists of capitalization of property enhancements of $17,842 and $73,862 for the Monterra Acquisition. Cash Provided by Financing Activities Cash provided by financing activities during the year ended December 31, 2015, totalled $23,957, compared to $13,665 in 2014. The cash provided by financing activities during the year was largely due from the net proceeds from new mortgages of $125,826 and contributions from non-controlling interest of $15,762, partially offset by the repayment of mortgages of $48,881, the net borrowings from Morguard through the Morguard Facility of $23,288, mortgage principal installment repayments of $22,627, distributions paid to unitholders of $17,333, distributions to non-controlling interest of $3,043 and an increase in restricted cash of $2,300.



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CAPITAL STRUCTURE AND DEBT PROFILEThe REIT’s capital management is designed to maintain a level of capital that allows it to implement its business strategy while complying with investment and debt restrictions pursuant to the Declaration of Trust, as well as existing debt covenants, while continuing to build long-term unitholder value and maintaining sufficient capital contingencies.

The total managed capital of the REIT is as follows:

As at December 31,(in thousands of dollars) 2015 2014Mortgages payable, principal balance $1,026,839 $860,865

Class C LP Units and present value of tax payment, principal balance 99,292 101,690

Debentures, face value 60,000 60,000

Class B LP Units 183,770 172,575

Unitholders’ equity 656,117 560,835Total capitalization $2,026,018 $1,755,965

DEBT PROFILEAs at December 31, 2015, the overall leverage, as represented by the ratio of total indebtedness to gross book value, was 55%. The maximum allowable ratio under the Declaration of Trust is 70%.

The following table summarizes the key liquidity metrics:

As at December 31, 2015 2014Total indebtedness to gross book value 55% 56%

Weighted average mortgage interest rate(1) 3.82% 3.91%Weighted average term to maturity on mortgages payable (years) 5.1 5.6

(1) Represents the contractual interest rates on mortgages payable and Class C LP Units.

For the years ended December 31, 2015 2014

Interest coverage ratio (1) 1.96 1.85

Indebtedness coverage ratio (2) 1.33 1.33 (1) Interest coverage ratio is defined as net income before interest expense, income taxes, fair value adjustments, foreign exchange loss (gain) and the impact of the

realty taxes accounted for under IFRIC 21, divided by interest expense excluding distributions on Class B LP Units and fair value adjustments but including interest on

the Debentures.

(2) Indebtedness coverage ratio is defined as net income before interest expense, income taxes, fair value adjustments, foreign exchange loss (gain) and the impact of

realty taxes accounted for under IFRIC 21, divided by interest expense including the contractual payments on mortgages payable and Class C LP Units and interest

on the Debentures and excluding distributions on Class B LP Units and any fair value adjustments.

The interest coverage ratio and the indebtedness coverage ratio are calculated based on obligations associated with mortgages payable, Class C LP Units, the Debentures and the Morguard Facility.



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MORTGAGE AND CLASS C LP UNITS REPAYMENT SCHEDULE The following table reflects the principal repayment schedule for the REIT’s mortgages and Class C LP Units.

PrincipalInstalment

RepaymentsBalance

Maturing Total

WeightedAverage

ContractualRate

As at December 31, 2015(In thousands of dollars)2016 $22,779 $38,403 $61,182 3.90%

2017 19,577 232,406 251,983 4.67%

2018 18,568 106,921 125,489 4.79%

2019 18,506 106,126 124,632 3.21%

2020 18,812 8,828 27,640 4.25%

Thereafter 55,060 471,898 526,958 3.41%

$153,302 $964,582 1,117,884 3.82%

Deferred financing costs (14,281)Mark-to-market adjustment 9,794Present value of tax payment on Class C LP Units 8,247Mortgage and Class C LP Units $1,121,644

The carrying value of the Class C LP Units that were issued to Morguard in consideration for the Retained Debt (see Part III, “Review of Operational Results”) includes the present value of the tax payments, which have been estimated to amount to $8,247 as at December 31, 2015 (December 31, 2014 - $7,838).

As at December 31, 2015, the principal balance on the mortgages payable and Class C LP Units totalled $1,117,884 (December 31, 2014 - $954,717). The deferred financing costs associated with the mortgages and Class C LP Units amounted to $14,281 as at December 31, 2015 (December 31, 2014 - $13,420).

Included in mortgages payable is $9,794 of mark-to-market premiums related to mortgages assumed on the properties acquired during 2013. The mark-to-market premiums are amortized to interest expense using the effective interest method over the remaining term of the debt.

The increase in mortgages payable and Class C LP Units of $158,180 is mainly due to the following: • Repayment of mortgage on maturities totaling $48,881 relating to multi-suite residential properties in

Kitchener, Ontario and Edmonton, Alberta, which were refinanced for a total of $87,369;• Mortgage financing on the Monterra acquisition of $41,337 (US$29,590);• Financing costs on new mortgages of $2,880;• Principal repayments of $22,627;• Amortization of mark-to-market adjustments on mortgages of $6,740;• Amortization of deferred financing cost of $2,984; and• An increase of $107,102 due to the change in U.S. dollar foreign exchange rates.

On December 22, 2015, the REIT completed the refinancing of a multi-suite residential property located in Edmonton, Alberta, in the amount of $41,038, at an interest rate of 2.99% for a term of 10 years.

On December 18, 2015, the REIT completed the financing of the Monterra Acquisition, in the amount of $41,337 (US$29,590), at an interest rate of 3.86% for a term of seven years.

On February 26, 2015, the REIT completed the refinancing of a multi-suite residential property located in Kitchener, Ontario, in the amount of $46,331, at an interest rate of 2.25% for a term of 10 years.

On November 28, 2014, the REIT completed the refinancing of two multi-suite residential properties located in Mississauga, Ontario, in the amount of $71,774, at an interest rate of 3.15% for a term of 10 years.



MORGUARD.COM 24

On November 26, 2014, the REIT completed the refinancing of three multi-suite residential properties located in Texas in the amount of US$76,680, at a weighted average interest rate of 3.21% for a term of five years. The mortgages had a maturity date of September 1, 2016, and the early refinancing resulted in a $1,517 write off of the mortgages mark-to-market adjustment that was recorded in other income.

On June 30, 2014, the REIT completed the refinancing of three multi-suite residential properties located in Mississauga, Ontario, in the amount of $130,627, at an interest rate of 3.36% for a term of 10 years.

On May 29, 2014, the REIT fully repaid the mortgage on a property located in Florida in the amount of US$9,800. The mortgage had an effective interest rate of 4.97%.

The REIT’s first mortgages are registered against specific real estate assets. The mortgages and Class C LP Units bear interest at rates ranging between 2.25% and 5.60% per annum with a weighted average interest rate of 3.82% (December 31, 2014 - 3.91%) and mature between 2016 and 2026 with a weighted average term to maturity of 5.1 years (December 31, 2014 - 5.6 years).

Short-term fluctuations in working capital are funded through the Morguard Facility. The REIT anticipates meeting all future obligations and has no off balance sheet financing arrangements. Significant changes in financial condition are reviewed below.

The following table details the REIT’s mortgages and Class C LP Units that are scheduled to mature in the next two years.

2016 2017

Asset TypeNumber ofProperties

PrincipalMaturing

WeightedAverage

Interest RateNumber ofProperties

PrincipalMaturing

WeightedAverage

Interest RateCanada 1 $10,634 4.71% — $— —%

U.S. 1 27,769 3.58% 17 232,406 4.67%2 $38,403 3.90% 17 $232,406 4.67%

CONVERTIBLE DEBENTURESConvertible debentures consist of the following:

As at December 31, 2015 2014

4.65% convertible unsecured subordinated debentures $59,806 $59,806Fair value of conversion option 41 94Unamortized financing costs (1,170) (1,636)

$58,677 $58,264

On March 15, 2013, the REIT issued $60,000 principal amount of 4.65% convertible unsecured subordinated debentures (the “Debentures”) maturing on March 30, 2018 (“Maturity Date”). The underwriters' commissions attributable to the Debentures in the amount of $2,062 have been capitalized and are being amortized over their term to maturity. Morguard acquired $5,000 aggregate principal amount of the Debentures.

As at December 31, 2015, $60,000 of the face value of the Debentures was outstanding (December 31, 2014 - $60,000), of which Morguard continues to own $5,000.

Interest is payable semi-annually, not in advance, on March 31 and September 30 of each year. For the year ended December 31, 2015, $2,790 (2014 - $2,790) is included in interest expense.

Each of the Debentures can be convertible into fully paid, non-assessable and freely tradable Units at any time prior to the close of business on the last business day immediately preceding the Maturity Date or, if such



MORGUARD.COM 25

Debentures have been called for redemption, then up to, but not after, the close of business on the last business day immediately preceding the date fixed for redemption at a conversion price of $15.50 per Unit, being the ratio of approximately 64.5161 Units per $1,000 principal amount of the Debentures.

From April 1, 2016, to March 31, 2017, the Debentures shall be redeemable, in whole at any time or in part from time to time, at the option of the REIT on not more than 60 days’ and not less than 30 days’ prior written notice at a redemption price equal to the principal amount thereof plus accrued and unpaid interest up to the date fixed for redemption provided that the volume-weighted average trading price of the Units on the TSX (if the Units are then listed on the TSX) for the 20 consecutive trading days ending on the fifth trading day preceding the date on which notice of redemption is given (the “Current Market Price”) is not less than 125% of the conversion price. From April 1, 2017, and prior to the Maturity Date, the Debentures shall be redeemable, in whole at any time or in part from time to time, at the option of the REIT on not more than 60 days’ and not less than 30 days’ prior written notice at a redemption price equal to the principal amount thereof plus accrued and unpaid interest up to the date fixed for redemption. Subject to regulatory approval and other conditions, the REIT may, at its option, elect to satisfy its obligation to pay, in whole or in part, the principal amount of the Debentures that are to be redeemed or that have matured by issuing and delivering that number of freely tradable Units to the debentureholders obtained by dividing the principal amount of the Debentures being repaid by 95% of the Current Market Price on the date of redemption or maturity, as applicable.

MORGUARD FACILITYThe REIT has an unsecured revolving credit facility with Morguard (the “Morguard Facility”) that provides for borrowings or advances that can be drawn or advanced either in Canadian dollars or an equivalent amount in U.S. dollars subject to the availability of sufficient funds. If in Canadian dollars, interest will be calculated either at the Canadian prime lending rate or at the bankers’ acceptance rate plus 1.8%. If the borrowing or advance is in U.S. dollars, interest will be calculated either at the U.S. prime lending rate or at the U.S. dollar London Interbank Offered Rate (LIBOR) plus 1.7%. The maximum allowable to be borrowed or advanced under the Morguard Facility is $100,000.

As at December 31, 2015, the amount of outstanding receivable under the Morguard Facility was $24,748 (December 31, 2014 - $nil).

During the year ended December 31, 2015, the REIT earned on the Morguard Facility net interest income of $99 (2014 - interest expense of $499).

CONTRACTUAL MATURITIESThe contractual maturities and repayment obligations of the REIT’s financial liabilities for upcoming periods as at December 31, 2015, are as follows:

As at December 31, 2015 2016 2017 2018 2019 2020 Thereafter TotalMortgages payable and Class C LP Units $61,182 $251,983 $125,489 $124,632 $27,640 $526,958 $1,117,884

Mortgage interest 40,362 27,843 21,336 18,825 17,971 43,337 169,674Convertible debentures — — 58,677 — — — 58,677Accounts payable and accrued liabilities 32,126 — — — — — 32,126

$133,670 $279,826 $205,502 $143,457 $45,611 $570,295 $1,378,361

UNITHOLDERS’ EQUITY, SPECIAL VOTING UNITS AND CLASS B LP UNITSUNITSThe REIT is authorized to issue an unlimited number of Units. Each Unit confers the right to one vote at any meeting of unitholders and to participate pro rata in the distributions by the REIT and, in the event of termination or winding-up of the REIT, in the net assets of the REIT. The unitholders have the right to require the REIT to redeem their Units on demand subject to certain conditions. The Units have no par value. Upon receipt of the redemption notice by the REIT, all rights to and under the Units tendered for redemption will cease and the



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holder thereof will be entitled to receive a price per Unit (“Redemption Price”) as determined by a formula outlined in the Declaration of Trust. The Redemption Price will be paid in accordance with the conditions provided for in the Declaration of Trust.

The Trustees have discretion with respect to the timing and amounts of distributions.

Units are redeemable at any time, in whole or in part, on demand by the holders. Upon receipt of the redemption notice by the REIT, all rights to and under the Units tendered for redemption will be surrendered and the holder will be entitled to receive a price per Unit equal to the lesser of: (i) 90% of the market price of the Units on the principal exchange market on which the Units are listed or quoted for trading during the 10 consecutive trading days ending immediately prior to the date on which the Units were surrendered for redemption; or (ii) 100% of the closing market price on the principal exchange market on which the Units are listed or quoted for trading on the redemption date.

The total amount payable by the REIT, with respect to any Units surrendered for redemption during any calendar month, will not exceed $50 unless waived at the discretion of the Trustees and will be satisfied by way of a cash payment in Canadian dollars within 30 days after the end of the calendar month in which the Units were tendered for redemption. To the extent the Redemption Price payable with respect to Units surrendered for redemption exceeds $50 in any given month, such excess will be redeemed for cash or another financial instrument such as notes payable.

The following table summarizes the changes in Units for the period from December 31, 2013, to December 31, 2015:

Issued and fully paid Units (in thousands, except Unit amounts) Units AmountBalance, December 31, 2013 29,288,519 $309,736Distribution Reinvestment Plan 21,219 214Balance, December 31, 2014 29,309,738 309,950Distribution Reinvestment Plan 25,455 261Balance, December 31, 2015 29,335,193 $310,211

NORMAL COURSE ISSUER BIDSThe REIT had the approval of the TSX under its normal course issuer bid (“NCIB”) to purchase up to 2,250,000 Units and $5,500 principal amount of the Debentures. The program expired on December 20, 2015. On December 15, 2015, the REIT obtained the approval of the TSX under its NCIB to purchase up to 2,251,652 Units, being approximately 10% of the public float of outstanding Units; the program expires on December 20, 2016. The daily repurchase restriction for the Units is 7,942. Additionally, the REIT may purchase up to $5,500 principal amount of the Debentures, being 10% of the public float of outstanding Debentures. The daily repurchase restriction for the Debentures is $6. The price that the REIT would pay for any such Units or Debentures would be the market price at the time of acquisition. There were no repurchases relating to Units and Debentures during the year ended December 31, 2015.

Subsequent to December 31, 2015, the REIT repurchased 70,400 Units under its NCIB for cash consideration of $736 at a weighted average price of $10.45 per Unit (See Part VIII, “Subsequent Events”).

SPECIAL VOTING UNITS AND CLASS B LP UNITSThe REIT is authorized to issue an unlimited number of Special Voting Units. The Declaration of Trust and the exchange agreement provide for the issuance of the Special Voting Units, which have no economic entitlement in the REIT or in the distribution or assets of the REIT but are used to provide voting rights proportionate to the votes of the Units to holders of securities exchangeable into Units, including the Class B LP Units. Each Special Voting Unit is not transferable separately from the Class B LP Unit to which it is attached and will be automatically redeemed and cancelled upon exchange of the attached Class B LP Unit into a Unit.



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On April 18, 2012, the REIT issued 17,223,090 Class B LP Units to Morguard for $172,231. The Class B LP Units are non-transferable, except under certain circumstances, but are exchangeable on a one-for-one basis into Units of the REIT at any time at the option of the holder. Prior to such exchange, distributions are made on the Class B LP Units in an amount equivalent to the distribution that would have been made had the Units of the REIT been issued. Each Class B LP Unit was accompanied by a Special Voting Unit, that entitles the holder to receive notice of, attend and vote at all meetings of the unitholders. There is no value assigned to the Special Voting Units.

As at December 31, 2015, the REIT valued the Class B LP Units based on the closing price of the TSX-listed Units which resulted in a fair value liability of $183,770 (December 31, 2014 - $172,575) and a corresponding fair value loss for the year ended December 31, 2015 of $11,195 (2014 - $10,506).

For the year ended December 31, 2015, $10,333 (2014 - $10,333) is included in interest expense.

