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.