CAPREIT APARTMENTS
ALWAYS MAKE MONEY
CAPREIT 2016 ANNUAL REPORT
BUILDING A
WORLD-CLASS
PORTFOLIO
CAPREIT PROFILE
About the
Photographer:
Jose Valenzuela has
been an architec-
tural photographer
since 2007, focus-
ing primarily on residential and
commercial property. Jose has
produced high-quality images for
industry award submissions, the
CAPREIT website and internal
communications of company
events. He is currently employed in
the Corporate Services department
at CAPREIT, and for the past eight
years has also worked closely with
the company’s Human Resources,
Operations and Marketing teams.
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.
2016 HIGHLIGHTS & OBJECTIVES
Highlights
• Acquired 2,552 residential
suites and sites for total costs of
$412.9 million, further strengthen-
ing 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 3.3%,
with strong 98.7% occupancy
• Same-property NOI up 3.3%, our
eleventh consecutive year of strong
organic growth
• NFFO up 15.9%, with NFFO per
Unit up an accretive 4.7%
• Named one of Canada’s Fifty
Best Employers for the fourth year
in a row
Objectives
• To provide Unitholders with
long-term, stable and predictable
monthly distributions;
• To grow NFFO, sustainable distri-
butions and Unit value through the
active management of our proper-
ties, accretive acquisitions and
strong financial management; and
• To reinvest capital within the prop-
erty portfolio in order to ensure life
safety of residents and maximize
earnings and cash flow potential.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 1
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 2
2016 SELECTED
FINANCIAL HIGHLIGHTS
2016 was another year of record growth as we significantly expanded, strengthened and further diversified
our property portfolio in our key target markets across Canada. Combined with industry-leading
organic growth resulting from our proven property management programs, we generated strong
and accretive increases in all our performance benchmarks for the year.
Notes
Year Ended December 31,
2016
2015
1 As at December 31.
2 NOI, FFO and NFFO
are not defined by IFRS,
do not have standard
meanings and may not be
comparable with other
industries or companies
(see Non-IFRS Financial
Measures).
3 Based on the historical cost
of investment properties.
4 Based on the trailing four
quarters.
5 Defined as the closing
price of the Units on the
last trading date of the
period times the number
of Units outstanding on
that date (see discussion of
Unitholders’ equity in the
Liquidity and Financial
Condition section).
6 Payout ratio (a non-IFRS
measure) is calculated as
distribution declared as
a percentage of FFO and
NFFO. See Section III
for details.
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 (6)
NFFO Payout Ratio (6)
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)
$
$
$
$
$
$
98.6%
1,003
596,831
366,947
61.5%
1.707
1.772
130,794
$
$
$
$
$
97.5%
963
533,798
324,614
60.8%
1.619
1.692
118,220
1.238
$
1.207
73.7%
70.9%
76.4%
73.1%
44.31%
54.36%
3.20%
6.1
1.63
3.09
45.71%
55.41%
3.39%
6.3
1.63
2.96
Available Liquidity – Acquisition and Operating Facility (000s) (1) $
275,922
$
70,315
Other
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units (1)
Market Capitalization (millions) (5)
2,549
579
31.37
4,290
$
$
5,632
530
$
$
26.84
3,478
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 3
CAPREIT’S PORTFOLIO DIVERSIFICATION
CAPREIT’S high-quality property portfolio is well-diversified both demographically
and by property type, and is strongly positioned in key Canadian urban markets from coast to
coast as well as holdings in the Netherlands
CANADA WIDE BY PROVINCE
THE NETHERLANDS
10%
6% 1%
3
1
1
2
4
4
1
12
11
10
2
3
4
5
6
9
8
7
Utrecht, Cuijk, Scherpenzeel,
Enschede and Warnsveld
1%
51%
21%
10
9
8
6
5
7
13
NB 5%
12
PEI 2%
NS 3%
11
COAST TO COAST IN CANADA
NETHERLANDS
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
3,039
23,014
15,695
41,748
98.7%
$ 1,103
Total Suites
Occupancy
Average Monthly Rents
568
98.4%
$ 974
Units Breakdown:
Affordable
Mid-tier
Luxury
465
103
0
1. GREATER VANCOUVER AREA AND
2. CALGARY
3. EDMONTON
VICTORIA
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
148
2,629
1,656
4,433
99.8%
$ 1,124
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
0
1,452
432
1,884
95.9%
$ 1,051
Total Suites
Occupancy
Average Monthly Rents
436
95.0%
$ 1,098
Units Breakdown:
Affordable
Mid-tier
Luxury
0
126
310
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 4
4. REGINA AND SASK ATOON
7. GREATER TORONTO AREA
10. QUEBÉC CITY
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
31
336
0
367
98.9%
$ 1,001
Total Suites
Occupancy
Average Monthly Rents
15,649
99.7%
$ 1,269
Total Suites
Occupancy
Average Monthly Rents
2,733
96.9%
$ 967
Units Breakdown:
Affordable
Mid-tier
Luxury
1,273
9,430
4,946
Units Breakdown:
Affordable
Mid-tier
Luxury
0
833
1,900
5. LONDON/KITCHENER /WATERLOO
8. OTTAWA
11. HALIFAX
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
0
1,439
968
2,407
98.3%
$ 910
Total Suites
Occupancy
Average Monthly Rents
2,377
99.6%
$ 1,186
Total Suites
Occupancy
Average Monthly Rents
1,659
96.6%
$ 1,077
Units Breakdown:
Affordable
Mid-tier
Luxury
185
2,192
0
Units Breakdown:
Affordable
Mid-tier
Luxury
505
0
1,154
6. OUTSIDE GREATER TORONTO AREA
9. GREATER MONTRÉAL REGION
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
0
1,508
190
1,698
99.4%
$ 1,176
Total Suites
Occupancy
Average Monthly Rents
7,640
97.6%
$ 866
Units Breakdown:
Affordable
Mid-tier
Luxury
897
2,877
3,866
12. CHARLOTTETOWN
Total Suites
Occupancy
Average Monthly Rents
Units Breakdown:
Affordable
Mid-tier
Luxury
0
192
273
465
99.1%
$ 982
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 5
MANUFACTURED HOME
COMMUNITIES
Our growing MHC portfolio continues to deliver strong
Unitholder returns and stable, sustainable cash flows
1. BRITISH COLUMBIA
4. ONTARIO
6. NEW BRUNSWICK
Total Suites
272
Occupancy
100.0%
Total Suites
2,701
Occupancy
99.9%
Total Suites
2,313
Occupancy
95.6%
Average Monthly Rents
$423
Average Monthly Rents
$513
Average Monthly Rents
$258
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
Bathurst
Bayview Park &
Kent Estates
Beresford
Bayview Park &
Kent Estates
Gibson
The Poplars
Fort St. John
Southridge Estates
2. ALBERTA
Total Suites
415
Occupancy
99.8%
Average Monthly Rents
$418
Slave Lake
Lynwood Gardens
Whitecourt
Evergreen Village
Hillpark Estates
Brooks
Greenbrook Estates
3. SASKATCHEWAN
Total Suites
246
Occupancy
99.6%
Average Monthly Rents
$384
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
5. PRINCE EDWARD
ISLAND
Total Suites
504
Occupancy
99.8%
Average Monthly Rents
$141
Charlottetown
Parkwood Estates
River Ridge Estates
Riverview Estates
Cornwall
Chateau Estates
TOTAL
Units 6,451
Occupancy 98.3%
Average Monthly Rents $378
1
2
3
6
5
4
OPERATING
REVENUES
($ Thousands)
506,411
477,023
412,421
596,831
533,798
2012 2013
2014
2015
2016
NET OPERATING
INCOME
($ Thousands)
324,614
303,885
273,854
237,916
366,947
2012 2013
2014
2015 2016
NORMALIZED FUNDS
FROM OPER ATIONS
($ Thousands)
231.8
200.0
183.4
159.4
132.6
2012
2013
2014
2015
2016
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 6
CAPREIT 2016 MESSAGE TO UNITHOLDERS
2016 was another year of record operating and financial
performance as we continued to generate very strong organic
growth while further strengthening and diversifying our
property portfolio with strategic acquisitions in our key target
markets. We also expanded our presence in Europe with
our first acquisitions in The Netherlands, complementing
our significant success in Dublin, Ireland. As we celebrate
two decades of growth and superior performance in 2017,
we are confident we have the assets, the team and the proven
strategies to continue delivering stable, sustainable and
growing returns to our Unitholders for many years to come.
