CAPREIT 2014 ANNUAL REPORT
BEST OPERATIONS =
BEST RETURNS
CAPREIT is achieving organic
growth by building the best operating
company in the business
PROFILE
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
Highlights
• To provide Unitholders with long-term, stable
• Revenues, NOI, FFO and AFFO at record
and predictable monthly distributions;
levels, driven by strong occupancies, increased
average monthly rents and acquisitions
• To grow Normalized Funds From Operations
(“NFFO”), sustainable distributions and Unit
value through the active management of our
properties, accretive acquisitions and strong
financial management; and
• To reinvest capital within the property portfolio
in order to ensure life safety of residents and
maximize earnings and cash flow potential.
• Average monthly rents on stabilized residential
properties up 2.1%, with strong 98.0%
occupancy
• Same property NOI up 7.5%, our ninth
consecutive year of strong organic growth
• NFFO up 15.0% for the year ended
December 31, 2014
• Continued accretive growth as NFFO per Unit
up 7.2%
• One of Canada’s 50 Best Employers for the
second year in a row
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
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
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
1
2014
2013
97.9%
964
506,411
303,885
60.0%
1.644
1.675
109,456
1.168
72.8%
71.5%
46.49%
56.73%
3.66%
6.3
1.61
2.82
152,043
474
338
25.13
2,844
$
$
$
$
$
$
$
$
$
98.0%
951
477,023
273,854
57.4%
1.529
1.562
102,064
1.138
76.4%
74.8%
47.32%
56.74%
3.76%
6.0
1.54
2.62
86,443
4,931
604
21.25
2,361
$
$
$
$
$
$
$
$
$
1 As at December 31.
2 NOI, FFO and NFFO are not defined 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 Defined 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 in the Liquidity and Financial Condition section).
2
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
1
GREATER VANCOUVER AREA
AND VICTORIA
Total Suites
3,128
Occupancy
99.5%
Average
Monthly Rents
$1,052
40
2
3
CALGARY
Total Suites
1,883
Occupancy
96.5%
Average
Monthly Rents
$1,211
EDMONTON
Total Suites
310
Occupancy
98.1%
Average
Monthly Rents
$1,201
1,488
431
310
1,600
1,452
4
REGINA AND
SASKATOON
Total Suites
367
Occupancy
96.2%
Average
Monthly Rents
$1,000
31
336
5
KITCHENER, WATERLOO
AND LONDON
Total Suites
1,649
Occupancy
97.9%
Average
Monthly Rents
$883
768
881
6
OUTSIDE GREATER
TORONTO AREA
Total Suites
1,410
Occupancy
99.1%
Average
Monthly Rents
$1,095
190
1,220
HIGH-QUALITY
PORTFOLIO
CAPREIT’S high-quality property
portfolio is well-diversified both
demographically and by property
type, and is strongly positioned
in key Canadian urban markets
from coast to coast.
Affordable
Mid-Tier
Luxury
2,470
13,773
19,161
TOTAL
Suites
35,404
Occupancy
97.9%
Average
Monthly Rents
$1,076
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
3
8
9
10
11
12
OTTAWA
Total Suites
1,527
Occupancy
100%
Average
Monthly Rents
$937
GREATER MONTRÉAL REGION
QUÉBEC CITY
Total Suites
4,581
Occupancy
97.0%
Average
Monthly Rents
$895
Total Suites
2,728
Occupancy
96.8%
Average
Monthly Rents
$938
HALIFAX
Total Suites
1,588
Occupancy
90.8%
Average
Monthly Rents
$995
CHARLOTTETOWN
Total Suites
453
Occupancy
94.9%
Average
Monthly Rents
$930
1,527
617
2,278
1,894
1,686
505
180
273
834
1,083
7
GREATER TORONTO
AREA (GTA)
Total Suites
15,780
Occupancy
98.8%
Average
Monthly Rents
$1,181
1,277
4,945
9,558
3 EDMONTON
1 VANCOUVER
VICTORIA
1
2 CALGARY
4 SASKATOON
4 REGINA
CANADA
QUÉBEC CITY
10
12 CHARLOTTETOWN
11 HALIFAX
9 MONTRÉAL
OTTAWA
8
GREATER TORONTO AREA
6
7
OUTSIDE GTA
5
KITCHENER
WATERLOO
LONDON
4
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
MANUFACTURED
HOME COMMUNITIES
6
Our growing MHC portfolio
continues to deliver strong
Unitholder returns and stable,
sustainable cash flows
1
2
3
4
5
TOTAL
Units
6,284
Occupancy
97.5%
Average
Monthly Rents
$356
1
2
3
4
5
6
BRITISH COLUMBIA
ALBERTA
SASKATCHEWAN
ONTARIO
PRINCE EDWARD ISLAND
NEW BRUNSWICK
Total Suites
130
Occupancy
99.2%
Average
Monthly Rents
$409
Gibson
The Poplars
Total Suites
246
Occupancy
100.0%
Average
Monthly Rents
$335
Saskatoon
Sunset Estates
Total Suites
415
Occupancy
98.6%
Average
Monthly Rents
$381
Slave Lake
Lynwood Gardens
Whitecourt
Evergreen Village
Hillpark Estates
Brooks
Greenbrook Estates
Total Suites
500
Occupancy
95.6%
Average
Monthly Rents
$138
Charlottetown
Parkwood Estates
River Ridge Estates
Riverview Estates
Cornwall
Chateau Estates
Total Suites
2,685
Occupancy
99.6%
Average
Monthly Rents
$489
Beamsville
Golden Horseshoe
Estates
Grand Bend
Grand Cove
Newcastle
Wilmot Creek
Orillia
Fergushill Estates
Parkside Estates
Silver Creek Estates
Sarnia
Green Haven Estates
Trenton
Bayview Estates
Sunny Creek Estates
Total Suites
2,308
Occupancy
94.8%
Average
Monthly Rents
$244
Bathurst
Bayview Park & Kent
Estates
Beresford
Bayview Park & Kent
Estates
Burton
Burton Estates
Edmundston
Park P’Tiso Estates
Lincoln
Tamarack Estates
Moncton
Pine Tree Village
White Frost Estates
Quispamsis
Parkside Estates
Riverview
River East Estates
Saint John
Milford Estates
Waqsis
Crown & Currie
Estates
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
5
From left to right: Maria Amaral, Chief Accounting Officer; Corinne Pruzanski, General Counsel and Corporate Secretary; Scott Cryer, Chief Financial Officer;
Thomas Schwartz, President and Chief Executive Officer; Mark Kenney, Chief Operating Officer
REPORT TO UNITHOLDERS: 2014 was another year of record performance for CAPREIT.
Prudent portfolio expansion combined with strong organic growth generated solid
increases in revenues, net operating income and Normalized Funds From Operations. Our
record results also clearly demonstrate that our industry-leading operating platform and
property management initiatives are generating significant benefits for our Unitholders.
OPERATING REVENUES ($ Thousands)
Acquisitions, high occupancies and
increased average monthly rents
contributed to stable and consistent
growth in operating revenues
NET OPERATING INCOME ($ Thousands)
Strong revenue growth combined
with proven management programs
generated stable NOI growth with
industry-leading NOI margins
506,411
477,023
412,421
338,959
361,955
206,157
190,339
303,885
273,854
237,916
NORMALIZED FUNDS FROM OPERATIONS
($ Millions)
Strong and accretive growth in NFFO
and NFFO per Unit despite increases
in the number of Units outstanding
183.4
159.4
132.6
103.9
92.0
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
6
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
RECORD PERFORMANCE
The past four years have been a period of
significant growth for CAPREIT as we
made a total of approximately $1.5 billion
of acquisitions (excluding capital expendi-
tures), representing 13,837 apartments,
townhomes and manufactured housing
community (“MHC”) sites owned as at
December 31, 2014. Since January 1, 2011,
CAPREIT has increased the size and scale
of its portfolio by 46.2% through net
acquisitions. With this significant growth,
combined with the positive impact of our
property management programs and
continuing strong fundamentals in the
Canadian multi-residential rental business,
we generated another record year in 2014.
Operating revenues rose by 6.2% to
$506.4 million as a result of contributions
from our acquisitions, continuing high
stable occupancies, and increased average
monthly rents compared to 2013. Ancillary
revenues, including parking, laundry, com-
munications services and antenna rentals,
continue to make a strong contribution to
our revenues, rising 8.8% to $26.7 million
compared to the prior year.
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 60.0%, with Normalized Funds From
Operations (NFFO), our key performance
benchmark, up 15.0% for the year to
$183.4 million. Importantly, our growth
was significantly accretive as NFFO per
Unit rose a solid 7.2% to $1.675 per Unit
over 2013. Our payout ratio of distribu-
tions declared to NFFO also remained very
strong, improving to 71.5% from 74.8%
last year.
Despite our record growth over the past
few years, we continue to maintain one
of the strongest financial positions in our
business. Total debt to gross book value
ratio was a conservative 46.5% at year-end,
well within our guidelines. Our mortgage
portfolio remained balanced, with the
weighted average interest rate declining
ANCILLARY REVENUES CONTINUE TO GROW
Growth in Ancillary Revenues for Stabilized Property Portfolio
5 . 8 % C A G R
$9.7M
$7.9M
Other
Antenna
Cable/Internet
Laundry
Parking: Commercial
Parking: Resident
2009
2010
2011
2012
2013
2014
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
7
Despite our record growth over the past few
years, we continue to maintain one of the
strongest financial positions in our business
to 3.66% at December 31, 2014, while we
extended the average term to maturity to
6.3 years, adding greater stability to our
financial position.
control, purchasing and energy manage-
ment programs that together not only
generate solid gains in cash flows, but also
enhance the lives of our residents in all our
properties across Canada.
PRUDENT AND RESPONSIBLE
PORTFOLIO GROWTH
2014 was a year of more muted portfolio
growth as we acquired 474 apartment suites
and MHC sites for total acquisition costs of
approximately $61.5 million. We have
stated many times that CAPREIT will not
simply grow for growth’s sake; that every
potential acquisition must be immediately
accretive to our NFFO, among other
rigorous criteria. Many of the potential
property purchases we evaluated during the
year did not meet these criteria, and we will
maintain this strategy of prudent portfolio
growth in the coming years.
INDUSTRY-LEADING
ORGANIC GROWTH
Our record performance in 2014, in
addition to contributions from our
acquisitions over the past four years, was
largely driven by very solid growth in our
stabilized property portfolio. Defined as
all properties owned continuously since
December 31, 2012, the performance of our
stabilized portfolio clearly demonstrates the
very positive impact our property manage-
ment programs and capital investments are
generating for our Unitholders. For the year
ended December 31, 2014, stabilized net
operating income rose a significant 7.5%
following a 3.0% increase in 2013. Stabi-
lized properties represented 87.5% of our
total portfolio at December 31, 2014.
This stellar growth in our same property
NOI is the result of a number of unique
and successful sales and marketing, cost
PROVEN SALES AND
MARKETING PROGRAMS
At CAPREIT we are employing the latest
technologies to maintain high occupancies
and maximize revenues in each of our
chosen markets. We have invested in
numerous initiatives to drive increased
visits to our innovative Internet portals,
including the use of high-quality videos
and enhanced content to showcase our
properties. We are also employing sophisti-
cated search engine optimization programs
to ensure Canadians looking for high-
quality rental accommodation visit our
website first. As a result of these initiatives,
visits to our website have increased
significantly, generating very strong sales
leads and conversion rates. Our innovative
mobile applications are also proving
successful as more people looking for rental
accommodation visit properties of interest
and then use their mobile devices to find
details of their chosen new home prior to
applying for a rental suite.
To ensure we retain residents in our
buildings – a key objective in generating
stable and consistent cash flows – we work
hard to meet their needs and answer their
questions. We recently launched “CAP
CARES”, a toll-free number residents can
use to obtain information, and we strive to
answer their questions as quickly as
possible. Comprehensive resident surveys,
conducted by an independent third party,
are another key tool we are utilizing to
ensure we deliver the best possible experi-
ence for our residents.
MARKETING
GROWTH
211%
Growth in
web visits,
inside sales
contacts
and mobile
site visits
over 2013
30%
10%
Inside
Sales
Contacts
Mobile
Site
Visits
Website
Visits
8
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
To ensure we retain residents in our
buildings – a key objective in generating stable
and consistent cash flows – we work hard to
meet their needs and answer their questions
REGIONAL OFFICE STRUCTURE
CAPREIT’s well-developed regional
office structure ensures we can effectively
manage costs locally, supported
by cost-effective national programs
TORONTO
CENTRAL
TORONTO
EAST
CAPREIT
HEAD OFFICE
TORONTO
WEST
SOUTH-
WESTERN
ONTARIO
VANCOUVER
QUÉBEC
CITY
MONTRÉAL
HALIFAX
Sales and
Marketing
Human
Resources
Procurement
and Energy
Management
Legal
Information
Technology
Accounting
and
Finance
Corporate
These and other innovative sales and
marketing programs are generating tangible
benefits for our Unitholders. Occupancy in
2014 remained at near-full levels of 97.9%,
while residential average monthly rents on
stabilized properties increased 2.1% com-
pared to 2013. Maximizing revenues at our
properties while meeting the needs of our
residents is a key driver of our performance,
and we are continuing to employ the latest
and most sophisticated strategies to meet
these objectives.
EFFECTIVE PORTFOLIO-WIDE
COST MANAGEMENT INITIATIVES
While maximizing property revenues is a key
goal, controlling operating costs also contrib-
uted to our record performance in 2014.
Portfolio-wide purchasing contracts for
such items as elevator maintenance,
landscaping and snow removal are improv-
ing service at our properties and reducing
costs. Recently-introduced new tendering
procedures, volume rebates and prompt-
payment discounts with approved vendors
are also generating substantial savings.
Energy management and environmental
enhancement programs, including the
installation of energy-efficient lighting
solutions and state-of-the-art heating
boilers, as well as low-flow taps and toilets
to reduce water consumption, are con-
tributing to solid operating returns, while
capitalizing on all available government
energy rebate programs to reduce costs.
In addition, our program to sub-meter
individual suites is allowing residents
control over their own energy costs while
producing significant savings for CAPREIT.
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
9
We have also invested in a new state-of-the-
art enterprise resource planning (“ERP”)
and accounting systems platform to ensure
our head office is as cost effective as pos-
sible. In addition to increased efficiency
in information processing, more timely
operational and financial decision-making,
and operational efficiencies through more
streamlined business processes, we are
managing our growth without a com-
mensurate increase in employment. As an
example, since January 1, 2011, we have
seen a 46% increase in our suite count, but
only a 14% rise in our headcount. We are
confident the scalability of our new ERP
systems will help to manage our growth
while enhancing our bottom line.
CAPITAL INVESTMENTS
ENHANCE PORTFOLIO VALUE
Over the past four years CAPREIT has
invested more than $550 million in capital
improvements to our properties, extend-
ing their useful economic life, enhancing
resident life safety and improving our
portfolio’s long-term cash flow potential.
Investments in our building envelopes,
common area and suite improvements,
energy saving initiatives and new heating
boilers, elevators and appliances all contrib-
ute to resident satisfaction and improved
cost performance, and enhance the overall
value of the CAPREIT property portfolio.
Our emphasis on targeted property capital
investment programs is yielding very posi-
tive results. As an example, for the 32 prop-
erties with the highest capital investment
averaged over the past five years, represent-
ing approximately 50.4% of total capital
expenditures over the period, average NOI
growth was just over 5.8%, clearly demon-
strating that our investment programs are
generating solid growth in cash flows.
AN EXPERIENCED AND
ENGAGED TEAM
At CAPREIT we know we could not have
generated such strong growth and record
operating performance without an engaged
and dedicated team. We recognize that our
greatest asset is our people, and we have
initiated a number of programs to ensure
we maintain what we believe is one of the
PROVEN BUSINESS MODEL
CAPREIT’s proven business model has
generated a track record of significant
growth, industry-leading operating performance
and enhanced Unitholder value
4. DIVEST
Divest non-
core properties
to invest
in growth
1. ACQUIRE
Acquire
strategic
properties
and portfolios
3. INVEST
Invest
capital for
maximum
returns
2. APPLY
Apply
operating
model to
enhance NOI
2014 RESIDENTIAL AVERAGE MONTHLY RENTS – CMHC VS CAPREIT
CAPREIT’s sophisticated sales and marketing programs, combined with a
focus on meeting resident needs, have resulted in average monthly rents that
consistently exceed the market.
Province
Québec
Prince Edward Island
Ontario
British Columbia
Alberta
Saskatchewan
CMHC 1
729
$
788
$
$ 1,109
$ 1,031
$ 1,197
992
$
CAPREIT
911
$
930
$
$ 1,140
$ 1,052
$ 1,209
$ 1,000
% Higher
25.0%
18.0%
2.8%
2.1%
1.0%
0.8%
1 Weighted average based on CAPREIT’s proportion of residential suites in each province.
10
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
As a testament to the success of our human
resources strategies, we are proud to have
been recognized as one of Canada’s 50 Best
Employers in both 2014 and 2015
best management and operating teams in
our business. New mentoring and training
programs are developing best-in-industry
operational expertise, while our focus
on the “CAPREIT WAY”– our emphasis
on stability, quality and growth – is the
foundation of our corporate culture and the
core of everything we do at CAPREIT.
These programs are resulting in a very
engaged workforce, one that brings solid
benefits through reduced absenteeism,
higher productivity, enhanced resident
service and increased accountability.
As a testament to the success of our human
resources strategies, we are proud to have
been recognized as one of Canada’s 50 Best
Employers in both 2014 and 2015.
Our human resources initiatives are
also helping to contain costs as we grow.
Trained and certified in-house recruiters
and legal expertise are generating substan-
tial savings compared to using external
agencies and legal firms, while our pro-
prietary education and training programs
ensure the “CAPREIT WAY” is instilled in
all our employees more cost-effectively.
THE “CAPREIT WAY”
The CAPREIT Way is the
foundation of our corporate culture
and defines everything
we do at CAPREIT
Innovative
PROGRAMS S
f
f
a
t
I
G
N
N
I
A
R
T
S
N
O
I
T
A
C
I
N
U
M
M
O
C
HANDS-ON
Approach R
t
n
e
d
i
s
e
Knowledge &
EXPERIENCE
A “DEVELOPING” NEW
GROWTH STRATEGY
In addition to increasing the size and scale
of our property portfolio and generating
solid organic growth through our proven
property and asset management programs,
we have recently begun investigating the
opportunity to develop new residential
rental properties internally or in partner-
ship with other REITs and real estate
corporations. At CAPREIT we have
developable land at a number of our cur-
rent locations that could be used to build
new rental properties, and we are currently
investigating zoning changes and hiring
development talent to capitalize on this
potential to generate very strong returns
on investment. We look forward to further
“developing” this new opportunity to build
Unitholder value.
In closing, we are very proud of everything
our team has accomplished in 2014, and we
are confident we have the right people in
the right places, the best operating platform
in the business and proven value-enhancing
strategies to maintain our track record of
growth and building Unitholder value for
years to come.
Thomas Schwartz
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Michael Stein
CHAIRMAN
BEST OPERATIONS = BEST RETURNS
CAPREIT 2014 Annual Report
11
NOI GROWTH
Superior same property
NOI growth has contributed
to our record performance
over the past five years
Cumulative Stabilized NOI Growth 26%
Annual Stabilized NOI Growth 4.8%
Average 5-year Stabilized NOI growth 4.8%
26%
7.0%
EMPLOYEE ENGAGEMENT
An engaged workforce brings
solid benefits such as reduced
absenteeism, higher productivity,
enhanced resident service and
increased accountability
80%
56%
Increased Engagement as a % of Total Workforce
2009 2010 2011 2012 2013 2014
(2009 NOI AS A BASE)
2010
2011
2012
2013
2014
EFFICIENT GROWTH
While CAPREIT has generated
strong portfolio growth since 2010,
operational efficiencies and
scalable technology platforms
ensure we can manage future
growth without a commensurate
growth in headcount
41,688
46% Increase in Suite Count
14% Increase
in Headcount
840
28,497
734
Suite Count
Headcount
2010
2011
2012
2013
2014
12
CSR and
FinanCial RepoRting
CSR RepoRting
13 Strengthening Performance –
Strengthening Environmental and
Sustainability Practices
14 Corporate Social Responsibility
and Sustainability
SECTION vI
55 Accounting Policies and Critical
Estimates, Assumptions, and
Judgements
57 Controls and Procedures
SECTION vII
57 Risks and Uncertainties
65 Related Party Transactions
66 Commitments and Contingencies
SECTION vIII
66 Subsequent Events
66 Future Outlook
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
104 Five-Year Review
ManageMent’S
DiSCuSSion
anD analySiS
SECTION I
IRES Transaction
19 Forward-Looking Disclaimer
20 Non-IFRS Financial Measures
20 Overview
20
22 Objectives
22 Business Strategy
23 Key Performance Indicators
24 Performance Measures
25 Property Portfolio
28
Investment Properties
SECTION II
30 Average Monthly Rents and Occupancy
34 Results of Operations
35 Net Operating Income
37 Stabilized Portfolio Performance
39 Net Income and Other Comprehensive
(Loss) Income
SECTION III
42 Non-IFRS Financial Measures
42 Per Unit Calculations
SECTION Iv
46 Property Capital Investments
47 Productive Capacity
48 Capital Structure
49 Liquidity and Financial Condition
53 Unitholder Taxation
SECTION v
54 Selected Consolidated Quarterly
Information
55 Selected Consolidated Financial
Information
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
CSR RepoRting
13
StRengthening peRFoRmanCe
Strengthening Environmental and
Sustainability Practices
In 2014 we celebrated seventeen years of providing our residents with
high-quality, safe and secure homes and our employees with an engaging place to
work, 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 manage-
ment 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 showcase these objectives, we are
pleased to present CAPREIT’s second
annual report on key initiatives to enhance
social responsibility and sustainability
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, energy-saving lighting,
high-efficiency toilets, low-flow faucets and
showers, and many others. We continue to
reduce energy and water consumption in a
cost effective manner, thereby minimizing
our impact on the environment and con-
tributing to better financial performance.
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 differ-
ence every day. We are very proud to have
been selected as one of Canada’s 50 Best
Employers in 2015 for a second consecutive
year. Our ranking significantly improved in
2015 compared to 2014 as one of Canada’s
50 Best Employers, a testament to our
success in engaging our employees. From a
governance perspective, CAPREIT’s Board
of Trustees is comprised of skilled and ex-
perienced individuals, the majority of them
independent, fully engaged in CAPREIT’s
operations and who ensure our business
practices remain ethical, open and transpar-
ent. We continue to bring greater diversity
and a broader wealth of knowledge to
the Board; in 2014 we added a trustee
who brings a wealth of experience in risk
management, internal audit and finance.
underprivileged schoolchildren and 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 past 15 years we have
partnered with government agencies to
provide approximately 2,000 suites across
our portfolio as affordable homes for less
fortunate families.
Each year we continue to share with you
our progress toward meeting our goals in
various aspects of our corporate social
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.
At CAPREIT we also believe in giving back
to the communities where we operate. In
2012 we instituted a breakfast program for
Thomas Schwartz
President and Chief exeCutive OffiCer
CAPREIT 2014 Annual Report 14
CSR RepoRting
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, located predominantly in or near major
urban centres across Canada. CAPREIT’s portfolio serves residents across all
demographic segments and is highly diversified geographically.
Established in 1997, CAPREIT has grown
by acquiring properties at values below
their replacement cost, primarily in large
urban rental markets close to public
amenities 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 profitable growth
for Unitholders.
CAPREIT’s Board of Trustees and
Management have made sustainable
business practices a priority, seeking to
incorporate the principles of sustainability
into CAPREIT’s long-term business
strategy, corporate culture and operations.
The goals of this focus are to operate the
business safely and more efficiently, 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 efficiency, innova-
tion, and operational and sustainable
financial performance.
In line with Management’s commitment
to best practices in communication,
CAPREIT’s annual reporting will incorpo-
rate 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 financial and
non-financial objectives contribute to
CAPREIT’s long-term sustainability.