As at December 31, 2015 and 2014, there were 17,223,090 Class B LP Units issued and outstanding.

As at December 31, 2015, Morguard owned a 48.7% effective interest in the REIT through its ownership of 5,445,166 Units and 17,223,090 Class B LP Units.

As at February 17, 2016, there were 29,339,681 Units and 17,223,090 exchangeable Class B LP Units issued and outstanding.



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PART VI

RELATED PARTY TRANSACTIONSRelated party transactions that are in the normal course of operations are subject to the same processes and controls as other transactions, that is, they are subject to standard approval procedures and management oversight, but are also considered by management for reasonability against fair value. Related party transactions that are found to be material are subject to review and approval by the REIT’s audit committee, which comprises of independent directors.

AGREEMENTS WITH MORGUARD AFFILIATESThe REIT, Morguard NAR Canada Limited Partnership (the “Partnership”) and its subsidiaries entered into a series of agreements (“Agreements”) with certain Morguard affiliates whereby the following services are provided by Morguard’s affiliates under the direction of the REIT:

Property ManagementPursuant to the Agreements, Morguard’s affiliates administer the day-to-day operations of the Canadian and U.S. income producing properties, for which Morguard’s affiliates receive partnership fees and distributions equal to 3.5% of gross property revenue of the income producing properties, payable monthly. For the year ended December 31, 2015, property management fees and distributions of $6,427 (2014 - $4,699) are included in property operating costs.

Asset ManagementPursuant to the Agreements, Morguard’s affiliates have certain duties and responsibilities for the strategic management and administration of the Partnership and its subsidiaries, for which they receive partnership fees and distributions equal to 0.25% of the Partnership’s gross book value defined as acquisition cost of the REIT’s assets plus (i) fair value adjustments and (ii) accumulated amortization on property, plant and equipment. In addition, an annual fee and distribution are calculated in arrears, determined by multiplying 15% of the Partnership’s funds from operations in excess of $0.66 per Unit. For the year ended December 31, 2015, asset management fees and distributions of $8,128 (2014 - $6,267) are included in trust expenses.

AcquisitionPursuant to the Agreements, Morguard’s affiliates are entitled to receive partnership fees and distributions with respect to properties acquired, directly or indirectly, by the REIT from third parties, and the fees and distributions are to be paid upon the closing of the purchase of each such property. The fees and distributions range from 0% of the purchase price paid for properties acquired directly or indirectly from Morguard, including entities controlled by Morguard, up to 0.75% of the purchase price paid for properties acquired from third parties. For the year ended December 31, 2015, acquisition fees and distributions amounted to $281 (2014 - $nil).

FinancingPursuant to the Agreements, with respect to arranging for financing services, Morguard’s affiliates are entitled to receive partnership fees and distributions equal to 0.15% of the principal amount and associated costs of any debt financing or refinancing. For the year ended December 31, 2015, financing fees and distributions of $160 (2014 - $430) have been capitalized to deferred financing costs.

Development FeesPursuant to the Agreements, Morguard’s affiliates are entitled to receive partnership fees and distributions equal to 1.00% of development costs, where such costs exceed $1,000 and are incurred in connection with: (i) the construction, enlargement or reconstruction of any building, erection, plant, equipment or improvement on a property; or (ii) any refurbishing, additions, upgrading or restoration of or renovations to existing buildings, erections, plant, equipment or improvements, including redevelopments, other than repair and maintenance in the ordinary course of business. There were no fees and distributions relating to development services for the years ended December 31, 2015 and 2014.



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All the Agreements have an initial term of 10 years and are renewable for further terms of five years each, subject to certain notice provisions or upon the occurrence of an event of default as stipulated in the provisions of the Agreements.

HEAD LEASE WITH MORGUARDThe REIT originally entered into a head lease agreement (the “Head Lease”) with Morguard as head tenant with respect to 90 furnished suites at 3665 Arista Way, Mississauga, Ontario in 2012. Under the terms of the Head Lease, Morguard will pay the REIT rent on a quarterly basis an amount equal to 85% of gross revenue allocable to the suites subject to the Head Lease. During 2015, the REIT gradually converted all the furnished suites under the agreement to unfurnished suites and terminated the Head Lease. For the year ended December 31, 2015, the payment under the Head Lease amounted to $310 (2014 - $959). The decrease in the payment under the Head Lease for the year ended December 31, 2015, compared to the same period in 2014 is due to higher vacancy and the conversion of all the furnished suites under the agreement to unfurnished suites during 2015.

INTEREST RECEIVABLEDuring 2013, the REIT acquired from Morguard, 12 residential properties financed by assumed mortgages with an effective weighted average interest rate of 5.7% and maturing on February 1, 2017. Morguard agreed to provide instalment payments during the remaining terms of the assumed mortgages to the REIT in order to achieve an effective annual interest rate of 4.7%. As at December 31, 2015, the REIT has a receivable of $1,813 (US$1,310) from Morguard with regard to the remaining instalment payments, which is included in amounts receivable with $1,553 (US$1,122) classified as a current receivable and $260 (US$188) classified as a non-current receivable.

KEY MANAGEMENT COMPENSATIONThe executive officers of the REIT are employed by Morguard, and the REIT does not directly or indirectly pay any compensation to them. Any variability in compensation paid by Morguard to the executive officers of the REIT has no impact on the REIT’s financial obligations, including its obligations under the various Agreements with Morguard and Morguard’s affiliates.



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PART VII

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATESThe REIT's consolidated financial statements for the years ended December 31, 2015 and 2014, have been prepared in accordance with IFRS. A summary of the significant accounting policies are described in Note 2 to the audited consolidated financial statements for the year ended December 31, 2015.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods.

In determining estimates of fair market value for the REIT’s income producing properties, the assumptions underlying estimated values are limited by the availability of comparable data and the uncertainty of predictions concerning future events. Significant estimates used in determining fair value of the REIT’s income producing properties include capitalization rates and stabilized net operating income (which is influenced by vacancy rates, inflation rates and operating costs). Should any of these underlying assumptions change, actual results could differ from the estimated amounts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATESThe REIT’s critical accounting policies are those that management believes are the most important in portraying the REIT’s financial condition and results and that require the most subjective judgment and estimates on the part of management.

INCOME PRODUCING PROPERTIESIncome producing properties are recorded at fair value, determined based on available market evidence, at the balance sheet date. The critical assumptions and estimates used when determining the fair value of income producing properties are the amount of rental income from future leases reflecting current market conditions adjusted for assumption of future cash flows with respect to current and future leases, capitalization rates and expected occupancy rates. The properties are appraised using the direct capitalization income method, and judgment is applied in determining the extent and frequency of independent appraisals. To assist with the evaluation of fair value, the REIT has its Canadian properties appraised by Morguard’s appraisal division and has its U.S. portfolio appraised by independent U.S. real estate appraisal firms. Morguard’s appraisal division is staffed with accredited members of the Appraisal Institute of Canada, who collectively in 2015 valued over $13.1 billion of real estate properties in Canada for institutional and corporate clients.

FAIR VALUE OF FINANCIAL INSTRUMENTSManagement reports on a quarterly basis the fair value of financial instruments. The fair value of financial instruments approximates amounts at which these instruments could be exchanged between knowledgeable and willing parties. The estimated fair value may differ in amount from that which could be realized on an immediate settlement of the instruments. Management estimates the fair value of mortgages payable by discounting the cash flows of these financial obligations using December 31, 2015 market rates for debts of similar terms.

FINANCIAL INSTRUMENTSFinancial instruments must be classified into one of the following specified categories: at fair value through profit or loss (“FVTPL”), held-to-maturity investments, available-for-sale (“AFS”) financial assets, loans and receivables and other liabilities.

The REIT’s financial assets and liabilities comprise cash, restricted cash, amounts receivable, the Morguard Facility, accounts payable and accrued liabilities, mortgages payable, Class C LP Units, Class B LP Units and convertible debentures payable. Fair values of financial assets and liabilities are presented as follows.



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FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIESThe fair values of cash, restricted cash, amounts receivable, the Morguard Facility and accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments.

Mortgages payable, Class C LP Units and the Debentures are carried at amortized cost using the effective interest method of amortization. The estimated fair values of long-term borrowings have been determined 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 REIT at year-end.

The fair values of the mortgages payable and Class C LP Units have been determined by discounting the cash flows of these financial obligations using December 31, 2015, market rates for debts of similar terms (Category Level 2). Based on these assumptions, the fair values as at December 31, 2015, of the mortgages payable and Class C LP Units before deferred financing costs and present value of tax payment are estimated at $1,055,119 and $100,207, respectively (December 31, 2014 - $888,525 and $101,726). The fair values of the mortgages payable and Class C LP Units vary from their carrying values due to fluctuations in market interest rates since their issue.

The fair value of the Debentures is based on their market trading price (Category Level 1). As at December 31, 2015, the fair value of the Debentures before deferred financing costs has been estimated at $60,300 (December 31, 2014 - $61,140), compared with the carrying value of $59,806 (December 31, 2014 - $59,806).

The fair value of the Class B LP Units is equal to the market trading price of the Units.

ADOPTION OF ACCOUNTING STANDARDSCURRENT ACCOUNTING POLICY CHANGESIAS 40, “Investment Property” (“IAS 40”)On January 1, 2015, the REIT adopted an amendment with respect to the description of ancillary services in IAS 40, which differentiates between investment property and owner-occupied property (for example, property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, Business Combinations, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This amendment did not result in a material impact to the consolidated financial statements.

IFRS 8, “Operating Segments” (“IFRS 8”)On January 1, 2015, the REIT adopted the amendments to IFRS 8. The amendments are applied retrospectively and clarify that:

• An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (for example, sales and gross margins) used to assess whether the segments are ‘similar’.

• The reconciliation of segment assets to total assets is only required to be disclosed if a measure of segment assets is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

These amendments did not result in a material impact to the consolidated financial statements.

FUTURE ACCOUNTING POLICY CHANGESAmendments to IFRS 11, “Joint Arrangements” (“IFRS 11”): Accounting for Acquisitions of InterestsThe amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.



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The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the REIT.

Amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1”): Disclosure InitiativeThe amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify:

• The materiality requirements in IAS 1;• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial

position may be disaggregated;• That entities have flexibility as to the order in which they present the notes to financial statements; and• That the share of OCI of associates and joint ventures accounted for using the equity method must be

presented in aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to profit or loss.

Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the REIT.

IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”)In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The REIT is currently assessing the impact of IFRS 15 on its consolidated financial statements.

IFRS 9 (2014), “Financial Instruments” (“IFRS 9”)The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the requirements to measure debt-based financial assets at either amortized cost or FVTPL and to measure equity-based financial assets either as held-for-trading or as FVTOCI. No amounts are reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The REIT is currently assessing the impact of IFRS 9 on its consolidated financial statements.

IFRS 16, “Leases”In January 2016, the IASB issued IFRS 16, Leases. The new standard requires that for most leases, lessees must initially recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to use the underlying asset for the lease term. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. This standard will be effective for annual periods beginning after January 1, 2019, with early adoption permitted so long as IFRS 15 has been adopted. The REIT is currently assessing the impact this new standard will have on its consolidated financial statements.



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RISKS AND UNCERTAINTIESAn investment in securities of the REIT involves significant risks. Investors should carefully consider the risks described below, the other information described elsewhere in this MD&A (as updated by subsequent interim MD&A) and those risks set out in the REIT’s Annual Information Form (“AIF”) for the year ended December 31, 2015, dated February 17, 2016, before making a decision to buy securities of the REIT. If any of the following or other risks occur, the REIT’s business, prospects, financial condition, financial performance and cash flows could be materially adversely impacted. In that case, the ability of the REIT to make distributions to Unitholders and the Partnership to make distributions could be adversely affected, the trading price of securities of the REIT could decline and investors could lose all or part of their investment in such securities. There is no assurance that risk management steps taken will avoid future loss due to the occurrence of the risks described below or other unforeseen risks. There are certain risks inherent in an investment in the securities of the REIT and in the activities of the REIT, including those set out in the REIT’s publicly filed disclosure available on SEDAR.

The following are business risks the REIT expects to face in the normal course of its operations and management’s strategy to reduce the potential impact.

OPERATING RISKReal estate has a high fixed cost associated with ownership, and income lost due to vacancies cannot easily be minimized through cost reduction.

Tenant retention and leasing vacant suites are critical to maintaining occupancy levels. Through well-located and professionally managed properties, management seeks to increase tenant loyalty and become the landlord of choice.

Certain significant expenditures, including property taxes, maintenance costs, mortgage payments, insurance costs and related charges, must be made throughout the period of ownership of real property regardless of whether a property is producing any income. If the REIT is unable to meet mortgage payments on any property, losses could be sustained as a result of the mortgagee’s exercise of its rights of foreclosure or of sale. The REIT is also subject to utility and property tax risk relating to increased costs that the REIT may experience as a result of higher resource prices, as well as its exposure to significant increases in property taxes. There is a risk that property taxes may be raised as a result of revaluations of municipal properties and their adherent tax rates. In some instances, enhancements to properties may result in a significant increase in property assessments following a revaluation. Additionally, utility expenses, mainly consisting of natural gas and electricity service charges, have been subject to considerable price fluctuations over the past several years. Unlike commercial leases, which generally are “net” leases and allow a landlord to recover expenditures, residential leases are generally “gross” leases and the landlord is not able to pass on costs to its tenants.

In connection with the prudent management of its properties, the REIT makes significant property capital investments (for example, to upgrade and maintain building structure, balconies, parking garages, roofing, electrical and mechanical systems). The REIT commissioned building condition reports in connection with the acquisition of each of the properties and has committed to a multi-year property capital investment plan based on the findings of such reports. The REIT continually monitors its properties to ensure appropriate and timely capital repairs and replacements are carried out in accordance with its property capital investment programs. The REIT requires sufficient capital to carry out its planned property capital investment and repair and refurbishment programs to upgrade its properties or be exposed to operating business risks arising from structural failure, electrical or mechanical breakdowns, fire or water damage, etc., which may result in significant loss of earnings to the REIT. Distributions may be reduced, or even eliminated, at times when the REIT deems it necessary to make significant capital or other expenditures.



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For the year ended December 31, 2015, the portfolio diversification as a percentage of NOI is as follows:

(1) Represents properties located in Alabama, Florida, Georgia and Louisiana.


DERIVATIVES RISKS The REIT may invest in and use derivative instruments, including futures, forwards, options and swaps, to manage its utility and interest rate risks inherent in its operations. There can be no assurance that the REIT’s hedging activities will be effective. Further, these activities, although intended to mitigate price volatility, expose the REIT to other risks. The REIT is subject to the credit risk that its counterparty (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of over-the-counter instruments) may be unable to meet its obligations. In addition, there is a risk of loss by the REIT of margin deposits in the event of the bankruptcy of the dealer with whom the REIT has an open position in an option or futures or forward contract. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these contracts involves judgment and use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of these contracts. The ability of the REIT to close out its positions may also be affected by exchange-imposed daily trading limits on options and futures contracts. If the REIT is unable to close out a position, it will be unable to realize its profit or limit its losses until such time as the option becomes exercisable or expires or the futures or forward contract terminates, as the case may be. The inability to close out options, futures and forward positions could also have an adverse impact on the REIT’s ability to use derivative instruments to effectively hedge its utility and interest rate risks.

As a significant part of the REIT’s operating expenses are attributable to charges, fluctuations in the price of energy can have a material impact on the performance of the REIT, its ability to pay distributions and the value of the Units.

From time to time, the REIT may enter into agreements to receive fixed prices on all or certain of its energy requirements (principally, natural gas and electricity in certain markets) to offset the risk of rising expenditures if prices for these energy commodities increase; however, if the prices for these energy commodities decline beyond the levels set in these agreements, the REIT will not benefit from such declines in energy prices and will be required to pay the higher price contracted for such energy supplies.



