Canadian Apartment Properties REIT Annual Report 2015

Plain-text annual report

CAPREIT 2015 ANNUAL REPORT A STRONG TRACK RECORD OF ACCRETIVE GROWTH 2015 46,790 units 1997 2,900 units 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. 2015 Highlights Objectives • To provide Unitholders with long-term, stable and predictable monthly distributions • To grow NFFO, sustainable distribu- tions and Unit value through the active management of our properties, accretive acquisitions and strong ﬁ nancial management • To reinvest capital within the property portfolio in order to ensure the life safety of residents and maximize earnings and cash ﬂ ow potential • Acquired 5,362 residential suites and sites for total costs of $823.9 million, further strengthening and diversifying the portfolio • Revenues, Net Operating Income (“NOI”) and Normalized Funds From Operations (“NFFO”) at record levels, driven by strong occupancies, increased same property average monthly rents and acquisitions • Average monthly rents on stabilized residential properties up 1.7%, with strong 97.3% occupancy • Same property NOI up 3.3%, our 10th consecutive year of strong organic growth • NFFO up 9.1%, with NFFO per Unit up an accretive 1.0% • Named one of Canada’s Fifty Best Employers for the third year in a row FINANCIAL HIGHLIGHTS Year Ended December 31, 2015 2014 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 97.5% $ 963 $ 533,798 $ 324,614 60.8% $ $ $ 1.619 1.692 118,220 1.207 76.4% 73.1% 45.71% 55.41% 3.39% 6.3 1.63 2.96 70,315 5,632 530 26.84 3,478 $ $ $ 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 $ $ 1 As at December 31. 2 NOI, FFO and NFFO are not deﬁ ned by IFRS, do not have standard meanings and may not be comparable with other industries or companies (see Non-IFRS Financial Measures). 3 Based on the historical cost of investment properties. 4 Based on the trailing four quarters. 5 Deﬁ ned as the closing price of the Units on the last trading date of the period times the number of Units outstanding on that date (see discussion of Unitholders’ equity in the Liquidity and Financial Condition section). CAPREIT 2015 ANNUAL REP ORT 1 7. GREATER TORONTO AREA (GTA) Total Suites Occupancy Average Monthly Rents 15,518 99.1% $ 1,218 Units Breakdown: Affordable 1,273 Mid-tier 9,299 Luxury 4,946 6. OUTSIDE GREATER TORONTO AREA Total Suites Occupancy Average Monthly Rents 1,696 99.1% $ 1,126 Units Breakdown: Affordable Mid-tier Luxury 0 1,506 190 5. KITCHENER, WATERLOO & LONDON Total Suites Occupancy Average Monthly Rents 1,650 97.3% $ 894 Units Breakdown: Affordable Mid-tier Luxury 0 769 881 4. REGINA & SASKATOON Total Suites Occupancy Average Monthly Rents 367 93.2% $ 975 Units Breakdown: Affordable Mid-tier Luxury 31 336 0 Total Suites Occupancy Average Monthly Rents Units Breakdown: Affordable Mid-tier Luxury 0 126 310 Total Suites Occupancy Average Monthly Rents Units Breakdown: Affordable Mid-tier Luxury 0 1,452 431 3. EDMONTON 436 91.5% $ 1,157 2. CALGARY 1,883 89.9% $ 1,118 1. GREATER VANCOUVER AREA & VICTORIA Total Suites Occupancy Average Monthly Rents 4,411 99.7% $ 1,070 Units Breakdown: Affordable Mid-tier Luxury 148 2,607 1,656 2 CAPREIT 2015 ANNUAL REP ORT High-Quality Portfolio Affordable Mid-tier Luxury TOTAL SUITES OCCUPANCY 3,291 21,679 15,331 40,501 97.4% AVERAGE RENTS $ 1,059 10% 6% 1% 3 1 1 2 4 4 Balanced, Diversiﬁ ed Portfolio by Province PORTFOLIO DIVERSIFICATION BY REGION CAPREIT’S high-quality property portfolio is well-diversiﬁ ed both demographically and by property type, and is strongly positioned in key Canadian urban markets from coast to coast. 8. OTTAWA Total Suites Occupancy Average Monthly Rents 1,527 99.7% $ 946 Units Breakdown: Affordable Mid-tier Luxury 0 1,527 0 9. GREATER MONTRÉAL REGION Total Suites Occupancy Average Monthly Rents 8,243 96.6% $ 830 Units Breakdown: Affordable 1,334 Mid-tier 3,044 Luxury 3,865 10. QUÉBEC CITY Total Suites Occupancy Average Monthly Rents 2,729 95.5% $ 947 Units Breakdown: Affordable Mid-tier Luxury 0 833 1,896 11. HALIFAX Total Suites Occupancy Average Monthly Rents 1,588 92.1% $ 1,004 Units Breakdown: Affordable Mid-tier Luxury 505 0 1,083 12. CHARLOTTETOWN Total Suites Occupancy Average Monthly Rents 453 84.8% $ 951 Units Breakdown: Affordable Mid-tier Luxury 0 180 273 CAPREIT 2015 ANNUAL REP ORT 3 24% 49% 10 9 8 6 5 7 NB 5% 12 PEI 2% NS 3% 11 MANUFACTURED HOME COMMUNITIES Our growing MHC portfolio continues to deliver strong Unitholder returns and stable, sustainable cash ﬂ ows 1 2 3 4 5 6 BRITISH COLUMBIA ALBERTA SASKATCHEWAN ONTARIO PRINCE EDWARD ISLAND NEW BRUNSWICK Total Suites 246 Occupancy 97.2% Average Monthly Rents $353 Total Suites 2,690 Occupancy 99.6% Average Monthly Rents $500 Total Suites 500 Occupancy 95.8% Average Monthly Rents $140 Total Suites 2,308 Occupancy 96.8% Average Monthly Rents $250 Saskatoon Sunset Estates 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 Charlottetown Bathurst Parkwood Estates River Ridge Estates Riverview Estates Cornwall Chateau Estates 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 Total Suites 130 Occupancy 96.9% Average Monthly Rents $411 Gibson The Poplars Total Suites 415 Occupancy 100% Average Monthly Rents $404 Slave Lake Lynwood Gardens Whitecourt Evergreen Village Hillpark Estates Brooks Greenbrook Estates 1 2 3 TOTAL Units 6,289 Occupancy 98.2% Average Monthly Rents $366 4 6 5 4 CAPREIT 2015 ANNUAL REP ORT Th omas Schwartz President and Chief Executive Offi cer INVESTING IN ACCRETIVE GROWTH Mark Kenney Chief Operating Offi cer Scott Cryer Chief Financial Offi cer Roberto Israel Chief Information Offi cer Jodi Lieberman Chief Human Resources Offi cer Corinne Pruzanski General Counsel and Corporate Secretary 2015 was another year of record growth as we signiﬁ cantly expanded, strengthened and further diversiﬁ ed our property portfolio in our key target markets across Canada. Combined with industry-leading organic growth result- ing from our proven property management programs, we generated strong and accretive increases in all our performance benchmarks for the year. Most importantly, since our initial public offering in 1997, we have clearly demonstrated our ability to deliver solid, sustainable and growing returns to our Unit- holders through both good times and bad. We look for this stellar track record of performance to continue in the years ahead. CAPREIT 2015 ANNUAL REP ORT 5 SUITE COUNT SINCE INCEPTION 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2,900 46,790 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Over the past eighteen years we have signiﬁ cantly increased the size and scale of our property portfolio, expanding from coast to coast and increasing our presence in all of Canada’s strongest rental markets Record Growth Continues For the year ended December 31, 2015 we acquired a total of 5,362 apartment suites, townhomes and MHC land lease sites, building our presence and criti- cal mass in many of Canada’s strongest rental mar- kets, including Montréal, the Greater Toronto Area, Vancouver and Victoria. The total acquisition cost for these property purchases amounted to approximately $823.9 million, funded primarily by two accretive bought-deal equity offerings during the year aggregat- ing gross proceeds of $405.0 million, ﬁ nancing on acquisitions, and cash from our credit lines. Subsequent to the year end, the pace of our record portfolio growth continued with the purchase of a portfolio of six apartment and townhome properties in London, Ontario totalling 670 rental suites for a purchase price of $52.0 million, funded with cash from our credit lines. With the completion of these transactions, our property portfolio now consists of 41,171 apart- ment and townhome suites and 6,289 land lease sites well diversiﬁ ed from coast to coast across all 6 CAPREIT 2015 ANNUAL REP ORT of Canada’s key rental markets. The critical mass and economies of scale we are generating in these markets is leading to very strong, industry-leading growth in same-property performance, as we can add many new properties to our regional manage- ment structure without any material increase in costs. Cash ﬂ ow from newly acquired properties also increases as we apply our highly successful sales and marketing strategies to achieve near-full occupancies and the highest average monthly rents in each respective market. In addition, as we inte- grate new properties into our proven management systems, cash ﬂ ow is increasing through reduced costs and enhanced efﬁ ciencies. Most importantly, our programs are geared to ensuring our residents receive the best and most effective responses to their questions and concerns, ensuring they choose a CAPREIT property and remain there, adding to the stability of our cash ﬂ ows. Record Performance Continues Combining this stellar portfolio growth with property management programs that are second to none in the industry has resulted in another year of record performance in 2015. Operating revenues rose by 5.4% to $533.8 million, the result of contributions from the signiﬁ cant number of acquisitions completed during the year, continuing high stable occupancies, and increased same-proper- ty average monthly rents compared to 2014. Ancillary revenues, including parking, laundry, communications services and antenna rentals, continue to make a strong contribution to our revenues, rising 7.0% to $28.6 million in 2015 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”) rose 6.8% to $324.6 million, with an improved NOI margin of 60.8% compared to 60.0% in 2014. As a measure of our ability to increase cash ﬂ ows, NOI from our stabilized portfolio rose 3.3% for the year ended December 31, 2015, among the highest levels of organic growth in our industry. Stabilized properties represented 87.2% of our total portfolio at December 31, 2015. Normalized Funds From Operations (“NFFO”), our key performance benchmark, increased 9.1% for the year to $200.0 million, resulting in strong accre- tive growth as NFFO per Unit rose to $1.692 per Unit from $1.675 per Unit in 2014, despite reduced leverage and the 8% increase in the weighted average number of Units outstanding resulting from our two equity ﬁ nancings during the year. Our payout ratio of distributions declared to NFFO also remained very strong at 73.1%. Despite our record growth in 2015, we continue to maintain one of the strongest balance sheets in our industry. Our total debt to gross book value ratio The signiﬁ cant growth in our property portfolio, combined with property management programs that are second to none in the industry, resulted in another year of record performance in 2015 was a conservative 45.7% at year-end, well within our guidelines. Our mortgage portfolio remained well-balanced, with the weighted average interest rate declining to 3.39% at December 31, 2015 with a weighted average term to maturity of 6.3 years, adding to the stability of our ﬁ nancial position. Record of Strong and Accretive Growth Continues We have come a long way since we entered the Canadian capital markets more than eighteen years ago. At the time of our initial public offering in 1997, we owned interests in 2,900 apartment suites located in only one market, the Greater Toronto Area. Since those early days we have proven we can source, acquire and integrate property purchases efﬁ ciently, effectively and, most importantly, accre- tively for the beneﬁ t of our Unitholders. Total assets have increased from $48.5 million at February 4, 1997 to $7.1 billion at the end of 2015. OPERATING REVENUES ($ Thousands) NET OPERATING INCOME ($ Thousands) 533,798 506,411 477,023 412,421 361,955 324,614 303,885 273,854 237,916 206,157 NORMALIZED FUNDS FROM OPERATIONS ($ Millions) 200.0 183.4 159.4 132.6 103.9 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 CAPREIT 2015 ANNUAL REP ORT 7 2016 marks the third consecutive year that CAPREIT has been recognized as one of Canada’s 50 best employers. We are proud of everything our team has accomplished over the past eighteen years, a testament to their commitment, experience and dedication to excellence classes in the rental residential real estate busi- ness, building a growing portfolio of manufactured home land lease communities that deliver strong and growing cash ﬂ ows with a reduced risk proﬁ le. All of these growth initiatives have transformed CAPREIT into Canada’s largest publicly-traded residential landlord with a high-quality and growing property portfolio and a management team located in key centres from coast to coast. We will continue to build on this dominant market presence in the years ahead. We are also not afraid to sell non-core properties when we believe we have maximized their value or when a property no longer ﬁ ts our strategic focus. The sale of 47 non-core properties (excluding Irish properties) over the past eighteen years generated approximately $328 million in net proceeds after the repayment of associated mortgages, debt, and transaction costs, funds that were then recycled into more strategic and higher-return investments. Since our IPO we have successfully expanded into new geographic regions, diversifying our portfolio to reduce risk and strengthen our presence in all of Canada’s strongest rental markets. We have repositioned the portfolio with an increased emphasis on the higher margin luxury and mid-tier demographic segments of the business, while main- taining a strong presence in the proﬁ table affordable sector. We have also expanded into new asset We have also demonstrated our ability to generate highly innovative growth in our business, buying a strong and expanding property portfolio in the Dublin, Ireland market and then selling it to a sepa- rate publicly-traded company in which CAPREIT continues to retain a signiﬁ cant 15.7% ownership interest. CAPREIT now manages the Irish proper- ties on behalf of the new public company, exporting our proven property management expertise and generating a new source of cash ﬂ ows for our Unit- holders. Irish Residential Properties REIT delivered $3.3 million in property and asset management fees to CAPREIT in 2015, and we look for this sus- tainable contribution to grow in the years ahead. Rental properties need constant investment, and at CAPREIT we have invested more than $1.1 billion since the REIT’s founding in 1997 in new energy- efﬁ cient boilers and other environmentally friendly NFFO PER UNIT SINCE INCEPTION ( NFFO PAYOUT RATIO) NFFO per unit 1.800 1.600 1.400 1.200 1.000 0.800 0.600 0.400 0.200 0 NFFO payout ratio 1.692 73.1% 120% 100% 80% 60% 40% 20% 0% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 8 CAPREIT 2015 ANNUAL REP ORT REMARKABLE UNITHOLDER RETURN SINCE IPO 1,100% 900% 700% 500% 300% 100% -100% CAPREIT 950% S&P/TSX REIT INDEX 526% S&P/TSX COMPOSITE INDEX 215% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 and energy-saving initiatives, upgraded parking garages, balconies and other structural improve- ments, as well as enhancements to suites and property common areas. These investments have not only increased the total value of CAPREIT’s prop- erty portfolio and enhanced its income-producing potential and economic life, they ensure our proper- ties remain the best and most attractive in their respective markets, leading to average occupancies and rental rates that continue to exceed those of our peers. Our portfolio growth and the investments we have made in our properties have resulted in a remark- able track record of operating results over the past eighteen years. Revenues have grown from only $42.5 million in 1998, our ﬁ rst full year of operation, to $533.8 million in 2015. NOI has risen from $21.7 million to $324.6 million for the year ended December 31, 2015. Most importantly, this growth has been very accretive to Unitholders as NFFO per Unit has risen from $0.906 per Unit in 1998 to $1.692 per Unit in 2015, despite the signiﬁ cant increase in the number of Units outstanding. CAPREIT’s market capitalization has risen from approximately $87 million at the time of our IPO to $3.5 billion today. All of this growth and progress could not have been achieved without the hard work and commitment of everyone on the CAPREIT team. We are very proud of everything we have accomplished over the past eighteen years, and very pleased to have been recognized as one of Canada’s Best Employers for three years in a row. Looking ahead, we remain very positive about our future. The apartment business offers proven stabil- ity through both good and bad economic times, and as Canada’s largest publicly-traded residential landlord, we are well positioned to deliver strong, sustainable and growing value to our Unitholders over the long term. We look forward to keeping you apprised of our progress in the years ahead. Thomas Schwartz PRESIDENT AND CHIEF EXECUTIVE OFFICER Michael Stein CHAIRMAN CAPREIT 2015 ANNUAL REP ORT 9 MANAGEMENT’S DISCUSSION AND ANALYSIS CSR AND FINANCIAL REPORTING Corporate and Social Responsibiity Reporting Management’s Discussion and Analysis SECTION I IRES Transaction 17 Forward-Looking Disclaimer 18 Non-IFRS Financial Measures 18 Overview 18 20 Objectives 20 Business Strategy 21 Key Performance Indicators 22 Performance Measures 23 Property Portfolio 26 Investment Properties SECTION II 28 Average Monthly Rents and Occupancy 32 Results of Operations 33 Net Operating Income 35 Stabilized Portfolio Performance 37 Net Income and Other Comprehensive Income (Loss) SECTION III 41 Non-IFRS Financial Measures 41 Per Unit Calculations SECTION IV 45 Property Capital Investments 46 Productive Capacity 47 Capital Structure 48 Liquidity and Financial Condition 53 Unitholder Taxation SECTION V 54 Selected Consolidated Quarterly Information 56 Selected Consolidated Financial Information 11 Built on Responsible and Sustainable Business Practices 12 Corporate Social Responsibility and Sustainability 10 CAPREIT 2015 ANNUAL REP ORT SECTION VI 56 Accounting Policies and Critical Estimates, Assumptions, and Judgements 58 Controls and Procedures SECTION VII 59 Risks and Uncertainties 68 Related Party Transactions 69 Commitments and Contingencies SECTION VIII 69 Subsequent Events 69 Future Outlook Consolidated Annual Financial Statements 71 Management’s Responsibility for Financial Statements 72 Independent Auditor’s Report 73 Consolidated Balance Sheets 74 Consolidated Statements of Income and Comprehensive Income 75 Consolidated Statements of Unitholders’ Equity 76 Consolidated Statements of Cash Flows 77 Notes to Consolidated Financial Statements 110 Five-Year Review CSR REPORTING A STRONG TRACK RECORD OF ACCRETIVE GROWTH… BUILT ON RESPONSIBLE AND SUSTAINABLE BUSINESS PRACTICES Since CAPREIT’s inception in 1997, we have recognized that to deliver stable, sustainable and growing returns to our Unitholders, we must ensure we remain a good corporate citizen and adopt the highest levels of responsible and sustainable business practices. To this end, our focus has been on enhancing the engagement of our employees, ensuring we build strong and enduring relationships with our residents, strengthening our environmental performance, and building on our strong corporate governance initiatives. We are very proud to have been selected as a Platinum Level Aon Best Employer in Canada in 2015. It was the third year in a row that we had been recognized for the high level of our employee engagement, our leadership programs, our culture of performance, and our employment brand. This year’s survey results show that our people are fully engaged with our leadership development initiatives, programs that encompass a mentoring program, a management trainee program, and a leadership curriculum. These programs provide our employees with the skills and tools they need to grow their careers at CAPREIT. Our team at CAPREIT is our most important asset, and we are proud of everything they have accomplished over the past eighteen years through their experience, dedication and commitment. Building strong and enduring relationships with our tenants is another key reason for our growth and success. By ensuring our residents receive timely assistance and answers to their questions and concerns, we reduce turnover and vacancy loss, experience fewer repairs and maintenance issues, achieve the highest sustainable monthly rents, and develop high-quality communities. We work hard to ensure our tenants are happy, and will continue to implement best-practice resident programs going forward. Reducing our environmental footprint is another goal of our sustainable business practices. Since inception we have made signiﬁ cant investments in energy-efﬁ cient heating boilers, energy- saving lighting, high-efﬁ ciency toilets, low-ﬂ ow taps and showerheads, and numerous other initiatives. All of these programs have reduced our energy use and water consumption, not only improving our environmental performance but also reducing operating costs. We will continue to invest in our properties to ensure they are modern and efﬁ cient, improving the environment in which we live. From a governance perspective, CAPREIT’s Board of Trustees is comprised of skilled and experienced individuals, the majority of whom are independent, and all of whom are fully engaged in CAPREIT’s operations, ensuring our business practices remain ethical, open and transparent. We continue to bring diversity and a broad and deep wealth of knowledge to the Board, and will continue to ensure we adopt the highest standards of corporate governance practices going forward. Through the balance of this report you will learn more about our progress in meeting established goals related to our corporate social responsibility and sustainability initiatives. Focusing on these important practices is another reason we have been able to deliver a strong, stable and sustainable track record of accretive growth to our Unitholders. Thomas Schwartz President and Chief Executive Ofﬁ cer CAPREIT 2015 ANNUAL REP ORT 11 CSR REPORTING CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY CAPREIT is Canada’s largest publicly-traded residential landlord, serving more than 46,700 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 diversiﬁ ed 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 long-term sustainable growing distributions and proﬁ table 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 efﬁ ciency, innovation, and operational and sustainable ﬁ nancial performance. In line with Management’s commitment to best practices in communication, CAPREIT’s annual reporting incorporates corporate social responsibility and sustainability information deemed relevant and material to CAPREIT’s employees, residents and investors. Such reporting will better demonstrate how the business is managed and how ﬁ nancial and non-ﬁ nancial objectives contribute to CAPREIT’s long- term sustainability. 12 CAPREIT 2015 ANNUAL REP ORT CSR REPORTING 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 2015, affecting several key stakeholders. CAPREIT achieved the following goals in 2015 Employment practices • Selected as a Platinum Level Aon Best Employer in Canada and chosen as one of Canada’s best employers for a third consecutive year • Completed corporate head ofﬁ ce workplace redesign for improved employee satisfaction and productivity • Successfully completed the Accounting Modernization Project to increase efﬁ ciencies and enhance processes while improving employee engagement • Hired a Chief Information Ofﬁ cer to streamline CAPREIT’s information and technology while realizing the full beneﬁ ts and efﬁ ciencies of CAPREIT’s state-of-the-art technology platform • Established the Operations Centre of Excellence team dedicated to process improvement and standardization across the organization • Created a new Forecast, Planning and Analysis team focused on overall planning, budgeting and forecasting for the organization • Increased the number of free breakfasts served to schoolchildren at CAPREIT properties • Continued commitment with the Toronto Foundation for Student Success in support of serving nutritious meals at a school near CAPREIT properties Environmental conservation • Invested $8.5 million in energy-efﬁ ciency capital investments to reduce resource consumption • Implemented better tracking and visibility of resource consumption to identify underperforming properties • Recognized for a best performing building by the City of Toronto and for gas savings by Burlington Hydro and Enbridge • Continued to expand electricity submetering to 91 properties and water submetering to 12 properties across the portfolio Corporate governance • Continued to improve transparency and timely disclosure of • Aligned executive performance incentives with key corporate results and events sustainability performance indicators that include qualitative and quantitative measures Resident satisfaction • $59.4 million in structural capital investments for enhanced life safety and property improvement • $89.5 million in suite improvements, common areas and other enhancements for the greater comfort of residents Investors • Increased cash distributions for the 18th time since IPO to $1.22 per Unit annually • Continued to maintain conservative total debt to gross book value ratios and weighted average term to maturity for the mortgage portfolio • Maintained a minimum of $130 million of unencumbered • $8.7 million in repairs and maintenance, including for assets reconditioning, and improved curb appeal of properties • Continue to maintain CAP CARES, a 24/7 urgent maintenance request line for residents Affordable housing and philanthropic efforts • Provided more than 2,000 affordable suites to families in need in partnership with multiple government agencies • Worked alongside local community organizations to assist in providing housing to Syrian refugees • Diversiﬁ ed revenue streams by providing asset management duties and property services for Irish Residential Properties REIT plc • Announced ﬁ rst joint venture development contract in the residential component of Toronto’s King High Line project • Continued stabilized net operating income growth and sustained overall portfolio occupancy at above 97% CAPREIT 2015 ANNUAL REP ORT 13 CSR REPORTING Future Targets 2016 Employment practices • Continue to maintain Platinum Level Aon Best Employer in Canada status Resident satisfaction • Improve customer relationship management by continuing to conduct resident satisfaction surveys • Continue to focus on renovations to improve the quality of life of our residents Affordable housing and philanthropic efforts • Expand breakfast programs to allow both staff and residents to donate and volunteer Environmental conservation • Invest $8 million in energy-efﬁ cient and environment-friendly projects In the medium term • Implement a Human Resource Information System – an employee and manager self-service system enabling the entire organization to perform collaboratively on a single platform to foster growth and development • Develop an integrated talent management plan for succession planning and leadership development, and to provide mentorship opportunities to all CAPREIT employees • Expand charitable efforts to improve the livelihoods of underprivileged families and further engage the community • Reduce average energy use and water consumption intensity on a per suite basis • Continue to investigate opportunities to enter into joint venture relationships with other real estate entities to develop new multi-unit rental residential properties on excess land owned by CAPREIT or other vacant land Investors • Acquire between 1,500 and 2,000 suites and sites on an Ultimately, these will help CAPREIT achieve its goal to • Continue to maintain Platinum Level Aon Best Employer in annualized basis Canada status • Raise between $275 million and $325 million in total • Attain above 98% occupancy while improving average mortgage reﬁ nancings monthly rents • Deliver year-over-year stabilized net operating income growth • Sustain overall portfolio occupancy above 97% while • Attain the lowest energy and water consumption intensity in the multi-residential industry increasing average monthly rents Sustainability Performance Employment Practices At CAPREIT, employees are considered the company’s most essential resource. Success is attributed to skillful and gifted operations people supported by effective and specialized corporate departments. CAPREIT prides itself on a culture focused on collaboration and excellent quality and service, as well as on providing employees with meaningful opportunities to advance their careers and develop leadership skills. One such opportunity is the recently launched mentorship program, which pairs employees at all levels with senior management mentors. The company plans to expand this valuable and popular program each year. 50 of Canada’s Best Employers for 2015, an award bestowed upon CAPREIT for the last three consecutive years, and to be selected as a Platinum Level Aon Best Employer. Management’s dedication to quality and continuous improvement is also evident in other areas of the company. The newly formed CAPTECH department and an employee self-service solution were developed to deliver increased technological efﬁ ciencies, while the recently renovated corporate ofﬁ ce provides a more modern and collaborative workspace for head ofﬁ ce employees. CAPREIT is also committed to maintaining a diverse workforce, with 75% of employees speaking at least one other language. In order to attract and retain top talent, CAPREIT is committed to continually striving for excellence in its employment practices. This commitment has been demonstrated through the company’s achievement of one of its primary goals: to be named one of The Top Looking ahead, CAPREIT will continue to establish itself as an industry leader focused on exceptional quality and service, and providing enriching opportunities to engage existing and future employees. 14 CAPREIT 2015 ANNUAL REP ORT CSR REPORTING Societal and Resident Satisfaction Practices CAPREIT’s success is also driven by strong relationships with its residents and the communities in which it operates. Building relationships with residents begins before a lease is signed, with an up-to-date, easy-to- navigate and interactive website featuring building ﬂ oor plans, virtual tours, pictures and videos, and local points of interest, all combined with a proactive social media presence to address any questions. Additional investments in technologies to improve resident experience are currently being explored. During 2016, we will introduce a customer relation ship management tool to conduct automated surveys to monitor and improve resident satisfaction. Happy and satisfied residents mean lower lease turnover, lower vacancy loss, fewer repairs and lower maintenance costs, higher average monthly rents, more resident referrals and a better resident community. Therefore, Management ensures resident engagement initiatives focused on strengthening these relationships are in place at every building. In addition to a formalized annual resident satisfaction survey, CAP CARES is an effective and efﬁ cient 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 services provided at its properties. In 2015, call volumes decreased year over year across all tiers. 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 investment program ensures residents enjoy safe, secure and comfortable homes. In the interest of resident safety and security, building manuals are maintained at every property in order to provide easily accessible information on shutdown procedures for all building mechanical systems in case of an emergency. Efforts are underway to ﬁ nd opportunities within the current portfolio to convert unused space and provide more amenities to tenants for greater resident satisfaction. To help working families in need of assistance, CAPREIT has formed long- term partnerships over the past 15 years with housing agencies at the 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 efﬁ cient operating platforms of landlords such as CAPREIT have the added beneﬁ t of effectively reducing the burden and cost to governments. 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. In 2015, CAPREIT worked alongside local community organizations to assist in providing housing to Syrian refugees. As of 2015, CAPREIT provides more than 2,000 suites across Canada and is one of the largest private-sector contributors of affordable housing in the Greater Toronto Area. CAPREIT is committed to supporting and expanding these programs as they contribute 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 of 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 2016, the breakfast programs will be expanded to give 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 ﬂ uctuate 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 ﬁ nancial performance through the optimization of its utility consumption and by facilitating the reduction of resident waste. Since inception, CAPREIT has strived to reduce energy and water consumption in a cost-effective manner, thereby reducing emissions and contributing to improved overall ﬁ nancial performance. One of CAPREIT’s key strategies is to evaluate the implementation of a variety of energy-efﬁ ciency initiatives at every property on acquisition and thereafter on a regular basis by means of newer, cost-effective technology allowing even greater reduction in energy use. These initiatives, with favourable payback periods, include: • Installation of new high-efﬁ ciency boilers and chillers • Installation of building automation systems to better control equipment performance and tenant comfort • Installation of efﬁ cient LED and ﬂ uorescent lighting technology in suites and common areas • Replacement of laundry machines with high-efﬁ ciency washing machines and dryers • Optimization of electricity and water consumption by way of submetering • Use of reﬂ ective panels to cost-effectively reduce heat loss • Regular cleaning of in-suite heating coils, ﬁ ns and radiators • Installation of variable frequency drives to further reduce electricity use CAPREIT 2015 ANNUAL REP ORT 15 CSR REPORTING High-efﬁ ciency boilers, remotely monitored by CAPREIT’s in-house energy department, allow for optimal temperatures for residents’ comfort while ensuring efﬁ cient energy use. Total expenditures since 2010 on energy consumption optimization investments amount to $44.9 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 operating costs. The following table shows the results of CAPREIT’s energy-efﬁ ciency and environmental initiatives on a per suite basis based on energy consumption for the years 2011–2014, calculated by an independent consulting ﬁ rm in accordance with GHG Protocol (including Scopes 1 to 3): ENERGY USE INTENSITY PERFORMANCE OVER PRIOR YEAR CAPREIT also evaluates the prompt installation of the latest water- efﬁ ciency equipment at newly acquired properties and on a regular basis where considered cost-effective. Such initiatives include the installation of the following since 2010: • Over 20,000 ultra-low-ﬂ ow toilets • Over 25,000 low-ﬂ ow showerheads plus faucets using aerators • Over 3,000 high-efﬁ ciency laundry machines The following table shows the results of CAPREIT’s initiatives to reduce water consumption on a per suite basis based on water consumption calculated by an independent consulting firm in accordance with GHG Protocol: WATER USE INTENSITY PERFORMANCE OVER PRIOR YEAR In Accordance with GHG Protocol 2014 2013 2012 2011 (3.4%) (2.8%) (1.0%) (7.1%) 2014 2013 2012 2011 Based on stabilized properties using 2010 as a base year. In Accordance with GHG Protocol In Accordance with GHG Protocol Adjusted for Impact of Weather 0.5% 4.5% (7.9%) 0.2% and Occupancy (2.5%) (1.8%) (2.6%) (1.8%) Based on stabilized properties using 2010 as a base year. In addition, to optimize electricity consumption, as of December 31, 2015 CAPREIT had installed tenant submetering systems at 91 properties for electricity submetering and 12 properties for water submetering, comprising more than 16,000 suites. On lease turnovers, new rental agreements include metered billing payable by the resident, which acts as a strong incentive to reduce energy consumption. The following table demonstrates the beneﬁ ts of submetering through the reduction in annual electricity use intensity on a per suite basis based on energy consumption in submetered buildings compared with those for the overall portfolio for the years 2011 to 2014. PERCENT REDUCTION IN ELECTRICITY USE INTENSITY OVER PRIOR YEAR Sub-metered Properties Overall Portfolio 2014 (4.4%) (2.9%) 2013 (6.4%) 3.1% 2012 (2.6%) (0.6%) 2011 (1.5%) 0.2% Based on stabilized properties using 2010 as a base year. The historical data above was adjusted to exclude the impact of weather and occupancy ﬂ uctuation. It should be noted that while sub-metered buildings performed, on average, better than the overall portfolio, other factors such as energy retroﬁ ts and operational improvements also contributed to the improved performance. 