CAPREIT 2014 Annual Report CSR RepoRting
15
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 methods as economic hedges related to utility
costs and interest rate volatility, programs to reduce the consumption of natural
resources, targeted capital investments to enhance the comfort and life safety
of residents, philanthropic and charitable efforts, and tenant satisfaction and
employee engagement initiatives. CAPREIT was able to meet and exceed many
of the key targets it set for 2014 affecting several key stakeholders.
caPreIt achIeved the followIng goals In 2014:
EmploymEnt practicEs:
> Improved ranking as one of Canada’s
50 Best and Quebec’s Best Employers
> Increased employee and employer
contributions under the Employee Unit
Purchase Plan (“EUPP”)
> Enhanced workplace design and
ergonomics for improved employee
satisfaction and productivity
> Established a new Human Resources
and Compensation Committee mandated
to provide oversight for key human
resource priorities
> Established the Leadership Excellence
and Development (“LEAD”) program to
mentor staff, provide cross-functional
exposure and groom future leaders
rEsidEnt satisfaction:
> $59.5 million in structural capital
investments for enhanced life safety and
property improvement
> $74.0 million in suite improvements,
common areas and other enhancements
for the greater comfort of residents
> $11.2 million in repairs and mainte-
nance, including for reconditioning and
improved curb appeal of properties
> Information systems upgrades and
enhancements for quicker suite turnover
and cost reduction
> Enhanced website with mobile integra-
tion and fully responsive site search for
improved customer service
corporatE govErnancE:
> Added a new trustee to bring greater
diversity and a broader wealth of
knowledge to the Board, including
experience in risk management,
internal audit and finance
affordablE housing and
philanthropic Efforts:
> Provided over 2,000 affordable suites
to families in need in partnership with
multiple government agencies
> Increased the number of free breakfasts
served to schoolchildren at CAPREIT
properties
> Continued commitment with the TFSS
in support of serving nutritious meals at
a school near CAPREIT properties
EnvironmEntal consErvation:
> Invested $8.8 million in energy-efficiency
capital investments to reduce resource
consumption
invEstors:
> Sixteenth increase in cash distributions
since IPO to $1.18 per Unit annually
> Extended weighted average term to
maturity for the mortgage portfolio
> 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 five consecutive years
> Diversified revenue streams by providing
asset management duties and property
services for Irish Residential Properties
REIT plc
> Implemented better tracking and
> Stabilized net operating income growth
visibility of resource consumption for
identification of underperforming
properties
of 4.8% over the past six years
> Sustained overall portfolio occupancy
above 97% over five years
> Awarded by Toronto Hydro for
electricity savings
> Continued to expand electricity
sub-metering and launched water
sub-metering projects
CAPREIT 2014 Annual Report 16
CSR RepoRting
future targets
2015
EmploymEnt practicEs:
> Further improve employee engagement
levels and maintain “Canada’s 50 Best
Employers” ranking
> Begin roll-out of phase 1 of a full-scale
Human Resource Information System
for performance management, tracking
and employee efficiency information,
among other benefits
> Commence corporate head office work-
place redesign for improved employee
productivity
> Begin implementation of the Accounting
Modernization Project to increase
efficiencies and enhance processes
while improving employee engagement
> Implement information technology
enhancements to permit flexibility and
broaden mobility for employees while
reducing operating costs
rEsidEnt satisfaction:
> Continue to upgrade suites and common
areas to increase the quality of life for
our residents
> Focus on conversion of space into ameni-
ties for resident use where feasible
affordablE housing and
philanthropic Efforts:
> Expand CAPREIT’s breakfast club
to three additional locations across
the country
> Expand breakfast programs to allow
both staff and residents to donate
and volunteer
EnvironmEntal consErvation:
> Invest $2.5 million in energy-efficient
and environment-friendly projects
> Expand water sub-metering projects
across 1,500–2,000 suites in an effort to
reduce impact on the environment
invEstors:
> Acquire between 1,500 and 2,000 suites
and sites on an annualized basis
> Raise between $280 million and
$320 million in total mortgage
refinancings
> Deliver year over year stabilized net
operating income growth
> Sustain overall portfolio occupancy
above 97% while increasing average
monthly rents
in thE mEdium tErm:
> Continue to improve CAPREIT’s
ranking as one of Canada’s 50 Best
Employers
> Complete implementation of Human
Resource Information System
> Continue to increase efficiencies and
streamline processes
> Expand charitable efforts to improve the
livelihood of underprivileged families
and further engage the community
> Align executive performance incentives
with key sustainability performance
indicators
> Reduce average energy use and water
consumption intensity on a per suite
basis
> Investigate opportunities to enter into
joint venture relationships with other
real estate entities to potentially develop
new multi-unit rental residential prop-
erties on excess land owned by
CAPREIT or other vacant land
ultimatEly, thEsE will hElp caprEit
achiEvE its goal to:
> Attain recognition as a Top Ten
Employer in Canada
> Attain above 98% occupancy while
improving average monthly rents
> Attain the lowest energy and water
consumption intensity in the multi-
residential industry
sustaInabIlIty Performance
EmploymEnt practicEs
CAPREIT recognizes that its people are its
most important asset. Talented and experi-
enced property managers, combined with
specialists in procurement and knowledge-
able finance staff, are the key drivers of suc-
cess. CAPREIT is focused on providing its
employees with meaningful work in a safe
environment, with training and develop-
ment 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 2014 was proud to have
been ranked in the top 15 as one of the
50 Best Employers in Canada as evalu-
ated by human resource firm Aon Hewitt.
Management is committed to further
improving the work environment, and to
increase productivity and improve effi-
ciency through key technological initiatives
that are focused on streamlining processes.
CAPREIT employees are provided with the
opportunity to own CAPREIT’s Trust Units
through a highly beneficial Employee
Unit Purchase Plan to align their interests
with those of all Unitholders, with an
increase in employee and employer
contributions in 2014. Looking forward,
CAPREIT is committed to providing
opportunities to its employees with a focus
on attracting new talent and keeping cur-
rent employees engaged.
CAPREIT 2014 Annual Report CSR RepoRting
17
CAPREIT has also taken a leadership
role in achieving gender balance. As of
December 31, 2014, CAPREIT is proud
that 17 of the 28 seniormost managers
are female.
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 floor plans, virtual tours, pictures
and videos, and local points of interest, all
combined with a proactive social media
presence to address questions. Additional
investments in technologies to improve
resident experience are currently being
explored.
Happy and satisfied residents mean lower
lease turnover, lower vacancy loss, fewer
repairs and maintenance, higher average
monthly rents, more resident referrals and
a better resident community. Therefore,
Management ensures resident engagement
initiatives are in place at every building fo-
cused on strengthening these relationships.
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 potentially costly repairs.
Feedback to CAPREIT helps identify areas
for improvement and enables CAPREIT’s
team to enhance and deliver resident ser-
vices provided at its properties. CAPREIT
also employs a “mystery shopper” program
to ensure its customer service initiatives
are effective in meeting its goals.
The reconditioning and enhancement of
buildings under CAPREIT’s capital invest-
ment 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 acces-
sible information on shutdown procedures
for all building mechanical systems in
case of an emergency. Conscious efforts
are underway for opportunities within the
current portfolio to convert unused space
to provide more amenities to tenants for
greater resident satisfaction.
To help working families in need of as-
sistance, CAPREIT has formed long-term
partnerships over the past 15 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 help to integrate
disadvantaged families into the broader
community while the efficient operating
platforms of landlords such as CAPREIT
have the added benefit of effectively reduc-
ing 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 2014, CAPREIT provides
over 2,000 suites across Canada and is
one of the largest contributors of afford-
able housing in the Greater Toronto Area.
CAPREIT is committed to supporting and
expanding these programs as it contrib-
utes to the well-being of communities and
society and ensures properties are fully
occupied at market rents.
CAPREIT’s breakfast club is in its second
year of a three-year commitment to a
partnership with a local Toronto breakfast
program to provide children with a hot
breakfast every morning at a school close
to some of the properties. The breakfast
program is funded mostly through staff and
vendor donations; only a third is paid for
by CAPREIT.
Due to the success of the existing breakfast
club location, this effort will be expanded
to three additional locations across the
country. In 2015, the breakfast program will
be expanded to allow both staff
and residents the opportunity to donate
and volunteer.
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 determine 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 financial performance
through the optimization of its utility
consumption and by facilitating the reduc-
tion 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 improved overall
financial performance.
One of CAPREIT’s key strategies is to
evaluate the implementation of a variety of
energy-efficiency initiatives at every prop-
erty on acquisition and thereafter on a regu-
lar basis by means of newer, cost-effective
technology, allowing even greater reduction
in energy use. These initiatives, with favour-
able payback periods, include:
> Installation of new high-efficiency
boilers and chillers
> Installation of compact fluorescent light
bulbs in suites and common areas
> Replacement of laundry machines
with high-efficiency washing machines
and dryers
> Use of reflective panels to cost-
effectively reduce heat loss
> Regular cleaning of in-suite heating
coils, fins and radiators
CAPREIT 2014 Annual Report 18
CSR RepoRting
High-efficiency boilers, remotely monitored
by CAPREIT’s in-house energy depart-
ment, allow for optimal temperatures for
residents’ comfort with efficient energy use.
Total expenditures since 2010 on energy
consumption optimization investments
amount to $34.2 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 past
few years, a number of properties using
heating oil have been converted to natural
gas, reducing overall emissions as well as
oper ating costs.
The following table shows the results of
CAPREIT’s energy-efficiency and environ-
mental initiatives on a per suite basis for the
years 2011–2013 calculated by an indepen-
dent consulting firm in accordance with
GHG Protocol (including Scopes 1 to 3):
EnErgy usE intEnsity pErformancE
ovEr prior yEar
2013
2012
2011
In Accordance with
GHG Protocol
4.5%
(7.9%) 0.2%
In Accordance with
GHG Protocol
Adjusted for Impact
of Weather and
The following table demonstrates the ben-
efits of sub-metering through the reduction
in annual electricity use intensity on a per
suite basis in sub-metered buildings com-
pared with those for the overall portfolio
for the years 2012 and 2011.
pErcEnt rEduction in ElEctricity
usE intEnsity ovEr prior yEar
Sub-metered
Properties
2013
2012
2011
(6.4%) (2.6%) (1.5%)
Overall Portfolio
(3.1%) (0.6%) 0.2%
Based on stabilized properties
The historical data above was adjusted
to exclude the impact of weather and oc-
cupancy fluctuation. 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 also contributed
to the improved performance.
CAPREIT also evaluates the prompt instal-
lation of the latest water-efficiency equip-
ment at newly acquired properties and on
a regular basis where considered cost-effec-
tive. Such initiatives include the installation
of the following since 2010:
> Over 16,000 ultra-high-efficiency toilets
> Over 15,000 low-flow showerheads plus
faucets using aerators
Occupancy
(1.8%) (2.6%) (1.8%)
> Over 3,000 high-efficiency laundry
Based on stabilized properties
machines
In addition, to optimize electricity consump-
tion, as of December 31, 2014, CAPREIT
had installed tenant sub-metering systems at
89 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 shows the results of
CAPREIT’s initiatives to reduce water
consumption on a per suite basis calculated
by an independent consulting firm in ac-
cordance with GHG Protocol:
watEr usE intEnsity pErformancE
ovEr prior yEar
2013
2012
2011
In Accordance with
GHG Protocol
(2.8%) (1.0%) (7.1%)
Based on stabilized properties
CAPREIT maintains a waste-diversion
policy and has expanded recycling initia-
tives at almost all of its properties. This
policy consists of increased use of blue bins
and garbage compactors, adaptation of
building waste collection substructure for
recycling and education of residents about
the benefits of recycling.
CAPREIT’s operations have little or no
impact on land contamination. Prior to the
acquisition or refinancing of a property,
thorough environmental studies are per-
formed by an independent consulting firm
to ensure there are no pre-existing contam-
inations and, if present, that appropriate
remediation work is performed to current
standards prior to acquisition.
CAPREIT contributes to the benefits
of greater urban density and lowers
pollution by revitalizing existing residential
properties. Revitalization adds to the useful
economic life of properties while mod-
ernizing them for changing demographic
needs and adding to the beautification of
the neighbourhood through contemporary
landscaping and other improvements.
Over the past seventeen years, CAPREIT
has come a long way from a small, regional
property owner to one of Canada’s larg-
est 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 employ-
ees, 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.
CAPREIT 2014 Annual Report
19
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 financial condition for the
year ended December 31, 2014 should be read in conjunction with
CAPREIT’s audited consolidated annual financial statements for
the year ended December 31, 2014.
Certain statements contained, or contained in documents
incorporated by reference, in this MD&A constitute forward-look-
ing 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 financial position, business strategy, budgets, litigation,
projected costs, capital investments, financial 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 specific 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 inflation 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 sufficient 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 inflation 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 financing, 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 specific capital investments. Although the forward-look-
ing statements contained in this MD&A are based on assumptions
which Management believes 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 opportu-
nities 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, co-ownerships, investment restric-
tions, operating risk, energy costs and hedging, environmental
matters, insurance, capital investments, indebtedness, interest rate
hedging, foreign operation and currency risks, taxation, harmoniza-
tion of federal goods and services taxes and provincial sales taxes,
government regulations, controls over financial 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 fluctuation of Units,
dilution, distributions, participation in CAPREIT’s distribution
reinvestment plan, potential conflicts 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
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 20
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 financial 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
defined 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 flows 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 manufac-
tured home communities located in and near major urban centres
in Canada. 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 addition, CAPREIT mitigates concentration risk through
demographic diversification by operating properties across the
affordable, mid-tier and luxury sectors, as well as through geo-
graphic diversification 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 profitable growth for Unitholders.
Established in 1997, CAPREIT has grown by acquiring prop -
erties 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.
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 June 12, 2014.
As at December 31, 2014, CAPREIT owned interests in
41,688 residential units, comprised of 35,404 residential suites
and 30 manufactured home communities (“MHC”), comprised
of 6,284 land lease sites. As at December 31, 2014, CAPREIT
had 840 employees (892 employees as at December 31, 2013).
IRES Transaction
On March 20, 2014, Irish Residential Apartments REIT Limited
(formerly, CAPREIT Ireland Limited, a wholly owned subsidiary of
CAPREIT) registered as a public limited company and changed its
name to Irish Residential Properties REIT public limited company
(“IRES”). It comprised a portfolio of 338 apartment suites in four
residential properties located in Dublin, Ireland. It was listed on
the Irish Stock Exchange on April 16, 2014, and on admission,
IRES issued 200,000,000 shares to the public on top of the existing
2,000,000 shares owned by CAPREIT LP, which resulted in
dilution of CAPREIT LP’s beneficial interest in IRES by 79.2%.
On dilution, CAPREIT LP had a loss of control of its subsidiary,
resulting in CAPREIT no longer consolidating IRES but rather
equity accounting for its retained investment. As a result of the
disposition, CAPREIT recognized a gain of $717 thousand relating
to the consideration received in lieu of the net asset value of the
properties in IRES on the disposition date, which is recorded in
other income. As at December 31, 2014, CAPREIT LP holds a
beneficial interest in 42.0 million Ordinary Shares, representing
20.8% of the issued share capital of IRES (See Subsequent Events
section for further details).
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
21
The tables below summarize property acquisitions and dispositions for the years ended December 31, 2014 and 2013:
Acquisitions Completed During the Year Ended December 31, 2014
($ Thousands)
January 15, 2014
April 17, 2014
Demographic
Sector
Commercial 3
MHC
July 31, 2014
September 30, 2014
November 20, 2014
Various 5
Mid-tier
MHC
December 8, 2014
December 16, 2014
Mid-tier
MHC
Total
Suite
or Site
Count
–
2
213
126
5
31
97
474
Region(s)
Burlington
Bowmanville and
Grand Bend
Charlottetown
Regina
Bowmanville and
Grand Bend
Calgary
Brooks, Alberta
Total
Acquisition
Costs
Assumed
Mortgage
Funding
$
11,356
$
– 4
141
20,624
17,097
426
7,570
4,331
– 4
14,747
8,391
– 4
2,984
– 4
$
61,545
$
26,122
Interest
Rate 1
– 4
– 4
3.95%
3.05%
– 4
3.27%
– 4
Term to
Maturity
(Years) 2
– 4
– 4
3.1
8.9
– 4
2.0
– 4
1 Weighted average stated interest rate on mortgage funding.
2 Weighted average term to maturity on mortgage funding.
3 The acquisition of a commercial property is situated beside an existing residential property in the Burlington area.
4 The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see Liquidity and Financial Condition section).
5 The acquisition comprised 213 suites (48 mid-tier and 165 luxury suites) in nine properties located in Charlottetown, Prince Edward Island.
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
10,274
– 3
$ 456,523
$
37,971
Interest
Rate 1
6.95%
– 3
4.25%
3.62%
– 5
– 3
4.49%
– 3
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 five-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.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
22
Dispositions Completed During the Year Ended December 31, 2014
($ Thousands)
April 16, 2014
Total
Demographic
Sector
Luxury 1
Suite
Count
338
338
Region
Dublin, Ireland
Sale Price
$
$
70,871
70,871
Mortgage
Discharged
$
$
7,599
7,599
1 The disposition of CAPREIT’s wholly owned subsidiary in Ireland, CAPREIT Ireland Limited (renamed to Irish Residential Properties REIT plc (“IRES”))
comprised a portfolio of 338 apartment suites in four properties located in Dublin, Ireland relating to IRES obtaining admission of its Ordinary Shares to
the Irish Stock Exchange. The public offering decreased CAPREIT’s ownership of IRES from 100% to 20.8% at admission.
Dispositions Completed During the Year Ended December 31, 2013
($ Thousands)
Demographic
Sector
August 28, 2013
Various 1
Total
Suite
Count
604
604
Region
Sale Price
Cash Proceeds
Greater Toronto Area $
$
94,250
94,250
$
$
57,672
57,672
Mortgage
Discharged
$
$
34,772
34,772
1 The disposition comprised 5 properties consisting of 604 mid-tier suites located in Mississauga and Toronto, Ontario.
Objectives
CAPREIT’s objectives are to:
• Provide Unitholders with long-term, stable and predictable
monthly cash distributions;
• Grow Normalized Funds From Operations, sustainable
distributions and Unit value through the active management
of its properties, accretive acquisitions and strong financial
management; and
• Reinvest capital within the property portfolio in order to ensure
life safety of residents and maximize earnings and cash flow
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, stressing
open and frequent communications to ensure residents’ needs are
met efficiently and effectively, thereby maintaining a high occu-
pancy 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 specific markets. In addition, CAPREIT’s
lease administration system improves control of rent-setting by
suite, increasing resident service and enhancing the overall profile
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 efficiently and cost effectively. CAPREIT strives
to capture potential economies of scale and cost generated by
the growth in its property portfolio. CAPREIT’s enterprise-wide
procurement system streamlines and centralizes purchasing
controls and procedures and is realizing reduced costs through
national master sourcing contracts, improved pricing and enhanced
operating efficiencies.
Capital investments
CAPREIT strives to acquire properties at prices significantly below
their current replacement costs, and is committed to improving its
operating performance by incurring appropriate capital invest-
ments in order to maintain the productive capacity of its property
portfolio and to sustain the portfolio’s rental income-generating
potential 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 invest-
ments extend the useful economic life of CAPREIT’s properties,
enhance life safety, maximize earnings and improve the long-term
cash flow potential of its portfolio.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
23
portfolio growth
CAPREIT will grow its portfolio over the long term through
accretive acquisitions that meet its strategic criteria and, where
possible, enhance geographic diversification while capturing
economies of scale and cost synergies, thereby increasing net
operating 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 investment programs and its
ability to maximize and manage the earnings and cash flow
potential of its property portfolio. In addition, Management has
recently begun prudently investigating the opportunity to enter
into joint venture relationships with other real estate entities to
potentially develop new multi-unit rental residential properties on
excess land owned by CAPREIT or other vacant land.
finanCial management
CAPREIT takes a conservative approach and strives to manage its
exposure to interest rate volatility by proactively managing its mort-
gage debt portfolio to fix and, where possible, reduce average inter-
est 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 defined a
number of key operating and performance indicators (“KPIs”) to
measure the success of its operating and financial strategies:
oCCupanCy
Management strives, through a focused, hands-on approach 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 profile
of its resident base.
average monthly rents
Through its active property management strategies, the lease
administration system and proactive capital investment 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 sufficient cash to meet its capital invest-
ment objectives, CAPREIT anticipates a long-term annual NFFO
payout ratio of between 70% and 80%.
portfolio growth
Management’s objective is to pursue acquisitions of between 1,500
and 2,000 suites and sites on an annual basis, subject to market
conditions and available financing, which meet its strategic
objectives, serve to accretively increase NFFO and continue to
further diversify the portfolio by geography and by demographic
sector. In addition, Management has recently begun prudently
investigating the opportunity to enter into joint venture relation-
ships with other real estate entities to potentially develop new
multi-unit rental residential properties on excess land owned by
CAPREIT or other vacant land.
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 refinancing
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 coverage ratios are maintained at a sustainable level. In
addition, CAPREIT focuses on maintaining capital adequacy by
complying with investment and debt restrictions in its DOT and
the financial covenants in its credit agreement comprised of an
acquisition and operating facility, which includes a Euro LIBOR
borrowing (“Acquisition and Operating Facility”) and a five-year
non-revolving term credit facility (collectively, the “Credit
Facilities”), as described under Liquidity and Financial Condition
in Section IV.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 24
Performance Measures
The following table presents an overview of certain key IFRS and non-IFRS financial measures and operational results of CAPREIT
for the years ended December 31, 2014 and 2013. Management believes that these measures are useful in assessing CAPREIT’s per-
formance vis-à-vis its objectives, business strategy and KPIs. Effective June 2014, monthly cash distributions declared to Unitholders
increased to $0.098 per Unit ($1.18 annually), compared to $0.096 per Unit ($1.15 annually) since June 2013 and $0.093 per Unit
($1.12 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
2014
2013
97.9%
964
506,411
303,885
60.0%
1.644
1.675
109,456
1.168
72.8%
71.5%
46.49%
56.73%
3.66%
6.3
1.61
2.82
152,043
474
338
25.13
2,844
$
$
$
$
$
$
$
$
$
98.0%
951
477,023
273,854
57.4%
1.529
1.562
102,064
1.138
76.4%
74.8%
47.32%
56.74%
3.76%
6.0
1.54
2.62
86,443
4,931
604
21.25
2,361
$
$
$
$
$
$
$
$
$
1 As at December 31.
2 NOI, FFO and NFFO are not defined 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 Defined 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 in the Liquidity and Financial Condition section).
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
25
Property Portfolio
types of property interests
CAPREIT’s investments in its property portfolio reflect 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
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 30 MHCs, whereby
CAPREIT owns the 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
Total Suites and Sites
2014
30,538
3,815
1,051
35,404
6,284
41,688
%
73.3
9.2
2.5
85.0
15.0
100.0
2013
30,506
3,815
1,051
35,372
6,180
41,552
%
73.4
9.2
2.5
85.1
14.9
100.0
portfolio diversifiCation
CAPREIT’s property portfolio continues to be diversified by geography and balanced among demographic sectors and asset
types. Management’s long-term goal is to further enhance the geographic diversification 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
2014
2,470
19,161
13,773
35,404
6,284
41,688
%
5.9
46.1
33.0
85.0
15.0
100.0
2013
2,470
18,956
13,946
35,372
6,180
41,552
%
5.9
45.6
33.6
85.1
14.9
100.0
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 26
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
2014
%
2013
%
15,780
1,527
1,649
1,410
20,366
4,581
2,728
7,309
1,948
1,180
3,128
310
1,883
2,193
1,588
133
234
367
453
37.9
3.7
3.9
3.4
48.9
11.0
6.6
17.6
4.7
2.8
7.5
0.7
4.5
5.2
3.8
0.3
0.6
0.9
1.1
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
1,588
133
108
241
240
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
3.8
0.3
0.3
0.6
0.6
–
35,404
–
85.0
338
35,372
0.8
85.1
2,685
130
415
246
500
2,308
6,284
41,688
6.4
0.3
1.0
0.6
1.2
5.5
15.0
100.0
2,678
130
318
246
500
2,308
6,180
41,552
6.4
0.3
0.8
0.6
1.2
5.6
14.9
100.0
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 stronger growth potential. CAPREIT continues to look
for investment opportunities that meet its investment criteria and that, where possible, will further its diversification strategy. The
geographic diversification of its portfolio also enables CAPREIT to mitigate the risks arising from potential downturns in specific markets.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
27
While CAPREIT’s portfolio growth was muted in 2014 due to a
lack of accretive acquisition opportunities, CAPREIT will continue
to target acquisitions of between 1,500 and 2,000 suites and sites
on an annualized basis over the long term.
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
properties. The option prices vary by property and by the year in
Operating Leasehold Interests Portfolio by Lease Maturity
($ Thousands)
As at December 31, 2014 and 2013
Year of Lease Maturity
Properties
2033
2034
2035
2037
Total Operating Leasehold Interests Portfolio
10
2
1
2
15
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, respec-
tively, 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 final 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 finance the option exercise prices.
Suites
3,099
161
200
355
3,815
Option Exercise Prices
%
81.3
4.2
5.2
9.3
26th Year
35th Year
$
202,071
19,300
14,200
47,200
$
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 i nterests
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 mature 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
2070
Total Land Leasehold Interests Portfolio
Suites
473
306
272
1,051
%
45.0
29.1
25.9
100.0
2014
1,000
621
1,280
2,901
$
$
Annual Ground Rent
$
$
2013
1,000
579
1,279
2,858
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
28
Investment Properties
Investment property is defined as property held to earn rental
income or for capital appreciation or both. Investment property is
recognized 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 specified date under all conditions requi-
site to a fair sale, the buyer and seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue
stimulus. This does not contemplate the potential for general
declines in real estate markets or the sale of assets by CAPREIT
under financial or other hardship. Each investment property has
been valued on a highest and best use basis but, specifically, does
not include any portfolio premium that may be associated with
economies of scale from owning a large portfolio or the consolida-
tion 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
necessarily reflect the specific history or experience related to
CAPREIT and, in many cases, the stabilized cash flows or NOI
used for appraisal purposes may not reflect the results ultimately
realized during future periods.
The fair value of investment properties is established by a
qualified, independent appraiser 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.
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
consolidated annual financial statements for the year ended
December 31, 2014 contained in CAPREIT’s 2014 Annual Report.
The following table summarizes the changes in the investment
properties portfolio during the years:
($ Thousands)
As at December 31,
2014
2013
Balance, Beginning of the Year
$ 5,459,218 $ 4,826,355
Add:
Acquisitions
Property Capital Investments 1
Capitalized Leasing Costs 2
Unrealized Gain on
Remeasurement at Fair Value
Foreign Currency Translation
Less:
Dispositions
Realized Loss on Dispositions
Investment Properties at Fair Value,
End of the Year
61,545
145,601
597
150,897
2,653
456,523
160,220
692
106,470
3,208
(70,871)
–
(93,439)
(811)
$ 5,749,640 $ 5,459,218
1 See Property Capital Investments section.
2 Comprises tenant inducements, straight-line rent and direct leasing costs.
For the years ended December 31, 2014 and 2013, the unreal-
ized 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 reflected in the fair value
of the investment properties at the measurement date.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
29
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 December 31,
2013
Changes Due to Change in
2014
2013
2014
($ Millions)
Fair Value
Rates 1
Stabilized
NOI
Forex
Translation
Net
Acquisitions
Fair Value
Rates 1
Rates 1
Greater Toronto Area
Other Ontario
Québec
British Columbia
Alberta
Nova Scotia
Saskatchewan
Prince Edward Island
Dublin, Ireland
MHC Land Lease Sites
$
$
2,436
482
902
589
434
232
27
27
67
263
Total
$
5,459
$
129
12
24
1
–
–
1
2
–
(4)
165
$
$
50
8
11
20
35
–
2
(1)
1
10
$
136
$
–
–
–
–
–
–
–
–
3
–
3
$
$
–
10
–
–
7
–
18
19
(71)
4
(13)
$
2,615
512
937
610
476
232
48
47
–
273
$
5,750
4.86%
5.22%
5.36%
4.30%
4.84%
5.75%
6.19%
6.28%
6.37%
6.07%
4.67%
5.12%
5.24%
4.28%
4.79%
5.75%
5.84%
6.04%
–
6.18%
1 Weighted average capitalization rates excluding implied capitalization rates on Operating and Land Leasehold Interests. See note 6 to the accompanying
audited consolidated annual financial statements for further valuation assumption details including discount rates as at December 31, 2014 for Operating
and Land Leasehold Interests.