From left to right:
Jodi Lieberman
Chief Human
Resources Officer
Scott Cryer
Chief Financial Officer
Corinne Pruzanski
General Counsel and
Corporate Secretary
Thomas Schwartz
President and Chief
Executive Officer
Mark Kenney
Chief Operating Officer
Roberto Israel
Chief Information
Officer
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 7
Another Year of Record Performance
CAPREIT experienced another year of record growth and
financial performance in 2016. Operating revenues rose by a
very strong 11.8% to $596.8 million for the year as a result of
continuing high stable occupancies, increased same-property
average monthly rents, and the contribution from our portfolio
growth during the year. Ancillary revenues, including parking,
laundry, communications services and antenna rentals continue
to make a strong contribution to our revenues, rising 10.9%
to $31.7 million in 2016 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 13.0% to $366.9 million, generating a very
strong NOI margin of 61.5%. Once again in 2016 we demon-
strated our ability to drive organic growth from our stabilized
portfolio as same property NOI increased a very strong 3.3%
for the year. Stabilized properties represented 83.4% of our
total portfolio at December 31, 2016.
Normalized Funds from Operations (NFFO), our key perfor-
mance benchmark, increased 15.9% for the year to $231.8 mil-
lion, resulting in strong accretive growth as NFFO per Unit rose
to $1.772, up from $1.692 per Unit in 2015 despite the 11%
increase in the weighted average number of Units outstanding
during the year. Our payout ratio of distributions declared
to NFFO also remained very conservative at 70.9%.
Importantly, we continue to maintain one of the strongest
balance sheets in our business. Total debt to gross book value
ratio was a conservative 44.3% at year end, well within our
guidelines. Our mortgage portfolio remained well-balanced
with the weighted average interest rate declining to 3.20% at
December 31, 2016 and a weighted average term to maturity of
6.1 years, adding to the stability of our long-term cash flows.
Building a World-Class Portfolio
We acquired a total of 1,984 suites and sites in Canada during
2016, building our presence and critical mass in key markets in
Ontario, British Columbia, Nova Scotia and Prince Edward Island,
and exceeding our long-term objective of purchasing an average
of between 1,500 and 2,000 suites annually. The total acquisi-
tion cost for these property purchases amounted to approximately
$317.6 million, funded primarily by an accretive $165.1 million
bought deal equity offering in August, new and assumed mort-
gages on the acquisitions, and cash from our credit lines.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 8
We also sold 579 non-core properties during the year for net
cash proceeds of $31.3 million after the payment of related
mortgages. We believe selling non-core properties when we
have maximized value or the properties no longer fit our stra-
tegic focus allows us to recycle capital into more strategic and
higher return investments. We will continue to evaluate our
entire portfolio to ensure all our properties are generating the
highest possible return on investment for our Unitholders.
With the completion of these transactions, our Canadian
property portfolio consisted of 41,748 apartment and town-
home suites and 6,451 land lease sites at December 31, 2016,
the majority well diversified from coast-to-coast across all
of the country’s key rental markets. As we build critical mass
and economies of scale in our target markets, we continue
to generate industry-leading growth in our same-property
performance. Cash flow from our acquisitions also increases
as we apply our proven sales and marketing strategies to
maximize occupancies and average monthly rents, while our
successful property management programs reduce costs and
enhance operating efficiencies. Most importantly, we remain
focused on ensuring our residents receive the best and most
effective responses to their questions and concerns, ensuring
Our growth over the
last twenty years has
transformed CAPREIT
into Canada’s largest
publicly-traded
residential landlord,
with a high-quality
and growing property
portfolio and a proven
and experienced
management team
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 9
they choose and remain in a CAPREIT property and add
to the stability of our cash flows.
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 proven
and experienced management team located in key centres from
coast to coast. We will continue to build on this dominant
market presence in the years ahead.
Expanding Globally
Competition for apartment properties in Canada remains
very strong, driven by recognition that the rental residential
business generates stable and growing cash flows through both
good times and bad. While we will see continued strong and
accretive growth in our Canadian portfolio going forward,
we have also focused on new markets where we believe capi-
talization rates are higher, interest rates are low and we can
generate significant long-term value.
Our successful entry into Ireland is an excellent example. We
initially purchased 338 luxury apartment suites in 2013 in well-
located key growth neighbourhoods of Dublin. In April 2014
we sold our Irish assets to a separate publicly-traded company
in which CAPREIT continues to retain a significant 15.7%
ownership interest. CAPREIT manages the Irish properties on
behalf of the new public company, exporting our proven prop-
erty management expertise to Ireland and generating a new
and growing source of cash flows for our Unitholders. Since
its founding, Irish Residential Properties REIT has delivered a
total of $9.7 million in property and asset management fees to
CAPREIT as at December 31, 2016, as well as $3.5 million in
dividends on our equity investment. We look for this sustain-
able contribution to grow in the years ahead.
Near the end of 2016 we capitalized on our success in Ireland and
acquired a portfolio of 568 luxury apartment suites in eight prop-
erties in The Netherlands. The total purchase price of E64.9 mil-
lion excluding transaction costs generated a capitalization rate of
just under 5% and is significantly below replacement cost. Similar
to our experience in Ireland, we will export our proven property
management expertise to our new Netherlands properties. We
have also entered into a partnership agreement with a highly
experienced local real estate investment firm in The Netherlands
to provide ongoing asset management services and help us grow
our presence in the country. With a current housing shortage,
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 10
and strong demand created by a growing population that favours
rental accommodation, we believe we will see solid returns as
we expand our Netherlands’ portfolio and bring our proven and
scalable property management programs to the country.
Innovative New Growth Str ategies
In addition to expanding outside of Canada, in 2016 we
embarked on a number of new and innovative programs to ac-
cretively grow our business and build value for our Unitholders.
We own a number of properties where there is sufficient land on
which we can develop new apartment buildings. After a full re-
view of our portfolio, we believe we can add approximately 1,600
new suites to these properties over the next three years, with
another 7,700 suites over the longer term. These investments will
generate very strong and accretive returns for our Unitholders
as there are no land costs associated with this growth.
