Exhibit 4.2

 

Independent auditor’s report

To the Shareholders of Tricon Residential Inc.

Our opinion

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of Tricon Residential Inc. and its subsidiaries (together, the Company) as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS).

What we have audited

The Company’s consolidated financial statements comprise:

 

•

the consolidated balance sheets as at December 31, 2020 and 2019;

 

•

the consolidated statements of comprehensive income for the years then ended;

 

•

the consolidated statements of changes in equity for the years then ended;

 

•

the consolidated statements of cash flows for the years then ended; and

 

•

the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.

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

Independence

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

PricewaterhouseCoopers LLP

PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2

T: +1 416 863 1133, F: +1 416 365 8215

 

“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.		TRICON RESIDENTIAL 2020 ANNUAL REPORT 1

 

 

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Other information

Management is responsible for the other information. The other information comprises the Management’s Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which is expected to be made available to us after that date.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance.

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, 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.

 

8 2020 ANNUAL REPORT TRICON RESIDENTIAL

 

In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

 

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

 

•

Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.

 

•

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

 

•

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 9

 

•

Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

 

•

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Derek Hatoum.

 

Chartered Professional Accountants, Licensed Public Accountants

Toronto, Ontario

March 2, 2021

 

10 2020 ANNUAL REPORT TRICON RESIDENTIAL

CONSOLIDATED BALANCE SHEETS

(in thousands of U.S. dollars)

 

		Notes				December 31, 2020				December 31, 2019
ASSETS
Non-current assets
Rental properties			6			$	6,321,918			$	—
Investments in Canadian multi-family developments			3, 7				94,868				—
Canadian development properties			3, 8				110,018				—
Investments in for-sale housing			3, 9				164,842				300,653
Investments – Tricon American Homes			2				—				1,365,007
Investments – Tricon Lifestyle Rentals			2				—				525,932
Restricted cash							116,302				—
Goodwill			5, 12				108,838				219
Intangible assets			24				12,363				16,396
Other assets			25				47,990				30,677
Deferred income tax assets			13				102,444				44,749
Derivative financial instruments			20				841				—
Total non-current assets							7,080,424				2,283,633
Current assets
Cash							55,158				8,908
Amounts receivable			16				25,593				8,952
Prepaid expenses and deposits							13,659				796
Total current assets							94,410				18,656
Total assets						$	7,174,834			$	2,302,289
LIABILITIES
Non-current liabilities
Long-term debt			17			$	3,863,316			$	307,869
Convertible debentures			18				165,956				161,311
Due to Affiliate			19				251,647				—
Derivative financial instruments			20				45,494				657
Limited partners’ interests in rental business			5				356,305				—
Long-term incentive plan			30				17,930				21,409
Other liabilities			26				4,599				14,329
Deferred income tax liabilities			13				298,071				98,584
Total non-current liabilities							5,003,318				604,159
Current liabilities
Amounts payable and accrued liabilities			11				98,290				26,190
Resident security deposits							45,157				—
Dividends payable			27				10,641				10,474
Current portion of long-term debt			17				274,190				284
Total current liabilities							428,278				36,948
Total liabilities							5,431,596				641,107
Equity
Share capital			28				1,192,963				1,201,061
Share capital reserve							—				(13,057	)
Contributed surplus							19,738				20,223
Cumulative translation adjustment							23,395				19,396
Retained earnings							499,000				425,515
Total shareholders’ equity							1,735,096				1,653,138
Non-controlling interest							8,142				8,044
Total equity							1,743,238				1,661,182
Total liabilities and equity						$	7,174,834			$	2,302,289

The accompanying notes are an integral part of these consolidated financial statements.

Approved by the Board of Directors

 

David Berman		Michael Knowlton

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 11

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands of U.S. dollars, except per share amounts which are in U.S. dollars, unless otherwise indicated)

 

For the years ended		Notes				December 31, 2020				December 31, 2019
Revenue from rental properties			14			$	478,187			$	—
Direct operating expenses			22				(169,538	)			—
Net operating income from rental properties							308,649				—
Revenue from private funds and advisory services			15			$	34,090			$	39,895
Income from investments in Canadian multi-family developments			7				14,124				—
Other income from Canadian development properties			8				791				—
(Loss) income from investments in for-sale housing			9				(61,776	)			9,646
Property management overhead			22				(22,654	)			—
Compensation expense			30				(40,100	)			(37,681	)
General and administration expense							(23,569	)			(11,683	)
Other income (expense)			23				(1,399	)			—
Interest expense			21				(170,610	)			(32,439	)
Fair value gain on rental properties			6				198,314				—
Fair value (loss) gain on derivative financial instruments and other liabilities			20				(7,461	)			2,961
Transaction costs							(14,016	)			(32,626	)
Amortization and depreciation expense			24, 25				(10,848	)			(6,274	)
Realized and unrealized foreign exchange (loss) gain							(166	)			42
Net change in fair value of limited partners’ interests in rental business			5				(50,581	)			—
Investment income – Tricon American Homes							—				162,193
Investment income – Tricon Lifestyle Rentals							—				34,980
							(189,951	)			89,119
Income before income taxes						$	152,788			$	129,014
Income tax recovery (expense) – current			13				4,050				(5,410	)
Income tax expense – deferred			13				(40,425	)			(9,469	)
Net income						$	116,413			$	114,135
Attributable to:
Shareholders of Tricon							113,322				111,562
Non-controlling interest							3,091				2,573
Net income						$	116,413			$	114,135
Other comprehensive income
Items that will be reclassified subsequently to net income
Cumulative translation reserve							3,999				(129	)
Comprehensive income for the year						$	120,412			$	114,006
Attributable to:
Shareholders of Tricon							117,321				111,433
Non-controlling interest							3,091				2,573
Comprehensive income for the year						$	120,412			$	114,006
Basic earnings per share attributable to shareholders of Tricon			29			$	0.58			$	0.65
Diluted earnings per share attributable to shareholders of Tricon			29			$	0.58			$	0.63
Weighted average shares outstanding – basic			29				194,627,127				172,735,776
Weighted average shares outstanding – diluted			29				195,795,473				191,081,128

The accompanying notes are an integral part of these consolidated financial statements.

 

12 2020 ANNUAL REPORT TRICON RESIDENTIAL

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(in thousands of U.S. dollars)

 

		Notes				Share capital				Share Capital Reserve				Contributed surplus				Cumulative translation adjustment				Retained earnings				Total shareholders’ equity				Non- controlling interest				Total
Balance at January 1, 2020						$	1,201,061			$	(13,057	)		$	20,223			$	19,396			$	425,515			$	1,653,138			$	8,044			$	1,661,182
Net income							—				—				—				—				113,322				113,322				3,091				116,413
Shares repurchased under put rights on common shares issued to acquire
Starlight U.S.
Multi-Family (No. 5)
Core Fund			28				(14,922	)			13,057				—				—				—				(1,865	)			—				(1,865	)
Cumulative translation reserve							—				—				—				3,999				—				3,999				—				3,999
Distributions to non-controlling interest							—				—				—				—				—				—				(2,993	)			(2,993	)
Dividends/Dividend reinvestment plan			27				4,388				—				—				—				(40,192	)			(35,804	)			—				(35,804	)
Stock options			30				1,615				—				(2,394	)			—				355				(424	)			—				(424	)
Shares reserved for restricted share awards			30				(541	)			—				276				—				—				(265	)			—				(265	)
Deferred share units			30				1,362				—				1,633				—				—				2,995				—				2,995
Balance at December 31, 2020						$	1,192,963			$	—			$	19,738			$	23,395			$	499,000			$	1,735,096			$	8,142			$	1,743,238
Balance at January 1, 2019						$	793,521			$	—			$	17,468			$	19,525			$	353,220			$	1,183,734			$	8,864			$	1,192,598
Net income							—				—				—				—				111,562				111,562				2,573				114,135
Shares issued to acquire Starlight
U.S. Multi-Family
(No. 5) Core Fund			28				405,491				(13,057	)			—				—				—				392,434				—				392,434
Cumulative translation reserve							—				—				—				(129	)			—				(129	)			—				(129	)
Distributions to non-controlling interest							—				—				—				—				—				—				(3,393	)			(3,393	)
Dividends/Dividend reinvestment plan			27				3,793				—				—				—				(38,575	)			(34,782	)			—				(34,782	)
Repurchase of common shares			28				(3,067	)			—				—				—				(692	)			(3,759	)			—				(3,759	)
Debentures conversion			28				100				—				—				—				—				100				—				100
Stock options			30				258				—				579				—				—				837				—				837
Shares repurchased and reserved for restricted share awards			30				(590	)			—				225				—				—				(365	)			—				(365	)
Deferred share units							1,555				—				1,951				—				—				3,506				—				3,506
Balance at December 31, 2019						$	1,201,061			$	(13,057	)		$	20,223			$	19,396			$	425,515			$	1,653,138			$	8,044			$	1,661,182