As at December 31, 2014, 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, 2014
Weighted Average Capitalization Rate
Weighted Average Capitalization Rate
Change (basis points) 1
Estimated (Decrease) Increase
+25
–25
$
$
(272)
300
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 2014 Annual ReportManageMent’s Discussion anD analysis
30
SECTION II
Average Monthly Rents and Occupancy
Portfolio Average Monthly Rents (“AMR”) and Occupancy by Demographic Sector
Total Portfolio
Properties Owned Prior to
December 31, 2013
As at December 31,
2014
AMR Occ. %
Affordable
$
869
Mid-tier
$ 1,033
Luxury
$ 1,170
Average Residential Suites $ 1,076
Average MHC Land
Lease Sites
356
$
94.9
98.6
97.6
97.9
2013
AMR Occ. %
$
870
$ 1,009
$ 1,160
$ 1,060
96.6
98.2
98.0
98.0
2014
AMR Occ. %
$
869
$ 1,034
$ 1,174
$ 1,078
94.9
98.6
97.7
98.0
2013 1
AMR Occ. %
$
870
$ 1,009
$ 1,152
$ 1,056
96.6
98.2
98.0
98.0
97.5
$
348
97.6
$
355
97.4
$
348
97.6
Properties
Acquired Since
December 31, 2013
2014
AMR Occ. %
–
992
875
940
–
95.1
90.3
93.0
402
100.0
$
$
$
$
$
Overall Portfolio
Average
$
964
97.9
$
951
98.0
$
966
97.9
$
947
98.0
$
822
94.5
1 Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2013.
AMR is defined 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 or remained stable in all demo-
graphic sectors of the residential suite portfolio, resulting in a 1.5%
increase in overall average monthly rent as at December 31, 2014
compared to last year while occupancy remained strong at 97.9%
compared to 98.0% for last year. The increases in average monthly
rents were due to strong rental growth, 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.
Average monthly rents for residential properties owned prior to
December 31, 2013 also increased as at December 31, 2014 to
$1,078 from $1,056 as at December 31, 2013, an increase of 2.1%
from last year. As at December 31, 2014, occupancy has remained
stable at 98.0%, similar to December 31, 2013.
For the MHC land lease portfolio, average monthly rents
increased to $356 as at December 31, 2014 compared to $348 as at
December 31, 2013, while occupancy for MHC properties remained
strong at 97.5% as at December 31, 2014. Management believes
MHC land lease sites provide secure and stable cash flows due to
long-term tenancies, high occupancies, steady increases in average
monthly rents, and significantly lower capital and maintenance costs.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
31
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,
2014
2013
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
Change in AMR
%
$
% Turnovers
& Renewals 1
Change in AMR
%
$
% Turnovers
& Renewals 1
32.6
17.4
21.4
3.0
1.6
2.0
28.1
79.7
23.5
28.7
27.3
2.2
2.7
2.6
28.7
77.9
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, 2014 resulted in
average monthly rent increasing by approximately $33 or 3.0%, compared to an increase of approximately $24 or 2.2% for last year.
Pursuant to Management’s focus on increasing overall portfolio rents for the year ended December 31, 2014, average monthly rents on
lease renewals increased by approximately $17 or 1.6%, compared to an increase of approximately $29 or 2.7% 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 2014
(Ontario – 0.8%, British Columbia – 2.2%), compared to the permitted guideline increases in 2013 (Ontario – 2.5%, British Columbia –
3.8%), partially offset by increases due to above guideline increases (“AGI”) achieved in Ontario. Increased portfolio diversification
helped mitigate the lower guideline increases. Management continues to pursue applications in Ontario for AGIs where it believes
increases above the annual guideline are supported by market conditions to raise average monthly rents on lease renewals (see discussion
in the Future Outlook section). For 2015, the permitted guideline increase in Ontario and British Columbia has been set at 1.6% and
2.5%, respectively.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
32
Portfolio Average Monthly Rents and Occupancy by Geography
Total Portfolio
Properties Owned Prior to
December 31, 2013
2014
AMR Occ. %
2013
AMR Occ. %
2014
AMR Occ. %
2013 1
AMR Occ. %
$ 1,181
98.8
937 100.0
$ 1,159
927
98.3
99.7
$ 1,181
98.8
937 100.0
$ 1,159
927
98.3
99.7
883
1,095
97.9
99.1
873
1,079
97.5
99.1
883
1,095
$ 1,140
98.8
$ 1,119
98.4
$ 1,140
97.9
99.1
98.8
873
1,079
97.5
99.1
$ 1,119
98.4
$
$
895
938
911
97.0
96.8
96.9
$
$
881
925
98.0
97.4
898
97.8
$
$
895
938
97.0
96.8
911
96.9
$
$
881
925
98.0
97.4
898
97.8
$ 1,100
972
99.6
99.3
$ 1,052
99.5
$ 1,075
922
99.5
97.1
$ 1,017
98.6
$ 1,100
972
99.6
99.3
$ 1,052
99.5
$ 1,075
922
99.5
97.1
$ 1,017
98.6
$ 1,201
1,211
$ 1,209
98.1
96.5
96.7
$ 1,128
1,154
99.0
98.2
$ 1,150
98.3
$ 1,201
1,208
98.1
96.4
$ 1,207
96.7
$ 1,128
1,154
99.0
98.2
$ 1,150
98.3
Properties
Acquired Since
December 31, 2013
2014
AMR Occ. %
$
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$
–
–
1,332 100.0
$ 1,332 100.0
995
90.8
$ 1,018
94.5
995
90.8
$ 1,018
94.5
–
–
$
$
965
1,021
97.7
95.3
$ 1,000
96.2
930
94.9
$
$
$
$
$
921
98.5
1,010 100.0
965
1,006
97.7
95.4
921
98.5
1,010 100.0
961
99.2
$
983
96.7
853
83.8
$ 1,022
98.8
961
99.2
$ 1,034
$
$
$
$
853
83.8
–
–
$
$
–
1,034
–
95.2
95.2
$
$
$
$
827
90.6
–
940
–
93.0
–
620 100.0
–
386 100.0
–
–
–
–
–
–
Total Residential Suites
$ 1,076
97.9
$ 1,060
98.0
$ 1,078
98.0
$ 1,056
98.0
–
–
$ 1,449
99.4
$
–
–
$
99.6
489
99.2
409
381
98.6
335 100.0
95.6
138
94.8
244
$
480
99.5
401 100.0
363
98.4
317 100.0
95.2
133
95.5
240
$
99.6
488
99.2
409
379
98.1
335 100.0
95.6
138
94.8
244
$
480
99.5
401 100.0
363
98.4
317 100.0
95.2
133
95.5
240
$
$
356
97.5
964
97.9
$
$
348
97.6
951
98.0
$
$
355
97.4
966
97.9
$
$
348
97.6
947
98.0
$
$
402 100.0
94.5
822
1 Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2013.
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
$
$
mhC land lease sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
Total MHC Land
Lease Sites
Total Suites and Sites
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
33
Overall average monthly rents for the residential suite portfolio as at December 31, 2014 increased by approximately 1.5%, as compared
to December 31, 2013, while occupancies remained strong at 97.9%. 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 sustainable
year-over-year increases in revenues.
Management also believes the defensive characteristics of its nationwide portfolio and its strategy to further diversify among Canada’s
major rental markets and by demographic sector will continue to protect Unitholders from downturns in any specific geographic region or
demographic 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, 2014 and 2013 as well as the
amortization 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
Tenant Inducements Amortized
Vacancy Loss Incurred
Total Amortization and Loss
Bad Debt Expense
1 As a percentage of total operating revenues.
2 Includes tenant inducements for commercial leases.
2014
% 1
2013
% 1
$ 1,732
$ 1,317
10,711
$ 12,028
$ 1,624
0.3
2.1
2.4
0.3
$ 1,813
$ 1,575
9,837
$ 11,412
$ 1,545
0.3
2.1
2.4
0.3
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
34
Results of Operations
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
Total MHC Land Lease Sites
Total Residential Suites
2014
2013
231,831 $
9,088
17,783
20,549
279,251 $
227,517
9,019
17,332
19,200
273,068
56,673 $
34,724
91,397 $
27,979 $
15,275
43,254 $
5,013 $
32,135
37,148 $
53,771
33,914
87,685
26,941
10,830
37,771
4,603
29,478
34,081
20,397 $
20,238
1,510 $
1,764
3,274 $
1,467
1,309
2,776
3,654 $
468
1,615 $
479,990 $
1,860
457,947
15,830 $
633
1,447
971
822
6,718
26,421 $
15,438
620
1,367
905
154
592
19,076
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
and MHC Land Lease Sites
$
506,411 $
477,023
($ Thousands)
For the Year Ended
December 31,
Operating Revenues
Net Rental Revenues
Other 2
Total Operating
Revenues
Operating Expenses
Realty Taxes
Utilities
Other 3
Total Operating
Expenses
NOI
2014
% 1
2013
% 1
$ 479,664
26,747
94.7
5.3
$ 452,429
24,594
94.8
5.2
$ 506,411
100.0
$ 477,023
100.0
56,591
51,753
94,182
11.2
10.2
18.6
55,546
48,207
99,416
11.7
10.1
20.8
$ 202,526
$ 303,885
40.0
60.0
$ 203,169
42.6
$ 273,854
57.4
1 As a percentage of total operating revenues.
2 Comprises ancillary income such as parking, laundry and antenna revenue.
3 Comprises repairs and maintenance, wages, general and administrative,
insurance, advertising, and legal costs.
operating revenues
For the year ended December 31, 2014, total operating revenues
increased by 6.2% compared to last year, due to the contributions
from acquisitions, increased average monthly rents, and continuing
high stable occupancies. As CAPREIT continues to enhance the
profile 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 8.8% for the year ended
December 31, 2014, primarily from acquisitions.
Estimated Net Rental Revenue Run-Rate
($ Thousands)
As at December 31,
Residential Rent Roll 1, 2
Commercial Rent Roll 1, 2
$
2014
465,958 $
20,545
486,503 $
2013
457,944
18,446
476,390
Annualized Net Rental Revenue Run-Rate $
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, 2014 and 2013, net
of average historical vacancy loss, tenant inducements and bad
debt. The estimated annualized Net Rental Revenue Run-Rate
improved by 2.1% to $486.5 million from $476.4 million, primarily
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
35
as a result of new acquisitions over the past 12 months. Net rental
revenue net of dispositions for the 12 months ended December 31,
2014 was $478.1 million (2013 – $447.5 million).
The table below provides information on CAPREIT’s fixed
natural gas contracts for the fiscal years 2015 and 2016:
Fixed Weighted
Average Cost per GJ 1
Total of CAPREIT’s
Estimated Requirements
2015
2016
$
3.77 $
3.79
63.3%
50.7%
1 Fixed weighted average cost per gigajoule (“GJ”) excludes
expected transportation costs of $1.99 per GJ for 2015 and other
administrative costs.
Other Operating Expenses
Other operating expenses, which include R&M costs, wages and
benefits, insurance and advertising, decreased as a percentage of
operating revenues for the year ended December 31, 2014 to
18.6% from 20.8% for last year, primarily due to R&M costs trend-
ing lower to a more normalized run-rate compared to last year.
Net Operating Income
Management believes NOI is a key indicator of operating perfor-
mance in the real estate industry. NOI includes all rental revenues
and other related ancillary income generated at the property level,
less: (i) related direct costs such as utilities, realty taxes, insurance,
R&M costs and on-site wages and salaries; and (ii) an appropriate
allocation of overhead costs. It may not, however, be comparable to
similar measures presented by other real estate trusts or companies.
operating expenses
Overall operating expenses as a percentage of operating revenues
decreased in the year ended December 31, 2014, compared to last
year, partially due to lower realty taxes, repairs and maintenance
(“R&M”) offset partially by higher utility costs.
Realty Taxes
For the year ended December 31, 2014, realty taxes as a percentage
of operating revenues decreased slightly to 11.2% compared to
11.7% last year.
Utilities
As a percentage of operating revenues, utility costs for the year
ended December 31, 2014 remained stable at 10.2% compared to
10.1% for last year, despite the harsh winter conditions experi-
enced in the first quarter of 2014.
CAPREIT’s utility costs can be highly variable from year to year
depending on energy consumption and rates. The table below
provides CAPREIT’s utility costs by type.
($ Thousands)
Year Ended December 31,
Electricity
Natural Gas
Water
Total
2014
% 1
2013
% 1
$ 22,262
15,227
14,264
$ 51,753
4.4
3.0
2.8
10.2
$ 21,818
13,569
12,820
4.6
2.8
2.7
$ 48,207
10.1
1 As a percentage of total operating revenues.
For the year ended December 31, 2014, electricity costs as
a percentage of total operating revenues decreased to 4.4%
compared to 4.6% for last year. In dollar terms, electricity costs
for the year ended December 31, 2014 increased in all regions of
CAPREIT’s portfolio except for Alberta compared to last year
due to increased electricity rates in 2014, partially offset by lower
consumption partly due to the increase in sub-metered units
in Ontario and Alberta. As at December 31, 2014, tenants who
pay their hydro charges directly represent 51.6% of the total
14,690 recently sub-metered suites in Ontario and Alberta.
For the year ended December 31, 2014, natural gas costs as a
percentage of total operating revenues increased to 3.0% compared
to 2.8% for last year, primarily due to higher rates partially offset
by lower consumption in 2014.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
36
The following table shows the NOI and the NOI margin attained for each regional market for the years ended December 31, 2014
and 2013.
($ 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
Total MHC Land Lease Sites
Total Suites and Sites
2014
NOI
NOI Margin (%)
2013
Increase (Decrease)
NOI
NOI Margin (%)
Revenue
Change (%)
Expense
Change (%)
NOI
Change (%)
$ 139,528
4,783
10,819
12,225
$ 167,355
$ 31,690
19,316
$ 51,006
$ 18,153
10,093
$ 28,246
$
3,429
19,847
$ 23,276
60.2
52.6
60.8
59.5
59.9
55.9
55.6
55.8
64.9
66.1
65.3
68.4
61.8
62.7
$ 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
$ 12,988
63.7
$ 12,550
$
725
1,106
$
1,831
48.0
62.7
55.9
$
735
796
$
1,531
$
1,671
45.7
$
166
$
1,268
$ 287,641
$ 10,267
435
910
541
312
3,779
$ 16,244
$ 303,885
78.5
59.9
64.9
68.7
62.9
55.7
38.0
56.3
61.5
60.0
$
1,311
$ 262,692
$
9,001
419
822
500
44
376
$ 11,162
$ 273,854
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
62.0
50.1
60.8
55.2
35.5
70.5
57.4
58.3
67.6
60.1
55.2
28.6
63.5
58.5
57.4
1.9
0.8
2.6
7.0
2.3
5.4
2.4
4.2
3.9
41.0
14.5
8.9
9.0
9.0
0.8
2.9
34.8
17.9
(5.1)
2.5
(10.6)
3.2
(4.6)
(1.5)
3.4
0.3
(5.5)
34.5
5.3
3.0
1.5
1.6
7.1
(0.7)
13.4
9.8
7.5
11.5
1.6
7.5
9.7
44.6
20.1
11.9
14.3
13.9
(3.6)
3.5
7.2
28.3
15.9
(1.4)
38.9
19.6
680.8
556.6
906.6
(13.2)
4.8
(36.8)
(1.5)
(3.3)
9.5
2.5
2.1
5.9
7.3
433.8
1,034.8
(13.6)
(1.5)
(1.5)
6.2
363.6
1,260.6
38.5
6.2
28.6
(0.3)
14.1
3.8
10.7
8.2
609.1
905.1
45.5
11.0
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
37
For the year ended December 31, 2014, NOI increased by 11.0% and the NOI margin increased to 60.0% from 57.4% for last year
due to higher rental revenues. The significant increase in NOI in specific 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
($ Thousands)
For the Year Ended December 31,
2014
NOI
NOI Margin (%)
2013
Increase (Decrease)
NOI
NOI Margin (%)
Revenue
Change (%)
Expense
Change (%)
NOI
Change (%)
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
British Columbia
Alberta
Saskatchewan
Total MHC Land Lease Sites
Total Suites and Sites
Stabilized Suites and Sites
$ 134,550
4,783
10,819
11,655
$ 161,807
$ 30,594
19,316
$ 49,910
$ 18,153
6,129
$ 24,282
$
3,429
16,191
$ 19,620
60.1
52.6
60.8
60.0
59.9
55.6
55.6
55.6
64.9
66.8
65.4
68.4
60.8
62.0
$ 125,250
4,819
9,544
11,109
$ 150,722
$ 28,057
19,013
$ 47,070
$ 16,547
5,761
$ 22,308
$
3,065
14,636
$ 17,701
$ 12,988
63.7
$ 12,550
$
725
847
$
1,572
$ 270,179
$ 10,267
435
910
541
$ 12,153
$ 282,332
35,466
48.0
62.6
54.9
59.8
64.9
68.7
62.9
55.7
64.4
60.0
$
735
796
$
1,531
$ 251,882
$
9,001
419
822
500
$ 10,742
$ 262,624
35,466
57.4
53.4
55.1
57.9
57.2
52.7
56.1
54.0
61.4
65.3
62.4
66.6
57.7
59.1
62.0
50.1
60.8
55.2
57.3
58.3
67.6
60.1
55.2
58.6
57.4
2.6
0.8
2.6
1.3
2.5
3.3
2.4
3.0
3.8
4.0
3.9
8.9
5.0
5.6
0.8
2.9
3.4
3.2
2.8
2.5
2.1
5.9
7.3
3.0
2.8
(3.8)
2.5
(10.6)
(3.7)
(4.1)
(3.0)
3.4
(0.6)
(5.5)
(0.4)
(4.3)
3.0
(2.8)
(2.1)
7.4
(0.7)
13.4
4.9
7.4
9.0
1.6
6.0
9.7
6.4
8.8
11.9
10.6
10.8
(3.6)
3.5
7.2
(1.2)
3.8
(3.1)
(13.6)
(1.5)
(1.5)
6.2
(11.3)
(3.5)
(1.4)
6.4
2.7
7.3
14.1
3.8
10.7
8.2
13.1
7.5
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
38
Stabilized properties for the year ended December 31, 2014 are
defined as all properties owned by CAPREIT continuously since
December 31, 2012, and therefore do not take into account the
impact on performance of acquisitions or dispositions completed
during 2014 and 2013. As at December 31, 2014, stabilized suites
and sites represent 87.5% of CAPREIT’s overall portfolio
(excluding co-ownerships).
For the year ended December 31, 2014, operating revenues in-
creased by 2.8% and operating costs decreased by 3.5% compared
to last year. As a result, stabilized NOI increased by 7.5% for the
year ended December 31, 2014.
For the year ended December 31, 2014, the NOI margin for
properties acquired since December 31, 2012 was 60.0%.
Ontario:
NOI for the stabilized Ontario portfolio increased by 7.4% during
the year ended December 31, 2014 compared to last year, primar-
ily due to higher operating and parking revenues and lower R&M
costs offset by higher utility costs. The NOI margin improved to
59.9% for the year ended December 31, 2014 compared to 57.2%
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 2015 is 1.6%
compared to 0.8% in 2014.
Alberta:
NOI for the stabilized Alberta portfolio increased by 10.8% during
the year ended December 31, 2014 compared to last year, primarily
due to higher operating revenues, lower wage expenses and lower
utility costs, partially offset by higher R&M costs. For the year
ended December 31, 2014, the NOI margin increased to 62.0%
compared to 59.1% for last year. Despite recent declines in the
price of oil on international markets, Management believes its well-
located properties in key Calgary and Edmonton markets should
continue to perform well due to CAPREIT’s proven property
management programs. In addition, with Alberta representing only
7.7% of CAPREIT’s total NOI in 2014, it is not overly exposed to
any unanticipated significant downturn in the Alberta multi-unit
residential rental business.
Nova Scotia:
NOI for the stabilized Nova Scotia portfolio increased by 3.5% for
the year ended December 31, 2014 compared to last year, primar-
ily due to higher operating and parking revenues and lower R&M
costs, partially offset by higher vacancy costs. For the year ended
December 31, 2014, the NOI margin increased to 63.7% from
62.0% for last year. Management believes its presence primarily in
downtown Halifax locations will serve to maintain or increase oc-
cupancy levels and average monthly rents in the medium term.
Québec:
NOI for the stabilized Québec portfolio increased by 6.0% during
the year ended December 31, 2014 compared to last year, primarily
due to higher operating revenues and lower R&M and realty tax
expenses, partially offset by higher wage costs. For the year ended
December 31, 2014, the NOI margin increased to 55.6% com-
pared to 54.0% for last year. CAPREIT believes the Québec rental
market will remain stable and generate steady to improving returns
in the medium term.
MHC Land Lease Sites:
NOI for the stabilized MHC land lease sites portfolio increased
significantly by 13.1% for the year ended December 31, 2014
compared to last year, primarily due to higher operating revenues,
lower wage costs and lower R&M costs. For the year ended
December 31, 2014, the NOI margin increased to 64.4% from
58.6% for last year. Management believes its MHC land lease port-
folio will provide accretive growth in the long term.
British Columbia:
NOI for the stabilized British Columbia portfolio increased by
8.8% during the year ended December 31, 2014 compared to last
year, primarily due to higher operating revenues, lower vacancies,
lower R&M costs and lower wage expenses. For the year ended
December 31, 2014, the NOI margin increased to 65.4% from
62.4% for last year. Management believes the British Columbia
portfolio will continue to generate steady returns in the medium
term. The rent guideline increase for 2015 is 2.5% compared to
2.2% in 2014.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report Net Income and Other Comprehensive (Loss) 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) Recoveries
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
Gain (Loss) on Foreign Currency Translation
net income
other Comprehensive (loss) income
items that may Be reclassified 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
(Loss) Gain on Foreign Currency Translation
other Comprehensive (loss) income
Comprehensive income
39
2014
$
303,885
2013
$
273,854
(20,944)
150,897
–
(626)
(16,478)
(99,931)
(5,326)
(188)
6,942
(2,400)
(2,810)
4,954
(19,280)
106,470
(811)
537
5,968
(95,197)
(6,071)
(197)
5,280
(2,178)
(680)
(17)
$
317,975
$
267,678
$
$
3,333
(3,649)
(478)
–
(5,296)
(6,090)
311,885
$
3,265
3,701
(4,392)
(1,381)
124
1,317
$
268,995
trust expenses
Trust expenses include costs directly attributable to third party
property and asset management services and head office, such as
salaries, trustee fees, professional fees for legal and advisory
services, trustees’ and officers’ insurance premiums, and other
general and administrative expenses net of amounts allocated to
property operating expenses for properties owned by CAPREIT.
Trust expenses increased for the year ended December 31, 2014 to
$20.9 million from $19.3 million for last year mainly due to
one-time non-recurring corporate taxes of $1.4 million relating to
the former wholly-owned subsidiary, CAPREIT Ireland Ltd, as well
as higher compensation, information technology, and consulting
costs, partially offset by lower legal costs resulting from a reversal
of a legal provision of approximately $0.5 million.
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 remeasure-
ment 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.
remeasurement of exChangeaBle units
CAPREIT accounts for its Exchangeable Units as a financial
liability, remeasures such liability at each reporting period, and
includes this remeasurement in the consolidated statements 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 increase in the
market price of the underlying CAPREIT Trust Units since the last
reporting date resulted in a loss on remeasurement of $0.6 million
for the year ended December 31, 2014 compared to a gain of
$0.5 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, 2014 contained in CAPREIT’s 2014
Annual Report.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
40
unit-Based Compensation expenses (reCoveries)
Unit-based compensation benefits are provided to officers, 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 financial
statements for the year ended December 31, 2014 contained
in CAPREIT’s 2014 Annual Report).
As a result of CAPREIT being an open-ended mutual fund
trust, whereby each Unitholder of Trust Units is entitled to
redeem their Units in accordance with the conditions specified 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 financial 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.
As at December 31, 2014, the maximum number of Units
issuable under all of CAPREIT’s Unit-based incentive plans is
9,500,000 Units (December 31, 2013 – 7,000,000). The maximum
number of Units available for future issuance under all Unit
incentive plans as at December 31, 2014 is 2,380,445 Units
(December 31, 2013 – 362,583 Units).
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 of CAPREIT’s audited
consolidated annual financial statements for the year ended
December 31, 2014 contained in CAPREIT’s 2014 Annual Report.
CAPREIT’s Unit-based compensation expense for the year
ended December 31, 2014 resulted in a loss of $16.5 million
compared to a gain of $6.0 million for last year due to the
increase in the market price of the underlying CAPREIT Trust
Units compared to the same period last year and higher grant
date amortization expense due to issuance of UOP awards
granted to the President and CEO and higher DUP and
RUR awards.
The table below demonstrates the impact of each component
of CAPREIT’s benefit plans on the total compensation expense.
($ Thousands)
Year Ended December 31,
Remeasurement of Unit-based
Compensation Liabilities
Amortization of Fair Value
on Grant Date of
Unit-based Compensation
Total
2014
2013
$
12,131 $
(8,493)
4,347
16,478 $
$
2,525
(5,968)
interest on mortgages payaBle and
other finanCing Costs
Interest on mortgages, which includes the amortization of certain
financing costs, increased for the year ended December 31, 2014
to $99.9 million from $95.2 million for last year due to increased
mortgage top-ups. However, as a percentage of operating revenues,
mortgage interest expense decreased to 19.7% for the year ended
December 31, 2014 compared to 20.0% for last year as a result of
CAPREIT’s successful refinancing of mortgages at lower interest
rates as well as higher operating revenues. Additional information
on the interest on mortgages payable and other financing costs is
included in note 20 to the accompanying audited consolidated an-
nual financial statements and the Liquidity and Financial Condition
section of this report.
interest on Bank indeBtedness
Interest on bank indebtedness relates to borrowings under the
Credit Facilities (see Liquidity and Capital Resources section).
other inCome
Other income primarily consists of dividends received from
investments (see note 7 to the accompanying audited consolidated
annual financial statements), income from associate, gains realized
on sale of investments, and asset management and property
management fees.