We are also looking at partnering with other real estate com-
panies to bring our expertise to new development opportuni-
ties. We were pleased to have announced our first joint venture
with First Capital Realty to acquire a one-third interest in
the residential component of their King High Line project in
In May 2017 we celebrate
twenty years of growth
and success since our
Initial Public Offering
in 1997. Looking ahead,
we are confident we
have the right team,
the right properties, and
the right strategies to
continue building value
for years to come
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 11
downtown Toronto, projected to add 506 suites to our port-
folio when completed. This is an exciting and very accretive
opportunity for CAPREIT, and will set the stage for further
similar joint-venture partnerships in the future.
Twenty Years of Building Value
In May 2017 we celebrate twenty years of growth and success
since our Initial Public Offering in 1997. We have expanded
our portfolio from only 2,900 apartment suites to where we
now own interests in 48,767. Total assets have increased from
$48.5 million to $7.9 billion at the end of 2016. We have en-
tered new geographic regions, both in Canada and internation-
ally, diversifying to reduce risk and strengthening our presence
in strong rental markets. We have also expanded into new asset
classes, building a growing portfolio of manufactured housing
land lease communities that deliver strong and growing cash
flows with a reduced risk profile.
We have increased monthly cash distributions to Unitholders
thirteen times since our IPO, rising from our initial $0.76 per
Unit to the current annual rate of $1.25 per Unit. Unitholders
to December 31, 2016 have achieved a remarkable total return
of 1,182%, well above the 281% for the TSX REIT Index and
636% for the overall Toronto Stock Exchange.
As we celebrate two decades of success in 2017, we look ahead
very excited about our future. We believe we have the right
team, the right properties, and the right strategies to continue
building value for years to come.
THOMAS SCHWARTZ
President and Chief Executive Officer
Most importantly, our growth and strong operating perfor-
mance has resulted in very accretive returns for our Unitholders.
NFFO per Unit has risen from $0.906 per Unit in 1998, our
first full year of operations, to $1.772 per Unit in 2016 despite
the significant increase in the number of Units outstanding.
MICHAEL STEIN
Chairman
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 12
CSR AND FINANCIAL REPORTING
CORPOR ATE AND SOCIAL
RESPONSIBILITY REPORTING
14 Celebrating Twenty Years of Responsible
and Sustainable Business Practices
15 Corporate Social Responsibility
and Sustainability
M ANAGEMENT’S DISCUSSION
AND ANALYSIS
SECTION I
21 Forward-Looking Disclaimer
21 Non-IFRS Financial Measures
22 Overview
22 IRES Transaction
24 Objectives
24 Business Strategy
25 Key Performance Indicators
26 Performance Measures
27 Property Portfolio
30 Investment Properties
SECTION II
31 Average Monthly Rents
and Occupancy
35 Results of Operations
39 Stabilized Portfolio Performance
41 Net Income and Other
Comprehensive Income
SECTION III
45 Non-IFRS Financial Measures
45 Per Unit Calculations
SECTION IV
50 Property Capital Investments
52 Productive Capacity
53 Capital Structure
54 Liquidity and Financial Condition
58 Unitholder Taxation
SECTION V
59 Selected Consolidated
Quarterly Information
61 Selected Consolidated
Financial Information
SECTION VI
61 Accounting Policies and Critical
Estimates, Assumptions, and
Judgements
63 Controls and Procedures
SECTION VII
63 Risks and Uncertainties
71 Related Party Transactions
72 Commitments and Contingencies
SECTION VIII
72 Subsequent Events
72 Future Outlook
CONSOLIDATED ANNUAL
FINANCIAL STATEMENTS
74 Management’s Responsibility for
Financial Statements
75 Independent Auditor’s Report
76 Consolidated Balance Sheets
77 Consolidated Statements of Income
and Comprehensive Income
78 Consolidated Statements of
Unitholders’ Equity
79 Consolidated Statements of Cash Flows
80 Notes to Consolidated Financial
Statements
112 Five Year Review
IBC Unitholder Information
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 13
CELEBR ATING TWENTY YEARS
OF RESPONSIBLE AND SUSTAINABLE
BUSINESS PR ACTICES
In 2017, CAPREIT will be celebrating twenty years of growth and perfor-
mance, as well as two decades of delivering stable, sustainable and grow-
ing returns to our Unitholders. We are very proud of this track record, and
remain confident we have the right strategies, the right properties and the
right team to continue building on this progress for years to come.
Our success is also built on a foundation of the highest levels
of responsible and sustainable business practices. Since our
founding in 1997, 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 will maintain this
important focus going forward.
Reducing our environmental footprint is another goal of our
sustainable business practices. We continue to invest in energy-
efficient heating boilers, energy-saving lighting, high-efficiency
toilets, low-flow taps and shower heads, and numerous other
initiatives. These programs reduce our energy use and water
consumption, as well as our operating costs. We will continue
to invest in our properties to ensure they are modern and
efficient while improving the environment in which we live.
Our track record of success over the last twenty years could not
have been achieved without the dedication, commitment and
full engagement of our people. At CAPREIT, we believe we have
the best team in the business, and in 2016 we were very proud
to have been awarded a Platinum Level AON Best Employer in
Canada for the fourth year in a row. This prestigious honour
recognizes our high levels of employee engagement, our
leadership programs, and our culture of performance. Our team
is our most important asset, and we are proud of everything
they have accomplished over the last twenty years.
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 responses 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 in our properties. We work hard to ensure our
tenants are happy, and will continue to implement best-practice
resident programs going forward.
From a governance perspective, CAPREIT’s Board of Trustees
is comprised of skilled and experienced individuals, the major-
ity of them independent, and all 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.
Throughout 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 for the last twenty years.
THOMAS SCHWARTZ
President and Chief Executive Officer
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 14
CORPOR ATE SOCIAL RESPONSIBILITY
AND SUSTAINABILITY
CAPREIT is Canada’s largest publicly-traded residential landlord,
serving more than 48,700 families. CAPREIT owns and operates a
large portfolio of multi-unit residential rental properties, including
apartments, townhomes and manufactured home communities,
located principally in or near major urban centres across Canada.
CAPREIT’s portfolio serves residents across all demographic
segments and is highly diversified geographically.
Established in 1997, CAPREIT has grown by acquiring properties
at values below their replacement cost, primarily in large urban
rental markets close to public amenities such as transportation
links, schools, shopping, parks, libraries and hospitals. CAPREIT
creates value by ensuring its acquisitions are accretive and through
focused operational strategies oriented to long-term ownership.
This focus has contributed to steady and sustainable growth in
Net Operating Income, Normalized Funds From Operations and
Net Asset Value.
CAPREIT’s vision is to be the premier residential real estate
landlord in Canada, the landlord and employer of choice,
and the investment of choice in its industry.
CAPREIT’s mission is to attract the right tenants by hiring
the right employees and acquiring the right properties to
generate long-term sustainable growing distributions and
profitable growth for Unitholders.
CAPREIT’s Board of Trustees and Management have made sus-
tainable 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 attract-
ing the best employees and residents. Management believes this
approach will lead to better risk management, cost efficiency, inno-
vation, and operational and sustainable financial performance.