The accompanying notes are an integral part of these consolidated financial statements.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 13

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands of U.S. dollars)

 

For the years ended		Notes				December 31, 2020				December 31, 2019
CASH PROVIDED BY (USED IN)
Operating activities
Net income						$	116,413			$	114,135
Adjustments for non-cash items
Fair value gain on rental properties			6				(198,314	)			—
Fair value loss (gain) on derivative financial instruments and other liabilities			20				7,461				(2,961	)
Loss (income) from investments in for-sale housing			9				61,776				(9,646	)
Income from investments in Canadian multi-family developments			7				(14,124	)			—
Amortization and depreciation expense			24, 25				10,848				6,274
Deferred income taxes			13				40,425				9,469
Net change in fair value of limited partners’ interests in rental business			5				50,581				—
Other non-cash items			35				22,340				(176,291	)
Cash paid for AIP and LTIP							(16,733	)			(14,083	)
Distributions to non-controlling interests							(2,993	)			(3,393	)
Advances made to investments			7, 9				(7,702	)			(197,067	)
Distributions received from investments			7, 9				78,378				200,631
Changes in non-cash working capital items			35				(5,343	)			28,631
Net cash (used in) provided by operating activities						$	143,013			$	(44,301	)
Investing activities
Cash acquired in deemed acquisitions			5				22,199				—
Acquisition of remaining interest of Canadian development properties			8				(7,643	)			—
Acquisition of rental properties			6				(356,514	)			—
Capital additions to rental properties			6				(102,635	)			—
Disposition of rental properties			6				18,070				—
Additions to fixed assets and other non-current assets			8, 25				(13,025	)			(10,017	)
Net cash (used in) provided by investing activities						$	(439,548	)		$	(10,017	)
Financing activities
Lease payments			26				(2,415	)			(180	)
Repurchase of common shares			28				(14,922	)			(3,759	)
Equity issuance costs							—				(223	)
Proceeds from corporate borrowing			36				163,500				547,000
Repayments of corporate borrowing			36				(434,775	)			(455,683	)
Proceeds from rental and development properties borrowing			36				1,361,458				—
Repayments of rental and development properties borrowing			36				(969,979	)			—
Proceeds from Due to Affiliate			19				287,798				—
Dividends paid			27				(35,637	)			(31,725	)
Change in restricted cash							(32,220	)			—
Advances from limited partners			5				66,112				—
Distributions to limited partners			5				(46,162	)			—
Net cash (used in) provided by financing activities						$	342,758			$	55,430
Effect of foreign exchange rate difference on cash							27				23
Change in cash during the year							46,250				1,135
Cash – beginning of year							8,908				7,773
Cash – end of year						$	55,158			$	8,908
Supplementary information
Cash paid on
Income taxes						$	226			$	1,224
Interest						$	155,053			$	27,824

The accompanying notes are an integral part of these consolidated financial statements.

 

14 2020 ANNUAL REPORT TRICON RESIDENTIAL

1. NATURE OF BUSINESS

Tricon Residential Inc. (“Tricon” or the “Company”), formerly Tricon Capital Group Inc., is a residential real estate company primarily focused on owning and operating rental housing in North America. Tricon currently owns and operates approximately 31,000 single-family rental homes and multi-family rental units in 21 markets across the United States and Canada. Through its fully integrated operating platform, the Company earns rental income and ancillary revenue from single-family and multi-family rental properties as well as fees from managing third-party capital associated with its businesses.

Tricon was incorporated on June 16, 1997 under the Business Corporations Act (Ontario) and its head office is located at 7 St. Thomas Street, Suite 801, Toronto, Ontario, M5S 2B7. The Company is domiciled in Canada. Tricon became a public company on May 20, 2010, and its common shares are listed on the Toronto Stock Exchange (“TSX”) (symbol: TCN).

These consolidated financial statements were approved for issue on March 2, 2021 by the Board of Directors of Tricon.

2. BASIS OF PRESENTATION

Transition to a rental housing company

In January 2020, the Company completed its previously announced transition to an owner and operator of diversified rental housing, resulting in the Company determining that it no longer meets the criteria for being an investment entity (“Investment Entity Accounting”) under IFRS 10, Consolidated Financial Statements (“IFRS 10”). The exact timing of the transition from an investment entity to a rental housing company is highly judgmental and the Company concluded that this transition occurred in January 2020. As a result, effective January 1, 2020 (the “Transition Date”), the Company was required to apply the acquisition method of accounting as per IFRS 3, Business Combinations (“IFRS 3”), to all subsidiaries that were previously measured at fair value through profit or loss (“FVTPL”) (Note 5).

Consequently, the Company began consolidating the financial results of controlled subsidiaries including those holding its investments in single-family rental homes and U.S. multi-family rental properties, resulting in the inclusion of these subsidiaries’ assets, liabilities and non-controlling interests in the consolidated balance sheet of the Company. Similarly, these subsidiaries’ revenues and expenses have been reported in the Company’s consolidated statement of comprehensive income together with the non-controlling interests’ share of income.

Concurrent with the consolidation of the single-family and multi-family rental properties, the Company’s investments in Canadian multi-family developments are accounted for as follows: (i) proportionate consolidation for joint operations in accordance with IFRS 11, Joint Arrangements (“IFRS 11”) for the period between January 1, 2020 and June 22, 2020, during which time the Company owned 50% and 25% interests in The James and The Shops of Summerhill, respectively; and (ii) equity accounting for associates and joint ventures under IAS 28, Investments in Associates and Joint Ventures (“IAS 28”). The Company’s legacy investments in for-sale housing in the U.S. will continue to be accounted for as portfolio investments (financial assets) measured at FVTPL in accordance with IFRS 9, Financial Instruments (“IFRS 9”).

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 15

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

The accounting impact of the Company’s businesses and their presentation in the Company’s consolidated financial statements on the Transition Date are summarized in the table below.

