CAPREIT 2013 Annual Report
Engagement =
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LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
Profi le
Canadian Apartment
Properties Real Estate
Investment Trust
(“CAPREIT”) is a growth-
oriented investment trust
owning interests in multi-
unit residential complexes,
including apartment
buildings, townhomes
and manufactured home
communities (“MHC”),
principally located in or
near major urban centres
across Canada.
Objectives
(cid:129)
To provide Unitholders with long-term, stable and
predictable monthly distributions;
(cid:129) To grow Normalized Funds From Operations
(“NFFO”), sustainable distributions and Unit value
through the active management of our properties, accre-
tive acquisitions and strong fi nancial management; and
(cid:129) To reinvest capital within the property portfolio in order
to ensure the life safety of residents and maximize
earnings and cash fl ow potential.
Highlights
(cid:129)
Acquired 4,931 suites and sites for $456.5 million,
and entered new geographic markets
Revenues, NOI, FFO and AFFO at record levels, driven
by portfolio growth, continuing high occupancies and
increased AMRs
Residential suite occupancy rises to 98.0% with 2.9%
increase in AMRs
Stabilized NOI up 3.0%, capping eight years of same-
property NOI growth
(cid:129)
(cid:129)
(cid:129)
(cid:129) NFFO up 20.2%
(cid:129) Strong accretive growth with NFFO per Unit up 5.1%
(cid:129) Chosen one of Canada’s 50 Best Employers
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
Financial Highlights
Year Ended December 31,
Portfolio Performance
Overall Portfolio Occupancy (1)
Overall Portfolio Average Monthly Rents (1)
Operating Revenues (000s)
NOI (000s)
NOI Margin
Operating Performance (2)
FFO Per Unit – Basic
NFFO Per Unit – Basic
Weighted Average Number of Units – Basic (000s)
Cash Distributions Per Unit
FFO Payout Ratio
NFFO Payout Ratio
2013
2012
$
$
$
$
$
$
98.0%
951
477,023
273,854
57.4%
1.522
1.562
102,064
1.138
76.8%
74.8%
97.6%
975
412,421
237,916
57.7%
1.448
1.486
89,215
1.097
78.4%
76.4%
47.25%
56.71%
3.87%
5.4
1.52
2.51
126,296
6,984
773
24.90
2,550
$
$
$
$
$
$
$
$
$
Liquidity and Leverage
Total Debt to Gross Book Value (1)
Total Debt to Gross Historical Cost (1),(3)
Weighted Average Mortgage Interest Rate (1)
Weighted Average Mortgage Term (years) (1)
Debt Service Coverage (times) (4)
Interest Coverage (times) (4)
Available Liquidity – Acquisition and Operating Facility (000s) (1) $
47.32%
56.74%
3.76%
6.0
1.54
2.62
86,443
Other
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units (1)
Market Capitalization (millions) (5)
1. As at December 31.
4,931
604
21.25
2,361
$
$
2. NOI, FFO and NFFO are not defi ned by IFRS, do not have standard meanings and may not be comparable with other industries or companies.
3. Based on the historical cost of investment properties.
4. Based on the trailing four quarters.
5. Defi ned as the closing price of the Units on the last trading date of the period times the number of Units outstanding on that date.
CAPREIT 2013 ANNUAL REPORT
1
LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
1
2
3
GREATER VANCOUVER
AREA AND VICTORIA
Total Suites
3,128
Occupancy
98.6%
Average
Monthly Rents
$1,017
40
CALGARY
Total Suites
1,852
Occupancy
98.2%
Average
Monthly Rents
$1,154
EDMONTON
Total Suites
310
Occupancy
99.0%
Average
Monthly Rents
$1,128
1,488
431
310
1,600
1,421
4
REGINA AND
SASKATOON
Total Suites
241
Occupancy
99.2%
Average
Monthly Rents
$961
31
210
5
6
KITCHENER, WATERLOO
AND LONDON
OUTSIDE GREATER
TORONTO AREA
Total Suites
1,649
Occupancy
97.5%
Average
Monthly Rents
$873
768
881
Total Suites
1,410
Occupancy
99.1%
Average
Monthly Rents
$1,079
190
1,220
TOTAL
Suites
35,372
Occupancy
98.0%
Average
Monthly Rents
$1,060
13,946
2,470
18,956
Affordable
Mid-Tier
Luxury
CAPREIT’S high-quality
property portfolio is
well-diversifi ed both
demographically and by
property type, and is
strongly positioned in key
Canadian urban markets
from coast-to-coast and
in Dublin, Ireland
2
CAPREIT 2013 ANNUAL REPORT
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
7
8
9
10
GREATER TORONTO
AREA (GTA)
Total Suites
15,780
Occupancy
98.3%
Average
Monthly Rents
$1,159
OTTAWA
Total Suites
1,527
Occupancy
99.7%
Average
Monthly Rents
$927
GREATER MONTRÉAL
REGION
Total Suites
4,581
Occupancy
98.0%
Average
Monthly Rents
$881
QUÉBEC CITY
Total Suites
2,728
Occupancy
97.4%
Average
Monthly Rents
$925
11
CHARLOTTETOWN
AND HALIFAX
Total Suites
1,828
Occupancy
93.1%
Average
Monthly Rents
$996
12
DUBLIN
Total Suites
338
Occupancy
99.4%
Average
Monthly Rents
$1,449
338
1,277
1,527
617
834
1,191
505
132
2,278
1,894
1,686
4,945
9,558
3 EDMONTON
1 VANCOUVER
1 VICTORIA
2
4 SASKATOON
CALGARY
4 REGINA
CANADA
DUBLIN
12
IRELAND
QUÉBEC CITY
10
11 HALIFAX
11
CHARLOTTETOWN
OUTSIDE GTA
GREATER TORONTO AREA
5
KITCHENER
WATERLOO
LONDON
6
7
9 MONTRÉAL
8
OTTAWA
OTTAWA
GREATER TORONTO AREA
CAPREIT 2013 ANNUAL REPORT
3
LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
Manufactured Home Communities: In 2013, we extended our presence
in the robust manufactured home communities business with the
purchase of 2,808 new sites in Prince Edward Island and New Brunswick.
BRITISH COLUMBIA
ALBERTA
SASKATCHEWAN
ONTARIO
PRINCE EDWARD ISLAND
NEW BRUNSWICK
Total Suites
318
Occupancy
98.4%
Average
Monthly Rents
$363
Slave Lake
Lynwood Gardens
Whitecourt
Evergreen Village
Hillpark Estates
Total Suites
246
Occupancy
100.0%
Average
Monthly Rents
$317
Saskatoon
Sunset Estates
Total Suites
130
Occupancy
100.0%
Average
Monthly Rents
$401
Gibson
The Poplars
TOTAL
Units
6,180
Occupancy
97.6%
Average
Monthly Rents
$348
Total Suites
500
Occupancy
95.2%
Average
Monthly Rents
$133
Charlottetown
Parkwood Estates
River Ridge Estates
Riverview Estates
Cornwall
Chateau Estates
Total Suites
2,678
Occupancy
99.5%
Average
Monthly Rents
$480
Beamsville
Golden Horseshoe
Estates
Grand Bend
Grand Cove
Newcastle
Wilmot Creek
Orillia
Fergushill Estates
Parkside Estates
Silver Creel Estates
Sarnia
Green Haven Estates
Trenton
Bayview Estates
Sunny Creek Estates
Total Suites
2,308
Occupancy
95.5%
Average
Monthly Rents
$240
Bathurst
Bayview Park & Kent
Estates
Beresford
Bayview Park & Kent
Estates
Burton
Burton Estates
Edmundston
Park P’Tiso Estates
Lincoln
Tamarack Estates
Moncton
Pine Tree Village
White Frost Estates
Quispamsis
Parkside Estates
Riverview
River East Estates
Saint John
Milford Estates
Waqsis
Crown & Currie Estates
4
CAPREIT 2013 ANNUAL REPORT
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
Report to Unitholders: 2013 was another record year for CAPREIT as we benefi ted
from our continuing strong occupancies and increases in average monthly rents,
while further expanding and diversifying our property portfolio. Looking ahead, with
the best team in the business, our proven and highly successful asset and property
management programs, and continuing strong fundamentals in the Canadian
residential rental sector, we look for this growth to continue.
Strengthening our Property Portfolio
2013 was another year of strong portfolio
growth as we accretively acquired 4,931
apartment and townhouse suites and
manufactured home community (MHC)
land lease sites for total acquisition costs
of approximately $456.5 million. Our goal
is to expand the portfolio by between
1,500 and 2,000 suites and sites each year,
and once again in 2013, we exceeded our
prudent growth objective.
A number of acquisitions were completed
in our current markets of Victoria, British
Columbia, Calgary, Alberta, the Greater
Toronto Area and Montréal, Québec.
These purchases not only strengthened
our presence in these cities, we expect
to see solid improvements in operating
performance as our new properties
benefi t from the economies of scale and
operating synergies already established in
these regions.
In addition to enhancing our presence
in current markets, we further diversifi ed
our portfolio with our entry into a new
geographic region in 2013. In October
CAPREIT 2013 ANNUAL REPORT
5
From left to right:
Maria Amaral, Chief Accounting Offi cer
Corinne Pruzanski, General Counsel and Corporate Secretary
Scott Cryer, Chief Financial Offi cer
Thomas Schwartz, President and Chief Executive Offi cer
Mark Kenney, Chief Operating Offi cer
LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
The peer-recognition program lets workers
encouraged to show appreciation through
we completed our first purchase in
vibrant Prince Edward Island with the
acquisition of 240 residential suites and
500 MHC land lease sites in Charlottetown
and Cornwall for acquisition costs of
approximately $36.4 million. We look
forward to building our presence in this
strong and growing market.
We also signifi cantly strengthened our very
stable MHC portfolio with the purchase of
2,308 land lease sites in November, well
situated in eleven locations across New
Brunswick for total costs of approx i mately
$71.8 million. Our MHC portfolio now stands
at 6,180 sites and represents approximately
14.9% of our total property portfolio.
Today our overall portfolio includes 41,552
apartment suites and land lease sites, well
diversifi ed by property type across key
targeted urban geographic markets. Looking
ahead, we will continue to prudently and
accretively expand and strengthen our asset
base, capitalizing on our strong presence
in current markets while entering new
regions that further diversify the portfolio
and enhance our risk profi le.
Another Year of Record Performance
With our signifi cant growth over the
last three years, the positive impact of
our property management programs,
and continuing strong fundamentals in
the Canadian multi-residential rental
From left to right:
Winek Janczura, Senior Human Resources Business Partner
Jodi Lieberman, Vice President, Human Resources
Ryan McDermott, National Training Manager
James Isenberg, Human Resources Manager
Patti Baker, Managing Director
Mike McLoughlin, Maintenance Manager
Brandon Benvenuto, Operations Manager
Lana Macfarlane, Operations Manager
6
CAPREIT 2013 ANNUAL REPORT
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
shine a spotlight on colleagues; managers are
handwritten thank-you cards.
business, we generated another record
year in 2013.
Operating revenues rose by 15.7% to
$477.0 million, the result of contributions
from acquisitions, continuing high stable
occupancies and an increase in average
monthly rents. Ancillary revenues, including
parking, laundry, communications services
and antenna rental, continue to make a
strong contribution to our revenues, rising
20.6% to $24.6 million in 2013 compared
to the prior year.
Our focus on keeping our buildings full
resulted in nearly-full average occupancies
of 98.0% at year-end, while average monthly
Operating Revenues ($ Thousands)
Acquisitions, high occupancies and increased
average monthly rents contribute to stable and
consistent growth in operating revenues
477,023
412,421
361,955
321,159
338,959
2009
2010
2011
2012
2013
CAPREIT 2013 ANNUAL REPORT
7
LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
In addition to doubling contributions to the
program, it started an assistance program for
rents in our apartment properties increased
2.9% to $1,060 per suite in 2013. The
performance in our MHC portfolio also
remained very strong in 2013, with occupancies
standing at 97.6% at year-end.
With this increase in operating revenues,
combined with our relentless focus on
managing our costs, our Net Operating
Income (NOI) margin remained very strong
at 57.4%, with Normalized Funds from
Operations (NFFO), our key performance
benchmark, up 20.2% for the year to
$159.4 million or $1.56 per Unit. Importantly,
our payout ratio of distributions declared
to NFFO further strengthened to 74.8%
from 76.4% last year.
While acquisitions made a strong contribu-
tion to our results, we are also generating
solid organic growth as NOI from our
stabilized properties increased 3.0% in
2013. We have now generated stable or
improved quarterly growth in our same-
property NOI for eight consecutive years,
a signifi cant track record in our industry.
Despite our record growth, we continue
to possess one of the strongest and most
conservative balance sheets in our business.
Total debt to gross book value ratio was a
conservative 47.3% at year-end, well within
our guidelines. Our mortgage portfolio
remained balanced with the weighted
average interest rate declining to 3.76% at
From left to right:
Gobal Mailwaganam, Managing Director
Ahalya Gobal, Regional Procurement Specialist
Zabeeda Sulaman, Administrative Coordinator
Shalini Bhutani, Operations Manager
Otilia Ciobanu, Revenue Specialist
Zack El Helou, Operations Manager
Carmen Oltean, Revenue Specialist
Santina Ratnasingham, Revenue Specialist
Krishna Moorthy, Regional Accounting Manager
8
CAPREIT 2013 ANNUAL REPORT
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
fi rm’s retirement planning
family issues.
December 31, 2013 from 3.87% last year.
During 2014, we expect to raise between
$600 million and $650 million in total
mort gage renewals and refi nancings, and
expect to complete these renewals at
lower interest rates than the maturing
debt, generating further cost savings over
the long term.
Largely to fi nance our growth, during 2013
we successfully completed a bought-deal
equity offering in October for aggregate gross
proceeds of approximately $149.5 million.
Given the challenging capital markets during
the year, we were very pleased to have seen
such strong support for CAPREIT through
this offering.
Net Operating Income ($ Thousands)
Strong revenue growth combined with proven
management programs generating stable NOI
growth with industry-leading NOI margins
273,854
237,916
206,157
190,339
174,432
2009
2010
2011
2012
2013
CAPREIT 2013 ANNUAL REPORT
9
LEADERSHIP
EXCELLENCE
MANAGER EFFECTIVENESS
A promote-from-within culture means nearly
every manager has risen from the ranks.
The Best Team in the Business
While we believe we have one of the strongest
property portfolios in our business, it is
our team of people that really makes the
difference at CAPREIT. It is their dedication
and commitment, working tirelessly each
and every day, that have resulted in strong
resident satisfaction and our continuing
record operating and fi nancial performance.
One of our goals over the last few years
was to build a team of fully engaged and
satisfi ed employees, and in recognition of
our achievements, we were very pleased to
have been selected as one of Canada’s 50
Best Employers in November. We know
that our people are our most important
asset, and we thank everyone at CAPREIT
for their contribution to our success.
A Positive Outlook
Looking ahead, we are confi dent our growth
and record performance will continue.
The acquisitions made over the last few
years are making a solid and increasing
contribution to our cash fl ows, and as our
proven property management, procurement
and energy programs are implemented, we
see this contribution only getting better.
We will continue to expand and diversify
our portfolio, capitalizing on our industry-
leading balance sheet and fi nancial position.
Fundamentals also remain very strong in
Importantly, despite the 14.4% increase
in the weighted average number of Units
outstanding at December 31, 2013, our
growth was signifi cantly accretive as NFFO
per Unit rose a solid 5.1% to $1.56 per
Unit over the prior year. At year-end we
maintained a very strong liquidity position
with available fi nancing capacity of over
$86.4 million, providing us with the resources
and fl exibility to act on further accretive
growth opportunities going forward.
We were also pleased to announce a
2.7% increase in monthly cash distributions
in June 2013 to $1.15 per Unit annually. This
increase is based on our strong performance
and our confi dence in the future. This was
our tenth increase in cash distributions since
our Initial Public Offering in 1997 and a
refl ection of our commitment to enhance
Unitholder value over the long term.
From left to right:
Judy Harkai, Managing Director
Patrick Ryan, Maintenance Manager
Daniela Douglas, Senior Operations Manager
Georgeta Morar, Operations Manager
Daniel Mack, Associate Vice President, Operations
Geeta Pundit, Operations Manager
Stacey Lilly, Operations Manager
10
CAPREIT 2013 ANNUAL REPORT
SUPPORTING PRODUCTIVIT Y
CAREER DEVELOPMENT
RECOGNITION
the Canadian rental residential business,
with solid demand in all of our key urban
markets. And with the best team of people
in the business, we are in a stronger position
than ever before to continue building value
for our Unitholders.
Thomas Schwartz
President and Chief Executive Offi cer
Michael Stein
Chairman
Normalized Funds From
Operations ($ Millions)
Strong and accretive growth in NFFO
and NFFO per Unit despite increases in
number of Units outstanding
159.4
132.6
103.9
92.0
83.4
2009
2010
2011
2012
2013
CAPREIT 2013 ANNUAL REPORT
11
CSR and Financial Reporting
CSR Reporting
13 Strengthening Performance
Strengthening Environmental and Sustainability Practices
14 Corporate Social Responsibilty and Sustainability
Management’s Discussion and Analysis
SECTION I
SECTION III
SECTION VII
19 Forward-Looking Disclaimer
20 Non-IFRS Financial Measures
20 Overview
22 Objectives
22 Business Strategy
23 Key Performance Indicators
24 Performance Measures
25 Property Portfolio
28
Investment Properties
42 Non-IFRS Financial Measures
42 Per Unit Calculations
SECTION IV
45 Property Capital Investments
46 Productive Capacity
47 Capital Structure
48 Liquidity and Financial Condition
54 Unitholder Taxation
57 Risks and Uncertainties
65 Related Party Transactions
66 Commitments and Contingencies
SECTION VIII
66 Subsequent Events
66 Future Outlook
SECTION II
SECTION V
30 Average Monthly Rents and Occupancy
34 Results of Operations
35 Net Operating Income
37 Stabilized Portfolio Performance
39 Net Income and Other Comprehensive Income
54 Selected Consolidated Quarterly Information
55 Selected Consolidated Financial Information
SECTION VI
55 Accounting Policies and Critical Estimates
57 Controls and Procedures
Consolidated Annual Financial Statements
68 Management’s Responsibility for Financial Reporting
69
Independent Auditor’s Report
70 Consolidated Balance Sheets
71 Consolidated Statements of Income and Comprehensive Income
72 Consolidated Statements of Unitholders’ Equity
73 Consolidated Statements of Cash Flows
74 Notes to Consolidated Financial Statements
103 Five-Year Review
12
CAPREIT 2013 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILIT Y
Strengthening Performance –
Strengthening Environmental and Sustainability Practices
In 2013 we celebrated sixteen years of providing our residents with high-quality,
safe and secure homes and an engaging place to work for our employees while
delivering stable monthly cash distributions and solid long-term value to our
Unitholders. This track record of success, and our platform for future growth, is
driven by a relentless focus on our proven property and asset management
strategies, executed by a talented team dedicated to meeting CAPREIT’s long-term
goals and objectives.
To accelerate our growth, while ensuring CAPREIT remains a
good corporate citizen, we also recognize that we must build on
our strengths in environmental conservation, employee engagement,
tenant relations and corporate governance. To achieve these objectives,
we are pleased to present CAPREIT’s fi rst report on key initiatives to
enhance sustainability and social responsibility within our business.
Since CAPREIT’s inception in 1997, we have implemented numerous
programs to enhance our environmental performance including
investments in energy-efficient heating boilers, low-power light
bulbs, high-efficiency toilets, low-flow faucets and showers, and
many others. We recognized from the outset that our employees are
our most important asset, and have targeted their engagement and
satisfaction through education, training and development, rewarding
exceptional service, introducing an Employee Unit Purchase Plan
and fostering a culture of teamwork and collegiality where employees
enjoy coming to work and making a difference every day. We were very
proud to have been selected as one of Canada’s 50 Best Employers
in 2013, a testament to our success in engaging our employees.
From a governance perspective, CAPREIT’s Board of Trustees is
comprised of skilled and experienced individuals, the majority of
them independent, fully engaged in CAPREIT’s operations and who
ensure our business practices remain ethical, open and transparent.
At CAPREIT we also believe in giving back to the communities where
we operate. In 2012 we instituted a nutritional breakfast program
for underprivileged schoolchildren and recently made a three-year
commitment to partner with the Toronto Foundation for Student
Success (“TFSS”), a well-respected charitable organization with
similar goals, to provide healthy meals to underprivileged students. In
addition, for the last fi fteen years we have partnered with government
agencies to provide approximately 1,800 suites across our portfolio
as affordable homes for less fortunate families.
Beginning with our 2013 Annual Report, each year we will share with
you our progress toward meeting our goals in various aspects of our
corporate responsibility and sustainability initiatives. Our industry-
leading practices in these important areas are another reason we have
been so successful, and why we will continue to build value in the
years ahead.
Thomas Schwartz
President and CEO
CAPREIT 2013 ANNUAL REPORT
13
CORPORATE SOCIAL RESPONSIBILIT Y
Corporate Social Responsibility
and Sustainability
CAPREIT is one of Canada’s largest publicly-traded residential landlords, serving
over 41,000 families. CAPREIT owns and operates a large portfolio of multi-unit
residential rental properties, including apartments, townhomes and manufactured
home communities, predominantly located near and in major urban centres across
Canada. CAPREIT’s portfolio serves residents across all demographic segments
and is highly diversifi ed geographically.
Established in 1997, CAPREIT has grown by acquiring properties
at values below replacement cost, primarily in large, urban rental
markets close to public facilities such as transportation links, schools,
shopping, parks, libraries and hospitals. CAPREIT creates value by
ensuring its acquisitions are accretive and through focused operational
strategies oriented to long-term ownership. This focus has contributed
to steady and sustainable growth in net operating income, normalized
funds from operations and net asset value.
CAPREIT’s vision is to be the premier residential real estate
landlord in Canada, the landlord and employer of choice, and
the investment of choice in its industry.
CAPREIT’s mission is to attract the right tenants by hiring the
right employees and acquiring the right properties to generate
the highest sustainable and profi table growth for Unitholders.
CAPREIT’s Board of Trustees and Management have made sustainable
business practices a priority, seeking to incorporate sustainability
principles into CAPREIT’s long-term business strategy, corporate
culture and operations. The goals of this focus are to operate the
business safely, more effi ciently, use energy more wisely and produce
less waste, while retaining and attracting the best employees and
residents. Management believes this approach will lead to better
risk management, cost effi ciency, innovation, and operational and
sustainable fi nancial performance.
In line with Management’s commitment to best practice communica-
tion, CAPREIT’s annual reporting will incorporate Corporate Social
Responsibility and Sustainability information deemed relevant and
material to CAPREIT’s employees, residents and investors. Such
reporting will better demonstrate how the business is managed and
how fi nancial and non-fi nancial objectives contribute to CAPREIT’s
long-term sustainability.
Key Opportunities and Achievements
Management continually monitors emerging trends in its business
and, where appropriate, takes steps to mitigate risk through the use of
such programs as economic hedges related to utility costs and interest
rate volatility, the reduction in consumption of natural resources,
targeted capital investments to enhance the comfort and life safety
of residents, philanthropic and charitable efforts, tenant satisfaction
and employee engagement initiatives.
14
CAPREIT 2013 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILIT Y
CAPREIT achieved the following goals in 2013:
Employment practices:
– Selected as one of Canada’s 50 Best Employers
– Instituted a variety of employee-oriented programs and benefi ts
– Achieved status as a qualifi ed Chartered Professional
Corporate governance:
– Two new Trustees bring greater diversity and a broader wealth
of knowledge to the Board
Investors:
– Fifteenth increase in cash distributions since IPO to $1.15
Accountant (“CPA”) Training Offi ce
per Unit annually
– Implemented information technology enhancements to permit
fl exibility and broaden mobility for employees while reducing
operating costs
– Continued improvement in the normalized funds from
operations payout ratio despite higher distributions
– Extended weighted average term to maturity for the
– Integrated procurement system for greater effi ciencies and
mortgage portfolio
reduced overall costs
– Enhanced workplace design and ergonomics for improved
employee satisfaction and productivity
Resident satisfaction:
– $80.7 million of structural capital investments for enhanced
life safety and property improvement
– Acquired 4,931 suites and sites
– Improved Total Debt to Gross Book Value ratios
– Maintained a minimum of $130 million of unencumbered assets
– Trust Expenses as a percentage of Gross Historical Cost have
remained below 0.50% for four consecutive years
– $67.4 million in suite improvements, common areas and other
Future Targets
enhancements for the greater comfort of residents
– $12.9 million on repairs and maintenance including
reconditioning and improved curb appeal of properties
– Expansion across Canada of CAP CARES, a 24/7 urgent
maintenance request line for residents
2014:
– Deliver year over year stabilized net operating income growth
– Acquire between 1,500 and 2,000 suites and sites
– Raise between $600 million and $650 million in total
– Information systems upgrades and enhancements for quicker
mortgage refi nancings
suite turnover and cost reduction
– Invest $2.5 million in energy-effi cient and environment-
friendly projects
Affordable housing and philanthropic efforts:
– Provided over 1,800 affordable suites to families in need in
– Sustain overall portfolio occupancy above 97% while increasing
average monthly rents
partnership with multiple government agencies
– Further improve employee engagement levels and maintain
– Increased the number of free breakfasts served to schoolchildren
one of “Canada’s 50 Best Employers” ranking
at CAPREIT properties to approximately 100 daily
– Implement a full-scale Human Resource Information System
– Partnered with the TFSS for a three-year commitment in
support of serving healthy meals at a school in proximity
to CAPREIT properties
for performance management, tracking and employee effi ciency
information, among other benefi ts
– Commence corporate head offi ce workplace redesign for
– CAPREIT employees and residents joined in 35 Ontario
improved employee productivity
towns and cities during the spring Housing Owners & People
Everywhere (“HOPE”) food drive to raise over 35,000 pounds
of food
– Formalize an integrated Enterprise Risk Management (“ERM”)
process encompassing virtually all aspects of CAPREIT’s
operations and tied to key performance metrics
– Establish a Leadership & Talent Management Committee
Environmental conservation:
– Invested $9.8 million in energy-effi ciency capital investments
comprised of Executives and Trustees for succession planning
at the senior executive level
for reduced resource consumption
– Implemented better tracking and visibility of resource
consumption for identifi cation of underperforming properties
– Establish a Leadership Excellence and Development (“LEAD”)
program to mentor staff, provide cross-functional exposure
and groom future leaders
CAPREIT 2013 ANNUAL REPORT
15
CORPORATE SOCIAL RESPONSIBILIT Y
– Establish a Rotational Leadership Development (“RLD”)
program to provide cross-functional exposure and
opportunities for talented younger leaders to accelerate their
career advancement at CAPREIT
– Expand the number of schoolchildren served complimentary
breakfasts at CAPREIT buildings
– Increase CAPREIT’s commitment to the TFSS with the support
One of CAPREIT’s key strategies is to evaluate the implementation of
a variety of energy effi ciency initiatives at every property on acquisition
and thereafter on a regular basis by means of newer, cost-effective
technology allowing even greater reduction in energy use. These
initiatives, with favourable payback periods, include:
– Installation of new high-effi ciency boilers and chillers
– Installation of compact fl uorescent light bulbs in suites and
of employees and residents
common areas
– Establish an academic bursary for students pursuing higher
– Replacement of laundry machines with high-effi ciency washing
education
machines and dryers
In the medium term:
– Improve CAPREIT’s ranking as one of “Canada’s 50 Best
Employers”
– Reduce average energy use and water consumption intensity
on a per suite basis
– Establish key sustainability performance indicators
– Align executive performance incentives with key sustainability
performance indicators
– Expand charitable efforts to improve the livelihood of
underprivileged families
Ultimately, these will help CAPREIT achieve its vision to:
– Attain recognition as a Top Ten Employer in Canada
– Attain over 98% occupancy while improving average
monthly rents
– Attain the lowest energy and water consumption intensity in
the multi-residential industry
– Use of refl ective panels to cost-effectively reduce heat loss
– Regular cleaning of in-suite heating coils, fi ns and radiators
The high-efficiency boilers, remotely monitored by CAPREIT’s
in-house energy department, allow for optimal temperatures for
residents’ comfort with efficient energy use. Total expenditures
since 2010 on energy consumption optimization investments total
$25.5 million.
The primary form of energy consumed by volume is natural gas, a
clean-burning energy source, used for heating the majority of the
property portfolio. Over the last few years, a number of properties
using heating oil have been converted to natural gas, reducing overall
emissions as well as operating costs.
The following table shows the results of CAPREIT’s energy-effi ciency
and environmental initiatives on a per suite basis for the years 2012
and 2011 calculated by an independent consulting fi rm in accordance
with GHG Protocol (including Scopes 1 to 3):
Sustainability Performance
Energy Use Intensity Performance over Prior Year
ENVIRONMENTAL AND RESOURCE CONSERVATION PRACTICES
CAPREIT’s ability to measure and monitor energy consumption
is critical to reducing operational costs, which fluctuate due to
changes in energy consumption and prices. The type and volume of
energy used also determines the volume of Greenhouse Gas (GHG)
emissions generated from CAPREIT’s operations.
CAPREIT believes it can minimize its environmental impact
while improving its long-term fi nancial performance through the
optimization of its utility consumption and by facilitating the reduction
of resident waste. Since inception, CAPREIT has strived to reduce
energy and water consumption in a cost-effective manner, thereby
reducing emissions and contributing to better fi nancial performance.
In Accordance with GHG Protocol
In Accordance with GHG Protocol
but Adjusted for Impact of
2012
(7.9%)
2011
0.2%
Weather and Occupancy
(2.6%)
(1.8%)
In addition, to optimize electricity consumption, as of December 31,
2013, CAPREIT had installed tenant sub-metering systems at
85 properties comprising over 14,000 suites. On lease turnovers, new
rental agreements include metered billing payable by the resident,
which acts as a strong incentive to reduce energy consumption.
The following table demonstrates the benefi t of sub-metering through
the reduction in annual electricity use intensity on a per suite basis in
sub-metered buildings compared with those for the overall portfolio
for the years 2012 and 2011.
16
CAPREIT 2013 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILIT Y
Percent Reduction in Electricity Use Intensity
Sub-metered Properties
Overall Portfolio
2012
(2.6%)
(0.6%)
2011
(1.5%)
0.2%
The historical data above was adjusted to exclude the impact of
weather and occupancy fl uctuation. It should be noted that while
sub-metered buildings performed, on average, better than the overall
portfolio, other factors, such as energy retrofits and operational
improvements, have also contributed to the improved performance.
Management has been studying alternative sources of energy such
as wind and solar power since 2008, however, provincial legislation
restricts progress in this area.
CAPREIT also evaluates the prompt installation of the latest water-
effi ciency equipment at newly acquired properties and on a regular
basis where considered cost-effective. Such initiatives include the
installation of the following since 2010:
– Over 16,000 ultra-high-effi ciency toilets
– Over 15,000 low-fl ow showerheads plus faucets using aerators
– Over 3,000 high-effi ciency laundry machines
The following table shows the results of CAPREIT’s initiatives to
reduce water consumption on a per suite basis calculated by an
independent consulting fi rm in accordance with GHG Protocol:
Water Use Intensity Performance over Prior Year
In Accordance with GHG Protocol
2012
(1.0%)
2011
(7.1%)
CAPREIT maintains a waste-diversion policy and expanded recycling
initiatives at almost all of its properties. This policy consists of
increased usage of blue bins and garbage compactors, adaptation of
building waste collection substructure for recycling, and education
of residents as to the benefi ts of recycling.
CAPREIT’s operations have little to no impact on land contamination.
Prior to the acquisition or refinancing of a property, thorough
environmental studies are performed by an independent consulting
fi rm to ensure there are no pre-existing contaminations and, if present,
that appropriate remediation work is performed to current standards
prior to acquisition.
CAPREIT contributes to the benefi ts of greater urban density and
lowers pollution by revitalizing existing residential properties rather
than developing new buildings and thus consuming more resources
and generating greater emissions. Revitalization adds to the useful
economic life of properties while at the same time modernizing them
for changing demographic needs and adding to the beautifi cation
of the neighbourhood through contemporary landscaping and
other improvements.
Employment Practices
CAPREIT recognizes that its people are its most important asset.
Talented and experienced property managers, combined with
specialists in procurement and knowledgeable fi nance staff, are the
key success drivers. CAPREIT is focused on providing its employees
with meaningful work in a safe environment, with training and
development opportunities for career advancement in a culture of
teamwork and recognition that encourages exceptional service.
One of CAPREIT’s main goals has been to be recognized as an
industry-leading employer, and in 2013 was proud to have achieved
a ranking as one of the “50 Best Employers in Canada” as evaluated
by human resource fi rm Aon Hewitt. Employees are encouraged to
“SAY, STAY and STRIVE”, speak positively about CAPREIT, have
the desire to remain a long-term employee, and go the extra mile to do
the best possible job. Management is committed to further improving
the work environment. Annual focus groups allow Management to
hear from employees from across the organization and to provide the
appropriate means of attracting and retaining the best employees.
CAPREIT’s fl exible benefi ts programs, competitive compensation,
employee mentorship, training and development initiatives, and a
warm and friendly work atmosphere, should help CAPREIT achieve
its goals. CAPREIT employees are provided with the opportunity to
own CAPREIT’s Trust Units through a highly benefi cial Employee
Unit Purchase Plan aligning their interests with all Unitholders.
CAPREIT is also proud to have its head offi ce qualifi ed as a CPA
Training Offi ce.
CAPREIT has also taken a leadership role in gender balance. As of
December 31, 2013, CAPREIT is proud that 14 of the 26 seniormost
managers are female.
CAPREIT 2013 ANNUAL REPORT
17
CORPORATE SOCIAL RESPONSIBILIT Y
Societal and Resident Satisfaction Practices
CAPREIT’s success is also driven by strong relationships with
its residents and the communities in which it operates. Building
relationships with residents begins before a lease is signed, with an
up-to-date, easy-to-navigate and interactive website featuring building
fl oor plans, virtual tours, pictures and videos, and local points of
interest, all combined with a proactive social media presence to
address questions.
Happy and satisfi ed residents mean lower lease turnover, lower vacancy
loss, lower repairs and maintenance, higher average monthly rents,
more resident referrals and a better resident community. Therefore,
Management ensures there are resident engagement initiatives at
every building focused on strengthening these relationships, which
include summer barbeques, weekly movie nights, informative resident
newsletters, on-site summer camps for resident children, and food
and toy drives that benefi t the underprivileged.
In addition to a formalized annual resident satisfaction survey,
CAP CARES is an effective and efficient means for residents to
communicate urgent maintenance requests. The program serves to
reduce response time for residents while also addressing and mitigating
possibly costly repairs. Feedback to CAPREIT helps identify areas of
improvement and enables CAPREIT’s team to enhance and deliver
resident services provided at its properties. CAPREIT also employs a
“mystery shopper” program to ensure its customer service initiatives
are effective and meeting its goals.
The reconditioning and enhancement of buildings under CAPREIT’s
capital investment program ensures residents enjoy safe, secure and
comfortable homes. In the interest of resident safety and security,
building manuals are maintained at every property in order to provide
easily accessible information on shutdown procedures for all building
mechanical systems in case of an emergency.
To help working families in need of assistance, CAPREIT has formed
long-term partnerships over the last fi fteen years with housing agencies
at federal, provincial and municipal levels of government across
Canada to provide well-managed, high-quality accommodation that
would otherwise be out of reach for many families. Such partnerships
also aid the integration of disadvantaged families into the broader
community while the effi cient operating platforms of landlords such as
CAPREIT have the added benefi t of effectively reducing the burden
and cost to the government. CAPREIT works closely with virtually
every agency and under every program possible to provide additional
suites, however, the imbalance between growing needs and available
accommodation persists due to the limited funding available to
partnering agencies. As of 2013, CAPREIT provides over 1,800 suites
across Canada and is one of the largest contributors of affordable
housing in the Greater Toronto Area. CAPREIT is committed to
supporting and expanding these programs as it contributes to the
well-being of communities and society and ensures properties are
fully occupied at market rents.
CAPREIT also runs a Student Breakfast Program that benefits
disadvantaged resident schoolchildren by providing complimentary
breakfasts at select CAPREIT properties with the aim of championing
academic performance. To expand this initiative, in 2013 CAPREIT
made a three-year commitment to partner with the TFSS to serve
healthy meals at an elementary school in proximity to certain
CAPREIT properties. Established in 1998, the TFSS supports over
600 breakfast, lunch and snack programs providing over 147,000
meals daily, as well as medical care, emergency funds and after-
school programs for children in need. CAPREIT also supports the
annual United Way Campaign and supports additional philanthropic
initiatives that benefi t disadvantaged schoolchildren.
Over the last sixteen years, CAPREIT has come a long way from a
small, regional property owner to one of Canada’s largest residential
landlords, with a portfolio spanning the country and all demographic
sectors. This growth and success would not have been possible
without CAPREIT’s service-oriented approach to residents, the
engagement and productivity of its employees, the control of resource
consumption, and addressing the needs of the investment community.
It is CAPREIT’s goal to maintain its focus on programs that enable
CAPREIT to be the premier residential landlord in Canada, the landlord
and employer of choice, and the investment of choice in its industry.
18
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Management’s
Discussion and Analysis
SECTION I
Forward-Looking Disclaimer
The following Management’s Discussion and Analysis (“MD&A”)
of Canadian Apartment Properties Real Estate Investment Trust’s
(“CAPREIT”) results of operations and fi nancial condition for the
year ended December 31, 2013 should be read in conjunction with
CAPREIT’s audited consolidated annual fi nancial statements for the
year ended December 31, 2013.
Certain statements contained, or contained in documents
incorporated by reference, in this MD&A constitute forward-
looking information within the meaning of securities laws. Forward-
looking information may relate to CAPREIT’s future outlook and
anticipated events or results and may include statements regarding
the future fi nancial position, business strategy, budgets, litigation,
projected costs, capital investments, fi nancial results, taxes, plans
and objectives of or involving CAPREIT. Particularly, statements
regarding CAPREIT’s future results, performance, achievements,
prospects, costs, opportunities and financial outlook, including
those relating to acquisition and capital investment strategy and
the real estate industry generally, are forward-looking statements.
In some cases, forward-looking information can be identified
by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”,
“believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or
the negative thereof, or other similar expressions concerning matters
that are not historical facts. Forward-looking statements are based on
certain factors and assumptions regarding expected growth, results of
operations, performance and business prospects and opportunities.
In addition, certain specifi c assumptions were made in preparing
forward-looking information, including: that the Canadian and Irish
economies will generally experience growth, which, however, may be
adversely impacted by the global economy; that infl ation will remain
low; that interest rates will remain low in the medium term; that
Canada Mortgage and Housing Corporation (“CMHC”) mortgage
insurance will continue to be available and that a suffi cient number
of lenders will participate in the CMHC-insured mortgage program
to ensure competitive rates; that the Canadian capital markets will
continue to provide CAPREIT with access to equity and/or debt at
reasonable rates; that vacancy rates for CAPREIT properties will be
consistent with historical norms; that rental rates will grow at levels
similar to the rate of infl ation on renewal; that rental rates on turnovers
will remain stable; that CAPREIT will effectively manage price
pressures relating to its energy usage; and, with respect to CAPREIT’s
financial outlook regarding capital investments, assumptions
respecting projected costs of construction and materials, availability
of trades, the cost and availability of fi nancing, CAPREIT’s investment
priorities, the properties in which investments will be made, the
composition of the property portfolio and the projected return on
investment in respect of specifi c capital investments. Although the
forward-looking statements contained in this MD&A are based on
assumptions, Management believes they are reasonable as of the date
hereof, there can be no assurance actual results will be consistent
with these forward-looking statements and they may prove to be
incorrect. Forward-looking statements necessarily involve known
and unknown risks and uncertainties, many of which are beyond
CAPREIT’s control, that may cause CAPREIT or the industry’s actual
results, performance, achievements, prospects and opportunities in
future periods to differ materially from those expressed or implied
by such forward-looking statements. These risks and uncertainties
include, among other things, risks related to: reporting investment
properties at fair value, real property ownership, leasehold interests,
CAPREIT 2013 ANNUAL REPORT
19
MANAGEMENT’S DISCUSSION AND ANALYSIS
co-ownerships, investment restrictions, operating risk, energy costs
and hedging, environmental matters, insurance, capital investments,
indebtedness, interest rate hedging, foreign operation and currency
risks, taxation, harmonization of federal goods and services taxes
and provincial sales taxes, government regulations, controls over
fi nancial accounting, legal and regulatory concerns, the nature of
units of CAPREIT (“Trust Units”) and of CAPREIT’s subsidiary,
CAPREIT Limited Partnership (“Exchangeable Units”) (collectively,
the “Units”), unitholder liability, liquidity and price fl uctuation of
Units, dilution, distributions, participation in CAPREIT’s distribution
reinvestment plan, potential confl icts of interest, dependence on key
personnel, general economic conditions, competition for residents,
competition for real property investments, continued growth, risks
related to acquisitions, and foreign operating and currency risks. There
can be no assurance the expectations of CAPREIT’s Management will
prove to be correct. For a detailed discussion of risk factors, refer
to the Risks and Uncertainties section. Subject to applicable law,
CAPREIT does not undertake any obligation to publicly update or
revise any forward-looking information.