In line with Management’s commitment to best practices in com-
munication, CAPREIT’s annual reporting incorporates corporate
social responsibility and sustainability information deemed rel-
evant and material to CAPREIT’s employees, residents and inves-
tors. Such reporting will better demonstrate how the business is
managed and how financial and non-financial objectives contrib-
ute to CAPREIT’s long-term sustainability.
KEY OPPORTUNITIES AND ACHIEVEMENTS
Management continually monitors emerging trends in its business
and, where appropriate, takes steps to mitigate risk through the
use of such 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 initia-
tives. CAPREIT was able to meet and exceed many of the key
targets it set for 2016, affecting several key stakeholders.
CAPREIT achieved the following goals in 2016:
Employment practices
• Selected as a Platinum Level Aon Hewitt Best Employer in
Canada for a fourth consecutive year for our outstanding
employee engagement
• Successful implementation of a new performance manage-
ment framework including core competencies aligned to our
mission and values that are fully integrated into our Human
Resources Information System
• Launch of employee and manager self-service portals
enabling the entire organization to perform collaboratively
on a single platform to foster growth and development
• Implementation of an online Learning Management System
(“LMS”) accessible through our employee self-service portal
that enhances our ability to deliver industry-leading training
content to all employees nationwide
• Expansion of our Leadership Excellence and Development
(“LEAD”) Programs including our two-year Rotational
Management Training and Mentorship Programs, in order
to support succession planning and increase the capacity
of our internal talent pipeline
• Introduction of a new organizational structure for our
Operations group that reinforces career progression, profes-
sional development and more clearly defined accountabilities
• Hiring of an Executive Vice-President, Operations in order
to improve the bench strength of our Operations leadership
team and support CAPREIT’s continued growth and expan-
sion into new and existing markets
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 15
CSR R EPORTING
Resident satisfaction
• $61.6 million in structural capital investments for enhanced
Corporate governance
• Continued to improve the transparency and timely disclosure
life safety and property improvement
of corporate results and events
• $117.2 million in suite improvements, common areas and
other enhancements for the greater comfort of residents
• $10.3 million in repairs and maintenance, including for
reconditioning, and improved curb appeal of properties
• Implemented an automation tool to aid in streamlining
customer relationship management
• Continue to maintain CAP CARES, a 24/7 urgent mainte-
nance request line for residents
• Rollout of a new Suite Turnover Mobile App, a tablet-
based solution to streamline and improve the suite
turnover process
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 and to
those affected by the fire in Fort McMurray in Alberta
• Continued to serve free breakfasts to schoolchildren
at CAPREIT properties
Environmental conservation
• Invested $10.8 million in energy-efficiency capital
investments to reduce resource consumption
• Implemented better tracking and visibility of resource
consumption to identify underperforming properties
• Received recognition in 2016 as an industry leader in
energy management:
– Water Efficiency Excellence Award, Multi-Residential
Water Fixtures Retrofit Project, Region of Waterloo
– Retrofit Energy Savings Champions Award, Enersource,
Mississauga
– Inducted into the Burlington Hydro Conservation Hall
of Fame
– Partner in Power Reduction Award, Hydro One Brampton
• Continued to expand electricity submetering to 94 properties
and water submetering to 25 properties
Investors
• Increased cash distributions for the nineteenth time since
IPO to $1.25 per Unit annually
• Continue 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
assets
• Diversified revenue streams by providing asset management
duties and property services for Irish Residential Properties
REIT plc
• Expanded into new markets with the acquisition of 568 lux-
ury apartment suites in eight properties in The Netherlands
• Development plan for more than 9,500 suites over the next
ten years.
• Continued stabilized net operating income growth and
sustained overall portfolio occupancy at above 97%
FUTURE TARGETS
2017
Employment practices
• Delivery of nationwide training to create a high performance
culture via performance management and fostering an envi-
ronment of innovation through open communication and
continuous feedback
• Rollout of a compensation strategy for all CAPREIT
employees that aligns pay with individual performance
• Introduction of CAPREIT’s Building Leaders Program, an
executive training program created in order to meet the
needs of CAPREIT’s future growth by supporting the devel-
opment of high potential employees
Resident satisfaction
• Improve customer relationship management by continuing
to conduct automated 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
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 16
CSR R EPORTING
Environmental conservation
• Continue to evaluate opportunities and invest in energy-
efficient and environment-friendly projects
Corporate governance
• Continue to evaluate opportunities to improve disclosure
and risk management policies
Investors
• Acquire between 1,500 and 2,000 suites and sites on
an annualized basis
• Raise between $175 million and $200 million in total
mortgage refinancings
• Deliver year-over-year stabilized Net Operating Income
growth
• Sustain overall portfolio occupancy above 97% while
increasing average monthly rents
• Continue to look for acquisition opportunities in The
Netherlands that meet CAPREIT’s investment criteria
In the medium term
• Focusing on continuous succession planning activities in
order to ensure CAPREIT’s sustainable growth
• Continue the multiphase implementation of our Human
Resources Information System in order to enhance visibility,
reporting and decision-making capabilities
• 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
Ultimately, these initiatives will help CAPREIT achieve its
goals to:
• Continue to maintain Platinum Level Aon Best Employer
in Canada status
• Attain above 98% occupancy while improving average
monthly rents
• Attain the lowest energy and water consumption intensity
in the multi-residential industry
SUSTAINABILITY PERFOR M ANCE
Employment Practices
At CAPREIT, we recognize that our employees play a pivotal role
in supporting our continued growth and success. This success
has been achieved by fostering a culture of open communication,
collaboration and teamwork that provides all employees with
opportunities to drive business process innovation and pursue
professional development.
In order to facilitate our employees’ ability to influence and shape
our business process innovation, our newly formed Centre of
Excellence department remains focused on continuous process
improvement and refinement. CAPREIT’s focus on organizational
efficiency via process improvement is a direct reflection of our
ability to innovate. In that respect, our CAPTECH department
plays a critical role in the creation and delivery of tailored appli-
cations that deliver industry-leading tools and reporting abilities
to our employees.
The ability to attract and retain top talent remains of utmost
importance to our organization in order to create open and col-
laborative teams staffed with employees dedicated to the pursuit
of excellence. We take great pride in being awarded Platinum-level
status as one of the 50 Best Employers in Canada by Aon Hewitt
for a fourth consecutive year. We believe this recognition of our
strong employee engagement is a direct reflection of our commit-
ment to excellence in our employment practices.
At CAPREIT, we believe that our professional development
opportunities contribute significantly to our outstanding employee
engagement. In particular, our Rotational Management Training
Program, Mentorship Program, and executive training programs
help ensure that employees are given the tools they need to develop
into our future leaders. In order to provide learning and develop-
ment opportunities for employees at all levels of the organization,
CAPREIT has launched our online Learning Management System
(LMS), allowing us to deliver original training content to our
employees nationwide. Furthermore, a suite of in-person train-
ing seminars delivered by our expert team of corporate trainers
furthers our ability to ensure that employees at all levels of the
organization are receiving the development they need to advance
their careers at CAPREIT.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 17
CSR R EPORTING
This focus on training and development provides us with the abil-
ity to maintain a robust internal talent pipeline that will meet the
needs of CAPREIT’s growth strategy for years to come.