($ Thousands)
For the Year Ended December 31,
recurring
Investment Income 1
Asset and Property Management Fees
non recurring 2
Total
2014
2013
$
$
3,305 $
1,177
2,460
6,942 $
1,289
–
3,991
5,280
1 Comprised of the income from equity pick-up of IRES including the
unrealized gain on remeasurement of investment properties for the period
April 16, 2014 to December 31, 2014.
2 Includes gain on sale of investments, termination fee income relating to
U.S. property and asset management agreements, reversal of legal provision,
and other interest income.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
41
b. The €45 million credit facility agreement and interest rate
swap agreement fixing the interest rate at 3.22%, which
matures in August 2018, was partially paid down by €5.0 mil-
lion on April 21, 2014, and therefore the entire hedge was
deemed ineffective and the marked-to-market loss of
approximately $2.0 million on the date of repayment was
recognized in net income.
ii) Interest rate contracts for which hedge accounting is not being
applied: The new €40 million interest rate swap agreement
effective April 21, 2014 fixes the interest rate at 2.92% and
matures in August 2018. This agreement effectively converts
the Euro LIBOR borrowings to a fixed rate for the remaining
four years of the original five-year term. At each reporting date,
the hedging derivative will be marked-to-market in net income
($1.0 million loss for the year ended December 31, 2014).
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 fix the exchange rate between the Euro and Canadian
dollar, for which hedge accounting is not being applied. The
mark-to-market gain of $0.2 million has been recognized in net
income for the year ended December 31, 2014.
Additional information on the above instruments is included in
notes 15 and 16 to the accompanying audited consolidated annual
financial statements.
Effective December 5, 2012, CAPREIT entered into third-party
external management agreements to perform certain asset manage-
ment duties and property services with a third-party real estate
investment trust in the United States, which owned and operated
16 manufactured home communities in Colorado, Texas, Arizona,
and Michigan. The external management agreements relating to the
asset management and property management services concluded
effective January 31, 2014. Included in non-recurring other income
is $1.3 million for the year ended December 31, 2014, compared to
$2.2 million for the same period last year, from asset and property
management fees and a one-time termination fee income recorded
in 2014. Expenses related to the asset management and property
management services are included in trust expenses for the year
ended December 31, 2014.
Effective April 11, 2014, CAPREIT entered into an external
management agreement to perform certain asset management
duties and property services for IRES (formerly CAPREIT’s Irish
subsidiary), which owns properties in Dublin, Ireland. Included in
other income is $1.2 million for the year ended December 31, 2014
from asset management and property management fees. Expenses
related to asset management and property management services are
included in trust expenses for the year ended December 31, 2014.
amortization
These costs represent the amortization of CAPREIT’s head office
property, plant and equipment on a straight-line basis over
their estimated useful lives, ranging primarily between three and
five years.
unrealized and realized loss on derivative
finanCial instruments
i) Interest rate contracts for which hedge accounting is being applied:
As at December 31, 2014, CAPREIT has two interest rate swap
agreements which include:
a. The $65 million interest rate swap agreement fixing the
interest rate at 3.6%, which matures in September 2022, for
which hedge accounting is being applied. The agreement
effectively converts borrowings on a bankers’ acceptance-
based floating rate credit facility to a fixed rate facility for a
10-year term. The related floating rate credit facility is for a
five-year term; on expiry of the term it is expected to be
refinanced for an additional five-year term. At each reporting
date, the hedging derivative will be marked-to-market with
the ineffective portion recognized in net income ($nil for the
year ended December 31, 2014).
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 42
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 financial 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 financial 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
Diluted Weighted Average Number of Units
Weighted Average Number of Units
Outstanding
Number of Units
2014
109,122
161
173
109,456
689
315
474
93
2013
101,748
177
139
102,064
671
295
339
88
111,027
103,457
2014
110,088
161
207
110,456
1,408
818
506
– 6
113,188
1 See note 11 to the accompanying audited consolidated annual financial statements for details of Exchangeable Units.
2 See notes 11 and 12 to the accompanying audited consolidated annual financial statements for the year ended December 31, 2014 contained in
CAPREIT’s 2014 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 financial statements).
4 Calculated using the treasury method after taking into account the exercise prices.
5 In 2013, pursuant to the terms of the Exchangeable Units, 100,000 Exchangeable Units were exchanged for 100,000 Trust Units.
6 There are 1,134,182 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
$
$
2014
127,496
188
3,360
131,044
(40,633)
(3,360)
87,051
33.6%
$
$
2013
116,056
197
3,003
119,256
(27,988)
(3,003)
88,265
26.0%
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 11 and 12 to the accompanying audited consolidated annual financial statements for the year ended December 31, 2014 contained in
CAPREIT’s 2014 Annual Report for a discussion of these plans).
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
43
Under CAPREIT’s DRIP, a participant may purchase additional
Units with the cash distributions paid on the eligible Units,
registered 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
distributions reinvested pursuant to the DRIP, which will automati-
cally 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 five trading days immediately preceding the relevant
distribution date.
The average participation rate in the DRIP and other plans
under which distributions are reinvested increased for the year
ended December 31, 2014 to 33.6%, from 26.0% 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
financial statements for a discussion of these plans). When
establishing the level of monthly cash distributions to Unitholders,
the Board of Trustees relies on cash flow information, including
forecasts and budgets.
net operating inCome
NOI is a key non-IFRS financial measure of the operating perfor-
mance of CAPREIT and is defined and reported in the Results of
Operations section.
funds from operations
FFO is a measure of operating performance based on the funds
generated by the business before reinvestment or provision for
other capital needs. FFO as presented is based on the recommen-
dations of the Real Property Association of Canada, with the
exception of the amortization 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 financial 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
Corporate Income Taxes
(Gain) Loss on Foreign Currency Translation
FFO Adjustment for Income from Equity Accounted Investments 1
Unrealized and Realized Loss on Derivative Financial Instruments
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
1 Included in Other Income in the consolidated statements of income and comprehensive income.
2014
2013
$
317,975
$
267,678
(150,897)
–
626
12,131
188
1,405
(4,954)
(1,710)
2,810
2,400
179,974
1.644
1.621
131,044
72.8%
87,051
92,923
48.4%
$
$
$
$
$
$
(106,470)
811
(537)
(8,493)
197
–
17
–
680
2,178
156,061
1.529
1.508
119,256
76.4%
88,265
67,796
56.6%
$
$
$
$
$
$
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
44
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 amortization of losses on certain hedging instruments, and mortgage prepayment penalties, offset by write-off of fair value
adjustment on assumed mortgages that were refinanced 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 flow 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:
Amortization of losses from AOCL to interest and other financing costs
Net Mortgage Prepayment Cost 1
Realized Gain on Sale of Investments 2
NFFO
NFFO per Unit – Basic
NFFO per Unit – Diluted
Total Distributions Declared
NFFO Payout Ratio
2014
$
179,974
2013
$
156,061
3,333
763
(717)
183,353
1.675
1.651
131,044
71.5%
$
$
$
$
3,265
1,786
(1,737)
159,375
1.562
1.540
119,256
74.8%
88,265
71,110
55.4%
$
$
$
$
$
$
Net Distributions Paid
Excess NFFO over Net Distributions Paid
87,051
96,302
47.5%
1 Net mortgage prepayment cost relates to early refinancing fees net of fully amortized fair value adjustment on assumed mortgages.
2 Included in Other Income in the Net Income and Other Comprehensive (Loss) Income section.
Effective NFFO Payout Ratio
$
$
NFFO for the year ended December 31, 2014 increased by
15.0% compared to last year, primarily due to the contributions
from acquisitions and higher net operating income for properties
owned prior to December 31, 2013.
For the year ended December 31, 2014, basic NFFO per Unit
increased by 7.2% compared to last year due to strong organic
NOI growth and one-time items despite an approximate 7%
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
ratio for the year ended December 31, 2014 improved to 71.5%
compared to 74.8% for last year. The effective NFFO payout ratio,
which compares NFFO to net distributions paid, improved for the
year ended December 31, 2014 to 47.5% from 55.4% for last year,
primarily due to a higher percentage of distributions reinvested
and higher NFFO during the current year. Management believes
NFFO will be sufficient to fund CAPREIT’s distributions at their
current level.
adjusted funds from operations
AFFO is a supplemental measure of cash generated from opera-
tions that is used in the real estate industry to assess the sustainabil-
ity 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
significant judgement is required to classify property capital
investments as maintenance, 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 identifiable. However,
given the current use by investors and other stakeholders of this
non-IFRS financial measure, CAPREIT currently intends to
continue presenting an estimate of AFFO.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
45
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 distri-
butions 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
2014
2013
$
183,353
$
159,375
(15,466)
4,347
172,234
1.574
1.551
131,044
76.1%
87,051
85,183
50.5%
$
$
$
$
$
$
(15,097)
2,525
146,803
1.438
1.419
119,256
81.2%
88,265
58,538
60.1%
$
$
$
$
$
$
1 Based on an industry estimate of $450 per suite per year and the weighted average number of residential suites during the year
(see Productive Capacity section).
Cash generated from operating aCtivities to affo reConCiliation
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), “Non-GAAP Financial Measures”, the table below
reconciles cash generated from operating activities to AFFO.
A reconciliation of cash generated from operating activites to AFFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Cash Generated from Operating Activities
Adjustments:
Net Income Items Related to Financing and Investing Activities
Changes in Non-Cash Operating Assets and Liabilities
Amortization of Other Financing Costs
Straight-line Rent Adjustment
Interest on Exchangeable Units
Corporate Income Taxes
Net Mortgage Prepayment Costs
FFO Adjustment for Income from Equity Accounted Investments 1
Provision for Maintenance Property Capital Investments
AFFO
1 Included in Other Income in the consolidated statements of income and comprehensive income.
2014
283,982
$
2013
260,280
$
(94,338)
19
(2,751)
142
188
1,405
763
(1,710)
(15,466)
(93,607)
(7,962)
995
211
197
–
1,786
–
(15,097)
$
172,234
$
146,803
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
46
SECTION IV
Property Capital Investments
A breakdown of property capital investments (excluding
disposed properties, head office assets, tenant improvements and
signage) is summarized by category below:
CAPREIT capitalizes all capital investments related to the improve-
ment 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 significantly
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 condi-
tions and the availability of competitive pricing from construction
trades at that time, 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 flow 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.
For the year ended December 31, 2014, CAPREIT made
property capital investments (excluding disposed properties) of
$145.2 million, compared to $157.8 million for last year. Property
capital investments were lower compared to the prior year
primarily due to reduced building improvement costs partially
offset by higher investments in suite improvements and common
areas, which generally tend to increase NOI more quickly.
In addition, CAPREIT continues to invest in environment-
friendly and energy-saving initiatives, including high-efficiency
boilers, energy-efficient lighting systems and water saving pro-
grams, which have permitted CAPREIT to mitigate potential
increases in utility and R&M costs and have improved overall
portfolio NOI significantly, as discussed in the Results of
Operations section.
Property Capital Investments by Category
($ Thousands)
Year Ended December 31,
Building Improvements
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
2014
$ 59,518
33,613
21,272
1,291
11,625
15,408
2,449
%
41.0
23.1
14.7
0.9
8.0
10.6
1.7
2013
$ 80,728
31,659
16,166
2,604
10,139
14,549
1,961
%
51.2
20.1
10.2
1.7
6.4
9.2
1.2
Total
$ 145,176
100.0
$ 157,806
100.0
The significant portfolio growth generated since 2011 has led
CAPREIT to adjust its multi-year capital investment programs.
Based on a revised multi-year property capital investment plan,
Management expects CAPREIT to complete property capital
investments of approximately $145 million to $155 million during
2015, including approximately $44 million targeted at acquisitions
completed since January 1, 2011 and approximately $15 million in
high-efficiency boilers and other energy-saving initiatives.
Set out in the table below is Management’s current estimate,
established through consultation with an independent engineering
firm, of CAPREIT’s investments in building improvements for 2015
through 2018 for properties owned as of December 31, 2014.
Building improvements represent the most significant category of
property capital investment at present, but are expected to decline
significantly in the coming years.
Future Investments in Building Improvements
Properties Held As At
December 31, 2014 Excluding
Acquisitions Since 2012
Estimated Range
$ 38,000 – $ 42,000
$ 15,000 – $ 19,000
$ 10,000 – $ 14,000
$ 13,000 – $ 17,000
($ Thousands)
2015
2016
2017
2018
Acquisitions
Since 2012
Estimate
$ 12,000
$ 6,000
$ 3,000
$ 3,000
Management believes CAPREIT has sufficient liquidity and
access to top-up financing opportunities (see the Liquidity and
Financial Condition section) to execute the above property capital
investment strategy.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
47
During the third quarter of 2011, CAPREIT began the multi-
phase implementation of a new Enterprise Resource Planning
(“ERP”) system. Management believes this unified platform will
continue to drive operational efficiencies in the business. To date,
$6.6 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
between investments to maintain existing cash flows from the
properties and investments incurred in order to achieve
CAPREIT’s longer term goals of enhanced cash flows and stable
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 approxi-
mately $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 $800 to $850 per
residential suite annually and are expensed to NOI.
Stabilizing and value-enhancing property capital investments are
focused on increasing the productivity of the property portfolio.
These investments enhance operating effectiveness and profitability
and increase revenues or reduce costs to improve NOI over the
long term. In addition, they improve the economic life and value
of the properties and are mainly long term in nature.
Owing to the gross lease structure of its portfolio, CAPREIT
does not divide its property capital investments between the two
categories described above. Instead, CAPREIT uses industry
guidelines for maintenance property capital investments to estimate
its stabilizing and value-enhancing property capital investments
as follows:
($ Thousands)
Year Ended December 31,
Total Property Capital Investments 1
Less: Estimated Maintenance
Property Capital Investments 2
Stabilizing and Value-enhancing
Property Capital Investments
2014
2013
$
145,176 $
157,806
(15,466)
(15,097)
$
129,710 $
142,709
1 Excludes capital investments for disposed properties, head office 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 significant benefits 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 2010
through 2014, reflecting 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 first 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 five years. To compute the results on a stabilized
basis, only those properties owned prior to 2010 and held as at
December 31, 2014 (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 Average NOI
Growth
Investments 1
32
33
32
33
5,834
6,750
6,155
6,910
50.4%
28.4%
14.2%
7.0%
130
25,649
100.0%
5.8%
5.1%
5.2%
3.9%
5.0%
1 As a percentage of total property capital investments over the five-year
period to December 31, 2014.
The analysis indicates a 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.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
48
Capital Structure
CAPREIT defines capital as the aggregate of Unitholders’ equity,
debt financing, 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 sufficient
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 flow requirements,
impact on near-term and long-term financial performance, current
and expected state of the credit markets and 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
section) require compliance with the financial covenants shown in
the table below. In addition, borrowings must not exceed the
borrowing base, calculated as a predefined percentage of the fair
value of the investment properties determined on an annual basis.
In addition, CAPREIT requires compliance with all investment
and debt restrictions and financial covenants under the agreement
with CMHC. Refer to the Liquidity and Financial Condition
section of this report for further details.
In the short term, CAPREIT utilizes the Credit Facilities to
finance its capital investments, which may include acquisitions.
In the long term, equity issuances, mortgage financings and
refinancings, including top-ups, are put in place to finance the
cumulative investment in the property portfolio and ensure the
sources of financing better reflect the long-term useful lives of
the underlying investments.
CAPREIT is in compliance with all the investment and debt
restrictions and financial covenants contained in the DOT and
the Credit Facilities. The total capital managed by CAPREIT
and the results of compliance with the key covenants are
summarized below:
($ Thousands)
As at
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, 2014
December 31, 2013
$ 2,658,454
113,167
48,686
4,054
2,983,105
$ 5,807,466
46.49%
56.73%
$ 3,035,845
$ 2,457,182
187,030
32,764
3,428
2,757,469
$ 5,437,873
47.32%
56.74%
$ 2,793,661
Threshold
Maximum 70.00%
Minimum $1,200,000
December 31, 2014
December 31, 2013
Minimum 1.20
Minimum 1.50
1.61
2.82
1.54
2.62
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 defined
as the gross book value of CAPREIT’s assets as per CAPREIT’s financial 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 defined 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 defined as EBITDA less taxes paid divided by interest payments.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
49
Liquidity and Financial Condition
liQuidity and Capital resourCes
Management ensures there is adequate overall liquidity by
maintaining sufficient available credit facilities to fund maintenance
and property capital investment commitments, distributions to
Unitholders and to provide for future growth in the business.
CAPREIT finances these commitments through: (i) cash flow from
operating activities; (ii) mortgage debt secured by its investment
properties; (iii) secured short-term debt financing with two
Canadian chartered banks; and (iv) equity. Management’s assess-
ment of CAPREIT’s liquidity position 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 sufficient cash flow 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 to be sufficient to fund its ongoing property capital
investments. For the year ended December 31, 2014,
CAPREIT’s NFFO payout ratio improved to 71.5% compared
to 74.8% for last year, and the effective NFFO payout ratio
improved to 47.5% compared to 55.4% for last year, which
demonstrated a greater retained portion of annual NFFO.
CAPREIT anticipates a long-term annual NFFO payout ratio
in the 70% to 80% range.
iv) On August 29, 2014, CAPREIT renewed and amended the
existing $280 million acquisition and operating facility and
€40 million five-year non-revolving Euro-denominated term
credit facility by combining the two facilities into a $340 million
revolving credit facility (“Acquisition and Operating Facility”).
The aggregate amount of Euro LIBOR borrowings at any time
shall not exceed €40.0 million while the Canadian Dollar
Equivalent of the aggregate principal amount of all advances
(including the Euro LIBOR borrowings) under the Revolving
Facility shall not exceed $340 million. Effective November 21,
2014, the aggregate amount of Euro LIBOR borrowings
was amended to €49.0 million that shall not be exceeded.
Subsequent to year end, effective January 16, 2015, the aggre-
gate amount of Euro LIBOR borrowings was amended to
(a) €210.0 million until the earlier of (i) October 31, 2015 and
(ii) fifteen days after the issuance of any equity or debt by
IRES; and (b) €60.0 million thereafter.
v) Effective September 28, 2012, CAPREIT has a $65 million
credit facility on two of the MHC land lease sites bearing
interest at the bankers’ acceptance rate plus 1.4% per annum.
This credit facility is a five-year non-revolving term credit
facility, and any principal amount repaid under this facility may
not be reborrowed. On expiry of the term, it is expected to be
refinanced for an additional five-year term. There is an interest
rate swap agreement on this facility, fixing the bankers’ accep-
tance rate to 2.20%, maturing in September 2022. The swap
agreement fixes the all-in rate of the loan at 3.60% for a
five-year term.
ii) Management believes CAPREIT is well-positioned to meet
its mortgage renewals and refinancing goals for 2015 due to
the continuing availability of CMHC-insured financing.
Management does not anticipate any material difficulties in
completing the renewal of mortgages maturing during 2015 of
approximately $209.8 million, which have an effective interest
rate of approximately 3.78%, and refinancing approximately
$78.7 million of principal repayments through 2015 with new
mortgages.
vi) As at December 31, 2014, the Euro LIBOR borrowings of
€48.9 million bear interest at the Euro LIBOR rate plus a margin
of 1.70% per annum. The margin is renegotiated annually.
There is an interest rate swap agreement on the Euro LIBOR
borrowings of €40.0 million, fixing the Euro LIBOR rate
to 1.22%, maturing in August 2018. The swap agreement
fixes the all-in rate of the loan at 2.92% (assuming a constant
margin of 1.70%) for the remaining four years of the original
five-year term.
iii) Investment properties with a fair value of $5.5 billion have been
pledged as security as at December 31, 2014. In addition,
CAPREIT has investment properties with a fair value of
approximately $217 million as at December 31, 2014 that are
not encumbered by mortgages and secure only the Acquisition
and Operating Facility. Unencumbered investment properties
with a fair value of approximately $52 million are expected to
be financed, reducing the total unencumbered investment
properties to approximately $165 million.
vii) On July 4, 2014, 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 accordance with the policies of the TSX. CAPREIT may
purchase its Units during the period from July 8, 2014 to
July 7, 2015. 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 10,659,524 Units,
representing 10% of the public float. As at December 31, 2014,
no Units have been purchased under the current approved
normal course issuer bid.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 50
viii) 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
accordance 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 float. As at December 31,
2014, no Units have been purchased under the current
approved normal course issuer bid.
ix) 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.
In order to maintain and enhance its CMHC-insured financing
program, and consistent with CMHC’s risk management practices
involving large borrowers, CAPREIT has entered into an agree-
ment with CMHC (the “Large Borrower Agreement” or “LBA”).
Other than improving the efficiency and consistency of such
process, the LBA has not materially affected the manner in which
CAPREIT conducts its business or its approach to mortgage
financing. The LBA provides for, among other things:
i) Enhanced disclosure to CMHC;
ii) Certain financial covenants and commitments and limitations on
indebtedness, none of which are inconsistent with CAPREIT’s
current requirements under its DOT and existing credit and
mortgage facilities;
iii) The posting of a revolving letter of credit with respect to certain
capital expenditures on a portfolio basis, rather than an
individual property basis; and
iv) Cross-collateralization of mortgage loans for certain CMHC-
insured mortgage lenders.
CAPREIT is in compliance with all its investment and debt
restrictions and financial 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, financial covenants are not significantly different than
those required under the DOT or Credit Facilities other than
as described above.
The working capital deficiency, as presented on CAPREIT’s con-
solidated balance sheets as at December 31, 2014, which includes
non-cash Unit-based compensation liabilities, is managed through
the available liquidity under the Credit Facilities as well as the
ongoing refinancing of mortgages payable.
The table below summarizes CAPREIT’s bank indebtedness
position as at December 31, 2014 and December 31, 2013:
($ Thousands)
As at December 31, 2014
Facility
Less:
Euro LIBOR Borrowings 1
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
($ Thousands)
As at December 31, 2013
Facility
Less:
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
1 Included in mortgages payable.
Acquisition and Operating Facility
$
340,000
(68,646)
(113,167)
(6,144)
$
152,043
3.09%
Acquisition and Operating Facility
$
280,000
(187,030)
(6,527)
$
86,443
3.02%
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
Debt Service Coverage Ratio (times) 2
Interest Coverage Ratio (times) 2
2014
44.60%
46.49%
56.73%
49.35%
1.61
2.82
2013
43.97%
47.32%
56.74%
52.83%
1.54
2.62
Weighted Average Mortgage Interest Rate 3
Weighted Average Mortgage
Term to Maturity (years)
3.66%
3.76%
6.3
6.0
1 Based on the historical cost of investment properties.
2 Based on the trailing four quarters ended December 31, 2014.
3 Weighted average mortgage interest rate includes deferred financing
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, 2014 would be 3.81%
(December 31, 2013 – 3.94%).
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
51
As at December 31, 2014, the overall leverage represented by
the ratio of total debt to gross book value improved to 46.49%
compared to 47.32% for last year. As at December 31, 2014,
CAPREIT’s total debt improved to 49.35% of total market capital-
ization compared to 52.83% for last year.
The effective portfolio weighted average interest rate has
declined from 3.76% as at December 31, 2013 to 3.66% as at
December 31, 2014, which Management expects could result
in continued interest rate savings in future years. Management
believes that as CAPREIT’s refinancing plan continues to be real-
ized, there may be scope to further reduce the effective portfo-
lio 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 five-year
range or longer and expects to gradually extend the term, while
continuing to balance the maturity profile.
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 adminis-
tered by CMHC, which benefits CAPREIT in two ways:
• CAPREIT obtains lower interest rate spreads for mortgage
financing; and
• 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,
2014
Percentage of CMHC-Insured Mortgages 1
Percentage of Fixed-Rate Mortgages
95.70%
100.00%
2013
93.90%
98.85%
1 Excludes the mortgages on the MHC land lease sites and the
Irish portfolio.
The following table summarizes the changes in the mortgage
portfolio during the years:
($ Thousands)
As at December 31,
2014
2013
Balance, Beginning of the Year
$ 2,457,182 $ 2,189,556
Add:
New Borrowings
Assumed
Refinanced
Foreign Currency Translation
Less:
Mortgage Repayments
Mortgages Matured
Mortgages Repaid on Dispositions
of Investment Properties
Change in Deferred Financing Costs,
Fair Value Adjustments, Net
Balance, End of the Year
12,650
26,122
576,457
(1,121)
161,019
37,971
514,990
3,308
(76,821)
(324,915)
(69,169)
(340,831)
(7,599)
(34,772)
(3,501)
(4,890)
$ 2,658,454 $ 2,457,182
The following table presents the refinancings for the year ended December 31, 2014, and the weighted average interest rates obtained.
($ Thousands)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
Original
Mortgage
Amount
98,542
149,695
70,190
6,488
Total and Weighted Average
$
324,915
1 Weighted average.
2 Excludes CMHC and Other Financing Costs and hedge impact.
Original
Stated
Interest
Rate 1
3.85%
4.01%
3.42%
3.96%
3.83%
$
New
Mortgage
Amount
139,951
273,839
150,057
12,610
New Stated
Interest
Weighted Average
Term on New
Mortgages
(Yrs)
Rate 1, 2
3.69%
3.22%
2.75%
2.94%
$
11.5
9.2
5.5
10.3
Top-Up
Amount
41,409
124,144
79,867
6,122
$
576,457
3.20%
8.8
$
251,542
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
52
For purposes of estimating top-up financing potential, the following table provides annualized NOI for those properties with mort-
gages maturing over the next five years and beyond. A property’s full NOI is included in the first 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
$280 million and $330 million in total mortgage renewals and refinancings for 2015.