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HARMONIZATION OF FEDERAL GOODS AND SERVICES TAX AND PROVINCIAL SALES TAX Currently, there is generally no HST on residential rents (for example, they are generally HST exempt). As input tax credits for HST paid can only be claimed if the payments are in respect of commercial activities and as renting residential properties is not a commercial activity, the REIT is not able to claim input tax credits for HST paid. In the future, the effect of increasing the HST rate or extending its application to a variety of new business input costs presently not subject to HST means landlords may have to absorb the additional tax costs on business inputs. FINANCING RISKThe REIT is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities secured by the REIT’s properties will not be able to be refinanced or that the terms of such refinancing will not be as favourable as the terms of existing indebtedness. To minimize this risk, the REIT has structured its debt maturities over a number of years and has negotiated fixed interest rates on all of its mortgages payable.

CREDIT RISKThe REIT’s primary business is the ownership and operation of multi-suite residential properties. The income stream, generated by tenants paying rent, can be affected by general and local economic conditions and by a change in the credit and financial stability of tenants. Examples of other local conditions that could adversely affect income include oversupply of space or reduced demand for rental space, the attractiveness of the REIT’s properties compared to other residential properties and fluctuation in real estate taxes, insurance and other operating costs. The REIT may be adversely affected if tenants become unable to meet their financial obligations under their leases.

REPORTING INVESTMENT PROPERTY AT FAIR VALUE The REIT holds investment property to earn rental income or for capital appreciation or both. All investment properties are measured using the fair value model under IFRS, whereby changes in fair value are recognized for each reporting period in the consolidated statements of income and comprehensive income. Management values each investment property based on the most probable price that a property should be sold for in a competitive and open market as of the specified date under all conditions requisite to a fair sale, such as the buyer and seller each acting prudently and knowledgeably and assuming the price is not affected by undue stimulus. Each investment property has been valued on a highest and best use basis. There is a risk that general declines in real estate markets or sales of assets by the REIT under financial or other hardship would have an impact on the fair values reported or the cash flows associated with owning or disposing of such properties. Market assumptions applied for valuation purposes do not necessarily reflect the REIT’s specific history or experience, and the conditions for realizing the fair values through a sale may change or may not be realized. Consequently, there is a risk that the actual fair values may differ, and the differences may be material. In addition, there is an inherent risk related to the reliance on and use of a single appraiser, as this approach may not adequately capture the range of fair values that market participants would assign to the investment properties. Certain ratios and covenants could be negatively affected by downturns in the real estate market and could significantly impact the REIT’s operating revenues and cash flows, as well as the fair values of the investment properties.

INVESTMENT RESTRICTIONS The REIT has been structured and operates in adherence to stringent investment restrictions and operating policies as set out in its Declaration of Trust and as applicable under tax laws relating to real estate investment trusts. These policies cover such matters as the type and location of properties that the REIT can acquire, the maximum leverage allowed, environmental matters and investment restrictions. In addition, pursuant to the Declaration of Trust, the REIT’s overall leverage is limited to 75% of its reported Gross Book Value, unless the Independent Trustees, in their discretion, determine that the maximum amount of Indebtedness should be based on the appraised value of the properties instead of Gross Book Value. As the REIT reports Gross Book Value at fair market value under IFRS, these amounts are not expected to be materially different.



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ENVIRONMENTAL RISKAs an owner and manager of real property, the REIT is subject to various laws relating to environmental matters. These laws impose liability for the cost of removal and remediation of certain hazardous materials released or deposited on properties owned or managed by the REIT or on adjacent properties. As a result, Phase 1 assessments are completed prior to the acquisition of any property. Once the property is acquired, environmental assessment programs ensure continued compliance with all laws and regulations governing environmental and related matters. The REIT’s management is responsible for ensuring compliance with environmental legislation and is required to report quarterly to the REIT’s Trustees. The REIT has certain properties that contain hazardous substances, and management has concluded that the necessary remediation costs will not have a material impact on its operations. The REIT has obtained environmental insurance on certain assets to further manage risk.

FOREIGN EXCHANGE RISKA significant portion of the REIT’s real estate properties are located in the United States. As a result, the REIT is exposed to foreign currency exchange rate risk with respect to future cash flows derived from the properties located in the U.S. The REIT’s exposure to exchange rate risk could increase if the proportion of income from properties located in the United States increases as a result of future property acquisitions in the United States.

The REIT mitigates its foreign currency exposure by offsetting certain revenues earned in United States dollars from its U.S. properties against expenses and liabilities undertaken by the REIT in United States dollars.

As at December 31, 2015, the Canadian dollar value was US$0.72 compared to US$0.86 a year earlier. The average exchange rate for the year ended December 31, 2015, was US$0.78 compared to US$0.91 during 2014. The weakening of the Canadian dollar during 2015 resulted in an unrealized foreign currency translation gain of approximately $74,424 for the year ended December 31, 2015, recognized in other comprehensive income.

RISK OF NATURAL DISASTERSWhile the REIT has insurance to cover a substantial portion of the cost of events such as natural disasters, the insurance includes deductible amounts, and certain items may not be covered by insurance. The REIT’s operations and properties may be significantly affected by future natural disasters. Future natural disasters may cause the REIT to lose rent and incur additional storm cleanup costs. Any of these events might have a materially adverse impact on the REIT’s results of operations and financial condition.

RISK OF LOSS NOT COVERED BY INSURANCEThe REIT generally maintains insurance policies related to its business, including casualty, general liability and other policies covering the REIT’s business operations and assets; however, the REIT would be required to bear all losses that are not adequately covered by insurance, as well as any insurance deductibles. In the event of a substantial property loss, the insurance coverage may not be sufficient to pay the full current market value or current replacement cost of the property. In the event of an uninsured loss, the REIT could lose some or all of its capital investment, cash flow and anticipated profits related to one or more properties. Although the REIT believes that its insurance programs are adequate, assurance cannot be provided that the REIT will not incur losses in excess of insurance coverage or that insurance can be obtained in the future at acceptable levels and reasonable cost.

RISK RELATED TO INSURANCE RENEWALSCertain events could make it more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When the REIT’s current insurance policies expire, the REIT may encounter difficulty in obtaining or renewing property or casualty insurance on its properties at the same levels of coverage and under similar terms. Such insurance may be more limited and, for catastrophic risks (for example, earthquake, hurricane, flood and terrorism), may not be generally available to fully cover potential losses. Even if the REIT is able to renew its policies at levels and with limitations consistent with its current policies, the REIT cannot be sure that it will be able to obtain such insurance at premium rates that are commercially reasonable. If the REIT were unable to obtain adequate insurance on its properties for certain risks, it could cause the REIT to be in default under specific covenants on certain of its indebtedness or other contractual commitments it has that



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require the REIT to maintain adequate insurance on its properties to protect against the risk of loss. If this were to occur or if the REIT were unable to obtain adequate insurance and its properties experienced damages that would otherwise have been covered by insurance, it could adversely affect the REIT’s financial condition and the operations of its properties.

RISK RELATED TO GOVERNMENT REGULATIONSCertain provinces and territories of Canada have enacted residential tenancy legislation that, among other things, imposes rent control guidelines that limit the REIT’s ability to raise rental rates at its properties. Limits on the REIT’s ability to raise rental rates at its properties may materially adversely affect the REIT’s ability to increase income from its properties.

In addition to limiting the REIT’s ability to raise rental rates, provincial and territorial residential tenancy legislation provides certain rights to tenants, while imposing obligations upon the landlord. Residential tenancy legislation in the provinces of Alberta and Ontario prescribes certain procedures that must be followed by a landlord in order to terminate a residential tenancy. As certain proceedings may need to be brought before the respective administrative body governing residential tenancies as appointed under a province’s residential tenancy legislation, it may take several months to terminate a residential lease, even where the tenant’s rent is in arrears.

Under Ontario’s rent control legislation, a landlord is entitled to increase the rent for existing tenants once every 12 months by no more than the “guideline amount” established by regulation. For the calendar year 2015, the guideline amount was established at 1.6% (0.8% for 2014). This adjustment is meant to take into account the income of the building and the municipal and school taxes, the insurance bills, the energy costs, maintenance and service costs. Landlords may apply to the Ontario Rental Housing Tribunal for an increase above the guideline amounts if annual costs for heat, hydro, water or municipal taxes have increased significantly or if building security, maintenance and service costs have increased. When a suite is vacated, however, the landlord is entitled to lease the suite to a new tenant at any rental amount, after which annual increases are limited to the applicable guideline amount. The landlord may also be entitled to a greater increase in rent for a suite under certain circumstances, including, for example, where extra expenses have been incurred as a result of a renovation of that suite.

Further, residential tenancy legislation in certain provinces and territories provides the tenant with the right to bring certain claims to the respective administrative body seeking an order to, among other things, compel the landlord to comply with health, safety, housing and maintenance standards. As a result, the REIT may, in the future, incur capital expenditures that may not be fully recoverable from tenants. The inability to fully recover substantial capital expenditures from tenants may have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make distributions to holders of Units.

Residential tenancy legislation may be subject to further regulations or may be amended, repealed or enforced or new legislation may be enacted in a manner that will materially adversely affect the ability of the REIT to maintain the historical level of earnings of its properties.

RELATIVE LIQUIDITY OF REAL ESTATEReal estate is not considered to be a liquid investment as it requires a reasonable sales period and normal market conditions to generate multiple bids to complete the sales process. The characteristics of the property being sold and general and local economic conditions can affect the time required to complete the sales process.

Significant competition exists that may decrease the rental rates and occupancy rates of the REIT’s properties. The REIT competes with many other real estate entities, and some of these entities develop their own properties that compete for tenants. New multi-suite residential properties with more convenient locations or lower rental rates may cause tenants to leave the REIT’s properties or may give cause for tenants to renew their leases on terms less favourable to the REIT.



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COMPETITIONThe multi-suite residential real estate sector is highly competitive. The REIT faces competition from many sources, including other multi-suite residential buildings in the immediate vicinity and the broader geographic areas where the REIT’s residential properties are located. In addition, overbuilding in the multi-suite residential sector, particularly in the United States, may increase the supply of multi-suite residential properties, further increasing the level of competition in certain markets. Such competition may reduce occupancy rates and rental revenues of the REIT and could have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make distributions to holders of Units.

Furthermore, the multi-suite residential properties that the REIT owns or may acquire compete with numerous housing alternatives in attracting tenants, including owner-occupied single and multi-family homes available to rent or purchase. The relative demand for such alternatives may be increased by declining mortgage interest rates, government programs that promote home ownership or other events or initiatives that increase the affordability of such alternatives to multi-suite residential rental properties and could materially adversely affect the REIT’s ability to retain tenants, lease suites and increase or maintain rental rates. Such competition may reduce occupancy rates and rental revenues of the REIT and could have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make distributions to holders of Units.

The competition for multi-suite residential properties available for sale may significantly increase the cost of acquiring such assets and may result in such assets being acquired by the REIT at prices or on terms that are comparatively less favourable to the REIT or may result in such assets being acquired by competitors of the REIT. In addition, the number of entities seeking to acquire multi-suite residential properties and/or the amount of funds competing for such acquisitions may increase. In addition, single-property acquisitions from tax-motivated individual sellers may be available for sale only at a higher cost to the REIT relative to portfolio acquisitions. Increases in the cost to the REIT of acquiring multi-suite residential properties may materially adversely affect the ability of the REIT to acquire such properties on favourable terms and may otherwise have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make distributions to holders of Units.

DEPENDENCE ON THE PARTNERSHIPThe REIT is an unincorporated, open-ended real estate investment trust that is entirely dependent on the operations and assets of the Partnership through the REIT’s ownership of a 63.0% limited partnership interest in the Partnership. Cash distributions to holders of Units will be dependent on, among other things, the ability of the Partnership to make cash distributions with respect to the Class A LP Units. The Partnership and its subsidiaries are separate and distinct legal entities. The ability of the Partnership to make cash distributions or other payments or advances will depend on the Partnership’s results of operations and may be restricted by, among other things, applicable corporate, tax and other laws and regulations and contractual restrictions contained in the instruments governing any indebtedness of the Partnership (including the Retained Debt), any priority distributions contained in the Limited Partnership Agreement and other agreements governing the Partnership, and restrictions contained in the agreements governing the arrangement with the co-owners of certain properties.

STRUCTURAL SUBORDINATION OF UNITS In the event of bankruptcy, liquidation or reorganization of the Partnership or any of their subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of the Partnership and those subsidiaries before any assets are made available for distribution to the REIT or Unitholders. The Units are effectively subordinated to the debt and other obligations of the Partnership and their subsidiaries. The Partnership and their subsidiaries generate all of the REIT’s cash available for distribution and hold substantially all of the REIT’s assets.

ACQUISITIONSThe REIT’s strategy includes growth through identifying suitable acquisition opportunities, pursuing such opportunities, consummating acquisitions and effectively operating and leasing such properties. If the REIT is unable to manage its growth effectively, it could have a material adverse effect on the REIT’s business, cash



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flows, financial condition and results of operations and ability to make distributions to holders of Units. There can be no assurance as to the pace of growth through property acquisitions or that the REIT will be able to acquire assets on an accretive basis and, as such, there can be no assurance that distributions to holders of Units will increase in the future.

The REIT will rely on Morguard’s expertise in identifying acquisition opportunities, underwriting potential transactions, transaction execution and asset management capabilities. Morguard also provides similar services to its other clients and will concurrently present acquisition opportunities to the REIT and to its other clients. The provision by Morguard of similar services to its other clients may increase the cost of acquiring properties that are of interest to the REIT, increase competition for those acquisitions generally or inhibit their acquisition altogether.

DEPENDENCE ON MORGUARD The REIT is dependent upon Morguard for certain operational and administrative services relating to the REIT’s business. Should Morguard terminate the Asset Management Agreement, the REIT may be required to engage the services of an external asset manager. The REIT may be unable to engage an asset manager on acceptable terms, in which case the REIT’s operations and cash available for distribution may be adversely affected.

SIGNIFICANT OWNERSHIP BY MORGUARD At the date hereof, Morguard holds an approximately 48.8% effective interest in the REIT through ownership of, or the control or direction over, Units and Class B LP Units. For so long as Morguard maintains a significant effective interest in the REIT, Morguard benefits from certain contractual rights regarding the REIT and the Partnership, such as pre-emptive rights to maintain its pro rata ownership interest in the REIT and the Partnership and certain “tag-along” rights to sell a proportionate number of its Units pursuant to a bona fide third-party offer to the REIT to purchase any of the securities of a partnership controlled by the REIT on the same terms and conditions set forth in the bona fide offer. Morguard has the ability to exercise influence with respect to the affairs of the REIT and significantly affect the outcome of Unitholder votes and also may have the ability to effectively prevent certain fundamental transactions. Morguard’s significant effective interest may discourage transactions involving a change of control of the REIT, including transactions in which an investor might otherwise receive a premium for its Units over the then current market price.

TAXATION MATTERSLegislation relating to the federal income taxation of a specified investment flow-through (“SIFT”) trust or partnership was enacted on June 22, 2007 (the “SIFT Rules”). A SIFT includes a publicly listed or traded partnership or trust such as an income trust. 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. However, distributions paid by a SIFT as returns of capital should generally not be subject to the tax. 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 REIT intends to comply with the requirements under the Income Tax Act (Canada) (the "Tax Act") at all relevant times such that it maintains its status as a “unit trust” and a “mutual fund trust” for purposes of the Tax Act. Under current law, a trust may lose its status under the Tax Act as a mutual fund trust if it can reasonably be considered that the trust was established or is maintained primarily for the benefit of non-residents, except in limited circumstances. Accordingly, non-residents may not be the beneficial owners of more than 49% of the Units (determined on a basic or a fully diluted basis). The Trustees will also have various powers that can be used for the purpose of monitoring and controlling the extent of non-resident ownership of the Units. The restrictions on the issuance of Units by the REIT to non-residents may negatively affect the REIT’s ability to raise financing for future acquisitions or operations. In addition, the non-resident ownership restrictions could have a negative impact on the liquidity of the Units and the market price at which Units can be sold.



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There can be no assurance that Canadian federal income tax laws and the administrative policies and assessing practices of the Canada Revenue Agency (CRA) respecting mutual fund trusts will not be changed in a manner that adversely affects unitholders.

Although, as of the date hereof, management believes that the REIT will be able to meet the requirements of the REIT Exception throughout 2016 and beyond, there can be no assurance that the REIT will be able to qualify for the REIT Exception such that the REIT and the unitholders will not be subject to the SIFT Rules in 2016 or in future years.