 

		ACCOUNTING						PRESENTATION
Business segment		Accounting assessment		Accounting methodology		Presentation in Balance Sheet		Presentation in Statement of Income		Presentation of Non-controlling interest
Single-Family Rental
Tricon wholly-owned		Controlled subsidiary		Consolidation		Rental properties		Revenue from rental properties		N/A
SFR JV-1		Controlled subsidiary		Consolidation						Limited partners’ interests (Component of liabilities)
Multi-Family Rental
U.S. multi-family		Controlled subsidiary		Consolidation		Rental properties		Revenue from rental properties		N/A
Canadian multi-family: 592 Sherbourne (The Selby)		Investments in associate		Equity method		Investments in Canadian multi-family developments		Income from investments in Canadian multi-family developments		N/A
Canadian Multi-Family Developments
The Shops of Summerhill(1)		Joint operation for the period between January 1, 2020 and June 22, 2020, and controlled subsidiary from June 23, 2020		Proportionate consolidation between January 1, 2020 and June 22, 2020, and consolidation from June 23, 2020		Canadian development properties		Other income from Canadian development properties		N/A
The James (Scrivener Square)(1)										N/A
57 Spadina (The Taylor)		Investments in associate		Equity method		Investments in Canadian multi-family developments		Income from investments in Canadian multi-family developments		N/A
WDL – Block 8		Joint venture		Equity method						N/A
WDL – Block 20		Joint venture		Equity method						N/A
WDL – Blocks 3/4/7		Joint venture		Equity method						N/A
WDL – Block 10		Joint venture		Equity method						N/A
6–8 Gloucester (The Ivy)		Joint venture		Equity method						N/A
7 Labatt		Joint venture		Equity method						N/A
Private Funds and Advisory
Private funds GP entities		Controlled subsidiary		Consolidation		Consolidated		Revenue from private funds and advisory		N/A
Johnson development management		Controlled subsidiary		Consolidation		Consolidated				Component of equity
For-Sale Housing
Commingled funds		Portfolio investments		FVTPL		Investments in for-sale housing		Income from investments in for-sale housing		N/A
Separate accounts, side-cars and joint ventures		Portfolio investments		FVTPL						N/A

 

(1)

On June 23, 2020, Tricon acquired the remaining ownership interests of 50% and 75% in The James and The Shops of Summerhill, respectively (see Note 8). As a result, these investees ceased to be accounted for as joint operations, and the Company began to consolidate these subsidiaries on a prospective basis.

 

16 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

These financial reporting changes are material to the Company and have been applied on a prospective basis in accordance with the relevant guidance of IFRS 10 and, as such, the comparative period presentation reflects Investment Entity Accounting as previously reported.

Preparation of consolidated financial statements

The consolidated financial statements are prepared on a going-concern basis and have been presented in U.S. dollars, which is also the Company’s functional currency. All financial information is presented in thousands of U.S. dollars except where otherwise indicated.

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). The preparation of consolidated financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying Tricon’s accounting policies. The estimates involving a high degree of judgment or complexity, or estimates where assumptions are significant to the consolidated financial statements, are disclosed in Note 4.

These consolidated financial statements have been prepared under the historical cost convention, except for:

 

(i)	Rental properties, which are recorded at fair value with changes in fair value recorded in the consolidated statements of comprehensive income;

 

(ii)	Canadian development properties, which are recorded at fair value with changes in fair value recorded in the consolidated statements of comprehensive income;

 

(iii)

Investments in for-sale housing, which are accounted for as portfolio investments (financial assets) and are recorded at fair value through profit or loss;

 

(iv)	Derivative financial instruments, which are recorded at fair value through profit or loss; and

 

(v)	Limited partners’ interests, which are recorded at fair value through profit or loss.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting policies applied in the preparation of these consolidated financial statements.

Consolidation

The consolidated financial statements include the financial statements of the Company and its controlled subsidiaries. The Company controls an entity when it 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.

The accounting policies of subsidiaries have been modified where necessary to align them with the policies adopted by the Company. When the Company does not own all of the equity in a subsidiary, the non-controlling equity interest is disclosed in the consolidated balance sheet as a separate component of total equity. A non-controlling interest may also be classified as a financial liability if the non-controlling interest contains an option or a redemption feature, which is the case for SFR JV-1. All intra-group balances and transactions are fully eliminated upon consolidation.

The Company currently consolidates Tricon Single-Family Rental REIT LLC and its wholly-owned subsidiaries, along with SFR JV-1 (collectively, the “single-family rental” business), Tricon US Multi-Family REIT Inc. and its wholly-owned subsidiaries (collectively, the “multi-family rental” business), and The James (Scrivener Square) and The Shops of Summerhill (collectively, the “Canadian development properties”). The single-family and multi-family rental businesses were previously held through Tricon SF Home Rental ULC and TLR Saturn Master LP until the Company reorganized and simplified its legal structure in May 2020.

Joint arrangements and interests in associates

Investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. Joint operations are accounted for using proportionate consolidation as per IFRS 11 while joint ventures apply the equity method in accordance with IAS 28.

Joint operations – proportionate consolidation

A joint operation is a joint arrangement under which the investors involved have joint control and usually results from the investors holding direct interests in the assets and liabilities of an investee (without establishing a separate legal entity). At the Transition Date, the Company had interests in one development project (The James) and an adjacent commercial property (The Shops of Summerhill) in Toronto that were accounted for as joint operations. On June 23, 2020, Tricon acquired the remaining ownership interests of 50% and 75% in The James and The Shops of Summerhill, respectively, and as a result, the Company began to consolidate these subsidiaries on a prospective basis (Note 8).

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 17

Joint ventures – equity method of accounting

A joint venture is a joint arrangement under which the investors have joint control through a separate legal entity established and hold an interest in the net assets (as opposed to a direct interest in the underlying project). The Company accounts for its joint ventures using the equity method. The Company currently has six active Canadian multi-family developments that are governed by joint venture arrangements.

Interests in associates – equity method of accounting

An associate is an entity over which the Company has significant influence, but not control (or joint control), in accordance with IAS 28. Generally, the Company is considered to exert significant influence when it holds, directly or indirectly, 20% or more of the voting power of the investee. However, determining significant influence is a matter of judgment and specific circumstances. The Company’s interests in 592 Sherbourne LP (The Selby) and 57 Spadina LP (The Taylor) are accounted for using the equity method. Under the equity method, a contribution to an investee is initially recognized at cost and adjusted thereafter to recognize the Company’s share of profit or loss of the investee in accordance with Tricon’s accounting policies. Distributions received from an investee reduce the carrying amount of the investment.

The Company’s associates and joint ventures that are equity-accounted include:

 

Name		Type				Principal place of business				Country of incorporation				Ownership interest %				Voting rights %(1)
Associates
592 Sherbourne LP (The Selby)			Limited Partnership				Canada				Canada				15	%			50	%
57 Spadina LP (The Taylor)			Limited Partnership				Canada				Canada				30	%			50	%
Joint ventures
WDL 3/4/7 LP			Limited Partnership				Canada				Canada				33	%			33	%
WDL 8 LP			Limited Partnership				Canada				Canada				33	%			33	%
WDL 20 LP			Limited Partnership				Canada				Canada				33	%			33	%
DKT B10 LP			Limited Partnership				Canada				Canada				33	%			33	%
6–8 Gloucester LP (The Ivy)			Limited Partnership				Canada				Canada				47	%			50	%
Labatt Village Holding LP			Limited Partnership				Canada				Canada				38	%			50	%

 

(1)	In respect of major decisions only.

Structured entity – unconsolidated

A structured entity is an entity created to accomplish a narrow and well-defined objective. Those entities’ activities are restricted to the extent that they are, in essence, not directed by voting or similar rights. The Company concluded that Tricon PIPE LLC is a structured entity as it was created for the sole purpose of issuing its preferred units to investors and offering financing to the Company (Note 19), and the Company does not have exposure to variable returns related to its involvement in the entity or make the relevant decisions for the entity. Under IFRS 10, such a structured entity does not meet the criteria for control and is not required to be consolidated.

Investments in for-sale housing

Investments that are held as part of the Company’s for-sale housing portfolio are carried on the consolidated balance sheets at fair value even though the Company may have significant influence over those companies. This treatment is permitted by IAS 28, which allows portfolio investments that are held by the Company to be recognized and measured at FVTPL and accounted for in accordance with IFRS 9 and IFRS 13, Fair Value Measurement (“IFRS 13”), with changes in fair value recognized in the consolidated statements of comprehensive income.

The Company invests in for-sale housing by providing equity or equity-type financing to experienced local or regional developers and builders primarily in the United States. The investments are typically made through co-investments in commingled funds, separate accounts, side-cars and joint ventures (“Investment Vehicles”) which hold interests in land development and homebuilding projects.