Non-IFRS Financial Measures
CAPREIT prepares and releases unaudited consolidated interim
financial statements and audited consolidated annual financial
statements in accordance with International Financial Reporting
Standards (“IFRS”). In this MD&A, and in earnings releases and
investor conference calls, as a complement to results provided in
accordance with IFRS, CAPREIT also discloses and discusses
certain fi nancial measures not recognized under IFRS and that do
not have standard meanings prescribed by IFRS, including Net
Operating Income (“NOI”), Net Rental Revenue Run-Rate, Funds
From Operations (“FFO”), Normalized Funds From Operations
(“NFFO”) and Adjusted Funds From Operations (“AFFO”), and
applicable per Unit amounts and payout ratios (collectively the “non-
IFRS measures”). These non-IFRS measures are further defi ned and
discussed in Section III under Non-IFRS Financial Measures. Since
NOI, Net Rental Revenue Run-Rate, FFO, NFFO and AFFO are
not measures determined under IFRS, they may not be comparable
to similarly titled measures reported by other issuers. CAPREIT has
presented such non-IFRS measures because Management believes
these non-IFRS measures are relevant measures of the ability of
CAPREIT to earn and distribute cash returns to investors in the
Units (“Unitholders”) and to evaluate CAPREIT’s performance. A
reconciliation of non-IFRS measures is provided in Section III under
Non-IFRS Financial Measures. These non-IFRS measures should not
be construed as alternatives to net income (loss) or cash fl ows from
operating activities determined in accordance with IFRS as indicators
of CAPREIT’s performance.
Overview
CAPREIT is an unincorporated open-ended publicly-traded real
estate investment trust and one of Canada’s largest residential land-
lords, serving over 41,000 families across the country. CAPREIT owns
and operates a portfolio of multi-unit residential rental properties,
including apartments, townhomes and manufactured home communi-
ties located in and near major urban centres in Canada and Ireland.
CAPREIT’s concentration on the residential real estate market is
aimed at generating solid year-over-year income growth in a portfolio
with stable occupancy and rising average monthly rents. In addi-
tion, CAPREIT mitigates concentration risk through demographic
diversifi cation by operating properties across the affordable, mid-
tier and luxury sectors, as well as through geographic diversifi cation
principally across Canada.
CAPREIT’s vision is to be the premier residential real estate
landlord in Canada, the landlord and employer of choice, and
the investment of choice in its industry.
CAPREIT’s mission is to attract the right tenants by hiring the
right employees and acquiring the right properties to generate
the highest sustainable and profi table growth for Unitholders.
Established in 1997, CAPREIT has grown by acquiring properties
at prices below their replacement cost, primarily in large urban rental
markets with high employment and close to public facilities such as
schools, libraries and hospitals. CAPREIT focuses on acquisitions
deemed accretive to growth and employing successful operational
strategies aimed at long-term ownership. This focus has contributed
to growing net operating income, Normalized Funds from Operations
and value for Unitholders.
2013 was a signifi cant year of growth for CAPREIT with an almost
12% increase in its portfolio, having acquired 2,121 residential suites
and 2,810 land lease sites in 15 manufactured home communities.
In the same period, pursuant to its strategy to dispose of non-core
assets from time to time, CAPREIT sold 604 non-core residential
suites. The acquisitions completed in 2013 have strengthened the
portfolio geographically. The acquisition of new manufactured home
communities has increased CAPREIT’s base in a profi table sector
of residential real estate, which Management believes will provide
CAPREIT with accretive growth in the long term.
CAPREIT was established under the laws of the Province of
Ontario by a declaration of trust (the “DOT”) dated February 3,
1997, as most recently amended and restated on May 21, 2013. As at
December 31, 2013, CAPREIT owned interests in 41,552 residential
units, comprised of 35,372 residential suites and 29 manufactured
home communities (“MHC”), comprised of 6,180 land lease sites. As
at December 31, 2013, CAPREIT had 892 employees (829 employees
as at December 31, 2012).
20
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The tables below summarize property acquisitions and dispositions for the years ended December 31, 2013 and 2012:
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2013
($ Thousands)
January 31, 2013
May 15, 2013
May 31, 2013
August 28, 2013
September 10, 2013
October 10, 2013
October 22, 2013
November 29, 2013
Total
Demographic
Sector
Mid-tier
Mid-tier
Luxury
Various (4)
Luxury
MHC
Various (6)
MHC (7)
Suite
or Site
Count
263
396
114
770
338
2
740
2,308
4,931
Region(s)
Calgary
Toronto
Calgary
Various (4)
Dublin, Ireland
Bowmanville
Prince Edward Island
New Brunswick
$
Total
Acquisition
Costs
49,022
58,019
25,812
153,894
61,431
170
36,393
71,782
Assumed
Mortgage
Funding
$
7,181
– (3)
11,041
9,475
– (5)
– (3)
Interest
Rate (1)
6.95%
– (3)
4.25%
3.62%
– (5)
– (3)
10,274
4.49%
– (3)
– (3)
$
456,523
$
37,971
Term to
Maturity
(Years) (2)
4.7
– (3)
1.6
0.9
– (5)
– (3)
1.8
– (3)
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see Liquidity and Financial Condition section).
(4) The acquisition comprised 10 properties consisting of 770 suites (597 mid-tier and 173 luxury suites) located in British Columbia,
Ontario and Québec.
(5) The acquisition was primarily funded from CAPREIT’s €45 million fi ve-year non-revolving Euro-denominated credit facility at an all-in
interest rate of 3.22% (see Liquidity and Financial Condition section).
(6) The acquisition comprised 240 suites (132 mid-tier and 108 luxury suites) and 500 land lease sites in four communities located in Charlottetown
and Cornwall, Prince Edward Island.
(7) The acquisition comprised 2,308 land lease sites in 11 communities in New Brunswick.
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2012
($ Thousands)
May 31, 2012
June 29, 2012
July 19, 2012
Demographic
Sector
MHC
Mixed (4)
MHC (5)
August 31, 2012
November 1, 2012
Mid-tier (7)
Luxury
Total
Suite
or Site
Count
2,032
3,562
5
405
980
6,984
Region(s)
Various (3)
Various (4)
Bowmanville and
Grand Bend
Calgary
Montréal
Total
Acquisition
Costs
Assumed
Mortgage
Funding
$
76,324
461,428
$
37,753
183,939
Interest
Rate (1)
5.33%
3.99%
499
69,501
183,516
– (6)
– (6)
31,208
82,048
3.38%
4.39%
$
791,268
$
334,948
Term to
Maturity
(Years) (2)
3.0
2.6
– (6)
1.7
0.8
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The acquisition comprised 12 manufactured home communities (“MHC”) located in Ontario, Saskatchewan, Alberta and British Columbia.
(4) The acquisition comprised 14 properties consisting of 3,562 suites (1,027 affordable, 1,403 mid-tier and 1,132 luxury suites) located in Ontario,
Québec and Nova Scotia.
(5) The MHC land lease sites acquisition comprised four sites in Bowmanville and one site in Grand Bend.
(6) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see Liquidity and Financial Condition section).
(7) The acquisition comprised two mid-tier properties. One property is a fee simple interest, and the other is a land leasehold interest.
CAPREIT 2013 ANNUAL REPORT
21
Mortgage
Discharged
$
$
34,772
34,772
$
Mortgage
Discharged
9,485
15,030
29,018
MANAGEMENT’S DISCUSSION AND ANALYSIS
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2013
($ Thousands)
Demographic Sector
August 28, 2013
Various (1)
Total
Suite
Count
604
604
Region(s)
Sale Price
Cash Proceeds
Greater Toronto Area
$
$
94,250
94,250
$
$
57,672
57,672
(1) The disposition comprised 5 properties consisting of 604 mid-tier suites located in Mississauga and Toronto, Ontario.
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2012
($ Thousands)
Demographic Sector
February 22, 2012
May 31, 2012
October 31, 2012
Mid-tier
Luxury
Various (1)
Total
Suite
Count
136
199
438
773
Region(s)
Sale Price
Cash Proceeds
Greater Toronto Area
Greater Toronto Area
Various (1)
$
17,500
33,500
60,700
$
7,726
17,974
29,944
$
111,700
$
55,644
$
53,533
(1) The disposition comprised 5 properties consisting of 438 suites (270 mid-tier and 168 luxury suites) located in Mississauga, Oakville and
Toronto, Ontario.
Objectives
CAPREIT’s objectives are to:
(cid:129) Provide Unitholders with long-term, stable and predictable
monthly cash distributions;
(cid:129) Grow Normalized Funds From Operations, sustainable distribu-
tions and Unit value through the active management of its proper-
ties, accretive acquisitions and strong fi nancial management; and
(cid:129) Reinvest capital within the property portfolio in order to ensure life
safety of residents and maximize earnings and cash fl ow potential.
Business Strategy
To meet its objectives, CAPREIT has established the following
strategies:
Customer Service – CAPREIT recognizes that it is in a “people business”
and strives to be recognized as the Landlord of Choice in all its chosen
markets by providing its residents with safe, secure and comfortable
homes. It takes a hands-on approach to managing its properties, stress-
ing open and frequent communications to ensure residents’ needs are
met effi ciently and effectively, thereby maintaining a high occupancy
level. Numerous initiatives, such as newsletters, special events, resident
committees and other initiatives help to build a true sense of community
at its properties. CAPREIT’s strong sales and marketing team continues
to execute innovative and highly effective strategies to help attract and
retain residents and adapt to changing conditions in specifi c markets.
In addition, CAPREIT’s lease administration system improves control
of rent-setting by suite, increasing resident service and enhancing the
overall profi le of its resident base.
Cost Management – While ensuring the needs of its residents are
met, CAPREIT also carefully monitors operating costs to ensure it
is delivering services to residents both effi ciently and cost effectively.
CAPREIT strives to capture potential economies of scale and cost
being generated by the growth in its property portfolio. CAPREIT’s
enterprise-wide procurement system streamlines and centralizes pur-
chasing controls and procedures and is realizing reduced costs through
national master sourcing contracts, improved pricing and enhanced
operating effi ciencies.
Capital Investments – CAPREIT strives to acquire properties at prices
signifi cantly below their current replacement costs, and is committed to
improving its operating performance by incurring appropriate capital
investments in order to maintain the productive capacity of its property
portfolio and to sustain the portfolio’s rental income-generating poten-
tial over its useful life. CAPREIT continues to invest in environment-
friendly and energy-saving initiatives that improve overall net operating
income. CAPREIT completes a review of its portfolio and revises its
long-term capital investment plan on an annual basis, which allows
Management to ensure capital investments extend the useful economic
life of CAPREIT’s properties, enhance life safety, maximize earnings
and improve the long-term cash fl ow potential of its portfolio.
22
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio Growth – CAPREIT will grow its portfolio over the long
term through accretive acquisitions that meet its strategic criteria and,
where possible, enhance geographic diversifi cation while capturing
economies of scale and cost synergies, thereby increasing net operat-
ing income. As a component of this growth strategy, CAPREIT will
monitor its portfolio and, from time to time, identify certain non-core
properties for divestiture. The funds from these divestitures will be
used to acquire additional strategic assets better suited to CAPREIT’s
portfolio composition and property management objectives or to pay
down existing debt. Management believes the continued realization
and reinvestment of capital is a fundamental component of its growth
strategy and demonstrates the success of CAPREIT’s capital invest-
ment programs and its ability to maximize and manage the earnings
and cash fl ow potential of its property portfolio.
Financial Management – CAPREIT takes a conservative approach and
strives to manage its exposure to interest rate volatility by proactively
managing its mortgage debt portfolio to fi x and, where possible, reduce
average interest rates, effectively manage the average term to maturity
and stagger maturity dates. In addition, CAPREIT strives to maintain
a conservative overall liquidity position and achieve a balance in its
overall capital resource requirements between debt and equity.
Key Performance Indicators
To assist Management and investors in monitoring and evaluating
CAPREIT’s achievement of its objectives, CAPREIT has defi ned a
number of key operating and performance indicators (“KPIs”) to mea-
sure the success of its operating and fi nancial strategies:
Occupancy – Management strives, through a focused, hands-on ap-
proach to its business, to achieve occupancies that are in line with,
or higher than, market conditions in each of the geographic regions
in which CAPREIT operates while enhancing the overall qualitative
profi le of its resident base.
Average Monthly Rents – Through its active property management
strategies, the lease administration system and proactive capital in-
vestment programs, CAPREIT strives to achieve the highest possible
average monthly rents in accordance with local market conditions.
NOI – As a measure of its operating performance, CAPREIT currently
strives to achieve an annual net operating income margin that is in the
range of 56% to 58% of operating revenues.
FFO and NFFO – CAPREIT is focused on achieving steady increases
in these metrics. Management believes these measures are indicative
of CAPREIT’s operating performance and the sustainability of its
distributions.
Payout Ratio – To help ensure it retains suffi cient cash to meet its capital
investment objectives, CAPREIT has historically targeted a long-term
annual NFFO payout ratio of between 80% and 85%.
Portfolio Growth – Management’s objective is to pursue strategic acqui-
sitions of between 1,500 and 2,000 suites and sites on an annual basis,
subject to market conditions and available fi nancing, which meet its
strategic objectives, serve to accretively increase NFFO and continue to
further diversify the portfolio by geography and by demographic sector.
Financing – CAPREIT takes a proactive approach with its mortgage
portfolio, striving to manage interest expense volatility risk by achieving
the lowest possible average interest rates while mitigating refi nancing
risk by prudently managing the portfolio’s average term to maturity
and staggering the maturity dates. For this purpose, CAPREIT strives
to ensure its overall leverage ratios and interest and debt service cover-
age ratios are maintained at a sustainable level. In addition, CAPREIT
focuses on maintaining capital adequacy by complying with invest-
ment and debt restrictions in its DOT and its fi nancial covenants in
its credit agreement comprising an acquisition and operating facility
(“Acquisition and Operating Facility”), a fi ve-year non-revolving term
credit facility, and a Euro-denominated fi ve-year non-revolving term
credit facility (collectively, the “Credit Facilities”), as described under
Liquidity and Financial Condition in Section IV.
CAPREIT 2013 ANNUAL REPORT
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Performance Measures
The following table presents an overview of certain key IFRS and non-IFRS fi nancial measures and operational results of CAPREIT for the
years ended December 31, 2013 and 2012. Management believes that these measures are useful in assessing CAPREIT’s performance vis-à-vis
its objectives, business strategy and KPIs. Effective June 2013, monthly cash distributions declared to Unitholders increased to $0.096 per
Unit ($1.15 annually), compared to $0.093 per Unit ($1.12 annually) since September 2012 and $0.090 per Unit ($1.08 annually) previously.
Year Ended December 31,
Portfolio Performance
Overall Portfolio Occupancy (1)
Overall Portfolio Average Monthly Rents (1)
Operating Revenues (000s)
NOI (000s)
NOI Margin
Operating Performance (2)
FFO Per Unit – Basic
NFFO Per Unit – Basic
Weighted Average Number of Units – Basic (000s)
Cash Distributions Per Unit
FFO Payout Ratio
NFFO Payout Ratio
Liquidity and Leverage
Total Debt to Gross Book Value (1)
Total Debt to Gross Historical Cost (1),(3)
Weighted Average Mortgage Interest Rate (1)
Weighted Average Mortgage Term (years) (1)
Debt Service Coverage (times) (4)
Interest Coverage (times) (4)
Available Liquidity – Acquisition and Operating Facility (000s) (1)
Other
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units (1)
Market Capitalization (millions) (5)
2013
2012
98.0%
951
477,023
273,854
57.4%
1.522
1.562
102,064
1.138
76.8%
74.8%
47.32%
56.74%
3.76%
6.0
1.54
2.62
86,443
4,931
604
21.25
2,361
$
$
$
$
$
$
$
$
$
97.9%
975
412,421
237,916
57.7%
1.448
1.486
89,215
1.097
78.4%
76.4%
47.25%
56.71%
3.87%
5.4
1.52
2.51
126,296
6,984
773
24.90
2,550
$
$
$
$
$
$
$
$
$
(1) As at December 31.
(2) NOI, FFO and NFFO are not defi ned by IFRS, do not have standard meanings and may not be comparable with other industries or companies
(see Non-IFRS Financial Measures).
(3) Based on the historical cost of investment properties.
(4) Based on the trailing four quarters.
(5) Defi ned as the closing price of the Units on the last trading date of the period times the number of Units outstanding on that date (see discussion
of Unitholders’ equity under the Liquidity and Financial Condition section).
24
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Property Portfolio
TYPES OF PROPERTY INTERESTS
CAPREIT’s investments in its property portfolio refl ect different
forms of property interests, including:
Fee Simple Interests – Apartments and Townhomes – The majority of
CAPREIT’s investment in its property portfolio is in the form of fee
simple interests, representing freehold ownership of the properties
subject only to typical encumbrances, such as mortgages.
Operating Leasehold Interests – CAPREIT owns leasehold interests in
15 properties located in the Greater Toronto Area. The leases mature
between 2033 and 2037. While separate lease arrangements exist for
each property, the general structure is common across all leases: each
lease is for a 35-year term and the rent for the entire lease term was
fully paid at the time the leasehold interest was acquired. Each lease
also provides CAPREIT with a purchase option exercisable between
the 26th and 35th year of the lease term. In the case of one of the
properties, the purchase option entitles CAPREIT to acquire a prepaid
operating leasehold interest in the property maturing in 2072 (see
Portfolio of Operating Leasehold Interests for additional information).
Land Leasehold Interests – CAPREIT owns leasehold interests in three
land parcels in Alberta, of which one was purchased in 2012, and
one land parcel in British Columbia. CAPREIT acquired a residential
building on each of the four land parcels and pays ground rent on an
annual basis for its use of the land. One land lease matures in 2045,
two mature in 2068 and another matures in 2070. CAPREIT does
not have the unilateral right to acquire the land or extend the lease
term at the maturity of the respective leases (see Portfolio of Land
Leasehold Interests for additional information).
Fee Simple Interests – MHC Land Lease Sites – CAPREIT has fee
simple interests in 29 MHCs, whereby CAPREIT owns sites, which
it rents to residents.
Portfolio by Type of Property Interest
As at December 31,
Fee Simple Interests – Apartments and Townhomes
Operating Leasehold Interests
Land Leasehold Interests
Total Residential Suites
Fee Simple Interests – MHC Land Lease Sites
2013
30,506
3,815
1,051
35,372
6,180
%
73.4
9.2
2.5
85.1
14.9
2012
28,989
3,815
1,051
33,855
3,370
%
77.9
10.2
2.8
90.9
9.1
Total Suites and Sites
41,552
100.0
37,225
100.0
PORTFOLIO DIVERSIFICATION
CAPREIT’s property portfolio continues to be diversifi ed by geography and balanced among demographic sectors and asset types. Management’s
long-term goal is to further enhance the geographic diversifi cation and the defensive nature of its portfolio through acquisitions.
Portfolio by Demographic Sector
As at December 31,
Affordable
Mid-tier
Luxury
Total Residential Suites
MHC Land Lease Sites
Total Suites and Sites
2013
%
2,470
18,956
13,946
35,372
6,180
5.9
45.6
33.6
85.1
14.9
2012
2,470
18,172
13,213
33,855
3,370
%
6.6
48.8
35.5
90.9
9.1
41,552
100.0
37,225
100.0
CAPREIT 2013 ANNUAL REPORT
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
2013
%
2012
%
15,780
1,527
1,649
1,410
20,366
4,581
2,728
7,309
1,948
1,180
3,128
310
1,852
2,162
38.0
3.7
4.0
3.4
49.1
11.0
6.6
17.6
4.7
2.8
7.5
0.7
4.4
5.1
15,728
1,527
1,649
1,410
20,314
4,436
2,728
7,164
1,948
815
2,763
310
1,475
1,785
42.3
4.1
4.4
3.8
54.6
11.9
7.3
19.2
5.2
2.2
7.4
0.8
4.0
4.8
1,588
3.8
1,588
4.3
133
108
241
0.3
0.3
0.6
240
0.6
338
35,372
0.8
85.1
2,678
130
318
246
500
2,308
6,180
6.4
0.3
0.8
0.6
1.2
5.6
14.9
133
108
241
–
–
0.3
0.3
0.6
–
–
33,855
90.9
2,676
130
318
246
–
–
3,370
7.2
0.3
0.9
0.7
–
–
9.1
41,552
100.0
37,225
100.0
Portfolio by Geography
As at December 31,
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
British Columbia
Greater Vancouver Region
Victoria
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Prince Edward Island
Charlottetown
Ireland
Dublin
Total Residential Suites
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
Total MHC Land Lease Sites
Total Suites and Sites
While maintaining a strong and strategic presence in Ontario’s residential market, CAPREIT continues to focus on diversifying its
geographic portfolio outside of Ontario by increasing its presence in markets with higher growth potential. CAPREIT continues to look for
investment opportunities that meet its investment criteria and that, where possible, will further its diversifi cation strategy. The geographic
diversifi cation of its portfolio also enables CAPREIT to mitigate the risks arising from potential downturns in specifi c markets.
26
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPREIT has exceeded its growth objective for 2013 with a
total gross number of 4,931 suites and sites acquired for the year, as
historically, CAPREIT targeted acquiring between 1,500 and 2,000
suites and sites on an annual basis.
PORTFOLIO OF OPERATING LEASEHOLD INTERESTS
CAPREIT has the option to acquire fee simple interests in 14 of the
properties, which are exercisable between the 26th and 35th years of
the respective leases. In the case of a 15th property, comprised of 327
suites, CAPREIT’s option entitles it to acquire a prepaid operating
leasehold interest in the property maturing in 2072.
The purchase options are independently exercisable, enabling
CAPREIT to acquire additional interests in any or all of the proper-
ties. The option prices vary by property and by the year in which the
option is to be exercised. The aggregate range of option prices would
be approximately $283 million to $339 million if each of the options
were exercised in the 26th and 35th years, respectively, of the lease
terms. If CAPREIT elected to exercise any option prior to the maturity
of the lease term, CAPREIT would be entitled to receive a pro rata
amount of the prepaid interest based on the remaining lease term.
In addition, under certain circumstances, the option price may be
reduced by the unamortized portion of capital expenditures incurred
during the fi nal ten years of the lease term.
The mortgages on each of these 15 properties are scheduled
to be fully repaid by their respective option exercise dates, which
Management expects will enable CAPREIT to utilize the equity in
these properties to fully fi nance the option exercise prices.
Operating Leasehold Interests Portfolio by Lease Maturity
($ Thousands)
As at December 31, 2013 and 2012
Year of Lease Maturity
Properties
Suites
2033
2034
2035
2037
10
2
1
2
Total Operating Leasehold Interests Portfolio 15
3,099
161
200
355
3,815
Option Exercise Prices
%
81.3
4.2
5.2
9.3
$
26th Year
202,071
19,300
14,200
47,200
$
35th Year
242,596
23,150
17,000
56,000
Prepaid Lease
Amount (1)
$
136,101
13,700
9,000
33,500
100.0
$
282,771
$
338,746
$
192,301
(1) As at the acquisition dates of these leasehold interests by a CAPREIT predecessor.
PORTFOLIO OF LAND LEASEHOLD INTERESTS
In the absence of any new arrangements negotiated between CAPREIT and the landowners of the four parcels on which CAPREIT has land
leasehold interests, CAPREIT’s interests in one property matures in 2045, two properties in 2068 and one property in 2070. Generally, each
lease provides for annual ground rent and additional rent calculated from the properties’ operating results. All rental payments associated
with land leasehold interests are included in other operating expenses (see Results of Operations).
Land Leasehold Interests Portfolio by Lease Maturity
($ Thousands)
Year Ended December 31,
Year of Lease Maturity
2045
2068 (1)
2070
Total Land Leasehold Interests Portfolio
(1) A land leasehold interest was purchased in 2012.
Annual Ground Rent
Suites
473
306
272
%
45.0
29.1
25.9
1,051
100.0
2013
1,000
579
1,279
2,858
$
$
2012
1,000
312
1,118
2,430
$
$
CAPREIT 2013 ANNUAL REPORT
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Investment Properties
Investment property is defi ned as property held to earn rental income
or for capital appreciation or both. Investment property is recog-
nized initially at cost. Subsequent to initial recognition, all investment
property is measured using the fair value model, whereby changes
in fair value are recognized for each reporting period in net income.
Management values each investment property based on the most
probable price that a property could be sold for in a competitive and
open market as of the specifi ed date under all conditions requisite
to a fair sale, the buyer and seller each acting prudently and knowl-
edgeably, and assuming the price is not affected by undue stimulus.
This does not contemplate the potential for general declines in real
estate markets or sale of assets by CAPREIT under fi nancial or other
hardship. Each investment property has been valued on a highest
and best use basis but, specifi cally, does not include any portfolio
premium that may be associated with economies of scale from own-
ing a large portfolio or the consolidation value of having compiled a
large portfolio of properties over a long period of time, many through
individual property acquisitions.
Market assumptions applied for valuation purposes do not neces-
sarily refl ect the specifi c history or experience related to CAPREIT,
and in many cases, the stabilized cash fl ows or NOI used for appraisal
purposes may not refl ect the results ultimately realized during future
periods.
The fair value of investment properties is established by a qualifi ed,
independent appraiser annually. Each quarter, CAPREIT utilizes mar-
ket assumptions for rent increases, capitalization and discount rates
provided by the external appraiser to determine the fair value of the
investment properties for interim reporting purposes. Capitalization
rates employed by the appraiser are based on recently closed transac-
tions, generally within the last three months, and other current market
indicators for similar properties. To the extent that the externally
provided capitalization rates or results of operations change from
one reporting period to the next, the fair value of the investment
properties would increase or decrease accordingly.
For a discussion of risk factors associated with the valuation of
investment properties, refer to the Risks and Uncertainties section.
For a detailed description of valuation methods and key assumptions
used for investment properties, see note 6 of CAPREIT’s audited con-
solidated annual fi nancial statements for the year ended December 31,
2013 contained in CAPREIT’s 2013 Annual Report.
The following table summarizes the changes in the investment
properties portfolio during the years:
($ Thousands)
As at December 31,
2013
2012
Balance, Beginning of the Year
$ 4,826,355
$ 3,713,737
Add:
Acquisitions
Property Capital Investments (1)
Capitalized Leasing Costs (2)
Unrealized Gain on
Remeasurement at Fair Value
Foreign Currency Translation
456,523
160,220
692
106,470
3,208
791,268
133,286
1,038
298,228
–
Less:
Dispositions
Realized Loss on Dispositions
Investment Properties at
Fair Value, End of the Year
(93,439)
(811)
(109,589)
(1,613)
$ 5,459,218
$ 4,826,355
(1) See Property Capital Investments section.
(2) Comprises tenant inducements, straight-line rent, and direct leasing
costs.
For the years ended December 31, 2013 and 2012, the unrealized
gain on remeasurement of investment properties is primarily the result
of changes in net operating income and capitalization rates offset
by certain capital investments not having an immediate effect on
stabilized NOI and thus not being refl ected in the fair value of the
investment properties at the measurement date.
28
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
A summary of the fair values of CAPREIT’s investment properties and changes, along with key market assumptions, is presented below:
Investment Properties by Geography
As at
($ Millions)
Greater Toronto Area
Other Ontario
Québec
British Columbia
Alberta
Nova Scotia
Saskatchewan
Prince Edward Island
Dublin, Ireland
MHC Land Lease Sites
Total
Dec 2012
Change Due to Change in
Dec 2013
Dec 2012
Dec 2013
Fair Value
Rates (1)
Stabilized
NOI
Forex
Net
Translation Acquisitions
Fair Value
Rates (1)
Rates (1)
$
2,265 $
460
848
497
330
226
27
–
–
173
73 $
14
23
(6)
9
9
–
–
–
5
93 $
8
11
9
22
(3)
–
–
3
10
$
–
–
–
–
–
–
–
–
3
–
5 $
–
20
89
73
–
–
27
61
75
2,436
482
902
589
434
232
27
27
67
263
5.07%
5.38%
5.52%
4.27%
4.94%
5.98%
6.14%
–
–
6.25%
4.86%
5.22%
5.36%
4.30%
4.84%
5.75%
6.19%
6.28%
6.37%
6.07%
$
4,826 $
127 $
153
3 $
350 $ 5,459
(1) Weighted average capitalization rates excluding implied capitalization rates on Operating and Land Leasehold Interests.
See note 6 to the accompanying audited consolidated annual fi nancial statements for further valuation assumption details including
discount rates as at December 31, 2013 for Operating and Land Leasehold Interests.
As at December 31, 2013, a 25 basis point change in capitalization rates would have the following approximate effect on the fair value of
investment properties:
($ Millions)
As at December 31, 2013
Weighted Average Capitalization Rate
Weighted Average Capitalization Rate
Change (basis points) (1)
Estimated (Decrease) Increase
+25
–25
$
$
(252)
278
(1) For Operating Leasehold Interests, CAPREIT applies discount rates to determine the fair value of these properties. However, for
the purposes of the above sensitivity analysis, CAPREIT has utilized the implied capitalization rates for Operating Leasehold Interests
to determine the impact on fair value of the total portfolio.
CAPREIT 2013 ANNUAL REPORT
29
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION II
Average Monthly Rents and Occupancy
Portfolio Average Monthly Rents (“AMR”) and Occupancy by Demographic Sector
As at December 31,
Affordable
Mid-tier
Luxury
Average Residential
Suites
Average MHC Land
Lease Sites
Overall Portfolio
Average
Total Portfolio
Properties Owned Prior to
December 31, 2012
Properties Acquired
Since December 31, 2012
2013
AMR Occ. %
2012
AMR Occ. %(2)
2013
AMR Occ. %
2012 (1)
AMR Occ. %
2013
AMR Occ. %
$
$
$
870
1,009
1,160
96.6
98.2
98.0
$
$
$
862
989
1,115
97.7
98.1
97.3
$
$
$
870
1,017
1,153
96.6
98.4
98.2
$
$
$
862
987
1,115
97.7
98.2
97.3
$
$
$
–
915
1,275
–
96.4
94.8
$
1,060
98.0
$
1,030
97.8
$
1,061
98.2
$
1,030
97.8
$
1,039
95.9
$
348
97.6
$
439
99.2
$
454
99.5
$
439
99.2
$
221
95.4
$
951
98.0
$
975
97.9
$
1,004
98.3
$
974
97.9
$
572
95.6
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of in 2013.
(2) Under the purchase agreements for two properties acquired between July 1, 2011 and June 30, 2012, CAPREIT received monthly escrow payments
for the positive differences, if any, between: (a) 97.0% of the gross rent roll for such month less (b) the actual rent earned for such month, with
all applicable sales taxes. CAPREIT continued to receive escrow payments when the actual occupancy rates were less than 97.0% up to a maximum
of $1.5 million for each property, after which rental revenue will be based on actual occupancy. The occupancy rates in the tables are refl ected at
97.0% for these two properties.
AMR is defi ned as actual residential rents, net of vacancies, divided
by the total number of suites and sites in the property and does not
include revenues from parking, laundry or other sources. Average
monthly rents increased in all demographic sectors of the residential
suite portfolio, resulting in a 2.9% increase in overall average monthly
rent as at December 31, 2013 compared to last year while occupancy
increased to 98.0% compared to 97.8% for last year. The increases in
average monthly rents were due to higher rent guideline increases, a
combination of ongoing successful sales and marketing strategies, above
guideline increases, and continued strength in the residential rental
sector in the majority of CAPREIT’s regional markets. As at December 31,
2013, the AMR of the luxury properties increased compared to last year,
partially as a result of the acquisitions in Dublin, Ireland.
Average monthly rents for residential properties owned prior to
December 31, 2012 also increased as at December 31, 2013 to $1,061
from $1,030 as at December 31, 2012, an increase of 3.0% from last
year. As at December 31, 2013, occupancy has increased to 98.2%
from 97.8% for December 31, 2012.
30
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the MHC land lease portfolio, average monthly rents
decreased to $348 as at December 31, 2013, compared to $439 as at
December 31, 2012, primarily due to the acquisition of 2,808 MHC
land lease sites acquired in the fourth quarter of 2013 in lower rent
geographic regions. Occupancy for MHC properties owned prior to
December 31, 2012 remained strong at 99.5%. Management believes
MHC land lease sites provide secure and stable cash fl ows due to
long-term tenancies, high occupancies, steady increases in average
monthly rents, and signifi cantly lower capital and maintenance costs.
The table below summarizes the changes in the average monthly
rent due to suite turnovers and lease renewals compared to the
prior year.
Suite Turnovers and Lease Renewals
For the Year Ended December 31,
2013
2012
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
Change in AMR
% Turnovers
Change in AMR
% Turnovers
$
23.5
28.7
27.3
% & Renewals (1)
28.7
77.9
2.2
2.7
2.6
$
20.3
34.2
30.3
% & Renewals (1)
26.8
70.0
2.0
3.3
2.9
(1) Percentage of suites turned over or renewed during the year based on the total number of residential suites (excluding co-ownerships)
held at the end of the year.
Suite turnovers in the residential suite portfolio (excluding
co-ownerships) during the year ended December 31, 2013 resulted
in average monthly rent increasing by approximately $24 or 2.2%,
compared to an increase of approximately $20 or 2.0% for last year.
Pursuant to Management’s focus on increasing overall portfolio
rents for the year ended December 31, 2013, average monthly rents
on lease renewals increased by approximately $29 or 2.7%, compared
to an increase of approximately $34 or 3.3% for last year. The lower
rate of growth in average monthly rents on lease renewals during
the year is due primarily to the lower guideline increases for 2013
(Ontario – 2.5%, British Columbia – 3.8%), compared to the permit-
ted guideline increases in 2012 (Ontario – 3.1%, British Columbia
– 4.3%), partially offset by increases due to above guideline increases
(“AGI”) achieved in Ontario. For 2014, the permitted guideline
increase in Ontario and British Columbia has been set at 0.8% and
2.2%, respectively. Management continues to pursue applications in
Ontario for AGIs where it believes increases are supported by market
conditions above the annual guideline to raise average monthly rents
on lease renewals (see discussion in the Future Outlook section).
CAPREIT 2013 ANNUAL REPORT
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio Average Monthly Rents and Occupancy by Geography
As at December 31,
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener /
Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
Total Portfolio
Properties Owned Prior to
December 31, 2012
Properties Acquired
Since December 31, 2012
2013
AMR Occ. %
2012
AMR Occ. %
2013
AMR Occ. %
2012 (1)
AMR Occ. %
2013
AMR Occ. %
$ 1,159
927
98.3
99.7
$ 1,134
913
98.5
99.9
$ 1,169
927
98.4
99.7
$ 1,138
913
98.6
99.9
$
928
–
97.0
–
873
1,079
97.5
99.1
828
1,057
93.0
99.4
873
1,079
97.5
99.1
828
1,057
93.0
99.4
–
–
–
–
$ 1,119
98.4
$ 1,093
98.3
$ 1,126
98.5
$ 1,095
98.3
$
928
97.0
$
881
925
98.0
97.4
$
846
907
96.1
97.5
$
881
925
98.1
97.4
$
846
907
96.1
97.5
$
881
–
96.6
–
$
898
97.8
$
869
96.6
$
898
97.8
$
869
96.6
$
881
96.6
British Columbia
Greater Vancouver Region $ 1,075
922
Victoria
99.5
97.1
$ 1,036
864
98.4
96.3
$ 1,075
896
99.5
98.0
$ 1,036
864
98.4
96.3
$
–
978
–
95.1
$ 1,017
98.6
$
986
97.8
$ 1,022
99.1
$
986
97.8
$
978
95.1
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Prince Edward Island
Charlottetown
Ireland
Dublin
$ 1,128
1,154
99.0
98.2
$ 1,072
1,096
99.0
98.7
$ 1,128
1,167
99.0
98.0
$ 1,072
1,096
99.0
98.7
$
–
1,102
–
98.9
$ 1,150
98.3
$ 1,092
98.8
$ 1,160
98.2
$ 1,092
98.8
$ 1,102
98.9
$ 1,018
94.5
$ 1,012
96.0
$ 1,018
94.5
$ 1,012
96.0
$
921
1,010
98.5
100.0
$
882
966
97.0
100.0
$
921
1,010
98.5
100.0
$
882
966
97.0
100.0
$
961
99.2
$
919
98.3
$
961
99.2
$
919
98.3
$
$
$
–
–
–
–
–
–
–
–
$
853
83.8
$ 1,449
99.4
$
$
–
–
–
–
$
$
–
–
–
–
$
$
–
–
–
–
$
853
83.8
$ 1,449
99.4
Total Residential Suites
$ 1,060
98.0
$ 1,030
97.8
$ 1,061
98.2
$ 1,030
97.8
$ 1,039
95.9
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
$
480
401
363
317
133
240
99.5
100.0
98.4
100.0
95.2
95.5
Total MHC Land Lease Sites $
348
97.6
Total Suites and Sites
$
951
98.0
$
$
$
466
383
348
292
–
–
99.6
97.7
97.2
99.2
–
–
$
480
401
363
317
–
–
99.5
100.0
98.4
100.0
–
–
$
466
383
348
292
–
–
99.6
97.7
97.2
99.2
–
–
$
655
–
–
–
133
240
100.0
–
–
–
95.2
95.5
439
99.2
$
454
99.5
975
97.9
$ 1,004
98.3
$
$
439
99.2
974
97.9
$
$
221
95.4
572
95.6
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of in 2013.
32
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Residential properties acquired since December 31, 2012 in Victoria
have higher average monthly rents, due to acquisitions in higher rent
geographic regions compared to properties owned by CAPREIT prior
to December 31, 2012, resulting in higher AMR for those regions in
the total portfolio. Management expects the recent acquisitions will be
fully integrated with CAPREIT’s strategies and systems in the medium
term, resulting in improved performance.
Management continues to focus on improving resident quality, with
an emphasis on maintaining or increasing rents in all of the portfolio’s
core markets, as summarized below:
(cid:129) Average monthly rents for residential properties owned prior to
December 31, 2012 increased in all regional markets of the portfolio,
while the overall average occupancy level increased to 98.2% as at
December 31, 2013.
(cid:129) Ontario, where residential suites represent about 58% of the total
residential suite portfolio, experienced an increase of 2.8% in aver-
age monthly rents for its properties owned prior to December 31,
2012. Occupancy levels remained nearly full at 98.5%. Management
expects the Ontario rental market to remain strong in the long run.
The rent guideline increase for 2014 is 0.8%.
(cid:129) Québec, representing about 21% of the total residential suite port-
folio, experienced an increase of 3.3% in average monthly rents
for its properties owned prior to December 31, 2012, compared to
last year, while occupancy levels increased strongly to 97.8% from
96.6% for last year. Management expects the Québec rental market
to remain stable.
(cid:129) British Columbia experienced an increase of 3.7% in average month-
ly rents for its residential properties owned prior to December 31,
2012, while occupancy levels increased to 99.1% compared to 97.8%
last year. Management expects the British Columbia rental market
to remain strong in the long run. The rent guideline increase for
2014 is 2.2%.
(cid:129) Strong economic conditions in Alberta resulted in an increase of
6.2% in average monthly rents for its properties owned prior to
December 31, 2012, and occupancy remained stable at 98.2%.
Management believes the Alberta market should continue to remain
strong.
(cid:129) MHC land lease portfolio properties owned prior to December 31,
2012 experienced an increase in average monthly rents of 3.4%,
while occupancy remained stable at 99.5% as at December 31, 2013.
Management believes the MHC land lease portfolio should continue
to remain strong.
Overall average monthly rents for the residential suite portfolio as at
December 31, 2013 increased by approximately 2.9%, as compared
to December 31, 2012, while occupancies improved to 98.0% from
97.8% for last year. Management believes annual occupancies can be
maintained in the 97% to 98% range and the trend for gradual increases
in average monthly rents will continue, providing the basis for sustain-
able year-over-year increases in revenues.
Management also believes the defensive characteristics of its nation-
wide portfolio and its strategy to further diversify among Canada’s ma-
jor rental markets and by demographic sector will continue to protect
Unitholders from downturns in any specifi c geographic region or demo-
graphic sector. This characteristic is demonstrated by CAPREIT’s ability
to increase overall average monthly rents and maintain high occupancy
levels in the course of the recent period of soft economic growth.
The table below shows the new tenant inducements incurred during
the years ended December 31, 2013 and 2012 as well as the amortiza-
tion of tenant inducements, loss from vacancies, and bad debt expense
included in net rental revenue for the same years.
Tenant Inducements, Vacancy Loss, and Bad Debt Expense on Residential Suites and Sites
($ Thousands)
Year Ended December 31,
New Tenant Inducements Incurred (2),(3)
Tenant Inducements Amortized
Vacancy Loss Incurred
Total Amortization and Loss
$
$
2013
1,813
1,575
9,837
$
11,412
% (1)
0.3
2.1
2.4
Bad Debt Expense
$
1,545
0.3
2012
1,139
881
8,325
9,206
% (1)
0.2
2.0
2.2
3,018
0.7
$
$
$
$
(1) As a percentage of total operating revenues.