16 CAPREIT 2015 ANNUAL REP ORT CAPREIT maintains a waste-diversion policy and has expanded recycling initiatives 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 beneﬁ ts of recycling. CAPREIT’s operations have little or no impact on land contamination. Prior to the acquisition or reﬁ nancing of a property, thorough environmental studies are performed by an independent consulting ﬁ rm to ensure there are no pre-existing contaminations and, if present, that appropriate remediation work is performed to current standards prior to acquisition. CAPREIT contributes to the beneﬁ ts of greater urban density and reduces pollution by revitalizing existing residential properties. Revitalization adds to the useful economic life of properties while modernizing them for changing demographic needs and adding to the beautification of the neighbourhood through contemporary landscaping and other improvements. Over the past eighteen years, CAPREIT has come a long way from a small, regional property owner to one of Canada’s largest residential landlords, with a portfolio spanning the country and all demographic sectors. This growth and success would not have been possible without CAPREIT’s service-oriented approach to residents, the engagement and productivity of its employees, the control of resource consumption, and to 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. MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS SECTION I Forward-Looking Disclaimer The following Management’s Discussion and Analysis (“MD&A”) of Canadian Apartment Properties Real Estate Investment Trust’s (“CAPREIT”) results of operations and financial condition for the year ended December 31, 2015 should be read in conjunction with CAPREIT’s audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015. Certain statements contained, or contained in documents incorporated by reference, in this MD&A constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to CAPREIT’s future outlook and anticipated events or results and may include statements regarding the future ﬁ nancial position, business strategy, budgets, litigation, projected costs, capital investments, ﬁ nancial results, taxes, plans and objectives of or involving CAPREIT. In particular, statements regarding CAPREIT’s future results, performance, achievements, prospects, costs, opportunities and ﬁ nancial outlook, including those relating to acquisition and capital investment strategy and the real estate industry in general, are forward-looking statements. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”, “continue” or the negative thereof, or other similar expressions concerning matters that are not historical facts. Forward-looking statements are based on certain factors and assumptions regarding expected growth, results of operations, performance and business prospects and opportunities. In addition, certain speciﬁ c assumptions were made in preparing forward- looking information, including: that the Canadian and Irish economies will generally experience growth, 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 sufﬁ cient number of lenders will participate in the CMHC-insured mortgage program to ensure competitive rates; that the Canadian capital markets will continue to provide CAPREIT with access to equity and/or debt at reasonable rates; that vacancy rates for CAPREIT properties will be consistent with historical norms; that rental rates will grow at levels similar to the rate of inﬂ ation on renewal; that rental rates on turnovers will remain stable; that CAPREIT will effectively manage price pressures relating to its energy usage; and, with respect to CAPREIT’s financial outlook regarding capital investments, assumptions respecting projected costs of construction and materials, availability of trades, the cost and availability of 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 speciﬁ c capital investments. Although the forward-looking statements contained in this MD&A are based on assumptions 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 opportunities in future periods to differ materially from those expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things, risks related to: reporting investment properties at fair value, real property ownership, leasehold interests, co-ownerships, investment restrictions, operating risk, energy costs and hedging, environmental matters, insurance, capital investments, indebtedness, interest rate hedging, foreign operation and currency risks, taxation, harmonization of federal goods and services tax and provincial sales tax, government regulations, controls over ﬁ nancial accounting, legal and regulatory concerns, the nature of units of CAPREIT (“Trust Units”) and of CAPREIT’s subsidiary, CAPREIT Limited Partnership (“Exchangeable Units”) (collectively, the “Units”), unitholder liability, liquidity and price ﬂ uctuation of Units, dilution, distributions, participation in CAPREIT’s distribution reinvestment plan, potential conﬂ icts of interest, dependence on key personnel, general economic conditions, competition for residents, competition for real property investments, continued growth, and risks related to acquisitions. 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. CAPREIT 2015 ANNUAL REP ORT 17 MANAGEMENT’S DISCUSSION AND ANALYSIS Non-IFRS Financial Measures CAPREIT prepares and releases unaudited consolidated interim financial statements and audited consolidated annual financial statements in accordance with International Financial Reporting Standards (“IFRS”). In this MD&A, and in earnings releases and investor conference calls, as a complement to results provided in accordance with IFRS, CAPREIT also discloses and discusses certain ﬁ nancial measures not recognized under IFRS and that do not have standard meanings prescribed by IFRS, including Net Operating Income (“NOI”), Net Rental Revenue Run-Rate, Funds From Operations (“FFO”), Normalized Funds From Operations (“NFFO”) and Adjusted Funds From Operations (“AFFO”), and applicable per Unit amounts and payout ratios (collectively, the “non-IFRS measures”). These non-IFRS measures are further deﬁ ned and discussed in Section III under Non- IFRS Financial Measures. Since NOI, Net Rental Revenue Run-Rate, FFO, NFFO and AFFO are not measures recognized under IFRS, they may not be comparable to similarly titled measures reported by other issuers. CAPREIT has presented such non-IFRS measures because Management believes these non-IFRS measures are relevant measures of the ability of CAPREIT to earn and distribute cash returns to investors in the Units (“Unitholders”) and to evaluate CAPREIT’s performance. A reconciliation of non-IFRS measures is provided in Section III under Non-IFRS Financial Measures. These non-IFRS measures should not be construed as alternatives to net income (loss) or cash ﬂ ows from operating activities determined in accordance with IFRS as indicators of CAPREIT’s performance. Overview CAPREIT is an unincorporated open-ended publicly-traded real estate investment trust and one of Canada’s largest residential landlords, serving over 46,700 families across the country. CAPREIT owns and operates a portfolio of multi-unit residential rental properties, including apartments, townhomes and manufactured home communities, located in and near major urban centres in Canada. CAPREIT’s concentration on the residential rental 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 diversiﬁ cation by operating properties across the affordable, mid-tier and luxury sectors, as well as through geographic diversiﬁ cation across Canada. CAPREIT’s vision is to be the premier residential rental 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 long-term sustainable growing distributions and proﬁ table growth for Unitholders. Established in 1997, CAPREIT has grown by acquiring properties at prices below their replacement cost, primarily in large urban rental markets with high employment and close to public facilities such as schools, libraries and hospitals. CAPREIT focuses on acquisitions deemed accretive to growth and employing successful operational strategies aimed at long-term ownership. This focus has contributed to growing net operating income, Normalized Funds From Operations and value for Unitholders. 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, 2015, CAPREIT owned interests in 46,790 residential units, comprised of 40,501 residential suites and 30 manufactured home communities (“MHC”), comprised of 6,289 land lease sites. As at December 31, 2015, CAPREIT had 937 employees (840 employees as at December 31, 2014). 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. 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 $717 thousand relating to the consideration received in lieu of the net asset value of the properties in IRES on the disposition date, which is recorded in other income. On March 25, 2015, CAPREIT invested an additional €23.5 million in Ordinary Shares in IRES as part of IRES’s €215.0 million secondary equity offering. As at December 31, 2015, CAPREIT LP holds 65.5 million ordinary shares of IRES, representing 15.7% of the issued share capital of IRES. 18 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS The tables below summarize property acquisitions and dispositions for the years ended December 31, 2015 and 2014: ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2015 ($ Thousands) January 28, 2015 4 February 18, 2015 March 31, 2015 June 15, 2015 June 30, 2015 July 31, 2015 September 14, 2015 September 30, 2015 November 1, 2015 Demographic Sector Luxury Mid-tier Mid-tier Mid-tier Affordable Luxury Various 6 Various 7 MHC December 17, 2015 Mid-tier Total Subsequent Acquisition Financing Suite or Site Count 270 126 285 32 108 58 919 3,661 4 169 5,632 Region(s) Dublin, Ireland Edmonton Burlington Victoria Langley Langley Greater Vancouver Area Montréal Bowmanville and Grand Bend Victoria Total Acquisition Costs $ 125,416 31,092 54,500 5,479 13,010 17,070 170,611 502,276 372 29,474 $ 949,300 $ Assumed Mortgage Funding – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 5 – 3 3,030 8 3,030 $ $ 382,203 Interest Rate 1 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 5 – 3 1.80% 8 Term to Maturity (Years) 2 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 5 – 3 4.2 8 2.36% 8.2 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 Rockbrook Portfolio acquisition is the ﬁ rst portfolio CAPREIT acquired for IRES for €89.7 million (including transaction costs), under the previously-announced agreement entered into between IRES and CAPREIT on November 21, 2014 and as amended on February 9, 2015 (the “Pipeline Agreement”). Refer to note 5 of the audited consolidated annual ﬁ nancial statements for further details. 5 The acquisition was funded from CAPREIT’s Bridge Increase and Acquisition and Operating Facility (see Liquidity and Financial Condition section). 6 The acquisition comprised 919 suites (807 mid-tier and 112 luxury suites) in 19 properties located in the Greater Vancouver Area. 7 The acquisition comprised 3,661 suites (717 affordable, 1,356 mid-tier, and 1,588 luxury suites) in 51 buildings located in Montréal. 8 The acquisition was funded by the assumption of a $3.0 million mortgage maturing in February 2020 with an effective interest rate of 1.8% and cash from CAPREIT’s Acquisition and Operating Facility. ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2014 ($ Thousands) January 15, 2014 April 17, 2014 Demographic Sector Commercial 3 MHC July 31, 2014 Various 5 September 30, 2014 Mid-tier November 20, 2014 MHC December 8, 2014 December 16, 2014 MHC Total Mid-tier 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 $ 11,356 Assumed Mortgage Funding $ – 4 141 20,624 17,097 – 4 14,747 8,391 426 7,570 4,331 $ 61,545 – 4 2,984 – 4 $ 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. CAPREIT 2015 ANNUAL REP ORT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2015 ($ Thousands) February 18, 2015 March 31, 2015 Total Demographic Sector Mid-tier Luxury 1 Suite Count 260 270 530 Region Toronto Dublin, Ireland Sale Price $ 47,000 123,450 $ 170,450 Cash Proceeds 23,642 $ 362 24,004 $ Mortgage Discharged $ 22,901 123,016 $ 145,917 1 Pursuant to the terms of the Pipeline Agreement, on March 31, 2015, CAPREIT sold the Rockbrook Portfolio via the sale of its interest in its wholly-owned Irish subsidiary (“Rockbrook SPV”) to IRES at the original acquisition cost of €89.7 million and earned an underwriters’ fee of €0.9 million. IRES repaid the loan to CAPREIT for approximately €89.7 million, the original acquisition cost (for which CAPREIT had initially drawn from its Acquisition and Operating Facility for the purchase of the Rockbrook Portfolio). In total, IRES paid €90.6 million for the acquisition of the Rockbrook Portfolio. CAPREIT repaid the euro LIBOR borrowings of €90.3 million subsequent to the sale. Included in foreign currency translation in the consolidated statements of income and comprehensive income is a foreign exchange loss of $3.2 million relating to the disposition and a foreign exchange gain of $3.1 million in respect of the repayment of the euro LIBOR borrowings. DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2014 ($ 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. 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 ﬁ nancial management; and • Invest capital within the property portfolio in order to ensure life safety of residents and maximize earnings and cash ﬂ ow potential. Business Strategy To meet its objectives, CAPREIT has established the following strategies: Customer Service CAPREIT recognizes that it is in a “people business” and strives to be recognized as the Landlord of Choice in all its chosen markets by providing its residents with safe, secure and comfortable homes. It takes a hands-on approach to managing its properties, stressing open and frequent communications to ensure residents’ needs are met efﬁ ciently and effectively, thereby maintaining a high occupancy level. Numerous initiatives, such as newsletters, special events, resident committees and other initiatives, help to build a true sense of community at its properties. CAPREIT’s strong sales and marketing team continues to execute innovative and highly effective strategies to help attract and retain residents and adapt to changing conditions in speciﬁ c markets. In addition, CAPREIT’s lease administration system improves control of rent-setting by suite, increasing resident service and enhancing the overall proﬁ le of its resident base. Cost Management While ensuring the needs of its residents are met, CAPREIT also carefully monitors operating costs to ensure it is delivering services to residents both efﬁ ciently and cost effectively. CAPREIT strives to capture potential economies of scale and cost 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 efﬁ ciencies. Capital Investments CAPREIT strives to acquire properties at prices signiﬁ cantly below their current replacement costs, and is committed to improving its operating performance by incurring appropriate capital investments in order to maintain the productive capacity of its property portfolio and to sustain the portfolio’s rental income-generating potential over its useful life. CAPREIT continues to invest in environment-friendly and energy-saving initiatives that improve overall net operating income. CAPREIT completes 20 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS a review of its portfolio and revises its long-term capital investment plan on an annual basis, which allows Management to ensure capital investments extend the useful economic life of CAPREIT’s properties, enhance life safety, maximize earnings and improve the long-term cash ﬂ ow potential of its portfolio. Average Monthly Rents Through its active property management strategies, lease administration system and proactive capital investment programs, CAPREIT strives to achieve the highest possible average monthly rents in accordance with local market conditions. Portfolio Growth CAPREIT will grow its portfolio over the long term through accretive acquisitions that meet its strategic criteria and, where possible, enhance geographic diversiﬁ cation while capturing economies of scale and cost synergies, thereby increasing net 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 ﬂ ow potential of its property portfolio. In addition, Management has recently entered into and continues to prudently investigate 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 mortgage debt portfolio to ﬁ x and, where possible, reduce average interest rates, effectively manage the average term to maturity and stagger maturity dates. In addition, CAPREIT strives to maintain a conservative overall liquidity position and achieve a balance in its overall capital resource requirements between debt and equity. Key Performance Indicators To assist Management and investors in monitoring and evaluating CAPREIT’s achievement of its objectives, CAPREIT has deﬁ ned a number of key operating and performance indicators (“KPIs”) to measure the success of its operating and ﬁ nancial strategies: Occupancy Management strives, through a focused, hands-on approach to its busi- ness, to achieve occupancies that are in line with, or higher than, market conditions in each of the geographic regions in which CAPREIT operates while enhancing the overall qualitative proﬁ le of its resident base. 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 58% to 60% of operating revenues. FFO and NFFO CAPREIT is focused on achieving steady increases in these metrics. Management believes these measures are indicative of CAPREIT’s operating performance and the sustainability of its distributions. Payout Ratio To help ensure it retains sufﬁ cient cash to meet its capital investment objectives, CAPREIT 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 ﬁ nancing, which meet its strategic objectives, serve to accretively increase NFFO and continue to further diversify the portfolio by geography and by demographic sector. In addition, Management has recently entered into and continues to prudently investigate 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. Financing CAPREIT takes a proactive approach with its mortgage portfolio, striving to manage interest expense volatility risk by achieving the lowest possible average interest rates while mitigating reﬁ nancing risk by prudently managing the portfolio’s average term to maturity and staggering the maturity dates. For this purpose, CAPREIT strives to ensure its overall leverage ratios and interest and debt service 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 ﬁ nancial covenants in its credit agreement comprised of an acquisition and operating facility, which includes a euro LIBOR borrowing (“Acquisition and Operating Facility”), and a ﬁ ve-year non-revolving term credit facility (collectively, the “Credit Facilities”), as described under Liquidity and Financial Condition in Section IV. CAPREIT 2015 ANNUAL REP ORT 21 MANAGEMENT’S DISCUSSION AND ANALYSIS Performance Measures The following table presents an overview of certain key IFRS and non-IFRS ﬁ nancial measures and operational results of CAPREIT for the years ended December 31, 2015 and 2014. Management believes that these measures are useful in assessing CAPREIT’s performance vis-à-vis its objectives, business strategy and KPIs. Effective May 2015, monthly cash distributions declared to Unitholders increased to $0.102 per Unit ($1.22 annually), compared to $0.098 per Unit ($1.18 annually) effective since June 2014 and $0.096 per Unit ($1.15 annually) effective since June 2013. 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 2015 2014 97.5% 963 533,798 324,614 60.8% 1.619 1.692 118,220 1.207 76.4% 73.1% 45.71% 55.41% 3.39% 6.3 1.63 2.96 70,315 5,632 530 26.84 3,478 $ $ $ $ $ $ $ $ $ 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 $ $ $ $ $ $ $ $ $ 1 As at December 31. 2 NOI, FFO and NFFO are not deﬁ ned by IFRS, do not have standard meanings and may not be comparable with other industries or companies (see Non-IFRS Financial Measures). 3 Based on the historical cost of investment properties. 4 Based on the trailing four quarters. 5 Deﬁ ned as the closing price of the Units on the last trading date of the period times the number of Units outstanding (including all Unit-based incentive plans except UOP) (see discussion of Unitholders’ equity under the Liquidity and Financial Condition section). 22 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Property Portfolio Types of Property Interests CAPREIT’s investments in its property portfolio reﬂ ect different forms of property interests, including: Fee Simple Interests – Apartments and Townhomes The majority of CAPREIT’s investment in its property portfolio is in the form of fee simple interests, representing freehold ownership of the properties subject only to typical encumbrances, such as mortgages. Operating Leasehold Interests CAPREIT owns leasehold interests in 15 properties located in the Greater Toronto Area. The leases mature between 2033 and 2037. While separate lease arrangements exist for each property, the general structure is common across all leases: each lease is for a 35-year term and the rent for the entire lease term was fully paid at the time the leasehold interest was acquired. Each lease also provides CAPREIT with a purchase option exercisable between the 26th and 35th year of the lease term. In the case of one of the properties, the purchase option entitles CAPREIT to acquire a prepaid operating leasehold interest in the property maturing in 2072 (see Portfolio of Operating Leasehold Interests for additional information). Land Leasehold Interests CAPREIT owns leasehold interests in three land parcels in Alberta 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 2015 35,635 3,815 1,051 40,501 6,289 46,790 % 76.2 8.2 2.2 86.6 13.4 100.0 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 Portfolio Diversiﬁ cation CAPREIT’s property portfolio continues to be diversiﬁ ed by geography and balanced among demographic sectors and asset types. Management’s long-term goal is to further enhance the geographic diversiﬁ cation and the defensive nature of its portfolio through acquisitions. PORTFOLIO BY DEMOGRAPHIC SECTOR As at December 31, Affordable Mid-tier Luxury Total Residential Suites MHC Land Lease Sites Total Suites and Sites 2015 3,291 21,679 15,531 40,501 6,289 46,790 % 7.0 46.4 33.2 86.6 13.4 100.0 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 CAPREIT 2015 ANNUAL REP ORT 23 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 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 2015 % 2014 % 15,518 1,527 1,650 1,696 20,391 8,243 2,729 10,972 3,030 1,381 4,411 436 1,883 2,319 1,588 133 234 367 33.2 3.3 3.5 3.6 43.6 17.6 5.8 23.4 6.5 3.0 9.5 0.9 4.0 4.9 3.4 0.3 0.5 0.8 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 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 0.9 453 40,501 1.0 86.6 453 35,404 1.1 85.0 2,690 130 415 246 500 2,308 6,289 46,790 5.7 0.3 0.9 0.5 1.1 4.9 13.4 100.0 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 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 diversiﬁ cation strategy. The geographic diversiﬁ cation of its portfolio also enables CAPREIT to mitigate the risks arising from potential downturns in speciﬁ c markets. 24 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS CAPREIT has acquired a total of 5,362 suites (excluding the Irish acquisition and subsequent disposition to IRES) in 2015 and continues 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 which the option is to be exercised. The aggregate range of option prices would be approximately $283 million to $339 million if each of the options were exercised in the 26th and 35th years, respectively, of the lease terms. If CAPREIT elected to exercise any option prior to the maturity of the lease term, CAPREIT would be entitled to receive a pro rata amount of the prepaid lease amount based on the remaining lease term. In addition, under certain circumstances, the option price may be reduced by the unamortized portion of capital expenditures incurred during the ﬁ nal ten years of the lease term. The mortgages on each of these 15 properties are scheduled to be fully repaid by their respective option exercise dates, which Management expects will enable CAPREIT to utilize the equity in these properties to fully ﬁ nance the option exercise prices. OPERATING LEASEHOLD INTERESTS PORTFOLIO BY LEASE MATURITY ($ Thousands) As at December 31, 2015 and 2014 Option Exercise Prices Year of Lease Maturity 2033 2034 2035 2037 Total Operating Leasehold Interests Portfolio Properties 10 2 1 2 15 Suites 3,099 161 200 355 3,815 % 81.3 4.2 5.2 9.3 100.0 26th Year $ 202,071 19,300 14,200 47,200 $ 282,771 35th Year $ 242,596 23,150 17,000 56,000 $ 338,746 1 As at the acquisition dates of these leasehold interests by a CAPREIT predecessor. Prepaid Lease Amount 1 $ 136,101 13,700 9,000 33,500 $ 192,301 Portfolio of Land Leasehold Interests In the absence of any new arrangements negotiated between CAPREIT and the landowners of the four parcels on which CAPREIT has land leasehold interests, CAPREIT’s interests in one property mature in 2045, in two properties in 2068 and in 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 Annual Ground Rent 2015 1,000 561 1,246 2,807 $ $ 2014 1,000 621 1,280 2,901 $ $ CAPREIT 2015 ANNUAL REP ORT 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Investment Properties Investment property is deﬁ ned as property held to earn rental income or for capital appreciation or both. Investment property is 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 speciﬁ ed date under all conditions requisite 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 ﬁ nancial or other hardship. Each investment property has been valued on a highest and best use basis but, speciﬁ cally, does not include any portfolio premium that may be associated with economies of scale from owning a large portfolio or the consolidation value of having compiled a large portfolio of properties over a long period of time, many through individual property acquisitions. Market assumptions applied for valuation purposes do not necessarily reﬂ ect the speciﬁ c history or experience related to CAPREIT and, in many cases, the stabilized cash ﬂ ows or NOI used for appraisal purposes may not reﬂ ect the results ultimately realized during future periods. The fair value of investment properties is established by a qualiﬁ ed, independent appraiser annually. Each quarter, CAPREIT utilizes market assumptions for rent increases, capitalization and discount rates provided by the independent 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 to the accompanying audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015. The following table summarizes the changes in the investment properties portfolio during the years: ($ Thousands) As at December 31, Balance, Beginning of the Year $ 2015 5,749,640 2014 5,459,218 $ Add: Acquisitions Property Capital Investments 1 Capitalized Leasing Costs 2 Unrealized Gain on Remeasurement at Fair Value Less: Dispositions Realized Loss on Dispositions Foreign Currency Translation Investment Properties at Fair Value, End of the Year $ 949,300 163,208 166 61,545 145,601 597 173,242 150,897 (168,622) (639) (3,155) (70,871) – 2,653 6,863,140 $ 5,749,640 1 See Property Capital Investments section. 2 Comprises tenant inducements, straight-line rent and direct leasing costs. For the years ended December 31, 2015 and 2014, the unrealized gain on remeasurement of investment properties is primarily the result of changes in net operating income and capitalization rates offset by certain capital investments not having an immediate effect on stabilized NOI and thus not reﬂ ected in the fair value of the investment properties at the measurement date. 26 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS A summary of the fair values of CAPREIT’s investment properties and changes, along with key market assumptions, is presented below: INVESTMENT PROPERTIES BY GEOGRAPHY As at December 31, 2014 Change Due to Change in 2015 2014 2015 ($ Millions) Greater Toronto Area Other Ontario Québec British Columbia Alberta Nova Scotia Saskatchewan Prince Edward Island Dublin, Ireland 2 MHC Land Lease Sites Total Fair Value $ 2,615 512 937 610 476 232 48 47 – 273 $ 5,750 Rates 1 130 25 22 17 (21) 5 (1) (1) – (2) 174 $ $ $ Stabilized NOI 144 17 22 46 (20) – (2) 1 – 12 220 $ Forex Translation – $ – – – – – – – – – – $ Net Acquisitions (43) $ 47 453 232 30 – – – – – 719 $ Fair Value $ 2,846 601 1,434 905 465 237 45 47 – 283 $ 6,863 Rates 1 4.67% 5.12% 5.24% 4.28% 4.79% 5.75% 5.84% 6.04% – 6.18% 4.91% Rates 1 4.41% 4.81% 4.94% 4.20% 4.99% 5.62% 5.99% 6.17% – 6.23% 4.74% 1 Weighted average capitalization rates excluding implied capitalization rates on Operating and Land Leasehold Interests. See note 6 to the accompanying audited consolidated annual ﬁ nancial statements for further valuation assumption details including discount rates as at December 31, 2015 for Operating and Land Leasehold Interests. 2 During the ﬁ rst quarter of 2015, CAPREIT acquired and sold the Rockbrook Portfolio in Dublin, Ireland for IRES pursuant to the Pipeline Agreement. Alberta Market Alberta’s economy has been negatively impacted by the continued decline in the price of oil on international markets therefore resulting in higher unemployment and declines in GDP. This has adversely affected the fair values of CAPREIT’s properties in the Alberta region (as indicated in the above chart) resulting in an unrealized loss on fair value remeasurement on investment properties from appreciation of capitalization rates and decrease in stabilized NOI. The appreciation of capitalization rates is a reﬂ ection of higher risk in the Alberta real estate market while the decrease in stabilized NOI is due to higher projected vacancy and bad debt exposure. As at December 31, 2015, 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, 2015 Weighted Average Capitalization Rate Weighted Average Capitalization Rate Change (basis points) 1 +25 –25 Estimated (Decrease) Increase (338) 376 $ $ 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 2015 ANNUAL REP ORT 27 MANAGEMENT’S DISCUSSION AND ANALYSIS SECTION II Average Monthly Rents and Occupancy PORTFOLIO AVERAGE MONTHLY RENTS (“AMR”) AND OCCUPANCY BY DEMOGRAPHIC SECTOR As at December 31, 2015 2014 2015 2014 1 Total Portfolio Properties Owned Prior to December 31, 2014 Properties Acquired Since December 31, 2014 Affordable Mid-tier Luxury Average Residential Suites Average MHC Land Lease Sites Overall Portfolio Average AMR Occ. % 95.7 98.1 96.6 $ 815 $ 1,028 $ 1,152 AMR Occ. % 94.9 $ 869 98.6 $ 1,033 97.6 $ 1,170 AMR Occ. % 95.5 98.0 96.6 $ 890 $ 1,047 $ 1,192 AMR Occ. % 94.9 $ 869 98.6 $ 1,033 97.6 $ 1,170 AMR Occ. % 96.4 98.6 96.6 592 903 841 $ $ $ $ 1,059 97.4 $ 1,076 97.9 $ 1,094 97.3 $ 1,076 97.9 $ 835 97.6 $ 366 98.2 $ 356 97.5 $ 365 98.2 $ 356 97.5 $ 615 100.0 $ 963 97.5 $ 964 97.9 $ 980 97.4 $ 964 97.8 $ 835 97.6 1 Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2014. AMR is deﬁ ned as actual residential rents, net of vacancies, divided by the total number of suites and sites in the property, and does not include revenues from parking, laundry or other sources. Average monthly rents decreased slightly in all demographic sectors of the residential suite portfolio, resulting in a 1.6% decrease in overall average monthly rents as at December 31, 2015 compared to the prior year while occupancy remained strong at 97.4% compared to 97.9% for the prior year. The decreases in average monthly rents were due to acquisitions in lower rent demographic sectors offset by strong stabilized rental growth, a combination of ongoing successful sales and marketing strategies, above-guideline increases (“AGI”) 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, 2014 increased as at December 31, 2015 to $1,094 from $1,076 as at December 31, 2014, an increase of 1.7% from the prior year. As at December 31, 2015, occupancy remained stable at 97.3%. For the MHC land lease portfolio, average monthly rents increased to $366 as at December 31, 2015 compared to $356 as at December 31, 2014, while occupancy for MHC properties increased to 98.2% as at December 31, 2015. Management believes MHC land lease sites provide secure and stable cash ﬂ ows due to long-term tenancies, high occupancies, steady increases in average monthly rents, and signiﬁ cantly lower capital and maintenance costs. 28 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS The table below summarizes the changes in average monthly rents due to suite turnovers and lease renewals compared to the prior year. SUITE TURNOVERS AND LEASE RENEWALS For the Year Ended December 31, Suite Turnovers Lease Renewals Weighted Average of Turnovers and Renewals 2015 Change in AMR % $ 20.7 21.6 21.4 1.9 2.0 1.9 % Turnovers & Renewals 1 24.8 71.6 2014 Change in AMR % $ 3.0 32.6 1.6 17.4 2.0 21.4 % Turnovers & Renewals 1 28.1 79.7 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, 2015, resulted in average monthly rents increasing by approximately $21 or 1.9%, compared to an increase of approximately $33 or 3.0% for the prior year. Pursuant to Management’s focus on increasing overall portfolio rents for the year ended December 31, 2015, average monthly rents on lease renewals increased by approximately $22 or 2.0%, compared to an increase of approximately $17 or 1.6% for the prior year. The higher rate of growth in average monthly rents on lease renewals during the year is due primarily to the higher guideline increases for 2015 (Ontario – 1.6%, British Columbia – 2.5%), compared to the permitted guideline increases in 2014 (Ontario – 0.8%, British Columbia – 2.2%), and by increases due to AGI achieved in Ontario. Increased portfolio diversiﬁ cation helped mitigate geographical risk in particular areas of Canada. Management continues to pursue applications in Ontario for AGIs where it believes increases to raise average monthly rents on lease renewals above the annual guideline are supported by market conditions (see discussion in the Future Outlook section). For 2016, the permitted guideline increases in Ontario and British Columbia have been set at 2.0% and 2.9%, respectively. CAPREIT 2015 ANNUAL REP ORT 29 MANAGEMENT’S DISCUSSION AND ANALYSIS PORTFOLIO AVERAGE MONTHLY RENTS AND OCCUPANCY BY GEOGRAPHY As at December 31, Residential Suites ONTARIO Greater Toronto Area Ottawa London / Kitchener / Waterloo Other Ontario 894 1,126 $ 1,171 QUÉBEC Greater Montréal Region $ 830 Québec City 947 $ 859 BRITISH COLUMBIA Greater Vancouver Region $ 1,095 1,017 Victoria $ 1,070 $ 1,157 1,118 $ 1,125 ALBERTA Edmonton Calgary NOVA SCOTIA Halifax SASKATCHEWAN Saskatoon Regina PRINCE EDWARD ISLAND Charlottetown 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 Total Portfolio Properties Owned Prior to December 31, 2014 2015 AMR Occ. % 2014 AMR Occ. % 2015 AMR Occ. % 2014 1 AMR Occ. % Properties Acquired Since December 31, 2014 AMR Occ. % $ 1,218 946 99.1 99.7 $ 1,181 98.8 937 100.0 $ 1,218 946 99.1 99.7 $ 1,184 98.8 937 100.0 $ – – – – 97.3 99.1 99.0 96.6 95.5 96.4 99.6 99.9 99.7 91.5 89.9 90.2 883 1,095 $ 1,140 $ 895 938 $ 911 $ 1,100 972 $ 1,052 $ 1,201 1,211 $ 1,209 97.9 99.1 98.8 97.0 96.8 96.9 99.6 99.3 99.5 98.1 96.5 96.7 894 1,125 $ 1,172 $ 905 947 $ 920 $ 1,139 1,009 $ 1,090 $ 1,180 1,118 $ 1,127 97.3 99.3 99.0 96.0 95.5 95.8 99.7 99.8 99.8 93.9 89.9 90.5 883 1,095 $ 1,141 $ 895 938 $ 911 $ 1,100 972 $ 1,052 $ 1,201 1,211 $ 1,209 97.9 99.1 98.8 97.0 96.8 96.9 99.6 99.3 99.5 98.1 96.5 96.7 – 1,129 $ 1,129 $ 737 – $ 737 – 97.9 97.9 97.4 – 97.4 99.3 $ 1,016 1,061 100.0 99.4 $ 1,023 $ 1,101 – $ 1,101 85.7 – 85.7 $ $ $ – – – – – – – – $ 1,004 92.1 $ 995 90.8 $ 1,004 92.1 $ 995 90.8 $ 894 1,022 $ 975 88.7 95.7 93.2 $ 965 1,021 $ 1,000 97.7 95.3 96.2 $ 894 1,022 $ 975 88.7 95.7 93.2 $ 965 1,021 $ 1,000 97.7 95.3 96.2 $ 951 $ 1,059 84.8 97.4 $ 930 $ 1,076 94.9 97.9 $ 951 $ 1,094 84.8 97.3 $ 930 $ 1,076 94.9 97.9 $ – $ 835 – 97.6 99.6 $ 500 411 96.9 404 100.0 97.2 353 95.8 140 96.8 250 99.6 $ 489 99.2 409 381 98.6 335 100.0 95.6 138 94.8 244 99.6 $ 500 96.9 411 404 100.0 97.2 353 95.8 140 96.8 250 99.6 $ 489 99.2 409 381 98.6 335 100.0 95.6 138 94.8 244 $ 615 100.0 – – – – – – – – – – $ 366 $ 963 98.2 97.5 $ 356 $ 964 97.5 97.9 $ 365 $ 980 98.2 97.4 $ 356 $ 964 97.5 97.8 $ 615 100.0 97.6 $ 835 1 Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2014. 30 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Overall average monthly rents for the residential suite portfolio as at December 31, 2015 decreased by approximately 1.6%, as compared to December 31, 2014, due to acquisitions in lower rent demographic sectors late in the third quarter, while occupancies remained stable at 97.4%. Management believes annual occupancies can be maintained in the 97% to 98% range and the trend for gradual increases in same-property 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 speciﬁ c geographic region or demographic sector. This characteristic is demonstrated by CAPREIT’s ability to increase same-property 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, 2015 and 2014 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. 2015 1,691 1,652 12,585 14,237 1,504 $ $ $ $ % 1 0.3 2.4 2.7 0.3 2014 1,732 1,317 10,711 12,028 1,624 $ $ $ $ % 1 0.3 2.1 2.4 0.3 CAPREIT 2015 ANNUAL REP ORT 31 MANAGEMENT’S DISCUSSION AND ANALYSIS Results of Operations RESULTS OF OPERATIONS ($ Thousands) For the Year Ended December 31, 2015 % 1 2014 % 1 Operating Revenues Net Rental Revenues $ 505,188 Other 2 28,610 Total Operating Revenues 94.6 $ 479,664 26,747 5.4 94.7 5.3 $ 533,798 100.0 $ 506,411 100.0 (59,337) 11.1 (54,241) 10.2 17.9 (95,606) (56,591) 11.2 (52,210) 10.3 (93,725) 18.5 Operating Expenses Realty Taxes Utilities Other 3 Total Operating Expenses NOI $ 324,614 60.8 $ 303,885 (209,184) 39.2 (202,526) 40.0 60.0 1 As a percentage of total operating revenues. 2 Comprises ancillary income such as parking, laundry and antenna income. 3 Comprises R&M, wages, general and administrative, insurance, advertising, and legal costs. Operating Revenues For the year ended December 31, 2015, total operating revenues increased by 5.4% compared to the prior year, due to the contributions from acquisitions, increased average monthly rents on stabilized properties, and continuing high stable occupancies. As CAPREIT continues to enhance the proﬁ le of its resident base and increase the level of service to residents, it expects to realize further increases in operating and ancillary revenues. Ancillary revenues, such as parking, laundry and antenna income, increased slightly by 7% for the year ended December 31, 2015. TOTAL OPERATING REVENUES BY GEOGRAPHY ($ Thousands) For the Year Ended December 31, 2015 2014 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 $ 235,037 $ 231,831 9,088 17,783 20,549 $ 285,782 $ 279,251 9,193 17,939 23,613 $ 65,961 $ 56,673 34,724 $ 101,007 $ 91,397 35,046 $ 33,384 $ 27,979 15,275 $ 49,656 $ 43,254 16,272 $ 6,890 $ 5,013 32,135 $ 39,345 $ 37,148 32,455 $ 20,193 $ 20,397 $ $ $ 1,500 $ 2,938 4,438 $ 1,510 1,764 3,274 5,136 $ 3,654 1,072 $ 1,615 $ $ 506,629 $ 479,990 $ 16,182 $ 15,830 633 1,447 971 822 6,718 $ 27,169 $ 26,421 640 1,518 1,027 870 6,932 and MHC Land Lease Sites $ 533,798 $ 506,411 32 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS ESTIMATED NET RENTAL REVENUE RUN-RATE ($ Thousands) As at December 31, Residential Rent Roll 1, 2 Commercial Rent Roll 1, 2 Annualized Net Rental Revenue Run-Rate 2015 2014 $ 524,341 $ 465,958 20,545 20,386 $ 544,727 $ 486,503 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. Includes rent roll for all properties owned as at December 31. 