 

18 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

The Company’s investments in for-sale housing include:

 

Name		Type		Principal place of business		Country of incorporation		Ownership interest %				Voting rights %(1)
Tricon Housing Partners US LP(2)		Limited Partnership		USA		USA			68	%			68	%
Tricon Housing Partners US Syndicated Pool I LP		Limited Partnership		USA		USA			20	%			50	%
Tricon Housing Partners US Syndicated Pool II LP		Limited Partnership		USA		USA			20	%			50	%
Tricon Housing Partners US II LP(2)		Limited Partnership		USA		USA			8	%			>50	%
Tricon Housing Partners Canada III LP(2)		Limited Partnership		Canada		Canada			10	%			>50	%
CCR Texas Equity LP		Limited Partnership		USA		USA			10	%			50	%
Vistancia West Equity LP		Limited Partnership		USA		USA			7	%			50	%
Conroe CS Texas Equity LP		Limited Partnership		USA		USA			10	%			50	%
Tegavah Equity LP		Limited Partnership		USA		USA			10	%			50	%
Lake Norman Equity LP		Limited Partnership		USA		USA			7	%			50	%
Arantine Hills Equity LP		Limited Partnership		USA		USA			7	%			50	%
Viridian Equity LP		Limited Partnership		USA		USA			18	%			50	%
THPAS Holdings JV-1 LLC		Limited Partnership		USA		USA			11	%			50	%
McKinney Project Equity LLC		Limited Partnership		USA		USA			44	%			50	%

 

(1)	In respect of major decisions only.

(2)	For the purposes of analysis under IFRS, it was determined that Tricon acts primarily as an agent for the benefit of its investors in these partnership entities, and thus Tricon does not control these entities in accordance with the criteria set out in IFRS 10.

Business combination

The Company assesses whether an acquisition transaction should be accounted for as an asset acquisition or a business combination under IFRS 3. A business combination is defined as an acquisition of assets and liabilities that constitute a business that is an integrated set of activities consisting of inputs (such as assets), and processes that when applied to those inputs have the ability to create outputs that provide a return to the Company and its shareholders.

The Company applies the acquisition method to account for business combinations in accordance with IFRS 3. The consideration transferred for the acquisition of the business is the fair value of the assets transferred net of the liabilities assumed, any non-controlling interest in the acquiree, as well as any goodwill or bargain purchase gain recognized and measured by the Company. These identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. All acquisition costs associated with a transaction identified as a business combination are expensed as incurred.

Goodwill

Goodwill arises on the acquisition (or deemed acquisition) of subsidiaries and represents the excess of the consideration transferred over the Company’s interest in the net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree and the fair value of any non-controlling interest in the acquiree. Upon initial recognition, goodwill is allocated to the cash-generating unit to which it relates. The Company identifies a cash-generating unit (“CGU”) as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets. For example, a CGU can be an individual property or a group of properties. Goodwill acquired in business combinations is allocated to the CGUs that are expected to benefit from the synergies of that business combination.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. The Company’s goodwill impairment test is performed at the CGU level as it is the lowest level within the Company at which goodwill is monitored for internal management purposes. Any goodwill impairment is recognized immediately as an expense in the consolidated statements of comprehensive income in the period in which it arises and is not subsequently reversed.

Rental properties

The Company’s rental properties consist of single-family rental homes and multi-family rental properties held to earn rental income.

At the time of the acquisition of a property, the Company applies judgment when determining if the acquisition is an asset acquisition or a business combination. The Company classifies its acquisitions as asset acquisitions when it acquires a single asset (or a group of similar assets) and it has not assumed any employees or acquired an operating platform. Where the Company has concluded that it has acquired an asset, the Company uses the asset purchase model whereby the initial cost of a rental property is comprised of its purchase price and any directly attributable expenditures. Directly attributable expenditures include transaction costs such as due diligence costs, appraisal fees, environmental fees, legal fees, land transfer taxes and brokerage fees.

Subsequent to initial recognition, rental properties are recorded at fair value in accordance with IAS 40, Investment Property (“IAS 40”). Fair value is determined based on a combination of internal and external processes and valuation techniques according to the valuation policy discussed in Note 6. Gains or losses arising from changes in the fair value and capitalized costs of rental properties are recorded in the consolidated statements of comprehensive income in the period in which they arise.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 19

In determining whether certain costs are additions to the carrying amount of rental properties or period expenses, management applies judgment based on whether these costs are incurred to enhance the service potential of the property. All costs associated with upgrading and extending the economic life of the existing properties, including internal amounts that are directly attributable to a specific rental property, other than ordinary repairs and maintenance, are capitalized to rental property.

Rental income and operating expenses from rental properties are reported within rental revenue and direct operating expenses incurred for rental properties, respectively, in the consolidated statements of comprehensive income.

Foreign currency translation

Currency translation

Foreign currency transactions (Canadian dollar) are translated into U.S. dollars using exchange rates in effect at the date of the transaction. Monetary assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using the exchange rate in effect at the measurement date. Non-monetary assets and liabilities denominated in Canadian dollars are translated into U.S. dollars using the historical exchange rate or the exchange rate in effect at the measurement date for items recognized at FVTPL. Gains and losses arising from foreign exchange are included in the consolidated statements of comprehensive income.

Consolidated entities

For subsidiaries that are required to be consolidated, the results and financial position of those subsidiaries with a functional currency different from the presentation currency are translated into the presentation currency as follows:

 

(i)	assets and liabilities are translated at the closing rate at the date of the balance sheet;

 

(ii)	income and expenses are translated at average exchange rates. The Company uses monthly average exchange rates due to the volume of transactions each month; and

 

(iii)

all resulting exchange differences are recognized in other comprehensive income.

Other assets

Other assets include fixed assets, leasehold improvements and right-of-use assets.

Fixed assets and leasehold improvements

Fixed assets (building, property-related systems software, vehicles, furniture and office equipment and computer equipment) and leasehold improvements are accounted for at cost less accumulated depreciation and impairment. Leasehold improvements are amortized on a straight-line basis over their useful lives, which are typically their lease terms. All other depreciation expense is recorded on a straight-line basis over the estimated useful lives of the fixed assets, as follows:

 

Building		30 years
Property-related systems software		15 years
Vehicles		5 years
Furniture and office equipment		2–7 years
Computer equipment		2–7 years
Computer software		3 years

The estimated useful lives of fixed assets are reviewed and adjusted, if appropriate, at each financial year-end. As described below under Impairment of non-financial assets, fixed assets are also reviewed at each balance sheet date to determine whether there is an indication of impairment.

Right-of-use assets and lease liabilities

At the lease commencement date, a right-of-use asset and lease liability are recognized on the consolidated balance sheets for all leases, with the exception of short-term and low-value leases. The right-of-use assets and lease liabilities are initially measured at the present value of the lease payments.

Lease payments are apportioned between the implicit finance charge and the implicit repayment of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the consolidated statements of comprehensive income using the effective interest method.

Right-of-use assets are amortized on a straight-line basis over their lease terms and are accounted for at cost less accumulated amortization and reviewed at each balance sheet date to determine whether there is an indication of impairment.

 

20 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

Intangible assets

Intangible assets include capitalized placement fees, customer relationship and contractual development fees.

Placement fees represent costs incurred to secure investment management contracts. Performance fee rights represent costs incurred to obtain rights to receive future performance fees from joint venture projects. These are accounted for as intangible assets carried at cost less accumulated amortization. Amortization is recorded using the straight-line method and is based on the estimated useful lives of the associated joint ventures, which are generally eight years.