In the event that the SIFT Rules apply to the REIT, the impact to unitholders will depend on the status of the holder and, in part, on the amount of income distributed, which would not be deductible by the REIT in computing its income in a particular year, and what portions of the REIT’s distributions constitute "non-portfolio earnings,’’ other income and returns of capital. The likely effect of the SIFT Rules on the market for Units and on the REIT’s ability to finance future acquisitions through the issue of Units or other securities is unclear. If the SIFT Rules apply to the REIT, they may adversely affect the marketability of the Units, the amount of cash available for distributions and the after-tax return to investors.

The Tax Act may impose additional withholding or other taxes on distributions made by the REIT to unitholders who are non-residents. These taxes and any reduction thereof under a tax treaty between Canada and another country may change from time to time. Prospective purchasers who are non-residents should consult their own tax advisers.

The CRA has expressed a view that, in certain circumstances, the deductibility of interest on money borrowed to invest in an income trust (including a real estate investment trust such as the REIT) may be reduced on a pro rata basis with respect to distributions from the income trust that are a return of capital and that are not reinvested for an income earning purpose. If the CRA’s view were to apply to a unitholder who borrowed money to invest in Units of the REIT, part of the interest payable by such unitholder in connection with money borrowed to acquire such Units could be non-deductible.

LITIGATION RISKSIn the normal course of the REIT’s operations, whether directly or indirectly, it may become involved in, named as a party to or the subject of various legal proceedings, including regulatory proceedings, tax proceedings and legal actions relating to personal injuries, property damage, property taxes, land rights, the environment and contract disputes. The outcome with respect to outstanding, pending or future proceedings cannot be predicted with certainty and may be determined in a manner adverse to the REIT and, as a result, could have a material adverse effect on the REIT’s assets, liabilities, business, financial condition and results of operations. Even if the REIT prevails in any such legal proceeding, the proceedings could be costly and time-consuming and may divert the attention of management and key personnel from the REIT’s business operations, which could have a material adverse effect on the REIT’s business, cash flows, financial condition and results of operations and ability to make distributions to holders of Units.

INTERNAL CONTROLSEffective internal controls are necessary for the REIT to provide reliable financial reports and to help prevent fraud. Although the REIT undertakes a number of procedures and Morguard and certain of its subsidiaries implement a number of safeguards, in each case in order to help ensure the reliability of their respective financial reports, including those imposed on the REIT under Canadian securities law, the REIT cannot be certain that such measures ensure that the REIT will maintain adequate control over financial processes and reporting. Failure to implement required new or improved controls or difficulties encountered in their implementation could harm the REIT’s results of operations or cause it to fail to meet its reporting obligations. If the REIT or its auditors discover a material weakness, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in the REIT’s consolidated financial statements and materially adversely affect the trading price of the Units.



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POTENTIAL CONFLICTS OF INTEREST WITH TRUSTEESThe Trustees will from time to time in their individual capacities deal with parties with whom the REIT may be dealing or who may be seeking investments similar to those desired by the REIT. The interests of these individuals could conflict with those of the REIT. The Declaration of Trust contains conflict of interest provisions requiring the Trustees to disclose their interests in certain contracts and transactions and to refrain from voting on those matters. In addition, certain decisions regarding matters that may give rise to a conflict of interest must be made by a majority of Independent Trustees only. Conflicts may also exist due to the fact that certain Trustees of the REIT will be affiliated with Morguard and will be nominated by Morguard.

POTENTIAL CONFLICTS OF INTEREST WITH MORGUARDMorguard’s continuing businesses may lead to conflicts of interest between Morguard and the REIT. The REIT may not be able to resolve any such conflicts, and, even if it does, the resolution may be less favourable to the REIT than if it were dealing with a party that was not a holder of a significant interest in the REIT. The agreements that the REIT entered into with Morguard may be amended upon agreement between the parties, subject to applicable law and approval of the Independent Trustees. Because of Morguard’s significant holdings in the REIT, the REIT may not have the leverage to negotiate any required amendments to these agreements on terms as favourable to the REIT as those the REIT could secure with a party that was not a significant holders of Units.

VOLATILE MARKET PRICE FOR THE REIT’S SECURITIES The market price for the REIT’s securities may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond the REIT’s control, including the following: (i) actual or anticipated fluctuations in the REIT’s financial performance and future prospects; (ii) recommendations by securities research analysts; (iii) changes in the economic performance or market valuations of other issuers that investors deem comparable to the REIT; (iv) addition or departure of the REIT’s executive officers; (v) release or expiration of lock-up or other transfer restrictions on outstanding Units or Class B LP Units; (vi) sales or perceived sales of additional Units; (vii) significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the REIT or its competitors; (viii) news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in the REIT’s industry or target markets; (ix) liquidity of the REIT’s securities; (x) prevailing interest rates; (xi) the market price of other REIT securities; (xii) a decrease in the amount of distributions declared and paid by the REIT; and (xiii) general economic conditions.

Financial markets have, in recent years, experienced significant price and volume fluctuations that have particularly affected the market prices of securities of issuers and that have, in many cases, been unrelated to the operating performance, underlying asset values or prospects of such issuers. Accordingly, the market price of the REIT’s securities may decline even if the REIT’s financial performance, underlying asset values, or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. As well, certain institutional investors may base their investment decisions on consideration of the REIT’s environmental, governance and social practices and performance against such institutions’ respective investment guidelines and criteria, and failure to meet such criteria may result in a limited or no investment in the REIT’s securities by those institutions. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increased levels of volatility and market turmoil exist for a protracted period of time, the REIT’s operations could be adversely impacted and the trading price of the securities may be adversely affected. RETURN ON INVESTMENT ON UNITS NOT GUARANTEED The Units are equity securities of the REIT and are not traditional fixed-income securities. A fundamental characteristic that distinguishes the Units from traditional fixed-income securities is that the REIT does not have a fixed obligation to make payments to holders of Units and does not promise to return the initial purchase price of a Unit on a certain date in the future. The REIT has the ability to reduce or suspend distributions to holders of Units if circumstances warrant. The ability of the REIT to make cash distributions to holders of Units, and the actual amount distributed, will be entirely dependent on the operations and assets of the REIT and its subsidiaries and will be subject to various factors, including financial performance, obligations under applicable credit facilities, fluctuations in working capital and capital expenditure requirements. There can be no



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assurance regarding the amount of income to be generated by the properties. The market value of the Units will deteriorate if the REIT is unable to meet its distribution targets in the future, and that deterioration may be significant. In addition, unlike interest payments or an interest-bearing debt security, the REIT’s cash distributions to holders of Units are composed of different types of payments (portions of which may be fully or partially taxable or may constitute non-taxable returns of capital). The composition for tax purposes of those distributions may change over time, thus affecting the after-tax returns to holders of Units. Therefore, the rate of return over a defined period for a holder of Units may not be comparable to the rate of return on a fixed-income security that provides a “return on capital” over the same period.

UNITHOLDER LIABILITY The Declaration of Trust provides that no holders of Units will be subject to any liability whatsoever to any person in connection with a holding of Units. In addition, legislation has been enacted in the Province of Ontario and certain other provinces that is intended to provide holders of Units in those provinces with limited liability. However, there remains a risk, which is considered by the REIT to be remote in the circumstances, that a holder of Units could be held personally liable for the obligations of the REIT to the extent that claims are not satisfied out of the assets of the REIT. The affairs of the REIT are conducted in a manner to seek to minimize such risk wherever possible.

NATURE OF INVESTMENT IN UNITS The Units represent a fractional interest in the REIT and do not represent a direct investment in the REIT’s assets and should not be viewed by investors as direct securities of the REIT’s assets. A holder of a Unit does not hold a share of a body corporate. Holders of Units, in such capacity, do not have statutory rights normally associated with ownership of shares of a corporation, including, for example, the right to bring “oppression” or “derivative” actions against the REIT. The rights of holders of Units are based primarily on the Declaration of Trust. There is no statute governing the affairs of the REIT equivalent to the Canada Business Corporations Act, which sets out the rights and entitlements of shareholders of corporations in various circumstances. As well, the REIT may not be a recognized entity under certain existing insolvency legislation such as the Bankruptcy and Insolvency Act (Canada) and the Companies Creditors’ Arrangement Act (Canada), and thus the treatment of holders of Units upon an insolvency is uncertain.

CREDIT RISK WITH RESPECT TO THE DEBENTURES, PRIOR RANKING INDEBTEDNESS AND ABSENCE OF COVENANT PROTECTIONThe likelihood that purchasers of the Debentures will receive payments owing to them under the terms of the Debentures will depend on the financial health of the REIT and its creditworthiness. In addition, the Debentures are unsecured obligations of the REIT and are subordinate in right of payment to all the REIT's existing and future Senior Indebtedness (as defined in the trust indenture that governs the Debentures, the "Indenture”). Therefore, if the REIT becomes bankrupt, liquidates its assets, reorganizes or enters into certain other transactions, the REIT's assets will be available to pay its obligations with respect to the Debentures only after it has paid all of its Senior Indebtedness and secured indebtedness in full. There may be insufficient assets remaining following such payments to pay amounts due on any or all of the Debentures then outstanding.

The Debentures are also effectively subordinate to claims of creditors (including trade creditors) of the REIT's subsidiaries except to the extent the REIT is a creditor of such subsidiaries ranking at least pari passu with such other creditors. The Indenture does not prohibit or limit the ability of the REIT or its subsidiaries to incur additional debt or liabilities (including Senior Indebtedness) or to make distributions, except, with respect to distributions, where an event of default has occurred and such default has not been cured or waived. The Indenture does not contain any provision specifically intended to protect debentureholders in the event of a future leveraged transaction involving the REIT.

Structural Subordination of Units and the DebenturesIn the event of bankruptcy, liquidation or reorganization of the Partnership or any of their subsidiaries, holders of their indebtedness and their trade creditors will generally be entitled to payment of their claims from the assets of the Partnership and those subsidiaries before any assets are made available for distribution to the REIT or holders of Units. The Debentures are effectively subordinated to the debt and other obligations of the



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Partnership and their subsidiaries. The Partnership and their subsidiaries generate all of the REIT’s cash available for distribution and hold substantially all of the REIT’s assets.

Conversion of Debentures Following Certain TransactionsIn the case of certain transactions, each Debenture will become convertible into the securities, cash or property receivable by a holder of Units in the kind and amount of securities, cash or property into which the Debenture was convertible immediately prior to the transaction. This change could substantially lessen or eliminate the value of the conversion privilege associated with the Debentures in the future. For example, if the REIT were acquired in a cash merger, each Debenture would become convertible solely into cash and would no longer be convertible into securities whose value would vary depending on the REIT's future prospects and other factors.

Value of Conversion PrivilegeUpon the occurrence of a change of control of the REIT, debentureholders will have the right to require the REIT to redeem the Debentures in an amount equal to 101% of the principal amount of the Debentures, plus accrued and unpaid interest until the date of redemption. In the event that debentureholders holding 90% or more of the Debentures exercise their right to require the REIT to redeem the Debentures, the REIT may acquire the remaining Debentures on the same terms. In such event, the conversion privilege associated with the Debentures would be eliminated, which may adversely affect some or all of the debentureholders.

Inability of the REIT to Purchase Debentures on a Change of ControlThe REIT may be required to purchase all outstanding Debentures upon the occurrence of a change of control. However, it is possible that following a change of control, the REIT will not have sufficient funds at that time to make any required purchase of outstanding Debentures or that restrictions contained in other present or future indebtedness or agreements will restrict those purchases. The REIT's failure to purchase the Debentures would constitute an event of default under the Indenture, which may also constitute a default under the terms of the REIT's other indebtedness at that time.

Redemption Prior to MaturityThe Debentures may be redeemed, at the option of the REIT, in whole at any time or in part from time to time on or after April 1, 2016, subject to certain conditions for redemptions prior to the Maturity Date, at a price equal to the principal amount thereof plus accrued and unpaid interest. Debentureholders should assume that this redemption option will be exercised if the REIT is able to refinance at a lower interest rate or if it is otherwise in the interest of the REIT to redeem the Debentures. Debentureholders whose Debentures are redeemed would not be entitled to participate in any growth in the trading price of the Debentures or underlying Units and may not be able to reinvest their redemption proceeds in securities providing a comparable expected rate of return as the Debentures for a comparable level of risk.

DISTRIBUTIONS As a result of seasonal fluctuations in cash flows, the REIT from time to time may pay distributions to Unitholders that have exceeded cash flow from operating activities. As a result, the REIT has not funded distributions from alternate sources such as the Morguard Facility, mortgages or other financing instruments, has not made any distributions that have included a return of capital and has not been required to amend any material contracts. There can be no assurance in the future that the REIT will continue to fund distributions entirely from cash from operating activities. In such an event, the REIT may be required to fund its distributions from sources other than operations, such as the Morguard Facility, mortgages or other financing instruments, make distributions that include a return of capital or amend material contracts. In addition, non-cash distributions, such as the issuance of Units under the DRIP, have the effect of increasing the number of Units outstanding, which may cause cash distributions to increase over time assuming stable per Unit cash distribution levels.

DILUTIONThe number of Units and the principal amount of Debentures under the Indenture that the REIT is authorized to issue are unlimited. The REIT may, in its sole discretion, issue additional Units and/or Debentures from time to time subject to the rules of any applicable stock exchange on which the Units are then listed and applicable



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securities law. The issuance of any additional Units and/or Debentures may have a dilutive effect on the interests of holders of Units and/or Debentures.

WITHHOLDING TAX Effective January 1, 2008, the Tax Act was amended to generally eliminate withholding tax on interest paid or credited to non-residents of Canada with whom the payor deals at arm’s length. However, Canadian withholding tax continues to apply to payments of ‘‘participating debt interest’’. For purposes of the Tax Act, participating debt interest is generally interest that is paid on an obligation where all or any portion of such interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any similar criterion. Under the Tax Act, when a debenture or other debt obligation issued by a person resident in Canada is assigned or otherwise transferred by a non-resident person to a person resident in Canada (which would include a conversion of the obligation or payment on maturity), the amount, if any, by which the price for which the obligation was assigned or transferred exceeds the price for which the obligation was issued is deemed to be a payment of interest on that obligation made by the person resident in Canada to the non-resident (an ‘‘excess’’). The deeming rule does not apply with respect to certain ‘‘excluded obligations’’, although it is not clear whether a particular convertible debenture would qualify as an ‘‘excluded obligation’’. If a convertible debenture is not an ‘‘excluded obligation’’, issues that arise are whether any excess would be considered to exist, whether any such excess that is deemed to be interest is ‘‘participating debt interest’’, and if the excess is participating debt interest, whether that results in all interest on the obligation being considered to be participating debt interest.

The CRA has stated that no excess, and therefore no participating debt interest, would in general arise on the conversion of a ‘‘traditional convertible debenture’’ and therefore there would be no withholding tax in such circumstances (provided that the payor and payee deal at arm’s length for purposes of the Tax Act). The CRA has published guidance on what it believes to be the criteria of a ‘‘traditional convertible debenture’’ for these purposes. The Debentures do not meet at least one of the criteria set forth in the CRA’s published guidance. Accordingly, there is a risk that amounts paid or payable by the REIT to a non-resident holder of Debentures on account of interest or any excess amount may be subject to Canadian withholding tax at a rate of 25% (subject to any reduction in accordance with any applicable income tax treaty or convention).

The Indenture does not contain a requirement for us to increase the amount of interest or other payments to holders of Debentures should the REIT be required to withhold amounts with respect to income or similar taxes on payments of interest or other amounts.

CONTROLS AND PROCEDURES CONCERNING FINANCIAL INFORMATION The financial certification process project team has documented and assessed the design and effectiveness of the internal controls in order to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. This undertaking has enabled the Chief Executive Officer and Chief Financial Officer to attest that the design and effectiveness of the internal controls with regard to financial information are effective using the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control - Integrated Framework (2013). In order to ensure that the consolidated financial statements and MD&A present fairly, in all material respects, the financial position of the REIT and the results of its operations, management is responsible for establishing and maintaining disclosure controls and procedures, as well as internal control over financial reporting.

The REIT’s management has evaluated the effectiveness of the REIT’s disclosure controls and procedures and, based on such evaluation, has concluded that their design and operation are adequate and effective as of the year ended December 31, 2015. The REIT’s management has also evaluated the effectiveness of the internal controls over financial reporting and has concluded that the design and operation are effective as of the year ended December 31, 2015.