2 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, 2015 and 2014, net of average historical vacancy loss, tenant inducements and bad debt. The estimated annualized Net Rental Revenue Run-Rate improved by 12.0% to $544.7 million from $486.5 million, primarily as a result of new acquisitions over the past 12 months. Net rental revenue net of dispositions for the 12 months ended December 31, 2015 was $503.7 million (2014 – $478.1 million). Operating Expenses Overall operating expenses as a percentage of operating revenues decreased in the year ended December 31, 2015, compared to the prior year, partially due to lower realty taxes, utilities, and repairs and maintenance (“R&M”). Realty Taxes For the year ended December 31, 2015, realty taxes as a percentage of operating revenues decreased to 11.1% compared to 11.2% the prior year. Utilities As a percentage of operating revenues, utility costs for the year ended December 31, 2015 decreased to 10.2% compared to 10.3% for the prior year. CAPREIT’s utility costs can be highly variable from year to year depending on energy consumption and rates. The table below provides CAPREIT’s utility costs by type. ($ Thousands) Year Ended December 31, 2015 Electricity Natural Gas Water Total $ $ 23,257 14,878 16,106 54,241 % 1 4.4 $ 2.8 3.0 2014 22,262 15,227 14,721 % 1 4.4 3.0 2.9 10.2 $ 52,210 10.3 1 As a percentage of total operating revenues. For the year ended December 31, 2015, electricity costs as a percentage of total operating revenues remained stable at 4.4% compared to 4.4% for the prior year. In dollar terms, electricity costs for the year ended December 31, 2015 increased compared to the prior year due to acquisitions partially offset by lower rates and consumption on stabilized properties and an increase in submetered units in Ontario and Alberta. As at December 31, 2015, tenants who pay their hydro charges directly represent 57.6% of the total 16,061 recently submetered suites in Ontario and Alberta. For the year ended December 31, 2015, natural gas costs as a percentage of total operating revenues decreased to 2.8% compared to 3.0% for the prior year, primarily due to lower consumption partially offset by higher rates in 2015. The table below provides information on CAPREIT’s ﬁ xed natural gas contracts for the ﬁ scal years 2016 and 2017: Actual 2015 2 2016 2017 Gas Commodity Fixed Weighted Average Cost per GJ 1 Total of CAPREIT’s Actual/ Estimated Requirements $ 3.75 $ 3.66 $ 3.00 70.0% 59.2% 33.7% Transport Fixed Weighted Average Cost per GJ 1 Total of CAPREIT’s Actual/ Estimated Requirements $ 1.84 $ 1.66 $ 1.12 52.0% 40.2% 23.5% 1 Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs. 2 Based on actual ﬁ xed hedged gas commodity and transport costs per GJ. Also shown above is the actual percentage of utilized hedge contracts against actual total requirements. Other Operating Expenses Other operating expenses, which include R&M costs, wages and beneﬁ ts, insurance and advertising, decreased as a percentage of operating revenues for the year ended December 31, 2015 to 17.9% from 18.5% for the prior year, primarily due to lower wages and R&M costs compared to the prior year. Net Operating Income Management believes NOI is a key indicator of operating performance 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. CAPREIT 2015 ANNUAL REP ORT 33 MANAGEMENT’S DISCUSSION AND ANALYSIS The following table shows the NOI and the NOI margin attained for each regional market for the years ended December 31, 2015 and 2014. For the Year Ended December 31, ($ Thousands) Residential Suites ONTARIO Greater Toronto Area Ottawa London / Kitchener / Waterloo Other Ontario QUÉBEC Greater Montréal Region Québec City BRITISH COLUMBIA Greater Vancouver Region Victoria ALBERTA Edmonton Calgary NOVA SCOTIA Halifax SASKATCHEWAN Saskatoon Regina PRINCE EDWARD ISLAND Charlottetown IRELAND Dublin Total Residential Suites MHC Land Lease Sites Ontario British Columbia Alberta Saskatchewan Prince Edward Island New Brunswick Total MHC Land Lease Sites Total Suites and Sites 2015 NOI NOI Margin (%) 2014 NOI NOI Margin (%) $ 144,294 4,776 10,750 13,814 $ 173,634 $ $ $ $ $ $ 37,359 19,227 56,586 22,472 11,043 33,515 4,772 20,605 25,377 61.4 52.0 59.9 58.5 60.8 56.6 54.9 56.0 67.3 67.9 67.5 69.3 63.5 64.5 $ 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 Increase (Decrease) Revenue NOI Change (%) Change (%) Change (%) Expense 1.4 1.2 0.9 14.9 2.3 16.4 0.9 10.5 19.3 6.5 14.8 37.4 1.0 5.9 (1.7) 2.6 3.2 17.7 0.2 14.5 2.7 10.0 11.1 0.9 7.5 33.7 (3.6) 0.7 3.4 (0.1) (0.6) 13.0 3.8 17.9 (0.5) 10.9 23.8 9.4 18.7 39.2 3.8 9.0 $ 12,513 62.0 $ 12,988 63.7 (1.0) 3.7 (3.7) $ $ $ 761 1,838 2,599 50.7 62.6 58.6 2,497 48.6 $ $ $ 725 1,106 1,831 48.0 62.7 55.9 (0.7) 66.6 35.6 (5.9) 67.2 27.4 5.0 66.2 41.9 1,671 45.7 40.6 33.1 49.4 $ 878 $ 307,599 81.9 60.7 $ 1,268 $ 287,641 $ 10,656 490 1,030 644 372 3,823 $ 17,015 $ 324,614 65.9 76.6 67.9 62.7 42.8 55.2 62.6 60.8 $ 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 (33.6) 5.5 (44.1) 3.5 (30.8) 6.9 2.2 1.1 4.9 5.8 5.8 3.2 2.8 5.4 (0.7) (24.2) (9.1) (10.9) (2.4) 5.8 (0.2) 3.3 3.8 12.6 13.2 19.0 19.2 1.2 4.7 6.8 For the year ended December 31, 2015, NOI increased by 6.8% and the NOI margin increased to 60.8% from 60.0% for the prior year due to higher rental revenues and lower operating expenses. The signiﬁ cant increase in NOI in speciﬁ c regions of the portfolio was primarily the result of acquisitions completed in the prior twelve months and higher operating revenues. CAPREIT remains focused on continuing to improve the NOI 34 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS 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 the prior year by geography, refer to the Stabilized Portfolio Performance section. Stabilized Portfolio Performance For the Year Ended December 31, ($ Thousands) Residential Suites ONTARIO Greater Toronto Area Ottawa London / Kitchener / Waterloo Other Ontario QUÉBEC Greater Montréal Region Québec City BRITISH COLUMBIA Greater Vancouver Region Victoria ALBERTA Edmonton Calgary NOVA SCOTIA Halifax SASKATCHEWAN Saskatoon Regina PRINCE EDWARD ISLAND Charlottetown 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 Stabilized Suites and Sites 2015 NOI NOI Margin (%) 2014 NOI NOI Margin (%) $ 143,272 4,776 10,750 11,905 $ 170,703 $ $ $ $ $ $ 32,044 19,227 51,271 19,442 10,872 30,314 3,622 20,052 23,674 61.3 52.0 59.9 60.1 60.8 56.2 54.9 55.7 67.0 67.8 67.3 68.9 63.5 64.3 $ 137,167 4,783 10,819 11,651 $ 164,420 $ $ $ $ $ $ 31,690 19,316 51,006 18,153 10,093 28,246 3,429 19,808 23,237 60.1 52.6 60.8 60.0 59.9 55.9 55.6 55.8 64.9 66.1 65.3 68.4 61.7 62.6 Increase (Decrease) Revenue NOI Change (%) Change (%) Change (%) Expense 2.4 1.2 0.9 2.1 2.2 0.6 0.9 0.7 3.7 5.0 4.1 4.9 (1.6) (0.7) (0.7) 2.6 3.2 1.9 (0.1) (0.1) 2.7 0.9 (2.7) (0.3) (1.9) 3.3 (6.1) (5.0) 4.5 (0.1) (0.6) 2.2 3.8 1.1 (0.5) 0.5 7.1 7.7 7.3 5.6 1.2 1.9 $ 12,513 62.0 $ 12,988 63.7 (1.0) 3.7 (3.7) $ $ 761 863 1,624 1,674 $ $ 291,773 $ 10,656 490 1,030 644 372 3,823 $ 17,015 $ 308,788 39,799 50.7 63.5 56.8 57.0 60.7 65.9 76.6 67.9 62.7 42.8 55.2 62.6 60.8 $ $ 725 847 1,572 1,310 $ $ 282,779 $ 10,267 435 910 541 312 3,779 $ 16,244 $ 299,023 39,799 48.0 62.6 54.9 48.0 59.9 64.9 68.7 62.9 55.7 38.0 56.3 61.5 60.0 (0.7) 0.4 (0.2) 7.7 1.8 2.2 1.1 4.9 5.8 5.8 3.2 2.8 1.8 (5.9) (2.2) (4.4) (10.9) (0.3) (0.7) (24.2) (9.1) (10.9) (2.4) 5.8 (0.2) (0.3) 5.0 1.9 3.3 27.8 3.2 3.8 12.6 13.2 19.0 19.2 1.2 4.7 3.3 CAPREIT 2015 ANNUAL REP ORT 35 MANAGEMENT’S DISCUSSION AND ANALYSIS Stabilized properties for the year ended December 31, 2015 are deﬁ ned as all properties owned by CAPREIT continuously since December 31, 2013, and therefore do not take into account the impact on performance of acquisitions or dispositions completed during 2015 and 2014. As at December 31, 2015, stabilized suites and sites represent 87.2% of CAPREIT’s overall portfolio (excluding co-ownerships). For the year ended December 31, 2015, operating revenues increased by 1.8% and operating costs decreased by 0.3% compared to the prior year. As a result, stabilized NOI increased by 3.3% for the year ended December 31, 2015. For the fourth quarter of 2015, operating revenues increased by 1.3% and operating costs decreased by 0.3% compared to the same period in the prior year, driving a 2.3% increase in stabilized NOI for the three months ended December 31, 2015. For the year ended December 31, 2015, the NOI margin for properties acquired since December 31, 2013 was 58.9%. Ontario: NOI for the stabilized Ontario portfolio increased by 3.8% during the year ended December 31, 2015 compared to the prior year, primarily due to higher operating revenues and lower R&M costs partially offset by higher wages. The NOI margin improved to 60.8% for the year ended December 31, 2015 compared to 59.9% for the prior 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 2016 is 2.0%. Québec: NOI for the stabilized Québec portfolio increased by 0.5% during the year ended December 31, 2015 compared to the prior year, primarily due to higher operating revenues and lower R&M costs partially offset by higher realty taxes, utilities and wage costs. For the year ended December 31, 2015, the NOI margin remained stable at 55.7% compared to 55.8% for the prior year. CAPREIT believes the Québec rental market will remain stable and generate steady to improving returns in the medium term. British Columbia: NOI for the stabilized British Columbia portfolio increased by 7.3% during the year ended December 31, 2015 compared to the prior year, primarily due to higher operating revenues and lower insurance and wage costs partially offset by higher R&M costs and realty taxes. For the year ended December 31, 2015, the NOI margin increased to 67.3% from 65.3% for the prior year. Management believes the British Columbia portfolio will continue to generate steady returns in the medium term. The rent guideline increase for 2016 is 2.9%. Alberta: NOI for the stabilized Alberta portfolio increased by 1.9% during the year ended December 31, 2015 compared to the prior year, primarily due to higher rental revenues and lower utility, R&M, and wage costs partially offset by higher vacancies and realty taxes. For the year ended December 31, 2015, the NOI margin increased to 64.3% compared to 62.6% for the prior year. Despite recent declines in the price of oil on international markets, management believes its well-located properties and CAPREIT’s proven property management programs should help mitigate any downturn in the local market. In addition, with Alberta representing only 7.8% of CAPREIT’s total NOI, 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 decreased by 3.7% for the year ended December 31, 2015 compared to the prior year, primarily due to higher vacancies, utilities and wage costs offset by higher rental revenue. For the year ended December 31, 2015, the NOI margin decreased to 62.0% from 63.7% for the prior year. Management believes its presence primarily in downtown Halifax locations will serve to maintain or increase occupancy levels and average monthly rents in the medium term. MHC Land Lease Sites: NOI for the stabilized MHC land lease sites portfolio increased by 4.7% for the year ended December 31, 2015 compared to the prior year, primarily due to higher rental revenue and lower vacancies, and wage costs offset by higher realty taxes. For the year ended December 31, 2015, the NOI margin increased to 62.6% from 61.5% for the prior year. Management believes its MHC land lease portfolio will provide accretive growth in the long term. 36 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Net Income and Other Comprehensive Income (Loss) ($ Thousands) Year Ended December 31, Net Operating Income (Less) Plus: Trust Expenses Unrealized Gain on Remeasurement of Investment Properties Realized Loss on Disposition of Investment Properties Remeasurement of Exchangeable Units Unit-based Compensation Expenses Interest on Mortgages Payable and Other Financing Costs Interest on Bank Indebtedness Interest on Exchangeable Units Other Income Amortization Severance and Other Employee Costs Unrealized and Realized Gain (Loss) on Derivative Financial Instruments Dilution Loss on Equity Accounted Investments (Loss) Gain on Foreign Currency Translation Net Income Other Comprehensive Income (Loss) Items That May Be Reclassiﬁ ed Subsequently to Net Income Amortization of Losses from AOCL to Interest and Other Financing Costs Change in Fair Value of Derivative Financial Instruments Change in Fair Value of Investments Foreign Currency Translation Reversal of Cumulative Foreign Currency Translation Relating to IRES Ownership Dilution Other Comprehensive Income (Loss) Comprehensive Income 2015 324,614 $ 2014 303,885 $ (22,707) 173,242 (639) (276) (13,417) (103,795) (3,988) (194) 12,340 (2,799) (5,237) 282 (4,346) (7,447) 345,633 3,311 (2,641) 652 8,305 3,127 12,754 358,387 $ $ $ (20,944) 150,897 – (626) (16,478) (99,931) (5,326) (188) 6,942 (2,400) – (2,810) – 4,954 317,975 3,333 (3,649) (478) (5,296) – (6,090) 311,885 $ $ $ Trust Expenses Trust expenses include costs directly attributable to third-party property and asset management services and head ofﬁ ce, such as salaries, trustee fees, professional fees for legal and advisory services, trustees’ and ofﬁ cers’ insurance premiums, and other general and administrative expenses net of amounts allocated to property operating expenses for properties owned by CAPREIT. Trust expenses increased for the year ended December 31, 2015 to $22.7 million from $20.9 million for the prior year mainly due to higher compensation relating to a special one-time bonus to senior management of $0.8 million, information technology, consulting, travel costs and a reversal of a legal provision of approximately $0.5 million in 2014 offset by non-recurring corporate taxes of $1.4 million in 2014 relating to the former wholly-owned subsidiary, CAPREIT Ireland Ltd. Unrealized Gain on Remeasurement of Investment Properties CAPREIT recognizes its investment properties at fair value at each reporting period, with any unrealized gain or loss on remeasurement recognized in the consolidated statements of income and comprehensive income for the year. A description of the key components of the change in the fair value of investment properties is included in the Investment Properties section. CAPREIT 2015 ANNUAL REP ORT 37 MANAGEMENT’S DISCUSSION AND ANALYSIS Remeasurement of Exchangeable Units CAPREIT accounts for its Exchangeable Units as a ﬁ nancial liability, remeasures such liability at each reporting period, and includes this remeasurement in the consolidated statements of income and comprehensive income. The increase in the market price of the underlying CAPREIT Trust Units since the last reporting date resulted in a loss on remeasurement of $0.3 million for the year ended December 31, 2015 compared to $0.6 million the prior year. A description of the key components of the remeasurement of Exchangeable Units is included in note 11 to the accompanying audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015. Unit-based Compensation Expenses Unit-based compensation beneﬁ ts are provided to ofﬁ cers, trustees and certain employees and are intended to facilitate long-term ownership of Trust Units and to provide additional incentives by increasing the participants’ interest, as owners, in CAPREIT. Unit-based compensation expenses include costs attributable to these incentive plans, namely the Restricted Unit Rights Plan (“RUR Plan”), Unit Option Plan (“UOP”), Deferred Unit Plan (“DUP”), Long-Term Incentive Plan (“LTIP”) and Senior Executive Long-Term Incentive Plan (“SELTIP”) (see notes 11 and 12 to the accompanying audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015. 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 ﬁ nancial liabilities. As such, these Unit-based compensation awards must be presented as liabilities and remeasured at fair value at each reporting date. Close-ended mutual fund trusts, such as certain of CAPREIT’s industry peers, are not required to remeasure their respective Unit- based compensation awards. In such cases, the related expense is limited to the amortization of the fair value of the award over the applicable vesting period. In order to aid comparability with CAPREIT’s peers, the Unit-based compensation expense has been separated into two components: (i) the amortization of the grant date fair value of the award over its vesting period, and (ii) the remeasurement of awards outstanding at year end at fair value. As at December 31, 2015, the maximum number of Units issuable under all of CAPREIT’s Unit-based incentive plans is 9,500,000 Units (December 31, 2014 – 9,500,000). The maximum number of Units available for future issuance under all Unit incentive plans as at December 31, 2015 is 2,020,762 Units (December 31, 2014 – 2,380,445 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 to the accompanying audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015. CAPREIT’s Unit-based compensation expense for the year ended December 31, 2015 resulted in a loss of $13.4 million compared to $16.5 million for the prior year due to the increase in the market price of the underlying CAPREIT Trust Units compared to the same period the prior year and higher DUP and RUR awards and UOP grant date amortization expense compared to 2014. The table below demonstrates the impact of each component of CAPREIT’s beneﬁ t plans on the total compensation expense. ($ Thousands) Year Ended December 31, Remeasurement of Unit-based Compensation Liabilities Amortization of Fair Value on Grant Date of Unit-based Compensation Total 2015 2014 $ 7,511 $ 12,131 5,906 4,347 $ 13,417 $ 16,478 Interest on Mortgages Payable and Other Financing Costs Interest on mortgages, which includes the amortization of certain ﬁ nancing costs, increased for the year ended December 31, 2015 to $103.8 million from $99.9 million for the prior year due to mortgage top-ups and acquisition ﬁ nancings in 2015. As a percentage of operating revenues, mortgage interest expense decreased to 19.4% for the year ended December 31, 2015 compared to 19.7% for the prior year due to reﬁ nancing of mortgages at lower interest rates and higher operating revenues from stabilized properties and acquisitions. Additional information on the interest on mortgages payable and other ﬁ nancing costs is included in note 21 to the accompanying audited consolidated annual ﬁ nancial statements and the Liquidity and Financial Condition section of this report. 38 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Interest on Bank Indebtedness Interest on bank indebtedness relates to borrowings under the Credit Facilities (see Liquidity and Capital Resources section). Other Income Other income primarily consists of dividends received from investments (see note 7 to the accompanying audited consolidated annual ﬁ nancial statements), income from associate, gains realized on sale of investments, and asset management and property management fees. ($ Thousands) For the Year Ended December 31, 2015 2014 Recurring Investment Income Net Proﬁ t from Equity Accounted Investment 1 Asset and Property Management Fees Non Recurring 2 Total $ 1,305 $ 1,305 6,894 2,000 3,316 1,177 825 $ 12,340 $ 2,460 6,942 1 2 Includes unrealized gain on remeasurement of IRES investment properties of $4,024 and $1,710 for the years ended December 31, 2015 and December 31, 2014, respectively. Includes other interest income and underwriters’ fee relating to the sale of Rockbrook SPV in 2015. Also includes gain on sale of investments, termination fee income relating to U.S. property and asset management agreements, and a reversal of a legal provision in 2014. Effective April 11, 2014, CAPREIT entered into an external management agreement to perform certain asset management duties and property services for IRES REIT (formerly CAPREIT’s Irish subsidiary) which owns properties in Dublin, Ireland. Asset management and property management fees included in other income for the year ended December 31, 2015 are $3.3 million compared to $1.2 million in the prior year. Expenses related to the asset management and property management services are included in trust expenses for the year ended December 31, 2015. Included in non-recurring other income is $0.8 million (net of taxes) for the year ended December 31, 2015 from one-time underwriters’ fee income relating to the sale of the Rockbrook Portfolio to IRES pursuant to the Pipeline Agreement. Effective December 5, 2012, CAPREIT entered into third-party external management agreements to perform certain asset management duties and property services with a third-party real estate investment trust in the United States, which 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 from asset management and property management fees and one-time termination fee income. Expenses related to the asset 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 ﬁ ve years. Severance and Other Employee Costs For the year ended December 31, 2015, $5.2 million of severance and other employee costs were incurred including compensation costs related to the accelerated vesting of previously-granted RUR Units. Unrealized and Realized Loss on Derivative Financial Instruments i) Interest rate contracts for which hedge accounting is being applied: As at December 31, 2015, CAPREIT has two interest rate swap agreements, which include: a. A $65.0 million interest rate swap agreement ﬁ xing the interest rate at 3.60%, which matures in September 2022. The agreement effectively converts borrowings on a bankers’ acceptance-based ﬂ oating rate credit facility to a ﬁ xed rate facility for a ten-year term. The related ﬂ oating rate credit facility is for a ﬁ ve-year term; on expiry of the term it is expected to be reﬁ nanced for an additional ﬁ ve-year term. At each reporting date, the hedging derivative will be marked-to-market with the ineffective portion recognized in net income ($nil for the year ended December 31, 2015). b. The €45.0 million credit facility agreement and interest rate swap agreement ﬁ xing the interest rate at 3.22%, which matures in September 2018, was partially paid down by €5.0 million on April 21, 2014, and the entire hedge was therefore deemed ineffective and the marked-to-market loss of approximately $2.0 million on the date of repayment was recognized in net income in 2014. CAPREIT 2015 ANNUAL REP ORT 39 MANAGEMENT’S DISCUSSION AND ANALYSIS ii) Interest rate contracts for which hedge accounting is not being applied: The new €40 million interest rate swap agreement effective April 21, 2014, ﬁ xes the interest rate at 2.87% (assuming a constant margin of 1.65% per annum) and matures in August 2018. This agreement effectively converts borrowings on a EURIBOR-based ﬂ oating rate credit facility to a ﬁ xed rate facility for a ﬁ ve-year term. At each reporting date, the hedging derivative will be marked-to- market in net income ($0.2 million unrealized loss for the year ended December 31, 2015). iii) Foreign currency exchange contracts for which hedge accounting is not being applied: CAPREIT had quarterly foreign currency exchange contracts aggregating to €2.8 million which commenced December 2013 and matured quarterly until September 2015 ﬁ xing the exchange rate between the euro and the Canadian dollar for which hedge accounting was not being applied. The mark-to-market gain of $23 thousand has been recognized in net income for the year ended December 31, 2015. iv) Forward interest rate hedge agreement for which hedge accounting is not being applied: CAPREIT had a $100.0 million forward interest hedge agreement ﬁ xing the Government of Canada 10-year bond at 1.44% effective October 29, 2015. The agreement effectively converted mortgage ﬁ nancings of $100.0 million for a 10-year term. The realized gain of $0.4 million has been recorded in net income for the year ended December 31, 2015. Additional information on the above instruments is included in notes 15 and 16 to the accompanying audited consolidated annual ﬁ nancial statements. Dilution Loss on Equity Accounted Investments On March 25, 2015, IRES raised €215.0 million from the secondary equity offering. Due to the issuance of additional IRES ordinary shares, CAPREIT recorded a loss resulting from ownership dilution of $1.2 million. This loss represents the difference between CAPREIT’s share of the fair value of the secondary equity offering and the carrying value of CAPREIT’s deemed disposed equity interest. In addition, due to CAPREIT’s ownership dilution, $3.1 million of accumulated foreign currency loss was reclassiﬁ ed from other comprehensive loss to dilution loss on equity accounted investments in the consolidated statements of income and comprehensive income. A corresponding foreign exchange gain has been recognized in current and prior periods in the consolidated statements of income on the euro LIBOR borrowings related to the investment in IRES. The investment in IRES for €63.5 million is funded fully by euro LIBOR borrowings, thereby economically substantially eliminating its foreign exchange exposure. CAPREIT does not apply hedge accounting for its investment in IRES against the euro LIBOR borrowings related to it; therefore, the accounting results may differ from the naturally offsetting asset and liability exposures to foreign exchange. (Loss) Gain on Foreign Currency Translation For the year ended December 31, 2015, CAPREIT recognized a loss on foreign exchange of $7.4 million compared to a gain of $5 million for the same period the prior year. The gain or loss on foreign currency translation recognized in the consolidated statements of income primarily represents the foreign exchange translation on the €63.5 million euro LIBOR borrowings. The foreign exchange gain or loss on the investment in IRES relating to these borrowings is recorded in other comprehensive income. The Rockbrook Portfolio acquisition and its subsequent disposition in the first quarter of 2015 resulted in foreign exchange loss of approximately $13 thousand. The foreign exchange loss on the sale of the Rockbrook Portfolio was substantially offset by the foreign exchange gain on the repayment of the euro LIBOR borrowings that were used to fund the acquisition. 40 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS SECTION III Non-IFRS Financial Measures Per Unit Calculations As a result of CAPREIT being an open-ended mutual fund trust, Unitholders are entitled to redeem their Trust Units, subject to certain restrictions. The impact of this redemption feature causes CAPREIT’s Trust Units to be treated as ﬁ nancial liabilities under IFRS. Consequently, all per Unit calculations are considered non-IFRS measures. The following table explains the number of Units used in calculating non-IFRS ﬁ nancial measures on a per Unit basis: (Thousands) Year Ended December 31, Trust Units Exchangeable Units 1 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 2015 117,835 161 224 118,220 564 316 608 218 119,926 2014 109,122 161 173 109,456 689 315 474 93 111,027 2015 127,140 161 248 127,549 891 555 586 – 5 129,581 1 See note 11 to the accompanying audited consolidated annual ﬁ nancial statements for details of Exchangeable Units. 2 See notes 11 and 12 to the accompanying audited consolidated annual ﬁ nancial statements for the year ended December 31, 2015 for details of CAPREIT’s Unit-based compensation plans. 3 Calculated using the treasury method after taking into account the respective subscriptions receivable (see note 12 to the accompanying audited consolidated annual ﬁ nancial statements). 4 Calculated using the treasury method after taking into account the exercise prices. 5 There are 1,334,432 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 $ $ 2015 142,973 194 3,031 146,198 (44,372) (3,031) 98,795 32.4% $ $ 2014 127,496 188 3,360 131,044 (40,633) (3,360) 87,051 33.6% 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 ﬁ nancial statements for the year ended December 31, 2015 for a discussion of these plans). CAPREIT 2015 ANNUAL REP ORT 41 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 automatically be paid on each distribution date in the form of additional Units. The price at which Units will be purchased with cash distributions will be the weighted average trading price for CAPREIT’s Trust Units on the Toronto Stock Exchange (“TSX”) for the ﬁ ve trading days immediately preceding the relevant distribution date. The average participation rate in the DRIP and other plans under which distributions are reinvested decreased for the year ended December 31, 2015 to 32.4% from 33.6% for the prior year. The DRIP participation rate is subject to factors beyond Management’s control and varies between investors. distributions to Unitholders, the Board of Trustees relies on cash ﬂ ow information, including forecasts and budgets. Net Operating Income NOI is a key non-IFRS ﬁ nancial measure of the operating performance of CAPREIT and is deﬁ ned and reported in the Results of Operations section. Funds From Operations FFO is a measure of operating performance based on the funds generated by the business before reinvestment or provision for other capital needs. FFO as presented is based on the recommendations of the Real Property Association of Canada, with the exception of the 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. Distributions declared on Units outstanding under the Unit-based compensation plans in these tables are based on all awards granted under the RUR Plan, DUP, LTIP and SELTIP (see notes 12 and 13 to the accompanying audited consolidated annual ﬁ nancial statements for a discussion of these plans). When establishing the level of monthly cash Payout ratios compare total and net distributions declared to these non- IFRS ﬁ nancial measures. Management also considers these ratios to be important measures of the sustainability of the level of distributions. A reconciliation of net income to FFO is as follows: ($ Thousands, except per Unit amounts) Year Ended December 31, Net Income Adjustments: Unrealized Gain on Remeasurement of Investment Properties Realized Loss on Disposition of Investment Properties Remeasurement of Exchangeable Units Remeasurement of Unit-based Compensation Liabilities Interest on Exchangeable Units Corporate Income Taxes Loss (Gain) on Foreign Currency Translation FFO Adjustment for Income from Equity Accounted Investments 1 Unrealized and Realized (Gain) Loss on Derivative Financial Instruments Dilution Loss on Equity Accounted Investments 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. 42 CAPREIT 2015 ANNUAL REP ORT 2015 $ 345,633 $ (173,242) 639 276 7,511 194 59 7,447 (4,024) (282) 4,346 2,799 191,356 1.619 1.596 146,198 76.4% 98,795 92,561 51.6% $ $ $ $ $ $ $ $ $ $ $ $ 2014 317,975 (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% MANAGEMENT’S DISCUSSION AND ANALYSIS Normalized Funds From Operations Management considers NFFO to be the key measure of CAPREIT’s operating performance and the primary indicator with respect to the sustainability of CAPREIT’s distributions. NFFO is calculated by excluding from FFO the effects of certain non-recurring items, including amortization of losses on certain hedging instruments, and mortgage prepayment penalties, offset by the write-off of fair value adjustment on assumed mortgages that were reﬁ nanced early, and severance and other employee costs. Management relies on NFFO on a per Unit basis as it facilitates better comparability to historical performance and provides a better indicator of CAPREIT’s long-term cash ﬂ ow generation capability than other measures. See the discussions in the Net Income and Other Comprehensive Income and Risks and Uncertainties sections for additional information on hedging instruments currently in place. A reconciliation of FFO to NFFO is as follows: ($ Thousands, except per Unit amounts) Year Ended December 31, FFO Adjustments: Amortization of losses from AOCL to interest and other ﬁ nancing costs Net Mortgage Prepayment Cost 1 Realized Gain on Sale of Investments 2 Severance and Other Employee Costs NFFO NFFO per Unit – Basic NFFO per Unit – Diluted Total Distributions Declared NFFO Payout Ratio Net Distributions Paid Excess NFFO over Net Distributions Paid Effective NFFO Payout Ratio 2015 191,356 $ 2014 179,974 $ 3,311 123 – 5,237 200,027 1.692 1.668 146,198 73.1% 98,795 101,232 49.4% $ $ $ $ $ $ 3,333 763 (717) – 183,353 1.675 1.651 131,044 71.5% 87,051 96,302 47.5% $ $ $ $ $ $ 1 Net mortgage prepayment cost relates to early reﬁ nancing fees net of fully amortized fair value adjustment on assumed mortgages. 2 Included in Other Income in the Net Income and Other Comprehensive Income (Loss) section. NFFO for the year ended December 31, 2015 increased by 9.1% compared to the prior year, primarily due to contributions from acquisitions and higher net operating income for properties owned prior to December 31, 2014. details), offset by strong organic NOI growth. 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. For the year ended December 31, 2015, basic NFFO per Unit increased by 1.0% compared to the prior year despite reduced leverage and an approximate 8% increase in the weighted average number of Units outstanding resulting from the March 2015 and October 2015 equity offerings (see Liquidity and Capital Resources section for further Comparing distributions declared to NFFO, the NFFO payout ratio for the year ended December 31, 2015 increased to 73.1% compared to 71.5% for the prior year. The effective NFFO payout ratio, which compares NFFO to net distributions paid, increased for the year ended December 31, 2015 to 49.4% from 47.5% for the prior year. Management believes NFFO will be sufﬁ cient to fund CAPREIT’s distributions at their current level. CAPREIT 2015 ANNUAL REP ORT 43 MANAGEMENT’S DISCUSSION AND ANALYSIS Adjusted Funds From Operations AFFO is a supplemental measure of cash generated from operations that is used in the real estate industry to assess the sustainability of future distributions paid to Unitholders after provision for maintenance property capital investments. for CAPREIT, because maintenance property capital investments are not clearly identiﬁ able. However, given the current use by investors and other stakeholders of this non-IFRS ﬁ nancial measure, CAPREIT currently intends to continue presenting an estimate of AFFO. Management relies on an industry-based estimate to determine the amount of maintenance property capital investments, as signiﬁ cant judgement is required to classify property capital investments as 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 CAPREIT calculates AFFO by deducting from NFFO an industry-based estimate for maintenance property capital investments and adding back the non-cash Unit-based compensation costs. In order to determine the AFFO payout ratio, CAPREIT compares distributions declared to AFFO. The effective AFFO payout ratio compares net cash distributions paid to AFFO. A reconciliation of NFFO to AFFO is as follows: ($ Thousands, except per Unit amounts) Year Ended December 31, NFFO Adjustments: Provision for Maintenance Property Capital Investments 1 Amortization of Fair Value on Grant Date of Unit-based Compensation AFFO AFFO per Unit – Basic AFFO per Unit – Diluted Total Distributions Declared AFFO Payout Ratio Net Distributions Paid Excess AFFO over Net Distributions Paid Effective AFFO Payout Ratio 2015 $ 200,027 (16,343) 5,906 189,590 1.604 1.581 146,198 77.1% 98,795 90,795 52.1% $ $ $ $ $ $ $ $ $ $ $ $ $ 2014 183,353 (15,466) 4,347 172,234 1.574 1.551 131,044 76.1% 87,051 85,183 50.5% 1 Based on an industry estimate of $450 per suite per year and the weighted average number of residential suites during the year (see Productive Capacity section). 