The customer relationship intangible relates to the Company’s ownership of The Johnson Companies LP (“Johnson”), in which Tricon owns a 50.1% interest, and represents an estimate of the potential management fees, development fees and commissions that Tricon could collect, based on potential future projects resulting from Johnson’s existing customer relationships at the time of the acquisition of Johnson, and as such are considered to be definite-life intangibles. Similarly, the contractual development fee intangibles from Johnson represent an estimate of the future lot development fees and commissions that Tricon expects to collect over the lives of the projects that Johnson managed at the time of acquisition. They are amortized by project over the estimated periods that the Company expects to collect these fees, which is approximately seven years for both management fees and lot development fees.

Impairment of non-financial assets

Assets that are subject to amortization and depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest CGU level. Non-financial assets are reviewed for possible impairment or reversal of a previously recorded impairment as at each reporting date.

Financial instruments

Financial assets

The Company’s financial assets are comprised of cash, restricted cash, amounts receivable, derivative financial instruments and investments in for-sale housing accounted for as portfolio investments. Financial assets within the scope of IFRS 9 are initially measured at fair value and subsequently classified and measured in one of three categories in accordance with IFRS 9: amortized cost, fair value through other comprehensive income (“FVOCI”) or FVTPL.

Transaction costs related to derivative financial instruments and investments in for-sale housing are expensed as incurred and charged to income within the consolidated statements of comprehensive income.

Gains and losses arising from changes in the fair value of investments in for-sale housing are presented in the consolidated statements of comprehensive income within income from investments in for-sale housing. Gains and losses arising from changes in the fair value of derivative financial instruments are presented in the consolidated statements of comprehensive income together with gains and losses arising from changes in the fair value of other liabilities.

Financial assets and liabilities classified and measured at FVTPL are presented within changes in operating assets and liabilities in the consolidated statements of cash flows.

Financial assets are derecognized only when the contractual rights to the cash flows from the financial assets expire or the Company transfers substantially all of the risks and rewards of ownership.

The Company assesses, at each balance sheet date, whether or not there is an expected credit loss with respect to amounts receivable. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed, to the extent that the carrying value of the receivable does not exceed its amortized cost at the reversal date. Any subsequent reversal of an impairment loss is recognized in net income.

Financial liabilities

Financial liabilities within the scope of IFRS 9 are initially measured at fair value and subsequently classified and measured at FVTPL or amortized cost, as appropriate.

A financial liability is derecognized when the obligation under the liability is discharged or cancelled, or expires.

The Company’s financial liabilities consist of amounts payable and accrued liabilities, resident security deposits, dividends payable, debt, convertible debentures, Due to Affiliate, derivative financial instruments, limited partners’ interests in rental business and other liabilities.

Interest expense is accounted for using the effective interest rate method.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 21

The effective interest rate method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating the interest income or interest expense over the expected life of the instrument. The effective interest rate is the rate that discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Company estimates cash flows considering all contractual terms of the financial instrument but does not consider future credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts.

Gains or losses from the modification of borrowing terms during the year are recognized over the remaining life of the borrowing by adjusting the effective interest rate, on the basis that the terms and conditions of the liability remained largely unchanged. Should the modification be considered substantial, the original financial liability is derecognized and a new financial liability is recognized at fair value.

Convertible debentures

Convertible debentures issued by the Company are comprised of convertible unsecured subordinated debentures that can be converted to share capital at the option of the holder. The Company may settle the conversion right in cash in lieu of common shares unless the holder has explicitly indicated that they do not wish to receive cash. The cash settlement amount depends on the weighted average trading price of the common shares of the Company. This settlement option requires the Company to record the conversion option as a derivative financial instrument measured at fair value at each reporting period, with changes in fair value recorded in the consolidated statements of comprehensive income.

In addition, the debentures contain a redemption option, subject to several conditions, which allows the Company to redeem the debentures, in whole or in part, and the Company may settle the redemption option either in cash at par plus accrued and unpaid interest or in common shares, with the number of common shares to be issued depending on the weighted average trading price of the common shares of the Company. The redemption option is recorded as a derivative financial instrument measured at fair value at each reporting period, with changes in fair value recorded in the consolidated statements of comprehensive income.

The host liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have an equity conversion option. The conversion and redemption options are considered to be interrelated and therefore are treated as a single compound embedded derivative which is recognized at fair value.

Any directly attributable transaction costs are allocated entirely to the host liability component.

Derivative financial instruments

Derivative financial instruments are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at fair value with the resulting gain or loss reflected in net income. The Company has two derivative financial instruments: (i) the conversion and redemption options related to its outstanding convertible debentures; and (ii) the mandatory prepayment provision related to the Due to Affiliate, along with the exchange and redemption provisions of the underlying preferred units (Note 20). Derivatives are valued using model calibration. Inputs to the valuation model are determined from observable market data wherever possible, including prices available from exchanges, over-the-counter markets and consensus pricing. Certain inputs may not be observable in the market directly, but can be determined from observable prices via model calibration procedures or estimated from historical data or other sources. Any directly attributable transaction costs are allocated between the derivative and the host liability component, and the portion attributed to the derivative is expensed in the consolidated statements of comprehensive income.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount is reported on the consolidated balance sheets when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the liability simultaneously. As of December 31, 2020, the Company does not have any assets or liabilities that are subject to an offsetting agreement.

Limited partners’ interests in rental business

The interests of the limited partners in SFR JV-1 Holdings LP, SFR JV-1 REIT 1 LLC, SFR JV-1 REIT 2 LLC, SFR JV-1 Equity LLC and SFR JV-1 LP (collectively, “SFR JV-1”) are recognized as financial liabilities in accordance with IAS 32, Financial Instruments: Presentation (“IAS 32”). Limited partners’ interests in rental business are recorded at fair value through profit or loss and reflect the fair value of the underlying investments in SFR JV-1, along with any contributions by and distributions to limited partners during the period. Changes in the fair value of the limited partners’ interests in rental business are reflected in the consolidated statements of comprehensive income.

 

22 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

Cash

Cash includes cash deposited in banks. The Company maintains its cash in financial institutions with high credit quality in order to minimize its credit loss exposure.

Restricted cash

Restricted cash primarily consists of resident security deposits held by the Company in separate bank accounts, as well as property tax reserves, capital reserves, and collateralized rent payment receipts held in bank accounts controlled by lenders.

Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issuance of new shares are shown as a deduction, net of tax, from the proceeds.

Where the Company purchases its equity share capital to settle restricted share awards or for cancellation, the consideration paid, including any directly attributable incremental costs, is deducted from equity attributable to the Company’s equity holders.

Earnings per share

Basic

Basic earnings per share is determined using the weighted average number of shares outstanding including vested deferred share units, taking into account on a retrospective basis any increases or decreases caused by share splits or reverse share splits occurring after the reporting period, but prior to the consolidated financial statements being authorized for issue.

Diluted

The Company considers the effects of stock compensation, convertible debentures and exchange rights in connection with the preferred unit issuance of Tricon PIPE LLC in calculating diluted earnings per share. Diluted earnings per share is calculated by adjusting net income attributable to shareholders of the Company and the weighted average number of shares outstanding based on the assumption of the conversion of all potentially dilutive shares on a weighted average basis from the beginning of the year or, if later, the date the stock compensation, convertible debentures or conversion rights were issued to the balance sheet date.

Dividends

Dividends on common shares are recognized in the consolidated financial statements in the period in which the dividends are approved by Tricon’s Board of Directors.

Current and deferred income taxes

Income tax expense includes current and deferred income taxes. Income tax expense is recognized in the consolidated statements of comprehensive income, except to the extent that it relates to items recognized directly in equity, in which case the tax is also recognized directly in equity.

Current income taxes are the expected taxes payable on the taxable income for the period, using income tax rates enacted, or substantively enacted, at the end of the reporting period, and any adjustment to income taxes payable in respect of previous years. The Company uses the liability method to recognize deferred income taxes on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts. Deferred income tax assets are only recorded if it is probable that they will be realized. Enacted or substantively enacted rates in effect at the consolidated balance sheet date that are expected to apply when the deferred income tax asset is realized or the deferred tax liability is settled are used to calculate deferred income taxes.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Revenue

Revenue from rental properties

Revenue recognition under a lease commences when a resident has a right to use the leased asset, which is typically when the resident takes possession of, or controls the physical use of, the leased property. Generally, this occurs on the lease commencement date.