($ Thousands)
As at December 31, 2014
Year of Maturity
2015
2016
2017
2018
2019
2020 Onward
Total
Mortgage
Maturities 1
$
209,838
81,181
239,808
97,416
240,250
1,194,508
$ 2,063,002
Mortgages
on the Same
Properties Maturing
NOI of Properties
with Maturing
in Other Years 1
Total Mortgages
Mortgage(s) 2, 3
$
41,347
55,392
24,095
15,240
(43,310)
(92,764)
$
–
$
251,185
136,573
263,903
112,656
196,940
1,101,744
$ 2,063,002
$
38,084
19,551
25,537
15,048
27,494
167,660
$
293,374
1 Mortgage balance due upon maturity.
2 NOI for the twelve months ended December 31, 2014.
3 Projected NOI included for acquisitions since December 31, 2013.
The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at
December 31, 2014 is as follows:
($ Thousands)
Year
2015
2016
2017 3, 4
2018
2019
2020
2021
2022
2023
2024
2025 – 2029
total
Principal
Repayments
$
78,662
74,385
72,301
72,706
68,750
64,286
58,462
48,526
30,105
14,729
14,178
$
Mortgage
Maturities
209,838
81,181
239,808
97,416
240,250
54,648
255,335
318,225
249,786
246,302
70,213
$
597,090
$ 2,063,002
Deferred Financing Costs, Fair Value Adjustments, Net
total
% of Total
Mortgage
Balance
Interest
Rate (%) 1, 2
10.8
5.8
11.7
6.4
11.6
4.5
11.8
13.8
10.5
9.8
3.3
100.0
3.78
3.93
3.86
3.48
3.53
4.66
4.12
3.11
3.23
3.84
4.06
3.66 2
$
Mortgage
Balance
288,500
155,566
312,109
170,122
309,000
118,934
313,797
366,751
279,891
261,031
84,391
$ 2,660,092
(1,638)
$ 2,658,454
1 Effective weighted average interest rates for maturing mortgages only.
2 Effective weighted average interest rate includes deferred financing 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, 2014 would be 3.81% (December 31, 2013 – 3.94%).
3 Included in mortgages payable is a €48.9 million non-amortizing Euro LIBOR borrowing.
4 Included in mortgages payable is a $65.0 million non-amortizing credit facility on two of the MHC land lease sites.
To ensure CAPREIT is not overly exposed to interest rate volatility risk, Management has been successful in staggering the maturity
dates within its mortgage portfolio or entering into long-term financing arrangements.
To reduce its interest cost and cost of capital, Management will continue to leverage its balance sheet strength and the stability of its
property portfolio to fund acquisitions and its capital investment plan, and to refinance its mortgage principal repayments.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
53
unitholders’ eQuity and units awarded under unit-Based Compensation plans
Unitholders’ Equity only represents the issued and outstanding Trust Units, and excludes the Exchangeable Units and any Units issued
in connection with Unit-based incentive plans. For the purposes of the discussion below, Exchangeable Units and Units issued in
connection with Unit-based incentive plans are treated as equity as they have claims similar or identical to those of the Trust Units.
Equity offerings and over-allotments as at December 31, 2014:
($ Thousands, except per Unit amounts)
Price Per Unit
Gross Proceeds
Transaction Costs
Net Proceeds
Units Issued
Period
October 2013
Bought-deal
Over-allotment
Total
$
$
20.55
20.55
$
$
130,020
19,503
149,523
$
$
5,870
911
6,781
$
124,150
18,592
$
142,742
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, Officers and Senior Managers
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 governing NCIBs, CAPREIT
will receive approval to purchase and cancel a specified number of
Trust Units, representing 10% of the public float 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 appropri-
ate use of its resources.
The table below summarizes the NCIB programs in place since
January 1, 2013. No Trust Units were acquired and cancelled under
these NCIB programs.
Period Covered Under Each NCIB
July 8, 2013 to July 7, 2014
July 8, 2014 to July 7, 2015
Approval Limit
9,773,361
10,659,524
6,327,000
949,050
7,276,050
2014
$ 2,844,408
113,187,753
2,225,597
206,726
506,041
161,311
1,134,182
3.5%
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
2014
2013
23.42%
6.82%
1.00%
2.58%
73.00%
100.00% 100.00%
1.06%
6.25%
85.87%
74.29%
88.99%
The portion of CAPREIT’s distributions to Canadian resident
Unitholders treated as taxable for the year ended December 31,
2014 increased over the prior year primarily due to higher earnings
from operations in the current year, partially offset by higher
capital cost allowance and lower capital gains and recapture
compared to the prior year.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
54
SECTION V
Selected Consolidated Quarterly Information
Overall Portfolio AMR
Operating
Revenues (000s) 1
NOI (000s) 1
NOI Margin 1
Net Income (000s)
FFO (000s)
NFFO (000s)
Total Debt to
Gross Book Value
Q4 14
Q3 14
Q2 14
Q1 14
Q4 13
Q3 13
Q2 13
Q1 13
$
964
$
969
$
958
$
954
$
951
$
1,003
$
989
$
978
$ 128,111
$ 76,806
60.0%
$ 126,356
$ 77,615
61.4%
$ 125,411
$ 78,089
62.3%
$ 126,533
$ 71,375
56.4%
$ 124,018
$ 66,033
53.2%
$ 119,995
$ 72,855
60.7%
$ 117,686
$ 71,475
60.7%
$ 115,324
$ 63,491
55.1%
$ 82,759
$ 45,774
$ 46,620
$ 117,601
$ 45,756
$ 46,707
$ 72,282
$ 46,325
$ 47,113
$ 45,333
$ 42,036
$ 42,913
$ 88,389
$ 35,329
$ 36,344
$ 53,669
$ 42,852
$ 44,263
$ 58,174
$ 41,467
$ 42,582
$ 67,446
$ 35,716
$ 36,186
46.49%
46.80%
47.22%
47.63%
47.32%
49.42%
48.42%
47.62%
FFO Per Unit – Basic
NFFO Per Unit – Basic
$
$
0.415
0.423
$
$
0.417
0.426
$
$
0.424
0.431
$
$
0.387
0.395
$
$
0.329
0.338
$
$
0.426
0.440
$
$
0.414
0.425
$
$
0.357
0.362
Weighted Average
Number of Units (000s)
– Basic
– Diluted
110,193
111,962
109,684
111,333
109,211
110,726
108,714
110,063
107,443
108,704
100,576
101,832
100,230
101,718
99,942
101,512
1 Includes the results of investment properties owned as at the period-end.
Non-IFRS financial measures are reconciled with IFRS reported amounts in the respective quarterly SEDAR filings.
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 first 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 2014 increased by
3.3% over the same quarter in 2013, while NOI increased by a
significant 16.3%, driven by higher operating revenues and lower
R&M costs, realty taxes and utility costs as a percentage of total
operating revenues compared to the same period last year. Net
income in the fourth quarter of 2014 decreased over the same
period last year to $82.8 million, mainly due to a lower unrealized
gain on remeasurement of investment properties of $42.0 million
compared to $56.4 million for the same period last year, and higher
Unit-based compensation expenses of $2.2 million and interest
on mortgage payable and other financing costs of $1.0 million,
offset by higher NOI of $10.8 million. Higher NFFO was primarily
due to strong organic growth on stabilized properties and NOI
from acquisitions.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
55
Selected Consolidated Financial Information
The following table presents a summary of selected financial information for the fiscal years indicated below:
($ Thousands, except per Unit amounts)
Year Ended December 31,
2014
2013
2012
Income Statement
Operating Revenues
Net Income
Distributions
Distributions Declared
Distributions per Unit
Balance Sheet
Investment Properties
Total Assets
Mortgages Payable
Bank Indebtedness
SECTION VI
Accounting Policies and Critical Estimates,
Assumptions, and Judgements
new aCCounting poliCies and aCCounting standards
The following new or amended IFRS have been applied in 2014:
IFRIC 21, Levies (“IFRIC 21”)
CAPREIT has applied IFRIC 21 as at January 1, 2014.
As at February 17, 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, 2014:
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classification
and measurement of financial liabilities over the existing derecogni-
tion requirements from IAS 39, Financial Instruments: Recognition
and Measurement. IFRS 9 also introduces new requirements for
classifying and measuring financial assets; specifically, investments
in equity instruments can be designated as “fair value through
other comprehensive income” with only dividends being recog-
nized in profit 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
financial 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.
$
$
$
$
506,411
317,975
127,496
1.168
$ 5,749,640
$ 5,926,161
$ 2,658,454
113,167
$
$
$
$
$
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
$
The final amendment of IFRS 9 as at July 2014 included:
(i) a third measurement category for financial assets – fair value
through other comprehensive income; (ii) a single, forward
looking “expected loss” impairment model, and (iii) a mandatory
effective date for IFRS 9 of annual periods beginning on or after
January 1, 2018.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from
IAS 39 to IFRS 9. Effective on adoption of IFRS 9.
IFRS 10 and IAS 28, Sale or Contribution of Assets Between
an Investor and its Associate or Joint Venture
The amendment clarifies an inconsistency between the two
standards, and establishes that a gain or loss is fully recognized
when the transaction involves a business, and a partial gain or loss
is recognized when the transaction involves assets that do not
constitute a business. This amendment will come into effect on
January 1, 2016.
IFRS 11, Accounting for Acquisitions of Interests in
Joint Operations
This amendment provides specific guidance for the acquisition of
an interest in a joint operation that is a business. This amendment
will come into effect on January 1, 2016.
IFRS 15, Revenue from Contracts with Customers
This new standard on revenue recognition supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and related interpreta-
tions. The new standard provides a single, comprehensive revenue
recognition model. While early adoption is permitted for IFRS
reporters, this standard is effective beginning January 1, 2017.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
56
CAPREIT is currently assessing the impact of the above standards
and amendments but does not expect to be significantly impacted
on adoption in its current form.
CritiCal estimates, assumptions, and judgements
In preparing the accompanying audited consolidated annual
financial statements in accordance with IFRS, certain accounting
policies require 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 audited consolidated
annual financial statements and accompanying notes. Areas of such
estimation include, but are not limited to, valuation of investment
properties, remeasurement at fair value of financial 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 financial
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 significant 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 specific to
the housing industry or to CAPREIT could have the potential to
alter accounting estimates and could impact CAPREIT’s financial
condition, changes in financial condition or results of operations.
Disclosures in the MD&A, including specifically 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 significant, due
to subjectivity, are as follows:
Valuation of Investment Properties
Investment properties are measured at fair value as at the consoli-
dated balance sheet dates. Any changes in the fair value are
included in the consolidated statements of income and comprehen-
sive 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 flow 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 flow method,
including an estimate of future lease payments. Management’s
internal assessments of fair value are based on a combination of
internal financial 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 significant judgement, estimates and assumptions
about market conditions in effect as at the consolidated balance
sheet dates. See note 6 to the accompanying audited consolidated
annual financial statements for a detailed discussion of valuation
methods and the significant 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 significant estimates.
The basis of valuation for CAPREIT’s Unit-based compensation
liabilities, such as market assumptions, estimates and valuation
methodology, is set out in note 12 to the accompanying audited
consolidated annual financial 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 significant estimates. The
basis of valuation for CAPREIT’s derivatives is set out in note 15 to
the accompanying audited consolidated annual financial 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.
Investment in Irish Residential Properties REIT plc (“IRES”)
CAPREIT has determined that its investment in IRES should be
accounted for using the equity method of accounting given the
significant influence it has over IRES. In making the determination
that CAPREIT does not control IRES, CAPREIT used judgement
when considering the extent of its ownership interest in IRES, the
level of its involvement, responsibilities and remuneration as IRES’
asset manager and the control exerted over IRES by its indepen-
dent Board of Directors. Management will reassess this conclusion
should its ownership interest or terms of the asset management
agreement change.
Interest Classification in the Consolidated Statements
of Cash Flows
IFRS permits the classification of interest paid as operating cash
flows because they enter into the determination of profit or loss, or
alternatively as financing cash flows because they are costs of obtain-
ing financial resources. CAPREIT has applied its judgement and
concluded that debt financing, which is used to provide leveraged
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
57
returns to its Unitholders, is an integral part of its capital structure
and not directly associated with its principal revenue-producing
activities. Therefore interest paid is classified as a financing activity
in CAPREIT’s consolidated statements of cash flows.
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 specified 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 Officer and the Chief Financial
Officer, to allow timely decisions regarding required disclosure.
As at December 31, 2014, Management evaluated the effective-
ness of the disclosure controls and procedures against the rules
adopted by the Canadian Securities Administrators as defined
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 2013, CAPREIT’s President
and Chief Executive Officer and its Chief Financial Officer
concluded that the design and operation of the disclosure controls
and procedures were effective as at December 31, 2014.
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 financial reporting
and the preparation of consolidated financial statements for
external purposes in accordance with IFRS. Management assessed
the effectiveness of the internal controls over financial reporting as
at December 31, 2014 and, based on that assessment, determined
that the internal controls over financial 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 final
approval by the Board of Trustees on an interim and annual basis.
Management also maintains internal controls that ensure
continued compliance with the specified investment flow-through
(“SIFT”) Rules allowing CAPREIT to maintain its qualification
under the REIT Exception (see Taxation-Related Risks in 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 the 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
significant or material changes to the design of internal controls
over financial reporting.
CAPREIT did not make any other changes to the design of
internal controls over financial reporting in 2014 that have
materially affected, or are reasonably likely to materially affect,
the internal controls over financial 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 assump-
tions 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, defined as either those that,
although unlikely, can have a significant impact on CAPREIT or
those that are significant to CAPREIT’s day-to-day operations.
Investors should carefully consider these risks before investing in
CAPREIT Units.
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 prop-
erty could be sold for in a competitive and open market as of the
specified date under all conditions requisite to a fair sale, such as
the buyer and seller each acting prudently and knowledgeably, and
assuming the price is not affected by undue stimulus. Each invest-
ment property has been valued on a highest and best use basis.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
58
Market assumptions applied for valuation purposes do not
necessarily reflect CAPREIT’s specific 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. Down-
turns in the real estate market could negatively affect CAPREIT’s
operating revenues and cash flows; and could significantly
impact the fair values of the investment properties as well as
certain financial 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 circum-
stances. 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 benefit from a broader diversification 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 profitable. 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 flows available for distributions. A significant 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, insur-
ance, 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 defined 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 flow 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 financial 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 financially 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, at 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.
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 fluctuations 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 oversup-
ply 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 55.3% of the overall portfolio (by number of suites and sites)
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
59
in Ontario (38% in the GTA), making CAPREIT’s performance
particularly sensitive to economic conditions in and changes
affecting Ontario and, in particular, the GTA.
CAPREIT’s investment properties generate income through
rental payments made by residents. 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, residen-
tial leases are generally “gross” leases (with the exception of
sub-metering of certain utilities at some properties) under which
the landlord is not able to pass on costs to 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 financial position of CAPREIT.
Energy Costs and Hedging
As a significant part of CAPREIT’s operating expenses are
attributable to energy and energy-related charges and fees,
fluctuations 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 pay
fixed prices on all or certain of its energy requirements (principally
natural gas and electricity in certain markets) to offset the risk of
rising expenditures if prices for these energy commodities increase;
however, if the prices for these energy commodities decline beyond
the levels set in these agreements, CAPREIT will not benefit from
such declines in energy prices and will be required to pay the
higher price contracted for such energy supplies.
CAPREIT enters into new natural gas physical delivery
contracts, fixing a portion of its variable rate natural gas commit-
ments. The fixed 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.
also result in regulatory enforcement proceedings and/or private
claims against the owner. Unless determined 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 environmental
assessments warrant further assessment, it is CAPREIT’s operating
policy to obtain Phase II or Phase III environmental assessments.
Wherever required by environmental regulations, CAPREIT also
carries out assessments to determine the presence of asbestos-
containing material and underground storage tanks to ensure
compliance with appropriate provincial legislation. CAPREIT
maintains environmental liability insurance to protect Unitholders
against such risks (also see Insurance in this section). Notwith-
standing the foregoing, Management is not aware of any environ-
mental condition with respect to any of the properties that it
believes would have a material adverse effect on CAPREIT.
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., fire, flood, injury or death, rental loss and environmental
insurance, etc., with policy specification 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 that
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 liability coverage will
continue to be available on acceptable terms. In addition, should
an uninsured or under insured loss occur, CAPREIT could lose its
investment in, and anticipated profits and cash flows from, one or
more of its properties but 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.
Environmental Matters
Environmental and ecological legislation and policies have become
increasingly important, and generally more 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
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
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis 60
replacements are carried out in accordance with its property capital
investment programs. CAPREIT requires sufficient capital to carry
out its planned property capital investment and repair and
refurbishment programs to upgrade its properties or be exposed to
operating business risks arising from structural failure, electrical or
mechanical breakdowns, fire or water damage, etc., which may
result in significant loss of earnings to CAPREIT. A significant
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 flow is devoted to servicing its debt,
and there can be no assurance that CAPREIT will continue to
generate sufficient cash flow from operations to meet required
interest and principal payments. CAPREIT has and will continue
to have substantial outstanding consolidated indebtedness compris-
ing 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 refinanced or that the terms of
such refinancing 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
financing, 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
financing 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 finance a conventional
mortgage which may be less favourable to CAPREIT than a
CMHC-insured mortgage.
CAPREIT’s Acquisition and Operating Facility of $340 million
matures on June 30, 2017. CAPREIT’s Acquisition and Operating
Facility is at a floating interest rate and, accordingly, changes in
short-term borrowing rates will affect CAPREIT’s costs of bor-
rowing. CAPREIT’s financial condition and results of operations
would be adversely affected if it were unable to obtain financing
or cost-effective financing. As at the date hereof, it is difficult to
forecast the future state of the commercial loan market. If, because
of CAPREIT’s level of indebtedness, the level of cash flows,
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
financing, CAPREIT may be required to take measures to conserve
cash until the markets stabilize or until alternative credit arrange-
ments or other funding can be arranged, if such financing 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 financing
which CAPREIT may require in order to grow and expand its
operations upon the expiry of the term of existing financing, or
the refinancing of 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 refinance 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 financial condition.
In general, hedging activities may subject CAPREIT to addi-
tional costs, such as transaction fees or breakage costs, if these
arrangements are terminated. In addition, although Management
enters into such hedge contracts with financially sound counterpar-
ties 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 qualifies 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 it 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 specific restrictions regarding its activities and the
investments held by it. If CAPREIT were to cease to qualify as a
mutual fund trust, the consequences could be adverse.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
61
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 profit-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 qualified investments
for trusts governed by designated savings plans. CAPREIT will
endeavour to ensure CAPREIT Units continue to be qualified
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-
qualified 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
retire ment savings plans, registered retirement income funds or
tax free savings accounts.
On June 22, 2007, the specified investment flow-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 defined in the Tax Act) will
be taxed 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 beneficiaries 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 fiscal 2013 and 2014,
CAPREIT qualified 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 exemp-
tion rule and, on October 24, 2012, released legislation to imple-
ment such amendments. These notable 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 clarification 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 definition “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 fluctuations in respect of revenues
derived from foreign real or immovable property, including
certain financing 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 significant 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 defined under the SIFT Rules as a trust that is resident
in Canada throughout the taxation year and that satisfies 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 qualified 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;
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;
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
62
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) of the
definition “qualified 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 satisfies the
above criteria in (i)–(iv) above, but does not include any depre-
ciable property of a prescribed class for which the rate of capital
cost allowance exceeds 5%.
Excluded from the definition 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, requires
the landlord to give tenants sufficient 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 attempt 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 flow from its properties. In addition,
applicable legislation provides for compliance with several
regulatory matters involving tenant evictions, work orders, health
and safety issues or fire 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 financial 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 possibil-
ity 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.
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.
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report 63
related to Capreit’s seCurities, organization
and struCture
Nature of CAPREIT Trust Units
Units and Special Voting Units are not traditional equity invest-
ments 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,
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 defined by the Tax Act, CAPREIT is
not a “mutual fund” as defined 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, beneficial interest in CAPREIT.
operating results, distributions and other factors beyond the control
of CAPREIT. One of the factors that may influence 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 significant price and volume fluctuations from time to
time in recent years that often have been unrelated or dispropor-
tionate to the operating performance of particular issuers. These
broad fluctuations 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 bene-
ficially owning more than 49% of the outstanding Units (on a
non-diluted or 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, or
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.
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 statutes by a
Unitholder or Special Unitholder or annuitant could be success-
fully challenged on jurisdictional or other grounds.
Liquidity and Price Fluctuation of Units
CAPREIT is an unincorporated “open-ended” investment 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 significant fluctuations in response to variations in quarterly
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 determines 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 such 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 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 significant. In addition, the composition of
the cash distributions for tax purposes may change over time
and may affect the after-tax return for Unitholders.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
64
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 or to make property capital investments.
Additionally, such effects may adversely affect Unit prices.
Potential Conflicts of Interest
CAPREIT may be subject to various conflicts of interest because
certain of the trustees and officers of CAPREIT are engaged in a
wide range of real estate and other business activities. CAPREIT
may become involved in transactions which conflict with the
interests of the foregoing.
The trustees may from time to time deal with persons, firms,
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 conflict 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 significant extent on the
efforts and abilities of its executive officers and other members of
Management, as well as its ability to attract and retain qualified
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 officer or other key employee could
have a material adverse effect on the business, operating results or
financial 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 depends
on the credit and financial stability of residents and upon the
vacancy rates of such properties. The properties generate revenue
through rental payments made by residents. 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 significant number of
residents are unable to meet their obligations under their leases or
if a significant 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, includ-
ing 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 accommoda-
tion 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 profitability, including its financing 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
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.
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 financial resources than those of CAPREIT, or
operate without the investment or operating restrictions of
CAPREIT or according to more flexible conditions. An increase in
the availability of investment funds and/or an increase in interest
in real property investments may 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 flow to
Unitholders, but there can be no assurance that this will be the
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report 65
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 financing or financing on reasonable terms, consummating
acquisitions (including obtaining necessary consents) and effectively
integrating and operating the acquired properties. Acquired
properties may not meet financial 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 refinancing risks. Moreover, newly
acquired properties may require significant 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 financial 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
financial results of CAPREIT. CAPREIT’s due diligence investiga-
tions 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 financial
capacity of such vendors.
Foreign operation and CurrenCy risks
Effective April 11, 2014, CAPREIT entered into an external
management agreement to perform certain asset management and
property services for IRES (formerly CAPREIT’s Irish subsidiary),
which owns properties in Dublin, Ireland. The Irish real estate
market differs from the Canadian environment and CAPREIT’s
experience and expertise in managing Canadian properties may not
apply perfectly to a foreign operation. In an effort to reduce its risk
exposure CAPREIT aligns with experienced Irish operating compa-
nies and hires locally-based employees with real estate experience.
There can be no certainty, however, that CAPREIT’s operation will
be successful. Additionally, it is possible that CAPREIT’s subsidiaries
will expose CAPREIT to foreign currency risk as CAPREIT’s
functional and presentation currency is the Canadian dollar, while the
functional currency of CAPREIT’s fund management subsidiary in
Dublin, Ireland and the investment in IRES is the Euro. CAPREIT
will in part mitigate this risk through the use of Euro-denominated
debt and a foreign currency hedging program.
Related Party Transactions
CAPREIT has a 20.8% beneficial interest in IRES and has
determined that it has significant influence over IRES. The
beneficial interest is held through a wholly-owned subsidiary of
CAPREIT, Irish Residential Properties Fund. For a more detailed
description, see note 5 to the accompanying audited consolidated
annual financial statements. In addition, effective April 11, 2014,
CAPREIT’s wholly-owned subsidiary, IRES Fund Management
Limited, entered into an external management agreement to
perform certain property and asset management services for IRES.
Included in other income is $1.2 million for the nine months
ended December 31, 2014 from asset management and property
management fees.
David Ehrlich is the CEO and a director of the IRES board.
He is also a trustee of CAPREIT. Thomas Schwartz is a director
(non-executive) of the IRES board. He is also a trustee and the
President and Chief Executive Officer of CAPREIT and each of its
subsidiaries. Officers and key management personnel of CAPREIT
were granted options of IRES.
CAPREIT has entered into an agreement (the “Pipeline
Agree ment”) with IRES to make available up to €150 million for
a period of up to one year to acquire high quality properties in
Ireland, and to subsequently permit IRES to acquire such proper-
ties from CAPREIT once IRES has sourced additional funding.
In addition to CAPREIT receiving the purchase price and related
acquisition cost, CAPREIT will receive an underwriting fee of
1.0% of the purchase price of any assets acquired by CAPREIT
under the Pipeline Agreement at such time as the assets are
acquired by IRES. The portfolio is intended to be transferred to
IRES conditional on, among other things, IRES shareholder
approval of the Pipeline Agreement and IRES having sufficient
funds available.
CAPREIT incurred the following transactions with key manage-
ment personnel and trustees. The loans outstanding to key
management personnel and trustees for indebtedness relating to
the SELTIP and LTIP at December 31, 2014 were $7.8 million and
$11.2 million, respectively (December 31, 2013 – $8.0 million and
$11.8 million, respectively). These amounts are taken into consider-
ation when calculating the fair value of the Unit-based compensa-
tion financial liabilities. Key management personnel are eligible to
participate in the EUPP. In addition, certain key management
personnel also participate in the RUR Plan and trustees currently
participate in the DUP. Pursuant to employee contracts, key
management personnel are subject to termination benefits that
entitle them to payments of up to 36 months of benefits (based
on base salary, bonus and other benefits) depending on cause.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
66
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive
income is comprised of:
($ Thousands)
Year Ended December 31,
Short-term employee benefits
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Total
2014
$
3,583 $
3,306
6,889
2013
3,439
2,050
5,489
6,997
13,886 $
(6,491)
(1,002)
$
The Rockbrook Portfolio is the first portfolio CAPREIT is
acquiring for IRES under the previously announced agreement
entered into between IRES and CAPREIT on November 21, 2014
and amended on February 9, 2015 (the “Pipeline Agreement”).
The Pipeline Agreement was amended on February 9, 2015 to
remove the proposed 2.5 year extension to be made to the invest-
ment management agreement but to include an underwriting fee of
1.0% of the purchase price of each property investment acquired
under the Pipeline Agreement. CAPREIT will receive the purchase
price and related acquisition cost and an underwriting fee of 1.0%
of the purchase price of any assets acquired by CAPREIT under the
Pipeline Agreement at such time as the assets are acquired by IRES.