44 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Cash Generated From Operating Activities to AFFO Reconciliation In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), Non-GAAP Financial Measures, the table below reconciles cash generated from operating activities to AFFO. A reconciliation of cash generated from operating activites to AFFO is as follows: ($ 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 Severance and Other Employee Costs Net Mortgage Prepayment Costs FFO Adjustment for Income from Equity Accounted Investments 1 Provision for Maintenance Property Capital Investments AFFO 2015 $ 292,824 $ (97,667) 12,921 (3,612) (122) 194 59 5,237 123 (4,024) (16,343) 189,590 $ $ 2014 283,982 (94,338) 19 (2,751) 142 188 1,405 – 763 (1,710) (15,466) 172,234 1 Included in Other Income in the consolidated statements of income and comprehensive income. SECTION IV Property Capital Investments CAPREIT capitalizes all capital investments related to the improvement of its properties. These investments have the objective of growing NOI in the future. An important component of CAPREIT’s property capital investment strategy is to acquire properties at values signiﬁ cantly below current replacement costs and improve their operating performance by investing annually in order to sustain and grow the portfolio’s future rental income- generating potential over its useful life. To achieve its property capital investment objectives, taking into account CAPREIT’s acquisition history, the soft economic conditions and the availability of competitive pricing from construction trades at the 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 ﬂ ow generating potential. Management also believes these building improvement programs, combined with existing suite improvement, common area and environment-friendly and energy-saving initiatives, will enable CAPREIT to reposition its portfolio and maintain high occupancy levels throughout any unfavourable economic conditions. These investments are expected to continue to increase average monthly rents while improving life safety and resident services. Management believes strategic investments will position the portfolio for improved operating performance over the long term. For the year ended December 31, 2015, CAPREIT made property capital investments (excluding disposed properties, head ofﬁ ce assets, tenant improvements and signage) of $161.7 million, compared to $143.6 million for the prior year. Property capital investments were higher compared to the prior year primarily due to investments in acquisitions completed in 2015 and higher building, suite and common area improvement costs which generally tend to increase NOI more quickly. CAPREIT 2015 ANNUAL REP ORT 45 MANAGEMENT’S DISCUSSION AND ANALYSIS In addition, CAPREIT continues to invest in environment-friendly and energy-saving initiatives, including high-efficiency boilers, energy- efficient lighting systems and water saving programs, which have permitted CAPREIT to mitigate potential increases in utility and R&M costs and have improved overall portfolio NOI signiﬁ cantly, as discussed in the Results of Operations section. A breakdown of property capital investments (excluding disposed properties, head ofﬁ ce assets, tenant improvements and signage) is summarized by category below: PROPERTY CAPITAL INVESTMENTS BY CATEGORY ($ Thousands) Year Ended December 31, 2015 Building Improvements $ 59,436 44,018 Suite Improvements 25,336 Common Area Energy-saving Initiatives 2,196 10,926 Equipment 16,394 Boilers and Elevators Appliances 3,364 Total % 36.7 27.2 15.7 1.4 6.8 10.1 2.1 $ 161,670 100.0 2014 $ 59,000 33,503 20,885 1,230 11,519 15,031 2,441 % 41.1 23.3 14.5 0.9 8.0 10.5 1.7 $ 143,609 100.0 The signiﬁ cant 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 $170 million to $180 million during 2016, including approximately $87 million targeted at acquisitions completed since January 1, 2011 and approximately $20 million for high-efﬁ ciency boilers and other energy-saving initiatives. Set out in the next table is Management’s current estimate, established through consultation with an independent engineering firm, of CAPREIT’s investments in building improvements for 2016 through 2019 for properties owned as of December 31, 2015. Building improvements represent the most significant category of property capital investment at present, but are expected to decline signiﬁ cantly in the coming years. 46 CAPREIT 2015 ANNUAL REP ORT FUTURE INVESTMENTS IN BUILDING IMPROVEMENTS Properties Held As At December 31, 2015 Excluding Acquisitions Since 2012 Estimated Range $ 23,000 – $ 27,000 $ 19,000 – $ 23,000 $ 14,000 – $ 18,000 $ 6,000 – $ 10,000 ($ Thousands) 2016 2017 2018 2019 Acquisitions Since 2012 Estimate $ 29,000 $ 8,000 $ 11,000 $ 7,000 Management believes CAPREIT has sufﬁ cient liquidity and access to top-up ﬁ nancing opportunities (see the Liquidity and Financial Condition section) to execute the above property capital investment strategy. CAPREIT continues its multi-phase implementation of an Enterprise Resource Planning (“ERP”) system, and Management believes this uniﬁ ed platform will continue to drive operational efﬁ ciencies in the business. To date, $8.5 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 ﬂ ows from the properties and investments incurred in order to achieve CAPREIT’s longer-term goals of enhanced cash ﬂ ows 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 approximately $450 per residential suite. These maintenance property capital investments are in addition to regular R&M costs, which have historically averaged in the range of $800 to $850 per residential suite annually and are expensed to NOI. Stabilizing and value-enhancing property capital investments are focused on increasing the productivity of the property portfolio. These investments enhance operating effectiveness and proﬁ tability and increase revenues or reduce costs to improve NOI over the long term. In addition, they improve the economic life and value of the properties and are mainly long term in nature. Owing to the gross lease structure of its portfolio, CAPREIT does not divide its property capital investments between the two categories described above. Instead, CAPREIT uses industry guidelines for MANAGEMENT’S DISCUSSION AND ANALYSIS maintenance property capital investments to estimate its stabilizing and value-enhancing property capital investments as follows: ($ Thousands) Year Ended December 31, Total Property Capital Investments 1 Less: Estimated Maintenance 2015 2014 $ 161,670 $ 143,609 Property Capital Investments 2 (16,343) (15,466) Stabilizing and Value-enhancing Property Capital Investments $ 145,327 $ 128,143 1 Excludes capital investments for disposed properties, head ofﬁ ce assets, tenant improvements, and signage. 2 Based on an industry estimate of $450 per suite per year and the weighted average number of residential suites during the year. Management believes its increased emphasis on targeted property capital investment programs for its property portfolio is yielding positive results, as signiﬁ cant beneﬁ ts are being, and are expected to continue to be, realized through maintaining high occupancy, increasing average monthly rents and reducing operating costs. These positive results are demonstrated below. The following table presents the average NOI growth from 2011 through 2015, reﬂ ecting a segregation of the portfolio based on the amount of capital investment per suite. For example, for each year, properties with the highest capital investment per suite were included in the ﬁ rst quartile, and properties with the lowest capital investment per suite were included in the fourth quartile. NOI growth was measured for those properties by quartile for the year following the year in which the capital investments were made, with the assumption that capital investments are undertaken throughout the year and the impact on NOI could reasonably be measured in the following year. A simple average was calculated covering each of the last ﬁ ve years. To compute the results on a stabilized basis, only those properties owned prior to 2011 and held as at December 31, 2015 were included in the analysis. AVERAGE NOI GROWTH BY LEVEL OF PROPERTY CAPITAL INVESTMENT PER SUITE Quartile 1st 2nd 3rd 4th Number of Properties 35 35 35 35 140 Average Number of Suites 6,159 6,929 6,449 6,647 26,184 % of Total Capital Investments 1 51.3% 28.4% 14.0% 6.3% 100.0% Average NOI Growth 6.4% 4.6% 5.4% 3.7% 5.0% 1 As a percentage of total property capital investments over the ﬁ ve-year period to December 31, 2015. The analysis indicates a positive relationship between capital invest- ments and higher NOI growth rates, which supports Management’s assertion that continued reinvestment of capital is a fundamental component of CAPREIT’s growth strategy. The analysis demonstrates the success of CAPREIT’s capital investment programs, which increase the earnings potential of the property portfolio. Capital Structure CAPREIT deﬁ nes capital as the aggregate of Unitholders’ equity, debt 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 sufﬁ cient funds are available to meet capital commitments. Management aims to maintain an optimal degree of leverage relative to the gross book value of CAPREIT’s assets depending on a number of factors at any given time, which include expected cash ﬂ ow requirements, impact on near-term and long-term ﬁ nancial performance, current and expected state of the credit markets 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 ﬁ nancial covenants shown in the table below. In addition, borrowings must not exceed the borrowing base, calculated as a predeﬁ ned percentage of the fair value of the investment properties determined on an annual basis. In addition, CAPREIT requires compliance with all investment and debt restrictions and ﬁ nancial 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 ﬁ nance its capital investments, which may include acquisitions. In the long term, equity issuances, mortgage ﬁ nancings and reﬁ nancings, including top- ups, are put in place to ﬁ nance the cumulative investment in the property portfolio and ensure the sources of ﬁ nancing better reﬂ ect the long-term useful lives of the underlying investments. CAPREIT 2015 ANNUAL REP ORT 47 MANAGEMENT’S DISCUSSION AND ANALYSIS CAPREIT is in compliance with all the investment and debt restrictions and ﬁ nancial 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 December 31, 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 December 31, Debt Service Coverage Ratio (times) 2, 5 Interest Coverage Ratio (times) 2, 6 2015 $ 3,097,773 168,211 46,163 4,330 3,659,953 $ 6,976,430 2014 $ 2,658,454 113,167 48,686 4,054 2,983,105 $ 5,807,466 45.71% 55.41% $ 3,710,446 46.49% 56.73% $ 3,035,845 2015 1.63 2.96 2014 1.61 2.82 Threshold Maximum 70.00% Minimum $1,200,000 Minimum 1.20 Minimum 1.50 1 CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is deﬁ ned as the gross book value of CAPREIT’s assets as per CAPREIT’s ﬁ nancial statements, determined on a fair value basis for investment properties, plus accumulated amortization on property, plant and equipment, CMHC fees, and deferred loan costs. In addition, the DOT provides for investment restrictions on type and maximum limits on single property investments. 2 Based on the trailing four quarters. 3 Based on the historical cost of investment properties, calculated as CAPREIT’s assets, as disclosed under IFRS, plus accumulated amortization on property, plant and equipment, CMHC fees, and deferred loan costs, and minus fair value adjustment on investment properties. 4 As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and compensation liabilities or assets, including Exchangeable Units are added back. 5 As per the Credit Facilities agreement and DOT, the debt service coverage ratio is deﬁ ned as earnings before interest, depreciation, amortization, income taxes and other adjustments including non-cash costs (“EBITDA”) less taxes paid divided by the sum of principal and interest payments. 6 As per the Credit Facilities agreement and DOT, the interest coverage ratio is deﬁ ned as EBITDA less taxes paid divided by interest payments. Liquidity and Financial Condition Liquidity and Capital Resources Management ensures there is adequate overall liquidity by maintaining sufﬁ cient available credit facilities to fund maintenance and property capital investment commitments and distributions to Unitholders and to provide for future growth in the business. CAPREIT ﬁ nances these commitments through: (i) cash ﬂ ow from operating activities; (ii) mortgage debt secured by its investment properties; (iii) secured short- term debt ﬁ nancing with two Canadian chartered banks; and (iv) equity. Management’s assessment of CAPREIT’s liquidity 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 sufﬁ cient cash ﬂ ow from operating activities to fund the current level of distributions. Management expects the combination of the current level of funds reinvested from its DRIP, the retained portion of its annual NFFO, mortgage top-ups and the available borrowing capacity of the Credit Facilities to be sufﬁ cient to fund its ongoing property capital investments. For the year ended December 31, 2015, CAPREIT’s NFFO payout ratio was 73.1% compared to 71.5% for the prior year, and the effective NFFO payout ratio was 49.4% compared to 47.5% for the prior year, both well within CAPREIT’s annual target. CAPREIT anticipates a long-term annual NFFO payout ratio in the 70% to 80% range. ii) Management believes CAPREIT is well-positioned to meet its mortgage renewals and refinancing goals for 2016 due to the continuing availability of CMHC-insured ﬁ nancing. Management does not anticipate any material difﬁ culties in completing the renewal of mortgages maturing during 2016 of approximately $145.4 million, which have an effective interest rate of approximately 4.10%, or 48 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS in reﬁ nancing approximately $93.7 million of principal repayments through 2016 with new mortgages. deal basis with an over-allotment option. The transaction closed on October 9, 2015. CAPREIT used the net proceeds of the offering to repay a portion of its borrowings under its Bridge Increase. iii) Investment properties with a fair value of $6.6 billion have been pledged as security as at December 31, 2015. In addition, CAPREIT has investment properties with a fair value of approximately $289.1 million as at December 31, 2015 that are not encumbered by mortgages and secure only the Acquisition and Operating Facility (as described below). CAPREIT intends to maintain unencumbered investment properties with an aggregate fair value in the range of $150 million to $180 million over the long term. iv) On September 30, 2015, CAPREIT amended its credit agreement for the $340.0 million revolving credit facility (“Acquisition and Operating Facility”) to provide for a six-month temporary bridge facility of up to $450.0 million (the “Bridge Increase”) to fund speciﬁ c acquisitions. The Bridge Increase was a term credit facility and any principal amount repaid may not be reborrowed, and its maturity date is six months from the initial drawdown of the advance, which was September 30, 2015. As at December 31, 2015, CAPREIT has fully repaid the $450.0 million Bridge Increase. In respect to the Acquisition and Operating Facility, the aggregate amount of euro LIBOR borrowings at any time shall not exceed €70.0 million 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 $340.0 million. v) Effective September 28, 2012, CAPREIT has a $65.0 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 ﬁ ve-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 reﬁ nanced for an additional ﬁ ve-year term. There is an interest rate swap agreement on this facility, ﬁ xing the bankers’ acceptance rate to 2.20%, maturing in September 2022. The swap agreement ﬁ xes the all-in rate of the loan at 3.60% for a ﬁ ve-year term. vi) As at December 31, 2015, the euro LIBOR borrowings of €63.5 million bear interest at the euro LIBOR rate plus a margin of 1.65% per annum. The margin is renegotiated annually. There is an interest rate swap agreement on the euro LIBOR borrowings of €40.0 million, ﬁ xing the euro LIBOR rate to 1.22%, maturing in August 2018. The swap agreement ﬁ xes the all-in rate of the loan at 2.87% (assuming a constant margin of 1.65%) for the remaining three years of the original ﬁ ve-year term. viii) On March 3, 2015, CAPREIT announced it had agreed to sell, subject to regulatory approval, 5,050,000 Units for $27.85 per Unit for aggregate gross proceeds of $140.6 million on a bought-deal basis with an over-allotment option. The transaction closed on March 25, 2015, and under the over-allotment option, 505,000 additional Units were also issued on March 25, 2015 for gross proceeds of $14.1 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 ﬁ nancing program, and consistent with CMHC’s risk management practices involving large borrowers, CAPREIT has entered into an agreement with CMHC (the “Large Borrower Agreement” or “LBA”). Other than improving the efﬁ ciency and consistency of such processes, the LBA has not materially affected the manner in which CAPREIT conducts its business or its approach to mortgage ﬁ nancing. The LBA provides for, among other things: i) Enhanced disclosure to CMHC; ii) Certain 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 ﬁ nancial covenants contained in the DOT, the LBA and the Credit Facilities. Under the terms of the LBA, total indebtedness of CAPREIT is limited to the greater of (i) 60% of Gross Book Value determined on a fair value basis, or (ii) 70% of Gross Book Value determined on a historical basis, and may only be increased above such limits with CMHC’s consent. Under the LBA, ﬁ nancial covenants are not signiﬁ cantly different than those required under the DOT or Credit Facilities other than as described above. vii) On September 21, 2015, CAPREIT announced it had agreed to sell, subject to regulatory approval, 8,720,000 Units for $28.70 per Unit for aggregate gross proceeds of $250.3 million on a bought- The working capital deﬁ ciency, as presented on CAPREIT’s consolidated balance sheets as at December 31, 2015, which includes non-cash Unit-based compensation liabilities, is managed through the available CAPREIT 2015 ANNUAL REP ORT 49 MANAGEMENT’S DISCUSSION AND ANALYSIS liquidity under the Credit Facilities as well as the ongoing reﬁ nancing of mortgages payable. The table below summarizes CAPREIT’s bank indebtedness position as at December 31, 2015 and December 31, 2014: As at December 31, 2015, the overall leverage represented by the ratio of total debt to gross book value improved to 45.71% compared to 46.49% for the prior year. As at December 31, 2015, CAPREIT’s total debt was 48.46% of total market capitalization compared to 49.35% for the prior year. ($ Thousands) As at December 31, 2015 Facility Less: Euro LIBOR Borrowings 1 Bank Indebtedness Letters of Credit Available Borrowing Capacity Weighted Average Floating Interest Rate ($ 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 1 Included in mortgages payable. Acquisition and Operating Facility $ 340,000 (95,434) (168,211) (6,040) $ 70,315 2.56% Acquisition and Operating Facility $ 340,000 (68,646) (113,167) (6,144) $ 152,043 3.09% 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 2015 43.36% 45.71% 55.41% 48.46% 1.63 2.96 2014 44.60% 46.49% 56.73% 49.35% The effective portfolio weighted average interest rate has declined from 3.66% as at December 31, 2014 to 3.39% as at December 31, 2015, which Management expects could result in continued interest rate savings in future years. Management believes that as CAPREIT’s reﬁ nancing plan continues to be realized, there may be scope to further reduce the effective portfolio weighted average interest rate based on foreseeable market conditions. Management is also focused on ensuring the portfolio weighted average term to maturity remains above the ﬁ ve-year range or longer and expects to gradually extend the term, while continuing to balance the maturity proﬁ le. Mortgages Payable CAPREIT takes a conservative approach and actively manages its mortgage portfolio to reduce interest costs while ensuring it is not overly exposed to interest rate volatility risk. Management takes a portfolio approach to its mortgage debt, proactively staggering maturities to reduce risk while taking advantage of the current low interest rate environment. CAPREIT focuses on multi-unit residential real estate, which is eligible for government-backed insurance for mortgages administered by CMHC, which beneﬁ ts CAPREIT in two ways: • CAPREIT obtains lower interest rate spreads for mortgage ﬁ nancing; and • CAPREIT’s overall renewal risk for mortgage reﬁ nancings 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 and 35 years. 1.61 2.82 As at December 31, Percentage of CMHC-Insured Mortgages 1 Percentage of Fixed-Rate Mortgages 2015 96.5% 98.9% 2014 95.7% 100.0% 1 Excludes the mortgages on the MHC land lease sites and the euro LIBOR borrowings. Weighted Average Mortgage Interest Rate 3 Weighted Average Mortgage Term to Maturity (years) 3.39% 3.66% 6.3 6.3 1 Based on the historical cost of investment properties. 2 Based on the trailing four quarters ended December 31, 2015. 3 Weighted average mortgage interest rate includes deferred ﬁ nancing costs and fair value adjustments on an effective interest rate basis. Including the amortization of the realized component of the loss on settlement of $32.5 million included in AOCL, the effective portfolio weighted average interest rate at December 31, 2015 would be 3.52% (December 31, 2014 – 3.81%). 50 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS The following table summarizes the changes in the mortgage portfolio during the years: ($ Thousands) As at December 31, Balance, Beginning of the Year Add: New Borrowings on Acquisitions Assumed Reﬁ nanced Foreign Currency Translation Less: Mortgage Repayments Mortgages Matured Mortgages Repaid on Dispositions of Investment Properties Change in Deferred Financing Costs, Fair Value Adjustments, Net Balance, End of the Year 2015 $ 2,658,454 2014 $ 2,457,182 524,197 3,030 284,779 4,780 (84,890) (143,328) (145,917) (3,332) $ 3,097,773 12,650 26,122 576,457 (1,121) (76,821) (324,915) (7,599) (3,501) $ 2,658,454 The following table presents reﬁ nancings for the year ended December 31, 2015 and the weighted average interest rates obtained. ($ Thousands) First Quarter Second Quarter Third Quarter Fourth Quarter Acquisitions 3 Total and Weighted Average Original Mortgage Amount $ 20,211 58,130 58,068 6,919 – $ 143,328 Original Stated Interest Rate 1 4.01% 3.75% 3.82% 3.55% 0.00% 3.81% New Mortgage Amount $ 77,932 88,502 85,657 32,688 382,203 $ 666,982 New Stated Interest Rate 1, 2 2.46% 2.69% 2.52% 2.51% 2.36% 2.44% Weighted Average Term on New Mortgages (Yrs) 10.1 10.3 8.8 10.0 8.2 8.8 Top-Up Amount $ 57,721 30,372 27,589 25,769 382,203 $ 523,654 1 Weighted average. 2 Excludes CMHC and Other Financing Costs and hedge impact. 3 Excludes the January 2015 Rockbrook Portfolio acquisition ﬁ nancing for €89.7 million, as this portfolio was disposed of in March 2015 and the loan was repaid concurrently. Also excludes the new ﬁ nancings of €23.5 million on IRES investment in March 2015, which forms part of the euro LIBOR borrowings. CAPREIT 2015 ANNUAL REP ORT 51 MANAGEMENT’S DISCUSSION AND ANALYSIS For purposes of estimating top-up ﬁ nancing potential, the following table provides annualized NOI for those properties with mortgages maturing over the next ﬁ ve years and beyond. A property’s full NOI is included in the ﬁ rst year in which a mortgage matures. The balance of mortgages remaining on the same property but maturing in other years is also shown. Management expects to raise between $275 million and $325 million in total mortgage renewals and reﬁ nancings for 2016 excluding ﬁ nancings on acquisitions. ($ Thousands) As at December 31, 2015 Year of Maturity 2016 2017 2018 2019 2020 2021 Onward Total $ Mortgage Maturities 1 145,442 171,163 192,850 240,250 222,309 1,433,312 $ 2,405,326 1 Mortgage balance due upon maturity. 2 NOI for the twelve months ended December 31, 2015. 3 Projected NOI included for acquisitions since December 31, 2014. Mortgages on the Same Properties $ Maturing in Other Years 1 79,634 56,618 15,241 (43,310) (3,278) (104,905) – $ Total Mortgages 225,076 $ 227,781 208,091 196,940 219,031 1,328,407 $ 2,405,326 NOI of Properties with Maturing Mortgage(s) 2, 3 $ $ 30,526 26,866 11,429 30,335 26,735 205,927 331,818 The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at December 31, 2015 is as follows: ($ Thousands) Year 2016 2017 3 2018 4 2019 2020 2021 2022 2023 2024 2025 2026 – 2030 $ Principal Repayments 93,709 91,683 92,550 89,066 83,852 72,736 63,180 45,150 30,602 20,552 14,337 $ Mortgage Maturities 145,442 171,163 192,850 240,250 222,309 255,335 318,225 249,786 230,133 299,390 80,443 Total Deferred Financing Costs, Fair Value Adjustments, Net 697,417 $ $ 2,405,326 Total % of Total Mortgage Balance 7.7 8.5 9.2 10.6 9.9 10.6 12.3 9.5 8.4 10.2 3.1 100.0 Interest Rate (%) 1, 2 4.10 4.17 3.02 3.52 2.58 4.12 3.11 3.23 3.84 2.76 3.93 3.39 2 $ Mortgage Balance 239,151 262,846 285,400 329,316 306,161 328,071 381,405 294,936 260,735 319,942 94,780 $ 3,102,743 (4,970) $ 3,097,773 1 Effective weighted average interest rates for maturing mortgages only. 2 Effective weighted average interest rate includes deferred ﬁ nancing costs and fair value adjustments but excludes CMHC premiums. Including the amortization of the realized component of the loss on settlement of $32.5 million included in AOCL, the effective portfolio weighted average interest rate as at December 31, 2015 would be 3.52% (December 31, 2014 – 3.81%). Included in mortgages payable is a $65.0 million non-amortizing credit facility on two of the MHC land lease sites. Included in mortgages payable is a €63.5 million non-amortizing euro LIBOR borrowing. 3 4 To ensure CAPREIT is not overly exposed to interest rate volatility risk, Management has been successful in staggering the maturity dates within its mortgage portfolio or entering into long-term ﬁ nancing arrangements. To reduce its interest cost and cost of capital, Management will continue to leverage its balance sheet strength and the stability of its property portfolio to fund acquisitions and its capital investment plan, and to reﬁ nance its mortgage principal repayments. 52 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Unitholders’ Equity and Units Awarded under Unit-based Compensation Plans Unitholders’ Equity only represents the issued and outstanding Trust Units, and excludes the Exchangeable Units and any Units issued in connection with Unit-based incentive plans. For the purposes of the discussion below, Exchangeable Units and Units issued in connection with Unit-based incentive plans are treated as equity as they have claims similar or identical to those of the Trust Units. Equity offerings and over-allotments as at December 31, 2015: ($ Thousands, except per Unit amounts) Price per Unit Gross Proceeds Transaction Costs Net Proceeds Units Issued Period March 2015 Bought-deal Over-allotment Total October 2015 Bought-deal Total $ $ 27.85 27.85 $ 28.70 $ 140,643 14,064 $ 154,707 $ 250,264 $ 250,264 $ $ $ $ 6,491 563 7,054 10,911 10,911 $ 134,152 13,501 $ 147,653 $ 239,353 $ 239,353 Year Ended December 31, Market Capitalization ($ thousands) Number of Units Outstanding LTIP and SELTIP Units Deferred Units RUR Plan Units Exchangeable Units Number of Unit Options Outstanding and Exercisable Ownership by Trustees, Ofﬁ cers and Senior Managers 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 speciﬁ ed number of Trust Units, representing 10% of the public ﬂ oat of its Trust Units at the time of the TSX approval. The NCIB will terminate on the earlier of the termination date or at such time as the purchases under the bid are completed. CAPREIT believes the purchase of its outstanding Trust Units from time to time may be an appropriate use of its resources. The table below summarizes the NCIB programs in place since January 1, 2014. 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 July 28, 2015 to July 27, 2016 Approval Limit 9,773,361 10,659,524 11,493,069 5,050,000 505,000 5,555,000 8,720,000 8,720,000 2015 3,477,954 $ 129,580,995 1,445,398 248,076 586,313 161,311 1,334,432 2.8% 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 2015 14.46% 2014 23.42% Eligible Dividend Income 0.90% 1.00% Taxable to Unitholders as Capital Gain Income Income Tax Deferral Total Total Effective Non-taxable Portion of Distributions 0.30% 84.34% 100.00% 2.58% 73.00% 100.00% 84.49% 74.29% The portion of CAPREIT’s distributions to Canadian resident Unitholders treated as taxable for the year ended December 31, 2015 decreased over the prior year primarily due to higher distributions and capital cost allowance, and lower capital gain and recapture, offset by higher earnings from operations in the current year. CAPREIT 2015 ANNUAL REP ORT 53 MANAGEMENT’S DISCUSSION AND ANALYSIS SECTION V Selected Consolidated Quarterly Information Overall Portfolio AMR Operating Revenues (000s) 1 NOI (000s) 1 NOI Margin 1 Q4 15 Q3 15 $ 963 $ 964 $ Q2 15 976 $ Q1 15 Q4 14 Q3 14 Q2 14 975 $ 964 $ 969 $ 958 $ Q1 14 954 $ 142,776 $ 131,812 $ 130,256 $ 128,954 $ 128,111 $ 126,356 $ 125,411 $ 126,533 $ 86,427 $ 82,087 $ 81,276 $ 74,824 $ 76,806 $ 77,615 $ 78,089 $ 71,375 56.4% 61.4% 60.0% 62.3% 58.0% 62.3% 62.4% 60.5% Net Income (Loss) (000s) $ 137,375 $ FFO (000s) NFFO (000s) Total Debt to Gross Book Value 45.71% (3,727) $ 159,118 $ 52,867 $ 82,759 $ 117,601 $ 72,282 $ 45,333 $ 51,640 $ 48,434 $ 50,821 $ 40,461 $ 45,774 $ 45,869 $ 46,253 $ 42,078 $ 52,813 $ 51,830 $ 51,665 $ 43,719 $ 46,620 $ 46,707 $ 47,113 $ 42,913 49.27% 43.71% 44.32% 46.49% 46.80% 47.22% 47.63% FFO per Unit – Basic NFFO per Unit – Basic $ $ 0.408 $ 0.417 $ 0.411 $ 0.440 $ 0.434 $ 0.441 $ 0.364 $ 0.393 $ 0.415 $ 0.423 $ 0.417 $ 0.426 $ 0.424 $ 0.431 $ 0.387 0.395 Weighted Average Number of Units (000s) – Basic – Diluted 126,515 128,056 117,912 119,566 117,081 118,845 111,207 113,076 110,193 111,962 109,684 111,333 109,211 110,726 108,714 110,063 1 Includes the results of investment properties owned as at the period-end. Non-IFRS ﬁ nancial measures are reconciled with IFRS reported amounts in the respective quarterly SEDAR ﬁ lings. CAPREIT’s operations are affected by seasonal cycles, and operating performance in one quarter may not be indicative of operating performance in any other quarter of the year. The fourth and ﬁ rst quarters of each year typically tend to generate weaker performance due to increased energy consumption in the winter months. Fourth Quarter Operating revenues in the fourth quarter of 2015 increased by 11.4% over the same quarter in 2014, while NOI increased by a signiﬁ cant 12.5%, driven by acquisitions, higher operating revenues and lower realty taxes, R&M costs and utility costs as a percentage of total operating revenues compared to the same period the prior year. Net income in the fourth quarter of 2015 increased over the same period the prior year to $137.4 million, mainly due to a higher unrealized gain on remeasurement of investment properties of $81.0 million compared to $42.0 million for the same period the prior year, and higher NOI of $9.6 million offset by higher Unit-based compensation expenses of $7.7 million and interest on mortgage payable and other ﬁ nancing costs of $1.7 million. Higher NFFO was primarily due to a 3.3% increase in stabilized property NOI and the NOI contribution from acquisitions completed over the prior twelve months. 54 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS The stabilized portfolio performance for the three months ended December 31, 2015 compared to December 31, 2014, is summarized as follows: For the Three Months Ended December 31, 2015 ($ Thousands) Residential Suites ONTARIO Greater Toronto Area Ottawa London / Kitchener / Waterloo Other Ontario QUÉBEC Greater Montréal Region Québec City BRITISH COLUMBIA Greater Vancouver Region Victoria ALBERTA Edmonton Calgary NOVA SCOTIA Halifax SASKATCHEWAN Saskatoon Regina PRINCE EDWARD ISLAND Charlottetown 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 Stabilized Suites and Sites NOI NOI Margin (%) 36,286 1,183 2,671 3,031 43,171 8,063 4,812 12,875 4,936 2,769 7,705 887 4,573 5,460 61.4 51.1 59.1 60.6 60.9 56.8 55.1 56.1 67.1 67.4 67.2 67.2 61.1 62.0 3,092 61.2 41.6 61.7 51.5 57.5 60.6 63.3 70.6 67.7 59.9 35.8 55.7 60.8 60.6 148 213 361 435 73,099 2,598 113 264 157 76 971 4,179 77,278 39,799 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2014 NOI NOI Margin (%) 35,216 1,127 2,748 2,804 41,895 7,755 4,896 12,651 4,633 2,555 7,188 948 5,045 5,993 61.1 49.4 60.9 57.5 60.5 54.5 55.6 54.9 65.3 66.4 65.7 69.5 61.8 62.9 Increase (Decrease) Revenue NOI Change (%) Change (%) Change (%) Expense 2.6 1.5 0.2 2.5 2.4 (0.1) (0.8) (0.4) 3.8 6.8 4.8 (3.2) (8.2) (7.5) 1.8 (1.8) 4.9 (5.0) 1.3 (5.1) 0.3 (3.0) (1.4) 3.6 0.3 4.1 (6.4) (5.1) 3.0 5.0 (2.8) 8.1 3.0 4.0 (1.7) 1.8 6.5 8.4 7.2 (6.4) (9.4) (8.9) 3,130 62.5 0.8 4.2 (1.2) 30.2 57.7 43.0 54.1 60.0 61.9 78.5 68.5 58.6 32.0 53.9 59.6 60.0 117 194 311 394 71,562 2,474 124 250 146 66 916 3,976 75,538 39,799 (8.2) 2.7 (3.2) 3.8 1.2 2.6 1.3 6.8 5.2 2.9 2.7 2.9 1.3 (23.2) (7.0) (17.7) (3.9) (0.3) (1.3) 38.2 9.6 1.9 (2.9) (1.2) (0.3) (0.3) 26.5 9.8 16.1 10.4 2.1 5.0 (8.9) 5.6 7.5 15.2 6.0 5.1 2.3 CAPREIT 2015 ANNUAL REP ORT 55 MANAGEMENT’S DISCUSSION AND ANALYSIS Selected Consolidated Financial Information The following table presents a summary of selected ﬁ nancial information for the ﬁ scal years indicated below: ($ Thousands, except per Unit amounts) Year Ended December 31, Income Statement Operating Revenues Net Income Distributions Distributions Declared Distributions per Unit Balance Sheet Investment Properties Total Assets Mortgages Payable Bank Indebtedness SECTION VI 2015 2014 $ $ $ $ 533,798 345,633 142,973 1.207 $ 6,863,140 $ 7,102,828 $ 3,097,773 168,211 $ $ $ $ $ 506,411 317,975 127,496 1.168 $ 5,749,640 $ 5,926,161 $ 2,658,454 113,167 $ 2013 477,023 267,678 116,056 1.138 $ $ $ $ $ 5,459,218 $ 5,558,934 $ 2,457,182 187,030 $ Accounting Policies and Critical Estimates, Assumptions, and Judgements New Accounting Policies and Accounting Standards As at February 16, 2016, 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, 2015: IAS 1, Presentation of Financial Statements This amendment clariﬁ es guidance on materiality and aggregation, the presentation of subtotals, the structure of ﬁ nancial statements and the disclosure of accounting policies. This amendment will come into effect for years beginning on or after January 1, 2016. IFRS 9, Financial Instruments (“IFRS 9”) The revised IFRS 9 incorporates requirements for the classiﬁ cation and measurement of ﬁ nancial liabilities over the existing derecognition requirements of IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 also introduces new requirements for classifying and measuring ﬁ nancial assets; speciﬁ cally, investments in equity instruments can be designated as “fair value through other comprehensive income” with only dividends being recognized in proﬁ t or loss. IFRS 9 was further amended in November 2013 to: (i) include guidance on hedge accounting, (ii) allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in an entity’s own credit risk, from ﬁ nancial liabilities designated under the fair value option, in OCI (without having to adopt the remainder of IFRS 9); and (iii) remove the previous mandatory effective date of January 1, 2015. The ﬁ nal amendment of IFRS 9 as at July 2014 included: (i) a third measurement category for ﬁ nancial 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 This amendment requires additional disclosures on transition from IAS 39 to IFRS 9 upon adoption of IFRS 9. An additional amendment, which is prospective with an option to apply retrospectively, requires disclosure of all types of continuing involvement that an entity may have in transferred ﬁ nancial assets when the transfer of ﬁ nancial assets to a third party occurs under conditions which allow the transferor to derecognize the asset. This amendment will come into effect on January 1, 2016. 56 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS IFRS 10 and IAS 28, Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture The amendment clariﬁ es 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 speciﬁ c 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 interpretations. The new standard provides a single, comprehensive revenue recognition model. While early adoption is permitted for IFRS reporters, this standard is effective for the interim periods within years beginning on or after January 1, 2018. IFRS 16, Leases This new standard on leases supersedes IAS 17, Leases and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract: i.e. the customer (“lessee”) and the supplier (“lessor”). From a lessee perspective, IFRS 16 eliminates the classiﬁ cation of leases as either operating leases or ﬁ nance leases as required by IAS 17 and, instead, introduces a single lessee accounting model. IFRS 16 is effective from January 1, 2019; however, a company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15, Revenue from Contracts with Customers. IAS 27, Consolidated and Separate Financial Statements This amendment restores the option to use the equity method to account for investments in subsidiaries, joint ventures and associates in an entity’s separate ﬁ nancial statements. The amendment will come into effect on January 1, 2016. IAS 34, Interim Financial Reporting This amendment is retrospective and requires a cross-reference from the interim ﬁ nancial statements to the location of that information. This amendment will come into effect on January 1, 2016. CAPREIT is currently assessing the impact of the above standards and amendments but does not expect to be signiﬁ cantly impacted on adoption in their current form. Critical Estimates, Assumptions, and Judgements In preparing the accompanying audited consolidated annual ﬁ nancial 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 ﬁ nancial statements and accompanying notes. Areas of such estimation include, but are not limited to, valuation of investment properties, remeasurement at fair value of 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 ﬁ nancial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could also differ from those estimates under different assumptions and conditions. Management believes the nature of the business and CAPREIT’s portfolio is defensive against economic downturns and, therefore, the current economic conditions have not had as signiﬁ cant an impact on CAPREIT’s critical accounting estimates as may have been realized in other industries. However, the current economic conditions impacting the general economy or those more speciﬁ c to the housing industry or to CAPREIT could have the potential to alter accounting estimates and could impact CAPREIT’s ﬁ nancial condition, changes in ﬁ nancial condition or results of operations. Disclosures in the MD&A, including 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 consolidated balance sheet dates. Any changes in the fair value are included in the consolidated statements of income and comprehensive income. Fair values are supported by independent external valuations or detailed internal valuations using market-based assumptions, each in accordance with recognized valuation techniques. The techniques used comprise both the capitalized net operating income method and the discounted cash ﬂ ow method and include estimating, among other things, future stabilized net operating income, capitalization rates, reversionary capitalization rates, discount rates and other future cash ﬂ ows applicable to investment properties. CAPREIT 2015 ANNUAL REP ORT 57 MANAGEMENT’S DISCUSSION AND ANALYSIS In the case of Leasehold Interests, CAPREIT established the fair value of such interests using the discounted cash ﬂ ow method, including an estimate of future lease payments. Management’s internal assessments of fair value are based on a combination of internal ﬁ nancial information and external market data, including components of net operating income and capitalization rates, all of which are obtained from an independent appraiser. Management’s internal valuations and the independent appraisals are both subject to signiﬁ cant judgement, estimates and assumptions about market conditions in effect as at the consolidated balance sheet dates. See note 6 to the accompanying audited consolidated annual ﬁ nancial statements for a detailed discussion of valuation methods and the signiﬁ cant assumptions and estimates used. Valuation of Unit-based Compensation Liabilities The fair value of Unit-based compensation liabilities is based on assumptions of future events and involves signiﬁ cant estimates. The basis of valuation for CAPREIT’s Unit-based compensation liabilities, such as market assumptions, estimates and valuation methodology, are set out in note 12 to the accompanying audited consolidated annual ﬁ nancial statements; however, the fair values as at the reporting date may differ materially from how they are ultimately recognized if there is volatility in Trust Unit prices, interest rates or other key assumptions in future years. Interest Classiﬁ cation in the Consolidated Statements of Cash Flows IFRS permits the classiﬁ cation of interest paid as operating cash ﬂ ows because they enter into the determination of proﬁ t or loss, or alternatively as ﬁ nancing cash ﬂ ows because they are costs of obtaining ﬁ nancial resources. CAPREIT has applied its judgement and concluded that debt ﬁ nancing, 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-producing activities. Therefore interest paid is classiﬁ ed as a ﬁ nancing activity in CAPREIT’s consolidated statements of cash ﬂ ows. Controls and Procedures Disclosure Controls and Procedures CAPREIT’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed is recorded, processed, summarized and reported within the time periods speciﬁ ed under Canadian securities laws, and include controls and procedures designed to ensure information is accumulated and communicated to Management, including the President and Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer, to allow timely decisions regarding required disclosure. Valuation of Derivative Financial Instruments The fair value of a derivative financial instrument is based on assumptions of future events and involves signiﬁ cant estimates. The basis of valuation for CAPREIT’s derivatives is set out in note 15 to the accompanying audited consolidated annual ﬁ nancial statements; however, the fair values of derivatives reported may differ from how they are ultimately recognized if there is volatility in interest rates in future years. As at December 31, 2015, CAPREIT’s President and Chief Executive Ofﬁ cer and its Chief Financial Ofﬁ cer with the assistance of Management evaluated the effectiveness of the disclosure controls and procedures in accordance with the rules adopted by the Canadian Securities Administrators under National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings and based on that evaluation concluded that the design and operation of the disclosure controls and procedures were effective as at December 31, 2015. 