(2) New Tenant Inducements increased compared to last year in specifi c regions such as Halifax, London, Victoria and Vancouver.
(3) Includes tenant inducements for commercial leases.
CAPREIT 2013 ANNUAL REPORT
33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Results of Operations
($ Thousands)
For the Year Ended December 31,
Operating Revenues
Net Rental Revenues $
Other (2)
2013
% (1)
2012
% (1)
452,429
24,594
94.8
5.2
$
392,024
20,397
95.1
4.9
Total Operating
Revenues
Operating Expenses
Realty Taxes
Utilities
Other (3)
Total Operating
Expenses
$
477,023 100.0
$
412,421 100.0
55,546
48,207
99,416
11.7
10.1
20.8
49,483
42,403
82,619
12.0
10.3
20.0
203,169
42.6
174,505
42.3
NOI
$
273,854
57.4
$
237,916
57.7
(1) As a percentage of total operating revenues.
(2) Comprises ancillary income such as parking, laundry and antenna
income.
(3) Comprises R&M, wages, general and administrative, insurance,
advertising, and legal costs.
OPERATING REVENUES
For the year ended December 31, 2013, total operating revenues
increased by 15.7%, compared to last year, due to the contributions
from acquisitions, increased average monthly rents on the residential
suite portfolio, and continuing high stable occupancies. As CAPREIT
continues to enhance the profi le of its resident base and increase the
level of service to residents, it expects to realize further increases in
operating and ancillary revenues. Ancillary revenues, such as parking,
laundry and antenna income, increased by 20.6% for the year ended
December 31, 2013, primarily from acquisitions.
Estimated Net Rental Revenue Run-Rate
($ Thousands)
As at December 31,
2013
2012
397,838
Residential Rent Roll (1),(2)
Commercial Rent Roll (1),(2)
$
457,944
18,446
$
418,199
11,623
Annualized Net Rental
Revenue Run-Rate
$
476,390
$
429,822
(1) Based on rent roll as at December 31, net of vacancy loss, tenant
inducements and bad debt for the 12 months ended on such date.
(2) Includes rent roll for all properties owned as at December 31.
The table above shows the estimated Net Rental Revenue Run-
Rate based on average monthly rents in place for CAPREIT’s share
of residential suites and sites as at December 31, 2013 and 2012, net
of average historical vacancy loss, tenant inducements and bad debt.
Results of Operations
Total Operating Revenues by Geography
($ Thousands)
For the Year Ended December 31,
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
British Columbia
Greater Vancouver Region
Victoria
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Prince Edward Island
Charlottetown
Ireland
Dublin
Total Residential Suites
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
2013
2012
$
227,517
9,019
17,332
19,200
$
216,404
8,802
13,106
18,555
$
273,068
$
256,867
$
53,771
33,914
$
35,408
26,385
$
87,685
$
61,793
$
26,941
10,830
$
26,282
8,704
$
37,771
$
34,986
$
4,603
29,478
$
4,413
19,409
$
34,081
$
23,822
$
20,238
$
17,715
$
$
$
$
$
$
$
$
$
$
$
$
1,467
1,309
2,776
468
1,860
457,947
15,438
620
1,367
905
154
592
1,415
1,240
2,655
–
–
12,949
347
785
502
–
–
Total MHC Land Lease Sites
$
19,076
$
14,583
Total Residential Suites and
MHC Land Lease Sites
$
477,023
$
412,421
34
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The estimated annualized Net Rental Revenue Run-Rate improved
by 10.8% to $476.4 million from $429.8 million, primarily as a result
of new acquisitions within the past 12 months. Net rental revenue
net of dispositions for the 12 months ended December 31, 2013 was
$447.5 million (2012 – $386.3 million).
Operating Expenses
Overall operating expenses as a percentage of operating revenues
increased slightly in the year ended December 31, 2013, compared
to last year, partially due to higher operating expenses for 2013
acquisitions, higher Repairs and Maintenance (“R&M”) and in-suite
maintenance costs offset partially by lower wages and hydro costs.
Realty Taxes
For the year ended December 31, 2013, realty taxes as a percentage of
operating revenues decreased slightly to 11.7% compared to 12.0%
last year.
Utilities
As a percentage of operating revenues, utility costs for the year ended
December 31, 2013 decreased to 10.1% from 10.3% for last year.
CAPREIT’s utility costs can be highly variable from year to year
depending on the energy consumption and rates. The table below
provides CAPREIT’s utility costs by type.
For the year ended December 31, 2013, natural gas costs as a
percentage of total operating revenues increased slightly to 2.8%
compared to 2.7% for last year, primarily due to higher natural gas
consumption and rates.
The table below provides information on CAPREIT’s fi xed natural
gas contracts for the fi scal years 2014 and 2015:
As at December 31,
2014
2015
Fixed Weighted Average
Cost per GJ (1)
Total of CAPREIT’s
Estimated Requirements
$
3.19
$
24.71%
–
–
(1) Fixed weighted average cost per gigajoule (“GJ”) excludes estimated
transportation costs of $1.20 and $1.03 per GJ for 2014 and 2015,
respectively, and other administrative costs.
Other Operating Expenses
Other operating expenses, which include R&M costs, wages and
benefi ts, insurance and advertising, increased slightly as a percentage
of operating revenues for the year ended December 31, 2013 to
20.8% from 20.0% for last year.
Net Operating Income
($ Thousands)
Year Ended December 31,
Electricity
Natural Gas
Water
Total
2013
% (1)
2012
% (1)
$
21,818
4.6 $
20,300
13,569
12,820
2.8
2.7
11,121
10,982
4.9
2.7
2.7
$
48,207
10.1 $
42,403
10.3
(1) As a percentage of total operating revenues.
Management believes NOI is a key indicator of operating performance
in the real estate industry. NOI includes all rental revenues generated
at the property level, less: (i) related direct costs such as utilities, realty
taxes, insurance, R&M costs and on-site wages and salaries; and (ii)
an appropriate allocation of overhead costs. It may not, however, be
comparable to similar measures presented by other real estate trusts
or companies.
For the year ended December 31, 2013, electricity costs as a
percentage of total operating revenues decreased to 4.6% compared
to 4.9% for last year, primarily due to lower electricity rates from
energy saving initiatives and lower consumption from the effects
of sub-metering. As at December 31, 2013, tenants who pay their
hydro charges directly, represent 42.6% of the total 14,688 recently
sub-metered suites in Ontario and Alberta.
CAPREIT 2013 ANNUAL REPORT
35
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table shows the NOI and the NOI margin attained for each regional market for the years ended December 31, 2013 and 2012.
For the Year Ended December 31,
2013
2012
Increase (Decrease)
NOI Margin
(%)
NOI
NOI Margin
(%)
NOI
Revenue
Change
Expense
Change
NOI
Change
(%)
(%)
(%)
($ Thousands)
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
British Columbia
Greater Vancouver Region
Victoria
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Prince Edward Island
Charlottetown
Ireland
Dublin
Total Residential Suites
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
$
$
$
$
$
$
$
$
$
$
$
$
$
$
130,251
4,819
9,544
11,136
$
155,750
28,415
19,013
47,428
16,547
6,978
23,525
3,065
17,366
20,431
57.2
53.4
55.1
58.0
57.0
52.8
56.1
54.1
61.4
64.4
62.3
66.6
58.9
59.9
$
123,787
4,704
6,921
10,816
$
146,228
18,915
14,777
33,692
16,268
5,831
22,099
3,018
11,235
14,253
57.2
53.4
52.8
58.3
56.9
53.4
56.0
54.5
61.9
67.0
63.2
68.4
57.9
59.8
5.1
2.5
32.2
3.5
6.3
51.9
28.5
41.9
2.5
24.4
8.0
4.3
51.9
43.1
5.0
2.5
25.9
4.2
6.0
53.7
28.4
43.3
3.8
34.1
10.5
10.3
48.2
42.6
5.2
2.4
37.9
3.0
6.5
50.2
28.7
40.8
1.7
19.7
6.5
1.6
54.6
43.3
12,550
62.0
735
796
1,531
50.1
60.8
55.2
166
35.5
1,311
262,692
70.5
57.4
9,001
419
822
500
44
376
58.3
67.6
60.1
55.2
28.6
63.5
58.5
57.4
11,682
65.9
14.2
27.4
7.4
755
801
1,556
53.4
64.6
58.6
–
–
–
–
3.7
5.6
4.6
–
–
10.9
16.9
13.3
–
–
(2.6)
(0.6)
(1.6)
–
–
229,510
57.7
15.1
16.0
14.5
7,387
245
504
270
–
–
8,406
237,916
57.0
70.6
64.2
53.8
–
–
57.6
57.7
19.2
78.7
74.1
80.3
–
–
30.8
15.7
15.7
97.1
94.0
74.6
–
–
28.1
16.4
21.8
71.0
63.1
85.2
–
–
32.8
15.1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Total MHC Land Lease Sites
Total Suites and Sites
$
$
11,162
273,854
36
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2013, NOI increased by 15.1% and the NOI margin decreased marginally to 57.4% from 57.7% for
last year due to higher operating expenses. The signifi cant increase in NOI in specifi c regions of the portfolio was primarily the result of
acquisitions completed in the prior 12 months and higher operating revenues. CAPREIT remains focused on continuing to further improve
the NOI and NOI margin through a combination of accretive and value-enhancing acquisitions, successful sales and marketing strategies
to improve revenues, and investments in capital programs to enhance the quality and value of its portfolio. For a comprehensive analysis of
stabilized NOI growth or decline compared to last year by geography, refer to the Stabilized Portfolio Performance section.
Stabilized Portfolio Performance
For the Year Ended December 31,
2013
2012
Increase (Decrease)
($ Thousands)
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
British Columbia
Greater Vancouver Region
Victoria
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Total Residential Suites
MHC Land Lease Sites
Ontario
Total MHC Land Lease Sites
Total Suites and Sites
Stabilized Suites and Sites
NOI Margin
(%)
NOI
NOI Margin
(%)
NOI
Revenue
Change
Expense
Change
NOI
Change
(%)
(%)
(%)
$
117,676
4,819
5,437
11,109
$
139,041
16,613
11,581
28,194
16,547
5,761
22,308
3,065
11,034
14,099
57.7
53.4
55.9
57.9
57.5
51.7
57.7
54.0
61.4
65.3
62.4
66.6
56.8
58.6
9,942
66.2
735
796
1,531
215,115
5,850
5,850
220,965
28,708
50.1
60.8
55.2
57.9
56.2
56.2
57.8
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
113,697
4,704
5,091
10,816
$
134,308
16,515
11,300
27,815
16,268
5,831
22,099
3,018
10,121
13,139
57.6
53.4
53.1
58.3
57.3
52.9
56.7
54.4
61.9
67.0
63.2
68.4
57.5
59.7
3.3
2.5
1.5
3.3
3.2
3.0
0.7
2.1
2.5
1.3
2.2
4.3
10.4
9.2
3.0
2.5
(4.5)
4.2
2.7
5.7
(1.6)
3.0
3.8
6.5
4.4
10.3
12.4
12.0
3.5
2.4
6.8
2.7
3.5
0.6
2.5
1.4
1.7
(1.2)
0.9
1.6
9.0
7.3
10,135
67.2
(0.4)
2.6
(1.9)
755
801
1,556
209,052
5,530
5,530
214,582
28,708
53.4
64.6
58.6
58.0
54.6
54.6
57.9
3.7
5.6
4.6
3.2
2.8
2.8
3.2
10.9
16.9
13.3
3.5
(0.8)
(0.8)
3.4
(2.6)
(0.6)
(1.6)
2.9
5.8
5.8
3.0
CAPREIT 2013 ANNUAL REPORT
37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Stabilized properties for the year ended December 31, 2013 are
defi ned as all properties owned by CAPREIT continuously since
December 31, 2011, and therefore, do not take into account the
impact on performance of acquisitions or dispositions completed
during 2013 and 2012. As at December 31, 2013, stabilized suites
and sites represent 71.1% of CAPREIT’s overall portfolio (excluding
co-ownerships).
As at December 31, 2013, CAPREIT has generated more than eight
years (32 consecutive quarters) of stable or improved year-over-year NOI
growth for stabilized properties. For the year ended December 31,
2013, operating revenues and operating costs increased by 3.2% and
3.4%, respectively, compared to last year. As a result, stabilized NOI
increased by 3.0% for the year ended December 31, 2013.
For the year ended December 31, 2013, the NOI margin for
properties acquired since December 31, 2011 was 55.9%.
Ontario:
NOI for the stabilized Ontario portfolio increased by 3.5% during
the year ended December 31, 2013 compared to last year, primarily
due to higher operating and parking revenues and lower bad debt,
electricity, and wage costs offset by higher vacancies, water and R&M
costs. The NOI margin improved slightly to 57.5% for the year ended
December 31, 2013, compared to 57.3% for last year. Management
believes the Ontario portfolio will remain strong and generate steady
returns in the medium term. As discussed earlier, the rent guideline
increase for 2014 is 0.8% compared to 2.5% in 2013.
Québec:
NOI for the stabilized Québec portfolio increased by 1.4% during
the year ended December 31, 2013, compared to last year, primarily
due to higher operating revenues and lower vacancies costs partially
offset by higher wage costs. For the year ended December 31, 2013,
the NOI margin decreased marginally to 54.0% compared to 54.4%
for last year. CAPREIT believes the Québec rental market will remain
stable and generate steady to improving returns in the medium term.
British Columbia:
NOI for the stabilized British Columbia portfolio increased by 0.9%
during the year ended December 31, 2013, compared to last year,
primarily due to higher operating revenues partially offset by higher
realty taxes, R&M and water costs. For the year ended December 31,
2013, the NOI margin decreased to 62.4% from 63.2% compared
to last year. Management believes the British Columbia portfolio will
continue to generate steady returns in the medium term. The rent
guideline increase for 2014 is 2.2% compared to 3.8% in 2013.
Alberta:
NOI for the stabilized Alberta portfolio increased by a signifi cant
7.3% during the year ended December 31, 2013 compared to last
year, primarily due to higher operating revenues and lower vacancies
partially offset by higher R&M, utilities, onsite, and leasing costs. For
the year ended December 31, 2013, the NOI margin decreased to
58.6% compared to 59.7% for last year. Management believes the
Alberta market should continue to improve over the medium term.
Nova Scotia:
NOI for the stabilized Nova Scotia portfolio decreased by 1.9% for
the year ended December 31, 2013 compared to last year, primarily
due to lower parking revenue and higher tenant allowances, utilities
and R&M costs partially offset by higher operating revenues and
lower wage costs. For the year ended December 31, 2013, the NOI
margin decreased to 66.2% from 67.2% for last year. Management
believes its presence primarily in downtown Halifax locations will
serve to maintain or increase occupancy levels and average monthly
rents in the medium term.
MHC Land Lease Sites:
NOI for the stabilized MHC land lease sites portfolio increased
signifi cantly by 5.8% for the year ended December 31, 2013 compared
to last year, primarily due to higher operating revenues and lower
wage costs partially offset by higher utilities and R&M costs. For the
year ended December 31, 2013, the NOI margin increased to 56.2%
from 54.6% for last year. Management believes its MHC land lease
portfolio will provide accretive growth in the long term.
38
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net Income and Other Comprehensive Income
($ Thousands)
Year Ended December 31,
Net Operating Income
(Less) Plus:
Trust Expenses
Unrealized Gain on Remeasurement of Investment Properties
Realized Loss on Disposition of Investment Properties
Remeasurement of Exchangeable Units
Unit-based Compensation Expenses
Interest on Mortgages Payable and Other Financing Costs
Interest on Bank Indebtedness
Interest on Exchangeable Units
Other Income
Amortization
Unrealized and Realized Loss on Derivative Financial Instruments
Loss on Foreign Currency Translation
2013
2012
$
273,854
$
237,916
(19,280)
106,470
(811)
537
5,968
(95,197)
(6,071)
(197)
5,280
(2,178)
(680)
(17)
(13,904)
298,228
(1,613)
(904)
(13,333)
(85,273)
(6,954)
(354)
3,503
(2,195)
(2,854)
–
Net Income
$
267,678
$
412,263
Other Comprehensive Income
Items That May Be Reclassifi ed Subsequently to Net Income
Amortization of Losses From AOCL to Interest and Other Financing Costs
Change in Fair Value of Derivative Financial Instruments
Change in Fair Value of Investments
Realized Gain on Sale of Investments
Gain on Foreign Currency Translation
Other Comprehensive Income
Comprehensive Income
$
3,265
3,701
(4,392)
(1,381)
124
1,317
$
2,000
(2,218)
3,168
(1,451)
–
1,499
$
268,995
$
413,762
TRUST EXPENSES
Trust expenses include costs directly attributable to head offi ce,
such as salaries, trustee fees, professional fees for legal and advisory
services, trustees’ and offi cers’ insurance premiums, and other general
and administrative expenses. Trust expenses increased for the year
ended December 31, 2013, to $19.3 million from $13.9 million for
last year mainly due to higher compensation, asset management and
property management services costs, travel expenses, information
technology costs, legal fees including a non-recurring legal provision,
and one-time insurance recoveries in the previous year.
UNREALIZED GAIN ON REMEASUREMENT OF INVESTMENT PROPERTIES
CAPREIT recognizes its investment properties at fair value
at each reporting period, with any unrealized gain or loss on
remeasurement recognized in the consolidated statements of income
and comprehensive income for the year. A description of the key
components of the change in the fair value of investment properties
is included in the Investment Properties section.
REALIZED LOSS ON DISPOSITION OF INVESTMENT PROPERTIES
The realized loss on disposition of investment properties for the years
ended December 31, 2013 and 2012 of $0.8 million and $1.6 million,
respectively, represents the difference between the net proceeds from
the disposition, compared to the fair value of the property at the
date of disposition.
REMEASUREMENT OF EXCHANGEABLE UNITS
CAPREIT accounts for its Exchangeable Units as a fi nancial liability,
remeasures such liability at each reporting period, and includes
this remeasurement in the consolidated statement of income and
comprehensive income. During 2013, pursuant to the terms of the
Exchangeable Units, 100,000 Exchangeable Units were exchanged for
100,000 Trust Units. The decrease in the market price of the underlying
CAPREIT Trust Units and redemption of Exchangeable Units for
the year ended December 31, 2013 compared to December 31, 2012
resulted in a gain on remeasurement of $0.5 million from an expense
of $0.9 million last year. A description of the key components of
the remeasurement of Exchangeable Units is included in note 11
of CAPREIT’s audited consolidated annual financial statements
for the year ended December 31, 2013 contained in CAPREIT’s
2013 Annual Report.
CAPREIT 2013 ANNUAL REPORT
39
MANAGEMENT’S DISCUSSION AND ANALYSIS
UNIT-BASED COMPENSATION EXPENSES
Unit-based compensation benefi ts are provided to offi cers, trustees
and certain employees and are intended to facilitate long-term
ownership of Trust Units and to provide additional incentives by
increasing the participants’ interest, as owners, in CAPREIT. Unit-
based compensation expenses include costs attributable to these
incentive plans, namely the Restricted Unit Rights Plan (“RUR
Plan”), Unit Option Plan (“UOP”), Deferred Unit Plan (“DUP”),
Long-Term Incentive Plan (“LTIP”) and Senior Executive Long-
Term Incentive Plan (“SELTIP”) (see notes 11 and 12 of CAPREIT’s
audited consolidated annual fi nancial statements for the year ended
December 31, 2013 contained in CAPREIT’s 2013 Annual Report).
As a result of CAPREIT being an open-ended mutual fund
trust, whereby each Unitholder of the Trust Units is entitled to
redeem their Units in accordance with the conditions specifi ed in
CAPREIT’s DOT, under IFRS, the underlying Trust Units relating
to the Unit-based compensation awards are not treated as equity and
are instead considered fi nancial liabilities. As such, these Unit-based
compensation awards must be presented as liabilities and remeasured
at fair value at each reporting date. Close-ended mutual fund trusts,
such as certain of CAPREIT’s industry peers, are not required to
remeasure their respective Unit-based compensation awards. In such
cases, the related expense is limited to the amortization of the fair
value of the award over the applicable vesting period.
In order to aid comparability with CAPREIT’s peers, the Unit-
based compensation expense has been separated into two components:
(i) the amortization of the grant date fair value of the award over its
vesting period, and (ii) the remeasurement of awards outstanding at
year end at fair value.
A description of the key components of the market-based rates
and assumptions used to determine the fair values of the awards is
included in notes 11 and 12 to the accompanying audited consolidated
annual fi nancial statements.
CAPREIT’s Unit-based compensation expense for the year
ended December 31, 2013 changed to a gain of $6.0 million from an
expense of $13.3 million for last year due to the decrease in the market
price of the underlying CAPREIT Trust Units and lower grant date
amortization expense primarily relating to the full amortization of the
fair value of options granted in the second quarter of 2012. The table
below demonstrates the impact of each component of CAPREIT’s
plans on the total compensation expense.
($ Thousands)
Year Ended December 31,
Remeasurement of Unit-based
Compensation Liabilities
Amortization of Fair Value
on Grant Date of Unit-based
Compensation
Total
2013
2012
$
(8,493)
$
10,053
2,525
3,280
$
(5,968)
$
13,333
INTEREST ON MORTGAGES PAYABLE AND OTHER FINANCING COSTS
Interest on mortgages, which includes the amortization of certain
fi nancing costs, increased for the year ended December 31, 2013, to
$95.2 million from $85.3 million for last year, due to acquisitions and
top-up fi nancings. However, as a percentage of operating revenues,
mortgage interest expense decreased to 20.0% for the year ended
December 31, 2013, compared to 20.7% for last year, as a result of
CAPREIT’s successful refi nancing of mortgages at lower interest rates
as well as higher operating revenues. Additional information on the
interest on mortgages payable and other fi nancing costs is included
in note 15 to the accompanying audited consolidated annual fi nan-
cial statements and the Liquidity and Financial Condition section of
this report.
INTEREST ON BANK INDEBTEDNESS
Interest on bank indebtedness relates to borrowings under the Credit
Facilities (see Liquidity and Capital Resources discussion).
OTHER INCOME
Other income primarily consists of dividends received from invest-
ments (see note 7 to the accompanying audited consolidated annual
fi nancial statements), asset management and property management
fees, and gains realized on the sale of investments. Other income
for the year ended December 31, 2013 increased to $5.3 million
from $3.5 million for last year primarily due to the asset management
and property management fees (as detailed below) and higher gains
from sale of investments. During the year ended December 31, 2013,
CAPREIT sold investments and realized a gain of $1.7 million com-
pared to $1.5 million for last year, which was included in other income.
40
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Effective December 5, 2012, CAPREIT entered into third party
external management agreements to perform certain asset management
duties and property services with a third party real estate investment trust
in the United States, which owns and operates 16 manufactured home
communities in Colorado, Texas, Arizona, and Michigan. Included
in other income for the year ended December 31, 2013 and 2012 is
$2.2 million and $0.1 million, respectively, from asset management and
property management fees. Expenses related to the asset management
and property management services were included in trust expenses
for the year ended December 31, 2013. The external management
agreements relating to the asset management and property management
services concluded effective January 31, 2014 (see Subsequent Events
section for further details).
AMORTIZATION
These costs represent the amortization of CAPREIT’s head offi ce
property, plant and equipment on a straight-line basis over their
estimated useful lives ranging primarily between three and fi ve years.
UNREALIZED AND REALIZED LOSS ON DERIVATIVE FINANCIAL
INSTRUMENTS
i) Forward interest rate hedges for which hedge accounting is being
applied: In June 2011, CAPREIT entered into a forward interest
rate hedge agreement to hedge interest rates on approximately
$312 million of mortgages maturing between September 2011
and June 2013, to which hedge accounting is being applied. The
maturing mortgages have been refi nanced for 10-year terms and
as a result, bear interest rates based on 10-year Government of
Canada bond rates between a fl oor rate of 3.00% and a ceiling rate
of 3.62%, before the impact of credit spread. At each reporting date
up to June 2013, the hedging derivative was marked-to-market with
the difference between the change in fair value and intrinsic value
recognized in net income or loss. For the year ended December 31,
2013 and 2012, there was a loss on derivative fi nancial instruments
of approximately $78 thousand and $2.9 million, respectively. All
contracts have been settled as at December 31, 2013.
ii) Interest rate contracts for which hedge accounting is being applied:
As at December 31, 2013, CAPREIT has two interest rate swap
agreements which include:
a. $65 million interest rate swap agreement fi xing the interest rate
at 3.6%, which matures in September 2022, for which hedge
accounting is being applied. The agreement effectively converts
borrowings on a bankers’ acceptance-based fl oating rate credit
facility to a fi xed rate facility for a 10-year term. The related
fl oating rate credit facility is for a fi ve-year term, on expiry of
the term it is expected to be refi nanced for an additional fi ve-
year term. At each reporting date, the hedging derivative will
be marked-to-market with the ineffective portion recognized in
net income ($nil for the year ended December 31, 2013).
b. €45 million interest rate swap agreement fi xing the interest rate
at 3.22%, which matures in September 2018. The agreement
effectively converts borrowings on a EURIBOR-based fl oating
rate credit facility to a fi xed rate facility for a fi ve-year term. At
each reporting date, the hedging derivative will be marked-to-
market with the ineffective portion recognized in net income
($0.2 million for the year ended December 31, 2013). Also
included in net income for the year ended December 31, 2013
is $185 thousand for the settlement of a previously terminated
interest rate swap agreement with similar terms.
iii) Foreign currency exchange contracts for which hedge accounting is not
being applied: CAPREIT has quarterly foreign currency exchange
contracts aggregating to €2.8 million commencing December
2013 and maturing quarterly until September 2015 which fi x the
exchange rate between the Euro and Canadian dollar, for which
hedge accounting is not being applied. The mark-to-market loss of
$0.2 million has been recognized in net income for the year ended
December 31, 2013.
Additional information on the above instruments is included in notes
15 and 16 to the accompanying audited consolidated annual fi nancial
statements.
CAPREIT 2013 ANNUAL REPORT
41
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION III
Non-IFRS Financial Measures
Per Unit Calculations
As a result of CAPREIT being an open-ended mutual fund trust, Unitholders are entitled to redeem their Trust Units, subject to certain
restrictions. The impact of this redemption feature causes CAPREIT’s Trust Units to be treated as fi nancial liabilities under IFRS. Consequently,
all per Unit calculations are considered non-IFRS measures.
The following table explains the number of Units used in calculating non-IFRS fi nancial measures on a per Unit basis:
Year Ended December 31,
Trust Units
Exchangeable Units (1),(5)
Units under the DUP (2)
Basic Weighted Average Number of Units
Plus:
Dilutive Units under the LTIP (2),(3)
Dilutive Units under the SELTIP (2),(3)
Units Rights under the RUR Plan (2)
Dilutive Unexercised Options under the UOP (2),(4)
Weighted Average Number of Units
Outstanding
Number of Units
2013
101,748
177
139
102,064
671
295
339
88
2012
88,762
332
121
89,215
702
303
249
124
2013
108,187
161
151
108,499
1,423
818
359
– (6)
Diluted Weighted Average Number of Units
103,457
90,593
111,099
(1) See note 11 to the accompanying audited consolidated annual fi nancial statements for details of Exchangeable Units.
(2) See notes 12 and 13 to the audited consolidated annual fi nancial statements for the year ended December 31, 2013 contained in CAPREIT’s 2013
Annual Report for details of CAPREIT’s Unit-based compensation plans.
(3) Calculated using the treasury method after taking into account the respective subscriptions receivable (see note 12 to the accompanying audited
consolidated annual fi nancial statements).
(4) Calculated using the treasury method after taking into account the exercise prices.
(5) During the second and third quarters of 2012 and fi rst quarter of 2013, pursuant to the terms of the Exchangeable Units, 250,000 Exchangeable
Units were exchanged for 250,000 Trust Units.
(6) There are 915,900 unexercised options outstanding under the UOP.
Distribution Reinvestment Plan (“DRIP”) and Net Distributions Paid
($ Thousands)
Year Ended December 31,
Distributions Declared on Trust Units
Distributions Declared on Exchangeable Units
Distributions Declared on Awards Outstanding under Unit-based Compensation Plans (1)
Total Distributions Declared
Less:
Distributions on Trust Units Reinvested
Distributions on Unit Awards Reinvested (1)
Net Distributions Paid
Percentage of Distributions Reinvested
$
$
2013
116,056
197
3,003
119,256
(27,988)
(3,003)
88,265
26.0%
$
$
2012
97,903
354
2,953
101,210
(20,421)
(2,953)
77,836
23.1%
(1) Comprises: (i) non-cash distributions related to the DUP and the RUR plan, and (ii) retained distributions on LTIP and SELTIP Units
(see notes 12 and 13 to the audited consolidated annual fi nancial statements for the year ended December 31, 2013 contained in CAPREIT’s 2013
Annual Report for a discussion of these plans).
42
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Under CAPREIT’s DRIP, a participant may purchase additional
Units with the cash distributions paid on the eligible Units, regis-
tered in the participant’s name or held in a participant’s account
maintained pursuant to the DRIP. Each participant has the right to
receive an additional amount equal to 5% of their monthly distribu-
tions reinvested pursuant to the DRIP, which will automatically be
paid on each distribution date in the form of additional Units. The
price at which Units will be purchased with cash distributions will
be the weighted average trading price for CAPREIT’s Trust Units
on the Toronto Stock Exchange (“TSX”) for the fi ve trading days
immediately preceding the relevant distribution date.
The average participation rate in the DRIP and other plans un-
der which distributions are reinvested increased for the year ended
December 31, 2013 to 26.0%, from 23.1% for last year. The DRIP
participation rate is subject to factors beyond Management’s control
and varies between investors.
Distributions declared on Units outstanding under the Unit-based
compensation plans in these tables are based on all awards granted
under the RUR Plan, DUP, LTIP and SELTIP (see notes 12 and
13 to the accompanying audited consolidated annual fi nancial state-
ments for a discussion of these plans). When establishing the level
of monthly cash distributions to Unitholders, the Board of Trustees
relies on cash fl ow information including forecasts and budgets.
NET OPERATING INCOME
NOI is a key non-IFRS fi nancial measure of the operating perfor-
mance of CAPREIT and is defi ned and reported in the Results of
Operations section.
FUNDS FROM OPERATIONS
FFO is a measure of operating performance based on the funds gener-
ated by the business before reinvestment or provision for other capital
needs. FFO as presented is based on the recommendations of the Real
Property Association of Canada, with the exception of the amortiza-
tion of certain other assets. It may not, however, be comparable to
similar measures presented by other real estate trusts or companies
in similar or different industries. Management considers FFO to be
an important measure of CAPREIT’s operating performance.
Payout ratios compare total and net distributions declared to these
non-IFRS fi nancial measures. Management also considers these ratios to
be important measures of the sustainability of the level of distributions.
A reconciliation of net income to FFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Net Income
Adjustments:
Unrealized Gain on Remeasurement of Investment Properties
Realized Loss on Disposition of Investment Properties
Remeasurement of Exchangeable Units
Remeasurement of Unit-based Compensation Liabilities
Interest on Exchangeable Units
Amortization of Property, Plant and Equipment
FFO
FFO per Unit – Basic
FFO per Unit – Diluted
Total Distributions Declared
FFO Payout Ratio
Net Distributions Paid
Excess FFO over Net Distributions Paid
FFO Effective Payout Ratio
2013
2012
$
267,678
$
412,263
(106,470)
811
(537)
(8,493)
197
2,178
$
$
$
155,364
1.522
1.502
(298,228)
1,613
904
10,053
354
2,195
$
$
$
129,154
1.448
1.426
$
119,256
$
101,210
76.8%
88,265
67,099
56.8%
$
$
78.4%
77,836
51,318
60.3%
$
$
CAPREIT 2013 ANNUAL REPORT
43
MANAGEMENT’S DISCUSSION AND ANALYSIS
NORMALIZED FUNDS FROM OPERATIONS
Management considers NFFO to be the key measure of CAPREIT’s
operating performance and the primary indicator with respect to
the sustainability of CAPREIT’s distributions. NFFO is calculated
by excluding from FFO the effects of certain non-recurring items,
including changes in fair value of hedging instruments, amortization
of losses on certain hedging instruments, and mortgage prepayment
penalties offset by write-off of fair value adjustment on assumed
mortgages that were refi nanced early. Management relies on NFFO
on a per Unit basis as it facilitates better comparability to historical
performance and provides a better indicator of CAPREIT’s long-
term cash fl ow generation capability than other measures. See the
discussions in the Net Income and Other Comprehensive Income
and Risks and Uncertainties sections for additional information on
hedging instruments currently in place.
A reconciliation of FFO to NFFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
FFO
Adjustments:
Unrealized and Realized (Gain) Loss on Derivative Financial Instruments
Amortization of losses from AOCL to interest and other fi nancing costs
Net Mortgage Prepayment Cost (1)
Realized Gain on Sale of Investments (2)
Loss on Foreign Currency Translation
NFFO
NFFO per Unit – Basic
NFFO per Unit – Diluted
Total Distributions Declared
NFFO Payout Ratio
Net Distributions Paid
Excess NFFO Over Net Distributions Paid
Effective NFFO Payout Ratio
2013
2012
$
155,364
$
129,154
680
3,265
1,786
(1,737)
17
2,854
2,000
–
(1,455)
–
$
$
$
159,375
1.562
1.540
$
$
$
132,553
1.486
1.463
$
119,256
$
101,210
74.8%
$
$
88,265
71,110
55.4%
76.4%
77,836
54,717
58.7%
$
$
(1) Net mortgage prepayment cost relates to early refi nancing fees net of fully amortized fair value adjustment on assumed mortgages.
(2) Included in Other Income in the Net Income and Other Comprehensive Income section.
NFFO for the year ended December 31, 2013 increased by
20.2%, compared to last year primarily due to the contributions
from acquisitions, and higher net operating income for properties
owned prior to December 31, 2012.
For the year ended December 31, 2013, basic NFFO per Unit
increased by 5.1% compared to last year despite an approximate 14%
increase in the weighted average number of Units outstanding due to
the equity offering completed in October 2013. Management expects
per Unit FFO and NFFO and related payout ratios to improve in the
medium term as a result of NOI contributions from recent acquisitions.
Comparing distributions declared to NFFO, the NFFO payout
ratios for the year ended December 31, 2013 improved to 74.8%,
compared to 76.4% for last year. The effective NFFO payout ratio,
which compares NFFO to net distributions paid, improved for the
year ended December 31, 2013, to 55.4% from 58.7% for last year
primarily due to higher NFFO during the current year. Management
believes NFFO will be suffi cient to fund CAPREIT’s distributions at
their current level.
44
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
ADJUSTED FUNDS FROM OPERATIONS
AFFO is a supplemental measure of cash generated from operations
that is used in the real estate industry to assess the sustainability
of future distributions paid to Unitholders after provision for
maintenance property capital investments.
Management relies on an industry-based estimate to determine the
amount of maintenance property capital investments, as signifi cant
judgement is required to classify property capital investments as either
maintenance or stabilizing or value-enhancing (see discussion in the
Productive Capacity section). Management views AFFO as less reliable
or applicable under a gross lease operating structure, as is the case
for CAPREIT, because maintenance property capital investments are
not clearly identifi able. However, given the current use by investors
and other stakeholders of this non-IFRS fi nancial measure, CAPREIT
currently intends to continue presenting an estimate of AFFO.
CAPREIT calculates AFFO by deducting from NFFO an industry-
based estimate for maintenance property capital investments and
adding back the non-cash Unit-based compensation costs. In order to
determine the AFFO payout ratio, CAPREIT compares distributions
declared to AFFO. The effective AFFO payout ratio compares net
cash distributions paid to AFFO.
A reconciliation of NFFO to AFFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
NFFO
Adjustments:
Provision for Maintenance Property Capital Investments (1)
Amortization of Fair Value on Grant Date of Unit-based Compensation
AFFO
AFFO per Unit – Basic
AFFO per Unit – Diluted
Distributions Declared
AFFO Payout Ratio
Net Distributions Paid
Excess AFFO Over Net Distributions Paid
Effective AFFO Payout Ratio
2013
2012
$
159,375
$
132,553
(15,097)
2,525
146,803
1.438
1.419
$
$
$
(13,758)
3,280
$
$
$
122,075
1.368
1.348
$
119,256
$
101,210
81.2%
82.9%
$
$
88,265
58,538
60.1%
$
$
77,836
44,239
63.8%
(1) Based on an industry estimate of $450 per suite per year and the weighted average number of residential suites during the year
(see Productive Capacity section).
SECTION IV
Property Capital Investments
CAPREIT capitalizes all capital investments related to the
improvement of its properties. These investments have the objective
of growing NOI in the future.
An important component of CAPREIT’s property capital
investment strategy is to acquire properties at values signifi cantly below
current replacement costs and improve their operating performance by
investing annually in order to sustain and grow the portfolio’s future
rental income-generating potential over its useful life.
To achieve its property capital investment objectives, taking into
account CAPREIT’s acquisition history, the soft economic conditions
and the availability of competitive pricing from construction trades,
in 2009, CAPREIT formulated and embarked on a multi-year capital
investment plan that accelerates spending on planned building
improvement programs, including upgrading parking garages,
balconies and other structural improvements. These investments are
closely connected to CAPREIT’s property acquisitions, many of which
were anticipated at the time of such acquisitions and were included
in the acquisition analysis, to ensure such transactions are accretive.
Management believes these investments will increase the productive
capacity, the useful economic life and the operating capabilities of
CAPREIT’s properties and enhance their future cash fl ow generating
potential. Management also believes these building improvement
programs, combined with existing suite improvement, common area
and environment-friendly and energy-saving initiatives, will enable
CAPREIT to reposition its portfolio and maintain high occupancy
levels throughout any unfavourable economic conditions. These
investments are expected to continue to increase average monthly
rents while improving life safety and resident services. Management
believes strategic investments will position the portfolio for improved
operating performance over the long term.
CAPREIT 2013 ANNUAL REPORT
45
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2013, CAPREIT made property
capital investments (excluding disposed properties) of $157.9 million,
compared to $128.3 million for last year. Property capital investments
were higher compared to the prior year primarily due to the acceleration
of building improvement programs, and higher investments in suite
improvements and common area, which generally tend to increase
NOI more quickly.
In addition, CAPREIT continues to invest in environment-friendly
and energy-saving initiatives, including high-effi ciency boilers, energy-
effi cient lighting systems and water saving programs, which have
permitted CAPREIT to mitigate potentially higher increases in utility
and R&M costs and have improved overall portfolio NOI signifi cantly
as discussed in the Results of Operations section.
A breakdown of property capital investments (excluding disposed
properties, head offi ce assets, tenant improvements and signage) is
summarized by category below:
Property Capital Investments by Category
($ Thousands)
Year Ended December 31,
2013
%
2012
%
Building Improvements $
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
80,728
31,684
16,168
2,604
10,140
14,549
1,998
51.1
20.1
10.2
1.7
6.4
9.2
1.3
$
61,232
29,399
15,749
2,781
7,288
9,824
2,024
47.7
22.9
12.3
2.2
5.7
7.6
1.6
Total
$ 157,871 100.0
$ 128,297
100.0
The significant portfolio growth generated since 2011 has led
CAPREIT to adjust its multi-year capital investment programs to
increase the anticipated levels for 2014. Based on a revised multi-year
property capital investment plan, Management expects CAPREIT to
complete property capital investments of approximately $165 million to
$175 million during 2014, including approximately $87 million targeted
at acquisitions completed since January 1, 2011 and approximately
$22 million in high-effi ciency boilers and other energy-saving initiatives.
Set out in the table below is Management’s current estimate,
established through consultation with an independent engineering
fi rm, of CAPREIT’s investments in building improvements for 2014
through 2017 for properties owned as of December 31, 2013. Building
improvements represent the most signifi cant category of property
capital investment at present, but are expected to decline signifi cantly
in the coming years.
Future Investments in Building Improvements
Properties Held As At December 31, 2013
Excluding 2012 and 2013 Acquisitions
2012 and 2013
Acquisitions
($ Thousands)
Estimated Range
2014
2015
2016
2017
$ 30,000 – $ 34,000
$ 19,000 – $ 23,000
$ 11,000 – $ 15,000
$ 6,000 – $ 10,000
Estimate
35,700
6,700
3,000
2,800
$
$
$
$
Management believes CAPREIT has suffi cient liquidity and access to
top up fi nancing opportunities (see the Liquidity and Financial Condition
section) to execute the above property capital investment strategy.
During the third quarter of 2011, CAPREIT began the multi-phase
implementation of a new Enterprise Resource Planning (“ERP”)
system. Management believes this unifi ed platform will continue to
drive operational effi ciencies to the business. To date, $5.9 million
of costs related to this initiative have been capitalized to property,
plant and equipment.
Productive Capacity
The primary focus of the following discussion is to differentiate be-
tween investments to maintain existing cash fl ows from the properties
and investments incurred in order to achieve CAPREIT’s longer term
goals of enhanced cash fl ows and Unit distributions.