Societal and Resident Satisfaction Practices
CAPREIT’s success is also driven by strong relationships with
its residents and the communities in which it operates. Building
relationships with residents begins before a lease is signed, with
an up-to-date, easy-to-navigate and interactive website featuring
building floor plans, virtual tours, pictures and videos, and local
points of interest, all combined with a proactive social media
presence to address any questions. Additional investments in tech-
nologies to improve the resident experience are currently being
explored. During 2016 we introduced a customer relationship
management tool to conduct automated surveys to monitor resi-
dent satisfaction and hired a new team focused on tenant expe-
rience. We also developed a new suite turnover mobile app for
on-site managers to streamline and improve the suite turnover
process, reduce inefficiencies and enhance resident satisfaction.
In 2016, we were honoured to be recognized by various industry
associations for our staff, property renovations, website redesign
and contributions to the community.
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 relation-
ships are in place at every building.
In addition to our formal annual resident satisfaction survey,
CAP CARES is an effective and efficient means for residents to
communicate urgent maintenance requests. The program serves
to reduce response time for residents while also addressing and
mitigating potentially costly repairs. Feedback to CAPREIT helps
identify areas for improvement and enables CAPREIT’s team to
enhance the delivery of resident services at its properties. In 2016,
call volumes decreased year over year across all tiers and most
provinces. CAPREIT continues to employ 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 shut-
down procedures for all building mechanical systems in case of
an emergency. Efforts are underway to find 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 efficient operating platforms of landlords
such as CAPREIT have the added benefit 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 2016, CAPREIT continued to
work alongside local community organizations to assist in providing
housing to Syrian refugees and to those affected by the fire in Fort
McMurray, Alberta. As of 2016, CAPREIT provides more than
2,000 suites across Canada and is one of the largest contributors
of affordable housing in the Greater Toronto Area. CAPREIT is
committed to supporting and expanding these programs as they
contribute to the well-being of communities and society and ensures
properties are fully occupied at market rents.
CAPREIT continues to partner with the Breakfast Club of Canada.
For 20 years, the Breakfast Club of Canada has been nourishing
children’s potential by making sure as many of them as possible
have access to a healthy morning meal before school, in an
environment that allows their self-esteem to grow and flourish.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 18
CSR R EPORTING
But the Club is much more than a breakfast program: they take a
broader approach that promotes the core values of engagement,
enrichment and empowerment, and team up with communities and
local partners to develop solutions adapted to their specific needs.
Operating from coast to coast, the Breakfast Club of Canada
helps feed 164,000 students every day in 1,455 schools. In 2016,
CAPREIT helped raise over $65,000 on behalf of the Breakfast
Club of Canada through employee and corporate donations.
Environmental and Resource Conservation Practices
CAPREIT’s ability to measure and monitor energy consumption
is critical to reducing operational costs, which fluctuate due to
changes in energy consumption and prices. The type and vol-
ume of energy used also determine the volume of greenhouse gas
(GHG) emissions generated from CAPREIT’s operations.
CAPREIT believes it can minimize its environmental impact while
improving its long-term financial performance through the opti-
mization of its utility consumption and by facilitating the reduc-
tion of resident waste. Since inception, CAPREIT has strived to
reduce energy and water consumption in a cost-effective manner,
thereby reducing emissions and contributing to improved overall
financial performance.
One of CAPREIT’s key strategies is to evaluate the implementa-
tion of a variety of energy-efficiency initiatives at every property
on acquisition and thereafter on a regular basis by means of newer,
more cost-effective technology that allows even greater reduc-
tions in energy use. These initiatives, with favourable payback
periods, include:
– Installation of new high-efficiency boilers and chillers
– Installation of building automation systems to better control
equipment performance and tenant comfort
– Installation of efficient LED and fluorescent lighting
technology in suites and common areas
– Replacement of laundry machines with high-efficiency
washing machines and dryers
– Optimization of electricity and water consumption by way
of submetering
– Use of reflective panels to cost-effectively reduce heat loss
– Regular cleaning of in-suite heating coils, fins and radiators
– Installation of variable frequency drives to further reduce
electricity use
High-efficiency boilers, remotely monitored by CAPREIT’s
in-house energy department, allow for optimal temperatures
for residents’ comfort while ensuring efficient energy use. Total
expenditures since 2010 on energy consumption optimization
investments amount to $62 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 proper-
ties 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-efficiency and environmental initiatives on a per suite basis based on
energy consumption for the years 2011 to 2015, calculated by an independent consulting firm in accordance with GHG Protocol (includ-
ing Scopes 1 to 3):
Energy Use Intensity Performance over Prior Year (%)
In Accordance with GHG Protocol
In Accordance with GHG Protocol Adjusted for Impact of Weather and Occupancy
Based on stabilized properties using 2010 as a base year.
2015
(7.0%)
(3.6%)
2014
0.5%
(2.5%)
2013
4.5%
(1.8%)
2012
(7.9%)
(2.6%)
In addition, to optimize electricity consumption, as of December 31, 2016 CAPREIT had installed tenant sub-metering systems at 94 prop-
erties for electricity submetering and 25 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 19
CSR R EPORTING
The following table demonstrates the benefits of submetering through the reduction in annual electricity use intensity on a per suite basis
in submetered buildings compared with those for the overall portfolio for the years 2011 to 2015.
Reduction in Electricity Use Intensity over Prior Year (%)
Sub-metered Properties
Overall Portfolio
Based on stabilized properties using 2010 as a base year.
2015
(4.0%)
(4.3%)
2014
(4.4%)
(2.9%)
2013
(6.4%)
3.1%
2012
(2.6%)
(0.6%)
The historical data above was adjusted to exclude the impact of weather and occupancy fluctuation. It should be noted that while
sub-metered buildings performed, on average, better than the overall portfolio, other factors such as energy retrofits and operational
improvements also contributed to the improved performance.
CAPREIT also evaluates the prompt installation of the latest water-efficiency equipment at newly acquired properties and on a regular
basis where considered cost effective. Such initiatives include the installation of the following since 2010:
– 24,000 ultra-low-flow toilets
– 50,000 low-flow shower heads and faucet aerators
– 1,158 high-efficiency front load washers
– Over 3,500 Energy Star appliances
The following table shows the results of CAPREIT’s initiatives to reduce water consumption on a per suite basis based on water consump-
tion calculated by an independent consulting firm in accordance with GHG Protocol:
Water Use Intensity Performance over Prior Year (%)
In Accordance with GHG Protocol
Based on stabilized properties using 2010 as a base year.
2015
0.0%
2014
(3.4%)
2013
(2.8%)
2012
(1.0%)
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 facilities for recycling, and
educating residents about the benefits of recycling.
CAPREIT’s operations have little to no impact on land con-
tamination. Prior to the acquisition or refinancing of a property,
thorough environmental studies are performed by an independent
consulting firm 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 benefits 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 nineteen years, CAPREIT has come a long way
from a small, regional property owner to one of Canada’s largest
residential landlords, with a portfolio spanning the country and
all demographic sectors. This growth and success would not have
been possible without CAPREIT’s service-oriented approach to
residents, the engagement and productivity of its employees, the
control of resource consumption, and addressing the needs of the
investment community. It is CAPREIT’s goal to maintain its focus
on programs that enable CAPREIT to be the premier residential
landlord in Canada, the landlord and employer of choice, and the
investment of choice in its industry.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 20
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, 2016 should be read in conjunction with
CAPREIT’s audited consolidated annual financial statements for
the year ended December 31, 2016.