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’s investment manager and the control exerted over IRES by its independent Board of Directors. Management will reassess this conclusion should its ownership interest or the terms of the asset management agreement change. 58 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Internal Controls over Financial Reporting Related to Reporting Investment Property at Fair Value Management is responsible for establishing and maintaining adequate internal controls over ﬁ nancial reporting to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of consolidated ﬁ nancial statements for external purposes in accordance with International Financial Reporting Standards (IFRS). As at December 31, 2015, CAPREIT’s President and Chief Executive Ofﬁ cer and its Chief Financial Ofﬁ cer with the assistance of Management assessed the effectiveness of the internal controls over ﬁ nancial reporting using the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013 and, based on that assessment, determined that the internal controls over ﬁ nancial reporting were designed and operating effectively as at December 31, 2015. CAPREIT did not make any changes to the design of internal controls over financial reporting in 2015 that have materially affected, or are reasonably likely to materially affect, the internal controls over ﬁ nancial reporting. It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurances that any design will succeed in achieving its stated goals under all potential conditions. SECTION VII Risks and Uncertainties There are certain risks inherent in an investment in the Units and the activities of CAPREIT. The following is a description of the principal risks in CAPREIT’s business, deﬁ ned as either those that, although unlikely to occur, could have a signiﬁ cant impact on CAPREIT or those that are signiﬁ cant to CAPREIT’s day-to-day operations. Investors should carefully consider these risks before investing in CAPREIT Units. CAPREIT holds investment property to earn rental income or for capital appreciation or both. All investment property is measured using the fair value model, whereby changes in fair value are recognized for each reporting period in the consolidated statements of income and comprehensive income. Management values each investment property based on the most probable price that a property could be sold for in a competitive and open market as of the speciﬁ ed date under all conditions requisite to a fair sale, such as the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Each investment property has been valued on a highest and best use basis. Market assumptions applied for valuation purposes do not necessarily reﬂ ect CAPREIT’s speciﬁ c history or experience and the conditions for realizing the fair values through a sale may change or may not be realized. In addition, there is an inherent risk related to the reliance on and use of a single appraiser, as this approach may not adequately capture the range of fair values that market participants would assign to the investment properties. CAPREIT mitigates this risk by undertaking a detailed review of the assumptions utilized in valuing the properties, including comparing the assumptions to the benchmarks derived from Management’s own observations of market transactions. Downturns in the real estate market could negatively affect CAPREIT’s operating revenues and cash flows; and could significantly impact the fair values of the investment properties as well as certain ﬁ nancial ratios and covenants. Related to Ownership and Operation of Real Property Real Property Ownership Real property investments are relatively illiquid. This illiquidity will tend to limit the ability of CAPREIT to respond to changing economic or investment conditions. If CAPREIT were required to quickly liquidate assets, there is a risk the proceeds realized from such sale would be less than the book value of the assets or less than what could be expected to be realized under normal circumstances. By specializing in a particular type of real estate, CAPREIT is exposed to adverse effects on that segment of the real estate market and does not beneﬁ t from a broader diversiﬁ cation of its portfolio by property class. CAPREIT 2015 ANNUAL REP ORT 59 MANAGEMENT’S DISCUSSION AND ANALYSIS CAPREIT is committed to preserving the life safety of its residents and to ensuring its properties are well maintained. CAPREIT believes that investing back into its properties increases resident satisfaction, which ultimately makes CAPREIT’s business more proﬁ table. The multi-unit residential rental business, like any other real estate enterprise, is capital intensive and is exposed to various risks associated with maintaining the infrastructure of its property portfolio. CAPREIT takes into account the capital maintenance requirements of its properties when determining future cash ﬂ ows available for distributions. A signiﬁ cant increase in capital maintenance requirements could adversely impact the cash available to CAPREIT. Leasehold Interests Some long-term leases and ground leases are subject to elements of risk. Unlike a freehold interest, a lessee’s interest in a lease may be affected by mortgage defaults by the lessor, which cannot be cured by the lessee. Pursuant to the terms of certain of CAPREIT’s long-term leases, CAPREIT is responsible for payment of all taxes, utilities, insurance, maintenance, repairs and replacements in respect of all of the leased premises, with certain exceptions in the last ten years of each of those long- term leases. Upon the transfer of such a long-term lease by CAPREIT, CAPREIT will only be released from liability thereunder if the transferee meets certain tests. The lessor under any such long-term lease may terminate such long-term lease only if there is a substantial event of default (as deﬁ ned in the leases) by CAPREIT that remains uncured after a cure period. CAPREIT has the option to acquire fee simple interests in 14 of the operating leasehold interest properties, exercisable between the 26th and 35th year of the respective leases. In the case of the 15th property, CAPREIT’s option entitles it to acquire a prepaid operating leasehold interest in the property maturing in 2072. If Management chooses not to exercise any or all such options, the NOI and cash ﬂ ow associated with such properties would no longer contribute to CAPREIT’s results of operations and could adversely impact its ability to make distributions to Unitholders. Co-ownerships CAPREIT has entered into co-ownership relationships with two other entities. If the properties in the respective portfolios do not perform as expected, or there is a default on ﬁ nancial obligations, CAPREIT would risk bearing its proportionate share of any related losses. CAPREIT aims to reduce this risk by seeking to: (i) negotiate contractual rights upon default of a partner; (ii) enter into agreements with ﬁ nancially stable partners; and/or (iii) work with partners who have a historical record of success. Investment Restrictions CAPREIT has been structured and operates in adherence to the stringent investment restrictions and operating policies set out in its DOT and as applicable under tax laws relating to real estate investment trusts (also see Taxation-Related Risks in this section). These policies cover such matters as the type and location of properties that CAPREIT can acquire, the maximum leverage allowed, environmental matters and investment restrictions. In addition, pursuant to the DOT, CAPREIT’s overall leverage is limited to 70% of its reported gross book value, unless a majority of trustees, 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 ﬂ uctuations in occupancy levels, the inability to achieve economic rents (including anticipated increases in rent), controlling bad debt exposure, rent control regulations, increases in labour costs and other operating costs including the costs of utilities, possible future changes in labour relations, competition from other landlords or the oversupply of rental accommodations, the imposition of increased taxes or new taxes and capital investment requirements. In general, economic conditions will also affect the performance of the portfolio. Additionally, the portfolio is currently weighted with 49.3% of the overall portfolio (by number of suites and sites) in Ontario (33% 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, residential leases are generally “gross” leases (with the exception of submetering 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 ﬁ nancial position of CAPREIT. 60 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Energy Costs and Hedging As a signiﬁ cant part of CAPREIT’s operating expenses are attributable to energy and energy-related charges and fees, ﬂ uctuations in the price of energy and any related charges and fees (including transportation costs and commodity taxes) can have a material impact on the performance of CAPREIT, its ability to pay distributions and the value of the Units. From time to time, CAPREIT may enter into agreements to pay ﬁ xed prices on all or certain of its energy requirements (principally natural gas and electricity in certain markets) to offset the risk of rising expenditures if prices for these energy commodities increase; however, if the prices for these energy commodities decline beyond the levels set in these agreements, CAPREIT will not beneﬁ t from such declines in energy prices and will be required to pay the higher price contracted for such energy supplies. CAPREIT enters into new natural gas physical delivery contracts, ﬁ xing a portion of its variable rate natural gas commitments. The ﬁ xed price arrangement is intended to mitigate the risk of rising natural gas prices over the related period. See the Natural Gas table in the Results of Operations section for additional information. Environmental Matters Environmental and ecological legislation and policies have become increasingly important, and generally 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 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). Notwithstanding the foregoing, Management is not aware of any environmental condition with respect to any of the properties that it believes would have a material adverse effect on CAPREIT. Insurance All real property investments owned and operated by CAPREIT entail an inherent risk of liability. From time to time, CAPREIT will be subject to lawsuits as a result of its business operations. It is CAPREIT’s policy to protect against this risk by maintaining a comprehensive insurance program to cover general liabilities: i.e., ﬁ re, ﬂ ood, injury or death, rental loss and environmental insurance, etc., with policy speciﬁ cation limits and deductibles as deemed appropriate based on the nature of the risk, historical experience and industry standards. There are some types of losses, including those of a catastrophic nature, that are generally uninsurable or not economically feasible to insure, or 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 underinsured loss occur, CAPREIT could lose its investment in, and anticipated proﬁ ts and cash ﬂ ows from, one or more of its properties but would continue to be obligated to repay any recourse mortgage indebtedness on such properties. These types of events/losses could adversely affect the performance of CAPREIT, its ability to make distributions and the market value of the Units. Capital Investments For prudent management of its property portfolio, CAPREIT makes significant property capital investments throughout the period of ownership of its properties (for example, to upgrade and maintain building structure, balconies, parking garages, electrical and mechanical systems). CAPREIT has prepared building condition reports and has committed to a multi-year property capital investment plan. CAPREIT must continuously monitor its properties to ensure appropriate and timely capital repairs and replacements are carried out in accordance with its property capital investment programs. CAPREIT requires sufﬁ cient capital to carry out its planned property capital investment and repair and refurbishment programs to upgrade its properties or be exposed to operating business risks arising from structural failure, electrical or mechanical breakdowns, ﬁ re or water damage, etc., which may result in significant loss of earnings to CAPREIT. A significant increase in capital investment requirements or difﬁ culty in securing ﬁ nancing or the availability of ﬁ nancing on reasonable terms could adversely impact the cash available to CAPREIT and its ability to pay distributions. CAPREIT 2015 ANNUAL REP ORT 61 or other funding can be arranged, if such ﬁ nancing is available on acceptable terms, or at all. Such measures could include deferring property capital investments, dispositions of one or more properties on unfavourable terms, reducing or eliminating future cash distributions or other discretionary uses of cash, or other more severe actions. Also, disruptions in the credit markets and uncertainty in the economy could adversely affect the banks that currently provide the Credit Facilities, could cause the banks or a bank to elect not to participate in any new Credit Facilities sought, or could cause other banks that are not currently participants in the Credit Facilities to be unwilling or unable to participate in any such new facility. Furthermore, given the relatively small size of the Canadian market- place, there are a limited number of lenders from which CAPREIT can reasonably expect to borrow and the number of lenders currently participating in the CMHC-insured mortgage market is even smaller. Consequently, it is possible that ﬁ nancing which CAPREIT may require in order to grow and expand its operations upon the expiry of the term of existing ﬁ nancing, or the reﬁ nancing 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 uses, and may use in the future, interest rate hedging arrangements or incur fees to early reﬁ nance certain mortgages prior to their maturity to manage its exposure to interest rate volatility. Such hedging activities may not prove successful and may not have a positive impact on the results of operations or ﬁ nancial condition. In general, hedging activities may subject CAPREIT to additional costs, such as transaction fees or breakage costs, if these arrangements are terminated. In addition, although Management enters into such hedge contracts with ﬁ nancially sound counterparties in order to mitigate the risk that the counterparty may fail to honour its obligations, the risk cannot be mitigated completely. MANAGEMENT’S DISCUSSION AND ANALYSIS Related to Financing Indebtedness A portion of CAPREIT’s cash ﬂ ow is devoted to servicing its debt, and there can be no assurance that CAPREIT will continue to generate sufficient cash flow from operations to meet required interest and principal payments. CAPREIT has and will continue to have substantial outstanding consolidated indebtedness comprising mainly property mortgages and indebtedness under its Credit Facilities. CAPREIT is subject to the risks associated with debt ﬁ nancing, including the risk that CAPREIT may be unable to make interest or principal payments or meet loan covenants, the risk that defaults under a loan could result in cross defaults or other lender rights or remedies under other loans, and the risk that existing indebtedness may not be able to be reﬁ nanced or that the terms of such reﬁ nancing may not be as favourable as the terms of existing indebtedness or expectation of future interest rates. In such circumstances, CAPREIT could be required to seek renegotiation of such payments or obtain additional equity, debt or other ﬁ nancing, and its ability to make property capital investments and distributions to Unitholders could be adversely affected. CAPREIT currently has access to the government-backed mortgage insurance program through the National Housing Act, which is administered by CMHC. CAPREIT entered into the LBA with CMHC during the third quarter of 2010. There can be no guarantee that the provisions of the mortgage insurance program will not be changed in the future so as to make the costs of obtaining mortgage insurance prohibitive or so as to restrict access to the insurance program. To the extent that any ﬁ nancing requiring CMHC consent or approval is not obtained or that such consent or approval is only available on unfavourable terms, CAPREIT may be required to ﬁ nance a conventional mortgage which may be less favourable to CAPREIT than a CMHC-insured mortgage. CAPREIT’s Acquisition and Operating Facility of $340 million matures on June 30, 2018. CAPREIT’s Acquisition and Operating Facility is at a ﬂ oating interest rate and, accordingly, changes in short-term borrowing rates will affect CAPREIT’s costs of borrowing. CAPREIT’s financial condition and results of operations would be adversely affected if it were unable to obtain ﬁ nancing or cost-effective ﬁ nancing. As at the date hereof, it is difﬁ cult to forecast the future state of the commercial loan market. If, because of CAPREIT’s level of indebtedness, the level of cash ﬂ ows, lenders’ perceptions of CAPREIT’s creditworthiness or other reasons, Management is unable to renew, replace or extend the Credit Facilities on acceptable terms, or to arrange for alternative ﬁ nancing, CAPREIT may be required to take measures to conserve cash until the markets stabilize or until alternative credit arrangements 62 CAPREIT 2015 ANNUAL REP ORT Related to Taxes and Regulations Taxation-Related Risks CAPREIT currently qualiﬁ es as a mutual fund trust for Canadian income tax purposes. It is the current policy of CAPREIT to distribute all of its taxable income to Unitholders and 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 speciﬁ c 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. There can be no assurance that Canadian federal income tax laws in respect of the treatment of mutual fund trusts will not be changed in a manner that adversely affects CAPREIT or its Unitholders. If CAPREIT ceases to qualify as a “mutual fund trust”, CAPREIT will be required to pay a tax under Part XII.2 of the Income Tax Act (“Tax Act”). The payment of Part XII.2 tax by CAPREIT may have adverse income tax consequences for certain of CAPREIT’s Unitholders, including non- resident persons and trusts governed by registered retirement savings plans, registered disability savings plans, deferred proﬁ t-sharing plans, registered retirement income funds, tax-free savings accounts and registered education savings plans (“designated savings plans”), which acquired an interest in CAPREIT directly or indirectly from another CAPREIT Unitholder. If CAPREIT ceases to qualify as a “mutual fund trust” or “registered investment” under the Tax Act and CAPREIT Units cease to be listed on a designated stock exchange, CAPREIT Units will cease to be qualiﬁ ed investments for trusts governed by designated savings plans. CAPREIT will endeavour to ensure CAPREIT Units continue to be 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-qualiﬁ ed investments by such trusts. Unitholders should consult their own tax advisors in this regard, including as to whether CAPREIT Units are “prohibited investments” for registered retirement savings plans, registered retirement income funds or tax free savings accounts. MANAGEMENT’S DISCUSSION AND ANALYSIS A REIT is deﬁ ned under the SIFT Rules as a trust that is resident in Canada throughout the taxation year and that satisﬁ es all of the following criteria: i) At each time in the taxation year the total fair market value at that time of all non-portfolio properties that are qualiﬁ ed REIT properties held by the trust is at least 90% of the total fair market value at that time of all non-portfolio properties held by the trust; ii) Not less than 90% of the trust’s gross REIT revenue for the taxation year is from one or more of the following: rent from real or immovable properties, interest, dispositions of real or immovable properties that are capital properties, dividends, royalties and dispositions of eligible resale properties; iii) Not less than 75% of the trust’s gross REIT revenue for the taxation year is from one or more of the following: rent from real or immovable properties, interest from mortgages, or hypothecs, on real or immovable properties, and dispositions of real or immovable properties that are capital properties; iv) At each time in the taxation year an amount that is equal to 75% or more of the equity value of the trust at that time is the amount that is the total fair market value of all properties held by the trust, each of which is a real or immovable property that is a capital property, an eligible resale property, an indebtedness of a Canadian corporation represented by a bankers’ acceptance, a property described by either paragraph (a) or (b) of the deﬁ nition “qualiﬁ ed investment” in section 204 of the SIFT Rules, or a deposit with a credit union; and v) Investments in the trust are, at any time in the taxation year, listed or traded on a stock exchange or other public market. For this purpose, “real or immovable property” includes a security of any trust, corporation or partnership that itself satisﬁ es the above criteria in (i)–(iv) above, but does not include any depreciable property of a prescribed class for which the rate of capital cost allowance exceeds 5%. Excluded from the deﬁ nition of a SIFT is a partnership, such as CAPLP and CAPLP2, that is not publicly traded and of which the equity (and equity-like debt) is wholly owned by any combination of a SIFT, a REIT or a taxable Canadian corporation. If CAPREIT does not qualify for the REIT Exception at any point in time in a given future year, the SIFT Rules will apply to CAPREIT for that taxation year. To the extent that CAPREIT does not qualify for the REIT Exception, CAPREIT will consider alternative measures, including restructuring, assuming that these measures are in the best interests of its Unitholders, in order to qualify for the REIT Exception in the following year. No assurances can be given that CAPREIT will continue to qualify for the REIT Exception. If applicable, the SIFT Rules may have a material adverse effect on Unitholders’ returns. CAPREIT 2015 ANNUAL REP ORT 63 MANAGEMENT’S DISCUSSION AND ANALYSIS CAPREIT or its subsidiaries may be reassessed for taxes from time to time. Such reassessments, together with associated interest and penalties, could adversely affect CAPREIT and CAPREIT’s Unitholders. Harmonization of Federal Goods and Services Tax and Provincial Sales Tax Both Ontario and British Columbia harmonized their respective provincial sales tax (“PST”) with the federal goods and services tax (“GST”) into the harmonized sales tax (“HST”), effective July 1, 2010. Currently, there is generally no HST on residential rents (i.e., they are generally HST exempt). As input tax credits for HST paid can only be claimed if the payments are in respect of commercial activities and as renting residential properties is not a commercial activity, CAPREIT is not able to claim input tax credits for HST paid. In the future, the effect of increasing the HST rate or extending its application to a variety of new business input costs presently not subject to HST means landlords will have to absorb the additional tax costs on business inputs. Effective April 1, 2013, however, British Columbia reverted back to the original PST and federal GST. British Columbia consumers pay PST on those goods and services that were subject to PST before the implementation of the HST and all permanent PST exemptions were re-implemented. Government Regulations Multi-unit residential rental properties are subject to rent control legislation in most provinces in Canada. Each province in which CAPREIT operates maintains distinct regulations with respect to tenants’ and landlords’ rights and obligations. The legislation in various degrees provides restrictions on the ability of a landlord to increase rents above an annually prescribed guideline or requires the landlord to give tenants sufﬁ cient notice prior to an increase in rent or restricts the frequency of rent increases permitted during the year. The annual rent increase guidelines as per applicable legislation 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 ﬁ re and maintenance standards, etc. An amendment to the Residential Tenancies Act, 2006, enacted on June 19, 2012, set Ontario’s annual rent increase guideline to no more than 2.5% beginning in 2013. Controls over Financial Reporting CAPREIT maintains information systems, procedures and controls over ﬁ nancial reporting. Because of the inherent limitations in all control systems, including well-designed and operated systems, no control system can provide complete assurance that the objectives of the control system will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, will be detected or prevented. These inherent limitations include, without limitation, the possibility that Management’s assumptions and judgements may ultimately prove to be incorrect under varying conditions and circumstances and the impact of isolated errors. In addition, 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. Related to CAPREIT’s Securities, Organization and Structure Nature of CAPREIT Trust Units Units and Special Voting Units are not traditional equity investments and Unitholders and Special Voting Unitholders do not have all of the statutory rights normally associated with ownership of shares of a company, including, for example, the right to bring “oppression” or “derivative” actions against CAPREIT. The Units and Special Voting Units are not “deposits” within the meaning of the Canada Deposit Insurance Corporation Act and are not insured under the provisions of that Act or any other legislation. Furthermore, CAPREIT is not a trust company and, accordingly, is not registered under any trust and loan company legislation, as it does not carry on or intend to carry on the business of a trust company. In addition, although CAPREIT is intended to qualify as a “mutual fund trust” as deﬁ ned by the Tax Act, CAPREIT is not a “mutual fund” as deﬁ ned by applicable securities legislation. 64 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS Securities like the Units are hybrids in that they share certain attributes common to both equity securities and debt instruments. The Units do not represent a direct investment in the business of CAPREIT and should not be viewed by investors as shares or interests in CAPREIT or any other company or entity. The Units do not represent debt instruments and there is no principal amount owing to Unitholders under the Units. Each Unit represents an equal, undivided, beneﬁ cial interest in CAPREIT. Unitholder Liability Recourse for any liability of CAPREIT is limited to the assets of CAPREIT. The DOT provides that no Unitholder, or Special Unitholder or annuitant (an “annuitant”) under a plan of which a Unitholder or Special Unitholder acts as a trustee or carrier, will be held to have any personal liability and that no recourse shall be had to the private property of any Unitholder, Special Unitholder or annuitant for satisfaction of any obligation or claim arising out of or in connection with any contract or obligation of CAPREIT or of the trustees. Certain provincial legislatures have passed legislation that provides for statutory limited liability for unitholders of public income trusts governed as a contractual matter by the laws of their jurisdictions. Certain of these statutes have not yet been judicially considered and it is possible that reliance on such statutes by a Unitholder or Special Unitholder or annuitant could be successfully challenged on jurisdictional or other grounds. Liquidity and Price Fluctuation of Units CAPREIT is an unincorporated “open-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 signiﬁ cant ﬂ uctuations in response to variations in quarterly operating results, distributions and other factors beyond the control of CAPREIT. One of the factors that may inﬂ uence the market price of the Units is the annual yield on the Units. Accordingly, an increase in market interest rates may lead purchasers of Units to demand a higher annual yield, which could adversely affect the market price of the Units. In addition, the securities markets have experienced signiﬁ cant price and volume ﬂ uctuations from time to time in recent years that often have been unrelated or disproportionate to the operating performance of particular issuers. These broad ﬂ uctuations may adversely affect the market price of the Units. Accordingly, the Units may trade at a premium or a discount to the value of CAPREIT’s underlying assets. In addition, changes in CAPREIT’s creditworthiness or perceived creditworthiness may affect the market price or value and/or the liquidity of the Units. The DOT imposes various restrictions on Unitholders. Non-residents and non-Canadian partnerships are prohibited from beneﬁ cially owning more than 49% of the outstanding Units (on a non-diluted 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. 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 signiﬁ cant. In addition, the composition of the cash distributions for tax purposes may change over time and may affect the after-tax return for Unitholders. CAPREIT 2015 ANNUAL REP ORT 65 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 Conﬂ icts of Interest CAPREIT may be subject to various conﬂ icts of interest because certain of the trustees and ofﬁ cers of CAPREIT are engaged in a wide range of real estate and other business activities. CAPREIT may become involved in transactions which conﬂ ict with the interests of the foregoing. The trustees may from time to time deal with persons, ﬁ rms, institutions or corporations with which CAPREIT may be dealing, or which may be seeking investments similar to those desired by CAPREIT. The interests of these persons could conﬂ ict with those of CAPREIT. In addition, from time to time these persons may be competing with CAPREIT for available investment opportunities. CAPREIT’s DOT contains “conﬂ icts 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 ofﬁ cers 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 ofﬁ cer or other key employee could have a material adverse effect on the business, operating results or ﬁ nancial condition of CAPREIT. Related to the Real Estate Industry General Economic Conditions and Competition for Residents All real property investments are subject to elements of risk. The real value of real property and any improvements thereto depends on the credit and ﬁ nancial stability of residents and upon the vacancy rates of such properties. The properties generate revenue through rental payments made by residents. CAPREIT is affected by changes in general economic conditions (such as the availability and cost of mortgage funds), local real estate markets (such as an oversupply of space or a reduction in demand for real estate in the area), government regulations, changing demographics, competition from other available rental premises, including new developments, and various other factors. If a signiﬁ cant number of residents are unable to meet their obligations under their leases or if a signiﬁ cant amount of available space in the properties becomes vacant and cannot be leased on economically favourable lease terms, cash available for distribution may be adversely affected. The real estate business is competitive. Numerous other developers, managers and owners of properties compete with CAPREIT in seeking residents. Competition for residents also comes from opportunities for individual home ownership, including condominiums, which can be particularly attractive when home mortgage loans are available at relatively low interest rates. The existence of competing developers, managers and owners and competition for CAPREIT’s residents could have an adverse effect on CAPREIT’s ability to lease suites in its properties and on the rents charged, and may increase leasing and marketing costs and refurbishing costs necessary to lease and release suites, all of which could adversely affect CAPREIT’s revenues and, consequently, its ability to meet its obligations and pay distributions. For example, increased condominium construction in the GTA could impact the rental market and affect residential rental fundamentals. In addition, any increase in the supply of available rental accommodation in the markets in which CAPREIT operates or may operate could have an adverse effect on CAPREIT. Furthermore, low interest rates may encourage residents to purchase condominiums or other types of housing, which could result in a reduction in demand for rental properties. Changes in interest rates may also have effects on vacancy rates, rent levels, refurbishing costs and other factors affecting CAPREIT’s business and proﬁ tability, including its ﬁ nancing costs. 