Maintenance property capital investments vary with market
conditions, are partially related to suite turnover and are intended
to maintain the earning capacity of the portfolio. Industry estimates
for annual overall maintenance capital investments are approximately
$450 per residential suite. These maintenance property capital
investments are in addition to regular R&M costs, which have
historically averaged in the range of $700 to $800 per residential
suite annually and are expensed to NOI.
Stabilizing and value-enhancing property capital investments are
focused on increasing the productivity of the property portfolio.
These investments enhance operating effectiveness and profi tability
and increase revenues or reduce costs to improve NOI over the long
term. In addition, they improve the economic life and value of the
properties and are mainly long term in nature.
46
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The analysis indicates a strong positive relationship between
capital investments and higher NOI growth rates, which supports
Management’s assertion that continued reinvestment of capital is a
fundamental component of CAPREIT’s growth strategy. The analysis
demonstrates the success of CAPREIT’s capital investment programs,
which increase the earnings potential of the property portfolio.
Capital Structure
CAPREIT defi nes capital as the aggregate of Unitholders’ equity,
debt fi nancing, Unit-based compensation liabilities and Exchangeable
Units. CAPREIT’s objectives when managing capital are to safeguard
its ability to continue to fund distributions to Unitholders, to retain a
portion to meet repayment obligations under its mortgages and credit
facilities, and to ensure suffi cient funds are available to meet capital
commitments. Management aims to maintain an optimal degree
of leverage relative to the gross book value of CAPREIT’s assets
depending on a number of factors at any given time, which include
expected cash fl ow requirements, impact on near-term and long-
term fi nancial performance, current and expected state of the credit
markets as well as any risks, among other considerations. Capital
adequacy is monitored against investment and debt restrictions
contained in CAPREIT’s DOT and the Credit Facilities agreement.
CAPREIT’s Credit Facilities (see Liquidity and Financial
Condition) require compliance with the fi nancial covenants shown
in the table below. In addition, borrowings must not exceed the
borrowing base, calculated as a predefi ned percentage of the fair
value of the investment properties determined on an annual basis.
In the short term, CAPREIT utilizes the Credit Facilities to fi nance
its capital investments, which may include acquisitions. In the long
term, equity issuances, mortgage fi nancings and refi nancings, including
top-ups, are put in place to fi nance the cumulative investment in the
property portfolio and ensure the sources of fi nancing better refl ect
the long-term useful lives of the underlying investments.
CAPREIT is in compliance with all the investment and debt
restrictions and fi nancial covenants contained in the DOT and in
the Credit Facilities.
Owing to the gross lease structure of its portfolio, CAPREIT
does not distinguish its property capital investments between the two
categories described above. Instead, CAPREIT uses industry guidelines
for maintenance property capital investments to estimate its stabilizing
and value-enhancing property capital investments as follows:
($ Thousands)
Year Ended December 31,
Total Property Capital Investments (1) $
Less: Estimated Maintenance
Property Capital Investments (2)
2013
2012
157,871
$
128,297
(15,097)
(13,758)
Stabilizing and Value-enhancing
Property Capital Investments
$
142,774
$
114,539
(1) Excludes capital investments for disposed properties, head offi ce
assets, tenant improvements and signage.
(2) Based on an industry estimate of $450 per suite per year and the
weighted average number of residential suites during the year.
Management believes its increased emphasis on targeted property
capital investment programs for its property portfolio is yielding
positive results, as signifi cant benefi ts are being and are expected
to continue to be realized through maintaining high occupancy,
increasing average monthly rents and reducing operating costs. These
positive results are demonstrated below.
The following table presents the average NOI growth from 2009
through 2013, refl ecting a segregation of the portfolio based on the
amount of capital investment per suite. For example, for each year,
properties with the highest capital investment per suite were included
in the fi rst quartile, and properties with the lowest capital investment
per suite were included in the fourth quartile. NOI growth was
measured for those properties, by quartile, for the year following the
year in which the capital investments were made, with the assumption
that capital investments are undertaken throughout the year and the
impact on NOI could reasonably be measured in the following year.
A simple average was calculated covering each of the last fi ve years.
To compute the results on a stabilized basis, only those properties
owned prior to 2009 and held as at December 31, 2013 (excluding
co-ownerships) were included in the analysis.
Average NOI Growth by Level of Property
Capital Investment Per Suite
Quartile
1st
2nd
3rd
4th
Number of
Properties
Average
Number of
Suites
% of
Total Capital
Investments (1)
Average NOI
Growth
32
33
32
33
5,658
6,062
5,862
6,471
56.8%
23.3%
12.8%
7.1%
130
24,053
100.0%
5.0%
4.2%
4.4%
3.2%
4.2%
(1) As a percentage of total property capital investments over the fi ve-year
period to December 31, 2013.
CAPREIT 2013 ANNUAL REPORT
47
MANAGEMENT’S DISCUSSION AND ANALYSIS
The total capital managed by CAPREIT and the results of compliance with the key covenants are summarized below:
As at
($ Thousands)
Mortgages Payable
Bank Indebtedness
Unit-based Compensation Liabilities
Exchangeable Units
Unitholders’ Equity
Total Capital
Total Debt to Gross Book Value (1)
Total Debt to Gross Historical Cost (3)
Tangible Net Worth (4)
For the four quarters ended
Debt Service Coverage Ratio (times) (2),(5)
Interest Coverage Ratio (times) (2),(6)
December 31, 2013
December 31, 2012
$
2,457,182
187,030
32,764
3,428
2,757,469
$ 5,437,873
$
2,189,556
147,316
40,844
6,507
2,429,214
$ 4,813,437
Threshold
Maximum 70.00%
Minimum $1,200,000
47.32%
56.74%
$ 2,793,661
47.25%
56.71%
$ 2,476,565
December 31, 2013
December 31, 2012
Minimum 1.20
Minimum 1.50
1.54
2.62
1.52
2.51
(1) CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is defi ned
as the gross book value of CAPREIT’s assets as per CAPREIT’s fi nancial statements, determined on a fair value basis for investment properties,
plus accumulated amortization on property, plant and equipment, CMHC fees, and deferred loan costs. In addition, the DOT provides for
investment restrictions on type and maximum limits on single property investments.
(2) Based on the trailing four quarters.
(3) Based on the historical cost of investment properties, calculated as CAPREIT’s assets, as disclosed under IFRS, plus accumulated amortization on
property, plant and equipment, CMHC fees, and deferred loan costs, and minus fair value adjustment on investment properties.
(4) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and
compensation liabilities or assets, including Exchangeable Units are added back.
(5) As per the Credit Facilities agreement and DOT, the debt service coverage ratio is defi ned as earnings before interest, depreciation, amortization,
income taxes and other adjustments including non-cash costs (“EBITDA”) less taxes paid divided by the sum of principal and interest payments.
(6) As per the Credit Facilities agreement and DOT, the interest coverage ratio is defi ned as EBITDA less taxes paid divided by interest payments.
Liquidity and Financial Condition
LIQUIDITY AND CAPITAL RESOURCES
Management ensures there is adequate overall liquidity by maintain-
ing suffi cient available credit facilities to fund maintenance and prop-
erty capital investment commitments, distributions to Unitholders
and to provide for future growth in its business. CAPREIT fi nances
these commitments through: (i) cash fl ow from operating activities;
(ii) mortgage debt secured by its investment properties; (iii) secured
short-term debt fi nancing with two Canadian chartered banks; and
(iv) equity. Management’s assessment of CAPREIT’s liquidity posi-
tion continues to be stable for the foreseeable future based on its
evaluation of capital resources as summarized below:
i) CAPREIT’s business continues to be stable and is expected
to generate suffi cient cash fl ow from operating activities to fund
the current level of distributions. Management expects the
combination of the current level of funds reinvested from its DRIP,
the retained portion of its annual NFFO, mortgage top-ups and
the available borrowing capacity on the Credit Facilities will be
suffi cient to fund its ongoing property capital investments. For the
year ended December 31, 2013, CAPREIT’s NFFO payout ratio
was 74.8%, compared to 76.4% for last year, and the effective
NFFO payout ratio was 55.4% compared to 58.7% for last year,
which demonstrated a greater retained portion of annual NFFO.
Historically, CAPREIT has targeted a long-term annual NFFO
payout ratio in the 80% to 85% range.
ii) Management believes CAPREIT is well-positioned to meet its
mortgage renewals and refi nancing goals for 2014 due to the con-
tinuing availability of CMHC-insured fi nancing. Management does
not anticipate any material diffi culties in completing the renewal of
mortgages maturing during 2014 of approximately $373.7 million,
which have an effective interest rate of approximately 3.77%, and
refi nancing approximately $67.4 million of principal repayments
through 2014 with new mortgages.
48
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
iii)
Investment properties with a fair value of $5.2 billion have
been pledged as security as at December 31, 2013. In addi-
tion, CAPREIT has investment properties with a fair value of
$271.1 million as at December 31, 2013 that are not encumbered
by mortgages and secure only the Acquisition and Operating
Facility. Unencumbered investment properties with a fair value
over $130 million are expected to be fi nanced during the fi rst
six months of 2014 reducing the total unencumbered investment
properties to approximately $140 million.
viii) On September 18, 2013, CAPREIT announced it had agreed to
sell, subject to regulatory approval, 6,327,000 Units for $20.55 per
Unit for aggregate gross proceeds of $130.0 million on a bought-
deal basis with an over-allotment option. The transaction closed on
October 10, 2013, and under the over-allotment option, 949,050
additional Units were also issued on October 22, 2013 for gross
proceeds of $19.5 million. CAPREIT used the net proceeds of the
offering to repay a portion of its borrowings under its Acquisition
and Operating Facility.
iv) Management successfully renewed and amended the Credit
Facilities aggregating to $345 million and €45 million effective
September 4, 2013, which comprise an existing $280 million
revolving three-year Acquisition and Operating Facility, an ex-
isting $65 million fi ve-year non-revolving term credit facility (as
described below) and a new €45 million fi ve-year non-revolving
Euro-denominated term credit facility (as described below),
subject to compliance with the various provisions of the Credit
Facilities in order to fund operations, acquisitions, capital im-
provements, letters of credit and other uses.
v) Effective September 28, 2012, CAPREIT has a $65 million
credit facility on two of the MHC land lease sites bearing inter-
est at the bankers’ acceptance rate plus 1.4% per annum. This
credit facility is a fi ve-year non-revolving term credit facility, and
any principal amount repaid under this facility may not be rebor-
rowed. On expiry of the term, it is expected to be refi nanced
for an additional fi ve-year term. There is an interest rate swap
agreement on this facility, fi xing the bankers’ acceptance rate to
2.20%, maturing in September 2022. The swap agreement fi xes
the all-in rate of the loan at 3.60% for a fi ve-year term.
vi) Effective September 4, 2013, CAPREIT has a €45 million
Euro-denominated credit facility to fi nance the Dublin, Ireland
properties bearing interest at the EURIBOR rate plus 2.00% per
annum. This credit facility is a fi ve-year non-revolving term credit
facility, and any principal amount repaid under this facility may not
be reborrowed. There is an interest rate swap agreement on this
facility, fi xing the EURIBOR rate to 1.22%, maturing in September
2018. The swap agreement fi xes the all-in rate of the loan at 3.22%
for a fi ve-year term.
vii) On July 4, 2013, CAPREIT announced that the TSX approved
its notice of intention to make a normal course issuer bid for its
units (“Units”) as appropriate opportunities arise from time to
time. CAPREIT’s normal course issuer bid will be made in ac-
cordance with the policies of the TSX. CAPREIT may purchase its
Units during the period from July 8, 2013 to July 7, 2014. Pursuant
to the notice and subject to the market price of its Units and other
considerations, CAPREIT may acquire over the 12-month period
up to 9,773,361 Units, representing 10% of the public fl oat. As
at December 31, 2013, no Units have been purchased under the
current approved normal course issuer bid.
ix) On November 12, 2012, CAPREIT announced it had agreed to
sell, subject to regulatory approval, 6,700,000 Units for $24.00 per
Unit for aggregate gross proceeds of $160.8 million on a bought-
deal basis with an over-allotment option. The transaction closed
on December 4, 2012, and under the over-allotment option,
1,005,000 additional Units were also issued on December 13,
2012. CAPREIT used the net proceeds of the offering to repay its
borrowings under its Bridge Loan and a portion of its Acquisition
and Operating Facility.
x) On April 26, 2012, CAPREIT announced it had agreed to sell,
subject to regulatory approval, 6,850,000 Units for $22.75 per Unit
for aggregate gross proceeds of $155.8 million on a bought-deal
basis with an over-allotment option. The transaction closed on
May 17, 2012, and under the over-allotment option, 900,000
additional Units were also issued on the same day. CAPREIT used
the net proceeds of the offering to repay a portion of the borrow-
ings under its Acquisition and Operating Facility.
In order to maintain and enhance its CMHC-insured fi nancing pro-
gram, and consistent with CMHC’s risk management practices involv-
ing large borrowers, CAPREIT has entered into an agreement with
CMHC (the “Large Borrower Agreement” or “LBA”). Other than
improving the effi ciency and consistency of such process, the LBA
has not materially affected the manner in which CAPREIT conducts
its business or its approach to mortgage fi nancing. The LBA provides
for, among other things:
i) Enhanced disclosure to CMHC;
ii) Certain fi nancial covenants and commitments and limitations
on indebtedness, none of which are inconsistent with
CAPREIT’s current operating policies;
iii) The posting of a revolving letter of credit with respect to
certain capital expenditures on a portfolio, rather than an
individual property basis; and
iv) Cross-collateralization of mortgage loans for certain CMHC-
insured mortgage lenders.
CAPREIT 2013 ANNUAL REPORT
49
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPREIT is in compliance with all its investment and debt restric-
tions and fi nancial covenants contained in the DOT, the LBA and the
Credit Facilities. Under the terms of the LBA, total indebtedness of
CAPREIT is limited to the greater of (i) 60% of Gross Book Value
determined on a fair value basis or, (ii) 70% of Gross Book Value
determined on a historical basis, and may only be increased above
such limits with CMHC’s consent. Under the LBA, fi nancial covenants
are not signifi cantly different than those required under the DOT or
Credit Facilities other than as described above.
The working capital deficiency, as presented on CAPREIT’s
consolidated balance sheet as at December 31, 2013, which includes
non-cash Unit-based compensation liabilities, is managed through the
available liquidity under the Credit Facilities as well as the ongoing
refi nancing of mortgages payable.
The table below summarizes CAPREIT’s bank indebtedness
position as at December 31, 2013 and December 31, 2012:
($ Thousands)
As at December 31, 2013
Facility
Less:
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
($ Thousands)
As at December 31, 2012
Facility
Less:
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
Acquisition and
Operating Facility (1),(2)
$
280,000
(187,030)
(6,527)
$
86,443
3.02%
Acquisition and
Operating Facility (1),(2)
$
280,000
(147,316)
(6,388)
$
126,296
3.27%
(1) Effective June 30, 2012, the Land Lease Facility of $10 million was
combined with the Acquisition and Operating Facility.
(2) As at December 31, 2012, the Bridge Loan aggregating to $140 million
was fully repaid from the net proceeds of the equity offering
completed on December 4, 2012.
CAPREIT’s key liquidity metrics are summarized as follows:
As at December 31,
Mortgage Debt to Gross Book Value
Total Debt to Gross Book Value
Total Debt to Gross Historical Cost (1)
Total Debt to Total Capitalization
2013
2012
43.97%
47.32%
56.74%
52.83%
44.27%
47.25%
56.71%
47.82%
Debt Service Coverage Ratio (times) (2)
Interest Coverage Ratio (times) (2)
1.54
2.62
1.52
2.51
Weighted Average Mortgage Interest Rate (3)
Weighted Average Mortgage
Term to Maturity (years)
3.76%
3.87%
6.0
5.4
(1) Based on the historical cost of investment properties.
(2) Based on the trailing four quarters ended December 31, 2013.
(3) Weighted average mortgage interest rate includes deferred fi nancing
costs and fair value adjustments on an effective interest basis.
Including the amortization of the realized component of the loss on
settlement of $32.5 million included in AOCL, the effective portfolio
weighted average interest rate at December 31, 2013 would be
3.94% (December 31, 2012 – 4.05%).
As at December 31, 2013, the overall leverage represented by the
ratio of total debt to gross book value increased slightly to 47.32%,
as compared to 47.25% for last year, mainly due to the higher
leveraged acquisitions. As at December 31, 2013, CAPREIT’s total
debt increased to 52.83% of total market capitalization compared to
47.82% for last year due to the decrease in CAPREIT’s Trust Unit
price since December 31, 2012 offset by the equity offering completed
in December 2012.
The effective portfolio weighted average interest rate has steadily
declined from 3.87% as at December 31, 2012, to 3.76% as at
December 31, 2013, which Management expects could result in
continued interest rate savings in future years. Management believes
that as CAPREIT’s refi nancing plan continues to be realized, there may
be scope to further reduce the effective portfolio weighted average
interest rate based on foreseeable market conditions. Management is
also focused on ensuring the portfolio weighted average term to maturity
remains above the fi ve-year range or longer and expects to gradually
extend the term, while continuing to balance the maturity profi le.
50
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
MORTGAGES PAYABLE
CAPREIT takes a conservative approach and actively manages its
mortgage portfolio to reduce interest costs while ensuring it is not
overly exposed to interest rate volatility risk. Management takes
a portfolio approach to its mortgage debt, proactively staggering
maturities to reduce risk while taking advantage of the current low
interest rate environment.
CAPREIT focuses on multi-unit residential real estate, which is
eligible for government-backed insurance for mortgages administered
by CMHC, which benefi ts CAPREIT in two ways:
(cid:129) CAPREIT obtains lower interest rate spreads for mortgage
fi nancing; and
(cid:129) CAPREIT’s overall renewal risk for mortgage refinancings is
reduced as the mortgage insurance premium is transferable between
approved lenders and is effective for the full initial amortization
period of the underlying mortgage ranging between 25 to 35 years.
As at December 31,
2013
2012
Percentage of CMHC-Insured Mortgages (1)
Percentage of Fixed-Rate Mortgages
93.90%
98.85%
92.90%
98.97%
The following table summarizes the changes in the mortgage
portfolio during the years:
($ Thousands)
As at December 31,
2013
2012
Balance, Beginning of the Year
$ 2,189,556
$ 1,848,190
Add:
New Borrowings
Assumed
Refi nanced
Foreign Currency Translation
Less:
Mortgage Repayments
Mortgages Matured
Mortgages Repaid on
Dispositions of Investment
Properties
Change in Deferred
Financing Costs, Fair Value
Adjustments, Net
161,019
37,971
514,990
3,308
(69,169)
(340,831)
1,713
334,948
358,556
–
(58,962)
(248,954)
(34,772)
(53,534)
(4,890)
7,599
(1) Excludes the mortgages on the MHC land lease sites and the
Balance, End of the Year
$ 2,457,182
$ 2,189,556
Ireland portfolio.
The following table presents the refi nancings for the year ended December 31, 2013, and the weighted average interest rates obtained.
($ Thousands)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Acquisitions
$
Original
Mortgage
Amount
145,531
90,599
17,471
80,136
7,094
Total and Weighted Average
$
340,831
Original
Stated Interest
Rate (1)
4.35%
4.30%
4.65%
4.64%
6.95%
4.47%
$
New
Mortgage
Amount
234,315
130,294
26,723
116,565
168,113
$
676,010
(1) Weighted average.
(2) Excludes CMHC and Other Financing Costs and hedge impact.
New
Stated Interest
Weighted Average
Term on New
Mortgages
(Yrs)
Rate (1),(2)
2.95%
2.98%
3.37%
3.66%
3.55%
3.25%
10.0
10.1
8.5
10.1
4.4
8.6
Top-Up Amount
$
88,784
39,695
9,252
36,429
161,019
$
335,179
CAPREIT 2013 ANNUAL REPORT
51
MANAGEMENT’S DISCUSSION AND ANALYSIS
For purposes of estimating top-up fi nancing potential, the following table provides annualized NOI for those properties with mortgages
maturing over the next fi ve years and beyond. A property’s full NOI is included in the fi rst year in which a mortgage matures. The balance
of mortgages remaining on the same property but maturing in other years is also shown. Management expects to raise between $600 million
and $650 million in total mortgage renewals and refi nancings for 2014. Based on this mortgage maturity profi le, Management believes it will
be in a position to achieve its mortgage renewal and refi nancing plan for 2014.
As at December 31, 2013
($ Thousands)
Year of Maturity
2014
2015
2016
2017
2018
2019 Onward
Total
Mortgages on the
Same Properties Maturing
NOI of Properties with
Mortgage Maturities (1)
in Other Years (1)
Total Mortgages
Maturing Mortgage(s) (2),(3)
$
373,749
156,587
75,598
164,958
158,291
1,008,539
$
1,937,722
$
82,556
16,547
55,392
(22,735)
(23,002)
(108,758)
$
456,305
173,134
130,990
142,223
135,289
899,781
$
62,228
21,570
17,676
16,296
13,847
138,123
$
–
$
1,937,722
$
269,740
(1) Mortgage balance due upon maturity.
(2) NOI for the twelve months ended December 31, 2013.
(3) Projected NOI included for acquisitions since December 31, 2012.
The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at
December 31, 2013, is as follows:
($ Thousands)
Year
2014
2015
2016
2017 (3)
2018 (4)
2019
2020
2021
2022
2023
2024 – 2027
Total
Principal Repayments
Mortgage Maturities
Mortgage Balance
Mortgage Balance
Interest Rate (%) (1),(2)
% of Total
$
67,356
62,320
58,094
55,701
55,718
53,702
52,098
46,266
36,047
17,251
13,044
$
373,749
156,587
75,598
164,958
158,291
92,636
54,648
240,623
318,225
243,319
59,088
$
441,105
218,907
133,692
220,659
214,009
146,338
106,746
286,889
354,272
260,570
72,132
18.0
8.9
5.4
9.0
8.7
6.0
4.4
11.7
14.4
10.6
2.9
3.77
3.57
4.08
4.25
3.42
4.91
4.66
4.07
3.09
3.23
4.71
$
517,597
$ 1,937,722
$ 2,455,319
100.0
3.76 (2)
Deferred Financing Costs, Fair Value Adjustments, Net
Total
1,863
$ 2,457,182
(1) Effective weighted average interest rates for maturing mortgages only.
(2) Effective weighted average interest rate includes deferred fi nancing costs and fair value adjustments but excludes CMHC premiums. Including the
amortization of the realized component of the loss on settlement of $32.5 million included in AOCL, the effective portfolio weighted average
interest rate as at December 31, 2013 would be 3.94% (December 31, 2012 – 4.05%).
(3) Included in mortgages payable is a $65 million non-amortizing credit facility on two of the MHC Land Lease sites.
(4) Included in mortgages payable is a €45 million non-amortizing Euro-denominated credit facility.
To ensure CAPREIT is not overly exposed to interest rate volatility risk, Management has been successful in staggering the maturity dates
within its mortgage portfolio or entering into long-term fi nancing arrangements.
To reduce its interest cost and cost of capital, Management will continue to leverage its balance sheet strength and the stability of its
property portfolio to fund acquisitions and its capital investment plan, and to refi nance its mortgage principal repayments.
52
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
UNITHOLDERS’ EQUITY AND UNITS AWARDED UNDER UNIT-BASED COMPENSATION PLANS
Unitholders’ Equity only represents the issued and outstanding Trust Units, and excludes the Exchangeable Units and any Units issued in
connection with Unit-based incentive plans. For the purposes of the discussion below, Exchangeable Units and Units issued in connection
with Unit-based incentive plans are treated as equity as they have claims similar or identical to those of the Trust Units.
Equity offerings and over-allotments as at December 31, 2013:
($ Thousands, except per Unit amounts)
Period
Price Per Unit
Gross Proceeds
Transaction Costs
Net Proceeds
Units Issued
May 2012
Bought-deal
Over-allotment
Total
December 2012
Bought-deal
Over-allotment
Total
October 2013
Bought-deal
Over-allotment
Total
$
$
$
$
$
$
22.75
22.75
24.00
24.00
20.55
20.55
$
155,838
20,475
$
176,313
$
160,800
24,120
$
184,920
$
130,020
19,503
$
149,523
$
$
$
$
$
$
6,897
819
7,716
7,232
965
8,197
5,870
911
6,781
$
148,941
19,656
$
168,597
$
153,568
23,155
$
176,723
$
124,150
18,592
$
142,742
6,850,000
900,000
7,750,000
6,700,000
1,005,000
7,705,000
6,327,000
949,050
7,276,050
In connection with the equity offerings and the exercise of the over-allotment options in May 2012 and December 2012, a total of 232,500 and
231,150 Unit Options were granted to the President and CEO under the UOP at weighted average exercise prices of $22.75 and $24.11 per Unit,
respectively with expiration dates of May 2022, and December 2022.
Year Ended December 31,
Market Capitalization ($ thousands)
Number of Units Outstanding
LTIP and SELTIP Units
Deferred Units
RUR Plan Units
Exchangeable Units
Number of Unit Options Outstanding and Exercisable
Ownership by Trustees, Offi cers and Senior Managers
$
2013
2,360,854
111,098,998
2,240,597
151,261
358,424
161,311
915,900
3.5%
NORMAL COURSE ISSUER BID
On a periodic basis, CAPREIT may apply to the Toronto Stock Exchange (“TSX”) for approval of a Normal Course Issuer Bid (“NCIB”).
Pursuant to regulations of NCIBs, CAPREIT will receive approval to purchase and cancel a specifi ed number of Trust Units, representing
10% of the public fl oat of its Trust Units at the time of the TSX approval. The NCIB will terminate on the earlier of the termination date or
at such time as the purchases under the bid are completed. CAPREIT believes the purchase of its outstanding Trust Units from time to time
may be an appropriate use of its resources and can provide liquidity to Unitholders who desire to sell their Trust Units.
The table below summarizes the NCIB programs in place since January 1, 2012. No Trust Units were acquired and cancelled under these
NCIB programs.
Period Covered Under Each NCIB
June 27, 2011 to June 26, 2012
July 8, 2013 to July 7, 2014
Approval Limit
7,267,915
9,773,361
CAPREIT 2013 ANNUAL REPORT
53
MANAGEMENT’S DISCUSSION AND ANALYSIS
Unitholder Taxation
For taxable Canadian resident Unitholders, the distributions are treated as follows for income tax purposes:
Year Ended December 31,
Taxable to Unitholders as Other Income
Taxable to Unitholders as Eligible Dividend Income
Taxable to Unitholders as Capital Gain Income
Income Tax Deferral
Total
Total Effective Non-taxable Portion of Distributions
2013
6.82%
1.06%
6.25%
85.87%
100.00%
88.99%
2012
14.59%
1.72%
18.98%
64.71%
100.00%
74.20%
The portion of CAPREIT’s distributions to Canadian resident Unitholders treated as taxable for the year ended December 31, 2013
decreased over the prior year, primarily due to lower recapture of capital cost allowance and capital gains resulting from the disposition of
properties in the current year, partially offset by higher realized loss on the interest rate forward contract in the prior year.
SECTION V
Selected Consolidated Quarterly Information
Q4 13
Q3 13
Q2 13
Q1 13
Q4 12
Q3 12
Q2 12
Q1 12
$
Overall Portfolio AMR
975
Operating Revenues (000s) (1) $ 124,018 $ 119,995 $ 117,686 $ 115,324 $ 112,109
NOI (000s) (1)
62,651
NOI Margin (1)
55.9%
72,855 $
60.7%
66,033 $
53.2%
63,491 $
55.1%
71,475 $
60.7%
1,003 $
951 $
978 $
989 $
$
$
972 $
$ 109,118 $
65,813 $
$
60.3%
960 $
95,932 $
56,714 $
59.1%
995
95,262
52,738
55.4%
Net Income (000s)
FFO (000s)
NFFO (000s)
Total Debt to
Gross Book Value
$
$
$
88,389 $
35,329 $
36,344 $
53,669 $
42,852 $
44,263 $
58,174 $
41,467 $
42,582 $
67,446 $ 162,982
32,243
35,716 $
33,556
36,186 $
$
$
$
96,703 $ 120,300 $
30,657 $
39,742 $
31,329 $
39,866 $
32,278
26,512
27,802
47.32%
49.42%
48.42%
47.62%
47.25%
50.97%
50.83%
50.11%
FFO Per Unit – Basic
NFFO Per Unit – Basic
$
$
0.329 $
0.338 $
0.426 $
0.440 $
0.414 $
0.425 $
0.357 $
0.362 $
0.342
0.356
$
$
0.434 $
0.435 $
0.350 $
0.358 $
0.318
0.333
Weighted Average
Number of Units (000s)
– Basic
– Diluted
107,443
108,704
100,576
101,832
100,230
101,718
99,942
101,512
94,210
95,635
91,667
93,134
87,509
88,880
83,395
84,640
(1) Includes the results of investment properties owned as at the respective period-end. Non-IFRS fi nancial measures are reconciled with IFRS reported
amounts in the respective quarterly SEDAR fi lings.
CAPREIT’s operations are affected by seasonal cycles, and operating
performance in one quarter may not be indicative of operating
performance in any other quarter of the year. The fourth and fi rst
quarters of each year typically tend to generate weaker performance
due to increased energy consumption in the winter months.
FOURTH QUARTER
Operating revenues in the fourth quarter of 2013 increased by
10.6% over the same quarter in 2012, while NOI increased by a
signifi cant 5.4%, driven by higher operating revenues and lower realty
taxes offset by increases in R&M and utility costs as a percentage
of total operating revenues, compared to the same period last year.
Net income in the fourth quarter of 2013 decreased over the same
period last year by $74.6 million, mainly due to a lower unrealized
gain on remeasurement of investment properties of $56.4 million
compared to $133.1 million for the same period last year, and higher
trust expenses of $1.0 million offset by higher NOI of $3.4 million.
Higher NFFO was primarily due to NOI from acquisitions.
54
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Selected Consolidated Financial Information
The following table presents a summary of selected fi nancial information for the fi scal years indicated below:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Income Statement
Operating Revenues
Net Income
Distributions
Distributions Declared
Distributions per Unit
Balance Sheet
Investment Properties
Total Assets
Mortgages Payable
Bank Indebtedness
SECTION VI
2013
2012
2011
$
$
$
$
$
$
$
$
477,023
267,678
116,056
1.138
5,459,218
5,558,934
2,457,182
187,030
$
$
$
$
412,421
412,263
97,903
1.097
$ 4,826,355
$ 4,921,546
$ 2,189,556
147,316
$
$
$
$
$
361,955
316,172
82,816
1.080
$ 3,713,737
3,804,650
$
1,848,190
$
74,132
$
Accounting Policies and Critical Estimates
ACCOUNTING POLICIES AND NEW ACCOUNTING STANDARDS
The following new or amended IFRS have been applied in 2013:
IFRS 11, Joint Arrangements (“IFRS 11”)
CAPREIT has applied IFRS 11 to all joint arrangements as of
January 1, 2013.
IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”)
CAPREIT has applied IFRS 12 to all joint arrangements for the year
ended December 31, 2013.
IAS 28, Investments in Associates and Joint Ventures (“IAS 28”)
CAPREIT concluded that this standard is not applicable for the year
ended December 31, 2013.
IFRS 13, Fair Value Measurement (“IFRS 13”)
CAPREIT has applied IFRS 13 for the year ended December 31, 2013.
IFRS 10, Consolidated Financial Statements (“IFRS 10”)
CAPREIT has applied IFRS 10 as of January 1, 2013.
IAS 27, Separate Financial Statements (“IAS 27”)
CAPREIT concluded that this standard is not applicable for the year
ended December 31, 2013.
As at February 28, 2014, the following new or amended IFRS
have been issued by the International Accounting Standards Board
(“IASB”) and are expected to apply to CAPREIT for annual reporting
periods beginning after December 31, 2013:
Amendments to IAS 32, Financial Instruments: Presentation,
on asset and liability offsetting
These amendments are to the application guidance in IAS 32, Financial
Instruments: Presentation, and clarify some of the requirements for
offsetting fi nancial assets and fi nancial liabilities on the balance sheet.
This standard is applicable to annual reporting periods beginning on
or after January 1, 2014, with early application permitted.
Amendment to IAS 36, Impairment of Assets on Recoverable
Amount Disclosures
This amendment addresses the disclosure of information about the
recoverable amount of impaired assets if that amount is based on
fair value less costs of disposal. This standard is applicable to annual
reporting periods beginning on or after January 1, 2014, with early
application permitted.
Financial Instruments: Recognition and Measurement Amendment
to IAS 39, Novation of derivatives
This amendment provides relief from discontinuing hedge accounting
when novation of a hedging instrument to a central counterparty meets
specifi ed criteria. This standard is applicable to annual reporting
periods beginning on or after January 1, 2014.
CAPREIT 2013 ANNUAL REPORT
55
MANAGEMENT’S DISCUSSION AND ANALYSIS
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classifi cation
and measurement of fi nancial liabilities over the existing derecognition
requirements from IAS 39, Financial Instruments: Recognition
and Measurement. IFRS 9 also introduces new requirements for
classifying and measuring fi nancial assets, specifi cally, investments
in equity instruments can be designated as “fair value through other
comprehensive income” with only dividends being recognized in
profi t or loss. IFRS 9 was further amended in November 2013 to:
(i) include guidance on hedge accounting, (ii) allow entities to early
adopt the requirement to recognize changes in fair value attributable
to changes in an entity’s own credit risk, from fi nancial liabilities
designated under the fair value option, in OCI (without having
to adopt the remainder of IFRS 9) and (iii) remove the previous
mandatory effective date of January 1, 2015.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from IAS 39
to IFRS 9. Effective on adoption of IFRS 9.
CAPREIT is currently assessing the impact of the standards and
amendments but does not expect to be signifi cantly impacted on
adoption in its current form.
IFRIC 21, Levies
This is an interpretation of IAS 37, Provisions, Contingent Liabilities
and Contingent Assets. IAS 37 sets out criteria for the recognition of a
liability, one of which is the requirement for the entity to have a present
obligation as a result of a past event (known as an obligating event).
The interpretation clarifi es that the obligating event that gives rise to a
liability to pay a levy is the activity described in the relevant legislation
that triggers the payment of the levy. This standard is applicable to
annual reporting periods beginning on or after January 1, 2014.
CRITICAL ESTIMATES
In preparing the accompanying audited consolidated annual
fi nancial statements in accordance with IFRS, certain accounting
policies require the use of estimates, assumptions and judgement
that in some cases relate to matters that are inherently uncertain,
and which affect the amounts reported in the audited consolidated
annual fi nancial statements and accompanying notes. Areas of such
estimation include, but are not limited to valuation of investment
properties, remeasurement at fair value of fi nancial instruments,
valuation of accounts receivable, capitalization of costs, accounting
accruals, the amortization of certain assets, accounting for deferred
income taxes and Unit-based compensation liabilities. Changes to
estimates and assumptions may affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the audited consolidated annual fi nancial statements and
the reported amounts of revenue and expenses during the reporting
period. Actual results could also differ from those estimates under
different assumptions and conditions.
Management believes the nature of the business and CAPREIT’s
portfolio is defensive against economic downturns and, therefore, the
current economic conditions have not had as signifi cant an impact on
CAPREIT’s critical accounting estimates as may have been realized in
other industries. However, the current economic conditions impacting
the general economy or those more specifi c to the housing industry or
to CAPREIT could have the potential to alter accounting estimates
and could impact CAPREIT’s fi nancial condition, changes in fi nancial
condition or results of operations. Disclosures in the MD&A,
including specifi cally the Property Portfolio, Results of Operations,
Property Capital Investments, Liquidity and Financial Condition and
Future Outlook sections, outline the risks and both the positive and
negative impacts on CAPREIT’s performance that have resulted, or
may in the future result, from the unusual economic conditions.
Estimates deemed by Management to be more signifi cant, due to
subjectivity, are as follows:
Valuation of Investment Properties
Investment properties are measured at fair value as at the balance sheet
dates. Any changes in the fair value are included in the consolidated
statements of income and comprehensive income. Fair values are
supported by independent external valuations or detailed internal
valuations using market-based assumptions, each in accordance with
recognized valuation techniques. The techniques used comprise both
the capitalized net operating income method and the discounted
cash fl ow method and include estimating, among other things, future
stabilized net operating income, capitalization rates, reversionary
capitalization rates, discount rates and other future cash flows
applicable to investment properties.
In the case of Leasehold Interests, CAPREIT established the
fair value of such interests using the discounted cash fl ow method,
including an estimate of future lease payments. Management’s internal
assessments of fair value are based on a combination of internal
fi nancial information and external market data, including components
of net operating income and capitalization rates, all of which are
obtained from an independent appraiser.
Management’s internal valuations and the independent appraisals
are both subject to signifi cant judgement, estimates and assumptions
about market conditions in effect as at the balance sheet dates. See
note 6 to the accompanying audited consolidated annual fi nancial
statements for a detailed discussion of valuation methods and the
signifi cant assumptions and estimates used.
Valuation of Unit-based Compensation Liabilities
The fair value of Unit-based compensation liabilities is based on
assumptions of future events and involves signifi cant estimates. The
basis of valuation for CAPREIT’s Unit-based compensation liabilities,
such as market assumptions, estimates and valuation methodology, is
56
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
set out in note 12 to the accompanying audited consolidated annual
fi nancial statements; however, the fair values as at the reporting date
may differ materially from how they are ultimately recognized if there
is volatility in Trust Unit prices, interest rates or other key assumptions
in future years.
Valuation of Derivative Financial Instruments
The fair value of a derivative financial instrument is based on
assumptions of future events and involves signifi cant estimates. The
basis of valuation for CAPREIT’s derivatives is set out in note 15 to
the accompanying audited consolidated annual fi nancial statements;
however, the fair values of derivatives reported may differ from how
they are ultimately recognized if there is volatility in interest rates
in future years.
Controls and Procedures
DISCLOSURE CONTROLS AND PROCEDURES
CAPREIT’s disclosure controls and procedures are designed to
provide reasonable assurance that information required to be disclosed
is recorded, processed, summarized and reported within the time
periods specifi ed under Canadian securities laws, and include controls
and procedures designed to ensure information is accumulated and
communicated to Management, including the President and Chief
Executive Offi cer and the Chief Financial Offi cer, to allow timely
decisions regarding required disclosure.
As at December 31, 2013, Management evaluated the effectiveness of
the disclosure controls and procedures against the rules adopted by the
Canadian Securities Administrators as defi ned under National Instrument
52-109, Certification of Disclosure in Issuers’ Annual and Interim
Filings. Based on that evaluation, using the criteria set forth in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in 1992, CAPREIT’s
President and Chief Executive Offi cer and the Chief Financial Offi cer
concluded that the design and operation of the disclosure controls and
procedures were effective as at December 31, 2013.
INTERNAL CONTROLS OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining
adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of fi nancial reporting
and the preparation of fi nancial statements for external purposes in
accordance with IFRS. Management assessed the effectiveness of the
internal controls over fi nancial reporting as at December 31, 2013
and, based on that assessment, determined that the internal controls
over fi nancial reporting were designed and operating effectively.
Management has designed an adequate and appropriate controls
framework for the fair value assessment processes required for
reporting to ensure values reported accurately reflect market
conditions. For the fair value assessment process of investment
properties and Unit-based compensation, these controls include a
comprehensive review of the assumptions and estimates, including
those used by the independent appraiser or third party on an annual
basis, as well as multiple levels of reviews of such key assumptions
and data within CAPREIT by Management, with fi nal approval by
the Board of Trustees on an interim and annual basis.
Management also maintains internal controls that ensure continued
compliance with the Specifi ed Investment fl ow-through (“SIFT”)
Rules allowing CAPREIT to maintain its qualifi cation under the
REIT Exception (see Taxation-Related Risks under the Risks and
Uncertainties section). These controls include training of key staff
with respect to entering into any new business activities, including
any new vendor and commercial leasing arrangements.
During November 2013, CAPREIT implemented SAP, Material
Management Module. The new module allows CAPREIT to integrate
“purchase to pay” business process with SAP-FICO business process
(previously implemented in 2011), allowing for real-time processing
between procurement and FICO. CAPREIT is well positioned to
handle future growth opportunities with this improved alignment
of business needs and business platform. Management has assessed
that the new Module did not cause signifi cant or material changes
to the design of internal controls over fi nancial reporting.
CAPREIT did not make any other changes to the design of internal
controls over fi nancial reporting in 2013 that have materially affected,
or are reasonably likely to materially affect, the internal controls over
fi nancial reporting.
It should be noted that a control system, no matter how well
conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Because
of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues,
including instances of fraud, if any, have been detected. The design
of any system of controls is also based in part on certain assumptions
about the likelihood of future events, and there can be no assurances
that any design will succeed in achieving its stated goals under all
potential conditions.
SECTION VII
Risks and Uncertainties
There are certain risks inherent in an investment in the Units and the
activities of CAPREIT. The following is a description of the principal
risks in CAPREIT’s business, defi ned as either those that, although
unlikely, can have a signifi cant impact on CAPREIT or those that are
signifi cant to CAPREIT’s day-to-day operations. Investors should
carefully consider these risks before investing in CAPREIT Units.