The portfolio is intended to be transferred to IRES conditional on,
among other things, IRES share holder approval of the Pipeline
Agreement and IRES having sufficient funds available.
CAPREIT leases office space from a company in which Thomas
Schwartz has an 18% beneficial interest. The rent paid for the
office space (which is based on fair market rents at the date the
lease was entered into) for the year ended December 31, 2014 was
$0.9 million (2013 – $0.9 million) excluding property operating
costs, and has been expensed as trust expenses. In 2012, the lease
was amended to extend for an additional three years, expiring on
October 31, 2017, and the minimum annual rental payments for
the extended period are $0.5 million, before HST, per year.
Commitments and Contingencies
From time to time, CAPREIT enters into commitments for fixed
price natural gas, hydro and land lease agreements, as outlined in
note 24 to the accompanying audited consolidated annual financial
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 financial statements of CAPREIT.
SECTION VIII
Subsequent Events
On January 28, 2015, CAPREIT announced that it had, through
a wholly-owned Irish subsidiary, completed the acquisition of
the Rockbrook Portfolio, consisting of 270 residential suites
and approximately 50,214 square feet of mixed-use commercial
space located in Dublin, Ireland for a purchase price (including
VAT) of approximately €87.3 million and other acquisition
costs of approximately €2.5 million. The purchase was funded
through CAPREIT’s Acquisition and Operating Facility.
Future Outlook
Despite the potential adverse impact of global economic uncertainty,
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
benefit from programs over the long term to enhance ancillary
revenues from parking, commercial leases, laundry, cable, tele-
communications 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.
CAPREIT believes the strong defensive characteristics of its
property portfolio, due to diversification by both geography and
demographic sector, will serve to mitigate the negative impact of
any future unfavourable economic conditions that certain regions
may experience. CAPREIT intends to continue to seek opportuni-
ties 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 experience difficulty in securing
long-term financing (i.e., financing for terms of ten years and
longer) due to credit market conditions.
CAPREIT has defined 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
ManageMent’s Discussion anD analysisCAPREIT 2014 Annual Report
67
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-efficient 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 flow 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 diversification. 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. In addition, Management has recently
begun prudently investigating the opportunity to enter into joint
venture relationships with other real estate entities to potentially
develop new multi-unit rental residential properties on excess land
owned by CAPREIT or other vacant land.
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 financing insured by CMHC that
is at lower cost than is currently available under conventional
mortgages, CAPREIT is well positioned to meet its financing and
refinancing 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 financing and mortgage refinancing 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.
value of its properties have contributed to a strong track record
of stable portfolio occupancy and average monthly rents.
A significant component of CAPREIT’s ability to manage 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 2015 has
been set at 1.6%. 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 filed 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 significant 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.
The following table summarizes the status of cumulative AGI
applications filed as at December 31, 2014 and December 31, 2013:
December 31,
Number of Suites and Sites Filed
2014
19,868
2013
12,368
Applications Settled
Number of Applications
Term Weighted Average Total Increase 1
Weighted Average Term (years) 1, 2
Applications Outstanding
Number of Applications
Term Weighted Average Total Increase 1
Weighted Average Term (years) 1, 2
91
3.51%
1.69
49
4.50%
1.89
73
3.44%
1.67
8
3.99%
1.79
1 Weighted by number of impacted suites and sites.
2 Represents the number of years over which the AGI application
is expected to apply.
CAPREIT 2014 Annual ReportManageMent’s Discussion anD analysis
68
ManageMent’s responsibility
ManageMent’s Responsibility
foR financial stateMents
The accompanying consolidated financial statements and informa-
tion 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
financial statements. The financial information presented elsewhere
in this Annual Report is consistent with that in the consolidated
financial statements in all material respects.
PricewaterhouseCoopers LLP, the auditors appointed by the
Unitholders, have examined the consolidated financial statements
in accordance with Canadian generally accepted auditing
standards to enable them to express to the Unitholders their
opinion on the consolidated financial statements. Their report
as auditors is set forth below.
The consolidated financial statements have been further reviewed
and approved by the Board of Trustees and its Audit Committee.
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 2013. The internal controls
are designed to ensure that our financial records are reliable for
preparing financial statements; other financial information,
transactions are properly authorized and recorded; and assets
are safeguarded.
As at December 31, 2014, our Chief Executive Officer and Chief
Financial Officer evaluated, or caused an evaluation under their
direct supervision of, the design and operation of our internal
controls over financial reporting (as defined in National Instrument
52-109, Certification of Disclosure in Issuers’ Annual and Interim
Filings) and, based on that assessment, determined that our
internal controls over financial reporting were appropriately
designed and operating effectively.
This committee meets regularly with management and the auditors,
who have full and free access to the Audit Committee.
February 17, 2015
Thomas Schwartz
Scott Cryer
President and Chief exeCutive OffiCer Chief finanCial OffiCer
CAPREIT 2014 Annual Report auditor’s report
69
independent
auditoR’s RepoRt
February 17, 2015
To the Unitholders of Canadian Apartment
Properties Real Estate Investment Trust
We have audited the accompanying consolidated financial state-
ments of Canadian Apartment Properties Real Estate Investment
Trust (CAPREIT) and its subsidiaries, which comprise the
consolidated balance sheets as at December 31, 2014 and
December 31, 2013 and the consolidated statements of income
and comprehensive income, unitholders’ equity and cash
flows for the years then ended, and the related notes, which
comprise a summary of significant accounting policies and
other explanatory information.
ManageMent’s responsibility for the consolidated
financial stateMents
Management is responsible for the preparation and fair presenta-
tion of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are
free from material misstatement, whether due to fraud or error.
auditor’s responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our
audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements
are free from material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circum-
stances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our
audits is sufficient and appropriate to provide a basis for our
audit opinion.
opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of CAPREIT
and its subsidiaries as at December 31, 2014 and December 31,
2013 and their financial performance and their cash flows for the
years then ended in accordance with International Financial
Reporting Standards.
Chartered PrOfessiOnal aCCOuntants,
liCensed PubliC aCCOuntants
Toronto, Ontario
CAPREIT 2014 Annual Report 70
Cons0lidated FinanCial stateMents
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 financial liabilities
Other non-current liabilities
current liabilities
Mortgages payable
Unit-based compensation financial 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 financial statements.
Signed on behalf of the Trustees
Note
6
7
7
9
10
11, 12
8
9
11, 12
8
11
19
December 31, 2014
December 31, 2013
$ 5,749,640
146,512
5,896,152
30,009
$ 5,926,161
$ 2,369,954
113,167
5,406
3,393
2,491,920
288,500
43,280
70,941
7,547
25,769
4,054
11,045
451,136
$ 5,459,218
82,263
5,541,481
17,453
$ 5,558,934
$ 2,016,077
187,030
1,772
1,121
2,206,000
441,105
30,992
77,432
7,250
24,892
3,428
10,366
595,465
$ 2,943,056
$ 2,801,465
$ 1,761,313
(27,284)
1,249,076
$ 2,983,105
$ 5,926,161
$ 1,720,066
(21,194)
1,058,597
$ 2,757,469
$ 5,558,934
Thomas Schwartz
trustee
Michael Stein
trustee
CAPREIT 2014 Annual Report
Cons0lidated FinanCial stateMents
71
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 expenses (recoveries)
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
Loss on derivative financial instruments
Interest and other financing costs
Foreign currency translation
Other income
net income
other comprehensive (loss) income
items that May be reclassified 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
(Loss) Gain on foreign currency translation
other comprehensive (loss) income
comprehensive income
See accompanying notes to consolidated financial statements.
Note
12
6
5
11
16
20
19
16
19
19
2014
2013
$
506,411
$
477,023
56,591
145,935
202,526
303,885
20,944
16,478
(150,897)
–
2,400
414,960
626
2,810
105,445
(4,954)
(6,942)
317,975
3,333
(3,649)
(478)
–
(5,296)
(6,090)
311,885
$
$
$
$
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)
$
267,678
$
$
$
3,265
3,701
(4,392)
(1,381)
124
1,317
268,995
CAPREIT 2014 Annual Report
72
Cons0lidated FinanCial stateMents
consolidated stateMents of unitholdeRs’ equity
(CA$ Thousands)
unitholders’ equity, January 1, 2014
Unit Capital
Distribution Reinvestment Plan
RUR Plan
Long-Term Incentive Plan
Employee Unit Purchase Plan
Retained Earnings and Other Comprehensive Loss
Net income
Other comprehensive loss
Distributions on Trust Units
Distributions declared and paid
Distributions payable
Note
13
12, 13
12, 13
12
14
14
Unit
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
$
1,720,066
$
1,058,597
$
(21,194)
$
2,757,469
39,897
94
373
883
41,247
–
–
–
–
–
–
–
–
–
–
–
317,975
–
317,975
(116,451)
(11,045)
(127,496)
–
–
–
–
–
–
(6,090)
(6,090)
–
–
–
39,897
94
373
883
41,247
317,975
(6,090)
311,885
(116,451)
(11,045)
(127,496)
unitholders’ equity, december 31, 2014
$
1,761,313
$
1,249,076
$
(27,284)
$
2,983,105
unitholders’ equity, January 1, 2013
Unit Capital
New Units issued
Distribution Reinvestment Plan
Deferred Unit Plan
RUR Plan
Long-Term Incentive Plan
Employee Unit Purchase Plan
Retained Earnings and Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
Note
13
13
12, 13
12, 13
12, 13
12
14
14
Unit
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
$
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
See accompanying notes to consolidated financial statements.
CAPREIT 2014 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 financial instruments
Amortization
Unit-based compensation expenses (recoveries)
Straight-line rent adjustment
Foreign currency adjustment
Net income items related to financing 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 financings
Mortgage principal repayments
Mortgages repaid on maturity
Financing costs on mortgages payable
CMHC premiums on mortgages payable
Interest paid
Bank indebtedness
Hedge settlement
Proceeds on issuance of Units
Net cash distributions to Unitholders
cash (used in) provided by financing activities
Note
5
16
19, 20
22
22
22
22
22
22
16
22
22
Cons0lidated FinanCial stateMents
73
2014
2013
$
317,975
$
267,678
(150,897)
626
(717)
–
2,810
8,484
16,478
(142)
(4,954)
189,663
94,338
(19)
283,982
(34,964)
(164,898)
7,599
–
(684)
3,786
(189,161)
589,107
(84,421)
(324,915)
(2,797)
(11,070)
(98,124)
(76,712)
–
1,031
(86,920)
(94,821)
(106,470)
(537)
(1,737)
811
680
4,448
(5,968)
(211)
17
158,711
93,607
7,962
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)
(94,905)
39,714
(3,492)
144,169
(87,966)
248,975
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 financial statements.
–
–
–
$
–
–
–
$
CAPREIT 2014 Annual Report
74
notes to Cons0lidated FinanCial stateMents
notes to consolidated financial stateMents
(CA$ Thousands, except Unit and per Unit amounts)
December 31, 2014
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”), principally located in and near
major urban centres across Canada. CAPREIT’s net assets and
operating results are derived 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 June 12, 2014. 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, and
owns directly or indirectly the beneficial interest of all its properties
along with the related mortgages and all the corporate debt
obligations of CAPREIT.
CAPREIT’s wholly-owned subsidiary, IRES Fund Management
Limited, entered into an external management agreement to
perform certain property and asset management services for Irish
Residential Properties REIT plc (“IRES”), an Irish residential
REIT listed on the Irish Stock Exchange. As at December 31, 2014,
CAPREIT has a 20.8% beneficial interest in IRES.
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. Summary of Significant 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 financial statements.
These consolidated annual financial statements, which were
approved by CAPREIT’s Board of Trustees on February 17, 2015,
have been prepared on the basis of IFRS issued and effective, or
available for early adoption, at December 31, 2014. These policies
have been consistently applied to all years presented, unless
stated otherwise.
b) basis of presentation
These consolidated annual financial 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
an historical cost basis except for:
i) Investment properties and certain financial 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 financial statements comprise the assets
and liabilities of all subsidiaries and the results of all subsidiaries
for the financial period. CAPREIT and its subsidiaries are collec-
tively 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 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 income and comprehensive income.
In general, CAPREIT has recourse against all of the assets of the
joint operations in the event that CAPREIT is called on 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.
iii) Investment in Associates
An associate is an entity over which the investor has significant
influence, but not control. Generally, CAPREIT is considered to
exert significant influence when it directly or indirectly holds 20%
or more of the voting power of the investee. However, determining
significant influence is a matter of judgment and specific circum-
stances; therefore, holding less than 20% of an entity does not
necessarily preclude an entity from having significant influence as
the entity may exert significant influence through representation
CAPREIT 2014 Annual Report notes to Cons0lidated FinanCial stateMents
75
on the board of trustees, direction of management or through
contractual agreements.
The financial results of CAPREIT’s associates are included in
CAPREIT’s consolidated financial statements using the equity
method, whereby the investment is carried on the consolidated
balance sheets at cost, adjusted for CAPREIT’s proportionate share
of post-acquisition changes in CAPREIT’s share of the net assets
of the associate. CAPREIT’s share of profits and losses is recognized
in other income in the consolidated statements of income and
comprehensive income. The standard provides an exception to
recognizing the share of the net assets of the associate if the reporting
periods of the entity and the investee are not aligned, provided the
information used in preparing the financial statements is not more
than three months old. The standard further requires adjustments
to this information for any significant transactions or events which
may have occurred between the entity’s reporting date and its
investee’s most recent reporting date. CAPREIT has applied this
guidance in the accounting for its investment in IRES.
At each reporting date, CAPREIT evaluates whether there is
objective evidence that its interest in an associate is impaired. The
entire carrying amount of the associate is compared to the recover-
able amount, which is the higher of the value in use or fair value
less costs to sell. The recoverable amount of the investment is
considered separately.
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 financial 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.
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 from 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 definition of investment
property and are classified and accounted for as such. All invest-
ment 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 classified
all such interests as finance leases, including the fair value of
options to purchase, and are accounted for and presented as
investment properties.
The fair value of all of CAPREIT’s investment properties is
determined by qualified 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 flows, capitalization rates
and discount rates. These assumptions are tested against market
information obtained from an independent appraisal firm. 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 significant 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 defined
under IFRS 3, CAPREIT classifies these properties or a portfolio
of properties as an asset acquisition. Identifiable 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 reclassified 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 first classified as “for sale”. The sale of one or a group of
investment properties by CAPREIT will generally be presented as
CAPREIT 2014 Annual Report 76
notes to Cons0lidated FinanCial stateMents
non-current assets held-for-sale and not discontinued operations.
If a group of assets held-for-sale is considered to meet the definition
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.
Classification of financial instruments
The following summarizes the classification and measurement
CAPREIT has elected to apply to each of its significant categories
of financial instruments:
Type
Classification
Measurement
financial assets
Cash and cash equivalents Loans and receivables Amortized cost
Loans and receivables Amortized cost
Restricted cash
Loans and receivables Amortized cost
Other receivables
Available-for-sale
Investments
Fair value
g) property, plant and equipMent
Property, plant and equipment are stated at historical cost less
accumulated depreciation and mainly comprise head office and
regional offices leasehold improvements, corporate and information
technology systems, and are presented within other non-current
assets on the consolidated balance sheets. These items are amor-
tized on a straight-line basis over their estimated useful lives ranging
from three to five years, or, in the case of leasehold improvements,
are amortized over the shorter of the lease term and their estimated
useful lives ranging from 10 to 15 years.
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
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 financing costs in the consolidated statements of income
and comprehensive income.
J) financial instruMents
Financial assets and financial liabilities
Financial assets and financial liabilities are initially recognized at
fair value and are subsequently accounted for based on their
classification as described below. Their classification depends on
the purpose for which the financial instruments were acquired or
issued, their characteristics and CAPREIT’s designation of such
instruments. The standards require that all financial assets and
financial liabilities be classified as fair value through profit or loss
(“FVTPL”), loans and receivables, available-for-sale, other
liabilities or held-to-maturity.
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 definition of cash and cash equivalents and
is included in other assets on the consolidated balance sheets.
Interest earned or accrued on these financial assets is included
in other income.
Loans and 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 consoli-
dated balance sheet date, which are classified as non-current assets.
Loans and receivables are included in other assets on the consoli-
dated 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 comprehen-
sive 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.
Other liabilities
Such financial liabilities are recorded at amortized cost and include
all liabilities other than derivatives or liabilities, which are desig-
nated to be accounted for at fair value.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
77
Fair Value Through Profit 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 state-
ments of income and comprehensive income in the period in which
they arise. Financial assets and liabilities at FVTPL are classified
as current, except for the portion expected to be realized or paid
beyond 12 months of the consolidated balance sheet date, which
is classified as non-current. Derivatives are also categorized as
FVTPL unless designated as hedges.
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 financial assets are included in the cost of the
asset on initial recognition.
Determination of fair value
The fair value of a financial 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 financial instruments is remeasured based on
relevant market data. CAPREIT classifies the fair value for each
class of financial instrument based on the fair value hierarchy.
The fair value hierarchy distinguishes between market value data
obtained from independent sources and CAPREIT’s own assump-
tions about market value. See note 15 for a detailed discussion
of valuation methods used for financial instruments quoted on an
active market and instruments valued using observable data.
Derivatives
Derivative financial 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 financial 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.
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.
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 financial 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 flow hedges. At the inception
of the transaction, CAPREIT documents the relationship between
hedging instruments and hedged items, as well as its risk manage-
ment 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 flows of hedged items. The effective portion of changes in
the fair value of derivatives that are designated and qualify as cash
flow 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 was operating the Dublin acquisition in a foreign
jurisdiction, it was exposed to foreign currency fluctuations arising
between the functional currency of the foreign operation (the
Euro) and the functional currency of CAPREIT (the Canadian
dollar). As such, CAPREIT entered into a hedge effective at the
date of the Dublin acquisition (September 10, 2013). CAPREIT
hedged the investment in the Dublin foreign operations against
the Euro-denominated debt on CAPREIT’s consolidated balance
sheets. As such, the effective portion of any foreign currency
gain/loss arising from the Euro-denominated debt and the foreign
currency gain/loss arising from the investment in the Dublin
foreign operations was recognized in OCI and the ineffective
portion was recognized in net income. On April 16, 2014, this
hedging relationship became ineffective when CAPREIT’s benefi-
cial interest in IRES was diluted from wholly owned to a 20.8%
ownership. See note 5 for further details.
Embedded derivatives
Derivatives embedded in other financial instruments or contracts
are separated from their host contracts and accounted for as deriva-
tives 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
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 financing
costs in the consolidated statements of income and comprehensive
CAPREIT 2014 Annual Report 78
notes to Cons0lidated FinanCial stateMents
income over the expected term of the mortgage. Mortgage maturities
and repayments due more than 12 months after the consolidated
balance sheet date are classified 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 classified 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 adjust-
ments 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 comprehen-
sive income (loss). Other comprehensive income (loss) includes
changes in the fair value of investments and the effective portion of
cash flow hedges less any amounts reclassified to interest and other
financing costs and the associated income taxes.
o) accuMulated other coMprehensive loss (“aocl”)
AOCL is included on the consolidated balance sheets as
Unitholders’ Equity and includes the unrealized gains and losses of
the changes in the fair value of cash flow 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 management
fees. Interest and dividend income are recognized as earned.
Management fees are recorded as the services are provided.
q) borrowing costs and interest on Mortgages payable
Interest and other financing 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 outstand-
ing Trust Units.
s) unit-based coMpensation and incentive plans
Unit-based compensation benefits are provided to officers, trustees
and certain employees and are intended to facilitate long-term own-
ership of Trust Units and provide additional incentives by increas-
ing the participants’ interest, as owners, in CAPREIT. Unit-based
compensation liabilities are classified as current, except for the
portion expected to be realized or paid beyond 12 months of the
consolidated balance sheet date, including amounts, 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 definitions 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.
CAPREIT 2014 Annual Report notes to Cons0lidated FinanCial stateMents
79
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 financing activities that do not require the use of cash or cash
equivalents are excluded from the consolidated statements of cash
flows and are disclosed separately in the notes to the consolidated
annual financial statements.
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 satisfied 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 specified
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 the carrying amounts of assets and liabilities
and their carrying amounts for tax purposes. Deferred income
taxes are measured using tax rates that have been enacted or
substantively enacted to the consolidated 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 substantively enacted.
v) earnings per unit
As a result of the redemption feature of CAPREIT’s Trust
Units, these Units are considered financial liabilities under IAS 33,
Earnings Per Share, and they may not be considered as 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
The consolidated financial statements are presented in Canadian
dollars, which is the functional currency of CAPREIT and the
presentation currency for the consolidated financial statements.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates 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
consolidated balance sheet date. Foreign exchange gains and losses
resulting from the settlement of such transactions, and from the
translation at period end exchange rates of monetary assets and
liabilities denominated in foreign currencies, are recognized in the
consolidated statements of income and comprehensive income.
Foreign exchange gains and losses are presented in the consoli-
dated statements of income and comprehensive income.
x) 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 clarifies 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 assessed
the standard and completed an analysis of the government levies
that CAPREIT is subject to and determined it does not impact
CAPREIT on adoption in its current form.
y) accounting changes applied in 2014
IFRIC 21, Levies (“IFRIC 21”)
CAPREIT has applied IFRIC 21 as at January 1, 2014. See
x) IFRIC 21, Levies above for further details of the accounting
impact.
z) future accounting changes
As at February 17, 2015, 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, 2014:
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classification
and measurement of financial liabilities over the existing derecogni-
tion requirements of IAS 39, Financial Instruments: Recognition
and Measurement. IFRS 9 also introduces new requirements for
classifying and measuring financial assets; specifically, investments
in equity instruments can be designated as “fair value through other
comprehensive income” with only dividends being recognized in
profit 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 financial 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.
CAPREIT 2014 Annual Report 80
notes to Cons0lidated FinanCial stateMents
The final amendment of IFRS 9 as at July 2014 included (i) a
third measurement category for financial assets – fair value through
other comprehensive income; (ii) a single, forward looking “expected
loss” impairment model; and (iii) a mandatory effective date for
IFRS 9 for annual periods beginning on or after January 1, 2018.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from IAS 39
to IFRS 9. Effective on adoption of IFRS 9.
IFRS 10 and IAS 28, Sale or Contribution of Assets Between an
Investor and its Associate or Joint Venture
The amendment clarifies an inconsistency between the two
standards, and establishes that a gain or loss is fully recognized
when the transaction involves a business, and a partial gain or loss
is recognized when the transaction involves assets that do not
constitute a business. This amendment will come into effect on
January 1, 2016.
IFRS 11, Accounting for Acquisitions of Interests in Joint Operations
This amendment provides specific guidance for the acquisition of
an interest in a joint operation that is a business. This amendment
will come into effect on January 1, 2016.
IFRS 15, Revenue from Contracts with Customers
This new standard on revenue recognition supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and related interpreta-
tions. The new standard provides a single, comprehensive revenue
recognition model. While early adoption is permitted for IFRS
reporters, this standard is effective beginning January 1, 2017.
CAPREIT is currently assessing the impact of the above
standards and amendments but does not expect to be significantly
impacted on adoption in their current form.
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 financial statements and accompanying
notes. Areas of such estimation include, but are not limited to:
valuation of investment properties, remeasurement at fair value of
financial instruments, valuation of accounts receivable, capitaliza-
tion of costs, accounting accruals, the amortization of certain assets,
accounting for deferred income taxes and Unit-based compensa-
tion 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 financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates under different assump-
tions and conditions.
The estimates deemed to be more significant, due to subjectivity
and the potential risk of causing a material adjustment within the
next financial 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 consoli-
dated 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 classified as Level 3 in the fair value
hierarchy as disclosed in note 15.
The fair value of investment properties is established by qualified,
independent appraisers annually. Each quarter, CAPREIT utilizes
market assumptions for rent increases, capitalization and discount
rates provided by an external appraisal firm to determine the fair
value of the investment properties for interim reporting purposes.
Capitalization rates employed by the appraisal firm 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 assump-
tions about market conditions in effect as at the consolidated
balance sheet date. See note 6 for a detailed discussion of valuation
methods and the significant assumptions and estimates used.
CAPREIT 2014 Annual Report notes to Cons0lidated FinanCial stateMents
81
ii) valuation of financial 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. The fair
values of derivatives reported may differ materially from the
amount they are ultimately settled for if there is volatility between
the valuation date and settlement date.
iii) unit-based coMpensation
The fair values of Unit-based compensation financial liabilities are
based on assumptions that involve significant estimates. The basis
of valuation for CAPREIT’s Unit-based compensation financial
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.
iv) investMent in irish residential properties
reit plc (“ires”)
CAPREIT has determined that its investment in IRES should be
accounted for using the equity method of accounting given the
4. Recent Investment Property Acquisitions
significant influence it has over IRES. In making the determination
that CAPREIT does not control IRES, CAPREIT used judgement
when considering the extent of its ownership interest in IRES, the
level of its involvement, responsibilities and remuneration as IRES’
asset manager and the control exerted over IRES by its indepen-
dent Board of Directors. Management will reassess this conclusion
should its ownership interest or the terms of the asset management
agreement change.
v) classification of interest paid on consolidated
stateMents of cash flows
IFRS permits the classification of interest paid as operating cash
flows because they enter into the determination of profit or loss,
or alternatively as financing cash flows because they are costs of
obtaining financial resources. CAPREIT has applied its judge-
ment and concluded that debt financing, which is used to provide
leveraged returns to its unitholders, is an integral part of its capital
structure and not directly associated with its principal revenue-pro-
ducing activities. Therefore interest paid is classified as a financing
activity in CAPREIT’s consolidated statements of cash flows.