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 financial position, business
strategy, budgets, litigation, projected costs, capital investments,
financial results, taxes, plans and objectives of or involving
CAPREIT. In particular, statements regarding CAPREIT’s future
results, performance, achievements, prospects, costs, opportunities
and financial outlook, including those relating to acquisition and
capital investment strategy and the real estate industry generally,
are forward-looking statements. In some cases, forward-looking
information can be identified by terms such as “may”, “will”,
“should”, “expect”, “plan”, “anticipate”, “believe”, “intend”,
“estimate”, “predict”, “potential”, “continue” or the negative
thereof, or other similar expressions concerning matters that
are not historical facts. Forward-looking statements are based
on certain factors and assumptions regarding expected growth,
results of operations, performance, and business prospects and
opportunities. In addition, certain specific assumptions were made
in preparing forward-looking information, including: that the
Canadian, Dutch, and Irish economies will generally experience
growth but may be adversely impacted by the global economy; that
inflation will remain low; that interest rates will remain low in the
medium term; that Canada Mortgage and Housing Corporation
(“CMHC”) mortgage insurance will continue to be available and
that a sufficient number of lenders will participate in the CMHC-
insured mortgage program to ensure competitive rates; that the
Canadian capital markets will continue to provide CAPREIT with
access to equity and/or debt at reasonable rates; that vacancy rates
for CAPREIT properties will be consistent with historical norms;
that rental rates will grow at levels similar to the rate of inflation
on renewal; that rental rates on turnovers will remain stable; that
CAPREIT will effectively manage price pressures relating to its
energy usage; and, with respect to CAPREIT’s financial outlook
regarding capital investments, assumptions respecting projected
costs of construction and materials, availability of trades, the cost
and availability of financing, CAPREIT’s investment priorities, the
properties in which investments will be made, the composition
of the property portfolio and the projected return on investment
in respect of specific capital investments. Although the forward-
looking statements contained in this MD&A are based on
assumptions, Management believes they are reasonable as of the
date hereof; however, 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’s
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, land transfer tax, government regulations,
controls over financial accounting, legal and regulatory concerns,
the nature of units of CAPREIT (“Trust Units”), Preferred
Units, and units of CAPREIT’s subsidiary, CAPREIT Limited
Partnership (“Exchangeable Units”) (collectively, the “Units”),
unitholder liability, liquidity and price fluctuation of Units,
dilution, distributions, participation in CAPREIT’s distribution
reinvestment plan, potential conflicts of interest, dependence
on key personnel, general economic conditions, competition for
residents, competition for real property investments, continued
growth, risks related to acquisitions, and foreign operating and
currency risks. There can be no assurance that the expectations of
CAPREIT’s Management will prove to be correct. For a detailed
discussion of risk factors, refer to CAPREIT’s MD&A contained
in CAPREIT’s 2016 Annual Report in the Risks and Uncertainties
section. Subject to applicable law, CAPREIT does not undertake
any obligation to publicly update or revise any forward-looking
information.
NON-IFRS FINANCIAL MEASURES
CAPREIT prepares and releases unaudited consolidated interim
financial statements and audited consolidated annual financial
statements in accordance with International Financial Reporting
Standards (“IFRS”). In this MD&A, and in earnings releases and
investor conference calls, as a complement to results provided
in accordance with IFRS, CAPREIT also discloses and discusses
certain financial measures not recognized under IFRS and that do
not have standard meanings prescribed by IFRS. These include
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 21
MANAGEMENT’S DISCUSSION AND ANALYSIS stabilized net rental income (“NOI”), Net Rental Revenue Run-
Rate, Funds From Operations (“FFO”), Normalized Funds From
Operations (“NFFO”), Adjusted Cash Flow from Operating
Activities and Adjusted Funds From Operations (“AFFO”), and
applicable per Unit amounts and payout ratios (collectively, the
“Non-IFRS Measures”). These Non-IFRS Measures are further
defined and discussed in Section III under Non-IFRS Financial
Measures. Since stabilized NOI, Net Rental Revenue Run-Rate,
FFO, NFFO, AFFO, and Adjusted Cash Flow from Operating
Activities are not measures recognized under IFRS, they may
not be comparable to similarly titled measures reported by other
issuers. CAPREIT has presented the Non-IFRS measures because
Management believes these Non-IFRS measures are relevant
measures of the ability of CAPREIT to earn revenue and to
evaluate CAPREIT’s performance. A reconciliation of the Non-
IFRS measures is provided in Section III under Non-IFRS Financial
Measures. The Non-IFRS measures should not be construed as
alternatives to net income (loss) or cash flows from operating
activities determined in accordance with IFRS as indicators of
CAPREIT’s performance or the sustainability of our distributions.
OVERVIEW
CAPREIT is an unincorporated open-ended publicly-traded real
estate investment trust and one of Canada’s largest residential
landlords, serving over 48,700 families across the country.
CAPREIT owns and operates a portfolio of multi-unit residential
rental properties, including apartments, townhomes and
manufactured home communities, principally 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 diversification by
operating properties across the affordable, mid-tier and luxury
sectors, as well as through geographic diversification across
Canada and internationally.
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 sector. 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 profitable 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, 2016, CAPREIT owned interests in 48,767
residential units, comprised of 42,316 residential suites and 31
manufactured home communities (“MHC”), comprised of 6,451
land lease sites. As at December 31, 2016, CAPREIT had 991
employees (937 employees as at December 31, 2015).
IRES TR ANSACTION
On March 25, 2015, CAPREIT invested an additional €23.5 mil-
lion in Ordinary Shares in IRES as part of IRES’s €215.0 mil-
lion secondary equity offering. As at December 31, 2016, CAPREIT
LP holds 65.5 million ordinary shares representing 15.7% of the
issued share capital of IRES.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 22
MANAGEMENT’S DISCUSSION AND ANALYSIS
The tables below summarize property acquisitions and dispositions for the years ended December 31, 2016 and 2015:
Acquisitions Completed During the Year Ended December 31, 2016
($ Thousands)
Demographic
Sector
Mid-tier
January 20, 2016
Mid-tier
April 12, 2016
Mid-tier
April 26, 2016
Mid-tier
May 11, 2016
MHC
May 11, 2016
Mid-tier
June 15, 2016
June 30, 2016 (4)
Various
September 15, 2016 Luxury
September 30, 2016 Luxury
December 1, 2016 MHC
December 23, 2016 (6) Various
Total
Acquisition Financing
Suite
or Site
Count
670
12
71
55
144
21
850
71
87
3
568
2,552
Region(s)
London
Charlottetown
Greater Toronto Area
Greater Toronto Area
Fort St. John
Victoria
Ottawa
Halifax
London
Bowmanville and
Grand Bend
The Netherlands
$
Total
Acquisition
Costs
53,200
1,162
16,630
10,178
8,668
2,643
184,668
17,407
22,813
270
95,217
$ 412,856
Assumed
Mortgage
Funding
$
Term to
Interest Maturity
– (3)
Rate (1)
– (3)
729 (3) 2.04% (3)
– (3)
– (3)
– (3)
– (3)
24,627 (3) 3.96% (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
(Years) (2)
– (3)
3.7 (3)
– (3)
– (3)
– (3)
– (3)
6.3 (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
$
25,356
$ 335,730 (5) 2.22% (5)
8.4 (5)
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see Liquidity and Financial Condition section).