CAPREIT 2013 ANNUAL REPORT
57
MANAGEMENT’S DISCUSSION AND ANALYSIS
RELATED TO REPORTING INVESTMENT PROPERTY AT FAIR VALUE
CAPREIT holds investment property to earn rental income or for
capital appreciation or both. All investment property is measured using
the fair value model, whereby changes in fair value are recognized for
each reporting period in the consolidated statements of income and
comprehensive income. Management values each investment property
based on the most probable price that a property could be sold for
in a competitive and open market as of the specifi ed date under all
conditions requisite to a fair sale, such as the buyer and seller each
acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Each investment property has been valued
on a highest and best use basis.
Market assumptions applied for valuation purposes do not
necessarily refl ect CAPREIT’s specifi c history or experience and the
conditions for realizing the fair values through a sale may change or
may not be realized. In addition, there is an inherent risk related to
the reliance on and use of a single appraiser, as this approach may not
adequately capture the range of fair values that market participants
would assign to the investment properties. CAPREIT mitigates this
risk by undertaking a detailed review of the assumptions utilized in
valuing the properties, including comparing the assumptions to the
benchmarks derived from Management’s own observations of market
transactions. Downturns in the real estate market could negatively
affect CAPREIT’s operating revenues and cash fl ows, and could
signifi cantly impact the fair values of the investment properties as
well as certain fi nancial ratios and covenants.
RELATED TO OWNERSHIP AND OPERATION OF REAL PROPERTY
Real Property Ownership
Real property investments are relatively illiquid. This illiquidity
will tend to limit the ability of CAPREIT to respond to changing
economic or investment conditions. If CAPREIT were required to
quickly liquidate assets, there is a risk the proceeds realized from such
sale would be less than the book value of the assets or less than what
could be expected to be realized under normal circumstances. By
specializing in a particular type of real estate, CAPREIT is exposed to
adverse effects on that segment of the real estate market and does not
benefi t from a broader diversifi cation of its portfolio by property class.
CAPREIT is committed to preserving the life safety of its residents
and to ensuring its properties are well maintained. CAPREIT
believes that investing back into its properties increases resident
satisfaction, which ultimately makes CAPREIT’s business more
profi table. The multi-unit residential rental business, like any other
real estate enterprise, is capital intensive and is exposed to various
risks associated with maintaining the infrastructure of its property
portfolio. CAPREIT takes into account the capital maintenance
requirements of its properties when determining future cash fl ows
available for distributions. A signifi cant increase in capital maintenance
requirements could adversely impact the cash available to CAPREIT.
Leasehold Interests
Some long-term leases and ground leases are subject to elements of
risk. Unlike a freehold interest, a lessee’s interest in a lease may be
affected by mortgage defaults by the lessor, which cannot be cured
by the lessee.
Pursuant to the terms of certain of CAPREIT’s long-term leases,
CAPREIT is responsible for payment of all taxes, utilities, insurance,
maintenance, repairs and replacements in respect of all of the leased
premises, with certain exceptions in the last ten years of each of those
long-term leases. Upon the transfer of such a long-term lease by
CAPREIT, CAPREIT will only be released from liability thereunder if
the transferee meets certain tests. The lessor under any such long-term
lease may terminate such long-term lease, only if there is a substantial
event of default (as defi ned in the leases) by CAPREIT, which remains
uncured after a cure period.
CAPREIT has the option to acquire fee simple interests in 14 of
the operating leasehold interest properties, exercisable between the
26th and 35th year of the respective leases. In the case of the 15th
property, CAPREIT’s option entitles it to acquire a prepaid operating
leasehold interest in the property maturing in 2072. If Management
chooses not to exercise any or all such options, the NOI and cash
fl ow associated with such properties would no longer contribute to
CAPREIT’s results of operations and could adversely impact its ability
to make distributions to Unitholders.
Co-ownerships
CAPREIT has entered into co-ownership relationships with two
other entities. If the properties in the respective portfolios do not
perform as expected, or there is a default on fi nancial obligations,
CAPREIT would risk bearing its proportionate share of any related
losses. CAPREIT aims to reduce this risk by seeking to: (i) negotiate
contractual rights upon default of a partner; (ii) enter into agreements
with fi nancially stable partners; and/or (iii) work with partners who
have a historical record of success.
Investment Restrictions
CAPREIT has been structured and operates in adherence to the
stringent investment restrictions and operating policies set out in
its DOT and as applicable under tax laws relating to real estate
investment trusts (also see Taxation Related Risks in this section). These
policies cover such matters as the type and location of properties that
CAPREIT can acquire, the maximum leverage allowed, environmental
matters and investment restrictions. In addition, pursuant to the DOT,
CAPREIT’s overall leverage is limited to 70% of its reported gross
book value, unless a majority of trustees, in their discretion, determine
that the maximum amount of indebtedness shall be based on the
appraised value of the real properties of CAPREIT. As CAPREIT
reports gross book value at fair market value under IFRS, these
amounts are not expected to be materially different.
58
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating Risk
CAPREIT is subject to general business risks and to risks inherent in
the multi-residential rental property industry and in the ownership of
real property. These risks include fl uctuations in occupancy levels, the
inability to achieve economic rents (including anticipated increases in
rent), controlling bad debt exposure, rent control regulations, increases
in labour costs and other operating costs including the costs of utilities,
possible future changes in labour relations, competition from other
landlords or the oversupply of rental accommodations, the imposition
of increased taxes or new taxes and capital investment requirements.
In general economic conditions will also affect the performance
of the portfolio. Additionally, the portfolio is currently weighted with
55.5% of the overall portfolio (by number of suites and sites) in Ontario
(38% in the GTA), making CAPREIT’s performance particularly
sensitive to its performance in, and changes affecting, Ontario and,
in particular, the GTA.
CAPREIT’s investment properties generate income through rental
payments made by the residents thereof. Residential tenant leases are
relatively short, exposing CAPREIT to market rental-rate volatility.
Upon the expiry of any lease, there can be no assurance that such lease
will be renewed or the resident replaced. The terms of any subsequent
lease may be less favourable to CAPREIT than the existing lease.
Renewal rates may be subject to restrictions on increases to the then
current rent (see Government Regulations in this section). As well,
unlike commercial leases, which are generally “net” leases and allow
a landlord to recover expenditures, residential leases are generally
“gross” leases (with the exception of sub-metering of certain utilities
at some properties) and the landlord is not able to pass on costs to
its residents. Moreover, there is no assurance that occupancy levels
achieved to date at the properties will continue to be achieved and/
or that occupancy levels expected in the future will be achieved. Any
one of, or a combination of, these factors may adversely affect the cash
available to, or the fi nancial position of CAPREIT.
During 2011 and 2012, CAPREIT entered into new natural gas
physical delivery contracts, fi xing a portion of its variable rate natural
gas commitments. The fi xed price arrangement is intended to mitigate
the risk of rising natural gas prices over the related period. See the
Natural Gas table in the Results of Operations section for additional
information.
Environmental Matters
Environmental and ecological legislation and policies have become
increasingly important, and generally restrictive, in recent years. Under
various laws, CAPREIT could be liable for the costs of removal or
remediation of certain hazardous or toxic substances released on or in
its properties or disposed of at other locations. The failure to remove
or remediate such substances, if any, may adversely affect an owner’s
ability to sell such real estate or to borrow using such real estate as
collateral, and could potentially also result in regulatory enforcement
proceedings and/or private claims against the owner. Unless deter-
mined otherwise by the Board of Trustees, it is CAPREIT’s operating
policy to obtain a Phase I environmental assessment, conducted by
an independent and experienced environmental consultant, prior to
acquiring a property. Phase I environmental assessments have been
performed in respect of each of the properties. Where Phase I envi-
ronmental assessments warrant further assessment, it is CAPREIT’s
operating policy to obtain Phase II or Phase III environmental assess-
ments. Wherever required by environmental regulations, CAPREIT
also carries out assessments to determine the presence of asbestos-
containing material and underground storage tanks to ensure com-
pliance with appropriate provincial legislation. CAPREIT maintains
environmental liability insurance to protect Unitholders against such
risks (also see Insurance in this section). Notwithstanding the fore-
going, Management is not aware of any environmental condition with
respect to any of the properties that it believes would have a material
adverse effect on CAPREIT.
Energy Costs and Hedging
As a signifi cant part of CAPREIT’s operating expenses are attributable
to energy and energy-related charges and fees, fl uctuations in the price
of energy and any related charges and fees (including transportation
costs and commodity taxes) can have a material impact on the
performance of CAPREIT, its ability to pay distributions and the
value of the Units.
From time to time, CAPREIT may enter into agreements to receive
fi xed prices on all or certain of its energy requirements (principally,
natural gas and electricity in certain markets) to offset the risk of
rising expenditures if prices for these energy commodities increase;
however, if the prices for these energy commodities decline beyond
the levels set in these agreements, CAPREIT will not benefi t from
such declines in energy prices and will be required to pay the higher
price contracted for such energy supplies.
Insurance
All real property investments owned and operated by CAPREIT entail
an inherent risk of liability. From time to time, CAPREIT will be subject
to lawsuits as a result of its business operations. It is CAPREIT’s policy
to protect against this risk by maintaining a comprehensive insurance
program to cover general liabilities, i.e. fi re, fl ood, injury or death,
rental loss, environmental insurance, etc., with policy specifi cation
limits and deductibles as deemed appropriate based on the nature
of the risk, historical experience and industry standards. There are
some types of losses, including those of a catastrophic nature, that are
generally uninsurable or not economically feasible to insure, or might
be subject to insurance coverage limitations, such as large deductibles
or co-payments. There can be no assurance that claims in excess
of the insurance coverage or claims not covered by the insurance
coverage will not arise or that the liability coverage will continue to
CAPREIT 2013 ANNUAL REPORT
59
MANAGEMENT’S DISCUSSION AND ANALYSIS
be available on acceptable terms. In addition, should an uninsured or
underinsured loss occur, CAPREIT could lose its investment in, and
anticipated profi ts and cash fl ows from, one or more of its properties,
but CAPREIT would continue to be obligated to repay any recourse
mortgage indebtedness on such properties. These types of events/
losses could adversely affect the performance of CAPREIT, its ability
to make distributions and the market value of the Units.
Capital Investments
For prudent management of its property portfolio, CAPREIT
makes significant property capital investments throughout the
period of ownership of its properties (for example, to upgrade and
maintain building structure, balconies, parking garages, electrical
and mechanical systems). CAPREIT has prepared building condition
reports and has committed to a multi-year property capital investment
plan. CAPREIT must continuously monitor its properties to ensure
appropriate and timely capital repairs and replacements are carried
out in accordance with its property capital investment programs.
CAPREIT requires suffi cient capital to carry out its planned property
capital investment and repair and refurbishment programs to upgrade
its properties or be exposed to operating business risks arising from
structural failure, electrical or mechanical breakdowns, fi re or water
damage, etc., which may result in significant loss of earnings to
CAPREIT. A signifi cant increase in capital investment requirements
or difficulties securing financing or the availability of financing
on reasonable terms could adversely impact the cash available to
CAPREIT and its ability to pay distributions.
RELATED TO FINANCING
Indebtedness
A portion of CAPREIT’s cash fl ow is devoted to servicing its debt,
and there can be no assurance that CAPREIT will continue to
generate suffi cient cash fl ow from operations to meet required interest
and principal payments. CAPREIT has and will continue to have
substantial outstanding consolidated indebtedness comprising mainly
property mortgages and indebtedness under its Credit Facilities.
CAPREIT is subject to the risks associated with debt financing,
including the risk that CAPREIT may be unable to make interest
or principal payments or meet loan covenants, the risk that defaults
under a loan could result in cross defaults or other lender rights or
remedies under other loans, and the risk that existing indebtedness
may not be able to be refi nanced or that the terms of such refi nancing
may not be as favourable as the terms of existing indebtedness or
expectation of future interest rates. In such circumstances, CAPREIT
could be required to seek renegotiation of such payments or obtain
additional equity, debt or other fi nancing, and its ability to make
property capital investments and distributions to Unitholders could
be adversely affected.
CAPREIT currently has access to the government-backed
mortgage insurance program through the National Housing Act, which
is administered by CMHC. CAPREIT entered into the LBA with
CMHC during the third quarter of 2010. There can be no guarantee
that the provisions of the mortgage insurance program will not be
changed in the future so as to make the costs of obtaining mortgage
insurance prohibitive or so as to restrict access to the insurance
program in the future. To the extent that any fi nancing requiring
CMHC consent or approval is not obtained or that such consent
or approval is only available on unfavourable terms, CAPREIT may
be required to fi nance a conventional mortgage which may be less
favourable to CAPREIT than a CMHC-insured mortgage.
CAPREIT’s Acquisition and Operating Facility of $280 million
matures on June 30, 2016. CAPREIT’s Acquisition and Operating
Facility is at a fl oating interest rate and, accordingly, changes in short-
term borrowing rates will affect CAPREIT’s costs of borrowing.
CAPREIT’s financial condition and results of operations would
be adversely affected if it were unable to obtain fi nancing or cost-
effective fi nancing. As at the date hereof, it is diffi cult to forecast the
future state of the commercial loan market. If, because of CAPREIT’s
level of indebtedness, the level of cash fl ows, lenders’ perceptions of
CAPREIT’s creditworthiness or other reasons, Management is unable
to renew, replace or extend the Credit Facilities on acceptable terms,
or to arrange for alternative fi nancing, CAPREIT may be required
to take measures to conserve cash until the markets stabilize or until
alternative credit arrangements or other funding could be arranged, if
such fi nancing is available on acceptable terms, or at all. Such measures
could include deferring property capital investments, dispositions
of one or more properties on unfavourable terms, reducing or
eliminating future cash distributions or other discretionary uses of
cash, or other more severe actions. Also, disruptions in the credit
markets and uncertainty in the economy could adversely affect the
banks that currently provide the Credit Facilities, could cause the
banks or a bank to elect not to participate in any new Credit Facilities
sought, or could cause other banks that are not currently participants
in the Credit Facilities to be unwilling or unable to participate in any
such new facility.
Furthermore, given the relatively small size of the Canadian
marketplace, there are a limited number of lenders from which
CAPREIT can reasonably expect to borrow and the number of lenders
currently participating in the CMHC-insured mortgage market is even
smaller. Consequently, it is possible that fi nancing which CAPREIT
may require in order to grow and expand its operations, upon the
expiry of the term of existing fi nancing, or refi nancing any particular
property owned by CAPREIT or otherwise, may not be available or
may not be available on favourable terms.
Interest Rate Hedging
CAPREIT currently does, and may in the future, use interest rate
hedging arrangements or incur fees to early refi nance certain mortgages
prior to their maturity to manage its exposure to interest rate volatility.
Such hedging activities may not prove successful and may not have
a positive impact on the results of operations or fi nancial condition.
In general, hedging activities may subject CAPREIT to additional
costs, such as transaction fees or breakage costs, if these arrangements
are terminated. In addition, although Management enters into such
60
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
hedge contracts with financially sound counterparties in order
to mitigate the risk that the counterparty may fail to honour its
obligations, the risk cannot be mitigated completely.
RELATED TO TAXES AND REGULATIONS
Taxation-Related Risks
CAPREIT currently qualifi es as a mutual fund trust for Canadian
income tax purposes. It is the current policy of CAPREIT to distribute
all of its taxable income to Unitholders and is therefore generally
not subject to tax on such amount. In order to maintain its current
mutual fund trust status, CAPREIT is required to comply with
specifi c restrictions regarding its activities and the investments held
by it. If CAPREIT was to cease to qualify as a mutual fund trust, the
consequences could be adverse.
There can be no assurance that Canadian federal income tax laws
in respect of the treatment of mutual fund trusts will not be changed
in a manner that adversely affects CAPREIT or its Unitholders. If
CAPREIT ceases to qualify as a “mutual fund trust”, CAPREIT
will be required to pay a tax under Part XII.2 of the Income Tax
Act (“Tax Act”). The payment of Part XII.2 tax by CAPREIT may
have adverse income tax consequences for certain of CAPREIT’s
Unitholders, including non-resident persons and trusts governed
by registered retirement savings plans, registered disability savings
plans, deferred profi t-sharing plans, registered retirement income
funds, tax-free savings accounts and registered education savings
plans (“designated savings plans”), which acquired an interest in
CAPREIT directly or indirectly from another CAPREIT Unitholder.
If CAPREIT ceases to qualify as a “mutual fund trust” or “registered
investment” under the Tax Act and CAPREIT Units cease to be listed
on a designated stock exchange, CAPREIT Units will cease to be
qualifi ed investments for trusts governed by designated savings plans.
CAPREIT will endeavour to ensure CAPREIT Units continue to be
qualifi ed investments for trusts governed by the designated savings
plans; however, there can be no assurance that this will be so. The Tax
Act imposes penalties for the acquisition or holding of non-qualifi ed
investments by such trusts. Unitholders should consult their own
tax advisors in this regard, including as to whether CAPREIT Units
are “prohibited investments” for registered retirement saving plans,
registered retirement income funds, or tax free savings accounts.
On June 22, 2007, the specifi ed investment fl ow-through rules
(“SIFT Rules”) were enacted in the Tax Act, which modify the federal
income tax treatment of certain publicly traded trusts and partnerships
that are SIFT trusts or partnerships. Under the SIFT Rules, a SIFT
will generally be taxed in a manner similar to corporations on income
from a business carried on in Canada by the SIFT and income (other
than taxable dividends) or capital gains from non-portfolio properties
(as defi ned in the Tax Act) at a rate similar to the combined federal/
provincial tax rate of a corporation. Allocations or distributions of
income and capital gains that are subject to the SIFT Rules will be
taxed as eligible dividends from a taxable Canadian corporation in
the hands of the benefi ciaries or partners of the SIFT. The SIFT Rules
did not apply until the 2011 taxation year to SIFTs that were publicly
traded prior to November 1, 2006, provided such SIFTs complied
with the “Normal Growth Guidelines” released by the Department
of Finance (Canada).
In accordance with the Tax Act, for fi scal 2012 and 2013, CAPREIT
qualifi ed as a real estate investment trust (“REIT”) for income tax
purposes and, as such, was exempted from the SIFT Rules.
On December 16, 2010, the Department of Finance announced
proposed amendments to the real estate investment trust exemption
rule and, on October 24, 2012, released legislation to implement such
amendments. Notably, these amendments:
i) Allow REIT subsidiaries to hold certain non-capital property in
respect of their real estate investment activities;
ii) Allow REITs to hold up to 10% of their non-portfolio property as
non-qualifying REIT property without losing REIT status (with an
associated clarifi cation of the circumstances under which property
can be considered to be ancillary REIT property);
iii) Allow REITs to derive up to 10% of their revenues from sources
that are not qualifying sources;
iv) Clarify that a trust’s revenue for purposes of the two revenue tests
in the defi nition “real estate investment trust” is to be computed
on a gross, rather than net, basis and that it will include capital
gains but will not include recapture or other amounts that are on
account of capital;
v) Allow REITs to earn, as qualifying REIT revenue, gains realized
by virtue of foreign currency fl uctuations in respect of revenues
derived from foreign real or immovable property including certain
fi nancing and hedging arrangements in respect of such property;
vi) Ensure that amounts distributed to a REIT, by an entity in which
the REIT has a signifi cant interest, will retain their character for
purposes of the revenue tests; and,
vii) Allow an entity to hold investments in a REIT without those
investments being treated as Canadian real, immovable, or
resource property in determining whether the entity itself is a
SIFT.
These amendments tabled by the Department of Finance received
Royal Assent and were enacted on June 26, 2013.
A REIT is defi ned under the SIFT Rules as a trust that is resident
in Canada throughout the taxation year and that satisfi es all of the
following criteria:
i) at each time in the taxation year the total fair market value at
that time of all non-portfolio properties that are qualifi ed REIT
properties held by the trust is at least 90% of the total fair market
value at that time of all non-portfolio properties held by the trust;
ii) not less than 90% of the trust’s gross REIT revenue for the taxation
year is from one or more of the following: rent from real or
immovable properties, interest, dispositions of real or immovable
properties that are capital properties, dividends, royalties, and
dispositions of eligible resale properties;
CAPREIT 2013 ANNUAL REPORT
61
MANAGEMENT’S DISCUSSION AND ANALYSIS
iii) not less than 75% of the trust’s gross REIT revenue for the
taxation year is from one or more of the following: rent from real
or immovable properties, interest from mortgages, or hypothecs,
on real or immovable properties, and dispositions of real or
immovable properties that are capital properties;
iv) at each time in the taxation year an amount, that is equal to 75% or
more of the equity value of the trust at that time, is the amount that
is the total fair market value of all properties held by the trust, each
of which is a real or immovable property that is a capital property, an
eligible resale property, an indebtedness of a Canadian corporation
represented by a bankers’ acceptance, a property described by either
paragraph (a) or (b) in the defi nition of “qualifi ed investment” in
section 204, or a deposit with a credit union; and,
v) investments in the trust are, at any time in the taxation year, listed
or traded on a stock exchange or other public market.
For this purpose, “real or immovable property” includes a security
of any trust, corporation or partnership that itself satisfi es the above
criteria in (i)-(iv) above, but does not include any depreciable property
of a prescribed class for which the rate of capital cost allowance
exceeds 5%.
Excluded from the defi nition of a SIFT is a partnership, such as
CAPLP and CAPLP2, that is not publicly traded and of which the
equity (and equity-like debt) is wholly owned by any combination of
a SIFT, a REIT or a taxable Canadian corporation. If CAPREIT does
not qualify for the REIT Exception at any point in time in a given
future year, the SIFT Rules will apply to CAPREIT for that taxation
year. To the extent that CAPREIT does not qualify for the REIT
Exception, CAPREIT will consider alternative measures, including
restructuring, assuming that these measures are in the best interests
of its Unitholders, in order to qualify for the REIT Exception in
the following year. No assurances can be given that CAPREIT will
continue to qualify for the REIT Exception. If applicable, the SIFT
Rules may have a material adverse effect on Unitholders’ returns.
CAPREIT or its subsidiaries may be reassessed for taxes
from time to time. Such reassessments, together with associated
interest and penalties, could adversely affect CAPREIT and
CAPREIT’s Unitholders.
Harmonization of Federal Goods and Services Tax and
Provincial Sales Tax
Both Ontario and British Columbia harmonized their respective
provincial sales tax (“PST”) with the federal goods and services tax
(“GST”) into the harmonized sales tax (“HST”), effective July 1, 2010.
Currently, there is generally no HST on residential rents (i.e. they are
generally HST exempt). As input tax credits for HST paid can only be
claimed if the payments are in respect of commercial activities and as
renting residential properties is not a commercial activity, CAPREIT
is not able to claim input tax credits for HST paid. In the future,
the effect of increasing the HST rate or extending its application to
a variety of new business input costs presently not subject to HST
means landlords will have to absorb the additional tax costs on
business inputs. Effective April 1, 2013, however, British Columbia
reverted back to the original PST and federal GST. British Columbia
consumers pay PST on those goods and services that were subject to
PST before the implementation of the HST and all permanent PST
exemptions were re-implemented.
Government Regulations
Multi-unit residential rental properties are subject to rent control
legislation in most provinces in Canada. Each province in which
CAPREIT operates maintains distinct regulations with respect to
tenants’ and landlords’ rights and obligations. The legislation in
various degrees provides restrictions on the ability of a landlord to
increase rents above an annually prescribed guideline or require the
landlord to give tenants suffi cient notice prior to an increase in rent or
restricts the frequency of rent increases permitted during the year. The
annual rent increase guidelines as per applicable legislation attempts
to link the annual rent increases to some measure of changes in the
cost of living index over the previous year. The legislation also, in
most cases, provides for a mechanism to ensure rents can be increased
above the guideline increases for extraordinary costs. As a result of
rent controls, CAPREIT may incur property capital investments in
the future that will not be fully recoverable from rents charged to
the tenants.
Applicable legislation may be further amended in a manner
that may adversely affect the ability of CAPREIT to maintain the
historical level of cash fl ow from its properties. In addition, applicable
legislation provides for compliance with several regulatory matters
involving tenant evictions, work orders, health and safety issues, fi re
and maintenance standards, etc. An amendment to the Residential
Tenancies Act, 2006, enacted on June 19, 2012, set Ontario’s annual
rent increase guideline to no more than 2.5% beginning in 2013.
Controls over Financial Reporting
CAPREIT maintains information systems, procedures and controls
over fi nancial reporting. Because of the inherent limitations in all
control systems, including well-designed and operated systems, no
control system can provide complete assurance that the objectives
of the control system will be met. Furthermore, no evaluation of
controls can provide absolute assurance that all control issues,
including instances of fraud, if any, will be detected or prevented.
These inherent limitations include, without limitation, the possibility
that Management’s assumptions and judgements may ultimately prove
to be incorrect under varying conditions and circumstances and the
impact of isolated errors.
Additionally, controls may be circumvented by the unauthorized
acts of individuals, by collusion of two or more people, or by
Management override. The design of any system of controls is also
based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential conditions.
62
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Legal and Regulatory Risks
CAPREIT is subject to a wide variety of laws and regulations across
all jurisdictions and faces risks associated with legal and regulatory
changes and litigation. CAPREIT relies on internal and external
legal counsel to assist in remaining current with legal and regulatory
changes and in enabling it to respond to litigation.
RELATED TO CAPREIT’S SECURITIES, ORGANIZATION
AND STRUCTURE
Nature of CAPREIT Trust Units
Units and Special Voting Units are not traditional equity investments
and Unitholders and Special Voting Unitholders do not have all of
the statutory rights normally associated with ownership of shares of a
company, including, for example, the right to bring “oppression” or
“derivative” actions against CAPREIT. The Units and Special Voting
Units are not “deposits” within the meaning of the Canada Deposit
Insurance Corporation Act and are not insured under the provisions
of that Act or any other legislation. Furthermore, CAPREIT is not
a trust company and, accordingly, it is not registered under any
trust and loan company legislation, as it does not carry on or intend
to carry on the business of a trust company. In addition, although
CAPREIT is intended to qualify as a “mutual fund trust” as defi ned
by the Tax Act, CAPREIT is not a “mutual fund” as defi ned by
applicable securities legislation.
Securities like the Units are hybrids in that they share certain
attributes common to both equity securities and debt instruments.
The Units do not represent a direct investment in the business
of CAPREIT and should not be viewed by investors as shares or
interests in CAPREIT or any other company or entity. The Units
do not represent debt instruments and there is no principal amount
owing to Unitholders under the Units. Each Unit represents an equal,
undivided, benefi cial interest in CAPREIT.
Unitholder Liability
Recourse for any liability of CAPREIT is limited to the assets
of CAPREIT. The DOT provides that no Unitholder, or Special
Unitholder or annuitant (an “annuitant”) under a plan of which a
Unitholder or Special Unitholder acts as a trustee or carrier will be held
to have any personal liability and that no recourse shall be had to the
private property of any Unitholder, Special Unitholder or annuitant for
satisfaction of any obligation or claim arising out of or in connection
with any contract or obligation of CAPREIT or of the trustees.
Certain provincial legislatures have passed legislation that provides
for statutory limited liability for unitholders of public income trusts
governed as a contractual matter by the laws of their jurisdictions.
Certain of these statutes have not yet been judicially considered
and it is possible that reliance on such statute by a Unitholder or
Special Unitholder or annuitant could be successfully challenged on
jurisdictional or other grounds.
Liquidity and Price Fluctuation of Units
CAPREIT is an unincorporated “open end” invetment trust and its
Units are listed on the TSX. There can be no assurance that an active
trading market in the Units will be sustained.
A publicly traded real estate investment trust will not necessarily
trade at values determined solely by reference to the underlying value
of its real estate assets. The prices at which Units will trade cannot be
predicted. The market price of the Units could be subject to signifi cant
fl uctuations in response to variations in quarterly operating results,
distributions and other factors beyond the control of CAPREIT. One
of the factors that may infl uence the market price of the Units is
the annual yield on the Units. Accordingly, an increase in market
interest rates may lead purchasers of Units to demand a higher annual
yield, which could adversely affect the market price of the Units. In
addition, the securities markets have experienced signifi cant price
and volume fl uctuations from time to time in recent years that often
have been unrelated or disproportionate to the operating performance
of particular issuers. These broad fl uctuations may adversely affect
the market price of the Units. Accordingly, the Units may trade at a
premium or a discount to the value of CAPREIT’s underlying assets.
In addition, changes in CAPREIT’s creditworthiness or perceived
creditworthiness may affect the market price or value and/or the
liquidity of the Units.
The DOT imposes various restrictions on Unitholders. Non-residents
and non-Canadian partnerships are prohibited from benefi cially owning
more than 49% of the outstanding Units (on a non-diluted and diluted
basis). These restrictions may limit (or inhibit the exercise of) the rights
of certain non-resident persons and partnerships to acquire Units, to
continue to hold Units, and to initiate and complete take-over bids in
respect of the Units. As a result, these restrictions may limit the demand
for Units from certain Unitholders and other investors and, thereby,
adversely affect the liquidity and market value of the Units.
Dilution
Subject to applicable laws, CAPREIT is authorized to issue an
unlimited number of Units for the consideration, and on the terms and
conditions, that the Board of Trustees determine without Unitholders’
approval. Unitholders have no pre-emptive right in connection with
any such further issuance. The Board of Trustees has the discretion to
issue additional Units in other circumstances, pursuant to CAPREIT’s
various incentive plans. Any issuance of additional Units may have a
dilutive effect on the holders of Units. Furthermore, timing differences
may occur between the issuance of additional Units and the time the
proceeds may be used to invest in new properties. Depending on the
duration of this timing difference, this may be dilutive.
Distributions
Cash distributions are not guaranteed. Distributions on the Units are
established by the Board of Trustees and are subject to change at the
discretion of the Board of Trustees. While CAPREIT has historically
CAPREIT 2013 ANNUAL REPORT
63
MANAGEMENT’S DISCUSSION AND ANALYSIS
made monthly cash distributions to Unitholders, the actual amount of
distributions paid in respect of the Units will depend upon numerous
factors, all of which are susceptible to a number of risks and other
factors beyond the control of CAPREIT. The market value of the Units
will deteriorate if CAPREIT is unable to meet its distribution targets
in the future, and that deterioration may be signifi cant. In addition,
the composition of the cash distributions for tax purposes may change
over time and may affect the after-tax return for Unitholders.
Distribution Reinvestment Plan (“DRIP”) Participation
Participation by Unitholders in CAPREIT’s DRIP is determined by
factors such as CAPREIT’s overall performance and also by many
factors outside the control of Management, such as, but not limited
to, market trends, general economic conditions and the liquidity
and credit crisis. Declining DRIP participation may adversely affect
funds available for distribution to Unitholders, to make interest
and principal payments and to make property capital investments.
Additionally, such effects may adversely affect Unit prices.
Potential Confl icts of Interest
CAPREIT may be subject to various confl icts of interest because
of the fact that certain of the trustees and offi cers of CAPREIT are
engaged in a wide range of real estate and other business activities.
CAPREIT may become involved in transactions which confl ict with
the interests of the foregoing.
The trustees may from time to time deal with persons, fi rms,
institutions or corporations with which CAPREIT may be dealing,
or which may be seeking investments similar to those desired by
CAPREIT. The interests of these persons could confl ict with those
of CAPREIT. In addition, from time to time, these persons may be
competing with CAPREIT for available investment opportunities.
CAPREIT’s DOT contains “conflicts of interest” provisions
requiring trustees to disclose material interests in material contracts
and transactions and to refrain from voting thereon.
Dependence on Key Personnel
The success of CAPREIT depends to a signifi cant extent on the efforts
and abilities of its executive offi cers and other members of Management,
as well as its ability to attract and retain qualifi ed personnel to manage
existing operations and future growth. Although CAPREIT has entered
into employment agreements with certain of its key employees, it cannot
be certain that any of those persons will not voluntarily terminate his
or her employment with CAPREIT.
The loss of an executive offi cer or other key employee could have
a material adverse effect on the business, operating results or fi nancial
condition of CAPREIT.
RELATED TO THE REAL ESTATE INDUSTRY
General Economic Conditions and Competition for Residents
All real property investments are subject to elements of risk. The real
value of real property and any improvements thereto depend on the
credit and fi nancial stability of residents and upon the vacancy rates of
such properties. The properties generate revenue through rental payments
made by residents thereof. CAPREIT is affected by changes in general
economic conditions (such as the availability and cost of mortgage funds),
local real estate markets (such as an oversupply of space or a reduction
in demand for real estate in the area), government regulations, changing
demographics, competition from other available rental premises, including
new developments, and various other factors. If a signifi cant number of
residents are unable to meet their obligations under their leases or if a
signifi cant amount of available space in the properties becomes vacant
and cannot be leased on economically favourable lease terms, cash
available for distribution may be adversely affected.
The real estate business is competitive. Numerous other developers,
managers and owners of properties compete with CAPREIT in seeking
residents. Competition for residents also comes from opportunities
for individual home ownership, including condominiums, which can
be particularly attractive when home mortgage loans are available at
relatively low interest rates. The existence of competing developers,
managers and owners and competition for CAPREIT’s residents could
have an adverse effect on CAPREIT’s ability to lease suites in its
properties and on the rents charged, and may increase leasing and
marketing costs and refurbishing costs necessary to lease and release
suites, all of which could adversely affect CAPREIT’s revenues and,
consequently, its ability to meet its obligations and pay distributions.
For example, increased condominium construction in the GTA could
impact the rental market and affect residential rental fundamentals. In
addition, any increase in the supply of available rental accommodation
in the markets in which CAPREIT operates or may operate could
have an adverse effect on CAPREIT.
Furthermore, low interest rates may encourage residents to
purchase condominiums or other types of housing, which could result
in a reduction in demand for rental properties. Changes in interest
rates may also have effects on vacancy rates, rent levels, refurbishing
costs and other factors affecting CAPREIT’s business and profi tability,
including its fi nancing costs.
CAPREIT will maintain its focus on maximizing occupancy and
average monthly rents in accordance with local conditions in each
of its markets. Since its inception in May 1997, CAPREIT’s hand-
on management style, focus on resident communications and capital
investment programs aimed at increasing the long-term value of its
properties have contributed to a strong track record of stable portfolio
occupancy and average monthly rents.
Competition for Real Property Investments
CAPREIT competes for suitable real property investments with
individuals, corporations and institutions (both Canadian and foreign)
and other real estate investment trusts that are presently seeking, or
which may seek in the future, real property investments similar to
those desired by CAPREIT. A number of these investors may have
greater fi nancial resources than those of CAPREIT, or operate without
the investment or operating restrictions of CAPREIT or according to
more fl exible conditions. An increase in the availability of investment
funds and/or an increase in interest in real property investments may
64
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
tend to increase competition for real property investments, thereby
increasing purchase prices and reducing the yield on them.
Continued Growth
CAPREIT expects it will have opportunities to acquire properties
that will be accretive and enable CAPREIT to increase cash fl ow to
Unitholders, but there can be no assurance that this will be the case.
Furthermore, as CAPREIT’s intention is to distribute a substantial
proportion of its NFFO, the ability of CAPREIT to fund growth will
be dependent on external sources of funding. Lack of availability of
such funds could limit the future growth of CAPREIT. In addition,
CAPREIT’s ability to grow may involve the disposition of non-core
or underperforming properties, which may be affected by market
conditions and other factors.
Acquisitions
CAPREIT’s external growth prospects will depend in large part on
identifying suitable acquisition opportunities that meet CAPREIT’s
investment criteria and satisfy its rigorous due diligence process. In
addition, external growth prospects will be affected by competition
for acquisition opportunities, the purchase price, ability to obtain
adequate fi nancing and fi nancing on reasonable terms, consummating
acquisitions (including obtaining necessary consents) and effectively
integrating and operating the acquired properties. Acquired
properties may not meet fi nancial or operational expectations due
to unexpected costs associated with acquiring the property, as well
as the general investment risks inherent in any real estate investment
or acquisition, including future refi nancing risks. Moreover, newly
acquired properties may require signifi cant Management attention
or property capital investments that would otherwise be allocated to
other properties. If CAPREIT is unable to manage its growth and
integrate its acquisitions effectively, its business, operating results and
fi nancial condition could be adversely affected.
Acquisition agreements entered into with third parties may be
subject to unknown, unexpected or undisclosed liabilities which could
have a material adverse impact on the operations and fi nancial results of
CAPREIT. CAPREIT’s due diligence investigations and representations
and warranties obtained from third party vendors may not adequately
protect against these liabilities and any recourse against such vendors
may be limited by the fi nancial capacity of such vendors.
FOREIGN OPERATION AND CURRENCY RISKS
CAPREIT made acquisitions in Dublin, Ireland in September 2013 and
continues to look for further investment opportunities in the region.
The Irish real estate market differs from the Canadian environment and
CAPREIT’s experience and expertise managing Canadian properties
may not apply perfectly to a foreign operation. In an effort to reduce
the risk exposure, investments are made conservatively to limit any
potential negative impact by aligning CAPREIT with experienced
Irish operating companies and hiring locally-based employees with
real estate experience. There can be no certainty, however, that
CAPREIT’s Irish investments will be successful. Additionally, it is
possible that CAPREIT’s Irish investments will expose CAPREIT to
foreign exchange fl uctuations. CAPREIT will in part mitigate this risk
through the use of Euro-denominated debt and a foreign currency
hedging program.
Related Party Transactions
CAPREIT incurred the following transactions with key management
personnel and trustees. The loans outstanding from key management
personnel and trustees for indebtedness relating to the SELTIP and
LTIP at December 31, 2013 were $8.0 million and $11.8 million,
respectively (December 31, 2012 – $8.3 million and $13.2 million,
respectively). These amounts are taken into consideration when
calculating the fair value of the Unit-based compensation fi nancial
liabilities. Key management personnel are eligible to participate in the
EUPP. In addition, certain key management personnel also participate
in the RUR and trustees currently participate in the DUP. Pursuant
to employee contracts, key management personnel are subject to
termination benefi ts that entitle them to payments of up to 36 months
of benefi ts (based on base salary, bonus and other benefi ts) depending
on cause.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive income
is comprised of:
($ Thousands)
Year Ended December 31,
Short-term employee benefi ts
Unit-based compensation
– grant date amortization
2013
2012
$
3,439
$
3,170
2,050
5,489
2,819
5,989
7,367
Unit-based compensation
– fair value remeasurement
(6,491)
Total
$
(1,002)
$
13,356
Previously, CAPREIT entered into construction management
agreements with a company that was owned by two trustees and
offi cers (Thomas Schwartz, President and CEO and Michael Stein,
Chairman) of CAPREIT to provide construction management services
(based on 4.5% of construction costs up to $20.0 million, 3.0% for
the next $15.0 million and 1.0% thereafter) to carry out the capital
improvements for the properties. Effective January 1, 2012, CAPREIT
terminated its construction management agreement and entered into
a new construction management agreement with a non-related party
on substantially similar terms. CAPREIT had related party manage-
ment fees until the balance of the work on the previous contract
was completed. All previous contracts have been completed as at
December 31, 2012.
CAPREIT leases offi ce space from a company in which Thomas
Schwartz has an 18% benefi cial interest. The rent paid for the offi ce
space (which is based on fair market rents at the date the lease was
CAPREIT 2013 ANNUAL REPORT
65
MANAGEMENT’S DISCUSSION AND ANALYSIS
entered into) for the year ended December 31, 2013 was $0.9 million
(2012 – $0.9 million) excluding property operating costs, and has
been expensed as trust expenses. The lease agreement expires on
October 31, 2014 and yearly minimum rental payment for 2014 is
$0.4 million before HST.
Commitments and Contingencies
From time to time, CAPREIT enters into commitments for fi xed price
natural gas, hydro and land lease agreements, as outlined in note 24 to
the accompanying audited consolidated annual fi nancial statements.
CAPREIT is contingently liable under guarantees provided to
certain of CAPREIT’s lenders in the event of defaults and with respect
to litigation and claims that arise in the ordinary course of business.
These matters are generally covered by insurance. In the opinion of
Management, any liability that may arise from such contingencies
would not be expected to have a material adverse effect on the
consolidated fi nancial statements of CAPREIT.
SECTION VIII
Subsequent Events
On January 31, 2014, the third party external management agreements
for the performance of certain asset and property management services
concluded. The 16 manufactured home communities in Colorado,
Texas, Arizona, and Michigan, which were managed by CAPREIT
for a third party real estate owner, have been sold. The agreements
were entered into on December 5, 2012.
Future Outlook
Despite the potential adverse impact of global economic uncertainty,
with a strong national economy, Management believes the multi-unit
residential rental business will continue to improve in the majority of
the markets in which CAPREIT operates. As a result, Management
expects to generate modest annual increases in overall average monthly
rents while stabilizing average occupancies in the range of 97% to
98% on an annual basis. Management also anticipates operating
revenues will benefi t from programs over the long term to enhance
ancillary revenues from parking, commercial leases, laundry, cable,
telecommunications and other income sources. In addition, numerous
successful cost management initiatives have proven effective, which
should lead to stable net operating income over this period.