Lease contracts with residents normally include lease and non-lease components, which may be bundled into one fixed gross lease payment. Lease revenue earned directly from leasing the homes and apartment suites is recognized and measured on a straight-line basis over the lease term in accordance with IFRS 16, Leases (“IFRS 16”). Leases for single-family rental homes and multi-family rental properties are generally for a term of one to two years.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 23

Ancillary revenue is income the Company generates from providing services that are not primary rental revenue from a lease contract. Ancillary revenue includes pet fees, early termination fees and other service fees. Ancillary revenue is measured at the amount of consideration which the Company expects to receive in exchange for providing services to a resident. Ancillary revenue is included with revenue from rental properties in the consolidated statements of comprehensive income, and the details of revenue, including ancillary income, are discussed in Note 14.

In addition to revenue generated from the lease component, revenue from rental properties includes a non-lease component earned from the residents, which is recognized under IFRS 15, Revenue from Contracts with Customers (“IFRS 15”). Non-lease revenue includes property management services, such as repairs and maintenance performed on the properties. These services represent a single performance obligation and revenue is recognized over time as the services are provided, regardless of when the payment is received. Revenue from rental properties is allocated to non-lease components using a cost-plus margin approach whereby the Company separates the operating costs that pertain to the services provided to the residents and applies a reasonable profit margin.

The Company has concluded that it is the principal in all of its revenue arrangements since it is the primary obligor in all of the revenue arrangements, it has pricing latitude and it is also exposed to credit risks.

Revenue from private funds and advisory services

The Company’s vertically integrated management platform provides asset management, property management and development management services.

The Company provides asset management services to joint venture partners and third-party investors for which it earns market-based fees in connection with its businesses in the U.S. and Canada. These contractual fees are typically 1–2% of committed or invested capital throughout the lives of the Investment Vehicles under management. The Company may also earn performance fees once targeted returns are achieved by an Investment Vehicle. The Company recognizes performance fees only to the extent that it is highly probable that a significant amount of the cumulative revenue recognized will not reverse. Consideration for these services is variable as it is dependent upon the occurrence of a future event that includes the repayment of investor capital and a predetermined rate of return. Revenue from performance fees is typically earned and recognized towards the end of the life of an Investment Vehicle.

The Company also earns development management and advisory service fees from third parties and/or related parties.

Development management and advisory services are satisfied over time. Revenues are recognized based on the best estimate of the amounts earned for those services, which typically reflects contractual fees of 2–5% of the sales price of single-family lots, residential land parcels and commercial land within master-planned communities, and 4–5% of overall development costs of Canadian multi-family rental apartments. The Company includes variable consideration in the revenues only to the extent that it is highly probable that a significant amount of the cumulative revenue recognized will not reverse. Specifically for Johnson, consideration for these services is variable as it is dependent upon the occurrence of a future event that is the sale of the developed property. Revenue is typically recognized as the development of the property is completed, and control has been transferred to the respective buyer. These management fees earned in exchange for providing development management and advisory services are billed upon the sale of the property.

The Company earns property management fees, leasing fees, acquisition and disposition fees, and construction management fees through its rental operating platform. These management services are satisfied over time and revenues are recognized as services are provided in accordance with IFRS 15.

Compensation arrangements

Stock option plan

The Company accounts for its stock option plan by calculating the fair value of the options as of the grant date using a Black-Scholes option pricing model and observable market inputs. This fair value is recognized as compensation cost using the graded vesting method over the vesting period of the options.

Annual Incentive Plan (“AIP”)

The Company’s AIP provides for an aggregate bonus pool based on the sum of all employees’ individual AIP targets. The portion of the pool attributable to senior executive management is market-benchmarked and subject to an adjustment factor, as approved by the Board, of between 50% and 150%, based on the achievement of Company performance objectives determined by the Board at the beginning of each year. The final pool is then allocated among employees based on individual and collective performance. AIP awards will be made in cash and equity-based grants, with the proportion of equity-based awards being correlated to the seniority of an individual’s role within the Company. Equity-based AIP awards are granted in a combination of deferred share units (“DSUs”), performance share units (“PSUs”), stock options and restricted shares, pursuant to the Company’s Deferred Share Unit Plan (“DSUP”), Performance Share Unit Plan (“PSUP”), stock option plan and Restricted Share Plan, respectively.

 

24 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

Long-term incentive plan (“LTIP”)

LTIP expense is generated from two sources: (i) 50% of the Company’s share of performance fees or carried interest from Investment Vehicles, paid in cash when received; and (ii) 15% of the income from THP1 US (a for-sale housing Investment Vehicle), payable in DSUs which vest in equal tranches over a three-year period (previously a five-year period) pursuant to the LTIP as amended on May 6, 2019. Amounts under the LTIP are allocated among employees in accordance with the plan.

For the LTIP generated from the Company’s share of performance fees or carried interest from certain Investment Vehicles, the Company estimates the LTIP liability by determining the performance fees at each reporting date based on the estimated fair value of the underlying investments. Changes in the LTIP liability are recognized in the consolidated statements of comprehensive income.

Directors’ fees

One-half of each independent Director’s base annual retainer is paid in DSUs which vest immediately upon their grant. An independent Director may also elect each year to receive a portion of the balance of his or her fees (including his or her base annual retainer and any additional retainer) in DSUs, which also vest on the date of their grant. Any remaining balance of such fees not payable in DSUs is paid in cash. The DSUs granted to Directors are governed by the DSUP.

Reportable segments

Tricon is comprised of four operating segments: Single-Family Rental, Multi-Family Rental, Residential Development and Private Funds and Advisory. Including the Company’s corporate activities, there are five reportable segments for internal and external reporting purposes. The reportable segments are business units offering different products and services, and are managed separately due to their distinct operating natures. These five reportable segments have been determined by the Company’s chief operating decision-makers (Note 31).

Accounting standards and interpretations adopted

Effective January 1, 2020, the Company has adopted amendments to IFRS 3, Business Combinations. The amendments provide further guidance on the determination of whether a transaction should be accounted for as a business combination or as an asset acquisition. The Company has also adopted amendments to IAS 1, Presentation of Financial Statements (“IAS 1”), and IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, which provide further clarification on the definition of materiality, specifying that materiality will depend on the nature or magnitude of information. The adoption of these standards did not have a significant impact on the Company’s consolidated financial statements.

Accounting standards and interpretations issued but not yet adopted

In August 2020, the International Accounting Standards Board (“IASB”) issued amendments to IFRS 9, Financial Instruments,

IAS 39, Financial Instruments: Recognition and Measurement, IFRS 7, Financial Instruments: Disclosure, IFRS 4, Insurance Contracts, and IFRS 16, Leases, as part of phase 2 of its project related to interest rate benchmark reform. The amendments address issues that might affect financial reporting after the reform of an interest rate benchmark, including its replacement with alternative benchmark rates. The amendments are effective for annual periods beginning on or after January 1, 2021, with earlier application permitted.

The Company is currently finalizing its assessment of the impact of the adoption of the phase 2 amendments. As a result of the adoption, it is not expected that interest rate benchmark reform will have a material impact on the Company’s financial statements. In January 2020, the IASB issued amendments to IAS 1 to provide a more general approach to the classification of liabilities under IAS 1 based on the contractual arrangements in place at the reporting date. The amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2023.

There are no other standards, interpretations or amendments to existing standards that are not yet effective that are expected to have a material impact on the consolidated financial statements of the Company.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 25

4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The following are the accounting policies subject to judgments and estimation uncertainty that management believes could have a significant risk of causing material adjustments to the amounts recognized in the consolidated financial statements. Actual results could differ from these estimates and the differences may be material.