66 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS 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 ﬁ nancial resources than those of CAPREIT, or operate without the investment or operating restrictions of CAPREIT or according to more ﬂ exible conditions. An increase in the availability of investment funds and/or an increase in interest in real property investments may tend to increase competition for real property investments, thereby increasing purchase prices and reducing the yield on them. Continued Growth CAPREIT expects it will have opportunities to acquire properties that will be accretive and enable CAPREIT to increase cash ﬂ ow to Unitholders, but there can be no assurance that this will be the case. Furthermore, as CAPREIT’s intention is to distribute a substantial proportion of its NFFO, the ability of CAPREIT to fund growth will be dependent on external sources of funding. Lack of availability of such funds could limit the future growth of CAPREIT. In addition, CAPREIT’s ability to grow may involve the disposition of non-core or underperforming properties, which may be affected by market conditions and other factors. Acquisitions CAPREIT’s external growth prospects will depend in large part on identifying suitable acquisition opportunities that meet CAPREIT’s investment criteria and satisfy its rigorous due diligence process. In addition, external growth prospects will be affected by competition for acquisition opportunities, the purchase price, ability to obtain adequate ﬁ nancing or ﬁ nancing on reasonable terms, consummating acquisitions (including obtaining necessary consents) and effectively integrating and operating the acquired properties. Acquired properties may not meet ﬁ nancial or operational expectations due to unexpected costs associated with acquiring the property, as well as the general investment risks inherent in any real estate investment or acquisition, including future reﬁ nancing risks. Moreover, newly acquired properties may require 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 ﬁ nancial condition could be adversely affected. Acquisition agreements entered into with third parties may be subject to unknown, unexpected or undisclosed liabilities which could have a material adverse impact on the operations and ﬁ nancial results of CAPREIT. CAPREIT’s due diligence investigations and representations and warranties obtained from third party vendors may not adequately protect against these liabilities and any recourse against such vendors may be limited by the ﬁ nancial capacity of such vendors. Foreign Operation and Currency Risks 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 companies 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. Related Party Transactions On March 25, 2015, CAPREIT invested an additional €23.5 million in Ordinary Shares in IRES as part of IRES’s €215.0 million secondary equity offering. As at December 31, 2015, CAPREIT has a 15.7% share ownership in IRES and has determined that it has signiﬁ cant inﬂ uence over IRES. The share ownership 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 ﬁ nancial 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 $3.3 million for the year ended December 31, 2015 from asset management and property management fees. Expenses related to the asset and property management services are included in trust expenses for the year ended December 31, 2015. CAPREIT 2015 ANNUAL REP ORT 67 MANAGEMENT’S DISCUSSION AND ANALYSIS On October 28, 2015, IRES Fund Management Limited became authorized by the Irish Central Bank as an alternative investment fund manager under the European Union (Alternative Investment Fund Managers) Regulation, 2013 (the “AIFM Regulations”). On November 1, 2015, IRES Fund Management Limited was appointed by IRES as its new alternative investment fund manager in accordance with the AIFM Regulations and replaced the existing alternative investment fund manager. 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 Ofﬁ cer of CAPREIT and each of its Canadian subsidiaries and director of each of its Irish subsidiaries. Ofﬁ cers and key management personnel of CAPREIT were granted options of IRES relating to the initial and secondary equity offerings. CAPREIT entered into the Pipeline Agreement with IRES to make available up to €150.0 million for a period of up to one year to acquire high quality properties in Ireland, and to subsequently permit IRES to acquire such properties from CAPREIT once IRES has sourced additional funding. The €150.0 million facility commitment provided by CAPREIT to IRES under the Pipeline Agreement terminated on March 26, 2015 on completion of IRES’s secondary equity offering. The facility commitment may be reauthorized by CAPREIT’s Board of Trustees at a later date. On January 28, 2015, CAPREIT, through a wholly-owned Irish subsidiary (“Rockbrook SPV”), acquired the Rockbrook Portfolio, consisting of 270 residential suites and approximately 50,214 square feet of mixed- use commercial space located in Dublin, Ireland under the Pipeline Agreement for €87.3 million (including VAT) and other acquisition costs of €2.4 million. The Rockbrook Portfolio was the ﬁ rst portfolio CAPREIT acquired for IRES under the Pipeline Agreement. Pursuant to the terms of the Pipeline Agreement, IRES acquired the Rockbrook SPV for the underwriters’ fee of €0.9 million and repaid the loan of €89.7 million to CAPREIT on March 31, 2015. CAPREIT had the following transactions with key management personnel and trustees. The loans outstanding to key management personnel and trustees for indebtedness relating to the SELTIP and LTIP at December 31, 2015 were $7.5 million and $6.4 million, respectively (December 31, 2014 – $7.8 million and $11.2 million, respectively). These amounts are taken into consideration when calculating the fair value of the Unit-based compensation financial liabilities. Key management personnel are eligible to participate in the EUPP. In addition, certain key management personnel also participate in the RUR Plan and trustees currently participate in the DUP. Pursuant to employee contracts, key management personnel are entitled to termination beneﬁ ts that provide for payments of up to 36 months of beneﬁ ts (based on base salary, bonus and other beneﬁ ts) depending on cause. Key management personnel and trustee compensation included in the consolidated statements of income and comprehensive income is comprised of: ($ Thousands) Year Ended December 31, Short-term employee beneﬁ ts Unit-based compensation – grant date amortization Unit-based compensation – fair value remeasurement Severance and other beneﬁ ts 1 Total 2015 $ 4,468 $ 4,012 8,480 2014 3,583 3,306 6,889 6,103 2,074 6,997 – $ 16,657 $ 13,886 1 Costs related to the departure of the former Chief Accounting Ofﬁ cer are included in severance and other employee costs. CAPREIT leases ofﬁ ce space from a company in which Thomas Schwartz has an 18% beneﬁ cial interest. The rent paid for the ofﬁ ce space (which is based on fair market rents at the date the lease was entered into) for the year ended December 31, 2015 was $0.9 million (2014 – $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 ﬁ xed price natural gas, hydro and land lease agreements, as outlined in note 25 to the accompanying audited consolidated annual ﬁ nancial statements. CAPREIT is contingently liable under guarantees provided to certain of CAPREIT’s lenders in the event of defaults and with respect to litigation and claims that arise in the ordinary course of business. These matters are generally covered by insurance. In the opinion of Management, any liability that may arise from such contingencies would not be expected to have a material adverse effect on the consolidated ﬁ nancial statements of CAPREIT. 68 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S DISCUSSION AND ANALYSIS SECTION VIII Subsequent Events On January 20, 2016, CAPREIT completed the acquisition of a portfolio of six apartment and townhome properties well located in London, Ontario totaling 670 rental suites. The purchase price (excluding transaction costs) of approximately $52.0 million was funded with cash from 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 same-property 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, telecommunications and other income sources. In addition, numerous successful cost management initiatives have proven effective, which should lead to stable net operating income over this period. CAPREIT believes the strong defensive characteristics of its property portfolio, due to diversiﬁ cation 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 opportunities to further diversify its property portfolio. While CAPREIT’s strategy is to remain principally focused on its core Canadian markets, CAPREIT continues to consider select opportunities in other markets. CAPREIT has deﬁ ned a number of strategies to capitalize on its strengths and achieve its objectives of providing Unitholders with stable and predictable monthly cash distributions while growing distributions and Unit value over the long term. First, Management maintains a focus on maximizing occupancy and average monthly rents in accordance with local conditions in each of its markets. Since its inception in May 1997, CAPREIT’s hands-on management style, focus on resident communications and capital investment programs aimed at increasing the long-term value of its properties have contributed to a strong track record of stable portfolio occupancy and average monthly rents. A signiﬁ cant 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 2016 has been set at 2.0% and in British Columbia has been set at 2.9%. An amendment to the Residential Tenancies Act, 2006, enacted on June 19, 2012, set Ontario’s annual rent increase guideline to not more than 2.5% beginning in 2013. The Ontario rent control legislation provides that landlords may apply to the Landlord and Tenant Board (the “Board”) to raise rents by more than the approved annual guideline increase (“AGI”). The Board can allow such an AGI for: (i) eligible capital expenditures; (ii) unusually high increases in property taxes and/or utility costs; and (iii) increases in eligible security costs. The maximum AGI permitted in connection with eligible capital expenditures is three percent per year to a maximum of nine percent over a three-year period. These same limitations do not apply to AGI applications related to unusually high increases in property taxes and/or utilities, or increases in eligible security costs. In line with its focus to maximize average monthly rents, CAPREIT continues to pursue AGIs where it believes appropriate and to this effect, has ﬁ led applications for completed property capital investments and/ or unusually high increases in realty taxes, as well as one application relating to an unusually high increase in water costs. In addition, CAPREIT continues to assess the viability of a number of additional AGI applications. The impact of these AGI applications could be signiﬁ cant at the property level; however, it is presently indeterminable due to the inherent uncertainties associated with the adjudication process and the impact of tenant turnover at the affected properties. The following table summarizes the status of cumulative AGI applica- tions ﬁ led as at December 31, 2015 and December 31, 2014: December 31, Number of Suites and Sites Filed 2015 20,594 2014 19,868 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, 2 133 3.74% 1.77 13 3.53% 1.56 91 3.51% 1.69 49 4.50% 1.89 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 2015 ANNUAL REP ORT 69 MANAGEMENT’S DISCUSSION AND ANALYSIS Second, Management continues to focus on reducing its operating costs as a percentage of total revenues. CAPREIT invests in various environment-friendly and energy-saving initiatives, including energy- efﬁ cient boilers and lighting systems, and is evaluating all energy- purchasing programs to reduce or stabilize overall net energy costs. Third, Management continues to direct its efforts on its building infrastructure improvement programs to upgrade properties across the portfolio and to reposition the portfolio by completing value-enhancing capital investments. These investments are expected to enhance the life safety of residents, improve the portfolio’s long-term cash ﬂ ow generating potential and increase its useful life over the long term. Fourth, CAPREIT continues to prudently focus on accretive acquisitions that meet its strategic criteria and enhance CAPREIT’s geographic diversiﬁ cation. From time to time, CAPREIT may also identify certain non-core assets for sale that do not conform to its current portfolio composition or operating strategies, or where Management believes their value has been maximized. 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 entered into and continues to prudently investigate 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 reﬁ nancing 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 ﬁ nancing and reﬁ nancing objectives at reasonable costs over the medium term. CAPREIT will continue to maintain its conservative approach to its capital structure, leverage and coverage ratios and strive to further improve its distribution payout ratio. Management believes its successful equity ﬁ nancing and mortgage reﬁ nancing programs have resulted in CAPREIT possessing one of the strongest balance sheets in its industry, well suited to delivering consistent, stable and secure monthly cash distributions over the long term. 70 CAPREIT 2015 ANNUAL REP ORT MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated ﬁ nancial statements and information included in this Annual Report have been prepared by the management of CAPREIT in accordance with International Financial Reporting Standards, and include amounts based on management’s informed judgements and estimates. Management is responsible for the integrity and objectivity of these consolidated ﬁ nancial statements. The ﬁ nancial information presented elsewhere in this Annual Report is consistent with that in the consolidated ﬁ nancial statements in all material respects. To assist management in the discharge of these responsibilities, management has established the necessary internal controls, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. These internal controls are designed to ensure that our ﬁ nancial records are reliable for preparing ﬁ nancial statements; other ﬁ nancial information, transactions are properly authorized and recorded; and assets are safeguarded. As at December 31, 2015, our Chief Executive Officer and Chief Financial Ofﬁ cer evaluated, or caused an evaluation under their direct supervision, of the design and operating effectiveness 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 evaluation, determined that our internal controls over financial reporting were appropriately designed and operating effectively. PricewaterhouseCoopers LLP, the independent auditors appointed by the Unitholders, have examined the consolidated ﬁ nancial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the Unitholders their opinion on the consolidated financial statements. Their report as auditors is set forth below. The consolidated ﬁ nancial statements have been further reviewed and approved by the Board of Trustees and its Audit Committee. This committee meets regularly with management and the auditors, who have full and free access to the Audit Committee. February 16, 2016 Thomas Schwartz President and Chief Executive Ofﬁ cer Chief Financial Ofﬁ cer Scott Cryer CAPREIT 2015 ANNUAL REP ORT 71 due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁ nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated ﬁ nancial statements. We believe that the audit evidence we have obtained in our audits is sufﬁ cient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated ﬁ nancial statements present fairly, in all material respects, the financial position of CAPREIT and its subsidiaries as at December 31, 2015 and December 31, 2014 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 INDEPENDENT AUDITOR’S REPORT February 16, 2016 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, 2015 and December 31, 2014 and the consolidated statements of income and comprehensive income, Unitholders’ equity and cash ﬂ ows for the years then ended, and the related notes, which comprise a summary of signiﬁ cant accounting policies and other explanatory information. Management’s responsibility for the consolidated ﬁ nancial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated 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 ﬁ nancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether 72 CAPREIT 2015 ANNUAL REP ORT CONSOLIDATED BALANCE SHEETS (CA$ Thousands) As at December 31, Non-Current Assets Investment properties Other non-current assets Current Assets Other current assets Non-Current Liabilities Mortgages payable Bank indebtedness Unit-based compensation ﬁ nancial liabilities Other non-current liabilities Current Liabilities Mortgages payable Unit-based compensation ﬁ nancial liabilities Accounts payable and accrued liabilities Other current liabilities Security deposits Exchangeable Units Distributions payable Unitholders’ Equity Unit Capital Accumulated other comprehensive loss (“AOCL”) Retained earnings See accompanying notes to consolidated ﬁ nancial statements. Signed on behalf of the Trustees Note 6 7 7 9 10 11, 12 8 9 11, 12 8 11 19 2015 2014 $ 6,863,140 205,939 7,069,079 33,749 $ 7,102,828 $ 2,858,622 168,211 6,980 5,856 3,039,669 239,151 39,183 72,412 8,008 27,049 4,330 13,073 403,206 $ 3,442,875 $ 2,222,747 (14,530) 1,451,736 $ 3,659,953 $ 7,102,828 $ 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 $ 2,943,056 $ 1,761,313 (27,284) 1,249,076 $ 2,983,105 $ 5,926,161 Thomas Schwartz TRUSTEE Michael Stein TRUSTEE CAPREIT 2015 ANNUAL REP ORT 73 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 Fair value adjustments of investment properties Realized loss on disposition of investment properties Amortization of property, plant and equipment Severance and other employee costs Operating Income Fair value adjustments of Exchangeable Units Gain (loss) on derivative ﬁ nancial instruments Interest and other ﬁ nancing costs Foreign currency translation Dilution loss on equity accounted investments Other income Net Income Other Comprehensive Income (Loss) Items That May Be Reclassiﬁ ed Subsequently to Net Income Amortization of losses from AOCL to interest and other ﬁ nancing costs Change in fair value of derivative ﬁ nancial instruments Change in fair value of investments Foreign currency translation Reversal of foreign currency translation relating to IRES ownership dilution Other Comprehensive Income (Loss) Comprehensive Income See accompanying notes to consolidated ﬁ nancial statements. Note 12 6 5 20 11 16 21 19 16 19 19 19 2015 2014 $ 533,798 $ 506,411 (59,337) (149,847) (209,184) 324,614 (22,707) (13,417) 173,242 (639) (2,799) (5,237) 453,057 (276) 282 (107,977) (7,447) (4,346) 12,340 345,633 3,311 (2,641) 652 8,305 3,127 12,754 358,387 $ $ $ $ (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 $ $ $ $ 74 CAPREIT 2015 ANNUAL REP ORT CONSOLIDATED STATEMENTS OF UNITHOLDERS’ EQUITY (CA$ Thousands) Unitholders’ Equity, January 1, 2015 Unit Capital New Units issued Distribution Reinvestment Plan Unit Option Plan Deferred Unit Plan RUR Plan Long-Term Incentive Plan Senior Executive 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, 13 12, 13 12 14 14 Unit Capital Retained Earnings Accumulated Other Comprehensive Loss Total $ 1,761,313 $ 1,249,076 $ (27,284) $ 2,983,105 386,988 44,206 6,473 116 963 14,380 7,162 1,146 461,434 – – – – – – – – – – – – – – – – – – – – – – – – 345,633 – 345,633 (129,900) (13,073) (142,973) – 12,754 12,754 – – – 386,988 44,206 6,473 116 963 14,380 7,162 1,146 461,434 345,633 12,754 358,387 (129,900) (13,073) (142,973) Unitholders’ Equity, December 31, 2015 $ 2,222,747 $ 1,451,736 $ (14,530) $ 3,659,953 (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 See accompanying notes to consolidated ﬁ nancial statements. $ 1,761,313 $ 1,249,076 $ (27,284) $ 2,983,105 CAPREIT 2015 ANNUAL REP ORT 75 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 investment properties Loss on disposition of investment properties (Gain) loss on derivative ﬁ nancial instruments Amortization Unit-based compensation expenses Straight-line rent adjustment Dilution loss on equity accounted investments Foreign currency adjustment Net income items related to ﬁ nancing and investing activities Changes in non-cash operating assets and liabilities Cash Provided by Operating Activities Investing Activities Acquisition of investment properties Capital investments Acquisition of investments Disposition of investments Disposition of investment properties Change in restricted cash Investment and other income received Cash Used in Investing Activities Financing Activities Mortgage ﬁ nancings Mortgage principal repayments Mortgages repaid on maturity Financing costs on mortgages payable CMHC premiums on mortgages payable Interest paid Bank indebtedness Proceeds on issuance of Units Net cash distributions to Unitholders Cash Provided by (Used in) Financing Activities Changes in Cash and Cash Equivalents During the Year Cash and Cash Equivalents, Beginning of the Year Cash and Cash Equivalents, End of the Year See accompanying notes to consolidated ﬁ nancial statements. 76 CAPREIT 2015 ANNUAL REP ORT Note 5 16 7, 19, 21 23 23 23 23 23 23 23 23 23 2015 2014 $ 345,633 $ 317,975 (173,242) 276 – 639 (282) 9,722 13,417 122 4,346 7,447 208,078 97,667 (12,921) 292,824 (933,386) (174,027) (32,305) – 24,004 (593) 1,611 (1,114,696) 808,976 (84,890) (143,328) (3,348) (14,130) (100,467) 54,644 401,154 (96,739) 821,872 (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) – – – $ – – – $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2015 (CA$ Thousands, except Unit and per Unit amounts) NOTE 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 commun- ities (“MHC”), principally located in and near major urban centres across Canada. CAPREIT’s net assets and operating results are substantially 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 gov- erned 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 cer- tain 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, 2015, CAPREIT holds 65.5 million ordinary shares representing 15.7% of the issued share capital of 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. NOTE 2 Summary of Signiﬁ cant Accounting Policies a) Statement of compliance CAPREIT has prepared these consolidated annual financial state- ments in accordance with International Financial Reporting Standards (“IFRS”) applicable to the preparation of consolidated annual ﬁ nancial statements. These consolidated annual ﬁ nancial statements, which were approved by CAPREIT’s Board of Trustees on February 16, 2016, have been pre- pared on the basis of IFRS issued and effective, or available for early adoption, at December 31, 2015. These policies have been consistently applied to all years presented, unless stated otherwise. b) Basis of presentation These consolidated annual ﬁ nancial statements have been prepared on a going concern basis, presented in Canadian dollars, which is also CAPREIT’s functional currency, and have been prepared on an historical cost basis except for: i) Investment properties and certain ﬁ nancial instruments, which are stated at fair value; and ii) Certain Unit-based compensation accounts, which are stated at fair value. c) Principles of consolidation i) Subsidiaries These consolidated annual ﬁ nancial statements comprise the assets and liabilities of all subsidiaries and the results of all subsidiaries for the ﬁ nancial period. CAPREIT and its subsidiaries are collectively referred to as “CAPREIT” in these consolidated annual ﬁ nancial state- ments. 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 commen- ces and deconsolidated from the date control ceases. ii) Joint Arrangements CAPREIT has joint arrangements in and joint control of a num- ber 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 rev- enues, expenses, assets and liabilities, which are included in their respective descriptions in 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 signiﬁ cant inﬂ uence, but not control. Generally, CAPREIT is considered to exert signiﬁ cant inﬂ uence when it directly or indirectly holds 20% or more of the voting power of the investee. However, determining signiﬁ cant inﬂ uence is a matter of judgement and speciﬁ c circumstances; there- fore, holding less than 20% of an entity does not necessarily preclude an entity from having signiﬁ cant inﬂ uence as the entity may exert signiﬁ cant inﬂ uence through representation on the board of trustees, direction of management or through contractual agreements. CAPREIT 2015 ANNUAL REP ORT 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 rec- ognizing 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 ﬁ nancial statements is not more than three months old. The standard further requires adjustments to this information for any signiﬁ cant 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 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 produ- cing rental income, capital appreciation, or both. CAPREIT’s investments in its property portfolio reﬂ ect different forms of property interests, including: (i) Fee Simple Interests – Apartments and Townhomes, (ii) Operating Leasehold Interests, (iii) Land Leasehold Interests and (iv) Fee Simple Interests – Manufactured Home Communities Land Lease Sites. These four forms of property interests meet the deﬁ nition of investment property and are classiﬁ ed and accounted for as such. All investment properties are recorded at their fair value at their respective acquisition dates and are subsequently stated at fair value at each consolidated balance sheet date, with any gain or loss arising from a change in fair value recognized within operating income in the consoli- dated statements of income and comprehensive income for the period. For Operating Leasehold Interests, all of which are held under a prepaid operating lease, CAPREIT has classiﬁ ed all such interests as ﬁ nance leases, including the fair value of options to purchase, and these are accounted for and presented as investment properties. The fair value of all of CAPREIT’s investment properties is determined by qualiﬁ ed external appraisers annually. Management regularly under- takes a review of its investment property valuation between external appraisal dates to assess the continuing validity of the underlying assumptions, such as cash ﬂ ows, capitalization rates and discount rates. These assumptions are tested against market information obtained from an independent 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 signiﬁ cant assumptions, estimates and valuation methods used. e) Property asset acquisitions At the time of acquisition of a property or a portfolio of investment properties, CAPREIT evaluates whether the acquisition is a business combination or asset acquisition. IFRS 3, Business Combinations (“IFRS 3”) is only applicable if it is considered that a business has been acquired. A business, according to IFRS 3, is deﬁned as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors or lower costs or other economic beneﬁts directly and proportionately to CAPREIT. When determining whether the acquisition of an investment property or a portfolio of investment properties is a business combination or an asset acquisition, CAPREIT applies judgement 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 or an operating platform has been acquired. When an acquisition does not represent a business as deﬁ ned under IFRS 3, CAPREIT classiﬁ es these properties or a portfolio of properties as an asset acquisition. Identiﬁ able assets acquired and liabilities assumed in an asset acquisition are measured initially at their fair val- ues at the acquisition date. Acquisition-related transaction costs are capitalized to the property. f) Presentation of non-current assets classiﬁ ed as held-for-sale Investment properties are reclassiﬁ ed to assets held-for-sale when criteria set out in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, are met. CAPREIT presents non-current assets classiﬁ ed as held-for-sale and their associated liabilities separately from other assets and liabilities on the consolidated balance sheets and in 78 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS the notes beginning from the period in which they were ﬁ rst classiﬁ ed as “for sale”. The sale of one or a group of investment properties by CAPREIT will generally be presented as non-current assets held-for-sale and not discontinued operations. If a group of assets held-for-sale is con- sidered to meet the deﬁ nition of a discontinued operation, then income or expense recognized in the consolidated statements of income and comprehensive income relating to that group of assets is presented separately from continuing operations. A discontinued operation is a component of operations that represents a separate major line of busi- ness 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. Classiﬁ cation of ﬁ nancial instruments The following summarizes the classiﬁ cation and measurement CAPREIT has elected to apply to each of its signiﬁ cant categories of ﬁ nancial instruments: Classiﬁ cation Type Financial assets Cash and cash equivalents Loans and receivables Loans and receivables Restricted cash Loans and receivables Other receivables Available-for-sale Investments Measurement Amortized cost Amortized cost Amortized cost Fair value g) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumu- lated depreciation and mainly comprise head ofﬁ ce and regional ofﬁ ces leasehold improvements, corporate and information technology systems, and are presented within other non-current assets on the consolidated balance sheets. These items are amortized on a straight-line basis over their estimated useful lives ranging from three to ﬁ ve years, or, in the case of leasehold improvements, are amortized over the 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 cap- italized and amortized on a straight-line basis over the term of the lease as a reduction of rental revenue. The carrying amounts of the tenant inducements are included in the fair value of investment properties. i) Prepaid CMHC premiums Fees and insurance premiums paid to Canada Mortgage and Housing Corporation (“CMHC”) are presented within other non-current assets. They are amortized over the amortization period of the underlying mortgage loans when incurred (initial amortization period is typically 25 to 35 years) and are included in interest and other ﬁ nancing costs in the consolidated statements of income and comprehensive income. j) Financial instruments Financial assets and ﬁ nancial liabilities Financial assets and ﬁ nancial liabilities are initially recognized at fair value and are subsequently accounted for based on their classiﬁ cation as described below. Their classiﬁ cation depends on the purpose for which the ﬁ nancial instruments were acquired or issued, their charac- teristics and CAPREIT’s designation of such instruments. The standards require that all ﬁ nancial assets and ﬁ nancial liabilities be classiﬁ ed as fair value through proﬁ t or loss (“FVTPL”), loans and receivables, avail- able-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 deﬁ nition of cash and cash equivalents and is included in other assets on the consolidated balance sheets. Interest earned or accrued on these ﬁ nancial 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 consolidated balance sheet date, which are classiﬁ ed as non-current assets. Loans and receiv- ables are included in other assets on the consolidated balance sheets and are accounted for at amortized cost. Available-for-sale Investments are measured at fair value at each consolidated balance sheet date and the difference between the fair value of the asset and its cost basis is included in other comprehensive income (“OCI”). Differences included in accumulated other comprehensive loss (“AOCL”) are transferred to net income when the asset is removed from the con- solidated 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. CAPREIT 2015 ANNUAL REP ORT 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Other liabilities Such ﬁ nancial liabilities are recorded at amortized cost and include all liabilities other than derivatives or liabilities, which are designated to be accounted for at fair value. FVTPL Financial instruments in this category are recognized initially and sub- sequently at fair value. Gains and losses arising from changes in fair value are presented within net income in the consolidated statements of income and comprehensive income in the period in which they arise. Financial assets and liabilities at FVTPL are classiﬁ ed as current, except for the portion expected to be realized or paid more than 12 months after the consolidated balance sheet date, which is classiﬁ ed as non-current. Derivatives are also categorized as FVTPL unless designated as hedges. Transaction costs Transaction costs related to ﬁ nancial assets classiﬁ ed as FVTPL are expensed as incurred. Transaction costs related to loans and receiv- ables and other liabilities, measured at amortized cost, are netted against the carrying value of the asset or liability and amortized over the expected life of the instrument using the effective interest rate method. Transaction costs relating to available-for-sale ﬁ nancial assets are included in the cost of the asset on initial recognition. Determination of fair value The fair value of a ﬁ nancial instrument on initial recognition is generally the transaction price, which is the fair value of the consideration given or received. Subsequent to initial recognition, the fair value of ﬁ nancial instruments is remeasured based on relevant market data. CAPREIT classiﬁ es the fair value for each class of ﬁ nancial instrument based on the fair value hierarchy. The fair value hierarchy distinguishes between market value data obtained from independent sources and CAPREIT’s own assumptions about market value. See note 15 for a detailed dis- cussion of valuation methods used for ﬁ nancial instruments quoted in an active market and instruments valued using observable data. Derivatives Derivative ﬁ nancial instruments are initially recognized at fair value on the date a derivative contract is entered into and subsequently remeas- ured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative ﬁ nancial instrument is designated as a hedging instrument and, if so, the nature of the item being hedged. For CAPREIT’s accounting policy on hedging, see k) Hedging relationships section below. Derivatives not designated in a hedging relationship are measured at fair value with changes therein recognized directly through the consoli- dated statements of income and comprehensive income (loss) within net income. Embedded derivatives Derivatives embedded in other ﬁ nancial instruments or contracts are separated from their host contracts and accounted for as derivatives when their economic characteristics and risks are not closely related to those of the host contract; the terms of the embedded derivative are the same as those of a free-standing derivative; and the combined instrument or contract is not measured at fair value. These embedded derivatives are measured at fair value with changes therein recog- nized 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 ﬂ ow hedges. At the inception of a trans- action, CAPREIT documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. CAPREIT also documents, both at hedge inception and on an ongoing basis, its assessment of whether the derivatives used in hedging transactions are highly effective in offsetting changes in cash ﬂ ows of hedged items. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂ ow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the consolidated statements of income and comprehensive income under net income. Should a hedging relationship become ineffective and/ or hedge accounting become no longer appropriate, previously unrealized gains and losses remain within AOCL and are amortized to the relevant item in the consolidated statements of income and comprehensive income in the same periods during which the hedged items affect earn- ings, 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 jurisdic- tion, it was exposed to foreign currency ﬂ uctuations 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 rec- ognized 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. 80 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 trans- action fees, costs and discounts directly related to the mortgage are recognized within interest and other ﬁ nancing costs in the consolidated statements of income and comprehensive income over the expected term of the mortgage. Mortgage maturities and repayments due more than 12 months after the consolidated balance sheet date are classiﬁ ed as non-current. m) Exchangeable Units Issued and outstanding Units of CAPLP are exchangeable on demand for Trust Units (“Exchangeable Units”). As the Trust Units are redeemable at the holder’s option, the Exchangeable Units are classiﬁ ed as current liabilities. The distributions on the Exchangeable Units are recognized in the consolidated statements of income and comprehensive income (loss) as interest expense under IFRS and the interest payable at the reporting date is reported under other current liabilities on the consoli- dated 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 comprehensive income (loss). Other comprehensive income (loss) includes changes in the fair value of investments and the effective portion of cash ﬂ ow hedges less any amounts reclassiﬁ ed to interest and other ﬁ nancing costs and the associated income taxes. o) Accumulated Other Comprehensive Loss (“AOCL”) AOCL is included on the consolidated balance sheets as Unitholders’ Equity and includes the unrealized gains and losses of the changes in the fair value of cash ﬂ ow hedges, derivatives and investments. The components of AOCL are disclosed in note 19. p) Revenue recognition CAPREIT recognizes rental revenue using the straight-line method, whereby the total amount of rental revenue to be received from all leases is accounted for on a straight-line basis over the term of the related leases. The difference between the rental revenue recognized and the amounts contractually due under the lease agreements is accrued as rent receivable, which is included as a component of investment prop- erties 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 ﬁ nancing costs include mortgage interest, which is expensed at the effective interest rate, and transaction costs incurred in connection with the revolving credit facilities, which are capitalized and presented as other non-current assets and amortized over the term of the facility to which they relate. r) Distributions Distributions represent the monthly cash distributions on outstanding Trust Units. s) Unit-based compensation and incentive plans Unit-based compensation beneﬁ ts are provided to ofﬁ cers, trustees and certain employees and are intended to facilitate long-term owner- ship of Trust Units and provide additional incentives by increasing the participants’ interest, as owners, in CAPREIT. Unit-based compensation liabilities are classiﬁ ed as current, except for the portion expected to be realized or paid beyond 12 months of the consolidated balance sheet date, including amounts 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 LTIP SELTIP DUP RUR Plan UOP Type Issued Units Issued Units Rights Rights Options Vesting Period 2 years 2 2 years 2 Grant date 3 years Reporting period 3 Type of Amortization Graded Graded Immediate Straight-line Straight-line Distributions Applied to Secured loan Secured loan Additional Units Additional Units N/A Mark-to-Market until Loan repaid Loan repaid Settled Settled Exercised 1 For deﬁ nitions of these plans, refer to notes 11, 12 and 13. 