However, as a result of some continued economic uncertainty in
certain geographic regions, CAPREIT may experience an increase in
bad debt and tenant inducement costs combined with a reduction in
occupancy levels over the short term. CAPREIT believes the strong
defensive characteristics of its property portfolio, due to diversifi cation
by both geography and demographic sector, will serve to mitigate some
of the negative impact of the unfavourable economic conditions that
certain regions are experiencing or may experience. CAPREIT intends
to continue to seek opportunities to further diversify its property
portfolio. While CAPREIT’s strategy is to remain principally focused
on its core Canadian markets, CAPREIT continues to consider select
opportunities in other markets. In addition, despite having entered
into a forward interest rate hedge, CAPREIT may still experience
diffi culty in obtaining long-term fi nancing (i.e., fi nancing for terms
of ten years and longer) due to credit market conditions.
CAPREIT has defi ned a number of strategies to capitalize on its
strengths and achieve its objectives of providing Unitholders with
stable and predictable monthly cash distributions while growing
distributions and Unit value over the long term.
First, Management maintains a focus on maximizing occupancy
and average monthly rents in accordance with local conditions in
each of its markets. Since its inception in May 1997, CAPREIT’s
hands-on management style, focus on resident communications and
capital investment programs aimed at increasing the long-term value
of its properties have contributed to a strong track record of stable
portfolio occupancy and average monthly rents.
A signifi cant part of managing CAPREIT’s annual rental increases
is determined by the annual guideline increases established by certain
provincial governments, currently in Ontario and British Columbia,
under rent control legislation that CAPREIT must adhere to in setting
annual rental rates for renewing tenants. In the Province of Ontario, the
guideline increase for 2014 has been set at 0.8%. An amendment to the
Residential Tenancies Act, 2006, enacted on June 19, 2012, set Ontario’s
annual rent increase guideline to not more than 2.5% beginning in 2013.
The Ontario rent control legislation provides that landlords may apply
to the Landlord and Tenant Board (the “Board”) to raise rents by more
than the approved annual guideline increase (“AGI”). The Board can
allow such an AGI for: (i) eligible capital expenditures; (ii) unusually
high increases in property taxes and/or utility costs; and (iii) increases
in eligible security costs. The maximum AGI permitted in connection
with eligible capital expenditures is three percent per year to a maximum
of nine percent over a three-year period. These same limitations do
not apply to AGI applications related to unusually high increases in
property taxes and/or utilities, or increases in eligible security costs.
In line with its focus to maximize average monthly rents, CAPREIT
continues to pursue AGIs where it believes appropriate and to this
effect, has fi led applications for completed property capital investments
and/or unusually high increases in realty taxes, as well as one application
relating to an unusually high increase in water costs. In addition,
CAPREIT continues to assess the viability of a number of additional
AGI applications. The impact of these AGI applications could be
signifi cant at the property level; however, it is presently indeterminable
due to the inherent uncertainties associated with the adjudication
process and the impact of tenant turnover at the affected properties.
66
CAPREIT 2013 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table summarizes the status of cumulative AGI
applications fi led as at December 31, 2013 and December 31, 2012:
Number of Units and Sites Filed
12,368
11,583
December 31, 2013
December 31, 2012
Applications Settled
Number of Applications
73
Term Weighted Average Total Increase (1) 3.44%
Weighted Average Term (years) (1),(2)
1.67
Applications Outstanding
Number of Applications
8
Term Weighted Average Total Increase (1) 3.99%
Weighted Average Term (years) (1),(2)
1.79
63
3.20%
1.62
12
5.91%
2.14
(1) Weighted by number of impacted suites and sites.
(2) Represents the number of years over which the AGI application is
expected to apply.
Second, Management continues to focus on reducing its operating
costs as a percentage of total revenues. CAPREIT invests in various
environment-friendly and energy-saving initiatives, including energy-
effi cient boilers and lighting systems, and is evaluating all energy-
purchasing programs to reduce or stabilize overall net energy costs.
Third, Management continues to direct its efforts on its building
infrastructure improvement programs to upgrade properties across the
portfolio and to reposition the portfolio by completing value-enhancing
capital investments. These investments are expected to enhance the
life safety of residents, improve the portfolio’s long-term cash fl ow
generating potential and increase its useful life over the long term.
Fourth, CAPREIT continues to prudently focus on accretive
acquisitions that meet its strategic criteria and enhance CAPREIT’s
geographic diversifi cation. From time to time, CAPREIT may also
identify certain non-core assets for sale that do not conform to its
current portfolio composition or operating strategies, or where
Management believes they have maximized value. Management
believes the realization and reinvestment of capital are fundamental
components of its growth strategy and demonstrate the success of
its investment programs.
Fifth, CAPREIT will continue to effectively manage interest
costs by leveraging its balance sheet strength and the stability of
its property portfolio to reduce borrowings on its credit facilities,
while appropriately staggering the maturity dates within its mortgage
portfolio to ensure it is not exposed to a refinancing risk in any
single year. Management believes that as a result of the continuing
availability of fi nancing insured by CMHC that is at lower cost than
is currently available under conventional mortgages, CAPREIT is
well positioned to meet its fi nancing and refi nancing objectives at
reasonable costs over the medium term.
CAPREIT will continue to maintain its conservative approach
to its capital structure, leverage and coverage ratios and strive to
further improve its distribution payout ratio. Management believes
its successful equity fi nancing and mortgage refi nancing programs
have resulted in CAPREIT possessing one of the strongest balance
sheets in its industry, well suited to delivering consistent, stable and
secure monthly cash distributions over the long term.
CAPREIT 2013 ANNUAL REPORT
67
Management’s Responsibility for Financial Statements
The accompanying consolidated fi nancial statements and information
included in this Annual Report have been prepared by the management
of CAPREIT in accordance with International Financial Reporting
Standards, and include amounts based on management’s informed
judgements and estimates. Management is responsible for the
integrity and objectivity of these consolidated fi nancial statements.
The fi nancial information presented elsewhere in this Annual Report
is consistent with that in the consolidated fi nancial statements in all
material respects.
To assist management in the discharge of these responsibilities,
management has established the necessary internal controls, based
on the criteria set forth in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in 1992. The internal controls are designed to
ensure that our fi nancial records are reliable for preparing fi nancial
statements and other fi nancial information; transactions are properly
authorized and recorded; and assets are safeguarded.
As at December 31, 2013, our Chief Executive Officer and
Chief Financial Offi cer evaluated, or caused an evaluation under
their direct supervision of, the design and operation of our internal
controls over fi nancial reporting (as defi ned in National Instrument
52-109, Certifi cation of Disclosure in Issuers’ Annual and Interim
Filings) and, based on that assessment, determined that our internal
controls over fi nancial reporting were appropriately designed and
operating effectively.
PricewaterhouseCoopers LLP, the auditors appointed by the
Unitholders, have examined the consolidated fi nancial statements
in accordance with Canadian generally accepted auditing standards
to enable them to express to the Unitholders their opinion on the
consolidated fi nancial statements. Their report as auditors is set forth
below.
The consolidated fi nancial statements have been further reviewed
and approved by the Board of Trustees and its Audit Committee.
This committee meets regularly with management and the auditors,
who have full and free access to the Audit Committee.
February 28, 2014
Thomas Schwartz
President and Chief Executive Offi cer
Scott Cryer
Chief Financial Offi cer
68
CAPREIT 2013 ANNUAL REPORT
Independent Auditor’s Report
February 28, 2014
To the Unitholders of Canadian Apartment Properties
Real Estate Investment Trust
We have audited the accompanying consolidated fi nancial statements
of Canadian Apartment Properties Real Estate Investment Trust
(CAPREIT) and its subsidiaries, which comprise the consolidated
balance sheets as at December 31, 2013 and December 31, 2012 and
the consolidated statements of income and comprehensive income
(loss), unitholders’ equity and cash fl ows for the years then ended, and
the related notes, which comprise a summary of signifi cant accounting
policies and other explanatory information.
Management’s responsibility for the consolidated
fi nancial statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal
control as management determines is necessary to enable the
preparation of consolidated fi nancial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated
fi nancial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance
about whether the consolidated fi nancial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material
misstatement of the consolidated fi nancial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated fi nancial statements in order to
design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness
of the entity’s internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness
of accounting estimates made by management, as well as evaluating
the overall presentation of the consolidated fi nancial statements.
We believe that the audit evidence we have obtained in our audits
is suffi cient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated fi nancial statements present fairly,
in all material respects, the fi nancial position of CAPREIT and its
subsidiaries as at December 31, 2013 and December 31, 2012 and their
fi nancial performance and their cash fl ows for the years then ended in
accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
CAPREIT 2013 ANNUAL REPORT
69
December 31, 2013
December 31, 2012
$ 5,459,218
82,263
5,541,481
$
4,826,355
81,073
4,907,428
17,453
14,118
$ 5,558,934
$
4,921,546
$ 2,016,077
187,030
1,772
1,121
2,206,000
$
1,790,772
147,316
2,144
–
1,940,232
441,105
30,992
77,432
7,250
24,892
3,428
10,366
595,465
398,784
38,700
64,295
11,158
23,377
6,507
9,279
552,100
$ 2,801,465
$
2,492,332
$ 1,720,066
(21,194)
1,058,597
$ 2,757,469
$ 1,544,750
(22,511)
906,975
$
2,429,214
$ 5,558,934
$
4,921,546
Consolidated Balance Sheets
(CA$ Thousands)
As at
Non-Current Assets
Investment properties
Other non-current assets
Current Assets
Other current assets
Non-Current Liabilities
Mortgages payable
Bank indebtedness
Unit-based compensation fi nancial liabilities
Other non-current liabilities
Current Liabilities
Mortgages payable
Unit-based compensation fi nancial liabilities
Accounts payable and accrued liabilities
Other current liabilities
Security deposits
Exchangeable Units
Distributions payable
Unitholders’ Equity
Unit Capital
Accumulated other comprehensive loss (“AOCL”)
Retained earnings
See accompanying notes to consolidated fi nancial statements.
Signed on behalf of the Trustees
Note
6
7
7
9
10
11, 12
8
9
11, 12
8
11
19
Thomas Schwartz
Trustee
Michael Stein
Trustee
70
CAPREIT 2013 ANNUAL REPORT
Consolidated Statements of Income and
Comprehensive Income
(CA$ Thousands)
For The Year Ended December 31,
Operating Revenues
Revenue from investment properties
Operating Expenses
Realty taxes
Property operating costs
Net Rental Income
Trust expenses
Unit-based compensation (recoveries) expenses
Fair value adjustments of investment properties
Realized loss on disposition of investment properties
Amortization of property, plant and equipment
Operating Income
Fair value adjustments of Exchangeable Units
(Gain)/Loss on derivative fi nancial instruments
Interest and other fi nancing costs
Foreign currency translation
Other income
Net Income
Other Comprehensive Income
Items That May Be Reclassifi ed Subsequently to Net Income
Amortization of losses from AOCL to interest and other fi nancing costs
Change in fair value of derivative fi nancial instruments
Change in fair value of investments
Realized gain on sale of investments
Gain on foreign currency translation
Other Comprehensive Income
Comprehensive Income
See accompanying notes to consolidated fi nancial statements.
Note
12
6
5
11
16
20
19
16
19
19
2013
2012
$
477,023
$
412,421
55,546
147,623
203,169
273,854
19,280
(5,968)
(106,470)
811
2,178
364,023
(537)
680
101,465
17
(5,280)
49,483
125,022
174,505
237,916
13,904
13,333
(298,228)
1,613
2,195
505,099
904
2,854
92,581
–
(3,503)
$
267,678
$
412,263
$
$
$
3,265
3,701
(4,392)
(1,381)
124
1,317
268,995
$
$
$
2,000
(2,218)
3,168
(1,451)
–
1,499
413,762
CAPREIT 2013 ANNUAL REPORT
71
Consolidated Statements of Unitholders’ Equity
(CA$ Thousands)
Note
Unit
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Unitholders’ Equity, January 1, 2013
Unit Capital
New Units issued
Distribution Reinvestment Plan
Deferred Unit Plan
Restricted Unit Rights Plan
Long-Term Incentive Plan
Employee Unit Purchase Plan
13
13
12, 13
12, 13
12, 13
12
Retained Earnings and Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
14
14
$ 1,544,750
$
906,975
$
(22,511)
$
2,429,214
145,287
27,003
422
119
2,024
461
175,316
–
–
–
–
–
–
–
–
–
–
–
–
–
267,678
–
267,678
(105,690)
(10,366)
(116,056)
–
–
–
–
–
–
–
–
1,317
1,317
–
–
–
145,287
27,003
422
119
2,024
461
175,316
267,678
1,317
268,995
(105,690)
(10,366)
(116,056)
Unitholders’ Equity, December 31, 2013
$ 1,720,066
$
1,058,597
$
(21,194)
$
2,757,469
(CA$ Thousands)
Note
Unitholders’ Equity, January 1, 2012
Unit Capital
New Units issued
Distribution Reinvestment Plan
Unit Option Plan
Employee Unit Purchase Plan
13
13
12, 13
12
Retained Earnings and Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
14
14
Unit
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
$ 1,172,058
$
592,615
$
(24,010)
$
1,740,663
349,365
20,122
2,796
409
372,692
–
–
–
–
–
–
–
–
–
–
–
412,263
–
412,263
(88,624)
(9,279)
(97,903)
–
–
–
–
–
–
1,499
1,499
–
–
–
349,365
20,122
2,796
409
372,692
412,263
1,499
413,762
(88,624)
(9,279)
(97,903)
Unitholders’ Equity, December 31, 2012
$ 1,544,750
$
906,975
$
(22,511)
$
2,429,214
See accompanying notes to consolidated fi nancial statements.
72
CAPREIT 2013 ANNUAL REPORT
Consolidated Statements of Cash Flows
(CA$ Thousands)
For the Year Ended December 31,
Cash Provided By (Used In):
Operating Activities
Net income
Items related to operating activities not affecting cash:
Fair value adjustment – investment properties
Fair value adjustment – Exchangeable Units
Gain on sale of investments
Loss on disposition of investment properties
Loss on derivative fi nancial instruments
Amortization of property, plant and equipment
Amortization of other fi nancing costs
Amortization of loss on derivative fi nancial instruments from AOCL
Unit-based compensation expenses
Straight-line rent adjustment
Net income items related to fi nancing and investing activities
Changes in non-cash operating assets and liabilities
Cash Provided By Operating Activities
Investing Activities
Acquisition of investment properties
Capital investments
Disposition of investments
Disposition of investment properties
Change in restricted cash
Investment income received
Cash Used In Investing Activities
Financing Activities
Mortgage fi nancings
Mortgage principal repayments
Mortgages repaid on maturity
Financing costs on mortgages payable
CMHC premiums on mortgages payable
Interest paid on mortgages payable
Bank indebtedness
Interest paid on bank indebtedness
Interest paid on Exchangeable Units
Hedge settlement
Proceeds on issuance of Units
Net cash distributions to Unitholders
Cash Provided By Financing Activities
Changes in Cash and Cash Equivalents During the Year
Cash and Cash Equivalents, Beginning of the Year
Cash and Cash Equivalents, End of the Year
See accompanying notes to consolidated fi nancial statements.
Note
5
16
20
19, 20
22
22
22
22
22
22
22
22
16
22
22
2013
2012
$
267,678
$
412,263
(106,470)
(537)
(1,737)
811
680
2,178
(995)
3,265
(5,968)
(211)
158,694
93,607
7,979
260,280
(416,565)
(158,367)
7,815
57,672
(1,108)
1,298
(509,255)
676,009
(69,169)
(340,831)
(2,706)
(11,848)
(89,631)
39,714
(5,068)
(206)
(3,492)
144,169
(87,966)
248,975
(298,228)
904
(1,455)
1,613
2,854
2,195
1,496
2,000
13,333
(151)
136,824
85,388
6,382
228,594
(445,682)
(131,280)
6,830
55,644
(503)
3,334
(511,657)
360,269
(58,962)
(248,954)
(1,772)
(5,223)
(82,490)
73,184
(5,865)
(367)
(18,377)
347,570
(75,950)
283,063
–
–
–
–
–
–
$
$
CAPREIT 2013 ANNUAL REPORT
73
Notes to Consolidated Financial Statements
(CA$ Thousands, except Unit and per Unit amounts)
December 31, 2013
1. Organization of the Trust
Canadian Apartment Properties Real Estate Investment Trust
(“CAPREIT”) owns interests in multi-unit residential rental
properties, including apartments, townhomes and manufactured
home communities (“MHC”), primarily located in and near major
urban centres across Canada and in Dublin, Ireland. CAPREIT’s net
assets and operating results are derived substantially from real estate
located in Canada, where it is also domiciled.
CAPREIT converted from a closed-end real estate investment
trust to an open-ended mutual fund trust on January 8, 2008, and is
governed under the laws of the Province of Ontario by a Declaration of
Trust (“DOT”) dated February 3, 1997, as most recently amended and
restated on May 21, 2013. CAPREIT commenced active operations
on February 4, 1997 when it acquired an initial portfolio of properties
and became a reporting issuer on May 21, 1997, pursuant to an initial
public offering prospectus dated May 12, 1997.
CAPREIT Limited Partnership (“CAPLP”) is a wholly-owned
consolidated subsidiary of CAPREIT, formed on April 1, 2008, owns
the beneficial interest of all its properties along with the related
mortgages and all the corporate debt obligations of CAPREIT.
CR Advisors Limited Partnership and CR Property Management
Limited Partnership, wholly-owned consolidated subsidiaries of
CAPREIT, were formed on December 5, 2012 to provide property
and asset management services to a third party real estate investment
trust domiciled in the United States, which owns and operates 16
manufactured housing communities in Colorado, Texas, Arizona
and Michigan.
CAPREIT is listed on the Toronto Stock Exchange (“TSX”) under
the symbol “CAR.UN” and its registered address is 11 Church Street,
Suite 401, Toronto, Ontario, Canada M5E 1W1.
2. Signifi cant Accounting Policies
A) STATEMENT OF COMPLIANCE
CAPREIT has prepared these consolidated annual financial
statements in accordance with International Financial Reporting
Standards (“IFRS”) applicable to the preparation of consolidated
annual fi nancial statements.
These consolidated annual financial statements, which were
approved by CAPREIT’s Board of Trustees on February 28, 2014,
have been prepared on the basis of IFRS issued and effective,
or available for early adoption, at December 31, 2013. These
policies have been consistently applied to all years presented, unless
stated otherwise.
74
CAPREIT 2013 ANNUAL REPORT
B) BASIS OF PRESENTATION
These consolidated annual fi nancial statements have been prepared
on a going concern basis presented in Canadian dollars, which is
also CAPREIT’s functional currency, and have been prepared on a
historical cost basis except for:
i) Investment properties and certain fi nancial instruments, which
are stated at fair value; and
ii) Certain Unit-based compensation accounts, which are stated at
fair value.
C) PRINCIPLES OF CONSOLIDATION
i) Subsidiaries
These consolidated annual fi nancial statements comprise the assets and
liabilities of all subsidiaries and the results of all subsidiaries for the
fi nancial period. CAPREIT and its subsidiaries are collectively referred
to as CAPREIT in these consolidated annual financial statements.
Subsidiaries are all entities over which CAPREIT has control. CAPREIT
controls an entity when CAPREIT is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
those returns through its power over the entity.
Subsidiaries are fully consolidated from the date control
commences and deconsolidated from the date that control ceases.
ii) Joint Arrangements
CAPREIT has joint arrangements in and joint control of a number of
properties. CAPREIT has assessed the nature of its joint arrangements
and determined them to be joint operations. Joint operations are
accounted for using the proportionate consolidation method. For joint
operations, CAPREIT recognizes its share of revenues, expenses, assets
and liabilities, which are included in their respective descriptions on
the consolidated balance sheets and consolidated statements of net
income. In general, CAPREIT has recourse against all of the assets
of the joint operations in the event that CAPREIT is called upon to
pay liabilities in excess of its proportionate share.
All balances and effects of transactions between joint operations
and CAPREIT have been eliminated to the extent of CAPREIT’s
interest in the joint operations.
D) INVESTMENT PROPERTIES
CAPREIT considers its income properties to be investment properties
under International Accounting Standards (“IAS”) 40, Investment
Property (“IAS 40”), and has chosen the fair value model to account
for its investment properties in the consolidated annual fi nancial
statements. Fair value represents the amount at which the properties
could be exchanged between a knowledgeable and willing buyer and
a knowledgeable and willing seller in an arm’s-length transaction at
the date of valuation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPREIT’s investment properties have been valued on a highest
and best use basis and do not include any portfolio premium that
may be associated with economies of scale of owning a large portfolio
or the consolidation value from having compiled a large portfolio
of properties over a long period of time, many through individual
property acquisitions.
Investment properties comprise investment interests held in land
and buildings (including integral equipment) held for the purpose of
producing rental income, capital appreciation, or both. CAPREIT’s
investments in its property portfolio reflect different forms of
property interests, including: (i) Fee Simple Interests – Apartments
and Townhomes, (ii) Operating Leasehold Interests, (iii) Land
Leasehold Interests and (iv) Fee Simple Interests – Manufactured
Home Communities Land Lease Sites. These four forms of
property interests meet the defi nition of investment property and
are classifi ed and accounted for as such. All investment properties
are recorded at their fair value at their respective acquisition dates
and are subsequently stated at fair value at each consolidated balance
sheet date with any gain or loss arising from a change in fair value
recognized within operating income in the consolidated statements
of income and comprehensive income for the period. For Operating
Leasehold Interests, all of which are held under a prepaid operating
lease, CAPREIT has classifi ed all such interests as fi nance leases,
including the fair value of options to purchase, and are accounted
for and presented as investment properties.
The fair value of investment properties is determined by qualifi ed
external appraisers annually. Management regularly undertakes
a review of its investment property valuation between external
appraisal dates to assess the continuing validity of the underlying
assumptions such as cash fl ows, capitalization rates and discount rates.
These assumptions are tested against market information obtained
from an independent appraiser. Where increases or decreases are
warranted, the carrying values of CAPREIT’s investment properties
are adjusted. See notes 3 and 6 for a detailed discussion of the
signifi cant assumptions, estimates and valuation methods used.
E) PROPERTY ASSET ACQUISITIONS
At the time of acquisition of a property or a portfolio of investment
properties, CAPREIT evaluates whether the acquisition is a business
combination or asset acquisition. IFRS 3, Business Combinations
(“IFRS 3”) is only applicable if it is considered that a business has been
acquired. A business according to IFRS 3, is defined as an integrated
set of activities and assets conducted and managed for the purpose
of providing a return to investors or lower costs or other economic
benefits directly and proportionately to CAPREIT.
When determining whether the acquisition of an investment
property or a portfolio of investment properties is a business
combination or an asset acquisition, CAPREIT applies judgment
when determining whether an integrated set of activities is acquired
in addition to the property or portfolio of properties. Activities can
include whether employees were assumed in the acquisition and an
operating platform has been acquired.
When an acquisition does not represent a business as defi ned
under IFRS 3, CAPREIT classifi es these properties or a portfolio of
properties as an asset acquisition. Identifi able assets acquired and
liabilities assumed in an asset acquisition are measured initially at
their fair values at the acquisition date. Acquisition-related transaction
costs are capitalized to the property.
F) PRESENTATION OF NON-CURRENT ASSETS
CLASSIFIED AS HELD-FOR-SALE
Investment properties are reclassifi ed to assets held-for-sale when
criteria set out in IFRS 5, Non-Current Assets Held-For-Sale and
Discontinued Operations, are met. CAPREIT presents non-current
assets classified as held-for-sale and their associated liabilities
separately from other assets and liabilities on the consolidated balance
sheets and in the notes beginning from the period in which they were
fi rst classifi ed as “for sale”. The sale of one or a group of investment
properties by CAPREIT will generally be presented as non-current
assets held-for-sale and not discontinued operations. If a group of
assets for sale is considered to meet the defi nition of a discontinued
operation, then income or expense recognized in the consolidated
statements of income and comprehensive income relating to that
group of assets is presented separately from continuing operations. A
discontinued operation is a component of operations that represents
a separate major line of business or geographic area of operations that
has been disposed of or is held-for-sale, or is a subsidiary acquired
exclusively with a view to resale.
G) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at historical cost less
accumulated depreciation and mainly comprise head office and
regional offi ces leasehold improvements, corporate and information
technology systems, and are presented within other non-current assets
on the consolidated balance sheets. These items are amortized on
a straight-line basis over their estimated useful lives ranging from
three to fi ve years, or, in the case of leasehold improvements, are
amortized over the leasehold improvement lease term ranging from
10 to 15 years.
H) TENANT INDUCEMENTS
Incentives such as cash, rent-free periods and move-in allowances
may be provided to lessees to enter into a lease. These incentives are
capitalized and amortized on a straight-line basis over the term of the
lease as a reduction of rental revenue. The carrying amounts of the tenant
inducements are included in the fair value of investment properties.
I) PREPAID CMHC PREMIUMS
Fees and insurance premiums paid to Canada Mortgage and Housing
Corporation (“CMHC”) are presented within other non-current assets.
They are amortized over the amortization period of the underlying
mortgage loans when incurred (initial amortization period is typically
25 to 35 years) and are included in interest and other fi nancing costs
in the consolidated statements of income and comprehensive income.
CAPREIT 2013 ANNUAL REPORT
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
J) FINANCIAL INSTRUMENTS
Financial assets and fi nancial liabilities
Financial assets and fi nancial liabilities are initially recognized at fair
value and are subsequently accounted for based on their classifi cation
as described below. Their classifi cation depends on the purpose
for which the fi nancial instruments were acquired or issued, their
characteristics and CAPREIT’s designation of such instruments. The
standards require that all fi nancial assets and fi nancial liabilities be
classifi ed as fair value through profi t or loss (“FVTPL”), loans and
receivables, available-for-sale, other liabilities or held-to-maturity.
Classifi cation of fi nancial instruments
The following summarizes the classification and measurement
CAPREIT has elected to apply to each of its signifi cant categories
of fi nancial instruments:
Type
Classifi cation
Measurement
Other receivables
Such receivables arise when CAPREIT provides services to a third
party, such as a tenant, and are included in current assets, except for
those with maturities more than 12 months after the consolidated
balance sheet date, which are classifi ed as non-current assets. Loans
and receivables are included in other assets in the consolidated
balance sheets and are accounted for at amortized cost.
Available-for-sale
Investments are measured at fair value at each consolidated balance
sheet date and the difference between the fair value of the asset and
its cost basis is included in other comprehensive income (“OCI”).
Differences included in accumulated other comprehensive loss
(“AOCL”) are transferred to net income when the asset is removed
from the consolidated balance sheets or an impairment loss on the
asset has to be recognized. Income on available-for-sale investments
is recognized as earned and included in other income.
Financial assets
Cash and cash equivalents Loans and receivables
Loans and receivables
Restricted cash
Loans and receivables
Other receivables
Available-for-sale
Investments
Amortized cost
Amortized cost
Amortized cost
Fair value
Other liabilities
Such fi nancial liabilities are recorded at amortized cost and include
all liabilities other than derivatives or liabilities, which are designated
to be accounted for at fair value.
Financial liabilities
Mortgages payable
Bank indebtedness
Accounts payable and
accrued liabilities and
other liabilities
Security deposits
Exchangeable Units
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Transaction costs
Transaction costs related to financial assets classified as FVTPL
are expensed as incurred. Transaction costs related to loans and
receivables and other liabilities, measured at amortized cost, are
netted against the carrying value of the asset or liability and amortized
over the expected life of the instrument using the effective interest
rate method. Transaction costs relating to available-for-sale fi nancial
assets are included in the cost of the asset on initial recognition.
Fair Value Through Profi t or Loss (“FVTPL”)
Financial instruments in this category are recognized initially and
subsequently at fair value. Gains and losses arising from changes
in fair value are presented within net income in the consolidated
statements of income and comprehensive income in the period in
which they arise. Financial assets and liabilities at FVTPL are classifi ed
as current, except for the portion expected to be realized or paid
beyond 12 months of the consolidated balance sheet date, which is
classifi ed as non-current. Derivatives are also categorized as FVTPL
unless designated as hedges.
Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash and short-term investments
with an original maturity of three months or less. Restricted cash does
not meet the defi nition of cash and cash equivalents and is included
in other assets in the consolidated balance sheet. Interest earned or
accrued on these fi nancial assets is included in other income.
Determination of fair value
The fair value of a fi nancial instrument on initial recognition is generally
the transaction price, which is the fair value of the consideration given
or received. Subsequent to initial recognition, the fair value of fi nancial
instruments is remeasured based on relevant market data. CAPREIT
classifi es the fair value for each class of fi nancial instrument based on
the fair value hierarchy. The fair value hierarchy distinguishes between
market value data obtained from independent sources and CAPREIT’s
own assumptions about market value. See note 15 for a detailed
discussion of valuation methods used for fi nancial instruments quoted
on an active market and instruments valued using observable data.
Derivatives
Derivative fi nancial instruments are initially recognized at fair value
on the date a derivative contract is entered into and subsequently
re-measured at fair value. The method of recognizing the resulting
gain or loss depends on whether the derivative fi nancial instrument
is designated as a hedging instrument and, if so, the nature of the
item being hedged. For CAPREIT’s accounting policy on hedging,
see Hedging relationships section below.
76
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivatives not designated in a hedging relationship are measured
at fair value with changes therein recognized directly through the
consolidated statements of income and comprehensive income (loss)
within net income.
foreign operations. The effective portion of foreign exchange gains
and losses on the Euro-denominated debt is recognized in OCI and
the ineffective portion is recognized in net earnings.
Embedded derivatives
Derivatives embedded in other fi nancial instruments or contracts are
separated from their host contracts and accounted for as derivatives
when their economic characteristics and risks are not closely related
to those of the host contract; the terms of the embedded derivative
are the same as those of a free-standing derivative; and the combined
instrument or contract is not measured at fair value. These embedded
derivatives are measured at fair value with changes therein recognized
within net income in the consolidated statements of income and
comprehensive income.
CAPREIT has concluded that it does not have any outstanding
contracts or fi nancial instruments with embedded derivatives that
require bifurcation.
K) HEDGING RELATIONSHIPS
CAPREIT has designated its interest rate swap agreement and forward
interest rate contracts as cash fl ow hedges. At the inception of the
transaction, CAPREIT documents the relationship between hedging
instruments and hedged items, as well as its risk management objectives
and strategy for undertaking various hedging transactions. CAPREIT
also documents, both at hedge inception and on an ongoing basis, its
assessment of whether the derivatives used in hedging transactions are
highly effective in offsetting changes in cash fl ows of hedged items.
The effective portion of changes in the fair value of derivatives that
are designated and qualify as cash fl ow hedges is recognized in other
comprehensive income. The gain or loss relating to the ineffective
portion is recognized immediately in the consolidated statements
of income and comprehensive income under net income. Should a
hedging relationship become ineffective and/or hedge accounting
become no longer appropriate, previously unrealized gains and losses
remain within AOCL and are amortized to the relevant item in the
consolidated statements of income and comprehensive income in
the same periods during which the hedged items affect earnings,
while future changes in the fair value of the hedging derivatives
are recognized within net income in the consolidated statements of
income and comprehensive income.
As CAPREIT is operating the Dublin acquisition in a foreign
jurisdiction, it is exposed to foreign currency fluctuations arising
between the functional currency of the foreign operation (that is,
Euros) and the functional currency of CAPREIT (that is, Canadian
dollars). As such, CAPREIT entered into a hedge effective at the date
of the Dublin acquisition (September 10, 2013). CAPREIT has hedged
the investment in the Dublin foreign operations against the Euro-
denominated debt on CAPREIT’s balance sheet. Any foreign currency
gain/loss arising from the Euro-denominated debt will be offset by the
foreign currency gain/loss arising from the investment in the Dublin
L) MORTGAGES PAYABLE AND BANK INDEBTEDNESS
Mortgages payable are recognized at amortized cost using the
effective interest rate method. Under the effective interest rate
method, any transaction fees, costs and discounts directly related to
the mortgage are recognized within interest and other fi nancing costs
in the consolidated statements of income and comprehensive income
over the expected term of the mortgage. Mortgage maturities and
repayments due more than 12 months after the consolidated balance
sheet date are classifi ed as non-current.
M) EXCHANGEABLE UNITS
Issued and outstanding Units of CAPLP are exchangeable on demand
for Trust Units (“Exchangeable Units”). As the Trust Units are
redeemable at the holder’s option, the Exchangeable Units are classifi ed
as current liabilities. The distributions on the Exchangeable Units are
recognized in the consolidated statements of income and comprehensive
income (loss) as interest expense under IFRS and the interest payable
at the reporting date is reported under other current liabilities on the
consolidated balance sheets. These Exchangeable Units are remeasured
at each reporting date at their amortized cost, which approximates fair
value, as they are considered to be puttable instruments under IAS 32,
with changes in the carrying amount recognized as fair value adjustments
of exchangeable units within net income in the consolidated statements
of income and comprehensive income (loss).
N) COMPREHENSIVE INCOME
Comprehensive income includes net income and other comprehensive
income (loss). Other comprehensive income (loss) includes changes
in the fair value of investments and the effective portion of cash fl ow
hedges less any amounts reclassifi ed to interest and other fi nancing
costs and the associated income taxes.
O) ACCUMULATED OTHER COMPREHENSIVE LOSS (“AOCL”)
AOCL is included in the consolidated balance sheets as Unitholders’
Equity and includes the unrealized gains and losses of the changes in
the fair value of cash fl ow hedges, derivatives and investments. The
components of AOCL are disclosed in note 19.
P) REVENUE RECOGNITION
CAPREIT recognizes rental revenue using the straight-line method,
whereby the total amount of rental revenue to be received from all
leases is accounted for on a straight-line basis over the term of the
related leases. The difference between the rental revenue recognized
and the amounts contractually due under the lease agreements is
accrued as rent receivable, which is included as a component of
investment properties on the consolidated balance sheets.
Other income includes interest, dividends and other income.
Interest and dividend income are recognized as earned.
CAPREIT 2013 ANNUAL REPORT
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Q) BORROWING COSTS AND INTEREST ON MORTGAGES PAYABLE
Interest and other fi nancing costs includes mortgage interest, which is expensed at the effective interest rate, and transaction costs incurred
in connection with the revolving credit facilities, which are capitalized and presented as other non-current assets and amortized over the
term of the facility to which they relate.
R) DISTRIBUTIONS
Distributions represent the monthly cash distributions on outstanding Trust Units.
S) UNIT-BASED COMPENSATION AND INCENTIVE PLANS
Unit-based compensation benefi ts are provided to offi cers, trustees and certain employees and are intended to facilitate long-term ownership
of Trust Units and provide additional incentives by increasing the participants’ interest, as owners, in CAPREIT. Unit-based compensation
liabilities are classifi ed as current, except for the portion expected to be realized or paid beyond 12 months of the consolidated balance
sheet date, including amounts classifi ed as non-current, where CAPREIT has the unconditional right to defer settlement of vested awards.
CAPREIT accounts for its Unit-based compensation plans using the fair value-based method, under which compensation expense is
recognized over the vesting period. The key drivers of recognition and measurement of compensation expense are summarized as follows:
Incentive Plan (1)
Type
Vesting Period
Type of Amortization
Distributions applied to Mark-to-Market until
LTIP
SELTIP
DUP
RUR Plan
UOP
Issued Units
Issued Units
Rights
Rights
Options
2 years (2)
2 years (2)
Grant date
3 years
Grant date
Graded
Graded
Immediate
Straight-line
Immediate
Secured loan
Secured loan
Additional Units
Additional Units
N/A
Loan repaid
Loan repaid
Issued
Issued
Exercised
(1) For defi nitions of these plans, refer to notes 11, 12 and 13.
(2) Vesting one-third on grant date and one-third on each of the subsequent two grant anniversary dates.
T) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash and cash equivalents consist of cash on hand, balances with
banks and investments in money market instruments with an
original term to maturity of 90 days or less at acquisition. Investing
and fi nancing activities that do not require the use of cash or cash
equivalents are excluded from the consolidated statements of cash
fl ows and are disclosed separately in the notes to the consolidated
annual fi nancial statements.
the carrying amounts of assets and liabilities and their carrying amounts
for tax purposes. Future income taxes are measured at the tax rates
expected to apply in the future when temporary differences reverse.
Changes to future income taxes related to changes in tax rates that have
been enacted or substantially enacted to the balance sheet date and
are expected to apply when temporary differences reverse. Changes to
deferred income taxes related to changes in tax rates are recognized in
income in the period when the tax rate change is substantially enacted.
U) INCOME TAXES
CAPREIT is taxed as a Mutual Fund Trust for income tax purposes
and intends, at the discretion of the Board of Trustees, to distribute
its income for income tax purposes each year to Unitholders to such
an extent that it would not be liable for income tax under Part I of
the Income Tax Act (Canada) (“Tax Act”). Accordingly, no provision
for current income taxes payable is required. For a comprehensive
discussion of CAPREIT’s liability for tax purposes, see note 18.
CAPREIT and its wholly-owned subsidiaries satisfi ed certain
conditions available to Real Estate Investment Trusts (“REITs”) (the
“REIT Exception”) under amendments to the Tax Act intended to
permit a corporate income tax rate of nil as long as the specifi ed
conditions continue to be met.
CAPREIT uses the liability method of accounting for deferred
income taxes due to CAPREIT’s tax structure relating to its investment
in Dublin, Ireland. The deferred income tax liability represents the
cumulative amount of taxes applicable to temporary differences between
V) EARNINGS PER UNIT
As a result of the redemption feature of CAPREIT’s Trust Units, these
Units are considered fi nancial liabilities under IAS 33, Earnings per
Share, and they may not be considered equity for the purposes of
calculating net income on a per Unit basis. Consequently, CAPREIT
has elected not to report an Earnings per Unit calculation, as permitted
under IFRS.
W) FOREIGN CURRENCY TRANSLATION
Under IAS 21, The Effects of Changes in Foreign Exchange Rates,
the functional currency of CAPREIT’s operating subsidiary in Dublin,
Ireland is the Euro, which is the primary currency in the economic
environment in which the entity operates. As CAPREIT’s consolidated
fi nancial statements are presented in Canadian dollars, which is the
group’s presentation currency, the Dublin, Ireland operations are
translated into Canadian dollars as follows:
78
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a. assets and liabilities for the balance sheet presented are translated
at the closing exchange rate at the date of that balance sheet;
b. income and expenses are translated at average exchange rates
(unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates,
in which case income and expenses are translated at the rate on
the dates of the transactions); and
c. all resulting exchange differences are recognized in other
comprehensive income.
On consolidation, exchange differences arising from the translation of
the net investment in foreign operations, and of borrowings and other
currency instruments designated as hedges of such net investments,
are recorded to other comprehensive income. When a foreign
operation is partially disposed of or sold, exchange differences that
were recorded in equity are recognized in the consolidated statements
of income as part of the gain or loss on sale.
Foreign currency transactions are translated into the functional
currency using exchange rates prevailing at the date of the transactions.
At the end of each reporting period, foreign currency denominated
monetary assets and liabilities are translated into the functional
currency using the prevailing rate of exchange at the balance sheet
date. Gains and losses on translation of monetary items are recognized
in the consolidated statements of income.
X) ACCOUNTING CHANGES APPLIED IN 2013
IFRS 11, Joint Arrangements (“IFRS 11”)
CAPREIT has applied IFRS 11 to all joint arrangements as of January 1,
2013. See note 2 section C for further details of the accounting impact.
IFRS 12, Disclosure of Interests in Other Entities (“IFRS 12”)
CAPREIT has applied IFRS 12 to all joint arrangements for the year
ended December 31, 2013. See note 2 section C for further details
of the accounting impact.
IAS 28, Investments in Associates and Joint Ventures (“IAS 28”)
CAPREIT concluded that this standard is not applicable for the year
ended December 31, 2013. See note 2 section C for further details
of the accounting impact.
IFRS 13, Fair Value Measurement (“IFRS 13”)
CAPREIT has applied IFRS 13 for the year ended December 31,
2013. See notes 6 and 15 for further details of the accounting impact.
Y) FUTURE ACCOUNTING CHANGES
As at February 28, 2014, the following new or amended IFRS have
been issued by the International Accounting Standards Board
(“IASB”) and are expected to apply to CAPREIT for annual reporting
periods beginning after December 31, 2013:
Amendments to IAS 32, Financial Instruments: Presentation, on
asset and liability offsetting
These amendments are to the application guidance in IAS 32, Financial
instruments: Presentation, and clarify some of the requirements for
offsetting fi nancial assets and fi nancial liabilities on the balance sheet.
This standard is applicable to annual reporting periods beginning on
or after January 1, 2014, with early application permitted.
Amendment to IAS 36, Impairment of Assets on Recoverable
Amount Disclosures
This amendment addresses the disclosure of information about the
recoverable amount of impaired assets if that amount is based on
fair value less costs of disposal. This standard is applicable to annual
reporting periods beginning on or after January 1, 2014, with early
application permitted.