(4) The acquisition comprised 5 properties consisting of 850 suites (185 affordable and 665 mid-tier suites) located in Ottawa, Ontario. The acquisition was
financed by the assumption of a $24,627 mortgage maturing in November 2022 with an interest rate of 3.96%, new CMHC insured 10 year mortgage
financings aggregating to $106,122 with a weighted average interest rate of 2.38% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(5) Subsequent acquisition financing of $51,918 with a weighted average interest rate of 2.25% and a weighted average term to maturity of 8.3 years relates
to properties acquired in 2015.
(6) The acquisition was financed by a new non-amortizing mortgage of €40,660 ($57,261) maturing January 1, 2024 with an interest rate of 2.05%, a contribution
from a non-controlling interest of €600 ($850), and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
Acquisitions Completed During the Year Ended December 31, 2015
($ Thousands)
Demographic
Sector
January 28, 2015 (4)
Luxury
February 18, 2015 Mid-tier
Mid-tier
March 31, 2015
Mid-tier
June 15, 2015
Affordable
June 30, 2015
July 31, 2015
Luxury
September 14, 2015 Various (6)
September 30, 2015 Various (7)
November 1, 2015 MHC
December 17, 2015 Mid-tier
Total
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
Term to
Interest Maturity
Total
Acquisition
Costs
$ 125,416
31,092
54,500
5,479
13,010
17,070
170,611
502,276
$
Assumed
Mortgage
Funding
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (5)
Rate (1)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (5)
372
29,474
$ 949,300
– (3)
– (3)
3,030 (8) 1.80% (8)
3,030
$
$ 382,203 2.36%
8.2
(Years) (2)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (3)
– (5)
– (3)
4.2 (8)
(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
(5) The acquisition was funded from CAPREIT’s Bridge Increase and
Acquisition and Operating Facility (see Liquidity and Financial Condition
section).
Facility (see Liquidity and Financial Condition section).
(6) The acquisition comprised 919 suites (807 mid-tier and 112 luxury suites)
(4) The Rockbrook Portfolio acquisition was the first portfolio CAPREIT
in 19 properties located in the Greater Vancouver Area.
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 financial statements for further details.
(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 $3.0 million mortgage
maturing in February 2020 with an effective interest rate of 1.8% and
cash from CAPREIT’s Acquisition and Operating Facility.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Dispositions Completed During the Year Ended December 31, 2016
($ Thousands)
Demographic
Sector
Mid-tier
Mid-tier
July 27, 2016
August 22, 2016
September 28, 2016 Affordable
Total
Suite
Count
145
22
412
579
Region(s)
Montréal
Montréal
Montréal
Sale Price
24,849
2,340
31,350
58,539
$
$
Dispositions Completed During the Year Ended December 31, 2015
($ Thousands)
Demographic
Sector
February 18, 2015 Mid-tier
Luxury (1)
March 31, 2015
Total
Suite
Count
260
270
530
Region(s)
Toronto
Dublin, Ireland
Sale Price
$
47,000
123,450
$ 170,450
Cash Proceeds
12,480
2,282
16,559
31,321
Mortgage
Discharged
12,085
–
14,322
26,407
$
$
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.
OBJECTIVES
CAPREIT’s objectives are to:
• Provide Unitholders with long-term, stable and predictable
monthly cash distributions;
• Grow Normalized Funds From Operations, sustainable
distributions and Unit value through the active management
of its properties, accretive acquisitions and strong financial
management; and
• Invest capital within the property portfolio in order to
ensure life safety of residents and maximize earnings and cash
flow potential.
BUSINESS STR ATEGY
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 mar-
kets by providing its residents with safe, secure and comfortable
homes. It takes a hands-on approach to managing its properties,
stressing open and frequent communications to ensure residents’
needs are met efficiently and effectively, thereby maintaining a
high 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 specific markets. In addi-
tion, CAPREIT’s lease administration system improves control
of rent-setting by suite, increasing resident service and enhancing
the overall profile of its resident base.
Cost Management
While ensuring the needs of its residents are met, CAPREIT also
carefully monitors operating costs to ensure it is delivering services
to residents both efficiently and cost-effectively. CAPREIT strives
to capture potential economies of scale and cost generated by the
growth in its property portfolio. CAPREIT’s enterprise-wide pro-
curement system streamlines and centralizes purchasing controls
and procedures and is realizing reduced costs through national
master sourcing contracts, improved pricing and enhanced oper-
ating efficiencies.
Capital Investments
CAPREIT strives to acquire properties at prices significantly below
their current replacement costs, and is committed to improving
its operating performance by investing appropriate capital invest-
ments in order to maintain the productive capacity of its property
portfolio and to sustain the portfolio’s rental income-generating
potential over its useful life. CAPREIT continues to invest in
environment-friendly and energy-saving initiatives that improve
overall net operating income. CAPREIT completes a review of its
portfolio and revises its long-term capital investment plan on an
annual basis, which allows Management to ensure capital invest-
ments extend the useful economic life of CAPREIT’s properties,
enhance life safety, maximize earnings and improve the long-term
cash flow potential of its portfolio.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 2 4
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio Growth
CAPREIT will grow its portfolio over the long term through
accretive acquisitions that meet its strategic criteria and, where
possible, enhance geographic diversification while capturing
economies of scale and cost synergies, thereby increasing net
operating income. As a component of this growth strategy,
CAPREIT will monitor its portfolio and, from time to time,
identify certain non-core properties for divestiture. The funds
from these divestitures will be used to acquire additional strategic
assets better suited to CAPREIT’s portfolio composition and
property management objectives or to pay down existing debt.
Management believes the continued realization and reinvestment
of capital is a fundamental component of its growth strategy
and demonstrates the success of CAPREIT’s capital investment
programs and its ability to maximize and manage the earnings
and cash flow potential of its property portfolio. Furthermore,
Management continues to seek development opportunities within
its portfolio to ensure existing assets are put towards their most
accretive use. In addition, Management continues to prudently
investigate opportunities 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 fix 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 PERFOR M ANCE INDICATORS
To assist Management and investors in monitoring and evaluating
CAPREIT’s achievement of its objectives, CAPREIT has defined
a number of key operating and performance indicators (“KPIs”)
to measure the success of its operating and financial strategies:
Occupancy
Management strives, through a focused, hands-on approach
to its business, to achieve occupancies that are in line with, or
higher than, market conditions in each of the geographic regions
in which CAPREIT operates while enhancing the overall qualita-
tive profile of its resident base.
Average Monthly Rents
Through its active property management strategies, lease admin-
istration system and proactive capital investment programs,
CAPREIT strives to achieve the highest possible average monthly
rents in accordance with local market conditions.