2 Vesting one-third on grant date and one-third on each of the subsequent two grant anniversary dates. 3 Vesting of the options is subject to satisfaction of performance criteria over the annual reporting period. CAPREIT 2015 ANNUAL REP ORT 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS t) Consolidated statements of cash ﬂ ows Cash and cash equivalents consist of cash on hand, balances with banks, and investments in money market instruments with an original term to maturity of 90 days or less at acquisition. Investing and ﬁ nan- cing activities that do not require the use of cash or cash equivalents are excluded from the consolidated statements of cash ﬂ ows and are disclosed separately in the notes to the consolidated annual ﬁ nancial statements. 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 condi- tions available to Real Estate Investment Trusts (“REITs”) (the “REIT Exception”) under amendments to the Tax Act intended to permit a cor- porate income tax rate of nil as long as the speciﬁ ed conditions continue to be met. v) Earnings per Unit As a result of the redemption feature of CAPREIT’s Trust Units, these Units are considered ﬁ nancial liabilities under IAS 33, Earnings per Share, and they may not be considered 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 ﬁ nancial statements are presented in Canadian dol- lars, which is the functional currency of CAPREIT and the presentation currency for the consolidated ﬁ nancial 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 monet- ary 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 comprehen- sive income. Foreign exchange gains and losses are presented in the consolidated 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 clariﬁ es that the obligating event that gives rise to a liabil- ity 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 has 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) Future accounting changes As at February 16, 2016, 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, 2015: IAS 1, Presentation of Financial Statements This amendment clariﬁ es guidance on materiality and aggregation, the presentation of subtotals, the structure of ﬁ nancial statements and the disclosure of accounting policies. This amendment came into effect for years beginning on or after January 1, 2016. IFRS 9, Financial Instruments (“IFRS 9”) The revised IFRS 9 incorporates requirements for the classiﬁ cation and measurement of ﬁ nancial liabilities over the existing 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 compre- hensive income’ with only dividends being recognized in proﬁ t or loss. IFRS 9 was further amended in November 2013 to: (i) include guidance on hedge accounting; (ii) allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in an entity’s own credit risk, from ﬁ nancial liabilities designated under the fair value option, in OCI (without having to adopt the remainder of IFRS 9); and (iii) remove the previous mandatory effective date of January 1, 2015. The ﬁ nal amendment of IFRS 9 as at July 2014 included (i) a third measurement category for ﬁ nancial 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. 82 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IFRS 7, Financial Instruments – Disclosure This amendment requires additional disclosures on transition from IAS 39 to IFRS 9 upon adoption of IFRS 9. An additional amendment, which is prospective with an option to apply retrospectively, requires disclosure of all types of continuing involvement that an entity may have in transferred ﬁ nancial assets when the transfer of ﬁ nancial assets to a third party occurs under conditions which allow the transferor to derec- ognize the asset. This amendment came into effect on January 1, 2016. IFRS 10 and IAS 28, Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture The amendment clariﬁ es an inconsistency between the two standards, and establishes that a gain or loss is fully recognized when the trans- action involves a business, and a partial gain or loss is recognized when the transaction involves assets that do not constitute a business. This amendment came into effect on January 1, 2016. IFRS 11, Accounting for Acquisitions of Interests in Joint Operations This amendment provides speciﬁ c guidance for the acquisition of an interest in a joint operation that is a business. This amendment came 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 interpretations. The new standard provides a single, comprehensive revenue recognition model. While early adoption is permitted for IFRS reporters, this standard is effective for the interim periods within years beginning on or after January 1, 2018. IFRS 16, Leases This new standard on leases supersedes IAS 17, Leases and related interpretations. IFRS 16 sets out the principles for the recognition, meas- urement, presentation and disclosure of leases for both parties to a contract: i.e. the customer (“lessee”) and the supplier (“lessor”). From a lessee perspective, IFRS 16 eliminates the classiﬁ cation of leases as either operating leases or ﬁ nance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. IFRS 16 is effective as of January 1, 2019; however, a company can choose to apply IFRS 16 before that date but only if it also applies IFRS 15, Revenue from Contracts with Customers. IAS 27, Consolidated and Separate Financial Statements This amendment restores the option to use the equity method to account for investments in subsidiaries, joint ventures and associates in an entity’s separate ﬁ nancial statements. The amendment came into effect on January 1, 2016. IAS 34, Interim Financial Reporting This amendment is retrospective and requires a cross-reference from the interim ﬁ nancial statements to the location of that information. This amendment came into effect on January 1, 2016. CAPREIT is currently assessing the impact of the above standards and amendments but does not expect to be signiﬁ cantly impacted on adop- tion in their current form. NOTE 3 Critical Accounting Estimates, Assumptions, and Judgements The preparation of consolidated annual financial statements in accordance with IFRS requires the use of estimates, assumptions and judgements that in some cases relate to matters that are inherently uncertain, and which affect the amounts reported in the consolidated annual ﬁ nancial statements and accompanying notes. Areas of such estimation include, but are not limited to: valuation of investment prop- erties, remeasurement at fair value of ﬁ nancial instruments, valuation of accounts receivable, capitalization of costs, accounting accruals, the amortization of certain assets, accounting for deferred income taxes and Unit-based compensation ﬁ nancial liabilities. Changes to estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated annual ﬁ nancial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions and conditions. CAPREIT 2015 ANNUAL REP ORT 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimates deemed to be more signiﬁ cant, due to subjectivity and the potential risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are dis- cussed below. i) Valuation of investment properties Investment properties are measured at fair value as at the con- solidated 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 recog- nized valuation techniques. The techniques used comprise both the capitalized net operating income method and the discounted cash ﬂ ow method and include estimating, among other things (all considered Level 3 inputs), future stabilized net operating income, capitalization rates, reversionary capitalization rates, discount rates and other future cash ﬂ ows applicable to investment properties. Fair values for investment properties are classiﬁ ed as Level 3 in the fair value hierarchy as disclosed in note 15. The fair value of investment properties is established annually by qualiﬁ ed, independent appraisers. Each quarter, CAPREIT utilizes market assumptions for rent increases, capitalization and discount rates provided by an external appraisal ﬁ rm to determine the fair value of the investment properties for interim reporting purposes. Capitalization rates employed by the appraisal ﬁ rm 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 signiﬁ cant judgements, estimates and assumptions about market conditions in effect as at the consolidated balance sheet date. See note 6 for a detailed discussion of valuation methods and the signiﬁ cant assumptions and estimates used. ii) Valuation of ﬁ nancial instruments The fair value of derivative assets and liabilities is based on assump- tions 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 ﬁ nancial liabilities are based on assumptions that involve signiﬁ cant estimates. The basis of valuation for CAPREIT’s Unit-based compensation ﬁ nancial liabilities is set out in note 12; however, the fair values as at the reporting date may differ materially from how they are ultimately recognized if there is volatility in listed Unit prices, interest rates or other key assumptions between the valuation date and settlement date. Market assumptions, estimates and valuation methodology are discussed in note 12. 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 signiﬁ cant inﬂ uence 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’s invest- ment manager and the control exerted over IRES by its independent Board of Directors. Management will reassess this conclusion should its ownership interest or the terms of the asset management agree ment change. v) Classiﬁ cation of Interest Paid on Consolidated Statements of Cash Flows IFRS permits the classiﬁ cation of interest paid as operating cash ﬂ ows because they enter into the determination of proﬁ t or loss, or alternatively as ﬁ nancing cash ﬂ ows because they are costs of obtaining ﬁ nancial resources. CAPREIT has applied its judgement and concluded that debt ﬁ nancing, 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-producing activ- ities. Therefore, interest paid is classiﬁ ed as a ﬁ nancing activity in CAPREIT’s consolidated statements of cash ﬂ ows. 84 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 Recent Investment Property Acquisitions CAPREIT completed the following investment property acquisitions since January 1, 2014, which have contributed to the operating results effective from their respective acquisition dates: For the Year Ended December 31, 2015 December 17, 2015 November 1, 2015 September 30, 2015 September 14, 2015 July 31, 2015 June 30, 2015 June 15, 2015 March 31, 2015 February 18, 2015 January 28, 2015 4 Suite or Site Count 169 4 3,661 Region(s) Victoria Bowmanville and Grand Bend Montréal 919 Greater Vancover Area Langley Langley Victoria Burlington Edmonton Dublin, Ireland 58 108 32 285 126 270 Total Acquisition Costs $ 29,474 Assumed Mortgage Funding 3,030 $ Interest Rate 1 1.80% Term to Maturity (Years) 2 4.2 372 502,276 170,611 17,070 13,010 5,479 54,500 31,092 125,416 – 3 – 5 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 5 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 3 – 5 – 3 – 3 – 3 – 3 – 3 – 3 – 3 5,632 $ 949,300 $ 3,030 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 Rockbrook Portfolio acquisition is the ﬁ rst portfolio CAPREIT acquired for Irish Residential Properties REIT plc (“IRES”) for €89,693 (including transaction costs) under the previously announced agreement entered into between IRES and CAPREIT on November 21, 2014 and as amended on February 9, 2015 (the “Pipeline Agreement”). Refer to note 5 for further details. 5 The acquisition was funded from CAPREIT’s Bridge Increase and Acquisition and Operating Facility (see note 10). 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 $ 4,331 7,570 $ – 3 2,984 426 17,097 20,624 141 11,356 – 3 8,391 14,747 – 3 – 3 $ 61,545 $ 26,122 Interest Rate 1 Term to Maturity (Years) 2 – 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. The total purchase consideration including mortgages payable and bank indebtedness is allocated to investment properties and other assets acquired based on the relative fair value of each at the time of purchase. CAPREIT 2015 ANNUAL REP ORT 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 Dispositions The tables below summarize the dispositions completed since January 1, 2014. These dispositions do not meet the deﬁ nition of discontinued operations under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations. Dispositions Completed During the Year Ended December 31, 2015 Disposition Date March 31, 2015 February 18, 2015 Suite Count 270 260 530 Region Dublin, Ireland 1 Toronto Sale Price $ 123,450 47,000 $ 170,450 Cash Proceeds 362 $ 23,642 $ 24,004 Mortgage Discharged $ 123,016 22,901 $ 145,917 1 Pursuant to the terms of the Pipeline Agreement, on March 31, 2015, CAPREIT sold the Rockbrook Portfolio via the sale of its interest in its wholly-owned Irish subsidiary (“Rockbrook SPV”) to IRES at the original acquisition cost of €89,693 and earned an underwriters’ fee of €873. IRES repaid the loan to CAPREIT for €89,693, the original acquisition cost (for which CAPREIT had initially drawn from the Acquisition and Operating Facility for the purchase of the Rockbrook Portfolio). In total, IRES paid €90,566 for the acquisition of the Rockbrook Portfolio. CAPREIT repaid the euro LIBOR borrowings of €90,300 subsequent to the sale. Included in foreign currency translation on the consolidated statements of income and comprehensive income is a foreign exchange loss of $3,155 relating to the disposition and a foreign exchange gain of $3,142 in respect to the repayment of the euro LIBOR borrowings. For the year ended December 31, 2015, a loss of $639 was recognized in connection with the property disposition on February 18, 2015. 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. 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”)), com- pleted 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 April 16, 2014 Suite Count 338 338 Region Dublin, Ireland Sale Price 70,871 70,871 $ $ Mortgage Discharged 7,599 7,599 $ $ 86 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 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 compre- hensive 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 qualiﬁ ed external appraisers annually. The qualiﬁ ed external apprais- ers hold a recognized relevant professional qualiﬁ cation and have recent experience in the location and category of the respective property. Each quarter, CAPREIT utilizes market assumptions for rent increases, cap- italization 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 ﬂ ows of an investment property change signiﬁ cantly in a quarter, the fair value of the investment property would be re-assessed by the external appraisers and the fair value adjusted accordingly. Fair values for investment properties are classiﬁ ed as Level 3 in the fair value hierarchy, as disclosed in note 15. On an annual basis, CAPREIT veriﬁ es all major inputs (as detailed above) to the valuation and reviews the results with the external appraisers for all independent valuations. On a quarterly basis, the market assumptions for rent increases, cap- italization and discount rates provided by the external appraisers are veriﬁ ed in determining the fair value of the investment properties. Discussion of the valuation process, the valuation methodology (as mentioned below), key inputs and results is held between CAPREIT and the qualiﬁ ed external appraisers at least once every quarter, in line with CAPREIT’s quarterly reporting dates. Changes in Level 3 fair values are analyzed at each reporting date as part of the quarterly valuation 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 proper- ties have been valued using the following methods and key assumptions: a) Fee Simple and MHC Land Lease Sites CAPREIT utilizes the DC method. Under this method, capitalization rates are applied to a stabilized net operating income (“NOI”) repre- senting market-based NOI assumptions (property revenue less property operating expenses adjusted for market-based assumptions such as long-term vacancy rates, management fees, R&M costs, and general and administration costs). The most signiﬁ cant assumption is the capitalization rate for each speciﬁ c property. The capitalization rate is based on the 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 capitaliz- ation rate will result in a decrease in the fair value of an investment property. The capitalization rate magniﬁ es the effect of a change in stabilized NOI, with a lower capitalization rate resulting in a greater effect of a change in stabilized NOI than a higher capitalization rate. b) Operating Leasehold Interests CAPREIT utilizes the DCF method. Under this method, discount rates are applied to the forecasted cash ﬂ ows reﬂ ecting market-based leas- ing assumptions for that speciﬁ c property as well as assumptions about renewal and new leasing activity. The most signiﬁ cant assump- tion is the discount rate applied over the initial term of the lease. The discount rate is generally the appropriate weighted average cost of capital that reﬂ ects the risk of the cash ﬂ ows for the investment property. In the case of one property, the forecasted cash ﬂ ows 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 ﬂ ows will result in an increase to the fair value of an investment property. An increase in the discount rate will result in a decrease to the fair value of an investment property. CAPREIT 2015 ANNUAL REP ORT 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS c) Options to Purchase the Related Operating Leasehold Interests d) Land Leasehold Interests CAPREIT utilizes the DC method at the reversion date (option exercise date) to estimate the future value, which is then discounted to a present value. Under this method, the stabilized income is adjusted to a projected NOI as at the end of the operating lease term and the capitalization rate is adjusted to a “reversionary capitalization rate” reﬂ ecting the incremental risk associated with future 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 utilizes the DCF method for properties that are subject to land or air rights leases. Under this method, discount rates are applied to the forecasted cash ﬂ ows reﬂ ecting market-based leasing assumptions for that speciﬁ c property as well as assumptions about renewal and new leasing activity. The most signiﬁ cant assumption is the discount rate applied over the term of the lease. Forecasted cash ﬂ ows are reduced for contractual land lease payments and the discount rates reﬂ ect the uncertainty regarding the renegotiation of land lease payments during and at the end of the term of the leases. A summary of the market assumptions and ranges for each type of property interest along with their fair values as at December 31, 2015 and December 31, 2014 is presented below: As at December 31, 2015 Type of Interest Fee Simple Interests – Fair Value WA NOI/ Cash Flow 1 Rate Type Apartments and Townhomes MHC Land Lease Sites Operating Leasehold Interests 2, 3, 4 Land Leasehold Interests 2 Total Investment Properties $ 5,786,430 282,820 598,690 195,200 $ 6,863,140 2,395 2,428 3,254 3,665 Capitalization rate Capitalization rate Discount rate 5 Discount rate As at December 31, 2014 Type of Interest Fee Simple Interests – Fair Value WA NOI/ Cash Flow 1 Rate Type Apartments and Townhomes MHC Land Lease Sites Operating Leasehold Interests 2, 3, 4 Land Leasehold Interests 2 Total Investment Properties $ 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 Max 7.96% 7.14% 6.50% 6.75% Max 6.70% 7.00% 6.75% 7.25% Weighted Average Min 3.25% 4.41% 5.75% 6.75% 4.69% 6.23% 5.94% 6.75% Weighted Average Min 3.50% 4.39% 5.75% 7.00% 4.90% 6.18% 6.03% 7.08% 1 Weighted average (“WA”) net operating income (“NOI”) or cash ﬂ ow 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 reﬂ ect the estimated air rights or land lease 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 $127,700 and $106,190 as at December 31, 2015 and December 31, 2014, respectively. 4 The weighted average remaining lease term on Operating Leasehold Interests is 17.8 years as at December 31, 2015 (December 31, 2014 – 18.8 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, 2015 and December 31, 2014. 88 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reconciliation of carrying amounts of investment properties by type For the Year Ended December 31, 2015 Balance at the beginning of the year Additions: Acquisitions Property capital investments Capitalized leasing costs 1 Foreign currency translation Dispositions 2 Realized loss on disposition of investment properties Unrealized fair value adjustments Fee Simple and MHC Land Lease Sites 4,986,030 $ Operating Leasehold Interests 559,560 $ Land Leasehold Interests 204,050 $ Total 5,749,640 $ 949,300 140,204 271 (3,155) (168,622) (639) 165,860 – 18,088 17 – – – 21,026 – 4,916 (122) – – – (13,644) 949,300 163,208 166 (3,155) (168,622) (639) 173,242 Balance of Investment Properties at end of year $ 6,069,249 $ 598,691 $ 195,200 $ 6,863,140 1 Comprises tenant inducements, straight-line rent and direct leasing costs. 2 See note 5 for further details. 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 Unrealized fair value adjustments Balance of Investment Properties at end of year Fee Simple and MHC Land Lease Sites 4,770,095 $ Operating Leasehold Interests 497,913 $ Land Leasehold Interests 191,210 $ 61,545 129,673 379 2,653 (70,871) 92,556 4,986,030 $ – 11,848 86 – – 49,713 559,560 $ – 4,080 132 – – 8,628 204,050 $ Total 5,459,218 $ 61,545 145,601 597 2,653 (70,871) 150,897 5,749,640 $ 1 Comprises tenant inducements, straight-line rent and direct leasing costs. CAPREIT 2015 ANNUAL REP ORT 89 NOTE 8 Other Liabilities 2015 2014 As at December 31, 2015 2014 Note 16a), b), c) $ $ 5,856 $ 5,856 $ 3,393 3,393 16c) $ $ – $ 8,008 8,008 $ 23 7,524 7,547 Other Non-Current Liabilities Hedge liability Total Other Current Liabilities Hedge liability Mortgage interest payable Total NOTE 9 Mortgages Payable As at December 31, 2015, mortgages payable bear interest at a weighted average effective rate of 3.52% (December 31, 2014 – 3.81%), and mature between 2016 and 2030. The effective interest rate as at December 31, 2015 includes 0.12% (December 31, 2014 – 0.15%) for the amortization of the realized component of the loss on settlement of derivative ﬁ nancial instruments of $32,494 included in AOCL. Approximately 98.9% of CAPREIT’s mortgages payable are ﬁ nanced at ﬁ xed interest rates as at December 31, 2015. Investment properties at fair value of $6,574,056 have been pledged as security as at December 31, 2015. CAPREIT has investment properties with a fair value of $289,084 as at December 31, 2015 that are not encumbered by mortgages and secure only the Acquisition and Operating Facility and Bridge Increase. As at December 31, 2015, unamortized deferred ﬁ nancing costs of $9,851 and fair value adjustments of ($4,881) are netted against mortgages payable. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 7 Other Assets As at December 31, Other Non-Current Assets Property, plant and equipment 1 Accumulated amortization of property, plant and equipment Net property, plant and equipment Prepaid CMHC premiums, net 2 Deferred loan costs, net 3 Investment Investment in associates 4 Total Other Current Assets Prepaid expenses Other receivables Restricted cash Deposits Total $ 26,350 $ 20,102 (17,109) 9,241 66,787 1,101 22,850 105,960 (14,317) 5,785 56,099 1,495 22,198 60,935 $ 205,939 $ 146,512 $ 4,753 $ 3,149 7,605 5,536 13,719 $ 33,749 $ 30,009 15,220 6,129 7,647 1 Consists of head ofﬁ ce and regional ofﬁ ces’ leasehold improvements, corpor- ate and information technology systems. 2 Represents prepaid CMHC premiums on mortgages payable net of accumu- lated amortization of $16,900 (December 31, 2014 – $14,017). 3 Represents deferred loan costs related to the revolving credit facilities net of accumulated amortization of $7,822 (December 31, 2014 – $6,784). 4 On March 25, 2015, IRES raised €215,000 from the secondary equity offering. CAPREIT recorded a loss on ownership dilution of $1,219 (in dilution loss on equity accounted investments) representing the difference between CAPREIT’s share of the fair value of the secondary equity offering (excluding CAPREIT’s investment of €23,500 ordinary shares) and the carrying value of CAPREIT’s disposed equity interest. Due to CAPREIT’s ownership dilution, $3,127 of accumulated foreign currency loss was reclassiﬁ ed from other comprehensive loss to dilution loss on equity accounted investments on the consolidated statements of income and comprehensive income. CAPREIT has determined that its investment in IRES should be accounted for using the equity method of accounting given the signiﬁ cant inﬂ uence 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’s asset manager and the control exerted over IRES by its independent Board of Directors. As at December 31, 2015, CAPREIT concluded that it continues to exert signiﬁ cant inﬂ uence over IRES. CAPREIT will continue to reassess this conclusion should its ownership interest or terms of the asset management agreement change. Refer to note 24 for further details. The table below discloses CAPREIT’s ownership in IRES and IRES’s share price: As at December 31, IRES Investment Share ownership (%) Number of IRES shares IRES share price (€) 2015 2014 15.7% 65,500,000 1.17 20.8% 42,000,000 1.06 90 CAPREIT 2015 ANNUAL REP ORT Future principal repayments for the period ending December 31 for the years indicated are as follows: As at December 31, 2015 2016 2017 1 2018 2 2019 2020 Subsequent to 2020 Deferred ﬁ nancing costs and fair value adjustments Principal Amount $ 239,151 262,846 285,400 329,316 306,161 1,679,869 % of Total Principal 7.7 8.5 9.2 10.6 9.9 54.1 3,102,743 100.0 (4,970) $ 3,097,773 As at December 31, Represented by: Mortgages payable – non-current 1, 2 $ 2,858,622 $ 2,369,954 288,500 Mortgages payable – current $ 3,097,773 $ 2,658,454 239,151 2015 2014 1 2 Included in mortgages payable as at December 31, 2015 is a $65,000 non-amortizing credit facility on two of the MHC land lease sites. Included in mortgages payable as at December 31, 2015 is a €63,500 ($95,434) non-amortizing euro LIBOR borrowing. See note 10 for further details. NOTE 10 Bank Indebtedness On September 30, 2015, CAPREIT amended its credit agreement for the $340,000 revolving credit facility (“Acquisition and Operating Facility”) to provide for a six-month temporary bridge facility of up to $450,000 (the “Bridge Increase”) to fund speciﬁ c acquisitions. The Bridge Increase was a term credit facility and any principal amount repaid may not be reborrowed, and its maturity date was six months from the initial drawdown of the advance, which was September 30, 2015. As at December 31, 2015, the Bridge Increase has been fully repaid. In respect to the Acquisition and Operating Facility, the aggregate amount of euro LIBOR borrowings at any time shall not exceed €70,000 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPREIT’s Credit Facilities include the $340,000 Acquisition and Operating Facility, the existing $65,000 five-year non-revolving term credit facility, and the Bridge Increase (collectively, the “Credit Facilities”). The $65,000 ﬁ ve-year non-revolving term credit facility bears interest at the bankers’ acceptance rate plus 1.4% per annum (included in mortgages payable). As at December 31, 2015, CAPREIT has euro LIBOR borrowings of €63,500 that bears interest at the euro LIBOR rate plus a margin of 1.65% 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, 2018. The interest rate on the Bridge Increase was determined by the interest rates on prime advances and bankers’ acceptances (plus a margin of 1.90% per annum) utilized during the six-month period. 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, 2015 Facility Less: Euro LIBOR borrowings 1 Bank indebtedness Letters of credit Available borrowing capacity Weighted average ﬂ oating interest rate As at December 31, 2014 Facility Less: Euro LIBOR borrowings 1 Bank Indebtedness Letters of credit Available borrowing capacity Weighted average ﬂ oating interest rate Acquisition and Operating Facility $ 340,000 (95,434) (168,211) (6,040) $ 70,315 2.56% Acquisition and Operating Facility $ 340,000 (68,646) (113,167) (6,144) $ 152,043 3.09% 1 Included in mortgages payable. Refer to note 9 for further details. CAPREIT 2015 ANNUAL REP ORT 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 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, 2015, the maximum number of Units issuable under all of CAPREIT’s Unit-based incentive plans is 9,500,000 Units (December 31, 2014 – 9,500,000). The maximum number of Units available for future issuance under all Unit incentive plans as at December 31, 2015 is 2,020,762 Units (December 31, 2014 – 2,380,445 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, 2015 and 2014 are as follows: (Number of Units) Year Ended December 31, 2015 Units, Unit Rights and Unit Options outstanding UOP DUP RUR SELTIP/ LTIP 1 Exch. Units 2 Total as at January 1, 2015 1,134,182 206,726 506,041 2,225,597 161,311 4,233,857 Issued, cancelled or granted during the year: Issued or granted Exercised or settled Cancelled Distributions reinvested Units, Unit Rights and Unit Options outstanding 428,250 (228,000) – – 37,488 (5,802) – 9,664 123,620 (67,438) (2,285) 26,375 – (780,199) – – – – – – 589,358 (1,081,439) (2,285) 36,039 as at December 31, 2015 1,334,432 248,076 586,313 1,445,398 161,311 3,775,530 (Number of Units) Year Ended December 31, 2014 Units, Unit Rights and Unit Options outstanding UOP DUP RUR SELTIP/ LTIP 1 Exch. Units 2 Total as at January 1, 2014 915,900 151,261 358,424 2,240,597 161,311 3,827,493 Issued, cancelled or granted during the year: Issued or granted Exercised or settled Distributions reinvested Units, Unit Rights and Unit Options outstanding 218,282 – – 46,594 – 8,871 132,525 (9,138) 24,230 – (15,000) – – – – 397,401 (24,138) 33,101 as at December 31, 2014 1,134,182 206,726 506,041 2,225,597 161,311 4,233,857 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 $4,330 as at December 31, 2015 (December 31, 2014 – $4,054), which approximates the closing price of the Trust Units. 92 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The table below summarizes the change in the total Unit-based compensation ﬁ nancial liabilities for the year ended December 31, 2015 and December 31, 2014, including the settlement of such liabilities through the issuance of Trust Units. As at December 31, Total Unit-based compensation ﬁ nancial liabilities, beginning of the year Unit-based compensation expenses Early vesting of RURs 1 Settlement of Unit-based compensation awards for Trust Units Total Unit-based compensation ﬁ nancial liabilities, end of the year The Unit-based compensation ﬁ nancial liabilities comprise: As at December 31, Current LTIP SELTIP DUP RUR UOP Non-Current RUR Total Unit-based compensation ﬁ nancial liabilities, end of the year 2015 48,686 13,226 1,307 (17,056) 46,163 2015 14,309 8,414 6,657 5,453 4,350 39,183 6,980 46,163 $ $ $ $ 2014 32,764 16,337 – (415) 48,686 2014 19,042 10,952 5,178 3,690 4,418 43,280 5,406 48,686 $ $ $ $ 1 Represents the accelerated vesting of previously-granted RUR Units relating to terminated employees and the departure of the former Chief Accounting Ofﬁ cer, which has been recognized in severance and other employee costs in the consolidated statements of income and comprehensive income. Units or Unit-based compensation ﬁ nancial liabilities held by trustees, ofﬁ cers and other senior management As at December 31, 2015, 2.8% (December 31, 2014 – 3.5%) of all Trust Units outstanding were held by trustees, ofﬁ cers and other senior management of CAPREIT. Normal course issuer bid (“NCIB”) The table below summarizes the NCIB programs in place since January 1, 2014. No Trust Units were acquired and cancelled under these NCIB programs. Period Covered under the NCIB July 28, 2015 to July 27, 2016 July 8, 2014 to July 7, 2015 July 8, 2013 to July 7, 2014 Approval Limit 11,493,069 10,659,524 9,773,361 CAPREIT 2015 ANNUAL REP ORT 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 Unit-based Compensation Expenses These costs represent Unit-based compensation expenses, which include fair value remeasurement at each reporting date recognized over the respective vesting periods for each plan for the years ended December 31, 2015 and 2014, as follows: 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 utilized to arrive at the estimated value for the outstanding grants at the respective years were as follows: Year Ended December 31, UOP LTIP SELTIP DUP RUR Plan EUPP Unit-based compensation expenses $ 2015 2014 1,994 5,837 2,523 1,978 4,005 141 $ 13,417 $ 16,478 2,461 $ 4,047 1,149 1,644 3,925 191 As at December 31, 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 2015 1,334,432 $ 2014 1,134,182 21.44 1.5 4.7 7.5 22.4 3.89 24.52 $ 1.1 4.5 7.7 20.6 3.26 $ $ 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 Ofﬁ cer and a former Chief Financial Ofﬁ cer 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 ﬁ ve trading days prior to issuance. The purchase price is payable in instalments, with an initial instalment of 5% paid when the Units are issued. The balance, represented by Instalment Receipts, is due over a term not exceeding ten years for the LTIP and 30 years in the case of the SELTIP. Participants are required to pay interest at ten-year and 30-year ﬁ xed rates, respectively, based on the Trust’s ﬁ xed borrowing rate for long-term mortgage ﬁ nancing, and are required to apply cash distributions received by them on these Units toward the payment of interest and the remaining instalments. In the case of the SELTIP, following the tenth anniversary, cash distributions shall be applied to pay interest only and any excess will be distributed to the Participants. Participants may pre-pay any remaining instalments at their discretion. The Instalment Receipts are non-recourse to the Participants and are secured by the Units as well as the distributions on the Units. If a Participant fails to pay interest and/or principal, CAPREIT may elect to reacquire or sell the Units in satisfaction of the outstanding amounts. No LTIP or SELTIP awards were granted for the years ended December 31, 2015 (2014 – nil). a) UOP Under the terms of the UOP, options are granted to trustees, ofﬁ cers and key employees based on a performance incentive for improved service and enhancing proﬁ tability. 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 percent (3%) of the number of Units issued by the Trust pursuant to any equity offering or acquisition transaction (not including pursuant to any com- pensation 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 March 25, 2015, the President and CEO was granted 166,650 options at an exercise price of $29.00 with an expiration date of March 24, 2025. On October 9, 2015, the President and CEO was granted 261,600 options at an exercise price of $28.70 with an expir- ation date of October 8, 2025. The vesting of the options granted in 2015 is subject to satisfaction of performance criteria over the annual reporting period before they may be exercisable. As at December 31, 2015, the options granted in 2015 have vested. 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. A summary of Unit option activity for the years ended December 31, 2015 and 2014 is presented below. All Unit options are exercisable as at December 31, 2015 and 2014. (Number of Units) For the Year Ended December 31, Balance, beginning of the year Granted Exercised Balance, end of the year 2015 1,134,182 428,250 (228,000) 1,334,432 2014 915,900 218,282 – 1,134,182 94 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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: Year Ended December 31, (Number of Units) Balance, beginning of the year Settled during the year Balance, end of the year 2015 LTIP 1,407,683 (517,000) 890,683 SELTIP 817,914 (263,199) 554,715 2014 LTIP SELTIP 1,422,683 (15,000) 1,407,683 817,914 – 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 2015 LTIP SELTIP $ 16,095 $ 11,309 (3,810) 7,499 (6,295) 9,800 $ $ 2014 LTIP SELTIP $ 17,120 $ 11,690 (381) (1,025) $ 16,095 $ 11,309 The Instalment Receipts are recognized as a deduction from Unit-based compensation liability. During the years ended December 31, 2015 and 2014, interest payments in the amounts of $982 and $1,345, 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 December 31, 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 2015 890,683 4.61 15.56 10.78 8.89 0.5 4.5 2.3 18.3 16.06 $ $ $ $ 2014 1,407,683 4.65 15.55 11.45 9.13 1.1 4.7 2.9 15.3 13.69 $ $ $ $ CAPREIT 2015 ANNUAL REP ORT 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SELTIP As at December 31, 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 2015 554,715 4.96 17.84 13.35 13.22 1.4 4.5 20.3 24.8 15.15 $ $ $ $ 2014 817,914 4.96 17.66 13.81 13.06 1.8 4.7 21.4 25.0 13.39 $ $ $ $ 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 established 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 ﬁ ve trading days immediately preceding the date on which board compensation is payable. The maximum Elected Percentage in respect of 2015 is 100% (2014 – 100%) of a trustee’s annual board compensation of $75 for 2015 and 2014. 