Financial Instruments: Recognition and Measurement Amendment
to IAS 39, Novation of derivatives
This amendment provides relief from discontinuing hedge accounting
when novation of a hedging instrument to a central counterparty meets
specifi ed criteria. This standard is applicable to annual reporting
periods beginning on or after January 1, 2014.
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classifi cation
and measurement of fi nancial liabilities over the existing derecognition
requirements from IAS 39, Financial Instruments: Recognition
and Measurement. IFRS 9 also introduces new requirements for
classifying and measuring fi nancial assets; specifi cally, investments
in equity instruments can be designated as “fair value through other
comprehensive income” with only dividends being recognized in
profi t or loss. IFRS 9 was further amended in November 2013 to:
(i) include guidance on hedge accounting, (ii) allow entities to early
adopt the requirement to recognize changes in fair value attributable
to changes in an entity’s own credit risk, from fi nancial liabilities
designated under the fair value option, in OCI (without having
to adopt the remainder of IFRS 9) and (iii) remove the previous
mandatory effective date of January 1, 2015.
IFRS 10, Consolidated Financial Statements (“IFRS 10”)
CAPREIT has applied IFRS 10 as of January 1, 2013. See note 2
section C for further details of the accounting impact.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from IAS 39
to IFRS 9. Effective on adoption of IFRS 9.
IAS 27, Separate Financial Statements (“IAS 27”)
CAPREIT concluded that this standard is not applicable for the year
ended December 31, 2013.
CAPREIT 2013 ANNUAL REPORT
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPREIT is currently assessing the impact of the above standards
and amendments but does not expect to be signifi cantly impacted on
adoption in its current form.
IFRIC 21, Levies
This is an interpretation of IAS 37, Provisions, Contingent Liabilities
and Contingent Assets. IAS 37 sets out criteria for the recognition of a
liability, one of which is the requirement for the entity to have a present
obligation as a result of a past event (known as an obligating event).
The interpretation clarifi es that the obligating event that gives rise to a
liability to pay a levy is the activity described in the relevant legislation
that triggers the payment of the levy. This standard is applicable
to annual reporting periods beginning on or after January 1, 2014.
CAPREIT is currently assessing the impact of this standard.
3. Critical Accounting Estimates,
Assumptions and Judgements
The preparation of consolidated annual financial statements in
accordance with IFRS requires the use of estimates, assumptions
and judgements that in some cases relate to matters that are inherently
uncertain, and which affect the amounts reported in the consolidated
annual fi nancial statements and accompanying notes. Areas of such
estimation include, but are not limited to: valuation of investment
properties, remeasurement at fair value of fi nancial instruments,
valuation of accounts receivable, capitalization of costs, accounting
accruals, the amortization of certain assets, accounting for deferred
income taxes and Unit-based compensation financial liabilities.
Changes to estimates and assumptions may affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated annual fi nancial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could also differ from
those estimates under different assumptions and conditions.
The estimates deemed to be more signifi cant, due to subjectivity
and the potential risk of causing a material adjustment within the
next fi nancial year to the carrying amounts of assets and liabilities,
are discussed below.
i) Valuation of investment properties
Investment properties are measured at fair value as at the
consolidated balance sheet dates. Any changes in the fair value
are included within net income in the consolidated statements of
income and comprehensive income. Fair value is supported by
independent external valuations or detailed internal valuations
using market-based assumptions, each in accordance with
recognized valuation techniques. The techniques used comprise
both the capitalized net operating income method and the
discounted cash flow method and include estimating, among
other things (all considered Level 3 inputs), future stabilized net
operating income, capitalization rates, reversionary capitalization
rates, discount rates and other future cash flows applicable
to investment properties. Fair values for investment properties
are classifi ed as Level 3 in the fair value hierarchy as disclosed
in note 15.
The fair value of investment properties is established by
qualifi ed, independent appraisers annually. Each quarter, CAPREIT
utilizes market assumptions for rent increases, capitalization and
discount rates provided by the external appraiser to determine
the fair value of the investment properties for interim reporting
purposes. Capitalization rates employed by the appraiser are based
on recently closed transactions, generally within the last three
months, and other current market indicators for similar properties.
CAPREIT’s internal valuations and the independent appraisals
are both subject to significant judgements, estimates and
assumptions about market conditions in effect as at the consolidated
balance sheet date. See note 6 for a detailed discussion of valuation
methods and the signifi cant assumptions and estimates used.
ii) Valuation of fi nancial instruments
The fair value of derivative assets and liabilities is based on
assumptions that involve significant estimates. The basis of
valuation for CAPREIT’s derivatives is set out in note 15; however,
the fair values of derivatives reported may differ from how they
are ultimately recognized if there is volatility in interest rates or
energy prices between the valuation date and settlement date.
iii) Unit-based compensation
The fair values of Unit-based compensation fi nancial liabilities are
based on assumptions that involve signifi cant estimates. The basis
of valuation for CAPREIT’s Unit-based compensation fi nancial
liabilities is set out in note 12; however, the fair values as at the
reporting date may differ materially from how they are ultimately
recognized if there is volatility in listed Unit prices, interest rates or
other key assumptions between the valuation date and settlement
date. Market assumptions, estimates and valuation methodology
are discussed in note 12.
80
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Recent Investment Property Acquisitions
CAPREIT completed the following investment property acquisitions since January 1, 2012, which have contributed to the operating results
effective from their respective acquisition dates:
For the Year Ended December 31, 2013
November 29, 2013 (3)
October 22, 2013 (4)
October 10, 2013
September 10, 2013
August 28, 2013 (7)
May 31, 2013
May 15, 2013
January 31, 2013
Suite or
Site Count
2,308
740
2
338
770
114
396
263
4,931
Region(s)
New Brunswick
Prince Edward Island
Bowmanville
Dublin, Ireland
Various
Calgary
Toronto
Calgary
Total
Acquisition Costs
Assumed
Mortgage Funding
Term
to Maturity
Interest Rate (1)
(Years) (2)
$
71,782
36,393
170
61,431
153,894
25,812
58,019
49,022
$
– (5)
– (5)
10,274
4.49%
– (5)
– (6)
9,475
11,041
– (5)
– (6)
3.62%
4.25%
– (5)
– (5)
7,181
6.95%
– (5)
1.8
– (5)
– (6)
0.9
1.6
– (5)
4.7
$
456,523
$
37,971
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The acquisition comprised of 2,308 land lease sites in eleven communities in New Brunswick.
(4) The acquisition comprised of 240 suites (132 mid-tier and 108 luxury suites) and 500 land lease sites in four communities located in
Charlottetown and Cornwall, Prince Edward Island.
(5) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see note 10).
(6) The acquisition was primarily funded from CAPREIT’s €45,000 fi ve-year non-revolving Euro-denominated credit facility at an all-in interest rate
of 3.22% (see note 10).
(7) The acquisition comprised 10 properties consisting of 770 suites (597 mid-tier and 173 luxury suites) located in British Columbia,
Ontario, and Québec.
For the Year Ended December 31, 2012
Suite or
Site Count
Region(s)
Total
Acquisition Costs
Assumed
Mortgage Funding
Term
to Maturity
Interest Rate (1)
(Years) (2)
November 1, 2012
August 31, 2012 (3)
July 19, 2012 (4)
June 29, 2012 (6)
May 31, 2012 (7)
980
405
Greater Montréal Region
Calgary
5 Bowmanville and Grand Bend
Various
Various
3,562
2,032
$
183,516
69,501
499
461,428
76,324
$
82,048
31,208
4.39%
3.38%
0.8
1.7
– (5)
– (5)
– (5)
183,939
37,753
3.99%
5.33%
2.6
3.0
6,984
$
791,268
$
334,948
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The acquisition comprised two mid-tier properties. One property is a fee simple interest and the other is a land leasehold interest.
(4) The MHC land lease sites acquisition comprised four sites in Bowmanville and one site in Grand Bend.
(5) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see note 10).
(6) The acquisition comprised 14 properties consisting of 3,562 suites (1,027 affordable, 1,403 mid-tier and 1,132 luxury) located in
Ontario, Québec and Nova Scotia.
(7) The acquisition comprised 12 manufactured home communities (“MHC”) located in Ontario, Saskatchewan, Alberta and British Columbia.
The total purchase consideration including mortgages payable and bank indebtedness is allocated to investment properties and other
assets acquired based on the relative fair value of each at the time of purchase.
CAPREIT 2013 ANNUAL REPORT
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investment Property Dispositions
The tables below summarize the investment property dispositions completed since January 1, 2012. These dispositions do not meet the
defi nition of discontinued operations under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
Dispositions Completed During the Year Ended December 31, 2013
August 28, 2013
Suite Count
Region
604
604
Greater Toronto Area (1)
Sale Price
94,250
94,250
$
$
Cash Proceeds
Mortgage Discharged
$
$
57,672
57,672
$
$
34,772
34,772
(1) The disposition comprised 5 properties located in Mississauga and Toronto, Ontario.
Dispositions Completed During the Year Ended December 31, 2012
October 31, 2012
May 31, 2012
February 22, 2012
Suite Count
438
199
136
773
Region
Various (1)
Greater Toronto Area
Greater Toronto Area
Sale Price
60,700
33,500
17,500
111,700
$
$
Cash Proceeds
Mortgage Discharged
$
$
29,944
17,974
7,726
55,644
$
$
29,018
15,030
9,485
53,533
(1) The disposition comprised fi ve properties located in Mississauga, Oakville and Toronto, Ontario. For the year ended December 31, 2013, a loss
of $811 was recognized in connection with the property dispositions.
For the year ended December 31, 2012, a loss of $1,613 was recognized in connection with the property dispositions. The loss represents
the difference between the net proceeds after transaction costs from the disposition compared to the fair value of the respective properties
at the date of disposition.
6. Investment Properties
VALUATION BASIS
Investment properties are carried at fair value, which is the amount at
which the individual properties could be sold between willing parties in
an arm’s-length transaction, based on current prices in an active market
for similar properties in the same location, considering the highest and
best use of the asset, with any gain or loss arising from a change in fair
value recognized in the consolidated statements of income and com-
prehensive income for the period. Valuations do not take into account
any potential portfolio premium.
The fair values of all of CAPREIT’s investment properties are deter-
mined by qualifi ed external appraisers annually. The qualifi ed external
appraisers hold a recognized relevant professional qualifi cation and
have recent experience in the location and category of the respective
property. Each quarter, CAPREIT utilizes market assumptions for rent
increases, capitalization and discount rates provided by the external
appraisers to determine the fair value of the investment properties. Cap
rates employed by the appraisers are based on recently closed transac-
tions for similar properties. To the extent that the stabilized forecasted
cash fl ows of an investment property change signifi cantly in a quarter,
the fair value of the investment property would be re-assessed by the
external appraisers and the fair value adjusted accordingly.
Fair values for investment properties are classifi ed as Level 3 in the
fair value hierarchy as disclosed in note 15. On an annual basis,
CAPREIT verifi es all major inputs (as detailed above) to the valuation and
reviews the results with the external appraiser for all the independent valu-
ations. On a quarterly basis, the market assumptions for rent increases,
82
CAPREIT 2013 ANNUAL REPORT
capitalization and discount rates provided by the external appraisers
are verifi ed in determining the fair value of the investment properties.
Discussion of the valuation process, the valuation methodology (as
mentioned below), key inputs and results are held between CAPREIT
and the qualifi ed external appraisers at least once every quarter, in line
with CAPREIT’s quarterly reporting dates.
Changes in Level 3 fair values are analyzed at each reporting date
as part of the quarterly valuation discussions between CAPREIT and
the qualifi ed external appraisers. As part of this discussion, the external
valuators present a report that explains the reasons for the fair value
movements.
To determine fair value, CAPREIT first considers whether it can
use current prices in an active market for a similar property in the same
location and condition. CAPREIT has concluded there is insufficient
market evidence on which to base investment property valuation using
this approach, and has therefore determined to use the Direct Income
Capitalization (“DC”) and Discounted Cash Flow (“DCF”) methods to
arrive at the fair value of the investment properties. Investment proper-
ties have been valued using the following methods and key assumptions:
a) Fee Simple and MHC Land Lease Sites
CAPREIT utilizes the DC method. Under this method, capital-
ization rates are applied to a stabilized net operating income
(“NOI”) representing market-based NOI assumptions (property
revenue less property operating expenses adjusted for market-based
assumptions such as long-term vacancy rates, management fees,
R&M costs, and general and administration costs). The most
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
signifi cant assumption is the capitalization rate for each specifi c
property. The capitalization rate is based on actual location, size and
quality of the property, taking into account any available market data
at the valuation date. Generally, an increase in stabilized NOI will
result in an increase to the fair value of an investment property. An
increase in the capitalization rate will result in a decrease to the fair
value of an investment property. The capitalization rate magnifi es
the effect of a change in stabilized NOI, with a lower capitalization
rate resulting in a greater effect of a change in stabilized NOI than
a higher capitalization rate.
b) Operating Leasehold Interests
CAPREIT utilizes the DCF method. Under this method, discount
rates are applied to the forecasted cash fl ows refl ecting market-based
leasing assumptions for that specifi c property as well as assump-
tions about renewal and new leasing activity. The most signifi cant
assumption is the discount rate applied over the initial term of
the lease. The discount rate is generally the appropriate weighted
average cost of capital that refl ects the risk of the cash fl ows for
the investment property. In the case of one property, the forecasted
cash fl ow is adjusted for contractual air rights payments and the
discount rate is adjusted for uncertainty regarding the renegotiation
of the air rights lease at the end of the term. Generally, an increase
in forecasted cash fl ows will result in an increase to the fair value of
an investment property. An increase in the discount rate will result
in a decrease to the fair value of an investment property.
c) Options to Purchase the Related Operating Leasehold Interests
CAPREIT utilizes the DC method at the reversion date (option ex-
ercise date) to estimate the future value, which is then discounted to
a present value. Under this method, the stabilized income is adjusted
to a projected NOI as at the end of the operating lease term and
the capitalization rate is adjusted to a “Reversionary Capitalization
Rate” refl ecting the incremental risk associated with future uncer-
tainty. The value of the option is then determined based on the dif-
ference between the estimated fair value of the property at such date
and the option buyout price, discounted back to its present value
using a risk-adjusted discount rate (the “Option Discount Rate”).
d) Land Leasehold Interests
CAPREIT utilizes the DCF method for properties that are subject
to land or air rights leases. Under this method, discount rates are
applied to the forecasted cash fl ows refl ecting market-based leasing
assumptions for that specifi c property as well as assumptions about
renewal and new leasing activity. The most signifi cant assumption
is the discount rate applied over the term of the lease. Forecasted
cash fl ows are reduced for contractual land lease payments and the
discount rates refl ect the uncertainty regarding the renegotiation of
land lease payments during and at the end of the term of the leases.
A summary of the market assumptions and ranges for each type of
property interest along with their fair values is presented below as at
December 31, 2013 and December 31, 2012:
As at December 31, 2013
Type of Interest
Fair Value
WA NOI/
Cash Flow
Rate Type
Fee Simple Interests – Apartments
and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests (1),(2),(3)
Land Leasehold Interests (1)
Total Investment Properties
$ 4,505,945
264,150
497,913
191,210
$ 5,459,218
2,480
2,253
2,932
3,200
Capitalization rate
Capitalization rate
Discount rate (4)
Discount rate
As at December 31, 2012
Type of Interest
Fair Value
WA NOI/
Cash Flow
Rate Type
Fee Simple Interests – Apartments
and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests (1),(2),(3)
Land Leasehold Interests (1)
Total Investment Properties
$ 3,996,120
173,620
471,185
185,430
$ 4,826,355
2,485
2,592
2,799
3,142
Capitalization rate
Capitalization rate
Discount rate (4)
Discount rate
Max
Min
7.34%
7.25%
7.00%
7.25%
3.50%
4.03%
6.00%
7.00%
Max
Min
6.50%
7.52%
7.75%
7.75%
3.50%
5.87%
6.00%
7.15%
Weighted
Average
5.04%
6.07%
6.25%
7.08%
Weighted
Average
5.19%
6.25%
6.36%
7.52%
(1) The fair values of Operating Leasehold Interests subject to a contractual air rights lease and Land Leasehold Interests subject to land leases
refl ect the estimated land lease or air rights payments over the term of the leases.
(2) The fair values of Operating Leasehold Interests include the fair values of the Options to purchase the related freehold interests of $49,863 and
$36,645 as at December 31, 2013 and December 31, 2012, respectively.
(3) The weighted average (“WA”) remaining lease term on Operating Leasehold Interests is 19.8 years as at December 31, 2013 (20.8 years –
December 31, 2012).
(4) Represents the discount rate used to determine the fair value for Operating Leasehold Interests using the Discounted Cash Flow (“DCF”) method.
A weighted average stabilized Net Operating Income (“NOI”) growth of 2.5% has been assumed as at December 31, 2013 and December 31, 2012.
CAPREIT 2013 ANNUAL REPORT
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of carrying amounts of investment properties by type
For the Year Ended December 31, 2013
Fee Simple and
MHC Land Lease Sites
Operating
Leasehold Interests
Land Leasehold
Interests
Total
Balance at the beginning of the year
Additions:
Acquisitions
Property capital investments
Capitalized leasing costs (1)
Foreign currency translation
Dispositions
Realized loss on dispositions of investment properties
Unrealized fair value adjustments
Balance of Investment Properties at end of year
$
4,169,740
$
471,185
$
185,430
$ 4,826,355
456,523
135,515
458
3,208
(93,439)
(811)
98,901
4,770,095
$
–
18,285
211
–
–
–
8,232
497,913
$
–
6,420
23
–
–
–
(663)
191,210
$
456,523
160,220
692
3,208
(93,439)
(811)
106,470
$ 5,459,218
(1) Comprises tenant inducements, straight-line rent and direct leasing costs.
For the Year Ended December 31, 2012
Fee Simple and
MHC Land Lease Sites
Operating
Leasehold Interests
Land Leasehold
Interests
Total
Balance at the beginning of the year
Additions:
Acquisitions
Property capital investments
Capitalized leasing costs (1)
Dispositions
Realized loss on dispositions of investment properties
Unrealized fair value adjustments
Balance of Investment Properties at end of year
$
3,131,900
$
435,907
$
145,930
$ 3,713,737
765,853
117,772
481
(109,589)
(1,613)
246,936
4,169,740
$
–
12,399
315
–
–
22,564
471,185
$
25,415
3,115
242
–
–
10,728
185,430
$
791,268
133,286
1,038
(109,589)
(1,613)
298,228
$ 4,826,355
(1) Comprises tenant inducements, straight-line rent and direct leasing costs.
84
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Other Assets
9. Mortgages Payable
As at
December 31, 2013
December 31, 2012
Other Non-Current Assets
Property, plant and equipment (1)
Accumulated amortization of
$
18,139
$
15,613
property, plant and equipment
(11,928)
Net property, plant and equipment
Investments (2)
Prepaid CMHC premiums, net (3)
Deferred loan costs, net (4)
Hedge asset (note 16(b))
6,211
22,676
47,638
2,039
3,699
(9,750)
5,863
34,526
38,626
2,058
–
Total
$
82,263
$
81,073
Other Current Assets
Prepaid expenses
Other receivables
Restricted cash
Deposits
Total
$
2,658
4,886
4,852
5,057
$
2,096
5,188
3,744
3,090
$
17,453
$
14,118
(1) Consists of head offi ce and regional offi ces’ leasehold improvements,
corporate and information technology systems.
(2) CAPREIT sold investments with a realized gain of $1,737
(December 31, 2012 – $1,455).
(3) Represents prepaid CMHC premiums on mortgages payable net of
accumulated amortization of $11,408 (December 31, 2012 – $9,347).
(4) Represents deferred loan costs related to the revolving credit
facilities net of accumulated amortization of $5,899
(December 31, 2012 – $4,866).
8. Other Liabilities
As at
December 31, 2013
December 31, 2012
Note
Other Non-Current Liabilities
Hedge liability
16(b)
Total
Other Current Liabilities
Hedge liability
Mortgage interest payable
16(c)
$
$
$
1,121
1,121
232
7,018
$
$
$
–
–
4,352
6,806
Total
$
7,250
$
11,158
As at December 31, 2013, mortgages payable bear interest at a
weighted average effective rate of 3.94% (December 31, 2012 –
4.05%), and mature between 2014 and 2027. The effective interest
rate as at December 31, 2013 includes 0.18% (December 31, 2012
– 0.18%) for the amortization of the realized component of the loss
on settlement of derivative fi nancial instruments of $32,494 included
in AOCL. All but $28,160 or 1.2% of CAPREIT’s mortgages payable
are fi nanced at fi xed interest rates. The investment properties at fair
value of $5,188,128 have been pledged as security as at December 31,
2013. CAPREIT has investment properties with a fair value of
$271,090 as at December 31, 2013 that are not encumbered by
mortgages and secure only the Acquisition and Operating Facility.
As at December 31, 2013, unamortized deferred financing costs
of $6,631 and fair value adjustments of ($8,494) are netted against
mortgages payable.
Future principal repayments ending December 31 for the years
indicated are as follows:
As at December 31, 2013
2014
2015
2016
2017
2018
Subsequent to 2018 (1)
Principal
Amount
% of Total
Principal
$
441,105
218,907
133,692
220,659
214,009
1,226,947
2,455,319
18.0
8.9
5.4
9.0
8.7
50.0
100.0
Deferred fi nancing costs
and fair value adjustments
1,863
$ 2,457,182
As at
Represented by:
Mortgages Payable – non-current (1)
Mortgages Payable – current
December 31, 2013
December 31, 2012
2,016,077
441,105
$
1,790,772
398,784
$
$ 2,457,182
$ 2,189,556
(1) Included in mortgages payable as at December 31, 2013 is a $65,000
non-amortizing credit facility on two of the MHC land lease sites as
well as a €45,000 non-amortizing Euro-denominated credit facility.
CAPREIT 2013 ANNUAL REPORT
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Bank Indebtedness
CAPREIT renewed and amended the Credit Facilities, which include the existing $280,000 acquisition and operating facility (“Acquisition
and Operating Facility”), the existing $65,000 fi ve-year non-revolving term credit facility bearing interest at the bankers’ acceptance rate
plus 1.4% per annum (included in mortgages payable), and a new €45,000 fi ve-year non-revolving Euro-denominated term credit facility
bearing interest at the EURIBOR rate plus 2.0% per annum (included in mortgages payable) (collectively, the “Credit Facilities”). The
€45,000 Euro-denominated term credit facility is effective September 4, 2013. The interest rate on the Acquisition and Operating Facility is
determined by the interest rates on the prime advances and bankers’ acceptances utilized during the year. The Acquisition and Operating
Facility matures June 30, 2016. The Credit Facilities are subject to compliance with the various provisions of the Credit Facilities in order
to fund operations, acquisitions, capital improvements, letters of credit and other uses.
As at December 31, 2013
Facility
Less:
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
As at December 31, 2012
Facility
Less:
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
Acquisition and Operating Facility (1),(2)
$
280,000
(187,030)
(6,527)
$
86,443
3.02%
Acquisition and Operating Facility (1),(2)
$
280,000
(147,316)
(6,388)
$
126,296
3.27%
(1) Effective June 30, 2012, the Land Lease Facility of $10,000 was combined with the Acquisition and Operating Facility.
(2) As at December 31, 2012, the Bridge Loan aggregating to $140,000 was fully repaid from the net proceeds of the equity offering completed
on December 4, 2012.
11. Unit-based Compensation Financial Liabilities and Exchangeable Units
Units are issuable pursuant to CAPREIT’s Unit-based compensation plans, namely, the Unit Option Plan (“UOP”), the Employee Unit
Purchase Plan (“EUPP”), the Unit Purchase Plan (“UPP”), the Long-term Incentive Plan (“LTIP”), the Senior Executive Long-term Incentive
Plan (“SELTIP”), the Deferred Unit Plan (“DUP”) and the Restricted Unit Rights (“RUR”) Plan (each of which is more fully described
in note 12). As at December 31, 2013, the maximum number of Units issuable under all of CAPREIT’s Unit-based incentive plans is
7,000,000 Units (December 31, 2012 – 7,000,000). The maximum number of Units available for future issuance under all Unit incentive
plans as at December 31, 2013 is 362,583 Units (December 31, 2012 – 511,020 Units).
86
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s incentive plans and exchangeable units as at December 31,
2013 and 2012 are as follows:
(Number of Units)
Year Ended December 31, 2013
Units, Unit Rights and Unit Options outstanding as at January 1, 2013
Issued, cancelled or granted during the year:
UOP
DUP
RUR
SELTIP/
LTIP (1)
Exch.
Units (2)
Total
915,900
139,907
268,397 2,333,341
261,311 3,918,856
Issued or granted
Exercised or settled
Cancelled
Distributions reinvested
–
–
–
–
34,499
(30,015)
–
6,870
92,966
(9,504)
(10,360)
16,925
–
(92,744)
–
–
–
(100,000)
–
–
127,465
(232,263)
(10,360)
23,795
Units, Unit Rights and Unit Options outstanding as at December 31, 2013 915,900
151,261
358,424
2,240,597
161,311 3,827,493
(Number of Units)
Year Ended December 31, 2012
Units, Unit Rights and Unit Options outstanding as at January 1, 2012
Issued, cancelled or granted during the year:
UOP
DUP
RUR
SELTIP/
LTIP (1)
Exch.
Units (2)
Total
590,750
108,639
170,555 2,340,841
411,311 3,622,096
Issued or granted
Exercised or settled
Cancelled
Distributions reinvested
463,650
(138,500)
–
–
25,667
–
–
5,601
89,098
–
(2,728)
11,472
–
–
(7,500)
–
–
(150,000)
–
–
578,415
(288,500)
(10,228)
17,073
Units, Unit Rights and Unit Options outstanding as at December 31, 2012
915,900
139,907
268,397
2,333,341
261,311 3,918,856
1) The distributions payable on SELTIP and LTIP Units do not increase the number of Units outstanding on these plans but are incorporated into
the fair value of the plans.
2) The outstanding 161,311 Exchangeable Units are entitled to distributions equivalent to distributions on Trust Units, must be exchanged solely
for Trust Units on a one-for-one basis, and are exchangeable at any time at the option of the holder. An equivalent number of Special Voting Units
were issued at the same time as the Exchangeable Units. The holders of these Units have no entitlement to any share of or interest in the
distributions or net assets of CAPREIT. Through Special Voting Units, holders of Exchangeable Units are entitled to an equivalent number of
votes at all meetings of Unitholders or in respect of any written resolution of Unitholders equal to the number of Exchangeable Units held.
The carrying value of these Units is measured at an amortized cost of $3,428 as at December 31, 2013 (December 31, 2012 – $6,507), which
approximates the closing bid price of the Trust Units. 100,000 Exchangeable Units were converted into 100,000 Trust Units in the fi rst quarter
of 2013. 150,000 Exchangeable Units were converted into 150,000 Trust Units in 2012 (see note 13(a)).
The table below summarizes the change in the total Unit-based compensation fi nancial liability for the year ended December 31, 2013
and December 31, 2012, including the reversal of liabilities as a result of settlements for Trust Units.
As at
Total Unit-based compensation fi nancial liabilities, beginning of the year
Unit-based compensation (recoveries) expenses
Settlement of Unit-based compensation awards for Trust Units
Total Unit-based compensation fi nancial liabilities, end of the year
December 31, 2013
December 31, 2012
$
40,844
(6,012)
(2,068)
$
28,975
13,296
(1,427)
$
32,764
$
40,844
The Unit-based compensation fi nancial liabilities comprise:
December 31, 2013
December 31, 2012
Current
LTIP
SELTIP
DUP
RUR
UOP
Non-Current
RUR
$
13,428
8,429
3,201
3,510
2,424
30,992
1,772
$
19,293
10,229
3,484
1,859
3,835
38,700
2,144
Total Unit-based compensation fi nancial liabilities, end of the year
$
32,764
$
40,844
CAPREIT 2013 ANNUAL REPORT
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Units or Unit-based compensation fi nancial liabilities held by
trustees, offi cers and other senior management
As at December 31, 2013, 3.5% (December 31, 2012 – 3.8%) of
all Trust Units outstanding were held by trustees, offi cers and other
senior management of CAPREIT.
Normal course issuer bid (“NCIB”)
The table below summarizes the NCIB programs in place since
January 1, 2012. No Trust Units were acquired and cancelled under
these NCIB programs.
Period Covered Under Each NCIB
July 8, 2013 to July 7, 2014
June 27, 2011 to June 26, 2012
Approval Limit
9,773,361
7,267,915
12. Unit-based Compensation (Recoveries) Expenses
These costs represent Unit-based compensation expense, which
includes fair value remeasurement at each reporting date recognized
over the respective vesting periods for each plan for the years ended
December 31, 2013 and 2012, as follows:
Year Ended December 31,
UOP
LTIP
SELTIP
DUP
RUR Plan
EUPP
Unit-based Compensation
(Recoveries) Expenses
$
2013
(1,412)
(4,787)
(1,800)
467
1,521
43
$
2012
2,564
4,182
3,132
1,060
2,358
37
$
(5,968)
$
13,333
December 13, 2012, there were 30,150 options granted to the President
and CEO in connection with the over-allotment option of CAPREIT’s
December 2012 Equity Offering at an exercise price of $24.85 with an
expiration date of December 12, 2022. In connection with CAPREIT’s
October 2013 Equity Offering, the President and CEO waived the
right to be awarded options to acquire three percent of the number
of Units issued by the Trust.
A summary of Unit option activity for the year ended December 31,
2013 and 2012 is presented below. All Unit options are exercisable
as at December 31, 2013 and 2012.
(Number of Units)
For the Year Ended December 31,
Balance, beginning of the year
Granted
Exercised
Balance, end of the year
2013
915,900
–
–
915,900
2012
590,750
463,650
(138,500)
915,900
The fair value of Unit Options is determined as at the grant date
and subsequent interim and annual valuations are determined by
adjusting market-based valuation assumptions used in arriving at the
estimated fair value. The weighted average assumptions for the grants
outstanding in the respective years were as follows:
As at
December 31, 2013
December 31, 2012
$
Number of Units
Weighted average issue price
Weighted average risk free rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit option value $
915,900
21.14
2.4
5.4
8.0
24.0
2.65
915,900
21.14
1.7
4.5
9.0
23.6
4.19
$
$
a) UOP
Under the terms of the UOP, options are granted to trustees, offi cers
and key employees based on a performance incentive for improved
service and enhancing profi tability and vest on the date of grant. In
February 2010, the President and CEO’s employment agreement was
amended to provide that during its term, the President and CEO will
be awarded options to acquire three percent (3%) of the number of
Units issued by the Trust pursuant to any equity offering or acquisition
transaction (not including pursuant to any compensation arrange-
ments) at the market price of the Units at the time of completion
of each such treasury issuance, in accordance with the terms of the
UOP, as amended from time to time. On May 17, 2012, there were
232,500 options granted to the President and CEO in connection with
CAPREIT’s May 2012 Equity Offering at an exercise price of $22.75
with an expiration date of May 16, 2022. On December 4, 2012, there
were 201,000 options granted to the President and CEO in connec-
tion with CAPREIT’s December 2012 Equity Offering at an exercise
price of $24.00 with an expiration date of December 3, 2022 and, on
b) LTIP and SELTIP
The Board of Trustees may award LTIP and SELTIP Units, subject to
the attainment of specifi ed performance objectives, to certain offi cers
and key employees, collectively the “Participants.” SELTIP Units may
only be awarded to the Chief Executive Offi cer and Chief Financial
Offi cer of the Trust. The Participants can subscribe for Units of
CAPREIT at a purchase price equal to the weighted average trading
price of the Units for fi ve trading days prior to issuance. The purchase
price is payable in instalments, with an initial instalment of 5% paid
when the Units are issued. The balance, represented by Instalment
Receipts, is due over a term not exceeding ten years for the LTIP
and 30 years in the case of the SELTIP. Participants are required
to pay interest at ten-year and 30-year fixed rates, respectively,
based on the Trust’s fi xed borrowing rate for long-term mortgage
financing, and are required to apply cash distributions received
by them on these Units toward the payment of interest and the
remaining instalments. In the case of the SELTIP, following the tenth
anniversary, cash distributions shall be applied to pay interest only
88
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and any excess will be distributed to the Participants. Participants
may pre-pay any remaining instalments at their discretion. The
Instalment Receipts are non-recourse to the Participants and are
secured by the Units as well as the distributions on the Units.
If a Participant fails to pay interest and/or principal, CAPREIT
may elect to reacquire or sell the Units in satisfaction of the
outstanding amounts. No LTIP or SELTIP awards were granted for
the year ended December 31, 2013 (2012 – nil). There are currently
no plans to grant additional awards under the LTIP and the SELTIP.
The fair value of LTIP and SELTIP awards is determined by using
an option pricing model that uses market-based valuation assumptions.
The details of the Units issued under the LTIP and SELTIP are as shown below:
(Number of Units)
Year Ended December 31,
Balance, beginning of the year
Settled during the year
Cancelled
Balance, end of the year
2013
2012
LTIP
1,515,427
(92,744)
–
1,422,683
SELTIP
817,914
–
–
817,914
LTIP
SELTIP
1,522,927
–
(7,500)
817,914
–
–
1,515,427
817,914
The details of the LTIP and SELTIP Instalment Receipts are as shown below:
(Instalment Receipts)
Year Ended December 31,
Balance, beginning of the year
Principal repayments during the year
Balance, end of the year
2013
LTIP
$
18,910
(1,790)
$
SELTIP
12,030
(340)
2012
LTIP
SELTIP
$
19,758
(848)
$
12,318
(288)
$
17,120
$
11,690
$
18,910
$
12,030
The Instalment Receipts are recognized as a deduction from Unit-based compensation liability. During the years ended December 31, 2013
and 2012, interest payments in the amounts of $1,425 and $1,512, respectively, were applied to the outstanding Unit-based compensation liability.
The outstanding balance of the instalment receivable is used in determining the fair value of the Unit and the related fair value adjustments.
The following table summarizes the market-based rates and assumptions as well as projections of certain inputs used in determining the
fair values using an option pricing model for LTIP and SELTIP Units outstanding at the respective measurement dates.
LTIP
As at
Number of Units
Weighted average loan rate (%)
Weighted average issue price
Weighted average loan balance per Unit – current
Weighted average loan balance per Unit – at maturity
Weighted average risk free rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit value
December 31, 2013
December 31, 2012
$
$
$
1,422,683
4.65
15.54
11.91
9.37
1.5
5.4
3.9
17.7
9.44
$
$
$
$
1,515,427
4.66
15.49
12.39
9.56
1.4
4.5
4.8
23.6
12.73
$
CAPREIT 2013 ANNUAL REPORT
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELTIP
As at
Number of Units
Weighted average loan rate (%)
Weighted average issue price
Weighted average loan balance per Unit – current
Weighted average loan balance per Unit – at maturity
Weighted average risk free rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit value
December 31, 2013
December 31, 2012
817,914
4.96
17.66
13.94
13.13
2.8
5.4
22.4
25.5
10.31
$
$
$
$
817,914
4.96
17.66
14.63
13.40
1.8
4.5
23.4
26.0
12.51
$
$
$
$
c) DUP
The DUP gives the non-executive trustees the right to receive a
percentage of their annual retainer in the form of deferred units
(“Deferred Units”). Each trustee who elects to participate may be paid
25%, 50%, 75% or 100% (the “Elected Percentage”) of his annual
retainer payable in respect of a calendar year (the “Elected Amount”),
subject to an annual maximum Elected Percentage established by the
Compensation and Governance Committee, in the form of Deferred
Units, in lieu of cash. CAPREIT will match the Elected Amount in the
form of Deferred Units having a value equal to the volume weighted
average price of all Units traded on the TSX for the fi ve trading
days immediately preceding the date on which board compensation
is payable. The maximum Elected Percentage in respect of 2013 is
100% (2012 – 100%) of a trustee’s annual board compensation of $55.
The details of the Units issued under the DUP are shown below:
The Deferred Units earn notional distributions based on the same
distributions paid on the Units, and such notional distributions are
used to acquire additional Deferred Units (“Distribution Units”).
The Deferred Units and additional Distribution Units are credited
to each trustee’s Deferred Unit account and are not issued to the
trustee until the trustee elects to withdraw such Units. Each trustee
may elect to withdraw up to 20% of the Deferred Units credited to
his Deferred Unit account only once in a fi ve-year period. The fair
value of the Distribution Units represents the closing price of the
Units on the TSX on the distribution date.
The fair value of such Units represents the closing price of the Units
on the TSX on the last trading day on which the Units traded prior to
the reporting date, representing the fair value of the redemption price.
Outstanding, beginning of the year
Granted during the year
Additional Unit Distributions
Net settled during the year
December 31, 2013
December 31, 2012
Weighted Avg
Issue Price
Fair Value
per Unit
Number
of Units
Weighted Avg
Issue Price
Fair Value
per Unit
Number
of Units
$
18.50
22.27
22.74
18.67
$
24.90
–
–
–
$
139,907
34,499
6,870
(30,015)
16.94
23.98
23.64
–
$
22.31
–
–
–
108,639
25,667
5,601
–
Outstanding, end of the year
$
19.52
$
21.25
151,261
$
18.50
$
24.90
139,907
d) RUR Plan
In 2010, CAPREIT adopted the RUR Plan as the primary plan
through which long-term incentive compensation will be awarded.
The RUR Plan was approved by Unitholders on May 19, 2010.
The Compensation and Governance Committee of the Board of
Trustees may award RURs, subject to the attainment of specifi ed
performance objectives to certain officers and key employees,
collectively the “Participants”. The purpose of the RUR Plan is to
provide its Participants with additional incentive and to further
align the interest of its Participants with Unitholders through the
use of RURs which, on vesting, are exercisable for Units. RUR Plan
Units will be issued from treasury on vesting. The RURs vest in their
entirety on the third anniversary of the grant date. The RURs earn
notional distributions in respect of each distribution paid on RURs
commencing from the grant date and such notional distributions are
used to calculate additional RURs (“Distribution RURs”), which are
accrued for the benefi t of the Participant. The Distribution RURs are
credited to the Participants only when the underlying RURs on which
the Distribution RURs are earned become vested. The fair value of
the Distribution RURs is based on the closing price of the Units on
the TSX on the distribution date.
90
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the RURs represents the closing price of the Units on the TSX on the last trading day on which the Units traded prior to
the reporting date, representing the fair value of the redemption price.
The details of the RURs granted under the RUR Plan (including the Distribution RURs) are as follows:
Outstanding, beginning of the year
Granted during the year
Additional Unit Distributions
Cancelled during the year
$
Weighted Avg
Issue Price
18.86
25.27
22.57
17.97
December 31, 2013
$
Fair Value
per Unit
24.90
–
–
–
Number
of Units
268,397
92,966
16,925
(19,864)
$
Weighted Avg
Issue Price
16.67
22.37
23.56
16.77
December 31, 2012
$
Fair Value
per Unit
22.31
–
–
–
Outstanding, end of the year
$
20.75
$
21.25
358,424
$
18.86
$
24.90
Number
of Units
170,555
89,098
11,472
(2,728)
268,397
e) EUPP
The EUPP grants employees the right to receive an additional amount equal to 10% of the Units they acquire, paid in the form of additional
Units. This additional amount is expensed as compensation on issuance of the Units.
13. Unitholders’ Equity
All Trust Units outstanding are fully paid, have no par value and are
voting Trust Units. CAPREIT is authorized to issue an unlimited
number of Trust Units. Trust Units represent a Unitholder’s
proportionate undivided benefi cial interest in CAPREIT. No Trust
Unit has any preference or priority over another. No Unitholder has
or is deemed to have any right of ownership in any of the assets of
CAPREIT. Each Unit confers the right to one vote at any meeting
of Unitholders and to participate pro rata in any distributions by
CAPREIT and, in the event of termination of CAPREIT, in the net
assets of CAPREIT remaining after satisfaction of all liabilities. Units
will be issued in registered form and are transferable. Issued and
outstanding Units may be subdivided or consolidated from time to
time by the trustees without Unitholder approval. No certifi cates for
fractional Units will be issued and fractional Units will not entitle the
holders thereof to vote.
By virtue of CAPREIT being an open-ended mutual fund trust,
Unitholders of Trust Units are entitled to redeem their Units at any time
at prices determined and payable in accordance with the conditions
specifi ed in the DOT. As a result, under IFRS, Trust Units are defi ned
as fi nancial liabilities; however, for the purposes of fi nancial statement
classifi cation and presentation, the Trust Units may be presented as
equity instruments as they meet the puttable instrument exemption
under IAS 32, Financial Instruments: Presentation. For the purposes
of presenting earnings on a per Unit basis as well as for Unit-based
compensation plans, CAPREIT’s Trust Units are not treated as equity
instruments.