CAPREIT completed the following investment property acquisitions since January 1, 2013, which have contributed to the operating results
effective from their respective acquisition dates:
For the Year Ended December 31, 2014
December 16, 2014
December 8, 2014
November 20, 2014
September 30, 2014
July 31, 2014 4
April 17, 2014
January 15, 2014 5
Suite or
Site Count
97
31
5
126
213
2
–
474
Region(s)
Brooks, Alberta
Calgary
Bowmanville and
Grand Bend
Regina
Charlottetown
Bowmanville and
Grand Bend
Burlington
Total
Acquisition Costs
Assumed
Mortgage Funding
Term
to Maturity
Interest Rate 1
(Years) 2
$
$
4,331
7,570
426
17,097
20,624
141
11,356
61,545
$
– 3
2,984
– 3
8,391
14,747
– 3
– 3
$
26,122
– 3
3.27%
– 3
3.05%
3.95%
– 3
– 3
– 3
2.0
– 3
8.9
3.1
– 3
– 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 note 10).
4 The acquisition comprised 213 suites (48 mid-tier and 165 luxury suites) in nine properties located in Charlottetown, Prince Edward Island.
5 The acquisition of a commercial property is situated beside an existing residential property in the Burlington, Ontario region.
CAPREIT 2014 Annual Report
82
notes to Cons0lidated FinanCial stateMents
For the Year Ended December 31, 2013
Suite or
Site Count
Region(s)
Total
Acquisition Costs
Assumed
Mortgage Funding
Term
to Maturity
Interest Rate 1
(Years) 2
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
2,308
740
2
338
770
114
396
263
4,931
New Brunswick
Prince Edward Island
Bowmanville
Dublin, Ireland
Various
Calgary
Toronto
Calgary
$
71,782
36,393
170
61,431
153,894
25,812
58,019
49,022
$
– 5
10,274
– 5
– 6
9,475
11,041
– 5
7,181
– 5
4.49%
– 5
– 6
3.62%
4.25%
– 5
6.95%
$
456,523
$
37,971
– 5
1.8
– 5
– 6
0.9
1.6
– 5
4.7
1 Weighted average stated interest rate on mortgage funding.
2 Weighted average term to maturity on mortgage funding.
3 The acquisition comprised 2,308 land lease sites in eleven communities in New Brunswick.
4 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.
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 five-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.
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.
5. Dispositions
The tables below summarize the dispositions completed since January 1, 2013. These dispositions do not meet the definition of discontinued
operations under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
dispositions coMpleted during the year ended deceMber 31, 2014
On April 16, 2014, CAPREIT’s wholly-owned subsidiary, CAPREIT Ireland Limited (renamed to Irish Residential Properties REIT plc
(“IRES”)), completed the admission of its Ordinary Shares to the Irish Stock Exchange. CAPREIT retained a 20.8% interest in IRES and
received cash of $7,599. CAPREIT’s retained interest is accounted as an equity investment and was recorded at fair value in the amount
of $64,039 on the transaction date. CAPREIT recorded a gain of $717 in other income on the transaction date, representing the difference
between fair value of the retained interest and cash received over the carrying value of the net assets of IRES.
Disposition Date
Suite Count
April 16, 2014
338
338
Region
Dublin, Ireland
dispositions coMpleted during the year ended deceMber 31, 2013
Disposition Date
Suite Count
Region
August 28, 2013
604
604
Greater Toronto Area 1
1 The disposition comprised five properties located in Mississauga and Toronto, Ontario.
$
$
$
$
Sale Price
70,871
70,871
Mortgage Discharged
$
$
7,599
7,599
Sale Price
Cash Proceeds
Mortgage Discharged
94,250
94,250
$
$
57,672
57,672
$
$
34,772
34,772
For the year ended December 31, 2013, a loss of $811 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.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
83
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 comprehensive 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 determined by qualified external appraisers annually. The
qualified external appraisers hold a recognized relevant profes-
sional qualification 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. Capitalization rates
employed by the appraisers are based on recently closed trans-
actions for similar properties. To the extent that the stabilized
forecasted cash flows of an investment property change signif-
icantly 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 classified as Level 3
in the fair value hierarchy as disclosed in note 15. On an annual
basis, CAPREIT verifies all major inputs (as detailed above) to
the valuation and reviews the results with the external appraisers
for all independent valuations. On a quarterly basis, the market
assumptions for rent increases, capitalization and discount rates
provided by the external appraisers are verified in determining
the fair value of the investment properties.
Discussion of the valuation process, the valuation methodology
(as mentioned below), key inputs and results is held between
CAPREIT and the qualified 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 discussion between
CAPREIT and the qualified 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 properties 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, capitaliza-
tion 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 assump-
tions such as long-term vacancy rates, management fees, R&M
costs, and general and administration costs). The most significant
assumption is the capitalization rate for each specific 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 magnifies
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 flows reflecting market-
based leasing assumptions for that specific property as well as
assumptions about renewal and new leasing activity. The most
significant 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 reflects the risk of the cash
flows for the investment property. In the case of one property,
the forecasted cash flows are 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 flows 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
exercise date) to estimate the future value, which is then discount-
ed 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” reflecting the incremental risk associated with
future uncertainty. The value of the option is then determined
based on the difference 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”).
CAPREIT 2014 Annual Report 84
notes to Cons0lidated FinanCial stateMents
d) land leasehold i nterests
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 flows reflecting market-based leasing assumptions for that specific property as well as assumptions about
renewal and new leasing activity. The most significant assumption is the discount rate applied over the term of the lease. Forecasted cash
flows are reduced for contractual land lease payments and the discount rates reflect 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, 2014 and December 31, 2013:
As at December 31, 2014
Type of Interest
Fee Simple Interests – Apartments
and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests 2,3,4
Land Leasehold Interests 2
Total Investment Properties
As at December 31, 2013
Type of Interest
Fee Simple Interests – Apartments
and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests 2,3,4
Land Leasehold Interests 2
Total Investment Properties
Fair Value
WA NOI/
Cash Flow 1
Rate Type
Max
Min
Weighted
Average
$ 4,713,330
272,700
559,560
204,050
$ 5,749,640
2,520
2,302
3,078
3,448
Capitalization rate
Capitalization rate
Discount rate 5
Discount rate
6.70%
7.00%
6.75%
7.25%
3.50%
4.39%
5.75%
7.00%
4.90%
6.18%
6.03%
7.08%
Fair Value
WA NOI/
Cash Flow 1
Rate Type
Max
Min
Weighted
Average
$ 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 5
Discount rate
7.34%
7.25%
7.00%
7.25%
3.50%
4.03%
6.00%
7.00%
5.04%
6.07%
6.25%
7.08%
1 Weighted average (“WA”) net operating income (“NOI”) or cash flow per property.
2 The fair values of Operating Leasehold Interests subject to a contractual air rights lease and Land Leasehold Interests subject to land leases reflect the
estimated land lease or air rights payments over the term of the leases.
3 The fair values of Operating Leasehold Interests include the fair values of the Options to purchase the related freehold interests of $106,190 and $49,863
as at December 31, 2014 and December 31, 2013, respectively.
4 The weighted average remaining lease term on Operating Leasehold Interests is 18.8 years as at December 31, 2014 (December 31, 2013 – 19.8 years).
5 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 NOI growth of 2.5% has been assumed as at December 31, 2014 and December 31, 2013.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
85
reconciliation of carrying aMounts of investMent properties by type
For the Year Ended December 31, 2014
balance at the beginning of the year
Additions:
Acquisitions
Property capital investments
Capitalized leasing costs 1
Foreign currency translation
Dispositions 2
Unrealized fair value adjustments
Fee Simple and
MHC Land Lease Sites
Operating
Leasehold Interests
$ 4,770,095
$
497,913
Land Leasehold
Interests
$
191,210
Total
$ 5,459,218
61,545
129,673
379
2,653
(70,871)
92,556
–
11,848
86
–
–
49,713
–
4,080
132
–
–
8,628
61,545
145,601
597
2,653
(70,871)
150,897
balance of investment properties at end of year
$ 4,986,030
$
559,560
$
204,050
$ 5,749,640
1 Comprises tenant inducements, straight-line rent and direct leasing costs.
2 See note 5 for further details.
For the Year Ended December 31, 2013
Fee Simple and
MHC Land Lease Sites
Operating
Leasehold Interests
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
$ 4,169,740
$
471,185
456,523
135,515
458
3,208
(93,439)
(811)
98,901
–
18,285
211
–
–
–
8,232
Land Leasehold
Interests
$
185,430
Total
$ 4,826,355
–
6,420
23
–
–
–
(663)
456,523
160,220
692
3,208
(93,439)
(811)
106,470
balance of investment properties at end of year
$ 4,770,095
$
497,913
$
191,210
$ 5,459,218
1 Comprises tenant inducements, straight-line rent and direct leasing costs.
CAPREIT 2014 Annual Report
86
notes to Cons0lidated FinanCial stateMents
7. Other Assets
9. Mortgages Payable
As at December 31,
2014
2013
Note
other non-current assets
Property, plant and equipment 1
Accumulated amortization of property,
$
plant and equipment
Net property, plant and equipment
Investments 2, 3
Prepaid CMHC premiums, net 4
Deferred loan costs, net 5
Hedge asset
16(b)
total
other current assets
Prepaid expenses
Other receivables
Restricted cash
Deposits
total
$
$
$
20,102 $
18,139
(14,317)
5,785
83,133
56,099
1,495
–
146,512 $
(11,928)
6,211
22,676
47,638
2,039
3,699
82,263
3,149 $
7,605
5,536
13,719
30,009 $
2,658
4,886
4,852
5,057
17,453
1 Consists of head office and regional offices’ leasehold improvements,
corporate and information technology systems.
2 CAPREIT sold investments with a realized gain of $1,737 for the year
ended December 31, 2013.
3 Included in investments is CAPREIT’s ownership interest in IRES. See
note 5 for further details.
4 Represents prepaid CMHC premiums on mortgages payable net of
accumulated amortization of $14,017 (December 31, 2013 – $11,408).
5 Represents deferred loan costs related to the revolving credit facilities net
of accumulated amortization of $6,784 (December 31, 2013 – $5,899).
8. Other Liabilities
As at December 31, 2014, mortgages payable bear interest at a
weighted average effective rate of 3.81% (December 31, 2013 –
3.94%), and mature between 2014 and 2027. The effective interest
rate as at December 31, 2014 includes 0.15% (December 31, 2013
– 0.18%) for the amortization of the realized component of the
loss on settlement of derivative financial instruments of $32,494
included in AOCL. All of CAPREIT’s mortgages payable are
financed at fixed interest rates as at December 31, 2014. Investment
properties at fair value of $5,532,736 have been pledged as security
as at December 31, 2014. CAPREIT has investment properties
with a fair value of $216,904 as at December 31, 2014 that are not
encumbered by mortgages and secure only the Acquisition and
Operating Facility. As at December 31, 2014, unamortized deferred
financing costs of $8,019 and fair value adjustments of ($6,381) are
netted against mortgages payable.
Future principal repayments for the period ending December 31
for the years indicated are as follows:
As at December 31, 2014
2015
2016
2017 1, 2
2018
2019
Subsequent to 2019
Deferred financing costs
and fair value adjustments
Principal
Amount
% of Total
Principal
10.8
5.8
11.7
6.4
11.6
53.7
100.0
$
288,500
155,566
312,109
170,122
309,000
1,424,795
2,660,092
(1,638)
$ 2,658,454
As at December 31,
2014
2013
As at December 31,
2014
2013
other non-current liabilities
Hedge liability
total
other current liabilities
Hedge liability
Mortgage interest payable
total
Note
16(b) $
$
3,393 $
3,393 $
1,121
1,121
Represented by:
Mortgages Payable – non-current 1, 2
Mortgages Payable – current
$ 2,369,954 $ 2,016,077
441,105
288,500
$ 2,658,454 $ 2,457,182
16(c) $
$
23 $
7,524
7,547 $
232
7,018
7,250
1 Included in mortgages payable as at December 31, 2014 is a €48,900
non-amortizing Euro LIBOR borrowing. See note 10 for further details.
2 Included in mortgages payable as at December 31, 2014 is a $65,000
non-amortizing credit facility on two of the MHC land lease sites.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
87
10. Bank Indebtedness
On August 29, 2014, CAPREIT renewed and amended the
existing $280,000 acquisition and operating facility and €40,000
five-year non-revolving Euro-denominated term credit facility by
combining the two facilities into a $340,000 revolving credit facility
(“Acquisition and Operating Facility”). The aggregate amount of
Euro LIBOR borrowings at any time shall not exceed €40,000
while the Canadian Dollar Equivalent of the aggregate principal
amount of all advances (including the Euro LIBOR borrowings)
under the Acquisition and Operating Facility shall not exceed
$340,000. Effective November 21, 2014, the Acquisition and
Operating Facility was amended such that the aggregate amount of
Euro LIBOR borrowings shall not exceed €49,000. Subsequent to
year end, effective January 16, 2015, the aggregate amount of Euro
LIBOR borrowings was amended to (a) €210,000 until the earlier
of (i) October 31, 2015; and (ii) fifteen days after the issuance of
any equity or debt by IRES; and (b) €60,000 thereafter.
CAPREIT’s Credit Facilities include the amended $340,000
acquisition and operating facility and the existing $65,000 five-year
non-revolving term credit facility bearing interest at the bankers’
acceptance rate plus 1.4% per annum (included in mortgages
payable), (collectively, the “Credit Facilities”). The €48,900 Euro
LIBOR borrowings bears interest at the Euro LIBOR rate plus
a margin of 1.70% per annum (included in mortgages payable).
The margin is renegotiated annually. The interest rate on the
Acquisition and Operating Facility is determined by interest rates
on prime advances and bankers’ acceptances utilized during the
year. The Acquisition and Operating Facility matures June 30, 2017.
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, 2014
Facility
Less: Euro LIBOR borrowings 1
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
As at December 31, 2013
Facility
Less: Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
Acquisition
and Operating
Facility
$
340,000
(68,646)
(113,167)
(6,144)
$
152,043
3.09%
Acquisition
and Operating
Facility
$
280,000
(187,030)
(6,527)
$
86,443
3.02%
1 Included in mortgages payable. Refer to note 9 for further details.
CAPREIT 2014 Annual Report
88
notes to Cons0lidated FinanCial stateMents
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 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, 2014, the maximum number of Units issuable under all of CAPREIT’s Unit-based incentive
plans is 9,500,000 Units (December 31, 2013 – 7,000,000). The maximum number of Units available for future issuance under all Unit
incentive plans as at December 31, 2014 is 2,380,445 Units (December 31, 2013 – 362,583 Units).
On April 4, 2014, the Long-term Incentive Plan (“LTIP”), the Senior Executive Long-term Incentive Plan (“SELTIP”), and the Unit
Purchase Plan (“UPP”) were terminated by the trustees of CAPREIT, although awards previously granted under the LTIP and SELTIP
remain outstanding under the original terms of such plans.
The Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s incentive plans and exchangeable units as at
December 31, 2014 and 2013 are as follows:
(Number of Units)
Year Ended December 31, 2014
Units, Unit Rights and Unit Options outstanding as at January 1, 2014
Issued, cancelled or granted during the year:
Issued or granted
Exercised or settled
Distributions reinvested
units, unit rights and unit options outstanding
as at december 31, 2014
UOP
DUP
RUR
SELTIP/
LTIP 1
Exch.
Units 2
Total
915,900
151,261
358,424
2,240,597
161,311 3,827,493
218,282
–
–
46,594
–
8,871
132,525
(9,138)
24,230
–
(15,000)
–
–
–
–
397,401
(24,138)
33,101
1,134,182
206,726
506,041
2,225,597
161,311 4,233,857
(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
Units, Unit Rights and Unit Options outstanding
as at December 31, 2013
–
–
–
–
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
915,900
151,261
358,424 2,240,597
161,311 3,827,493
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 $4,054 as at December 31, 2014 (December 31, 2013 – $3,428), which approximates the closing bid price of the Trust Units. In 2013,
100,000 Exchangeable Units were converted into 100,000 Trust Units (see note 13(b)).
CAPREIT 2014 Annual Report
89
The table below summarizes the change in the total Unit-based compensation financial liabilities for the year ended December 31,
2014 and December 31, 2013, including the settlement of such liabilities through the issuance of Trust Units.
As at December 31,
Total Unit-based compensation financial liabilities, beginning of the year
Unit-based compensation expenses (recoveries)
Settlement of Unit-based compensation awards for Trust Units
Total Unit-based compensation financial liabilities, end of the year
2014
32,764
16,337
(415)
48,686
$
$
2013
40,844
(6,012)
(2,068)
32,764
$
$
The Unit-based compensation financial liabilities comprise:
December 31, 2014
December 31, 2013
Current
LTIP
SELTIP
DUP
RUR
UOP
Non-Current
RUR
Total Unit-based compensation financial liabilities, end of the year
Units or Unit-based compensation financial liabilities held by
trustees, officers and other senior management
As at December 31, 2014, 3.5% (December 31, 2013 – 3.5%) of all
Trust Units outstanding were held by trustees, officers and other
senior management of CAPREIT.
Normal course issuer bid (“NCIB”)
The table below summarizes the NCIB programs in place since
January 1, 2013. No Trust Units were acquired and cancelled under
these NCIB programs.
Period Covered Under the NCIB
July 8, 2014 to July 7, 2015
July 8, 2013 to July 7, 2014
Approval Limit
10,659,524
9,773,361
12. Unit-based Compensation Expenses (Recoveries)
These costs represent Unit-based compensation expenses
(recoveries), which includes fair value remeasurement at each
reporting date recognized over the respective vesting periods
for each plan for the years ended December 31, 2014 and 2013,
as follows:
$
$
$
19,042
10,952
5,178
3,690
4,418
43,280
5,406
48,686
2014
1,994
5,837
2,523
1,978
4,005
141
$
13,428
8,429
3,201
3,510
2,424
30,992
1,772
$
32,764
$
2013
(1,412)
(4,787)
(1,800)
467
1,521
43
Year Ended December 31,
UOP
LTIP
SELTIP
DUP
RUR Plan
EUPP
Unit-based Compensation
(Recoveries) Expenses
$
16,478
$
(5,968)
a) UOP
Under the terms of the UOP, options are granted to trustees,
officers and key employees based on a performance incentive for
improved service and enhancing profitability and vest on the date
of grant. In February 2010, the President and CEO’s employment
agreement was amended to provide that during his term, the
President and CEO will be awarded options to acquire three per-
cent (3%) of the number of Units issued by the Trust pursuant to
any equity offering or acquisition transaction (not including
pursuant to any compensation arrangements) 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 June 12, 2014, the President and CEO was
granted 218,282 options at an exercise price of $22.72 with an
expiration date of June 11, 2024.
CAPREIT 2014 Annual ReportNotes to CoNs0lidated FiNaNCial statemeNts
90
A summary of Unit option activity for the years ended Decem-
ber 31, 2014 and 2013 is presented below. All Unit options are
exercisable as at December 31, 2014 and 2013.
Number of Units
For the Year Ended December 31,
Balance, beginning of the year
Granted
Balance, end of the year
2014
915,900
218,282
1,134,182
2013
915,900
–
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,
2014
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 $
1,134,182
21.44
$
1.5
4.7
7.5
22.4
3.89
2013
915,900
21.14
2.4
5.4
8.0
24.0
2.65
$
$
b) LTIP and SELTIP
The Board of Trustees awarded LTIP and SELTIP Units, subject
to the attainment of specified performance objectives, to certain
officers and key employees (collectively the “Participants”).
SELTIP Units were awarded to the Chief Executive Officer and
Year Ended December 31,
Number of Units
Balance, beginning of the year
Settled during the year
Balance, end of the year
Chief Financial Officer of the Trust. The Participants subscribed
for Units of CAPREIT at a purchase price equal to the weighted
average trading price of the Units for five 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 fixed
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 instal-
ments. In the case of the SELTIP, following the tenth anniversary,
cash distributions shall be applied to pay interest only 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 outstand-
ing amounts. No LTIP or SELTIP awards were granted for the
year ended December 31, 2014 (2013 – nil).
The LTIP and SELTIP were terminated on April 4, 2014 by
the Trustees of CAPREIT, although awards previously granted
remain outstanding under the original terms of such plans.
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:
2014
LTIP
SELTIP
1,422,683
(15,000)
1,407,683
817,914
–
817,914
2013
LTIP
1,515,427
(92,744)
1,422,683
SELTIP
817,914
–
817,914
The details of the LTIP and SELTIP Instalment Receipts are as shown below:
Year Ended December 31,
Instalment Receipts
Balance, beginning of the year
Principal repayments during the year
Balance, end of the year
2014
LTIP
17,120 $
(1,025)
SELTIP
11,690
(381)
16,095 $
11,309
$
$
2013
LTIP
18,910 $
(1,790)
SELTIP
12,030
(340)
17,120 $
11,690
$
$
Notes to CoNs0lidated FiNaNCial statemeNtsCAPREIT 2014 Annual Report
91
The Instalment Receipts are recognized as a deduction from Unit-based compensation liability. During the years ended December 31,
2014 and 2013, interest payments in the amounts of $1,345 and $1,425, 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
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, 2014
December 31, 2013
1,407,683
4.65
15.55
11.45
9.13
1.1
4.7
2.9
15.3
13.69
$
$
$
$
$
$
$
1,422,683
4.65
15.54
11.91
9.37
1.5
5.4
3.9
17.7
9.44
$
December 31, 2014
December 31, 2013
817,914
4.96
17.66
13.81
13.06
1.8
4.7
21.4
25.0
13.39
$
$
$
$
817,914
4.96
17.66
14.18
13.13
2.8
5.4
22.4
25.5
10.31
$
$
$
$
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 their
annual retainer payable in respect of a calendar year (the “Elected Amount”), subject to an annual maximum Elected Percentage estab-
lished by the Human Resources and Compensation 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 five trading days immediately preceding the date on which board compensation is payable. The maximum Elected Percentage
in respect of 2014 is 100% (2013 – 100%) of a trustee’s annual board compensation of $75 and $55, respectively, for 2014 and 2013.
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 their Deferred Unit account only once in a five-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.
CAPREIT 2014 Annual ReportNotes to CoNs0lidated FiNaNCial statemeNts
92
notes to Cons0lidated FinanCial stateMents
The details of the Units issued under the DUP are shown below:
Outstanding, beginning of the year
Granted during the year
Additional Unit Distributions
Net settled during the year
Outstanding, end of the year
December 31, 2014
December 31, 2013
Weighted Avg
Issue Price
Fair Value
per Unit
Number Weighted Avg
Issue Price
of Units
Fair Value
per Unit
$
$
19.52
23.18
22.80
–
20.48
$
$
21.25
–
–
–
25.13
151,261
46,594
8,871
–
206,726
$
$
18.50
22.27
22.74
18.67
19.52
$
$
24.90
–
–
–
21.25
Number
of Units
139,907
34,499
6,870
(30,015)
151,261
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 Human Resources and Compensation Committee of the Board of
Trustees may award RURs, subject to the attainment of specified 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 interests
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 benefit of the Participants. 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 five business day weighted average closing price of the Units on the TSX prior to the distribution date.
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
Outstanding, end of the year
December 31, 2014
December 31, 2013
Weighted Avg
Issue Price
Fair Value
per Unit
Number Weighted Avg
Issue Price
of Units
Fair Value
per Unit
$
$
20.85
21.66
22.72
18.93
21.19
$
$
21.25
–
–
–
25.13
$
358,424
132,525
24,230
(9,138)
506,041
$
18.86
25.64
22.57
17.77
20.85
$
$
24.90
–
–
–
21.25
Number
of Units
268,397
92,966
16,925
(19,864)
358,424
e) EUPP
The EUPP grants all employees the right to receive an additional amount equal to 20% of the Units they acquire, paid in the form of
additional Units. This additional amount is expensed as compensation on issuance of the Units.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
93
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 beneficial 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 distribu-
tions 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 transfer-
able. Issued and outstanding Units may be subdivided or consoli-
dated from time to time by the trustees without Unitholder
approval. No certificates 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 specified in the DOT. As a result, under IFRS, Trust
Units are defined as financial liabilities; however, for the purposes
of financial statement classification 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,
2014
2013
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
LTIP
Units outstanding, end of the year
Ref
(a)
(b)
(c)
(d)
(e)
(f)
(g)
108,187,406
99,412,550
–
–
7,276,050
100,000
1,842,604
38,236
–
4,833
15,000
110,088,079
1,263,844
20,938
16,553
4,727
92,744
108,187,406
a) New Units Issued
october 2013 (the “october 2013 equity offering”)
Bought-Deal (October 10, 2013)
Over-allotment (October 22, 2013)
Total
Price
Per Unit
Gross
Proceeds
Transaction
Costs
Net
Proceeds
Units
Issued
$
$
20.55
20.55
$ 130,020
19,503
$ 149,523
$
$
5,870
911
6,781
$ 124,150
18,592
$ 142,742
6,327,000
949,050
7,276,050
b) Exchangeable Units
During the first quarter of 2013, pursuant to the terms of the
Exchangeable Units, 100,000 Exchangeable Units were exchanged
for 100,000 Trust Units.
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.
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”)
Effective January 1, 2014, the EUPP grants all employees the right
to receive an additional amount equal to 20% 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
f) Restricted Unit Rights Plan (“RUR Plan”)
In 2014, 9,138 RUR Units were settled, out of which 4,833 RUR
Units were settled for an equivalent number of Trust Units, and the
remaining RUR Units were cancelled in consideration for withhold-
ing taxes owed on the Trust Units issued. In 2013, 9,504 RUR
Units were settled, 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.
g) Long-Term Incentive Plan (“LTIP”)
In 2014, 15,000 Units previously issued were settled. In 2013,
92,744 Units previously issued were settled.
CAPREIT 2014 Annual Report
94
notes to Cons0lidated FinanCial stateMents
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 2014, monthly cash distributions declared to Unitholders
increased to $0.098 per Unit ($1.18 annually). 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.
Year Ended December 31,
2014
Distributions declared on Trust Units
Distributions per Unit
$
$
127,496 $
1.168 $
2013
116,056
1.138
15. Financial Instruments, Investment Properties
and Risk Management
a) fair value of financial instruMents
The fair value of CAPREIT’s financial assets and liabilities, except
as noted below and elsewhere in the consolidated annual financial
statements, approximates their carrying amount due to the
short-term and variable rate nature of these instruments.