An information disclosure policy constitutes the framework for the information disclosure process with regard to the annual and interim filings, as well as to other reports filed or submitted under securities legislation. This



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policy aims in particular at identifying material information and validating the related reporting. Morguard’s Disclosure Committee, established in 2005, is responsible for ensuring compliance with this policy for both Morguard and the REIT. Morguard’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.



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PART VIII

SELECTED ANNUAL AND QUARTERLY INFORMATIONThe following table shows information for revenue from income producing properties, NOI, net income attributable to unitholders, FFO, distributions declared, total assets, non-current financial liabilities, and per Unit amounts for the periods noted.


Revenue from income producing properties $198,442 $174,815 $142,939NOI 104,182 90,217 78,846NOI per Unit(1)

- basic 2.24 1.94 1.76- diluted 2.07 1.79 1.64

Net income attributable to unitholders 38,784 38,157 56,381Net income attributable to unitholders per Unit(1)

- basic 0.83 0.82 1.26- diluted 0.77 0.76 1.18

FFO

- basic 51,112 44,726 34,657- diluted 53,902 47,516 36,889

FFO per Unit(1)

- basic 1.10 0.96 0.77- diluted 1.07 0.94 0.77

Distributions declared(2) 27,927 27,912 27,073Distributions per Unit (annualized) 0.60 0.60 0.60Total assets 2,160,015 1,832,287 1,671,233Non-current portion of financial liabilities

Mortgages payable and Class C LP Units 1,056,869 891,327 680,280Debentures 58,677 58,264 57,875Class B LP Units $183,770 $172,575 $162,069

Number of suites 13,102 12,850 12,850

(1) For the purpose of calculating NOI, net income attributable to unitholders and FFO per Unit, Class B LP Units are included as Units outstanding on both a basic and

diluted basis.

(2) Distributions declared is calculated based on the monthly distribution per Unit of $0.05 multiplied by the weighted average number of Units outstanding during the

period. Class B LP Units are included as Units outstanding.



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The following table provides a summary of operating results for the last eight quarters.

(In thousands of dollars, exceptper Unit amounts) Revenue NOI FFO

Net Income(Loss)

Attributable to

Unitholders

Net Income (Loss)Attributable to Unitholders

per UnitBasic Diluted(1)

December 31, 2015 $52,915 $30,598 $12,775 $2,291 $0.05 $0.04September 30, 2015 50,310 29,857 13,277 15,005 0.32 0.30June 30, 2015 47,530 28,730 12,812 31,627 0.68 0.63March 31, 2015 47,687 14,997 12,248 (10,139) (0.22) (0.20)December 31, 2014 45,136 25,469 11,691 10,519 0.23 0.21September 30, 2014 43,828 25,324 10,808 16,102 0.35 0.32June 30, 2014 43,090 25,662 11,485 2,424 0.05 0.05March 31, 2014 42,761 13,762 10,742 9,112 0.19 0.18

(1) Units also include the dilutive impact of the Debentures.

Fourth Quarter Results 2015The REIT’s net income attributable to Unitholders for the three months ended December 31, 2015, decreased by $8,228 to $2,291, compared to $10,519 in the fourth quarter of 2014. The decrease in net income was primarily due to fair value loss of $11,539 on Class B LP Units, an decrease in other income of $1,742, an increase in interest expense of $450 and an increase in trust expenses of $372. These items were partially offset by an increase in NOI of $5,129 and an increase in fair value gain on income producing properties of $416.

SUBSEQUENT EVENTSOn January 26, 2016, the REIT repurchased 70,400 Units under its NCIB for cash consideration of $736 at a weighted average price of $10.45 per Unit.

On February 1, 2016, the REIT acquired a multi-suite residential property comprising 370 suites located in Ottawa, Ontario, from a third party for a gross purchase price of approximately $67,000. The acquisition was partially financed by a new mortgage of $38,589 at an interest rate of 2.88% for a term of 10 years.



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PART IX

OUTLOOKThe REIT posted another year of healthy results in 2015. Leasing fundamentals in residential markets remained strong, but need to be resilient given the influence of a number of economic uncertainties. Strong operating performance and prudent management of its balance sheet have positioned the REIT to take advantage of opportunities as they arise. The REIT continued to take advantage of cyclically low interest rates. During the year ended December 31, 2015, $128,706 of fixed rate financing was completed with an average interest rate of 3.00%. These financings further strengthened the balance sheet by increasing the weighted average debt term to 5.1 years while also decreasing the weighted average interest rate to 3.82%. Management remains focused on maintaining access to various sources of capital at the lowest possible cost. In terms of asset values, the capitalization rate compression of the previous few years came to a close, and therefore valuation increases were largely the result of growth in net operating income.

In 2015, the environment for acquisitions continued to be extremely competitive. Management remains disciplined in exploring new investment opportunities. The REIT will continue to seek acquisition opportunities, focusing on properties that meet our investment criteria. In addition to acquisitions, the REIT also expects growth to come organically from within the existing portfolio and from intensification opportunities.

Modest economic growth is forecasted for 2016, against a backdrop of material risk. Uncertainty about oil prices and their impact on economic growth remains. This could have a negative impact on the real estate sector. To date, the outlook remains generally positive.

The REIT benefits from a conservative financial leverage, a low payout ratio and access to debt and equity markets at a reasonable cost. The REIT’s asset class and geographic diversification should also help it withstand the economic challenges that are anticipated in 2016.

MORGUARD NORTH AMERICAN RESIDENTIAL REAL ESTATE INVESTMENT TRUST CONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015

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CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

Independent Auditors’ Report 50

Consolidated Balance Sheets 51

Consolidated Statements of Income 52

Consolidated Statements of Comprehensive Income 53

Consolidated Statements of Changes in Equity 54

Consolidated Statements of Cash Flow 55

Notes to the Consolidated Financial Statements 56

INDEPENDENT AUDITORS’ REPORT

To the Unitholders of Morguard North American Residential Real Estate Investment TrustWe have audited the accompanying consolidated financial statements of Morguard North American Residential Real Estate Investment Trust, which comprise the consolidated balance sheets as at December 31, 2015 and 2014, and the consolidated statements of income, comprehensive income, changes in unitholders’ equity and cash flows for the years then ended and a summary of significant accounting policies and other explanatory information.

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

Auditors’ ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

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

OpinionIn our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Morguard North American Residential Real Estate Investment Trust as at December 31, 2015 and 2014, and its financial performance and its cash flows for the years then ended, in accordance with International Financial Reporting Standards.

“Ernst & Young LLP”Chartered Professional AccountantsLicensed Public AccountantsToronto, CanadaFebruary 16, 2016

MORGUARD NORTH AMERICAN RESIDENTIAL REAL ESTATE INVESTMENT TRUSTCONSOLIDATED FINANCIAL STATEMENTS | DECEMBER 31, 2015

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BALANCE SHEETSIn thousands of Canadian dollars

As at December 31, Note 2015 2014

ASSETSNon-current assetsIncome producing properties 5 $2,105,254 $1,785,308Amounts receivable 260 1,519

2,105,514 1,786,827Current assetsMorguard Facility 9 24,748 —Amounts receivable 5,107 3,611Prepaid expenses 6,285 3,116Restricted cash 9,762 6,180Cash 8,599 32,553

54,501 45,460$2,160,015 $1,832,287

LIABILITIES AND EQUITYNon-current liabilitiesMortgages payable and Class C LP Units 6 $1,056,869 $891,327Convertible debentures 7 58,677 58,264Class B LP Units 8 183,770 172,575Deferred income tax liabilities 15(c) 78,831 35,971

1,378,147 1,158,137Current liabilitiesMortgages payable and Class C LP Units 6 64,775 72,137Accounts payable and accrued liabilities 10 32,126 28,412

96,901 100,549Total liabilities 1,475,048 1,258,686

EQUITYUnitholders’ equity 656,117 560,835Non-controlling interest 28,850 12,766Total equity 684,967 573,601

$2,160,015 $1,832,287

Commitments and contingencies 19

See accompanying notes to the consolidated financial statements.

On behalf of the Trustees:

(Signed) “K. (Rai) Sahi” (Signed) “Mel Leiderman”

K. (Rai) Sahi, Mel Leiderman,Trustee Trustee


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STATEMENTS OF INCOMEIn thousands of Canadian dollars

NoteFor the years ended December 31, 2015 2014

Revenue from income producing properties $198,442 $174,815Property operating expenses

Property operating costs 55,068 48,824Realty taxes 22,162 20,014Utilities 17,030 15,760

Net operating income 104,182 90,217Other expenses (income)

Interest expense 12 51,291 48,298Trust expenses 13 10,160 8,463Foreign exchange gain (2,882) (830)Other expense (income) 183 (1,543)

Income before fair value changes and income taxes 45,430 35,829Fair value gain on income producing properties, net 5 38,804 40,104Fair value loss on Class B LP Units 8 (11,195) (10,506)Income before income taxes 73,039 65,427

Provision for income taxes 15(a)

Current 166 109

Deferred 33,193 26,111

33,359 26,220


Net income attributable to:Unitholders $38,784 $38,157

Non-controlling interest 896 1,050

$39,680 $39,207



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STATEMENTS OF COMPREHENSIVE INCOMEIn thousands of Canadian dollars



OTHER COMPREHENSIVE INCOMEItems that may be reclassified subsequently to net income:Unrealized foreign currency translation gain 74,424 28,824Amortization of cash flow hedge 284 218Other comprehensive income 74,708 29,042

Total comprehensive income for the year $114,388 $68,249

Total comprehensive income attributable to:Unitholders $112,615 $67,199

Non-controlling interest 1,773 1,050

$114,388 $68,249



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STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITYIn thousands of Canadian dollars

UnitsContributed

SurplusRetainedEarnings

AccumulatedOther

ComprehensiveIncome

TotalUnitholders’

Equity

Non-Controlling

InterestTotal

Equity

Unitholders' equity, December 31, 2013 $309,736 $48,762 $140,693 $11,810 $511,001 $11,961 $522,962

Changes during the year:

Net income — — 38,157 — 38,157 1,050 39,207

Other comprehensive income — — — 29,042 29,042 — 29,042

Issue of Units - Distribution Reinvestment Plan 214 — (214) — — — —

Distributions — — (17,365) — (17,365) (245) (17,610)


Changes during the year:

Contribution from non-controlling interest — — — — — 17,354 17,354

Net income — — 38,784 — 38,784 896 39,680

Other comprehensive income — — — 73,831 73,831 877 74,708

Issue of Units - Distribution Reinvestment Plan 261 — (261) — — — —

Distributions — — (17,333) — (17,333) (3,043) (20,376)




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STATEMENTS OF CASH FLOWSIn thousands of Canadian dollars

NoteFor the years ended December 31, 2015 2014

OPERATING ACTIVITIESNet income $39,680 $39,207Add (deduct) items not affecting cash 16(a) 3,323 (7,777)Additions to tenant incentives (259) (456)Net change in non-cash operating assets and liabilities 16(b) (160) 5,236Cash provided by operating activities 42,584 36,210

INVESTING ACTIVITIESAcquisition of income producing properties 5 (73,862) (8,692)Additions to income producing properties 5 (17,842) (19,540)Proceeds from sale of income producing properties 5 — 4,000Cash used in investing activities (91,704) (24,232)

FINANCING ACTIVITIESMorguard Facility, net 16(c) (23,288) (15,482)Proceeds from new mortgages 6 128,706 288,558Financing cost on new mortgages (2,880) (5,998)Repayment of mortgages and Class C LP Units

Repayments on maturity (48,881) (139,530)Repayments due to early extinguishments — (75,670)Principal instalment repayments (22,627) (20,502)

Contributions from non-controlling interest 15,762 —Distributions to unitholders 11(d) (17,333) (17,365)Distributions to non-controlling interest (3,043) (245)

Increase in restricted cash (2,459) (101)

Cash provided by financing activities 23,957 13,665

Net increase (decrease) in cash during the year (25,163) 25,643Net effect of foreign currency translation on cash balance 1,209 1,660Cash, beginning of year 32,553 5,250Cash, end of year $8,599 $32,553



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NOTESFor the years ended December 31, 2015 and 2014In thousands of Canadian dollars, except Unit, per Unit amounts and where otherwise noted

NOTE 1NATURE AND FORMATION OF TRUSTMorguard North American Residential Real Estate Investment Trust (the “REIT”) is an unincorporated open-ended real estate investment trust established pursuant to a Declaration of Trust dated March 1, 2012, and as amended and restated on April 18, 2012 (the “Declaration of Trust”), under and governed by the laws of the Province of Ontario. The trust units of the REIT (“Units”) trade on the Toronto Stock Exchange (“TSX”) under the symbol “MRG.UN”. The REIT invests in multi-suite residential rental properties in Canada and the United States. The REIT’s head office is located at 55 City Centre Drive, Suite 1000, Mississauga, Ontario, L5B 1M3.

The REIT holds its investments in its income producing properties through its ownership in Morguard NAR Canada Limited Partnership (the “Partnership”) in which Morguard Corporation (“Morguard”) holds an indirect 48.7% interest as at December 31, 2015, through its ownership of 5,445,166 Units and 17,223,090 Class B LP Units. Morguard is the parent company of the REIT.

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

The consolidated financial statements were approved and authorized for issue by the Board of Trustees on February 16, 2016.

Basis of PresentationThe REIT’s consolidated financial statements are prepared on a going concern basis and have been presented in Canadian dollars rounded to the nearest thousand unless otherwise indicated. The consolidated financial statements are prepared on a historical basis, except for income producing properties and certain financial instruments that are measured at fair value. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements unless otherwise indicated.

Basis of ConsolidationThe REIT holds its interest in the income producing properties and other assets and liabilities related to these properties directly or indirectly through the Partnership. The consolidated financial statements include the financial statements of the REIT, as well as the entities that are controlled by the REIT (“subsidiaries”). The REIT controls an entity when the REIT is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date of acquisition or the date on which the REIT obtains control and are deconsolidated from the date that control ceases. Intercompany transactions, balances, unrealized losses and unrealized gains on transactions between the REIT and its subsidiaries are eliminated. Non-controlling interests in the equity and the results of these subsidiaries are shown separately in equity in the consolidated balance sheets.

Non-Controlling InterestNon-controlling interests represent equity interests in subsidiaries that are not attributable to the REIT. For all of REIT’s subsidiaries, the share of the net assets of the subsidiaries that is attributable to non-controlling interest is presented as a component of equity.


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Income Producing PropertiesIncome producing properties include multi-suite residential properties held to earn rental income. An income producing property that is acquired as an asset purchase and not as a business combination is recorded initially at cost, including transaction costs. Transaction costs include transfer taxes and professional fees.

Subsequent to initial recognition, income producing properties are recorded at fair value. The changes in fair value for each reporting period will be recorded in the consolidated statements of income. In order to avoid double counting, the carrying value of income producing properties include all capital expenditures associated with upgrading and extending the economic life of the existing properties since these amounts are incorporated in the appraised values of the income producing properties. Fair value is based on valuations using the direct capitalization income method. Recent real estate transactions with characteristics and locations similar to the REIT’s assets are also considered. The direct capitalization income method applies a capitalization rate to the property’s stabilized net operating income, which incorporates allowances for vacancy, management fees and structural reserves for capital expenditures for the property. The resulting appraised value is further adjusted, where appropriate, for non-recurring costs to stabilize the income.

Classification of Units, Class B LP Units and Class C LP UnitsUnitsUnits meet the definition of a financial liability under IFRS as the redemption feature of the Units creates an unavoidable contractual obligation to pay cash (or another financial instrument such as notes payable if redemptions exceed $50 in a given month).

Units are redeemable at the option of the holder and, therefore, are considered “puttable instruments” in accordance with International Accounting Standards (“IAS”) 32, “Financial Instruments - Presentation”, (“IAS 32”). IAS 32 allows puttable instruments to be presented as equity provided the instrument meets all of the following conditions: (i) it must entitle the holder to a pro rata share of the entity’s net assets in the event of the entity’s dissolution; (ii) it must be in the class of instruments that is subordinate to all other instruments; (iii) all instruments in the class in (ii) must have identical features; (iv) other than the redemption feature, there can be no other contractual obligations that meet the definition of a liability; and (v) the expected cash flows for the instruments must be based substantially on the profit or loss of the entity or change in fair value of the entity over the life of the instrument. Units meet these criteria and, accordingly, are presented as equity in the consolidated financial statements. The distributions declared on the Units are deducted from retained earnings.