The number of issued and outstanding Trust Units (excluding
Units, Unit Rights and Unit Options issued or outstanding under
CAPREIT’s incentive plans) is as follows:
For the Year Ended December 31,
2013
2012
Units outstanding,
beginning of the year
Issued or granted during the year in
connection with the following:
New Units Issued
Exchangeable Units
Distribution Reinvestment
Plan (“DRIP”)
EUPP
DUP
RUR Plan
UOP
LTIP
Ref
99,412,550
82,754,453
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
7,276,050
100,000
15,455,000
150,000
1,263,844
20,938
16,553
4,727
–
92,744
897,117
17,480
–
–
138,500
–
Units outstanding, end of the year
108,187,406
99,412,550
CAPREIT 2013 ANNUAL REPORT
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a) New Units Issued
October 2013 (the “October 2013 Equity Offering”)
Bought-Deal (October 10, 2013)
Over-allotment (October 22, 2013)
Total
December 2012 (the “December 2012 Equity Offering”)
Bought-Deal (December 4, 2012)
Over-allotment (December 13, 2012)
Total
May 2012 (the “May 2012 Equity Offering”)
Bought-Deal (May 17, 2012)
Over-allotment (May 17, 2012)
Total
Price
Per Unit
Gross
Proceeds
Transaction
Costs
Net
Proceeds
Units
Issued
$
$
$
$
$
$
20.55
20.55
$
130,020
19,503
$
149,523
24.00
24.00
$
160,800
24,120
$
184,920
22.75
22.75
$
155,838
20,475
$
176,313
$
$
$
$
$
$
5,870
911
$
124,150
18,592
6,327,000
949,050
6,781
$
142,742
7,276,050
7,232
965
$
153,568
23,155
6,700,000
1,005,000
8,197
$
176,723
7,705,000
6,897
819
$
148,941
19,656
6,850,000
900,000
7,716
$
168,597
7,750,000
b) Exchangeable Units
In 2013, pursuant to the terms of the Exchangeable Units, 100,000
Exchangeable Units were exchanged for 100,000 Trust Units. During
2012, 150,000 Exchangeable Units were exchanged for 150,000
Trust Units.
f) Restricted Unit Rights Plan (“RUR Plan”)
In 2013, 9,504 RUR Units were exercised, out of which 4,727 RUR
Units were settled for an equivalent number of Trust Units, and the
remaining RUR Units were cancelled in consideration for withholding
taxes owed on the Trust Units issued.
c) Distribution Reinvestment Plan (“DRIP”)
The terms of the DRIP grant participants the right to receive an
additional amount equal to 5% of their monthly distributions paid
in the form of additional Units. The total consideration for Units
issued represents the amount of cash distributions reinvested in
additional Units.
d) Employee Unit Purchase Plan (“EUPP”)
The EUPP grants employees the right to receive an additional amount
equal to 10% of the Units they acquire, paid in the form of additional
Units.
e) Deferred Unit Plan (“DUP”)
In 2013, in accordance with the DUP, one retired trustee exercised
30,015 Deferred Units, out of which 16,553 DUP Units were settled
for an equivalent number of Trust Units, and the remaining DUP
Units were cancelled in consideration for withholding taxes owed
on the Trust Units issued.
g) Unit Option Plan (“UOP”)
Under the terms of the UOP, options are granted to trustees, offi cers
and employees based on performance incentive for improved service
and enhancing profi tability and vest on the date of grant.
h) Long-Term Incentive Plan (“LTIP”)
In 2013, 92,744 Units previously issued were settled at a value of
$2,024 to settle instalment receipts owing on such Units.
14. Distributions on Trust Units
CAPREIT paid distributions to its Unitholders in accordance with
its DOT. Distributions declared by its Board of Trustees were paid
monthly, on or about the 15th day of each month. Effective June
2013, monthly cash distributions declared to Unitholders increased
to $0.096 per Unit ($1.15 annually), compared to $0.093 per Unit
($1.12 annually) since September 2012 and $0.090 per Unit ($1.08
annually), previously.
Year Ended December 31,
2013
2012
Distributions declared on Trust Units
Distributions per Unit
$
$
116,056
1.138
$
$
97,903
1.097
92
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Financial Instruments and Risk Management
A) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of CAPREIT’s fi nancial assets and liabilities, except
as noted below and elsewhere in the consolidated annual fi nancial
statements, approximate their carrying amount due to the short-term
and variable rate nature of these instruments.
As at December 31, 2013, the fair value of CAPREIT’s mortgages
payable is estimated to be $2,475,000 (December 31, 2012 – $2,316,000)
due to changes in interest rates since the dates the individual mortgages
were fi nanced and the impact of the passage of time on the primarily
fixed rate nature of CAPREIT’s mortgages. The fair value of the
mortgages payable is based on discounted future cash fl ows using
rates that refl ect current rates for similar fi nancial instruments with
similar duration, terms and conditions, which are considered Level 2
inputs (as described below).
CAPREIT has classifi ed and disclosed the fair value for each class
of fi nancial instrument based on the fair value hierarchy in accordance
with IFRS 13. The fair value hierarchy distinguishes between market
value data obtained from independent sources and CAPREIT’s own
assumptions about market value. The hierarchy levels are defi ned
below:
Level 1 – Inputs based on quoted prices in active markets for identical
assets or liabilities;
Level 2 – Inputs based on factors other than quoted prices included
in Level 1 and may include quoted prices for similar assets and
liabilities in active markets, as well as inputs that are observable
for the asset or liability (other than quoted prices), such as interest
rates and yield curves that are observable at commonly quoted
intervals; and
Level 3 – Inputs which are unobservable for the asset or liability, and
are typically based on CAPREIT’s own assumptions, as there is
little, if any, related market activity.
CAPREIT’s assessment of the signifi cance of a particular input to
the fair value measurement in its entirety requires judgement, and
considers factors specifi c to the asset or liability.
The following table presents CAPREIT’s estimates of assets
and liabilities measured at fair value on a recurring basis based on
information available to management as at December 31, 2013, and
aggregated by the level in the fair value hierarchy within which those
measurements fall. These estimates are not necessarily indicative of
the amounts CAPREIT could ultimately realize.
Level 1
Level 2
Level 3
Quoted prices in active markets for
identical assets and liabilities
Signifi cant other
observable inputs
Signifi cant
unobservable inputs
Total
Recurring Measurements
Assets
Investment Properties
Fee simple and MHC land lease sites
Operating leasehold interests
Land leasehold interests
Investments
Derivative fi nancial instruments – interest
Liabilities
Derivative fi nancial instruments – interest
Derivative fi nancial instruments – foreign currency
$
$
–
–
–
22,676 (2)
–
–
–
–
–
–
–
3,699 (3)
(1,121) (3)
(232) (4)
$ 4,770,095 (1)
497,913 (1)
191,210 (1)
–
–
–
–
$ 4,770,095
497,913
191,210
22,676
3,699
(1,121)
(232)
Total
$
22,676
$
2,346
$ 5,459,218
$ 5,484,240
(1) Fair values for investment properties are calculated using the direct income capitalization and discounted cash fl ow methods, which results in
these measurements being classifi ed as Level 3 in the fair value hierarchy. See note 6 for detailed information on the valuation methodologies
and fair value reconciliation.
(2) CAPREIT’s investments are accounted for as available-for-sale and are measured at fair value based on the quoted market price in an active
market of the asset.
(3) The valuation of the interest rate swap instrument is determined using widely accepted valuation techniques including discounted cash fl ow
analysis on the expected cash fl ows of the derivatives. The fair value is determined using the market standard methodology of netting the
discounted future fi xed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation
of future interest rates (forward curves) derived from observable market interest rate curves. CAPREIT considers the impact of credit valuation
adjustments to refl ect both its risk and the counterparty’s risk in the fair value measurement of the interest rate swap agreement.
(4) The valuation of the foreign currency derivatives is determined using forward exchange rates at the measurement date, with the resulting value
discounted back to present value.
CAPREIT 2013 ANNUAL REPORT
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although CAPREIT has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads,
to evaluate the likelihood of default by CAPREIT itself. As at December 31, 2013, CAPREIT has assessed the signifi cance of the impact of
the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is
not signifi cant to the overall valuation of the derivative. As a result, CAPREIT has determined that the derivative valuations in their entirety
should be classifi ed in Level 2 of the fair value hierarchy.
B) RISK MANAGEMENT
The main risks arising from CAPREIT’s fi nancial instruments are interest rate, liquidity, credit and foreign currency risks. CAPREIT’s
approach to managing these risks is summarized as follows:
Interest rate risk
CAPREIT is subject to the risks associated with debt fi nancing, including the risk that mortgages and credit facilities will not be able to be
refi nanced on terms as favourable as those of the existing indebtedness. In addition, interest on CAPREIT’s bank indebtedness is subject
to fl oating interest rates. CAPREIT is also subject to the risks associated with changes in interest rates or different fi nancing terms from the
hedging derivative assumptions, which may result in the hedging relationship being ineffective, causing volatility in earnings.
For the year ended December 31, 2013 and 2012, a 100 basis point change in interest rates would have the following effect:
Change in interest rates
(basis points)
Increase (decrease) in net income
2012
2013
Increase (decrease) in OCI
2012
2013
Floating rate debt
Floating rate debt
Forward interest rate hedge
Forward interest rate hedge
Interest rate swap agreements
Interest rate swap agreements
Euro interest rate swap agreements
Euro interest rate swap agreements
+100
–100
+100
–100
+100
–100
+100
–100
$
$
$
$
$
$
$
$
(1,497)
1,497
–
–
–
–
–
–
$
$
$
$
$
$
$
$
(1,275)
1,275
–
–
–
–
–
–
$
$
$
$
$
$
$
$
–
–
–
–
5,437
(5,033)
2,941
(2,008)
$
$
$
$
$
$
$
$
–
–
3,469
(3,793)
5,445
(5,985)
–
–
CAPREIT’s objective in managing interest rate risk is to minimize
the volatility of earnings. As at December 31, 2013, interest rate risk
has been minimized as all but $28,160 or 1.2% of mortgages payable
is fi nanced at fi xed interest rates, with maturities staggered over a
number of years.
Liquidity risk
Liquidity risk is the risk that CAPREIT may encounter diffi culties
in accessing capital and refi nancing its fi nancial obligations as they
come due. Approximately 93.9% of CAPREIT’s mortgages are
CMHC-insured (excluding $170,786 of mortgages on the MHC and
Ireland portfolios), which reduces the risk in refi nancing mortgages.
CAPREIT’s overall risk for mortgage refi nancings is further reduced
as the unamortized mortgage insurance premiums are transferable
between approved lenders and are effective for the full amortization
period of the underlying mortgages, ranging between 25 to 35 years.
To mitigate the risk associated with the refi nancing of maturing debt,
CAPREIT staggers the maturity dates of its mortgage portfolio over
a number of years.
94
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, CAPREIT manages its overall liquidity risk by maintaining suffi cient available credit facilities to fund its ongoing operational
and capital commitments, distributions to Unitholders, and provide future growth in its business. As at December 31, 2013, CAPREIT had
undrawn lines of credit in the amount of $86,443 (December 31, 2012 – $126,296). The contractual maturities and repayment obligations of
CAPREIT’s fi nancial liabilities as at December 31, 2013 are as follows:
Mortgages payable
Bank indebtedness
Mortgage interest (1)
Bank indebtedness interest (1)
Other liabilities
Security deposits
Exchangeable Units
Distributions payable
$
2014
441,105
–
81,765
5,656
85,803
24,892
3,428
10,366
$
2015-2016
352,599
187,030
134,265
8,468
–
–
–
–
$
2017-2018
434,668
–
104,599
–
–
–
–
–
$
653,015
$
682,362
$
539,267
2019 onward
$ 1,226,947
–
136,541
–
–
–
–
–
$ 1,363,488
(1) Based on current in-place interest rates for the remaining term to maturity.
Credit risk
Credit risk is the risk that: (i) counterparties to contractual fi nancial
obligations will default; and (ii) the possibility that CAPREIT’s
residents may experience fi nancial diffi culty and be unable to meet
their rental obligations.
CAPREIT monitors its risk exposure regarding obligations with
counterparties through the regular assessment of counterparties’
credit positions.
CAPREIT mitigates the risk of credit loss with respect to residents
by evaluating the creditworthiness of new residents, obtaining security
deposits wherever permitted by legislation, and geographically
diversifying its portfolio.
CAPREIT monitors its collection experience on a monthly basis
and ensures that a stringent policy is adopted to provide for all past
due amounts. All residential accounts receivable balances exceeding
30 days are written off to bad debt expense and recognized in the
consolidated statements of income and comprehensive income.
Subsequent recoveries of amounts previously written off are credited
in the consolidated statements of income and comprehensive income.
Accordingly, no allowance for doubtful accounts is established.
Foreign currency risk
Foreign currency risk is the fi nancial risk exposure to unanticipated
changes in the exchange rate between two currencies. CAPREIT
is exposed to foreign currency risk as CAPREIT’s functional and
presentation currency is the Canadian dollar while the functional
currency of CAPREIT’s wholly-owned operating subsidiary in
Dublin, Ireland is the Euro. Accordingly, the assets and liabilities
are translated at the prevailing rate at period end, and comprehensive
income is translated at the average rate for the period.
CAPREIT manages and mitigates the exposure to foreign currency
risk by hedging the investment in the Dublin foreign operations
against the €45,000 Euro-denominated debt and entering into foreign
exchange forward contracts. The effective portion of foreign exchange
gains and losses on the €45,000 Euro-denominated debt is recognized
in OCI, offset by the foreign currency gains and losses arising from the
Dublin investment. The ineffective portion of foreign exchange and
losses on the Euro-denominated debt is recognized in the statement
of income. In addition, CAPREIT currently has quarterly foreign
exchange forward contracts aggregating to €2,800 commencing
December 2013 and maturing quarterly until September 2015 which
fi x the exchange rate between the Euro and the Canadian dollar.
CAPREIT 2013 ANNUAL REPORT
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. Realized and Unrealized Gains and Losses
on Derivative Financial Instruments
a) Contracts for which hedge accounting is no longer effective
During 2005, CAPREIT entered into interest rate forward contracts
aggregating to $145,740 (the “Interest Rate Forward Contracts”) to
hedge its exposure to the potential rise in interest rates for refi nancings
of mortgages maturing in 2009.
CAPREIT settled these Interest Rate Forward Contracts in 2009.
The associated cumulative unamortized loss of $9,908 included in
AOCL at September 30, 2008 is being amortized to mortgage interest
expense over the original terms of the hedged contracts. For the year
ended December 31, 2013, $1,071 (December 31, 2012 – $1,071) was
amortized from AOCL to mortgage interest expense.
b) Contracts for which hedge accounting is being applied
(i) As at December 31, 2013, CAPREIT has a $65,000 interest rate
swap agreement fi xing the bankers’ acceptance rate at 2.20%,
which matures in September 2022, for which hedge accounting is
being applied. The agreement effectively converts borrowings on
a bankers’ acceptance-based fl oating rate credit facility to a fi xed
rate facility for a 10-year term (see note 9 for further details). The
related fl oating rate credit facility is for a fi ve-year non-revolving
term with an effective interest rate of 3.60%, and any principal
that is repaid may not be reborrowed. On expiry of the term, it
is expected to be refi nanced for an additional fi ve-year term. The
mark-to-market gain of $3,699 has been set up in other assets as
at December 31, 2013.
The interest rate swap agreement has been summarized as
follows:
As at
December 31, 2013
December 31, 2012
Hedge liability,
beginning of the year
Change in intrinsic value
Hedge asset (liability),
$
(418)
4,117
$
–
(418)
end of the year
$
3,699
$
(418)
Hedge liability in AOCL,
beginning of the year
Change in intrinsic value in OCI
$
Hedge asset (liability) in AOCL,
(418)
4,117
$
–
(418)
end of the year
$
3,699
$
(418)
(ii) As CAPREIT is operating the Dublin acquisition in a foreign jurisdic-
tion, it is exposed to foreign currency fl uctuations arising between
the functional currency of the foreign operation (that is, Euros) and
the functional currency of CAPREIT (that is, Canadian dollars). As
such, CAPREIT entered into a hedge effective at the date of the
Dublin acquisition (September 10, 2013). CAPREIT has hedged
the investment in the Dublin foreign operations against the €45,000
Euro-denominated debt on CAPREIT’s balance sheet. Any foreign
currency gain/losses arising from the Euro-denominated debt will be
offset by the foreign currency gain/loss arising from the investment
in the Dublin foreign operations. The effective portion of foreign
exchange gains and losses on the €45,000 Euro-denominated debt
is recognized in OCI and the ineffective portion is recognized in net
earnings. The fair value of the Euro-denominated debt is €45,120 as
at December 31, 2013.
(iii)As at December 31, 2013, CAPREIT has a €45,000 interest rate swap
agreement fi xing the EURIBOR rate at 1.22%, which matures in
September 2018, for which hedge accounting is being applied. The
agreement effectively converts borrowings on a EURIBOR-based
fl oating rate credit facility to a fi xed rate facility for a fi ve-year term
(see note 9 for further details). The related fl oating rate credit facility
is for a fi ve-year, non-revolving term with an effective interest rate
of 3.22%, and any principal that is repaid may not be reborrowed.
The mark-to-market loss of $1,121 has been set up in other liabilities
as at December 31, 2013.
The interest rate swap agreement has been summarized as follows:
As at
December 31, 2013
December 31, 2012
Hedge liability,
beginning of the year
Change in intrinsic value
$
–
(1,121)
Hedge liability, end of the year
$
(1,121)
Hedge liability in AOCL,
beginning of the year
$
Change in intrinsic value in OCI
–
(936)
$
$
$
Hedge liability in AOCL,
end of the year
$
(936)
$
–
–
–
–
–
–
(iv)In June 2011, CAPREIT entered into a hedging program, which
effectively hedged interest rates on approximately $312,000 of
mortgages maturing between September 2011 and June 2013. The
maturing mortgages have been refi nanced for 10-year terms and as a
result bear interest rates between a fl oor rate of 3.00% and a ceiling
rate of 3.62%, before the credit spread. The change in the intrinsic
value of the forward interest rate hedge has been included in OCI
(see note 19). The hedging program matured in June 2013, for which
hedge accounting was being applied. The ineffective portion and
the difference between the settled amount and the mark-to-market
has been recognized in net income. As at December 31, 2013 and
2012, the mark-to-market cumulative unrealized losses of $nil and
$3,934, respectively, have been set up in other liabilities. All contracts
have been settled as at December 31, 2013.
96
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The forward interest rate hedge liability has been summarized
as follows:
As at
December 31, 2013
December 31, 2012
Hedge liability,
beginning of the year
Change in intrinsic value
included in OCI
Loss on derivative
$
(3,934)
$
(16,349)
520
(2,831)
c) Contracts for which hedge accounting is not being applied
As at December 31, 2013, CAPREIT has quarterly foreign currency
exchange contracts aggregating to €2,800 commencing December
2013 and maturing quarterly until September 2015 which fi x the
exchange rate between the Euro and the Canadian dollar, for which
hedge accounting is not being applied. The mark-to-market loss of
$232 has been set up in other liabilities as at December 31, 2013, and
is recognized in net income for the year ended December 31, 2013.
fi nancial instruments
Cash settlement of derivatives
(78)
3,492
(3,131)
18,377
Hedge liability, end of the year
$
–
$
(3,934)
17. Capital Management
Hedge liability in AOCL,
beginning of the year
Change in intrinsic value
included in OCI
Amortization from AOCL to
interest and other
fi nancing costs
Hedge liability in AOCL,
end of the year
$
(22,422)
$
(20,540)
520
(2,831)
2,207
949
$
19,695
$
(22,422)
(v) CAPREIT had a $55,000 interest rate swap agreement fi xing the
interest rate at 5.706%, which matured in July 2012, for which
hedge accounting was being applied. Mark-to-market losses of
$nil were set up in other liabilities as at December 31, 2013 and
December 31, 2012.
As at
December 31, 2013
December 31, 2012
Hedge liability,
beginning of the year
Settlement of previously
unrealized losses
included in OCI
Change in ineffective portion
$
included in loss on derivative
fi nancial instruments
Change in accrued mortgage interest
included in interest and other
fi nancing costs
Hedge liability, end of the year
$
Hedge liability in AOCL,
beginning of the year
Settlement of previously
unrealized losses included
in OCI
Hedge liability in AOCL,
end of the year
$
$
–
–
–
–
–
–
–
–
$
(1,568)
1,031
61
476
–
$
$
(1,031)
1,031
$
–
CAPREIT defines capital as the aggregate of Unitholders’ equity,
mortgages payable, bank indebtedness, Unit-based compensation
fi nancial liabilities, Exchangeable Units and other non-current liabili-
ties. CAPREIT’s objectives when managing capital are to safeguard its
ability to continue to fund its distributions to Unitholders, to meet its
repayment obligations under its mortgages and credit facilities, and
to ensure suffi cient funds are available to meet capital commitments.
Capital adequacy is monitored against investment and debt restrictions
contained in CAPREIT’s DOT and Credit Facilities.
CAPREIT’s Credit Facilities (see note 10) require compliance with
certain fi nancial covenants. In addition, borrowings must not exceed
the borrowing base, calculated at a predefi ned percentage to the market
value of the properties.
In the short term, CAPREIT utilizes the Credit Facilities to fi nance
its capital investments, which may include acquisitions. In the long
term, equity issuances, mortgage fi nancings and refi nancings, including
“top-ups”, are put in place to fi nance the cumulative investment in
the property portfolio and ensure that the sources of fi nancing better
refl ect the long-term useful lives of the underlying investments.
CAPREIT is in compliance with all its investment and debt re-
strictions and fi nancial covenants contained in the DOT, the Large
Borrowers Agreement (“LBA”) and the Credit Facilities.
Under the terms of CAPREIT’s LBA with CMHC, total indebted-
ness of CAPREIT is limited to the greater of (i) 60% of Gross Book
Value determined on a fair value basis or (ii) 70% of Gross Book Value
determined on a historical basis, and may only be increased above such
limits with CMHC’s consent.
The LBA provides for, among other things: (i) certain fi nancial cov-
enants and limitations on indebtedness; (ii) the posting of a revolving
letter of credit with respect to certain capital expenditures on a portfolio
rather than an individual property basis; and (iii) cross-collateralization
of mortgage loans for certain CMHC-insured mortgage lenders.
CAPREIT 2013 ANNUAL REPORT
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total capital managed by CAPREIT and the results of its compliance with the key covenants are summarized as follows:
As at
Mortgages payable
Bank indebtedness
Unit-based compensation fi nancial liabilities
Exchangeable Units
Unitholders’ equity
Total capital
Total debt to gross book value (1)
Tangible net worth (3)
Debt service coverage ratio (times) (2),(4)
Interest coverage ratio (times) (2),(5)
December 31, 2013
December 31, 2012
$ 2,457,182
187,030
32,764
3,428
2,757,469
$ 5,437,873
$ 2,189,556
147,316
40,844
6,507
2,429,214
$ 4,813,437
Threshold
Maximum 70.00%
Minimum $1,200,000
47.32%
$ 2,793,661
47.25%
$ 2,476,565
Minimum 1.20
Minimum 1.50
1.54
2.62
1.52
2.51
(1) CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is defi ned
as the gross book value of CAPREIT’s assets as per CAPREIT’s fi nancial statements, determined on a fair value basis for the investment properties,
plus accumulated amortization on property, plant and equipment, CMHC fees and deferred loan costs. In addition, the DOT provides for
investment restrictions on type and maximum limits on single property investments.
(2) Based on the trailing four quarters.
(3) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and
compensation liabilities or assets, including Exchangeable Units added back.
(4) As per the Credit Facilities agreement and DOT, the debt service coverage ratio is defi ned as earnings before interest, income taxes, depreciation and
amortization and other adjustments, including non-cash costs (“EBITDA”), less income taxes paid divided by the sum of principal and interest payments.
(5) As per the Credit Facilities agreement and DOT, the interest coverage ratio is defi ned as EBITDA less taxes paid divided by interest payments.
18. Deferred Income Taxes
For fi scal 2012 and 2013, CAPREIT is a “mutual fund trust” as defi ned
under the Income Tax Act (Canada) (the “Tax Act”) and as a Real
Estate Investment Trust (“REIT”) eligible for the “REIT Exemption”
in accordance with the rules affecting the tax treatment of publicly
traded trusts. Accordingly, CAPREIT is not subject to income tax
provided all of its taxable income is distributed to its Unitholders.
On December 16, 2010, the Government of Canada proposed
technical amendments clarifying the defi nition of a REIT for Canadian
income tax purposes. The proposed amendments included the fol-
lowing clarifi cations as applicable to the Trust:
(i) amounts distributed to a REIT by an entity in which the REIT
has a signifi cant interest will retain the source character of income
earned by the subsidiary entity, and
(ii) the revenue requirements in the definition of a REIT will be
amended by replacing the term “revenues” with the term “gross
REIT revenue”.
The proposed changes outlined above in their current form will
allow CAPREIT, with greater certainty, to qualify as a REIT for
Canadian income tax purposes. On October 24, 2012, legislation
was tabled by the Government of Canada which, among other
changes, implemented the December 16, 2010 technical amend-
ments. In accordance with IAS 12 – Income Taxes, the December 16,
2010 technical amendments were considered substantively enacted,
effective November 21, 2012, when the legislation was introduced
for First Reading by the Government of Canada. The amendments
tabled by the Department of Finance on October 24, 2012 received
Royal Assent and were enacted on June 26, 2013.
CAPREIT is not subject to income tax and, accordingly, no
current income taxes have been recorded for 2013 (2012 – $nil).
98
CAPREIT 2013 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. Accumulated Other Comprehensive Loss
Year Ended December 31,
AOCL balance, beginning of the year
Other comprehensive (loss) income:
Amortization from AOCL to interest and other fi nancing costs (1),(2)
Change in fair value of derivative fi nancial instruments (note 16(b))
Change in fair value of investments
Gain on foreign currency translation
Realized gain on sale of investments
Other comprehensive income
AOCL balance, end of the year
2013
2012
$
(22,511)
$
(24,010)
3,265
3,701
(4,393)
124
(1,380)
1,317
2,000
(2,218)
3,168
–
(1,451)
1,499
$
(21,194)
$
(22,511)
As at
December 31, 2013
December 31, 2012
AOCL comprises:
Loss on derivative fi nancial instruments
Cumulative realized loss (1)
Accumulated amortization to interest and other fi nancing costs
Unamortized balance of loss on cash fl ow hedges previously settled
Gain (Loss) on interest rate swap agreements
Loss on forward interest rate hedge (2)
Accumulated amortization to interest and other fi nancing costs
Change in fair value of investments
Cumulative gain on foreign currency translation
Realized gain on sale of investments
AOCL balance, end of the year
$
$
(9,908)
5,079
(176)
2,763
(22,884)
3,189
3,450
124
(2,831)
(21,194)
$
$
(9,908)
4,008
(163)
(418)
(23,404)
982
7,843
–
(1,451)
(22,511)
(1) The cumulative realized loss on derivative fi nancial instruments aggregating to $9,908 will be amortized to net income as mortgage interest
expense over periods ending December 2014 to September 2022, being the original terms of the hedged contracts. The estimated amount of the
amortization that is expected to be reclassifi ed to net income from AOCL in the next 12 months is $1,070.
(2) The realized loss component of the $22,884 OCI loss on forward interest rate hedge is $22,585, which will be amortized to net income as mortgage
interest expense over the original 10-year term of the hedged contracts. The estimated amount of the amortization expected to be reclassifi ed to
net income from AOCL in the next 12 months is $2,294.
20. Interest and Other Financing Costs
21. Joint Arrangements
Year Ended December 31,
2013
2012
Interest on mortgages payable (1)
Amortization of CMHC
premiums and fees
Interest on bank indebtedness
and deferred loan costs (2)
Interest on Exchangeable Units
$
93,072
$
83,503
2,124
1,770
6,072
197
6,954
354
$
101,465
$
92,581
(1) Includes amortization of deferred fi nancing costs, fair value
adjustments and OCI hedge interest of ($836)
(December 31, 2012 – $575).
(2) Includes amortization of deferred loan costs of $982
(December 31, 2012 – $1,151).
CAPREIT’s share of assets, liabilities, revenues, expenses and cash
fl ows from joint arrangement activities is summarized as follows:
Year Ended December 31,
Assets
Liabilities
Revenues
Expenses
Net Income
Cash Provided By (Used In):
Operating Activities
Financing Activities
Investing Activities
$
2013
173,778
75,752
15,142
7,226
7,916
$
$
$
6,275
(4,238)
(2,455)
2012
167,408
71,716
14,780
(10,487)
25,267
7,125
(4,088)
(3,382)
$
$
$
$
CAPREIT 2013 ANNUAL REPORT
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. Supplemental Cash Flow Information
a) Net income items related to investing and fi nancing activities
e) Acquisition of investment properties
Year Ended December 31,
2013
2012
Year Ended December 31,
2013
2012
Dividend and interest income
on investments
Interest paid on Exchangeable Units
Interest paid on mortgages payable
Interest paid on bank indebtedness
$
$
(1,298)
206
89,631
5,068
(3,334)
367
82,490
5,865
Acquired properties
Fair value adjustment of assumed debt
Assumed debt
$
(456,523) $ (791,268)
10,638
334,948
1,987
37,971
Net disbursement
$
(416,565) $ (445,682)
Net disbursement
$
93,607
$
85,388
f) Disposition of investment properties
b) Changes in non-cash operating assets and liabilities
Year Ended December 31,
Prepaid expenses
Tenant inducements and
direct leasing costs
Other receivables
Deferred loan costs
Deposits on purchases
Deposits
Accounts payable and other liabilities
Security deposits
2013
2012
$
(569)
$
(604)
(3,689)
(3,438)
(1,014)
(1,931)
(36)
16,544
2,112
(887)
(1,430)
(1,313)
(2,442)
(39)
10,220
2,877
Net proceeds
$
7,979
$
6,382
c) Net cash distributions to Unitholders
Year Ended December 31,
2013
2012
Year Ended December 31,
2013
2012
Proceeds
Closing costs
Mortgages assumed by purchasers
and discharged
Net proceeds
$
94,250
(1,806)
$
111,700
(2,523)
(34,772)
(53,533)
$
57,672
$
55,644
g) Issuance of Trust Units
Year Ended December 31,
2013
2012
Issuance of Trust Units
Conversion of Exchangeable Units
to Trust Units
Settlement of Unit-based Compensation
Awards for Trust Units
Net proceeds
$
148,313
$
352,570
(2,542)
(3,573)
(1,602)
(1,427)
$
144,169
$
347,570
Distributions declared to Unitholders
Add: Distributions payable
at beginning of year
Less: Distributions payable at end of year
Less: Distributions to
$
(116,056)
$
(97,903)
(9,279)
10,366
(7,448)
9,279
participants in the DRIP
27,003
20,122
Net disbursement
$
(87,966)
$
(75,950)
d) Capital investments
Year Ended December 31,
2013
2012
Capital investments
Change in capital investments
included in accounts payable
and other liabilities
$
(162,659)
$ (136,315)
4,292
5,035
Net disbursement
$ (158,367)
$ (131,280)
100 CAPREIT 2013 ANNUAL REPORT
$
3,439
$
3,170
Minimum annual rent
2014
382
$
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. Related Party Transactions
a) CAPREIT incurred the following transactions with key
management personnel and trustees. The loans outstanding from
key management personnel and trustees for indebtedness relating
to the SELTIP and LTIP as at December 31, 2013 were $8,040 and
$11,834, respectively (December 31, 2012 – $8,264 and $13,214,
respectively). These amounts are taken into consideration when
calculating the fair value of the Unit-based compensation fi nancial
liabilities. Key management personnel are eligible to participate in the
EUPP. In addition, certain key management personnel also participate
in the RUR, and trustees currently participate in the DUP. Pursuant
to employee contracts, key management personnel are subject to
termination benefi ts that entitle them to payments of up to 36 months
of benefi ts (based on base salary, bonus and other benefi ts) depending
on cause.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive income
comprises:
Year Ended December 31,
2013
2012
Short-term employee benefi ts
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Total
2,050
5,489
2,819
5,989
(6,491)
7,367
$
(1,002) $
13,356
b) Previously, CAPREIT had entered into a construction management
agreement with a company that was owned by two trustees and
offi cers (Thomas Schwartz, President and CEO and Michael Stein,
Chairman) of CAPREIT to provide construction management services
(based on 4.5% of construction costs up to $20,000, 3% for the next
$15,000 and 1% thereafter) to carry out the capital improvements
for the properties. Effective January 1, 2012, CAPREIT terminated
its construction management agreement and entered into a new
construction management agreement with a non-related party on
substantially similar terms. CAPREIT continued to incur related
party management fees until the balance of the work on the previous
contract was completed. All previous contracts were completed as at
December 31, 2012. The total construction management fees for the
year ended December 31, 2012 (excluding reimbursable expenses of
$nil and HST/GST) of $107 were capitalized to income properties.
As at December 31, 2013, there were construction management fees
outstanding of $nil (December 31, 2012 – $nil) in accounts payable
and other liabilities.
CAPREIT has a lease for offi ce space with a company in which
Thomas Schwartz has an 18% benefi cial interest. The rent paid for
the offi ce space for the year ended December 31, 2013 and 2012
was $868 and $868, respectively, excluding property operating costs,
and has been expensed as trust expenses. During the third quarter
of 2011, the above lease was amended for additional offi ce space,
resulting in minimum annual rental payments increasing by $51. There
is no change to the lease expiry date. The lease agreement expires
on October 31, 2014. Minimum annual rental payment for the next
year is as follows:
24. Commitments
NATURAL GAS
Through the combination of fixed and variable price contracts,
CAPREIT is committed as at December 31, 2013, in the aggregate
amount of $2,610 for its natural gas and transport requirements.
These commitments, which range from one to three years, fi x the price
of natural gas and transport for a portion of CAPREIT’s requirements
as summarized below.
As at December 31,
2014
2015
Fixed Average Weighted Cost per GJ (1)
Total of CAPREIT’s
Estimated Requirements
$
3.19
$
24.71%
–
–
(1) Fixed weighted average cost per gigajoule (“GJ”) excludes estimated
transportation costs of $1.20 and $1.03 per GJ for 2014 and 2015,
respectively, and other administrative costs.
CAPREIT 2013 ANNUAL REPORT
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LAND LEASEHOLD INTERESTS
Four of the investment properties have ground leases with various expiry dates (subject to revisions at periodic intervals) between March 31,
2045 and March 31, 2070. One land lease matures in 2045, two mature in 2068 and another matures in 2070. Generally, each lease provides
for annual rent and additional rent calculated from the results of property operations. During the years ended December 31, 2013 and 2012,
total expenses under these four leases were $2,858 and $2,430, respectively.
Annual lease payments under these four leasehold interests are included in property operating costs. Minimum annual rent for the next
fi ve years and thereafter under these four leases is as follows:
Minimum annual rent
$
1,325
$
1,323
$
1,323
$
1,323
$
1,323
$
42,646
2014
2015
2016
2017
2018
Thereafter
PROPERTY CAPITAL INVESTMENTS
Commitments primarily related to capital investments in investment
properties of $44,620 were outstanding as at December 31, 2013
(December 31, 2012 – $21,171).
25. Contingencies
CAPREIT is contingently liable under guarantees provided to certain
of CAPREIT’s lenders in the event of default, and with respect to
litigation and claims that arise in the ordinary course of business.
Matters relating to litigation and claims are generally covered by
insurance, or have been provided for in Trust expenses where
appropriate.
26. Subsequent Events
On January 31, 2014, the third party U.S. external management
agreements for the performance of certain asset and property
management services concluded. The 16 manufactured home
communities in Colorado, Texas, Arizona and Michigan, which were
managed by CAPREIT for a third party real estate owner, have been
sold. The agreements were entered into on December 5, 2012.
102 CAPREIT 2013 ANNUAL REPORT
Five-Year Review
($ Thousands, except per Unit amounts)
Reporting Under IFRS
Reporting Under
Canadian GAAP
Year Ended December 31,
2013
2012
2011
2010
2009
Operating Revenues (1)
Net Operating Income (“NOI”) (1)
Net Operating Income Margin (%) (1)
Net Income (2)
Income from Discontinued Operations
Normalized Funds from Operations (“NFFO”)
Cash Distributions
NFFO Payout Ratio (%)
Non-taxable Distributions (%)
Normalized Funds From Operations
NFFO Per Unit – Basic
Cash Distributions Per Unit
Weighted Average Number of Units (000s)
Number of Suites and Sites – total
Number of Suites and Sites – CAPREIT’s share
Investment Properties (3)
Unitholders’ Equity
Overall Portfolio Occupancy (%) (1)
Mortgage Debt to Gross Book Value (%)
Interest Coverage (times)
Weighted Average Mortgage Interest Rate (%) (4)
Weighted Average Mortgage Term (years)
Cumulative Compounded Return Since Inception (%)
Unit Price at End of Year
$
$
$
$
$
$
$
$
$
$
477,023
273,854
57.4
267,678
–
159,375
119,256
74.8
89.0
1.562
1.138
102,064
41,552
40,397
5,459,218
2,757,469
98.0
44.0
2.62
3.76
6.0
652
21.25
$
$
$
$
$
$
$
$
$
$
412,421
237,916
57.7
412,263
–
132,553
101,210
76.4
74.2
1.486
1.097
89,215
37,225
36,070
4,826,355
2,429,214
97.9
44.3
2.51
3.87
5.4
736
24.90
$
$
$
$
$
$
$
$
$
$
361,955
206,157
57.0
316,172
–
103,875
86,054
82.8
86.9
1.357
1.080
76,538
31,014
29,859
3,713,737
1,740,663
98.5
48.3
2.20
4.48
5.7
614
22.31
$
$
$
$
$
$
$
$
$
$
338,959
190,339
56.2
529,048
–
92,026
75,526
82.1
72.5
1.371
1.080
67,130
28,947
27,792
3,049,980
1,355,445
98.4
51.8
2.07
4.82
4.9
417
17.14
$
$
$
$
$
$
$
$
$
$
321,159
174,432
54.3
15,716
705
83,380
73,805
88.5
99.9
1.263
1.080
66,016
28,916
27,761
2,148,761
457,184
98.1
57.3
2.06
5.07
5.1
294
14.06
(1) 2009 has been restated for discontinued operations.
(2) 2010 and 2009 include a recovery of future income taxes of $435,733 and $9,568, respectively.
(3) 2009 has been restated to exclude assets held for sale.
(4) Includes deferred fi nancing costs and fair value adjustments.
CAPREIT 2013 ANNUAL REPORT
103
Unitholder Information
BOARD OF TRUSTEES
OFFICERS
INVESTOR INFORMATION
ANNUAL MEETING OF
UNITHOLDERS
The Annual Meeting of
Unitholders will be held at
4:30 p.m. EDT on
Tuesday, May 27, 2014 at
One King West Hotel
1 King Street West
Toronto, Ontario M5H 1A1
Thomas Schwartz
President and
Chief Executive Offi cer
Thomas Schwartz
President and
Chief Executive Offi cer
Michael Stein
Chairman and Chief Executive
Offi cer of MPI Group Inc.
Michael Stein
Chairman
Scott Cryer
Chief Financial Offi cer
Mark Kenney
Chief Operating Offi cer
Maria Amaral
Chief Accounting Offi cer
Corinne Pruzanski
General Counsel and
Corporate Secretary
HEAD OFFICE
11 Church Street, Suite 401
Toronto, Ontario M5E 1W1
Tel: 416.861.9404
Fax: 416.861.9209
website: www.capreit.net
Paul Harris (2)
Partner, Davies, Ward,
Phillips & Vineberg LLP
(a law fi rm)
Harold Burke (2)
Principal, Dundee Real Estate
Asset Management (a real
estate management fi rm)
Stanley Swartzman (1) (2) (3)
Corporate Director
Edwin F. Hawken (1) (2)
Corporate Director
David Ehrlich (1) (3)
Corporate Director
Elaine Todres (3)
President, Todres Leadership
Counsel
(1) Investment Committee
(2) Audit Committee
(3) Compensation and
Governance Committee
Analysts, Unitholders and
others seeking fi nancial data
should visit CAPREIT’s
website at www.capreit.net
or contact:
Thomas Schwartz
President and
Chief Executive Offi cer
Tel: 416.861.9404
E-mail: ir@capreit.net
Registrar and Transfer Agent
Computershare Trust Company
of Canada
100 University Avenue
9th Floor
Toronto, Ontario
M5J 2Y1
Tel: 1.800.663.9097
E-mail:
caregistry@computershare.com
Auditors
PricewaterhouseCoopers LLP
Legal Counsel
Stikeman Elliott LLP
Stock Exchange Listing
Units of CAPREIT are
listed on the Toronto Stock
Exchange under the trading
symbol “CAR.UN”.
Monthly Distribution per Unit
January 2013 –
May 2013: $0.093
($1.12 annually)
June 2013 –
December 2013: $0.096
($1.15 annually)
104 CAPREIT 2013 ANNUAL REPORT
www.capreit.net
2013 marks the fi rst year that CAPREIT has been recognized as one of Canada’s 50 Best Employers.
The Best Employers list, compiled by Aon Hewitt, a global HR consulting fi rm, is determined in large part by surveying
employees. Their engagement is measured by their views on areas such as leadership excellence, manager effectiveness,
supporting productivity, career development and recognition. The list was published in Maclean’s magazine.