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 ﬁ ve-year period. The fair value of the Distribution Units represents the closing price of the Units on the TSX on the distribution date. The fair value of such Units represents the closing price of the Units on the TSX on the last trading day on which the Units traded prior to the reporting date, representing the fair value of the redemption price. The details of the Units issued under the DUP are shown below: December 31, Outstanding, beginning of the year Granted during the year Additional Unit distributions Settled during the year Outstanding, end of the year Weighted Avg Issue Price $ $ 20.48 $ 27.99 27.63 21.54 21.87 $ 2015 Fair Value per Unit 25.13 – – – 26.84 Number of Units 206,726 37,488 9,664 (5,802) 248,076 Weighted Avg Issue Price 2014 Fair Value per Unit Number of Units $ 19.52 $ 23.18 22.80 – 21.25 – – – 151,261 46,594 8,871 – $ 20.48 $ 25.13 206,726 96 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Resource and Compensation Committee of the Board of Trustees may award RURs, subject to the attainment of speciﬁ ed performance objectives to certain ofﬁ cers 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 beneﬁ t 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 ﬁ ve-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: December 31, Outstanding, beginning of the year Granted during the year Additional Unit distributions Settled or cancelled during the year Outstanding, end of the year Weighted Avg Issue Price $ $ 21.19 $ 27.27 27.53 22.53 22.78 $ 2015 Fair Value per Unit 25.13 – – – 26.84 Number of Units 506,041 123,620 26,375 (69,723) 586,313 Weighted Avg Issue Price 2014 Fair Value per Unit Number of Units $ 20.85 $ 21.66 22.72 18.93 21.25 – – – 358,424 132,525 24,230 (9,138) $ 21.19 $ 25.13 506,041 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. NOTE 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 distributions by CAPREIT and, in the event of termination of CAPREIT, in the net assets of CAPREIT remaining after satisfaction of all liabilities. Units will be issued in registered form and are transferable. Issued and outstanding Units may be subdivided or consolidated from time to time by the trustees without Unitholder approval. No certiﬁ cates for fractional Units will be issued and fractional Units will not entitle the holders thereof to vote. By virtue of CAPREIT being an open-ended mutual fund trust, Unitholders of Trust Units are entitled to redeem their Units at any time at prices determined and payable in accordance with the conditions speciﬁ ed in the DOT. As a result, under IFRS, Trust Units are deﬁ ned as ﬁ nancial liabilities; however, for the purposes of ﬁ nancial statement classiﬁ cation and presentation, the Trust Units may be presented as equity instru- ments 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. CAPREIT 2015 ANNUAL REP ORT 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2015 2014 Units outstanding, beginning of the year Issued or granted during the year in connection with the following: New Units issued Distribution Reinvestment Plan (“DRIP”) EUPP DUP RUR Plan UOP LTIP SELTIP Units outstanding, end of the year a) New Units Issued October 2015 (the “October 2015 Equity Offering”) Bought-Deal (October 9, 2015) Total March 2015 (the “March 2015 Equity Offering”) Bought-Deal (March 25, 2015) Over-allotment (March 25, 2015) Total Ref a) b) c) d) e) f) g) h) $ $ $ 110,088,079 108,187,406 14,275,000 1,688,603 41,385 4,061 34,570 228,000 517,000 263,199 127,139,897 – 1,842,604 38,236 – 4,833 – 15,000 – 110,088,079 Price per Unit Gross Proceeds Transaction Costs Net Proceeds Units Issued 28.70 $ 250,264 $ 10,911 $ 239,353 $ 250,264 $ 10,911 $ 239,353 8,720,000 8,720,000 27.85 $ 140,643 $ 6,491 $ 134,152 13,501 27.85 7,054 $ 147,653 14,064 $ 154,707 $ 563 5,050,000 505,000 5,555,000 b) 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. e) Restricted Unit Rights Plan (“RUR Plan”) In 2015, 67,438 RUR Units were settled, out of which 34,570 RUR Units were settled for an equivalent number of Trust Units, and the remaining RUR Units were cancelled in consideration of withholding taxes owed on the Trust Units issued. In addition, 2,285 RUR Units were cancelled during 2015. c) 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. f) Unit Option Plan (“UOP”) In the third quarter of 2015, 228,000 options were exercised and an equivalent number of Trust Units were issued. d) Deferred Unit Plan (“DUP”) In the ﬁ rst quarter of 2015, in accordance with the DUP, one trustee exercised 5,802 Deferred Units, out of which 4,061 DUP Units were settled for an equivalent number of Trust Units, and the remaining DUP Units were cancelled in consideration of withholding taxes owed on the Trust Units issued. g) Long-Term Incentive Plan (“LTIP”) In 2015, 517,000 Units previously issued were settled. The remaining instalments were repaid in full in respect of the settled Units. h) Senior Executive Long-Term Incentive Plan (“SELTIP”) In 2015, 263,199 Units previously issued were settled. The remaining instalments were repaid in full in respect of the settled Units. 98 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 Distributions on Trust Units NOTE 15 Financial Instruments, Investment Properties and Risk Management 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 May 2015, monthly cash distributions declared to Unitholders increased to $0.1017 ($1.22 annually) compared to $0.098 per Unit ($1.18 annually) since June 2014 and $0.096 per Unit ($1.15 annually) since June 2013. a) Fair value of ﬁ nancial instruments The fair value of CAPREIT’s financial assets and liabilities, except as noted below and elsewhere in the consolidated annual ﬁ nancial statements, approximates their carrying amount due to the short-term and variable rate nature of these instruments. Year Ended December 31, Distributions declared on Trust Units Distributions per Unit 2015 2014 $ 142,973 $ 127,496 1.168 $ 1.207 $ As at December 31, 2015, the fair value of CAPREIT’s mortgages payable is estimated to be $3,237,000 (December 31, 2014 – $2,799,000) due to changes in interest rates since the dates the individual mortgages were ﬁ nanced and the impact of the passage of time on the primarily ﬁ xed rate nature of CAPREIT’s mortgages. The fair value of the mortgages payable is based on discounted future cash ﬂ ows using rates that reﬂ ect current rates for similar ﬁ nancial instruments with similar duration, terms and conditions, which are considered Level 2 inputs (as described below). CAPREIT has classiﬁ ed and disclosed the fair value for each class of ﬁ nancial instrument based on the fair value hierarchy in accordance with IFRS 13. The fair value hierarchy distinguishes between market value data obtained from independent sources and CAPREIT’s own assumptions about market value. The hierarchy levels are deﬁ ned below: Level 1 Inputs based on quoted prices in active markets for identical assets or liabilities; Level 2 Inputs based on factors other than quoted prices included in Level 1, which may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals; and Level 3 Inputs which are unobservable for the asset or liability, and are typically based on CAPREIT’s own assumptions, as there is little, if any, related market activity. CAPREIT’s assessment of the signiﬁ cance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors speciﬁ c to the asset or liability. CAPREIT 2015 ANNUAL REP ORT 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2015, 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 Signiﬁ cant other observable inputs Level 3 Signiﬁ cant unobservable inputs Total Recurring Measurements Assets Investment properties Fee simple and MHC land lease sites Operating leasehold interests Land leasehold interests Investments Liabilities Derivative ﬁ nancial instruments – interest Derivative ﬁ nancial instruments – interest euro Total $ – – – 22,850 2 – – 22,850 $ $ $ – – – – $ 6,069,250 1 598,690 1 195,200 1 – $ 6,069,250 598,690 195,200 22,850 (3,527) 3 (2,329) 3 (5,856) – – 6,863,140 $ (3,527) (2,329) 6,880,134 $ 1 Fair values for investment properties are calculated using the direct income capitalization and discounted cash ﬂ ow methods, which results in these measurements being classiﬁ ed as Level 3 in the fair value hierarchy. See note 6 for detailed information on the valuation methodologies and fair value reconciliation. 2 CAPREIT’s investments (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 ﬂ ow analysis on the expected cash ﬂ ows of the derivatives. The fair value is determined using the market standard methodology of netting the discounted future ﬁ xed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. If the total mark-to-market value is positive, CAPREIT will consider a current value adjustment to reﬂ ect the credit risk of the counterparty and if the total mark-to-market value is negative CAPREIT will consider a current value adjustment to reﬂ ect CAPREIT’s own credit risk in the fair value measurement of the interest rate swap agreements. 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, 2015, CAPREIT has assessed the signiﬁ cance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not signiﬁ cant to the overall valuation of the derivative. As a result, CAPREIT has determined that the derivative valuations in their entirety should be classiﬁ ed as Level 2 of the fair value hierarchy. b) Risk management The main risks arising from CAPREIT’s ﬁ nancial instruments are interest rate, liquidity, credit and foreign currency risks. CAPREIT’s approach to managing these risks is summarized as follows: Interest rate risk CAPREIT is subject to the risks associated with debt ﬁ nancing, including the risk that mortgages and credit facilities will not be able to be reﬁ nanced on terms as favourable as those of the existing indebtedness. In addition, interest on CAPREIT’s bank indebtedness is subject to ﬂ oating interest rates. CAPREIT is also subject to the risks associated with changes in interest rates or different ﬁ nancing terms from the hedging derivative assumptions, which may result in the hedging relationship being ineffective, causing volatility in earnings. 100 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2015 and 2014, a 100 basis point change in interest rates would have the following effect: Floating rate debt Floating rate debt Change in interest rates (basis points) +100 –100 Interest rate swap agreements Interest rate swap agreements Euro interest rate swap agreements Euro interest rate swap agreements 1 +100 –100 +100 –100 1 Assumes an interest rate ﬂ oor of zero percent. Increase (decrease) in net income Increase (decrease) in OCI 2015 (933) 933 – – 1,623 345 $ $ $ $ $ $ 2014 (1,316) 1,316 – – 2,063 (41) $ $ $ $ $ $ 2015 – – 6,274 (4,155) – – $ $ $ $ $ $ 2014 – – 5,976 (4,869) – – $ $ $ $ $ $ CAPREIT’s objective in managing interest rate risk is to minimize the volatility of earnings. As at December 31, 2015, interest rate risk has been minimized as approximately 98.9% of the mortgages payable are ﬁ nanced at ﬁ xed interest rates, with maturities staggered over a number of years. Liquidity risk Liquidity risk is the risk that CAPREIT may encounter difﬁ culties in accessing capital and reﬁ nancing its ﬁ nancial obligations as they come due. Approximately 96.5% of CAPREIT’s mortgages are CMHC-insured (excluding $171,272 of mortgages on the MHC), which reduces the risk in reﬁ nancing mortgages. CAPREIT’s overall risk for mortgage reﬁ nancings is further reduced as the unamortized mortgage insurance premiums are transferable between approved lenders and are effective for the full amortization period of the underlying mortgages, ranging between 25 and 35 years. To mitigate the risk associated with the reﬁ nancing of maturing debt, CAPREIT staggers the maturity dates of its mortgage portfolio over a number of years. In addition, CAPREIT manages its overall liquidity risk by maintaining sufﬁ cient 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, 2015, CAPREIT had undrawn lines of credit in the amount of $70,315 (December 31, 2014 – $152,043). The contractual maturities and repayment obligations of CAPREIT’s ﬁ nancial liabilities as at December 31, 2015 are as follows: Mortgages payable Bank indebtedness Mortgage interest 1 Bank indebtedness interest 1 Other liabilities Security deposits Exchangeable Units Distributions payable 2016 $ 239,151 – 96,681 4,314 80,420 27,049 4,330 13,073 $ 465,018 2017–2018 $ 548,246 168,211 167,317 6,430 5,856 – – – $ 896,060 2019–2020 $ 635,477 – 129,250 – – – – – $ 764,727 2021 onward $ 1,679,869 – 148,363 – – – – – $ 1,828,232 1 Based on current in-place interest rates for the remaining term to maturity. Credit risk Credit risk is the risk that: (i) counterparties to contractual ﬁ nancial obligations will default; and (ii) the possibility that CAPREIT’s residents may experience ﬁ nancial difﬁ culty and be unable to meet their rental obligations. CAPREIT monitors its risk exposure regarding obligations with counterparties through the regular assessment of counterparties’ credit positions. CAPREIT 2015 ANNUAL REP ORT 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPREIT mitigates the risk of credit loss with respect to residents by evaluating the creditworthiness of new residents, obtaining security deposits wherever permitted by legislation, and geographically diversifying its portfolio. CAPREIT monitors its collection experience on a monthly basis and ensures that a stringent policy is adopted to provide for all past due amounts. All residential accounts receivable balances exceeding 30 days are written off to bad debt expense and recognized in the consolidated statements of income and comprehensive income. Subsequent recoveries of amounts previously written off are credited in the consolidated statements of income and comprehensive income. Accordingly, no allowance for doubtful accounts is established. The maximum exposure to credit risk at the reporting date is the carrying value of the tenant receivables. Foreign currency risk Foreign currency risk is the ﬁ nancial risk exposure to unanticipated changes in the exchange rate between two currencies. CAPREIT is exposed to foreign currency risk as CAPREIT’s functional and presentation currency is Canadian dollars 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 on its investment in IRES with its euro LIBOR borrowings. The gain or loss on foreign currency translation relating to CAPREIT’s IRES investment is recognized in other comprehensive income while the foreign exchange translation on the euro LIBOR borrowings is recognized in the consolidated statement of income. NOTE 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 reﬁ nancings of mortgages maturing in 2009. CAPREIT settled these Interest Rate Forward Contracts in 2009. The associated cumulative unamortized loss of $9,908 included in AOCL at September 30, 2008 is being amortized to mortgage interest expense over the original terms of the hedged contracts. For the year ended December 31, 2015, $986 (December 31, 2014 – $1,070) was amortized from AOCL to mortgage interest expense. 102 CAPREIT 2015 ANNUAL REP ORT ii) As CAPREIT was operating the Dublin acquisition in a foreign jurisdiction, it was exposed to foreign currency ﬂ uctuations 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 ﬁ xing 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, 2015, 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 2015 (1,511) $ 336 (1,175) $ $ $ Liability in AOCL, beginning of the year $ Change in value in OCI Reversal of OCI to net income Liability in AOCL, end of the year $ – $ – – – $ 2014 (1,121) (390) (1,511) (936) (1,053) 1,989 – NOTES TO CONSOLIDATED FINANCIAL STATEMENTS b) Contracts for which hedge accounting is being applied The forward interest rate hedge liability has been summarized i) As at December 31, 2015, CAPREIT has a $65,000 interest rate swap agreement ﬁ xing the bankers’ acceptance rate at 2.20%, which matures in September 2022, for which hedge accounting is being applied. The agreement effectively converts borrowings on a bankers’ acceptance-based ﬂ oating rate credit facility to a ﬁ xed rate facility for a 10-year term (see note 9 for further details). The related ﬂ oating rate credit facility is for a ﬁ ve-year non-revolving term with an effective interest rate of 3.60%, and any principal that is repaid may not be reborrowed. On expiry of the term, it is expected to be reﬁ nanced for an additional ﬁ ve-year term. The mark-to-market loss of $3,527 has been set up in other non-current liabilities as at December 31, 2015. The interest rate swap agreement has been summarized as follows: As at December 31, Hedge (liability) asset, beginning of the year Change in intrinsic value Hedge liability, end of the year Hedge (liability) asset in AOCL, beginning of the year $ $ $ Change in intrinsic value in OCI Hedge liability in AOCL, end of the year $ 2015 2014 (886) $ (2,641) (3,527) $ 3,699 (4,585) (886) (886) $ (2,641) (3,527) $ 3,699 (4,585) (886) 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 reﬁ nanced for 10-year terms and as a result bear interest rates between a ﬂ oor rate of 3.00% and a ceiling rate of 3.62%, before the credit spread. The change in the intrinsic value of the forward interest rate hedge has been included in OCI (see note 19). The hedging program matured in June 2013, for which hedge accounting was being applied. The ineffective portion and the difference between the settled amount and the mark-to-market has been recognized in net income. All contracts have been settled. as follows: As at December 31, Hedge liability in AOCL, beginning of the year Amortization from AOCL to interest and other ﬁ nancing costs Hedge liability in AOCL, end of the year 2015 2014 $ (17,409) $ (19,695) 2,288 2,286 $ (15,121) $ (17,409) c) Contracts for which hedge accounting is not being applied i) As at December 31, 2015, CAPREIT has quarterly foreign currency exchange contracts aggregating to €2,800, settling between December 2013 and maturing quarterly until September 2015, which ﬁ x the exchange rate between the euro and the Canadian dollar, for which hedge accounting is not being applied. As at December 31, 2015, all foreign currency exchange contracts have settled. The mark-to-market gain of $23 has been recognized in net income for the year ended December 31, 2015. ii) As at December 31, 2015, CAPREIT has a €40,000 interest rate swap agreement ﬁ xing 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 ﬂ oating rate credit facility to a ﬁ xed rate facility for a ﬁ ve-year term (see note 9 for further details). The mark-to-market loss for 2015 of $158 has been recorded in net income and the cumulative mark-to- market loss of $1,154 is in other liabilities as at December 31, 2015. iii) As at December 31, 2015, CAPREIT has settled the $100,000 forward interest hedge agreement ﬁ xing the Government of Canada 10-year bond at 1.44% effective October 29, 2015. The agreement effectively converted anticipated mortgage ﬁ nancings of $100,000 for a 10-year term. The forward interest hedge agreement was settled in October 2015 and the realized gain for 2015 of $416 has been recorded in net income. CAPREIT 2015 ANNUAL REP ORT 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 Capital Management CAPREIT deﬁ nes capital as the aggregate of Unitholders’ equity, mortgages payable, bank indebtedness, Unit-based compensation ﬁ nancial liabilities, Exchangeable Units and other non-current liabilities. CAPREIT’s objectives when managing capital are to safeguard its ability to continue to fund its distributions to Unitholders, to meet its repayment obligations under its mortgages and credit facilities, and to ensure sufﬁ cient funds are available to meet capital commitments. Capital adequacy is monitored against investment and debt restrictions contained in CAPREIT’s DOT and Credit Facilities. CAPREIT’s Credit Facilities (see note 10) require compliance with certain ﬁ nancial covenants. In addition, borrowings must not exceed the borrowing base, calculated at a predeﬁ ned percentage to the market value of the properties. In the short term, CAPREIT utilizes the Credit Facilities to ﬁ nance its capital investments, which may include acquisitions. In the long term, equity issuances, mortgage ﬁ nancings and reﬁ nancings, including “top-ups”, are put in place to ﬁ nance the cumulative investment in the property portfolio and ensure that the sources of ﬁ nancing better reﬂ ect the long-term useful lives of the underlying investments. Under the terms of CAPREIT’s LBA with CMHC, total indebtedness of CAPREIT is limited to the greater of (i) 60% of gross book value deter- mined on a fair value basis or (ii) 70% of gross book value determined on a historical basis, and may only be increased above such limits with CMHC’s consent. The LBA provides for, among other things: (i) certain ﬁ nancial covenants and limitations on indebtedness; (ii) the posting of a revolving letter of credit with respect to certain capital expenditures on a portfolio rather than an individual property basis; and (iii) cross-collateralization of mortgage loans for certain CMHC-insured mortgage lenders. The total capital managed by CAPREIT and the results of its compliance with the key covenants are summarized as follows: As at December 31, Mortgages payable Bank indebtedness Unit-based compensation ﬁ nancial liabilities Exchangeable Units Unitholders’ equity Total capital Total debt to gross book value 1 Tangible net worth 3 Debt service coverage ratio (times) 2, 4 Interest coverage ratio (times) 2, 5 2015 $ 3,097,773 168,211 46,163 4,330 3,659,953 $ 6,976,430 2014 $ 2,658,454 113,167 48,686 4,054 2,983,105 $ 5,807,466 45.71% $ 3,710,446 46.49% $ 3,035,845 1.63 2.96 1.61 2.82 Threshold Maximum 70.00% Minimum $1,200,000 Minimum 1.20 Minimum 1.50 1 CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is deﬁ ned as the gross book value of CAPREIT’s assets as per CAPREIT’s ﬁ nancial statements, determined on a fair value basis for the investment properties, plus accumulated amortization on property, plant and equipment, CMHC fees and deferred loan costs. In addition, the DOT provides for investment restrictions on type and maximum limits on single property investments. 2 Based on the trailing four quarters. 3 As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and compensation liabilities or assets, including Exchangeable Units added back. 4 As per the Credit Facilities agreement and DOT, the debt service coverage ratio is deﬁ ned as earnings before interest, income taxes, depreciation and amortization and other adjustments, including non-cash costs (“EBITDA”), less income taxes paid divided by the sum of principal and interest payments. 5 As per the Credit Facilities agreement and DOT, the interest coverage ratio is deﬁ ned as EBITDA less taxes paid divided by interest payments. 104 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 Deferred Income Taxes For 2014 and 2015, CAPREIT is taxed as a “mutual fund trust” as deﬁ ned under the Income Tax Act (Canada) (the “Tax Act”) and continues to meet the prescribed conditions relating to the nature of its assets and revenues in order to qualify as a Real Estate Investment Trust eligible for the REIT exemption to the SIFT rules. The Trust expects to distribute all of its taxable income to its Unitholders; accordingly, no provision for income tax has ben made. Income tax obligations relating to the distributions from CAPREIT are with the individual Unitholder. CAPREIT is subject to tax on income earned in Ireland on certain of its Irish subsidiaries at a rate of approximately 12.5%. Income taxes may be paid on occasion where activities related to the Irish subsidiaries are considered to be taxable in Ireland. NOTE 19 Accumulated Other Comprehensive Loss As at December 31, AOCL balance, beginning of the year Other comprehensive income (loss): Amortization from AOCL to interest and other ﬁ nancing costs 1, 2 Change in fair value of derivative ﬁ nancial instruments (note 16(b)) Change in fair value of investments Foreign currency translation Reversal of cumulative foreign currency translation relating to IRES ownership dilution Other comprehensive income (loss) AOCL balance, end of the year As at December 31, AOCL comprises: Loss on derivative ﬁ nancial instruments Cumulative realized loss 1 Accumulated amortization to interest and other ﬁ nancing costs Unamortized balance of loss on cash ﬂ ow hedges previously settled Loss on interest rate swap agreements Loss on forward interest rate hedge 2 Accumulated amortization to interest and other ﬁ nancing costs Change in fair value of investments Cumulative gain (loss) on foreign currency translation Reversal of cumulative foreign currency translation relating to IRES ownership dilution Cumulative realized gain on sale of investments AOCL balance, end of the year 2015 (27,284) $ 2014 (21,194) $ 3,311 (2,641) 652 8,305 3,127 12,754 (14,530) 2015 (9,908) 7,136 (163) (3,527) (22,884) 7,763 3,624 3,133 3,127 (2,831) (14,530) $ $ $ 3,333 (3,649) (478) (5,296) – (6,090) (27,284) 2014 (9,908) 6,150 (200) (886) (22,884) 5,475 2,972 (5,172) – (2,831) (27,284) $ $ $ 1 The cumulative realized loss on derivative ﬁ nancial instruments aggregating to $9,908 will be amortized to net income as mortgage interest expense over periods ending December 2016 to September 2022, being the original terms of the hedged contracts. The estimated amount of the amortization that is expected to be reclassiﬁ ed to net income from AOCL in the next 12 months is $785. 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 reclassiﬁ ed to net income from AOCL in the next 12 months is $2,287. CAPREIT 2015 ANNUAL REP ORT 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 Severance and Other Employee Costs NOTE 23 Supplemental Cash Flow Information For the year ended December 31, 2015, $5,237 of severance and other employee costs were incurred including compensation costs related to the accelerated vesting of previously-granted RUR Units. a) Net income items related to investing and ﬁ nancing activities Year Ended December 31, Dividend and other income Interest paid on Exchangeable Units Interest paid on mortgages payable Interest paid on bank indebtedness Net disbursement 2015 1,611 $ (194) (97,300) (2,973) (98,856) $ 2014 3,786 (188) (93,410) (4,526) (94,338) $ $ Note: Included in disposition of investment properties is the underwriters’ fee of €873 ($1,189 in CAD) for 2015 relating to the sale of the Rockbrook SPV. b) Changes in non-cash operating assets and liabilities Year Ended December 31, Prepaid expenses Tenant inducements, direct leasing costs, and other adjustments Other receivables Deferred loan costs Deposits on purchases Deposits Accounts payable and other liabilities Security deposits Net proceeds 2015 $ (1,763) $ 2014 (642) 2,866 (8,360) (644) (6,417) (21) (581) 1,999 (12,921) $ (3,138) 699 (341) (8,678) (10) 10,701 1,390 (19) $ c) Net cash distributions to Unitholders Year Ended December 31, Distributions declared to Unitholders Add: Distributions payable 2015 2014 $ (142,973) $ (127,496) at beginning of year (11,045) (10,366) Less: Distributions payable at end of year Less: Distributions to participants in the DRIP $ Net disbursement 13,073 11,045 44,206 (96,739) $ 39,897 (86,920) NOTE 21 Interest and Other Financing Costs 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 2015 2014 $ 100,886 $ 97,323 2,609 2,909 3,988 194 5,325 188 $ 107,977 $ 105,445 1 2 Includes amortization of deferred ﬁ nancing costs, fair value adjustments and OCI hedge interest of $2,976 (December 31, 2014 – $2,641). Includes amortization of deferred loan costs of $1,038 (December 31, 2014 – $833). NOTE 22 Joint Arrangements CAPREIT’s share of the assets, liabilities, revenues, expenses and cash ﬂ ows from joint arrangement activities is summarized as follows: Year Ended December 31, Assets Liabilities Revenues Expenses Net income Cash provided by (used in): Operating activities Financing activities Investing activities 2015 2014 $ 196,113 $ 181,890 79,278 15,364 (3,596) 11,768 77,462 15,612 (2,455) 18,067 $ $ $ 9,011 $ (7,100) $ (1,564) $ 2,043 (535) (1,627) 106 CAPREIT 2015 ANNUAL REP ORT d) Capital investments Year Ended December 31, Capital investments Change in capital investments included in accounts payable and other liabilities Net disbursement 2015 2014 $ (169,456) $ (147,564) (4,571) (17,334) $ (174,027) $ (164,898) e) Acquisition of investment properties Year Ended December 31, Acquired properties Fair value adjustment of assumed debt Assumed debt Deposit on purchases Net disbursement $ (949,300) $ 2015 374 3,030 12,510 $ (933,386) $ 2014 (61,545) 459 26,122 – (34,964) f) Disposition of investment properties Year Ended December 31, Proceeds Closing costs Mortgages assumed by purchasers and discharged Net proceeds 2015 $ 170,450 $ (529) (145,917) $ 24,004 $ 2014 – – – – g) Issuance of Trust Units Year Ended December 31, Issuance of Trust Units Settlement of Unit-based 2015 $ 417,228 $ compensation awards for Trust Units (16,074) Net proceeds $ 401,154 $ 2014 1,350 (319) 1,031 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 24 Related Party Transactions a) On March 25, 2015, CAPREIT invested an additional €23,500 in Ordinary Shares in IRES as part of IRES’s €215,000 secondary equity offering. As at December 31, 2015, CAPREIT has a 15.7% share ownership in IRES and has determined that it has signiﬁ cant inﬂ uence over IRES. The share ownership 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, 2015 is $3,316 from asset management and property management fees. Expenses related to the asset and property management services are included in trust expenses for the year ended December 31, 2015. The amount receivable from IRES as at December 31, 2015 is $5,544. On October 28, 2015, IRES Fund Management Limited became authorized by the Irish Central Bank as an alternative investment fund manager under the European Union (Alternative Investment Fund Managers) Regulation, 2013 (the “AIFM Regulations”). On November 1, 2015, IRES Fund Management Limited was appointed by IRES as its new alternative investment fund manager in accordance with the AIFM Regulations, and replaced the existing alternative investment fund manager. 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 ofﬁ cer of CAPREIT and each of its Canadian subsidiaries and director of each of its Irish subsidiaries. Ofﬁ cers and key management of CAPREIT were granted options of IRES relating to the initial and secondary equity offerings. CAPREIT 2015 ANNUAL REP ORT 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPREIT entered into 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 properties from CAPREIT once IRES has sourced additional funding. The €150,000 facility commitment provided by CAPREIT to IRES under the Pipeline Agreement terminated on March 26, 2015 on completion of IRES’s secondary equity offering. The facility commitment may be reauthorized by CAPREIT’s Board of Trustees at a later date. On January 28, 2015, CAPREIT, through a wholly-owned Irish subsidiary (“Rockbrook SPV”), acquired the Rockbrook Portfolio, consisting of 270 residential suites and approximately 50,214 square feet of mixed-use commercial space located in Dublin, Ireland under the Pipeline Agreement for €87,303 (including VAT) and other acquisition costs of €2,390. Pursuant to the terms of the Pipeline Agreement, IRES acquired the Rockbrook SPV for the underwriters’ fee of €873 and repaid the loan of €89,693 to CAPREIT on March 31, 2015. b) CAPREIT had the following transactions with key management personnel and trustees. The loans outstanding to key management personnel and trustees for indebtedness relating to the SELTIP and LTIP as at December 31, 2015 were $7,499 and $6,417, respectively (December 31, 2014 – $7,787 and $11,226, respectively). These amounts are taken into consideration when calculating the fair value of the Unit-based compensation ﬁ nancial liabilities. Key management personnel are eligible to participate in the EUPP. In addition, certain key management personnel also participate in the RUR, and trustees currently participate in the DUP. Pursuant to employee contracts, key management personnel are entitled to termination beneﬁ ts that provide for payments of up to 36 months of beneﬁ ts (based on base salary, bonus and other beneﬁ ts) depending on cause. Key management personnel and trustee compensation included in the consolidated statements of income and comprehensive income comprises: Year Ended December 31, Short-term employee beneﬁ ts Unit-based compensation – grant date amortization Unit-based compensation – fair value remeasurement Severance and other beneﬁ ts 1 Total 2015 4,468 $ 2014 3,583 $ 4,012 8,480 3,306 6,889 6,103 2,074 6,997 – $ 16,657 $ 13,886 1 Costs related to the departure of the former Chief Accounting Ofﬁ cer are included in severance and other employee costs. c) CAPREIT has a lease for ofﬁ ce space with a company in which an ofﬁ cer has an 18% beneﬁ cial interest. The rent paid for the ofﬁ ce space for the year ended December 31, 2015 and 2014 was $942 and $876, 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 two years are as follows: Minimum annual rent $ 2016 502 $ 2017 419 108 CAPREIT 2015 ANNUAL REP ORT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 25 Commitments Natural gas Through the combination of ﬁ xed and variable price contracts, CAPREIT is committed as at December 31, 2015, in the aggregate amount of $7,913 for its natural gas and transport requirements. These commitments, which range from one to three years, ﬁ x the price of natural gas and transport for a portion of CAPREIT’s requirements as summarized below. Gas Commodity Fixed Weighted Average Cost per GJ 1 Total of CAPREIT’s Estimated Requirements Transport Fixed Weighted Average Cost per GJ 1 Total of CAPREIT’s Estimated Requirements 2016 3.66 59.2% 1.66 40.2% $ $ 2017 3.00 33.7% 1.12 23.5% $ $ 1 Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs. Land Leasehold Interests Four of the investment properties have ground leases with various expiry dates (subject to revisions at periodic intervals) between March 31, 2045 and March 31, 2070. One land lease matures in 2045, two mature in 2068 and another matures in 2070. Generally, each lease provides for annual rent and additional rent calculated from the results of property operations. During the years ended December 31, 2015 and 2014, total expenses under these four leases were $2,808 and $2,901, respectively. Annual lease payments under these four leasehold interests are included in property operating costs. Minimum annual rent for the next ﬁ ve years and thereafter under these four leases is as follows: Minimum annual rent $ 1,323 $ 1,323 $ 1,323 $ 1,323 $ 1,323 $ 40,000 2016 2017 2018 2019 2020 Thereafter Property capital investments Commitments primarily related to capital investments in investment properties of $29,247 were outstanding as at December 31, 2015 (December 31, 2014 – $35,452). NOTE 26 Contingencies NOTE 27 Subsequent Event 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. On January 20, 2016, CAPREIT completed the acquisition of a portfolio of six apartment and townhome properties located in London, Ontario totaling 670 rental suites. The purchase price (excluding transaction costs) of approximately $52,000 was funded with cash from CAPREIT’s Acquisition and Operating credit facility. CAPREIT 2015 ANNUAL REP ORT 109 FIVE-YEAR REVIEW ($ Thousands, except per Unit amounts) Year Ended December 31, Operating Revenues Net Operating Income (“NOI”) Net Operating Income Margin (%) Net Income 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 (%) 1 Weighted Average Mortgage Term (years) Cumulative Compounded Return Since Inception (%) Unit Price at End of Year 2015 2014 2013 2012 2011 $ $ $ $ $ 533,798 324,614 60.8 345,633 200,027 146,198 73.1 84.5 $ $ $ $ $ 506,411 303,885 60.0 317,975 183,353 131,044 71.5 74.3 $ $ $ $ $ 477,023 273,854 57.4 267,678 159,375 119,256 74.8 89.0 $ $ $ $ $ 412,421 237,916 57.7 412,263 132,553 101,210 76.4 74.2 $ $ $ $ $ 361,955 206,157 57.0 316,172 103,875 86,054 82.8 86.9 $ $ 1.692 1.207 118,220 46,790 45,635 $ 6,863,140 $ 3,659,953 97.5 $ $ 1.675 1.168 109,456 41,688 40,533 $ 5,749,640 $ 2,983,105 97.9 $ $ 1.562 1.138 102,064 41,552 40,397 $ 5,459,218 $ 2,757,469 98.0 $ $ 1.486 1.097 89,215 37,225 36,070 $ 4,826,355 $ 2,429,214 97.9 $ $ 1.357 1.080 76,538 31,014 29,859 $ 3,713,737 $ 1,740,663 98.5 43.4 2.96 3.39 6.3 44.6 2.82 3.66 6.3 44.0 2.62 3.76 6.0 44.3 2.51 3.87 5.4 48.3 2.20 4.48 5.7 950 26.84 $ 839 25.13 $ 652 21.25 $ 736 24.90 $ 614 22.31 $ 1 Includes deferred ﬁ nancing costs and fair value adjustments. 110 CAPREIT 2015 ANNUAL REP ORT ANNUAL MEETING OF UNITHOLDERS The Annual Meeting of Unitholders will be held at 4:30 p.m. EDT on Wednesday, May 25, 2016 at One King West Hotel 1 King Street West Toronto, Ontario M5H 1A1 UNITHOLDER INFORMATION BOARD OF TRUSTEES OFFICERS INVESTOR INFORMATION Michael Stein Chairman and Chief Executive Ofﬁ cer of MPI Group Inc. Thomas Schwartz President and Chief Executive Ofﬁ cer Thomas Schwartz President & Chief Executive Ofﬁ cer Michael Stein Chairman David Ehrlich 2, 3, 4 Chief Executive Ofﬁ cer, Irish Residential Properties REIT plc Harold Burke 1 Senior Vice President of Taxation, Dream Asset Management Corporation Stanley Swartzman 2, 3, 4 Corporate Director Mark Kenney Chief Operating Ofﬁ cer Scott Cryer Chief Financial Ofﬁ cer Roberto Israel Chief Information Ofﬁ cer Jodi Lieberman Chief Human Resources Ofﬁ cer Elaine Todres 3, 4 President, Todres Leadership Counsel 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 David Sloan 1 Corporate Director Edwin Hawken 1, 2 Corporate Director Paul Harris 1 Partner, Davis, Ward, Phillips & Vineberg LLP (a law ﬁ rm) 1 Audit Committee 2 Investment Committee 3 Governance and Nominating Committee 4 Human Resources and Compensation Committee Analysts, Unitholders and others seeking ﬁ nancial data should visit CAPREIT’s website at www.caprent.com or www.capreit.net or contact: Thomas Schwartz President and Chief Executive Ofﬁ cer Tel: 416.861.9404 E-mail: ir@capreit.net Website www.caprent.com www.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 Auditor 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 June 2013 – May 2014: $0.096 ($1.15 annually) June 2014 – April 2015: $0.098 ($1.18 annually) May 2015 – December 2015: $0.102 ($1.22 annually) www.capreit.net www.caprent.com 2016 marks the third consecutive year that CAPREIT has been recognized as one of Canada’s 50 best employers. Employees’ engagement is measured by their views on leadership excellence, manager effectiveness, productivity support, career development and recognition.

Continue reading text version or see original annual report in PDF format above