Significant estimates

Income taxes

The determination of the Company’s income and other tax liabilities requires interpretation of complex laws and regulations often involving multiple jurisdictions. Significant estimates are required in determining the Company’s consolidated income tax provision. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current tax and deferred tax provisions. Furthermore, deferred income tax balances are recorded using enacted or substantively enacted future income tax rates. Changes in enacted income tax rates are not within the control of management. However, any such changes in income tax rates may result in actual income tax amounts that may differ significantly from estimates recorded in deferred tax balances.

Valuation of rental properties

Fair value is determined using independent external valuations prepared by management’s specialists or detailed internal valuations prepared by management using market-based assumptions, each in accordance with recognized valuation techniques as set out in Note 6. Significant estimates used in determining the fair value of the Company’s rental properties include estimating, among other things, future stabilized net operating income, capitalization rates, discount rates, and other future cash flows applicable to rental properties (all considered Level 3 inputs), as well as market comparables based on recent transaction prices. A change to any one of these inputs could significantly alter the fair value of a rental property. In addition, the novel coronavirus (“COVID-19”) pandemic and related market and economic uncertainty that occurred in 2020 has had a significant impact on estimates used in the valuation of the rental properties and this impact may continue into 2021. Management will continue to monitor the situation and its impact on the Company.

Fair value and impairment of financial instruments

Certain financial instruments are recorded in the Company’s consolidated balance sheets at values that are representative of or approximate fair value.

The fair values of the Company’s investments in for-sale housing are determined using the valuation methodologies described in Note 9. By their nature, these valuation techniques require the use of assumptions that are mainly based on market conditions existing at the end of each reporting period. Changes in the underlying assumptions could materially impact the determination of the fair value of a financial instrument. Imprecision in determining fair value using valuation techniques may affect the investment income recognized in a particular period. Any significant changes to the inputs and assumptions owing to the COVID-19 pandemic as discussed above could further impact the valuation of the for-sale housing investments in future periods.

Fair value of incentive plans

Management is required to make certain assumptions and to estimate future financial performance in order to estimate the fair value of incentive plans at each consolidated balance sheet date. Significant estimates and assumptions relating to such incentive plans are disclosed in Notes 3 and 30. The LTIP requires management to estimate future non-IFRS earnings measures, namely future performance fees relative to each Investment Vehicle. Future non-IFRS measures are estimated based on current projections, and are updated at least annually, taking into account actual performance since inception.

Goodwill impairment

Assessment of impairment is based on management’s judgment of whether there are internal and external factors that would indicate that an asset or CGU is impaired. The determination of the Company’s goodwill impairment involves management’s significant estimates and assumptions with respect to future cash flows, growth rates and discount rates of the underlying CGU. The risk premiums expected by market participants related to uncertainties about the industry and assumptions relating to future cash flows may differ, depending on economic conditions and other events. Changes in any of these underlying assumptions could materially affect the assessment of the recoverable value of a CGU (Note 12).

Due to Affiliate

In connection with the Due to Affiliate transaction, the Company made certain key assumptions about the structure, cash flow and terms of the issued instruments. In addition, management was required to make significant estimates in determining the initial recognition and measurement of the Due to Affiliate and related derivative instruments (Notes 19 and 20).

 

26 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

Significant judgments

Acquisition of rental properties

The Company’s accounting policies relating to rental properties are described in Note 3. In applying these policies, judgment is exercised in determining whether certain costs are additions to the carrying amount of a rental property and whether properties acquired are considered to be asset acquisitions or business combinations. Should the purchase meet the criteria of a business combination, then transaction costs such as appraisal and legal fees are expensed immediately and included in the consolidated statements of comprehensive income. If the purchase is an asset acquisition, transaction costs form part of the purchase price and earnings are not immediately affected.

Basis of consolidation

The consolidated financial statements of the Company include the accounts of Tricon and its wholly-owned subsidiaries, as well as entities over which the Company exercises control on a basis other than majority ownership of voting interests within the scope of IFRS 10. Judgment is applied in determining if an entity meets the criteria of control as defined in the accounting standard.

Investments in joint ventures and joint arrangements

The Company makes judgments in determining the appropriate accounting for investments in other entities. These judgments include determining the significant relevant activities and assessing the level of influence Tricon has over the activities through contractual arrangements. In addition, the Company also determines whether Tricon’s rights and obligations are directly related to the assets and liabilities of the arrangement or to the net assets of the joint arrangement.

CGU determination for goodwill impairment assessment

The determination of CGUs is based on management’s judgment and is an assessment of the smallest group of assets that generate cash inflows independently of other assets. Factors considered include whether an active market exists for the output produced by the asset or group of assets as well as how management monitors and makes decisions about the Company’s operations.

5. BUSINESS COMBINATIONS

As discussed in Note 2, the Company successfully completed its transition to a rental housing company effective January 1, 2020, and as a result, it was required to apply the acquisition method of accounting in accordance with IFRS 3 to all subsidiaries that were previously measured at FVTPL (the “Deemed Acquisition”), as discussed in further detail below.

Deemed acquisition of single-family and multi-family rental businesses

On the Transition Date, Tricon SF Home Rental ULC and its wholly-owned subsidiaries, along with SFR JV-1 (collectively, the “single-family rental” business), and TLR Saturn Master LP and its wholly-owned subsidiaries (collectively, the “multi-family rental” business) were deemed to have been acquired by the Company and were accounted for as business combinations in accordance with IFRS 3.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 27

The following table summarizes the deemed consideration paid and the estimates of the fair values of identified assets acquired and liabilities assumed from both businesses on the Transition Date. The deemed consideration paid reflects the fair value of the Company’s interests in the single-family and multi-family rental businesses as portfolio investments immediately prior to the Transition Date.

 

(in thousands of U.S. dollars)		Single-Family Rental(1)				Multi-Family Rental
Deemed consideration transferred		$	1,270,293			$	429,060
Recognized amounts of assets acquired
Cash		$	18,948			$	2,537
Restricted cash			67,519				16,563
Amounts receivable			1,033				3,436
Derivative financial instruments			28				–
Prepaid expenses and deposits			9,829				720
Rental properties			4,337,681				1,344,844
Deferred income tax assets			40,000				–
Other assets			11,255				90
Total identifiable assets		$	4,486,293			$	1,368,190
Recognized amount of liabilities assumed
Amounts payable and accrued liabilities		$	49,623			$	20,759
Resident security deposits			30,094				2,031
Other liabilities			5,435				–
Debt			2,716,840				916,340
Deferred income tax liabilities			157,741				79,112
Limited partners’ interests in rental business			285,774				–
Total identifiable liabilities			3,245,507				1,018,242
Total identifiable assets and liabilities		$	1,240,786			$	349,948
Goodwill			29,507				79,112
Total		$	1,270,293			$	429,060

 

(1)	The deemed consideration transferred reflects the fair value of the Company’s interests in the single-family rental business as a portfolio investment immediately prior to the Transition Date, net of the Company’s deferred tax liabilities associated with the investment of $94,714.

The purchase price allocation resulted in $29,507 and $79,112 of goodwill being recognized from the Deemed Acquisition of the single-family rental and multi-family rental businesses, respectively, due to the recognition of deferred tax liabilities because the tax bases of the net assets are lower than their acquisition date fair values.

Ownership interests in SFR JV-1 are in the form of limited partnership interests which are classified as liabilities under the provisions of IAS 32. Limited partners’ interests in rental business are measured as a percentage of net assets acquired.

The following table presents the changes in the limited partners’ interests in rental business balance for the year ended December 31, 2020, representing third-party limited partners’ 66.33% ownership interests in the net assets of SFR JV-1.

 

(in thousands of U.S. dollars) For the year ended December 31		2020
Balance, beginning of year(1)		$	285,774
Contributions			66,112
Distributions			(46,162	)
Net change in fair value of limited partners’ interests in rental business			50,581
Balance, end of year		$	356,305

 

(1)	The initial balance was recognized as a result of the Deemed Acquisition of the single-family rental business.