Class B LP UnitsThe Class B LP Units of the Partnership are exchangeable into Units at the option of the holder. As a result of this obligation, the Class B LP Units are exchangeable into a liability (as the Units are a liability by definition) and, accordingly, the Class B LP Units are also considered to be a liability and do not qualify for the exception in IAS 32 to be presented as equity. The distributions paid on the Class B LP Units are classified as interest expense in the consolidated statements of income.

Class C LP UnitsMorguard retained the mortgages on four properties (“Retained Debt”) that were sold to the REIT and also retained the deferred financing costs associated with the Retained Debt. Morguard remains responsible for the interest and principal payments on the Retained Debt, and the Retained Debt is secured by a charge on the properties. In consideration of the Retained Debt, Morguard received Class C LP Units of the Partnership on which distribution payments will be made in an amount expected to be sufficient to permit Morguard to satisfy amounts payable with respect to (i) the principal and interest under the Retained Debt and (ii) the amount of tax that is due and payable that is reasonably attributable to any distributions on the Class C LP Units.


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

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

Classification MeasurementFinancial AssetsAmounts receivable Loans and receivables Amortized costMorguard Facility Loans and receivables Amortized costRestricted cash Loans and receivables Amortized costCash Loans and receivables Amortized cost

Financial LiabilitiesMortgages payable and Class C LP Units Other financial liabilities Amortized costConvertible debentures, excluding conversion option Other financial liabilities Amortized costMorguard Facility Other financial liabilities Amortized costAccounts payable and accrued liabilities Other financial liabilities Amortized costConversion option of convertible debentures FVTPL FVTPLClass B LP Units FVTPL FVTPL

Transaction CostsFinancing costs that are attributable to the issue of financial liabilities not at FVTPL are presented as a reduction from the carrying amount of the related debt and are amortized using the effective interest rate method over the terms of the related debt. These costs include interest, amortization of discounts or premiums relating to borrowings, fees and commissions paid to agents, brokers and advisers and transfer taxes and duties that are incurred in connection with the arrangement of borrowings.

Derivatives and Embedded DerivativesAll derivative instruments, including embedded derivatives, are recorded in the consolidated balance sheets at fair value unless exempt from derivative treatment as a normal purchase and sale.

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


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Fair ValueThe fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (i) in the principal market for the asset or liability; or (ii) in the absence of a principal market, in the most advantageous market for the asset or liability.

Fair value measurements recognized in the consolidated balance sheets are categorized using a fair value hierarchy that reflects the significance of inputs used in determining the fair values:

Level 1: Quoted prices in active markets for identical assets or liabilities.Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are based on observable market data.Level 3: Valuation techniques for which any significant input is not based on observable market data.

Each type of fair value measurement is categorized based on the lowest-level input that is significant to the fair value measurement in its entirety.

Cash and Cash EquivalentsCash and cash equivalents include cash on hand, balances with banks and short-term deposits with remaining maturities at the time of acquisition of three months or less. Borrowings under the Morguard Facility are considered to be financing activities.

Convertible DebenturesConvertible debentures issued by the REIT are convertible into Units at the option of the holder, and the number of Units to be issued does not vary with changes in their fair value.

Upon issuance, convertible debentures are separated into their debt and conversion feature components. The debt component of the convertible debentures is recognized initially at the fair value of a similar debt instrument without a conversion feature. Subsequent to initial recognition, the debt component of a compound financial instrument is measured at amortized cost using the effective interest method.

The conversion feature component of the convertible debentures is recognized at fair value using the Black-Scholes option pricing model at each consolidated balance sheet date. The convertible debentures are convertible into Units at the holder's option. As a result of this obligation, the convertible debentures are exchangeable into a liability since the Units are puttable instruments that meet the definition of a financial liability under IAS 32. Accordingly, the conversion feature component of the convertible debentures is recorded in the consolidated balance sheets as a liability, measured at fair value, with changes in fair value recognized in the consolidated statements of income.

Any directly attributable transaction costs are allocated to the debt and conversion components of the convertible debentures in proportion to their initial carrying amounts.

Revenue RecognitionRevenue from income producing properties include rents from tenants under leases, parking income, laundry income and other miscellaneous income paid by the tenants under the terms of their existing leases. Revenue recognition under a lease commences when a tenant has a right to use the leased asset, and revenue is recognized pursuant to the terms of the lease agreement. The REIT has not transferred substantially all of the risks and benefits of ownership of its income producing properties and therefore accounts for leases with its tenants as operating leases.

Revenue is recognized systematically over the term of the lease, which is generally not more than 12 months. Any suite-specific incentives offered or initial direct costs incurred in negotiating and arranging an operating lease are reflected in the consolidated balance sheets in the carrying value of income producing properties and are


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amortized over the term of the operating lease and recognized in the consolidated statements of income on a straight-line basis.

Income TaxesThe REIT is a “mutual fund trust and a real estate investment trust” pursuant to the Income Tax Act (Canada). Under current tax legislation, a real estate investment trust is entitled to deduct distributions of taxable income such that it is not liable to pay income taxes provided that its taxable income is fully distributed to unitholders. The REIT intends to continue to qualify as a real estate investment trust and to make distributions of not less than the amount necessary to ensure that the REIT will not be liable to pay income taxes in Canada. Accordingly, no current or deferred income taxes have been recorded in the consolidated financial statements for the REIT’s Canadian properties.

However, the REIT’s U.S. properties are held by U.S. subsidiaries that are taxable legal entities. The REIT uses the liability method of accounting for the U.S. income taxes. Under the liability method of tax allocation, current income tax assets and liabilities are based on the amount expected to be paid to tax authorities, net of recoveries, based on the tax rates and laws enacted or substantively enacted as at the consolidated balance sheet dates. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses to the extent that it is probable that deductions, tax credits and tax losses can be utilized. The carrying amounts of deferred income tax assets are reviewed at each consolidated balance sheet date and reduced to the extent it is no longer probable that the income tax asset will be recovered.

In accordance with IAS 12, “Income Taxes”, the REIT measures deferred income tax assets and liabilities on its U.S. income producing properties based on the rebuttable presumption that the carrying amount of the income producing property is recovered through sale, as opposed to presuming that the economic benefits of the income producing property will be substantially consumed through use over time. This presumption is rebutted if the property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the income producing property over time rather than through sale.

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

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


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DistributionsDistributions are recognized as a deduction from retained earnings for the Units classified as equity and as interest expense for Class B LP Units classified as a liability.

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

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

Income Producing PropertiesThe REIT’s accounting policies relating to income producing properties are described above. In applying these policies, judgment has been applied in determining whether certain costs are additions to the carrying amount of the property. Judgment is also applied in determining the extent and frequency of independent appraisals. The key assumptions are further defined in Note 5.

Basis of ConsolidationThe REIT’s basis of consolidation is described above in the “Basis of Consolidation” section. Judgment is applied in determining whether “control” exists within the framework of IFRS 10, "Consolidated Financial Statements".

Income TaxesUnder current tax legislation, a real estate investment trust is not liable to pay Canadian income taxes provided that its taxable income is fully distributed to unitholders during the year. The REIT is a real estate investment trust if it meets prescribed conditions under the Income Tax Act (Canada) relating to the nature of its assets and revenue (the “REIT Conditions”). The REIT has reviewed the REIT Conditions and has assessed their interpretation and application to the REIT’s Canadian assets and revenue, and it has determined that it qualifies as a real estate investment trust. The REIT expects to qualify as a real estate investment trust under the Income Tax Act (Canada); however, should it no longer qualify, it would not be able to flow through its taxable income to unitholders and the REIT would, therefore, be subject to tax on its Canadian properties.

Critical Accounting Estimates and AssumptionsThe preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods.

In determining estimates of fair market value for the REIT’s income producing properties, the assumptions underlying estimated values are limited by the availability of comparable data and the uncertainty of predictions concerning future events. Significant estimates used in determining fair value of the REIT’s income producing properties include capitalization rates and stabilized net operating income (which is influenced by vacancy rates, inflation rates and operating costs). Should any of these underlying assumptions change, actual results could differ from the estimated amounts. The critical estimates and assumptions underlying the valuation of income producing properties are outlined in Note 5.


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NOTE 3ADOPTION OF ACCOUNTING STANDARDS Current Accounting Policy ChangesIAS 40, “Investment Property” (“IAS 40”)On January 1, 2015, the REIT adopted an amendment with respect to the description of ancillary services in IAS 40, which differentiates between investment property and owner-occupied property (for example, property, plant and equipment). The amendment is applied prospectively and clarifies that IFRS 3, Business Combinations, and not the description of ancillary services in IAS 40, is used to determine if the transaction is the purchase of an asset or a business combination. This amendment did not result in a material impact to the consolidated financial statements.

IFRS 8, “Operating Segments” (“IFRS 8”)On January 1, 2015, the REIT adopted the amendments to IFRS 8. The amendments are applied retrospectively and clarify that:

• An entity must disclose the judgments made by management in applying the aggregation criteria in paragraph 12 of IFRS 8, including a brief description of operating segments that have been aggregated and the economic characteristics (for example, sales and gross margins) used to assess whether the segments are ‘similar’.

• The reconciliation of segment assets to total assets is only required to be disclosed if a measure of segment assets is reported to the chief operating decision maker, similar to the required disclosure for segment liabilities.

These amendments did not result in a material impact to the consolidated financial statements.

Future Accounting Policy ChangesAmendments to IFRS 11, “Joint Arrangements” (“IFRS 11”): Accounting for Acquisitions of InterestsThe amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not remeasured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party.

The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the REIT.

Amendments to IAS 1, “Presentation of Financial Statements” (“IAS 1”): Disclosure InitiativeThe amendments to IAS 1 clarify, rather than significantly change, existing IAS 1 requirements. The amendments clarify:

• The materiality requirements in IAS 1;• That specific line items in the statement(s) of profit or loss and OCI and the statement of financial position

may be disaggregated;• That entities have flexibility as to the order in which they present the notes to financial statements; and• That the share of OCI of associates and joint ventures accounted for using the equity method must be

presented in aggregate as a single line item and classified between those items that will or will not be subsequently reclassified to profit or loss.

Furthermore, the amendments clarify the requirements that apply when additional subtotals are presented in the statement of financial position and the statement(s) of profit or loss and OCI. These amendments are effective for annual periods beginning on or after January 1, 2016, with early adoption permitted. These amendments are not expected to have any impact on the REIT.


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IFRS 15, “Revenue from Contracts with Customers” (“IFRS 15”)In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The REIT is currently assessing the impact of IFRS 15 on its consolidated financial statements.

IFRS 9 (2014), “Financial Instruments” (“IFRS 9”)The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, “Financial Instruments: Recognition and Measurement” (“IAS 39”). IFRS 9 addresses the classification and measurement of all financial assets and liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Included also are the requirements to measure debt-based financial assets at either amortized cost or FVTPL and to measure equity-based financial assets either as held-for-trading or as FVTOCI. No amounts are reclassified out of OCI if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018, with earlier application permitted. The REIT is currently assessing the impact of IFRS 9 on its consolidated financial statements.

IFRS 16, “Leases”In January 2016, the IASB issued IFRS 16, Leases. The new standard requires that for most leases, lessees must initially recognize a lease liability for the obligation to make lease payments and a corresponding right-of-use asset for the right to use the underlying asset for the lease term. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance leases is retained. This standard will be effective for annual periods beginning after January 1, 2019, with early adoption permitted so long as IFRS 15 has been adopted. The REIT is currently assessing the impact this new standard will have on its consolidated financial statements.


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NOTE 4SUBSIDIARY WITH NON-CONTROLLING INTEREST As at December 31, 2015, the REIT owned a 51% effective interest in a limited partnership (the “LP”). The following summarizes the results of the LP before any intercompany eliminations and the corresponding non-controlling interest in the equity of the LP.

As at December 31, 2015 LPNon-current assets 77,089

Current assets 1,398

Total assets 78,487

Non-current liabilities 40,302

Current liabilities 401

Total liabilities 40,703

Equity 37,784

Non-controlling interest 18,515

For the year ended December 31, 2015 LPRevenue from income producing property 2,253

Expenses (691)

Fair value loss on real estate property (981)

Net income for the year 581

Non-controlling interest 284

NOTE 5 INCOME PRODUCING PROPERTIESReconciliations of the carrying amounts for income producing properties at the beginning and end of the current and prior financial years are set out below:


Balance, beginning of year $1,785,308 $1,651,790Additions:

Acquisitions 73,862 1,087Capital expenditures 17,842 19,540

Dispositions — (4,000)Fair value gain, net 38,804 40,104Foreign currency translation 189,460 76,615Other (22) 172

Balance, end of year $2,105,254 $1,785,308

On September 1, 2015, the REIT acquired a 51% interest in a garden-style property comprising 252 suites located in Cooper City, Florida (the “Monterra Acquisition”), for a purchase price of $73,862 (US$56,045), including closing costs.


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As at December 31, 2015 and 2014, the REIT had its Canadian portfolio appraised by Morguard’s appraisal division and the U.S. portfolio appraised by independent U.S. real estate appraisal firms. As at December 31, 2015, approximately 58.1% (December 31, 2014 - 52.8%) of the REIT’s portfolio was appraised by independent U.S. real estate appraisal firms.

Morguard’s appraisal division consists of Appraisal Institute of Canada (“AIC”) designated Accredited Appraiser Canadian Institute (“AACI”) members who are qualified to offer valuation and consulting services and expertise for all types of real property, all of whom are knowledgeable and have recent experience in the fair value techniques for investment properties. AACI designated members must adhere to AIC’s Canadian Uniform Standards of Professional Appraisal Practice (CUSPAP) and undertake ongoing professional development. Morguard’s appraisal division is responsible for determining the fair value of investment properties every quarter. The team reports directly to a senior executive, and the internal valuation team's valuation processes and results are reviewed by management at least once every quarter, in line with the REIT’s quarterly reporting dates.

The REIT utilizes the direct capitalization income method. This method requires that rental income from current leases and key assumptions about rental income, vacancies and inflation rates among other factors are used to determine a one-year stabilized net operating income forecast for each individual property within the REIT’s portfolio and also considers any capital expenditures anticipated within the year. A capitalization rate was also determined for each property based on market information related to the external sale of similar properties within a similar location. These factors were used to determine the fair value of investment properties at each reporting period.

As at December 31, 2015, using the direct capitalization income approach, the properties were valued using capitalization rates in the range of 4.8% to 8.0% (December 31, 2014 - 4.8% to 8.3%), applied to a stabilized net operating income of $107,869 (December 31, 2014 - $93,649), resulting in an overall weighted average capitalization rate of 5.3% (December 31, 2014 - 5.4%).

The stabilized occupancy and average capitalization rates by location are set out in the following table:

December 31, 2015 December 31, 2014Occupancy Rates Capitalization Rates Occupancy Rates Capitalization Rates

Max. Min. Max. Min.Weighted

Average Max. Min. Max. Min.Weighted Average

Canada 5.0% 4.8% 4.9% 5.0% 4.8% 4.9%Ontario 97.0% 97.0% 5.0% 4.8% 4.9% 97.0% 97.0% 5.0% 4.8% 4.9%

Alberta 97.7% 97.7% 5.0% 5.0% 5.0% 97.7% 97.7% 5.0% 5.0% 5.0%

United StatesSoutheast

Alabama 94.0% 93.0% 6.3% 6.3% 6.3% 94.0% 94.0% 6.5% 6.5% 6.5%Florida 95.0% 93.5% 7.0% 5.0% 5.7% 95.0% 93.5% 7.0% 5.3% 5.8%Georgia 96.0% 95.0% 5.8% 5.3% 5.6% 96.0% 95.0% 5.8% 5.5% 5.7%Louisiana 98.1% 91.0% 8.0% 5.8% 7.1% 97.6% 91.0% 8.3% 5.8% 7.2%

OtherColorado 95.0% 95.0% 5.5% 5.5% 5.5% 95.0% 95.0% 5.8% 5.5% 5.6%North Carolina 94.0% 94.0% 5.5% 5.3% 5.4% 95.0% 94.0% 5.8% 5.5% 5.6%Texas 95.0% 95.0% 5.5% 5.3% 5.3% 95.0% 95.0% 5.5% 5.3% 5.3%

Fair values are most sensitive to changes in capitalization rates and stabilized net operating income. Generally, an increase in stabilized net operating income will result in an increase in the fair value of the income producing properties, and an increase in capitalization rates will result in a decrease in the fair value of the properties. The capitalization rate magnifies the effect of a change in stabilized net operating income, with a lower capitalization rate resulting in a greater impact on the fair value of the property than a higher capitalization rate. If the weighted


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average stabilized capitalization rate were to increase or decrease by 25 basis points, the value of the income producing properties as at December 31, 2015, would decrease by $93,968 or increase by $103,259, respectively.

