MORGUARD CORPORATION 2015 ANNUAL REPORT FOCUSED ON PERFORMANCE SPOTLIGHT STRONG FINANCIAL PERFORMANCE PAGE 4 INCREASING OUR PRESENCE IN CHICAGO PAGE 8 TOP HONOURS FOR A TOP-QUALITY DEVELOPMENT PAGE 15 MORGUARD CORPORATION Morguard Corporation (“Morguard” or the “Company”) is a real estate operating company listed on the Toronto Stock Exchange (TSX) under the symbol MRC. At December 31, 2015, the Company’s owned and managed portfolio of assets was valued at nearly $19 billion. Morguard’s primary business strategy is to create shareholder value through stable and increasing cash flow and asset value. This is achieved by improving the performance of the real estate portfolio and by acquiring and developing real estate properties in sound economic markets. The Company has three diversified lines of business: Investments in Real Property: Morguard owns and manages a diversified portfolio of high-quality residential, retail, office, industrial and hotel properties in North America. Real Estate Investment Trusts: Morguard owns a significant interest in two real estate investment trusts (REITs): Morguard REIT (TSX: MRT.UN), a closed-end trust with a diversified portfolio of Canadian commercial real estate assets, and Morguard North American Residential REIT (TSX: MRG.UN), an open-end trust with a diversified portfolio of multi-suite residential properties across North America. Advisory and Investment Services: Morguard provides real estate advisory services and portfolio management services, specializing in publicly traded equities and fixed income securities, to institutional clients and private investors. ON OUR COVER The Heathview, Toronto, ON, recipient of FRPO’s Rental Development of the Year Award for 2015. FELLOW SHAREHOLDERS 2015 WAS ANOTHER YEAR OF ACHIEVEMENT AS WE MAINTAINED OUR FOCUS ON CREATING VALUE IN OUR CORE LINES OF BUSINESS AND STRENGTHENED THE COMPANY THROUGH STRATEGIC INVESTMENTS. Our goal is to be a leading owner and manager of real estate while providing our investors with a high level of diversification. Our business model includes ownership and management of real estate assets, including substantial interests in two real estate investment trusts, Morguard REIT and Morguard North American Residential REIT. Further diversification comes from our portfolio of managed equities and fixed income products recently enhanced by our acquisition of a 60% interest in Lincluden Investment Management Limited. In 2015, we successfully grew Morguard’s portfolio with investments in the multi-suite residential segment and in the hotel industry, and through our ongoing development activities. For the long term, our focus is on increasing value for our shareholders while management continues to search for attractive real estate investment opportunities in markets across North America. Our core portfolio of assets and conservatively leveraged balance sheet continue to provide a high level of cash flow, allowing Morguard to grow without accessing capital markets. It is expected, in general, that real estate performance in 2016 will be similar to that seen in 2015, and that the oil sector will continue have a negative impact on overall growth. In 2016, management is actively working on remerchandising at a number of our enclosed retail centres with the prospect of achieving increased rental rates and securing long-term tenancies. Morguard’s achievements are made possible by the dedication and professionalism of our management team and employees and through the guidance of our directors. I express my appreciation to them all and I thank our shareholders sincerely for their support. K. RAI SAHI Chairman and Chief Executive Officer 2015 HIGHLIGHTS OUR STRONG PERFORMANCE FLOWS DIRECTLY FROM THE STRENGTH OF OUR REAL ESTATE PORTFOLIO. In 2015, Morguard again delivered strong financial results, building on its long record of success. At the same time, Morguard also strengthened its portfolio through development and strategic investments and earned recognition for its activities and for the quality of its properties. REVENUE AND EARNINGS Morguard’s sources of revenue and earnings are diversified, including rental revenue from owned properties, fees earned from the advisory services business, changes in property values, and management fees from investment clients, in both Canada and the United States. At December 31, 2015, our portfolio of owned real estate assets was valued at 20% INCREASE $8.1 billion, while our managed portfolio was valued at an IN MORGUARD’S additional $7.5 billion. SHARE OF FUNDS FROM OPERATIONS Our key financial metric is Morguard’s share of funds from (IN MILLIONS OF DOLLARS) operations (“FFO”). In 2015, Morguard’s share of FFO reached $183 million, up from $152 million a year earlier, $183 or 20%. Morguard’s share of FFO per common share $153 $152 reached $14.96 in 2015, an increase of 23% over 2014. $144 The key reasons for the year-over-year increase were the $129 continued growth in net operating income (“NOI”) and the refinancing of maturing term debt at prevailing low level interest rates. In 2015, Morguard’s total revenues increased to $884 million from $566 million the previous year, an increase of 56%. Revenue from our real estate properties accounted for 92% of total revenues, while management and advisory fees accounted for 7% of total revenues. On December 31, 2014, 11 12 13 14 15 2 MORGUARD CORPORATION the portfolio of real estate properties that the Company reports was significantly altered because of the consolidation of Morguard REIT. This accounting change, which added $292 million of revenues for 2015, required the Company to combine Morguard REIT’s real estate portfolio with 81% INCREASE Morguard Corporation’s portfolio and to eliminate the 56% INCREASE IN IN NET OPERATING reporting of the investment in Morguard REIT. TOTAL REVENUE INCOME (IN MILLIONS OF DOLLARS) (IN MILLIONS OF DOLLARS) Another key metric for Morguard is NOI, which is made up of revenue from real estate properties less operating costs, $884 $436 utilities and realty taxes. Increases in NOI demonstrate $292 $172 our ability to grow and to manage our properties efficiently. During 2015, NOI increased to $436 million from $241 million $592 a year earlier, which represents a rise of 81%. In addition to $566 $517 the consolidation of Morguard REIT, which added $172 million, $241 $264 $414 the increase in NOI was driven by higher same-property $393 $201 results, particularly in the multi-suite residential and office $164 $171 segments, acquisitions and contributions from completed developments. Excluding the impact of the consolidation of Morguard REIT, the Company has reported an increase in NOI in each of the past five years; and over this five-year period the compound annual growth rate in NOI was 12%. 11 12 13 14 15 11 12 13 14 15 SPOTLIGHT MANAGING GROWTH ACROSS THE BORDER One of Morguard’s successful business models in Canada has been to partner, or co-invest, with institutional clients in the purchase and management of major properties. Now that same model has been applied in the U.S. In 2015, Morguard and a Canadian pension fund client acquired for $74 million (US$56 million) 2940 Solano at Monterra, a newly- constructed, 252-suite, garden-style apartment property located in Cooper City, Florida, about 16 miles southwest of Fort Lauderdale. Morguard arranged for the sale of a 49% interest to one of its Canadian pension fund clients, and continues to hold the remaining 51%. This transaction represents Morguard’s first mandate to manage a U.S. asset for a Canadian client. The property has more than 281,000 square feet of space and offers its residents a clubhouse, pool, summer kitchen, fitness centre, and walking trails. Monterra itself is a community spanning more than 500 acres, and has been described as a “family paradise.” It is located near fine dining, exclusive shopping, and entertainment venues. 2015 ANNUAL REPORT 3 SPOTLIGHT STRONG FINANCIAL PERFORMANCE OVER FIVE YEARS Strong financial performance over the longer term is a key objective of Morguard Corporation and the results for the past five years demonstrate its achievement. Key factors include a strategic focus on growth, a prudent approach to financial management and an increasingly diversified portfolio and revenue streams. FINANCIAL HIGHLIGHTS (IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) 2011 2012 2013 2014 2015 Revenue from real estate properties $297,265 $315,590 $417,376 $472,808 $808,595 Total revenue 392,958 414,439 516,882 566,326 883,559 Net operating income 164,330 170,989 201,496 241,193 435,899 Morguard’s share of FFO1 128,609 144,133 153,073 152,053 183,139 Morguard’s share of FFO per common share $9.92 $11.22 $12.07 $12.14 $14.96 Total assets 3,486,107 4,409,816 5,452,995 7,993,684 8,602,132 Shareholders’ equity 1,683,100 2,048,288 2,329,972 2,498,605 2,697,724 Shareholders’ equity per common share $129.98 $160.37 $185.12 $202.27 $224.94 Number of common shares 12,949 12,772 12,586 12,353 11,993 1 Morguard’s share of FFO eliminates the non-controlling interests of Morguard North American Residential REIT. 4 MORGUARD CORPORATION 72% CANADA % NET OPERATING INCOME 28 IS DIVERSIFIED BY U.S. GEOGRAPHY THE MORGUARD PORTFOLIO NET OPERATING INCOME IS FURTHER DIVERSIFIED Morguard management is committed to maintaining the BY ASSET CLASS diversified nature of the Company’s real estate portfolio. YEAR ENDED DECEMBER 31, 2015 We believe this diversification is a key strength as it helps to insulate shareholders from any cyclical downturns in Multi-suite Residential a particular asset class or location and enhances the 34% long-term reliability of the revenue stream. The Company’s portfolio of real estate properties is highly diversified by asset class and by geography, with Retail 28% (by value and NOI) of the Company’s real estate 34% properties located in the U.S.