 

28 2020 ANNUAL REPORT TRICON RESIDENTIAL

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended December 31, 2020

(in thousands of U.S. dollars, except per share amounts and percentage amounts)

 

Deemed acquisition of Canadian multi-family development business under joint operations (proportionate consolidation)

In the Company’s Canadian multi-family development business, TLR Investment LP through its wholly-owned subsidiaries (collectively, the “Canadian multi-family development” business) held a 50% and 25% direct ownership interest, respectively, of the properties known as The James (Scrivener Square) and The Shops of Summerhill, which were classified as joint operations under IFRS 11. As at the Transition Date, the Company’s proportionate interests in these properties were deemed to be acquired by the Company and were treated as business combinations in accordance with IFRS 3.

The following table summarizes the deemed consideration paid for the Canadian multi-family development business and the estimates of the fair values of identified assets acquired and liabilities assumed, on a proportionate basis, from the Canadian multi-family development business on the Transition Date.

 

(in thousands of U.S. dollars)		The James (Scrivener Square)				The Shops of Summerhill				Other entities(1)				Canadian multi-family developments
Deemed consideration transferred		$	14,682			$	7,339			$	74,851			$	96,872
Recognized amounts of assets acquired
Cash		$	420			$	65			$	229			$	714
Amounts receivable			131				51				248				430
Prepaid expenses and deposits			12				1				—				13
Other assets			—				—				49				49
Investments in Canadian multi-family developments(2)			—				—				75,141				75,141
Canadian development properties			25,170				10,455				—				35,625
Total identifiable assets		$	25,733			$	10,572			$	75,667			$	111,972
Recognized amount of liabilities assumed
Amounts payable and accrued liabilities		$	272			$	84			$	816			$	1,172
Debt			10,779				3,149				—				13,928
Total identifiable liabilities			11,051				3,233				816				15,100
Total identifiable assets and liabilities – proportionate basis		$	14,682			$	7,339			$	74,851			$	96,872

 

(1)	Other entities include Tricon Lifestyle Rentals LP and its wholly-owned subsidiaries.

(2)	Includes Tricon’s investment in The Selby.

On June 23, 2020, Tricon acquired the remaining 50% and 75% ownership interests in The James and The Shops of Summerhill, respectively (Note 8). The acquisition of the remaining ownership is considered to be an asset acquisition as it does not meet the definition of a business combination as prescribed by IFRS 3.

6. RENTAL PROPERTIES

The Company’s Valuation Committee is responsible for fair value measurements included in the financial statements, including Level 3 measurements. The valuation processes and results are reviewed and approved by the Valuation Committee once every quarter, in line with the Company’s quarterly reporting dates. The Valuation Committee consists of individuals who are knowledgeable and have experience in the fair value techniques for the real estate properties held by the Company. The Valuation Committee decides on the appropriate valuation methodologies for new real estate properties and contemplates changes in the valuation methodology for existing real estate holdings. Additionally, the Valuation Committee analyzes the movements in each property’s (or group of properties’) value, which involves assessing the validity of the inputs applied in the valuation.

The following table presents the changes in the rental property balances for the year ended December 31, 2020.

 

		December 31, 2020
(in thousands of U.S. dollars)		Single-Family Rental				Multi-Family Rental				Total
Initial recognition on Deemed Acquisition (Note 5)		$	4,337,681			$	1,344,844			$	5,682,525
Acquisitions(1)			356,514				—				356,514
Capital expenditures			93,568				9,067				102,635
Dispositions			(18,070	)			—				(18,070	)
Fair value adjustments			220,849				(22,535	)			198,314
Balance, end of year		$	4,990,542			$	1,331,376			$	6,321,918

 

(1)	The total purchase price includes $1,913 of capitalized transaction costs in relation to the acquisitions.

 

TRICON RESIDENTIAL 2020 ANNUAL REPORT 29

The Company used the following techniques to determine the fair value measurements included in the consolidated financial statements categorized under Level 3.

Single-family rental homes

Valuation methodology

The fair value of single-family rental homes is typically determined by using a combination of Broker Price Opinion (“BPO”) and the Home Price Index (“HPI”) methodologies. In addition, homes that were purchased in the last three to six months (or properties purchased in the year that are not yet stabilized) from the reporting date are recorded at their purchase price plus the cost of capital expenditures as the home values typically do not change materially in the short term, and capital expenditures generally do not significantly impact values in those periods.

BPOs are quoted by independent brokers who hold active real estate licenses and have market experience in the locations and segments of the properties being valued. The brokers value each property based on recent comparable sales and active comparable listings in the area, assuming the properties were all renovated to an average standard in their respective areas. The Company typically obtains a BPO for a property once every three years or when a home is included in a new debt facility.

The HPI methodology is used to update the value, on a quarterly basis, of single-family rental homes that were most recently valued using a BPO as well as single-family rental homes held for more than six months following initial acquisition. The HPI is calculated based on a repeat-sales model using large real estate information databases compiled from public records. The Company uses the twelve-month trailing average HPI change to update the value of its single-family rental homes. The quarterly HPI change is then applied to the previously recorded fair value of the rental homes. The data used to determine the fair value of the Company’s single-family rental homes is specific to the zip code in which the property is located.

The Company performed a valuation at November 30, 2020 for rental homes acquired prior to October 1, 2020, according to its valuation policy and based on the best information available. HPI growth continued across all markets during the year at 4.2% (net of capital expenditures) compared to 3.0% during the prior year. There were 6,980 homes valued using the BPO method during the year. The combination of the HPI and BPO methodologies resulted in a fair value gain of $220,849 for the year ended December 31, 2020. Management has assessed the impact of any market changes that occurred subsequent to the date of the valuation and has determined that the values were valid as of December 31, 2020.

Sensitivity

The weighted average of the quarterly HPI change was 1.5% . If the change in the quarterly HPI increased or decreased by 0.5%, the impact on the rental properties at December 31, 2020 would be $19,294 and ($19,294), respectively.

Multi-family rental properties

Valuation methodology

Fair value is determined using independent valuations prepared by management’s specialists or detailed internal valuations prepared by management using market-based assumptions, each in accordance with recognized valuation techniques. The Company utilizes the direct income capitalization approach to determine the fair value of its multi-family rental properties. This method requires that a projected stabilized net operating income (“NOI”) for each property is divided by the appropriate capitalization rate to determine a property’s fair value. NOI is calculated as a one-year income forecast based on rental income from current leases and key assumptions about rental income, vacancies and inflation rates, among other factors, less property operating costs. Fair value also considers any forecasted capital expenditures within the year to maintain the property in good condition. Given the short-term nature of residential leases (typically one to two years), revenue and costs are not discounted. The capitalization rate is determined for each property based on location, size and quality/vintage of the property and takes into account market information related to recent sales of comparable buildings within a similar geographic location.

In applying the Company’s valuation policies, external valuations are obtained from third-party valuation professionals on a rotational basis based on a cross-section of properties from different geographic locations and markets across the Company’s multi-family rental portfolio, as determined by management and approved by the Valuation Committee. The fair value of the remainder of the Company’s rental properties is determined internally by management using the same assumptions and valuation techniques as those used by the external valuation professionals.

Management assessed changes in capitalization rates in each of the markets in which it owns multi-family rental properties by consulting third-party data based on market transactions. In contrast to the single-family rental market, multi-family rental market conditions were negatively impacted by the COVID-19 pandemic. A decline in demand for multi-family living contributed to a downward adjustment in the stabilized NOI assumptions, which led to a fair value loss of $22,535 for the year ended December 31, 2020. Management will continue to monitor rental market conditions that could adversely affect the valuation of the Company’s rental properties.

 

30 2020 ANNUAL REPORT TRICON RESIDENTIAL