Dispositions Completed During the Year Ended December 31, 2014 On April 25, 2014, the REIT sold approximately 0.7 acres of land adjacent to a residential property in Edmonton, Alberta, for $4,000.

NOTE 6 MORTGAGES PAYABLE AND CLASS C LP UNITS Morguard retained the mortgages on four properties that were sold to the REIT and also retained the deferred financing costs associated with the Retained Debt. Morguard remains responsible for the interest and principal payments on the Retained Debt, and the Retained Debt is secured by a charge on the properties. In consideration of the Retained Debt, Morguard received Class C LP Units of the Partnership on which distribution payments will be made in an amount expected to be sufficient to permit Morguard to satisfy amounts payable with respect to (i) principal and interest under the Retained Debt and (ii) the amount of tax that is due and payable that is reasonably attributable to any distributions on the Class C LP Units.

Mortgages payable and Class C LP Units consist of the following:

As at December 31, 2015 2014Mortgages Payable

Mortgages Class C LP and Class C LPPayable Units Total Units

Principal balance of mortgages $1,026,839 $91,045 $1,117,884 $954,717Deferred financing costs (12,598) (1,683) (14,281) (13,420)Mark-to-market adjustment 9,794 — 9,794 14,329Present value of tax payment on Class C LP Units — 8,247 8,247 7,838

$1,024,035 $97,609 $1,121,644 $963,464

Current $62,151 $2,624 $64,775 $72,137Non-current 961,884 94,985 1,056,869 891,327

$1,024,035 $97,609 $1,121,644 $963,464

Range of interest rates 2.25%-5.60% 3.97% 2.25%-5.60% 2.96%-5.60%Weighted average interest rate 3.81% 3.97% 3.82% 3.91%Weighted average term to maturity (years) 5.1 5.5 5.1 5.6Fair value of mortgages and Class C LP Units $1,055,119 $100,207 $1,155,326 $990,251

The mortgages directly held by the REIT and the Class C LP Units bear interest at rates ranging between 2.25% and 5.60% per annum with a weighted average interest rate of 3.82% (December 31, 2014 - 3.91%) and mature between 2016 and 2026 with a weighted average term to maturity of 5.1 years (December 31, 2014 - 5.6 years).

On February 26, 2015, the REIT completed the refinancing of a multi-suite residential property located in Kitchener, Ontario, in the amount of $46,331, at an interest rate of 2.25% for a term of 10 years.

On December 18, 2015, the REIT completed the financing of the Monterra Acquisition (Note 5), in the amount of $41,337 (US$29,590), at an interest rate of 3.86% for a term of seven years.

On December 22, 2015, the REIT completed the refinancing of a multi-suite residential property located in Edmonton, Alberta, in the amount of $41,038, at an interest rate of 2.99% for a term of 10 years.


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

PrincipalInstalment

RepaymentsBalancesMaturing Total

WeightedAverage

Contractual Rate2016 $22,779 $38,403 $61,182 3.90%2017 19,577 232,406 251,983 4.67%2018 18,568 106,921 125,489 4.79%2019 18,506 106,126 124,632 3.21%2020 18,812 8,828 27,640 4.25%Thereafter 55,060 471,898 526,958 3.41%

$153,302 $964,582 $1,117,884 3.82%

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

The REIT’s first mortgages are registered against specific real estate assets, and the Retained Debt is secured by a charge on the four properties. The REIT provided Morguard’s creditors with a guarantee with respect to the Retained Debt to ensure the lenders are not prejudiced in their ability to collect from Morguard in the event that payments on the Class C LP Units are not made as expected. Morguard has also provided an indemnity to the REIT for any losses suffered by the REIT in the event payments on the Retained Debt are not made as required provided such losses are not attributable to any action or failure to act on the part of the REIT.

NOTE 7CONVERTIBLE DEBENTURESConvertible debentures consist of the following:

As at December 31, 2015 20144.65% convertible unsecured subordinated debentures $59,806 $59,806Fair value of conversion option 41 94Unamortized financing costs (1,170) (1,636)

$58,677 $58,264

On March 15, 2013, the REIT issued $60,000 principal amount of 4.65% convertible unsecured subordinated debentures (the “Debentures”) maturing on March 30, 2018 (“Maturity Date”). The underwriters’ commissions attributable to the Debentures in the amount of $2,062 have been capitalized and are being amortized over their term to maturity. Morguard acquired $5,000 aggregate principal amount of the Debentures.

As at December 31, 2015, $60,000 of the face value of the Debentures was outstanding (December 31, 2014 - $60,000), of which Morguard continues to own $5,000.

Interest is payable semi-annually, not in advance, on March 31 and September 30 of each year, commencing on September 30, 2013. For the year ended December 31, 2015, $2,790 (2014 - $2,790) is included in interest expense (Note 12). As at December 31, 2015, $703 (December 31, 2014 - $711) is included in accounts payable and accrued liabilities.

Each of the Debentures can be convertible into fully paid, non-assessable and freely tradable Units at any time prior to the close of business on the last business day immediately preceding the Maturity Date or, if such Debentures have been called for redemption, then up to, but not after, the close of business on the last business day immediately preceding the date fixed for redemption at a conversion price of $15.50 per Unit, being the ratio of approximately 64.5161 Units per $1,000 principal amount of the Debentures.


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From April 1, 2016 to March 31, 2017, the Debentures shall be redeemable, in whole at any time or in part from time to time, at the option of the REIT on not more than 60 days’ and not less than 30 days’ prior written notice at a redemption price equal to the principal amount thereof plus accrued and unpaid interest up to the date fixed for redemption provided that the volume-weighted average trading price of the Units on the TSX (if the Units are then listed on the TSX) for the 20 consecutive trading days ending on the fifth trading day preceding the date on which notice of redemption is given (the “Current Market Price”) is not less than 125% of the conversion price. From April 1, 2017, and prior to the Maturity Date, the Debentures shall be redeemable, in whole at any time or in part from time to time, at the option of the REIT on not more than 60 days’ and not less than 30 days’ prior written notice at a redemption price equal to the principal amount thereof plus accrued and unpaid interest up to the date fixed for redemption. Subject to regulatory approval and other conditions, the REIT may, at its option, elect to satisfy its obligation to pay, in whole or in part, the principal amount of the Debentures that are to be redeemed or that have matured by issuing and delivering that number of freely tradable Units to the debentureholders obtained by dividing the principal amount of the Debentures being repaid by 95% of the Current Market Price on the date of redemption or maturity, as applicable.

NOTE 8CLASS B LP UNITSOn April 18, 2012, the REIT issued 17,223,090 Class B LP Units to Morguard for $172,231. The Class B LP Units are non-transferable, except under certain circumstances, but are exchangeable on a one-for-one basis into Units of the REIT at any time at the option of the holder. Prior to such exchange, distributions are made on the Class B LP Units in an amount equivalent to the distribution that would have been made had the Units of the REIT been issued. Each Class B LP Unit was accompanied by a Special Voting Unit, which entitles the holder to receive notice of, attend and vote at all meetings of the unitholders. There is no value assigned to the Special Voting Units.

As at December 31, 2015, the REIT valued the Class B LP Units based on the closing price of the TSX-listed Units which resulted in a fair value liability of $183,770 (December 31, 2014 - $172,575) and a corresponding fair value loss for the year ended December 31, 2015 of $11,195 (2014 - $10,506).

For the year ended December 31, 2015, $10,333 (2014 - $10,333) is included in interest expense (Note 12).

As at December 31, 2015 and 2014, there were 17,223,090 Class B LP Units issued and outstanding.

NOTE 9MORGUARD FACILITYThe REIT has an unsecured revolving credit facility with Morguard (the “Morguard Facility”) that provides for borrowings or advances that can be drawn or advanced either in Canadian dollars or an equivalent amount in U.S. dollars subject to the availability of sufficient funds. If in Canadian dollars, interest will be calculated either at the Canadian prime lending rate or at the bankers’ acceptance rate plus 1.8%. If the borrowing or advance is in U.S. dollars, interest will be calculated either at the U.S. prime lending rate or at the U.S. dollar London Interbank Offered Rate (LIBOR) plus 1.7%. The maximum allowable to be borrowed or advanced under the Morguard Facility is $100,000.

As at December 31, 2015, the amount receivable outstanding under the Morguard Facility was $24,748 (December 31, 2014 - $nil).

During the year ended December 31, 2015, the REIT earned on the Morguard Facility net interest income of $99 (2014 - interest expense of $499).


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NOTE 10ACCOUNTS PAYABLE AND ACCRUED LIABILITIESAccounts payable and accrued liabilities consist of the following:


Accounts payable and accrued liabilities $22,244 $20,473Tenant deposits 9,882 7,939

$32,126 $28,412

NOTE 11UNITHOLDERS’ EQUITY(a) UnitsThe REIT is authorized to issue an unlimited number of Units. Each Unit confers the right to one vote at any meeting of unitholders and to participate pro rata in the distributions by the REIT and, in the event of termination or winding-up of the REIT, in the net assets of the REIT. The unitholders have the right to require the REIT to redeem their Units on demand subject to certain conditions. The Units have no par value. Upon receipt of the redemption notice by the REIT, all rights to and under the Units tendered for redemption will cease and the holder thereof will be entitled to receive a price per Unit (“Redemption Price”) as determined by a formula outlined in the Declaration of Trust. The Redemption Price will be paid in accordance with the conditions provided for in the Declaration of Trust.

The Trustees have discretion with respect to the timing and amounts of distributions.

Units are redeemable at any time, in whole or in part, on demand by the holders. Upon receipt of the redemption notice by the REIT, all rights to and under the Units tendered for redemption will be surrendered and the holder will be entitled to receive a price per Unit equal to the lesser of: (i) 90% of the market price of the Units on the principal exchange market on which the Units are listed or quoted for trading during the 10 consecutive trading days ending immediately prior to the date on which the Units were surrendered for redemption; or (ii) 100% of the closing market price on the principal exchange market on which the Units are listed or quoted for trading on the redemption date.

The total amount payable by the REIT, with respect to any Units surrendered for redemption during any calendar month, will not exceed $50 unless waived at the discretion of the Trustees and will be satisfied by way of a cash payment in Canadian dollars within 30 days after the end of the calendar month in which the Units were tendered for redemption. To the extent the Redemption Price payable with respect to Units surrendered for redemption exceeds $50 in any given month, such excess will be redeemed for cash or another financial instrument such as notes payable.

(b) Normal Course Issuer BidsThe REIT had the approval of the TSX under its normal course issuer bid (“NCIB”) to purchase up to 2,250,000 Units and $5,500 principal amount of the Debentures. The program expired on December 20, 2015. On December 15, 2015, the REIT obtained the approval of the TSX under its NCIB to purchase up to 2,251,652 Units, being approximately 10% of the public float of outstanding Units; the program expires on December 20, 2016. The daily repurchase restriction for the Units is 7,942. Additionally, the REIT may purchase up to $5,500 principal amount of the Debentures, being 10% of the public float of outstanding Debentures. The daily repurchase restriction for the Debentures is $6. The price that the REIT would pay for any such Units or Debentures would be the market price at the time of acquisition. There were no repurchases relating to Units and Debentures during the year ended December 31, 2015.

(c) Special Voting UnitsThe REIT is authorized to issue an unlimited number of Special Voting Units. The Declaration of Trust and the exchange agreement provide for the issuance of the Special Voting Units, which have no economic entitlement in the REIT or in the distribution or assets of the REIT but are used to provide voting rights proportionate to the votes


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of the Units to holders of securities exchangeable into Units, including the Class B LP Units. Each Special Voting Unit is not transferable separately from the Class B LP Unit to which it is attached and will be automatically redeemed and cancelled upon exchange of the attached Class B LP Unit into a Unit.

(d) Units OutstandingThe following table summarizes the changes in Units for the period from December 31, 2013, to December 31, 2015:

Issued and fully paid Units Units AmountBalance, December 31, 2013 29,288,519 $309,736Distribution Reinvestment Plan 21,219 214Balance, December 31, 2014 29,309,738 309,950Distribution Reinvestment Plan 25,455 261Balance, December 31, 2015 29,335,193 $310,211

Total distributions declared during the year ended December 31, 2015 amounted to $17,594 or $0.60 per Unit (2014 - $17,580 or $0.60 per Unit), including distributions payable of $1,467 that were declared on December 15, 2015, and paid on January 15, 2016. On January 15, 2016, the REIT declared a distribution of $0.05 per Unit paid on February 16, 2016. On February 16, 2016, the REIT declared a distribution of $0.05 per Unit payable on March 15, 2016.

(e) Distribution Reinvestment PlanUnder the REIT’s Distribution Reinvestment Plan (“DRIP”), unitholders can elect to reinvest cash distributions into additional Units at a weighted average closing price of the Units on the TSX for the five trading days immediately preceding the applicable date of distribution. During the year ended December 31, 2015, the REIT issued 25,455 Units under the DRIP (December 31, 2014 - 21,219 Units).

(f) Accumulated Other Comprehensive IncomeThe accumulated other comprehensive income consists of the following amounts:


Unrealized foreign currency translation gain $114,683 $41,136Unamortized balance of cash flow hedge — (284)

Balance, end of year $114,683 $40,852


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NOTE 12INTEREST EXPENSEThe components of interest expense are as follows:


Interest on mortgages $37,065 $33,979Interest and tax payment on Class C LP Units 4,162 4,239Interest on the Debentures (Note 7) 2,790 2,790Interest on indebtedness and other — 499Amortization of mark-to-market adjustment on mortgages (6,740) (7,457)Amortization of deferred financing costs 2,984 3,308Amortization of deferred financing costs on the Debentures (Note 7) 466 446Amortization of cash flow hedge 284 218Fair value gain on conversion option on the Debentures (Note 7) (53) (57)

40,958 37,965Distributions on Class B LP Units (Note 8) 10,333 10,333

$51,291 $48,298

NOTE 13TRUST EXPENSESThe components of trust expenses are as follows:


Asset management fees and distributions $8,128 $6,691Professional fees 1,159 1,125Public company expenses 595 461Other 278 186

$10,160 $8,463

NOTE 14RELATED PARTY TRANSACTIONSIn addition to the related party transactions disclosed in Notes 6, 7, 8 and 9, related party transactions also include the following:

(a) Agreements With Morguard AffiliatesThe REIT, the Partnership and its subsidiaries entered into a series of agreements (the “Agreements”) with certain Morguard affiliates whereby the following services are provided by Morguard’s affiliates under the direction of the REIT:

Property ManagementPursuant to the Agreements, Morguard’s affiliates administer the day-to-day operations of the Canadian and U.S. income producing properties, for which Morguard’s affiliates receive partnership fees and distributions equal to 3.5% of gross property revenue of the income producing properties, payable monthly. For the year ended December 31, 2015, property management fees and distributions of $6,427 (2014 - $4,699) are included in property operating costs. As at December 31, 2015, $588 (December 31, 2014 - $426) is included in accounts payable and accrued liabilities.

Asset ManagementPursuant to the Agreements, Morguard’s affiliates have certain duties and responsibilities for the strategic management and administration of the Partnership and its subsidiaries, for which they receive partnership fees


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and distributions equal to 0.25% of the Partnership’s gross book value defined as acquisition cost of the REIT’s assets plus (i) fair value adjustments and (ii) accumulated amortization on property, plant and equipment. In addition, an annual fee and distribution are calculated in arrears, determined by multiplying 15% of the Partnership’s funds from operations in excess of $0.66 per Unit. For the year ended December 31, 2015, asset management fees and distributions of $8,128 (2014 - $6,267) are included in trust expenses. As at December 31, 2015, $3,979 (December 31, 2014 - $2,815) is included in accounts payable and accrued liabilities.