As at December 31, 2014, the fair value of CAPREIT’s mort-
gages payable is estimated to be $2,799,000 (December 31, 2013
– $2,475,000) due to changes in interest rates since the dates the
individual mortgages were financed 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 flows using rates that reflect current rates for similar
financial instruments with similar duration, terms and conditions,
which are considered Level 2 inputs (as described below).
CAPREIT has classified and disclosed the fair value for each
class of financial 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 defined 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 significance of a particular input
to the fair value measurement in its entirety requires judgement,
and considers factors specific to the asset or liability.
CAPREIT 2014 Annual Report notes to Cons0lidated FinanCial stateMents
95
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, 2014, 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
Quoted prices in active markets for
identical assets and liabilities
Level 2
Significant other
observable inputs
Level 3
Significant
unobservable inputs
Total
Recurring Measurements
assets
Investment Properties
Fee simple and MHC land lease sites
Operating leasehold interests
Land leasehold interests
Investments
liabilities
Derivative financial instruments – interest
Derivative financial instruments – interest Euro
Derivative financial instruments – foreign currency
$
–
–
–
22,197 2
$
–
–
–
–
$ 4,986,030 1
559,560 1
204,050 1
–
$ 4,986,030
559,560
204,050
22,197
–
–
–
(886) 3
(2,507) 3
(23) 4
–
–
–
(886)
(2,507)
(23)
Total
$
22,197
$
(3,416)
$ 5,749,640
$ 5,768,421
1 Fair values for investment properties are calculated using the direct income capitalization and discounted cash flow methods, which results in these
measurements being classified 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 (excluding CAPREIT’s equity accounted investment in IRES) 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 flow analysis on the
expected cash flows of the derivatives. The fair value is determined using the market standard methodology of netting the discounted future fixed 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. If the total mark to market is positive, CAPREIT will consider a current value adjustment to reflect the
credit risk of the counterparty and if the total mark to market is negative, CAPREIT will consider a current value adjustment to reflect CAPREIT’s own
credit risk in the fair value measurement of the interest rate swap adjustments.
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.
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, 2014, CAPREIT has assessed the significance
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 significant to the overall
valuation of the derivative. As a result, CAPREIT has determined
that the derivative valuations in their entirety should be classified
in Level 2 of the fair value hierarchy.
b) risk ManageMent
The main risks arising from CAPREIT’s financial 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 financing,
including the risk that mortgages and credit facilities will not be
able to be refinanced on terms as favourable as those of the existing
indebtedness. In addition, interest on CAPREIT’s bank indebted-
ness is subject to floating interest rates. CAPREIT is also subject to
the risks associated with changes in interest rates or different
financing terms from the hedging derivative assumptions, which
may result in the hedging relationship being ineffective, causing
volatility in earnings.
CAPREIT 2014 Annual Report
96
notes to Cons0lidated FinanCial stateMents
For the year ended December 31, 2014 and 2013, a 100 basis point change in interest rates would have the following effect:
Change in interest rates
(basis points)
Increase (decrease) in net income
2013
2014
Increase (decrease) in OCI
2013
2014
Floating rate debt
Floating rate debt
Interest rate swap agreements
Interest rate swap agreements
Euro interest rate swap agreements
Euro interest rate swap agreements 1
1 Assumes an interest rate floor of zero percent.
+100
–100
+100
–100
+100
–100
$
$
$
$
$
$
(1,316)
1,316
–
–
2,063
(41)
$
$
$
$
$
$
(1,497)
1,497
–
–
–
–
$
$
$
$
$
$
–
–
5,976
(4,869)
–
–
$
$
$
$
$
$
–
–
5,437
(5,033)
2,941
(2,008)
CAPREIT’s objective in managing interest rate risk is to minimize the volatility of earnings. As at December 31, 2014, interest rate risk
has been minimized as all of the mortgages payable are financed at fixed interest rates, with maturities staggered over a number of years.
Liquidity risk
Liquidity risk is the risk that CAPREIT may encounter difficulties in accessing capital and refinancing its financial obligations as they
come due. Approximately 95.7% of CAPREIT’s mortgages are CMHC-insured (excluding $162,199 of mortgages on the MHC), which
reduces the risk in refinancing mortgages. CAPREIT’s overall risk for mortgage refinancings is further reduced as the unamortized
mortgage insurance premiums are transferable between approved lenders and are effective for the full amortization period of the underly-
ing mortgages, ranging between 25 to 35 years. To mitigate the risk associated with the refinancing of maturing debt, CAPREIT staggers
the maturity dates of its mortgage portfolio over a number of years.
In addition, CAPREIT manages its overall liquidity risk by maintaining sufficient available credit facilities and unencumbered assets
to fund its ongoing operational and capital commitments, distributions to Unitholders, and to provide future growth in its business.
As at December 31, 2014, CAPREIT had undrawn lines of credit in the amount of $152,043 (December 31, 2013 – $86,443).
The contractual maturities and repayment obligations of CAPREIT’s financial liabilities as at December 31, 2014 are as follows:
Mortgages payable
Bank indebtedness
Mortgage interest 1
Bank indebtedness interest 1
Other liabilities
Security deposits
Exchangeable Units
Distributions payable
$
2015
288,500
–
88,904
3,499
78,490
25,769
4,054
11,045
2016–2017
2018–2019
$
467,675
113,167
153,205
5,238
886
–
–
–
$
479,122
–
119,649
–
2,507
–
–
–
$
500,261
$
740,171
$
601,278
2020 onward
$ 1,424,795
–
149,516
–
–
–
–
–
$ 1,574,311
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 financial obligations will default; and (ii) the possibility that CAPREIT’s
residents may experience financial difficulty 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 2014 Annual Report
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 exceed-
ing 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 comprehen-
sive income. Accordingly, no allowance for doubtful accounts is
established. The maximum exposure to credit risk at the reporting
date is the carrying amount of the tenant receivables.
Foreign currency risk
Foreign currency risk is the financial 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 fund management subsidiary in Dublin,
Ireland and the investment in IRES is the Euro.
CAPREIT manages and mitigates the exposure to foreign
currency risk by entering into foreign exchange forward contracts.
CAPREIT currently has quarterly foreign exchange forward
contracts aggregating to €2,800, settling between December 2013
and maturing quarterly until September 2015, which fix the
exchange rate between the Euro and the Canadian dollar.
16. Realized and Unrealized Gains and Losses
on Derivative Financial Instruments
a) Contracts for which hedge accounting is no longer effective
i) 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 refinancings 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, 2014, $1,070
(December 31, 2013 – $1,071) was amortized from AOCL to
mortgage interest expense.
notes to Cons0lidated FinanCial stateMents
97
ii) As CAPREIT was operating the Dublin acquisition in a foreign
jurisdiction, it was exposed to foreign currency fluctuations
arising between the functional currency of the foreign operation
(the Euro) and the functional currency of CAPREIT (the
Canadian dollar). As such, CAPREIT entered into a hedge
effective at the date of the Dublin acquisition (September 10,
2013). CAPREIT hedged the investment in the Dublin foreign
operations with the €45,000 Euro-denominated debt on
CAPREIT’s consolidated balance sheets. Any foreign currency
gains/losses arising from the Euro-denominated debt were 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 was recognized in OCI and the ineffective portion was
recognized in net income. This hedge was ineffective at the date
of disposition of the Dublin operation, on April 16, 2014, and
the related OCI of $197 was recycled to net income.
iii) CAPREIT had a €45,000 interest rate swap agreement fixing the
EURIBOR rate at 1.22%, with a maturity of August 2018, for
which hedge accounting was being applied. On April 21, 2014,
the €45,000 credit facility was paid down by €5,000, resulting in
ineffectiveness of the hedging relationship for accounting
purposes. As a result, the hedge was no longer effective and
a loss of $1,989 was recycled to net income from OCI.
As at December 31, 2014, the interest rate swap agreement
has been summarized as follows:
As at December 31,
Liability, beginning of the year
Change in value
Liability, end of the year
2014
(1,121) $
(390)
(1,511) $
2013
–
(1,121)
(1,121)
$
$
Liability in AOCL,
beginning of the year
Change in value in OCI
Reversal of OCI to net income
$
(936) $
(1,053)
1,989
Liability in AOCL, end of the year
$
– $
–
(936)
–
(936)
b) Contracts for which hedge accounting is being applied
i) As at December 31, 2014, CAPREIT has a $65,000 interest rate
swap agreement fixing 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 floating rate credit facility to
a fixed rate facility for a 10-year term (see note 9 for further
details). The related floating rate credit facility is for a five-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 refinanced for an additional five-
year term. The mark-to-market loss of $886 has been set up in
other non-current liabilities as at December 31, 2014.
CAPREIT 2014 Annual Report
98
notes to Cons0lidated FinanCial stateMents
The interest rate swap agreement has been summarized
as follows:
The forward interest rate hedge liability has been summarized
as follows:
2014
2013
As at December 31,
2014
2013
As at December 31,
Hedge asset (liability),
beginning of the year
Change in intrinsic value
Hedge (liability) asset,
end of the year
Hedge asset (liability) in AOCL,
beginning of the year
Change in intrinsic value in OCI
Hedge (liability) asset in AOCL,
$
3,699 $
(4,585)
(418)
4,117
$
(886) $
3,699
$
3,699 $
(4,585)
(418)
4,117
end of the year
$
(886) $
3,699
ii) 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 refinanced for
10-year terms and as a result bear interest rates between a floor
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. All contracts have been settled as at
December 31, 2013.
Hedge liability,
beginning of the year
Change in intrinsic value
included in OCI
Loss on derivative
financial instruments
Cash settlement of derivatives
Hedge liability, end of the year
$
$
– $
(3,934)
–
520
–
–
– $
(78)
3,492
–
Hedge liability in AOCL,
beginning of the year
Change in intrinsic value
included in OCI
$
(19,695) $
(22,422)
–
520
Amortization from AOCL to interest
and other financing costs
2,286
2,207
Hedge liability in AOCL,
end of the year
$
(17,409) $
(19,695)
c) Contracts for which hedge accounting is not being applied
i) As at December 31, 2014, CAPREIT has quarterly foreign
currency exchange contracts aggregating to €2,800, settling
between December 2013 and maturing quarterly until
September 2015, which fix the exchange rate between the Euro
and the Canadian dollar, for which hedge accounting is not
being applied. As at December 31, 2014, foreign currency
exchange contracts amounting to €1,050 are still outstanding.
The mark-to-market gain of $209 has been recognized in net
income for the year ended December 31, 2014, and $23 has
been included in other liabilities as at December 31, 2014.
ii) As at December 31, 2014, CAPREIT has a €40,000 interest rate
swap agreement fixing the EURIBOR rate at 1.22%, which
matures in August 2018, for which hedge accounting is not
being applied. The agreement effectively converts borrowings on
a EURIBOR-based floating rate credit facility to a fixed rate
facility for a five-year term (see note 9 for further details). The
mark-to-market loss of $996 has been recorded in net income
and included in other liabilities as at December 31, 2014.
CAPREIT 2014 Annual Report
99
17. Capital Management
CAPREIT defines capital as the aggregate of Unitholders’ equity,
mortgages payable, bank indebtedness, Unit-based compensation
financial 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 sufficient funds are available to meet capital commit-
ments. 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 financial covenants. In addition, borrowings must not
exceed the borrowing base, calculated at a predefined percentage
to the market value of the properties.
In the short term, CAPREIT utilizes the Credit Facilities to
finance its capital investments, which may include acquisitions.
In the long term, equity issuances, mortgage financings and
refinancings, including “top-ups”, are put in place to finance the
cumulative investment in the property portfolio and ensure that
the sources of financing better reflect the long-term useful lives
of the under lying investments.
Under the terms of CAPREIT’s LBA with CMHC, total indebt-
edness 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 financial
covenants and limitations on indebtedness; (ii) the posting of a re-
volving 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.
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 financial 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, 2014
December 31, 2013
$ 2,658,454
113,167
48,686
4,054
2,983,105
$ 5,807,466
$ 2,457,182
187,030
32,764
3,428
2,757,469
$ 5,437,873
Threshold
Maximum 70.00%
Minimum $1,200,000
46.49%
$ 3,035,845
47.32%
$ 2,793,661
Minimum 1.20
Minimum 1.50
1.61
2.82
1.54
2.62
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 defined as the gross
book value of CAPREIT’s assets as per CAPREIT’s financial 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 defined 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 defined as EBITDA less taxes paid divided by interest payments.
CAPREIT 2014 Annual ReportNotes to CoNs0lidated FiNaNCial statemeNts
100
notes to Cons0lidated FinanCial stateMents
18. Deferred Income Taxes
For 2013 and 2014, CAPREIT is a “mutual fund trust” as defined
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 definition of a REIT for
Canadian income tax purposes. The proposed amendments
included the following clarifications as applicable to the Trust:
i) amounts distributed to a REIT by an entity in which the REIT
has a significant 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, legisla-
tion was tabled by the Government of Canada which, among
other changes, implemented the December 16, 2010 technical
amendments. 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 2014 (2013 – $nil).
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 financing costs 1,2
Change in fair value of derivative financial instruments (note 16(b))
Change in fair value of investments
(Loss) gain on foreign currency translation
Realized gain on sale of investments
other comprehensive (loss) income
aocl balance, end of the year
aocl comprises:
Loss on derivative financial instruments
Cumulative realized loss 1
Accumulated amortization to interest and other financing costs
Unamortized balance of loss on cash flow hedges previously settled
(Loss) gain on interest rate swap agreements
Loss on forward interest rate hedge 2
Accumulated amortization to interest and other financing costs
Change in fair value of investments
Cumulative (loss) gain on foreign currency translation
Cumulative realized gain on sale of investments
aocl balance, end of the year
2014
2013
$
(21,194)
$
(22,511)
3,333
(3,649)
(478)
(5,296)
–
(6,090)
(27,284)
$
3,265
3,701
(4,392)
124
(1,381)
1,317
$
(21,194)
December 31, 2014
December 31, 2013
$
$
(9,908)
6,150
(200)
(886)
(22,884)
5,475
2,972
(5,172)
(2,831)
(27,284)
$
(9,908)
5,079
(176)
2,763
(22,884)
3,189
3,450
124
(2,831)
$
(21,194)
1 The cumulative realized loss on derivative financial 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 reclassified 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 hedges 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 reclassified to net income from
AOCL in the next 12 months is $2,288.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
101
20. Interest and Other Financing Costs
b) Changes in non-cash operating assets and liabilities
Year Ended December 31,
2014
2013
Year Ended December 31,
Interest on mortgages payable 1
Amortization of CMHC
premiums and fees
Interest on bank indebtedness and
deferred loan costs 2
Interest on Exchangeable Units
$
97,323 $
93,072
2,609
5,325
188
105,445 $
$
2,124
6,072
197
101,465
1 Includes amortization of deferred financing costs, fair value adjustments
and OCI hedge interest of $2,641 (December 31, 2013 – ($836)).
2 Includes amortization of deferred loan costs of $833 (December 31, 2013
– $982).
21. Joint Arrangements
CAPREIT’s share of the assets, liabilities, revenues, expenses
and cash flows 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
$
2014
181,890 $
79,278
15,364
3,596
11,768
2013
173,778
75,752
15,142
7,226
7,916
$
$
$
2,043 $
(535) $
(1,627) $
6,275
(2,455)
(4,238)
22. Supplemental Cash Flow Information
a) Net income items related to investing and financing activities
Year Ended December 31,
2014
2013
Dividend, interest income, and
equity pick-up on equity
accounted investments
Interest paid on Exchangeable Units
Interest paid on mortgages payable
Interest paid on bank indebtedness
Net disbursement
$
$
(3,786) $
188
93,410
4,526
94,338 $
(1,298)
206
89,631
5,068
93,607
Prepaid expenses
$
Tenant inducements and direct leasing costs
Other receivables
Deferred loan costs
Deposits on purchases
Deposits
Accounts payable and other liabilities
Security deposits
2014
(642) $
(3,138)
699
(341)
(8,678)
(10)
10,701
1,390
2013
(569)
(3,689)
(3,438)
(1,014)
(1,931)
(36)
16,527
2,112
Net (disbursement) proceeds
$
(19) $
7,962
c) Net cash distributions to Unitholders
Year Ended December 31,
2014
2013
Distributions declared to Unitholders
Add: Distributions payable at
beginning of year
Less: Distributions payable at end of year
Less: Distributions to participants
$ (127,496) $
(116,056)
(10,366)
11,045
(9,279)
10,366
in the DRIP
Net disbursement
d) Capital investments
39,897
(86,920) $
27,003
(87,966)
$
Year Ended December 31,
2014
2013
Capital investments
Change in capital investments
included in accounts payable
and other liabilities
Net disbursement
$ (147,564) $
(162,659)
(17,334)
4,292
$ (164,898) $
(158,367)
e) Acquisition of investment properties
Year Ended December 31,
2014
2013
Acquired properties
Fair value adjustment of assumed debt
Assumed debt
Net disbursement
$
$
(61,545) $
459
26,122
(34,964) $
(456,523)
1,987
37,971
(416,565)
f) Disposition of investment properties
Year Ended December 31,
Proceeds
Closing costs
Mortgages assumed by purchasers
and discharged
Net proceeds
2014
– $
–
2013
94,250
(1,806)
–
– $
(34,772)
57,672
$
$
CAPREIT 2014 Annual Report
102
notes to Cons0lidated FinanCial stateMents
g) Issuance of Trust Units
Year Ended December 31,
2014
2013
Issuance of Trust Units
Conversion of Exchangeable Units
to Trust Units
Settlement of Unit-based Compensation
Awards for Trust Units
Net proceeds
$
1,350 $
148,313
–
(2,542)
(319)
1,031 $
(1,602)
144,169
$
23. Related Party Transactions
a) CAPREIT has a 20.8% beneficial interest in IRES and has
determined that it has significant influence over IRES. The
beneficial interest is held through a wholly-owned subsidiary of
CAPREIT, Irish Residential Properties Fund. See note 5 for a
more detailed description. In addition, effective April 11, 2014,
CAPREIT’s wholly-owned subsidiary, IRES Fund Management
Limited, entered into an external management agreement to
perform certain property and asset management services for IRES.
Included in other income for the year ended December 31, 2014
is $1,176 from asset management and property management fees.
The amount receivable from IRES as at December 31, 2014
is $2,475.
David Ehrlich is the CEO and a director of the IRES board.
He is also a trustee of CAPREIT. Thomas Schwartz is a director
(non-executive) of the IRES board. He is also a trustee and the
president and chief executive officer of CAPREIT and each of its
subsidiaries. Officers and key management of CAPREIT were
granted options of IRES.
CAPREIT has entered into an agreement (the “Pipeline
Agreement”) with IRES to make available up to €150,000 for a
period of up to one year to acquire high quality properties in
Ireland, and to subsequently permit IRES to acquire such proper-
ties from CAPREIT once IRES has sourced additional funding.
In addition to CAPREIT receiving the purchase price and related
acquisition cost, CAPREIT will receive an underwriting fee of
1.0% of the purchase price of any assets acquired by CAPREIT
under the Pipeline Agreement at such time as the assets are
acquired by IRES. The portfolio is intended to be transferred to
IRES conditional on, among other things, IRES shareholder
approval of the Pipeline Agreement and IRES having sufficient
funds available.
b) CAPREIT incurred the following transactions with key manage-
ment personnel and trustees. The loans outstanding to key
management personnel and trustees for indebtedness relating to
the SELTIP and LTIP as at December 31, 2014 were $7,787 and
$11,226, respectively (December 31, 2013 – $8,040 and $11,834,
respectively). These amounts are taken into consideration when
calculating the fair value of the Unit-based compensation financial
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 benefits that entitle them to payments of
up to 36 months of benefits (based on base salary, bonus and other
benefits) depending on cause.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive
income comprises:
Year Ended December 31,
Short-term employee benefits
Unit-based compensation –
grant date amortization
Unit-based compensation –
fair value remeasurement
Total
2014
$
3,583 $
3,306
6,889
2013
3,439
2,050
5,489
6,997
13,886 $
(6,491)
(1,002)
$
c) CAPREIT has a lease for office space with a company in which
an officer has an 18% beneficial interest. The rent paid for the
office space for the years ended December 31, 2014 and 2013 was
$876 and $868, respectively, excluding property operating costs,
and has been expensed as trust expenses. The lease expires on
October 31, 2017. Minimum annual rental payments for the next
three years are as follows:
Minimum annual rent
$
502
$
502 $
2015
2016
2017
419
24. Commitments
natural gas
Through the combination of fixed and variable price contracts,
CAPREIT is committed as at December 31, 2014, in the aggregate
amount of $9,604 for its natural gas and transport requirements.
These commitments, which range from one to three years, fix the
price of natural gas and transport for a portion of CAPREIT’s
requirements as summarized below.
Fixed Weighted Average Cost per GJ 1
Total of CAPREIT’s
Estimated Requirements
2015
$
3.77 $
2016
3.79
63.3%
50.7%
1 Fixed weighted average cost per gigajoule (“GJ”) excludes expected
transportation costs of $1.99 per GJ for 2015 and other administrative
costs.
CAPREIT 2014 Annual Report
notes to Cons0lidated FinanCial stateMents
103
land leasehold i nterests
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, 2014 and 2013, total expenses under these four leases were $2,901 and $2,858, respectively.
Annual lease payments under these four leasehold interests are included in property operating costs. Minimum annual rent for the
next five years and thereafter under these four leases is as follows:
Minimum annual rent
2015
1,323
$
$
2016
1,323
$
2017
1,323
$
2018
1,323
$
2019
1,323
Thereafter
$
41,323
property capital investMents
Commitments primarily related to capital investments in invest-
ment properties of $35,452 were outstanding as at December 31,
2014 (December 31, 2013 – $44,620).
25. Contingencies
CAPREIT is contingently liable under guarantees provided to
certain of CAPREIT’s lenders in the event of default, and with
respect to litigation and claims that arise in the ordinary course of
business. Matters relating to litigation and claims are generally
covered by insurance, or have been provided for in Trust expenses
where appropriate.
26. Subsequent Events
On January 28, 2015, CAPREIT announced that it had, through
a wholly-owned Irish subsidiary, completed the acquisition of
the Rockbrook Portfolio, consisting of 270 residential suites
and approximately 50,214 square feet of mixed-use commercial
space located in Dublin, Ireland for a purchase price (including
VAT) of approximately €87,300 and other acquisition costs
of approximately €2,500. The purchase will be funded through
CAPREIT’s Acquisition and Operating Facility.
The Rockbrook Portfolio is the first portfolio CAPREIT is
acquiring for IRES under the previously announced agreement
entered into between IRES and CAPREIT on November 21, 2014
and amended on February 9, 2015 (the “Pipeline Agreement”).
The Pipeline Agreement was amended on February 9, 2015 to
remove the proposed 2.5 year extension to be made to the
investment management agreement but to include an underwriting
fee of 1.0% of the purchase price of each property investment
acquired under the Pipeline Agreement. CAPREIT will receive
the purchase price and related acquisition cost and an underwriting
fee of 1.0% of the purchase price of any assets acquired by
CAPREIT under the Pipeline Agreement at such time as the assets
are acquired by IRES. The portfolio is intended to be transferred
to IRES conditional on, among other things, IRES shareholder
approval of the Pipeline Agreement and IRES having sufficient
funds available.
CAPREIT 2014 Annual Report
104
FiVe-year reVieW
fiVe-yeaR ReView
($ Thousands, except per Unit amounts)
Year Ended December 31,
Operating Revenues
Net Operating Income (“NOI”)
Net Operating Income Margin (%)
Net Income 1
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
Unitholders’ Equity
Overall Portfolio Occupancy (%)
Mortgage Debt to Gross Book Value (%)
Interest Coverage (times)
Weighted Average Mortgage Interest Rate (%) 2
Weighted Average Mortgage Term (years)
Cumulative Compounded Return Since Inception (%)
Unit Price at End of Year
2014
506,411
303,885
60.0
317,975
183,353
131,044
71.5
76.0
1.675
1.168
109,456
41,688
40,533
5,749,640
2,983,105
97.9
44.6
2.82
3.66
6.3
839
25.13
$
$
$
$
$
$
$
$
$
$
2013
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
$
$
$
$
$
$
$
$
$
$
2012
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
$
$
$
$
$
$
$
$
$
$
2011
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
$
$
$
$
$
$
$
$
$
$
2010
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
$
$
$
$
$
$
$
$
$
$
1 2010 includes a recovery of deferred income taxes of $435,733.
2 Includes deferred financing costs and fair value adjustments.
CAPREIT 2014 Annual Report
unitholdeR infoRMation
annual Meeting of
unitholders
The Annual Meeting of
Unitholders will be held at
4:30 p.m. EDT on
Thursday, May 21, 2015 at
One King West Hotel
1 King Street West
Toronto, Ontario M5H 1A1
board of trustees
officers
investor infor Mation
Thomas Schwartz
President and
Chief Executive Officer
Thomas Schwartz
President and
Chief Executive Officer
Michael Stein
Chairman
Scott Cryer
Chief Financial Officer
Mark Kenney
Chief Operating Officer
Maria Amaral
Chief Accounting Officer
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
Michael Stein
Chairman and Chief
Executive Officer of
MPI Group Inc.
Paul Harris 2
Partner, Davies, Ward,
Phillips & Vineberg LLP
(a law firm)
Harold Burke 2
Principal, Dundee Real Estate
Asset Management
(a real estate management firm)
Stanley Swartzman 1, 3, 4
Corporate Director
Edwin F. Hawken 1, 2
Corporate Director
David Ehrlich 1, 3, 4
Corporate Director
Elaine Todres 3, 4
President, Todres Leadership
Counsel
David Sloan 2
Corporate Director
1 Investment Committee
2 Audit Committee
3 Governance and
Nominating Committee
4 Human Resources and
Compensation Committee
Analysts, Unitholders and
others seeking financial data
should visit CAPREIT’s
website at www.capreit.net
or contact:
Thomas Schwartz
President and
Chief Executive Officer
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 – May 2014:
$0.096 ($1.15 annually)
June 2014 – December 2014:
$0.098 ($1.18 annually)
www.capreit.net
2014 - 2015
2015 marks the second consecutive 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 firm, 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.