AcquisitionPursuant to the Agreements, Morguard’s affiliates are entitled to receive partnership fees and distributions with respect to properties acquired, directly or indirectly, by the REIT from third parties, and the fees and distributions are to be paid upon the closing of the purchase of each such property. The fees and distributions range from 0% of the purchase price paid for properties acquired directly or indirectly from Morguard, including entities controlled by Morguard, up to 0.75% of the purchase price paid for properties acquired from third parties. For the year ended December 31, 2015, acquisition fees and distributions amounted to $281 (2014 - $nil).

FinancingPursuant to the Agreements, with respect to arranging for financing services, Morguard’s affiliates are entitled to receive partnership fees and distributions equal to 0.15% of the principal amount and associated costs of any debt financing or refinancing. For the year ended December 31, 2015, financing fees and distributions of $160 (2014 - $430) have been capitalized to deferred financing costs.

DevelopmentPursuant to the Agreements, Morguard’s affiliates are entitled to receive partnership fees and distributions equal to 1.00% of development costs, where such costs exceed $1,000 and are incurred in connection with: (i) the construction, enlargement or reconstruction of any building, erection, plant, equipment or improvement on a property; or (ii) any refurbishing, additions, upgrading or restoration of or renovations to existing buildings, erections, plant, equipment or improvements, including redevelopments, other than repair and maintenance in the ordinary course of business. There were no fees and distributions relating to development services for the years ended December 31, 2015 and 2014.

All the Agreements have an initial term of 10 years and are renewable for further terms of five years each, subject to certain notice provisions or upon the occurrence of an event of default as stipulated in the provisions of the Agreements.

(b) Head Lease With MorguardThe REIT originally entered into a head lease agreement (the “Head Lease”) with Morguard as head tenant with respect to 90 furnished suites at 3665 Arista Way, Mississauga, Ontario in 2012. Under the terms of the Head Lease, Morguard will pay the REIT rent on a quarterly basis an amount equal to 85% of gross revenue allocable to the suites subject to the Head Lease. During 2015, the REIT gradually converted all the furnished suites under the agreement to unfurnished suites and terminated the Head Lease. The payment under the Head Lease for the year ended December 31, 2015 amounted to $310 (2014 - $959).

(c) Interest ReceivableDuring 2013, the REIT acquired from Morguard, 12 residential properties financed by assumed mortgages with an effective weighted average interest rate of 5.7% and maturing on February 1, 2017. Morguard agreed to provide instalment payments during the remaining terms of the assumed mortgages to the REIT in order to achieve an effective annual interest rate of 4.7%. As at December 31, 2015, the REIT has a receivable of $1,813 (US$1,310) from Morguard with regard to the remaining instalment receipts, which is included in amounts receivable with $1,553 (US$1,122) classified as a current receivable and $260 (US$188) classified as a non-current receivable.

(d) Key Management CompensationThe executive officers of the REIT are employed by Morguard, and the REIT does not directly or indirectly pay any compensation to them. Any variability in compensation paid by Morguard to the executive officers of the REIT


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has no impact on the REIT’s financial obligations, including its obligations under the various Agreements with Morguard and Morguard’s affiliates.

NOTE 15INCOME TAXESThe REIT is a “mutual fund trust and a real estate investment trust” pursuant to the Income Tax Act (Canada) and, accordingly, is not taxable on its income earned on its Canadian properties to the extent that the income is distributed to its unitholders. However, this exemption does not extend to the REIT’s U.S. properties, which are held by U.S. subsidiaries that are taxable legal entities.

(a) The following are the major components of income tax expense:

For the years ended December 31, 2015 2014Current income tax provision - based on taxable income of the current year $166 $109Deferred income tax provision - origination and reversal of temporary differences 33,193 26,111

$33,359 $26,220

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


Impact of foreign tax rates $28,834 $21,029Non-recognition of the benefit of current year’s tax losses 4,346 4,659State tax 166 109Other 13 423

$33,359 $26,220

(c) The following are the major components of deferred income tax liabilities pertaining to the U.S. properties:

As at December 31, 2015 2014Income producing properties $82,229 $40,972Equity-accounted investment 28 —Mark-to-market adjustment on mortgages payable (3,674) (5,113)Other 248 112

Total net deferred income tax liabilities $78,831 $35,971

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

As at December 31, 2015 2014Balance, beginning of year $35,971 $7,867Provision reflected in consolidated statements of income 33,193 26,111Impact of foreign currency fluctuations 9,667 1,993

Balance, end of year $78,831 $35,971

(e) The U.S. subsidiaries of the REIT have net operating losses of approximately US$29,989 (December 31, 2014 - US$19,028) that have not been recognized as it is not probable that taxable income will be available against which they can be utilized. These losses expire in varying years commencing in 2032. The U.S. subsidiaries of the REIT have other temporary differences for which no deferred tax asset is recognized of approximately US$750 (December 31, 2014 - US$2,686). These other temporary differences have no expiration date.


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

NOTE 16CONSOLIDATED STATEMENTS OF CASH FLOWS(a) Items Not Affecting Cash

For the years ended December 31, 2015 2014Fair value gain on income producing properties, net ($38,804) ($40,104)Fair value loss on Class B LP Units 11,195 10,506Fair value gain on conversion option on the Debentures (53) (57)Amortization of cash flow hedge 284 218Amortization of deferred financing - mortgages 2,687 3,012Amortization of deferred financing - Class C LP Units 297 296Amortization of deferred financing - Debentures 466 446Present value adjustment of tax liability on Class C LP Units 517 485Amortization of mark-to-market adjustments on mortgages (6,740) (7,457)Gain from early extinguishment of mortgages payable — (1,517)Amortization of tenant incentive 281 284Deferred income taxes 33,193 26,111

$3,323 ($7,777)

(b) Net Change in Non-Cash Operating Assets and Liabilities


Amounts receivable $678 $1,039Prepaid expenses (2,647) (6)Accounts payable and accrued liabilities 1,809 4,203

($160) $5,236

(c) Supplemental Cash Flow Information


Interest paid $43,634 $40,205


Proceeds from Morguard Facility $77,363 $46,485Repayment of Morguard Facility (100,651) (61,967)

($23,288) ($15,482)

NOTE 17MANAGEMENT OF CAPITALThe REIT defines capital that it manages as the aggregate of its unitholders’ equity, Class B LP Units, mortgages payable, Class C LP Units, convertible debentures and Morguard Facility payable. The REIT’s objective when managing capital is to ensure that the REIT will continue as a going concern so that it can sustain daily operations and provide adequate returns to its unitholders.


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The REIT 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 REIT mitigates these risks by its continued efforts to stagger the maturity profile of its long-term debt, enhance the value of its income producing properties, maintain high occupancy levels and foster excellent relations with its lenders. The REIT manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.

The total managed capital for the REIT as at December 31, 2015 and 2014, is summarized below:

As at December 31, 2015 2014Mortgages payable, principal balance $1,026,839 $860,865Class C LP Units and present value of tax payment, principal balance 99,292 101,690Convertible debentures, face value 60,000 60,000Class B LP Units 183,770 172,575Unitholders’ equity 656,117 560,835

$2,026,018 $1,755,965

The REIT’s primary objectives when managing capital are to maximize Unit value through the ongoing active management of the REIT’s assets and the acquisition of additional income producing properties, which are leased to creditworthy tenants, as opportunities arise.

The REIT’s strategy is also driven by policies as set out in the Declaration of Trust, as well as requirements from certain lenders.

The requirements of the REIT’s operating policies as outlined in the Declaration of Trust include requirements that the REIT will not:

(a) Incur or assume indebtedness if, after giving effect to the incurring or assumption of the indebtedness, the total indebtedness of the REIT would be more than 70% of the gross book value (as defined in the Declaration of Trust) in accordance with IFRS; and

(b) Incur indebtedness aggregating more than 20% of gross book value (as defined in the Declaration of Trust) in accordance with IFRS at floating interest rates or having maturities of less than one year.

The REIT’s debt ratios compared to its borrowing limits established in the Declaration of Trust are outlined in the table below:

As at December 31, Borrowing Limits 2015 2014

Total debt to gross book value 70% 55% 56%

Floating-rate debt to gross book value 20% —% —%

NOTE 18FINANCIAL INSTRUMENTS AND RISK MANAGEMENTThe REIT’s financial assets and liabilities comprise cash, restricted cash, amounts receivable, the Morguard Facility, accounts payable and accrued liabilities, mortgages payable, Class C LP Units, Class B LP Units 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 LiabilitiesThe fair values of cash, restricted cash, amounts receivable, the Morguard Facility and accounts payable and accrued liabilities approximate their carrying values due to the short-term maturity of those instruments.


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Mortgages payable, Class C LP Units and the Debentures are carried at amortized cost using the effective interest method of amortization. The estimated fair values of long-term borrowings have been determined 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 REIT at year-end.

The fair values of the mortgages payable and Class C LP Units have been determined by discounting the cash flows of these financial obligations using December 31, 2015, market rates for debts of similar terms (Category Level 2). Based on these assumptions, as at December 31, 2015, the fair values of the mortgages payable and Class C LP Units before deferred financing costs and present value of tax payment are estimated at $1,055,119 and $100,207, respectively (December 31, 2014 - $888,525 and $101,726). The fair values of the mortgages payable and Class C LP Units vary from their carrying values due to fluctuations in market interest rates since their issue.

The fair value of the Debentures is based on their market trading price (Category Level 1). As at December 31, 2015, the fair value of the Debentures before deferred financing costs has been estimated at $60,300 (December 31, 2014 - $61,140), compared with the carrying value of $59,806 (December 31, 2014 - $59,806).

The fair value of the Class B LP Units is equal to the market trading price of the Units.

The fair value hierarchy of financial instruments and income producing properties measured at fair value on the consolidated balance sheets is as follows:

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

Assets:Income producing properties $— $— $2,105,254 $— $— $1,785,308

Financial liabilities:Class B LP Units 183,770 — — 172,575 — —Conversion option of the Debentures — 41 — — 94 —

The REIT’s Debentures have no restrictive covenants.

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

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

Interest Rate RiskThe REIT is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not be refinanced on terms as favourable as those of the existing indebtedness. Interest on the Morguard Facility is subject to floating interest rates. As at December 31, 2015, the REIT had no outstanding balance of floating interest rate debt.

The REIT’s objective when managing interest rate risk is to minimize the volatility of the REIT’s income. As at December 31, 2015, interest rate risk has been minimized because all of the long-term debt is financed at fixed interest rates with maturities scheduled over a number of years.


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In addition, all the mortgages on the Canadian properties are insured by the Canada Mortgage and Housing Corporation. This added level of insurance offered to lenders allows the REIT to receive advantageous interest rates while minimizing the risk of mortgage renewals or extensions and significantly reduces the potential for a lender to call a loan prematurely.

Foreign Exchange RiskThe REIT is exposed to foreign exchange risk as it relates to its U.S. income producing properties due to fluctuations in the exchange rate between Canadian and U.S. dollars. Changes in the exchange rate may result in a reduction or an increase of reported earnings and OCI. For the year ended December 31, 2015, a $0.05 change in the U.S. to Canadian dollar exchange rate would have resulted in approximately a change to net income or loss of $1,700 and a change to comprehensive income or loss of $15,580.

The REIT’s objective when managing foreign exchange risk is to mitigate the exposure from fluctuations in the exchange rate by maintaining U.S. dollar denominated debt against its U.S. assets, which amounted to US$496,720 as at December 31, 2015 (December 31, 2014 - US$474,337). The REIT currently does not hedge translation exposures.

(b) Credit RiskCredit risk is the risk that: (i) one party to a financial instrument will cause a financial loss for the REIT by failing to discharge its obligations; and (ii) the possibility that tenants may experience financial difficulty and be unable to meet their rental obligations.

The REIT is exposed to credit risk on all financial assets, and its exposure is generally limited to the carrying value of the financial assets. The REIT mitigates the risk of credit loss with respect to tenants by evaluating their creditworthiness, obtaining security deposits as permitted by legislation and geographically diversifying its portfolio.

The REIT monitors its collection process on a month-to-month basis to ensure that a stringent policy is adopted to provide for all past due amounts. All receivables from past tenants and tenant receivable balances exceeding 90 days are provided for as bad debt expense in the consolidated statements of income within property operating costs. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against property operating costs in the consolidated statements of income.

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

As at December 31, 2015 2014Trade receivables $1,410 $1,228Less: Allowance for doubtful accounts (524) (511)Total trade receivables, net $886 $717

(c) Liquidity RiskLiquidity risk is the risk the REIT will encounter difficulties in meeting its financial liability obligations. The REIT is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not be able to be refinanced. The REIT’s objectives in minimizing liquidity risk are to maintain appropriate levels of leverage on its real estate assets and to stagger the debt maturity profile. As at December 31, 2015, the REIT was holding cash of $8,599 and had access to an additional $100,000 through the Morguard Facility.


CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | JUNE 30, 2015

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NOTE 19COMMITMENTS AND CONTINGENCIESThe REIT is involved in litigation and claims in relation to income producing properties that arise from time to time in the normal course of business. In the opinion of management, none of these, individually or in aggregate, would result in a liability that would have a significant adverse effect on the final position of the REIT. The REIT has agreed to indemnify, in certain circumstances, the Trustees and officers of the REIT.

In the Province of Ontario, the REIT is subject to, and believes it has complied with, the Residential Tenancies Act, 2006 (Ontario). Each year, the Ontario government determines the province’s residential rent increase for existing tenants. In 2015, the rental guideline increase was 1.6% (2014 - 0.8%).

NOTE 20SEGMENTED INFORMATIONAll of the REIT’s assets and liabilities are in, and their revenue derived from, the Canadian and U.S. multi-suite residential real estate segment. The Canadian properties are located in the provinces of Ontario and Alberta, and the U.S. properties are located in the states of Alabama, Colorado, Florida, Georgia, Louisiana, North Carolina and Texas. No single tenant accounts for 10% or more of the REIT’s total revenue. The REIT is separated into two reportable segments, Canada and the United States. The REIT has applied judgment by aggregating its operating segments according to the nature of the property operations. Such judgment considers the nature of operations, types of customers and an expectation that operating segments within a reportable segment have similar long-term economic characteristics.

Additional information with respect to each reportable segment is outlined below:

Three months ended Three months endedFor the three months ended December 31, December 31, 2015 December 31, 2014For the years ended, Canada U.S. Total Canada U.S. Total

Revenue from income producing properties $74,406 $124,036 $198,442 $72,535 $102,280 $174,815

Property operating expenses 36,145 58,115 94,260 36,309 48,289 84,598Net operating income $38,261 $65,921 $104,182 $36,226 $53,991 $90,217

December 31, 2015 December 31, 2014As at Canada U.S. Total Canada U.S. TotalIncome producing properties $850,810 $1,254,444 $2,105,254 $842,990 $942,318 $1,785,308

Mortgages payable and Class C LP Units $429,716 $691,928 $1,121,644 $404,479 $558,985 $963,464

Three months ended Three months endedFor the year ended December 31, December 31, 2015 December 31, 2014For the years ended, Canada U.S. Total Canada U.S. TotalAdditions to income producing properties $8,068 $83,636 $91,704 $8,936 $11,691 $20,627Fair value gain (loss) on income producingproperties ($226) $39,030 $38,804 $15,967 $24,137 $40,104

NOTE 21COMPARATIVE AMOUNTSCertain prior year comparative amounts have been reclassified to conform to the current year’s presentation.


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NOTE 22SUBSEQUENT EVENTOn January 26, 2016, the REIT repurchased 70,400 Units under its NCIB for a cash consideration of $736 at a weighted average price of $10.45 per Unit.

On February 1, 2016, the REIT acquired a multi-suite residential property comprising 370 suites located in Ottawa, Ontario, from a third party for a gross purchase price of approximately $67,000. The acquisition was partially financed by a new mortgage of $38,589 at an interest rate of 2.88% for a term of 10 years.

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