Net Rental Income (“NOI”)
NOI is a widely used operating performance indicator in the
real estate industry, and is presented in the consolidated state-
ments of income and comprehensive income as net rental income.
Management has chosen to refer to Net Rental Income as NOI
in all instances in its MD&A. As a measure of its operating per-
formance, CAPREIT currently strives to achieve an annual NOI
margin 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.
Payout Ratio
CAPREIT anticipates a long-term annual NFFO payout ratio of
between 70% and 80%. This ratio is not meant to be a mea-
sure of the sustainability of CAPREIT’s distributions. Although
CAPREIT intends to continue to sustain and grow distributions,
the actual amount of distributions in respect to the CAPREIT
Units will depend upon numerous factors, including, but not lim-
ited to, the amount of principal repayments, tenant allowances,
capital expenditures, and other factors that may be beyond the
control of CAPREIT.
Portfolio Growth
Management’s objective is to pursue acquisitions of between
1,500 and 2,000 suites and sites on an annual basis, subject to
market conditions and available financing, which meet its strate-
gic objectives, serve to accretively increase NFFO and continue to
further diversify the portfolio by geography and by demographic
sector. In addition, Management continues to prudently investi-
gate opportunities to add new suites through the development of
properties within its own portfolio and 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 refinancing
risk by prudently managing the portfolio’s average term to matu-
rity and staggering the maturity dates. For this purpose, CAPREIT
strives to ensure its overall leverage ratios and interest and debt
service coverage ratios are maintained at a sustainable level. In
addition, CAPREIT focuses on maintaining capital adequacy by
complying with investment and debt restrictions in its DOT and
the financial covenants in its credit agreement comprised of an
acquisition and operating facility, which includes a Euro LIBOR
borrowing (“Acquisition and Operating Facility”), and a five-
year non-revolving term credit facility (collectively, the “Credit
Facilities”), as described under Liquidity and Financial Condition
in Section IV.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 25
MANAGEMENT’S DISCUSSION AND ANALYSIS PERFOR M ANCE MEASURES
The following table presents an overview of certain non-IFRS financial measures and operational results of CAPREIT for the years ended
December 31, 2016 and 2015. Management believes that these measures are useful in assessing CAPREIT’s performance vis-à-vis its
objectives, business strategy and KPIs. Effective May 2016, monthly cash distribution declared to Unitholders increased to $0.1042 per
Unit ($1.25 annually), compared to $0.102 per Unit ($1.22 annually) effective since May 2015 and $0.098 per Unit ($1.18 annually)
effective since June 2014.
Year Ended December 31,
2016
2015
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 (6)
NFFO Payout Ratio (6)
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)
98.6%
1,003
596,831
366,947
61.5%
1.707
1.772
130,794
1.238
73.7%
70.9%
44.31%
54.36%
3.20%
6.1
1.63
3.09
275,922
2,552
579
31.37
4,290
$
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
(1) As at December 31.
(2) NOI, FFO and NFFO are not defined by IFRS, do not have standard meanings and may not be comparable with other industries or companies
(see Non-IFRS Financial Measures).
(3) Based on the historical cost of investment properties.
(4) Based on the trailing four quarters.
(5) Defined as the closing price of the Units on the last trading date of the period times the number of Units outstanding (including all Unit-based
incentive plans except UOP) (see discussion of Unitholders’ equity under the Liquidity and Financial Condition section).
(6) Payout ratio (a Non-IFRS Measure) is calculated as distribution declared as a percentage of FFO and NFFO. See Section III for details.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 26
MANAGEMENT’S DISCUSSION AND ANALYSIS
PROPERTY PORTFOLIO
Types of Property Interests
CAPREIT’s investments in its property portfolio reflect different forms of property interests, including:
Fee Simple Interests – Apartments and Townhomes
The majority of CAPREIT’s investment in its property portfolio is in the form of fee simple interests, representing freehold ownership of
the properties subject only to typical encumbrances, such as mortgages.
Operating Leasehold Interests
CAPREIT owns leasehold interests in 15 properties located in the Greater Toronto Area. The leases mature between 2033 and 2037. While
separate lease arrangements exist for each property, the general structure is common across all leases: each lease is for a 35-year term
and the rent for the entire lease term was fully paid at the time the leasehold interest was acquired. Each lease also provides CAPREIT
with a purchase option exercisable between the 26th and 35th year of the lease term. In the case of one of the properties, the purchase
option entitles CAPREIT to acquire a prepaid operating leasehold interest in the property maturing in 2072 (see Portfolio of Operating
Leasehold Interests for additional information).
Land Leasehold Interests
CAPREIT owns leasehold interests in three land parcels in Alberta and one land parcel in British Columbia. CAPREIT acquired a resi-
dential 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 31 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
2016
37,450
3,815
1,051
42,316
6,451
48,767
%
76.8
7.8
2.2
86.8
13.2
100.0
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
Portfolio Diversification
CAPREIT’s property portfolio continues to be diversified by geography and balanced among demographic sectors and asset types.
Management’s long-term goal is to further enhance the geographic diversification and the defensive nature of its portfolio through
acquisitions.
Portfolio by Demographic Sector
As at December 31,
Affordable
Mid-tier
Luxury
Total Residential Suites
MHC Land Lease Sites
Total Suites and Sites
2016
3,504
23,117
15,695
42,316
6,451
48,767
%
7.2
47.4
32.2
86.8
13.2
100.0
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
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 27
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
Europe
The Netherlands
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
2016
%
2015
%
15,649
2,377
2,407
1,698
22,131
7,640
2,733
10,373
3,031
1,402
4,433
436
1,884
2,320
32.1
4.9
4.9
3.5
45.4
15.6
5.6
21.2
6.2
2.9
9.1
0.9
3.9
4.8
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
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
1,659
3.4
1,588
3.4
133
234
367
0.2
0.5
0.7
133
234
367
0.3
0.5
0.8
465
1.0
453
1.0
568
42,316
1.2
86.8
–
40,501
–
86.6
2,701
272
415
246
504
2,313
6,451
5.5
0.6
0.9
0.5
1.0
4.7
13.2
2,690
130
415
246
500
2,308
6,289
5.7
0.3
0.9
0.5
1.1
4.9
13.4
48,767
100.0
46,790
100.0
While maintaining a strong and strategic presence in Ontario’s residential market, CAPREIT continues to focus on diversifying its geo-
graphic portfolio outside of Ontario by increasing its presence in markets with stronger growth potential. CAPREIT continues to look
for investment opportunities that meet its investment criteria and that, where possible, will further its diversification strategy. The geo-
graphic diversification of its portfolio also enables CAPREIT to mitigate the risks arising from potential downturns in specific markets.
CAPREIT continues to target acquisitions of between 1,500 and 2,000 suites and sites on an annualized basis over the long term.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 28
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 $339 million if each of the options were exercised in the 26th and 35th years, respectively, of the lease
terms. If CAPREIT elected to exercise any option prior to the maturity of the lease term, CAPREIT would be entitled to receive a pro
rata amount of the prepaid lease amount based on the remaining lease term. In addition, under certain circumstances, the option price
may be reduced by the unamortized portion of capital expenditures incurred during the final ten years of the lease term.
The mortgages on each of these 15 properties are scheduled to be fully repaid by their respective option exercise dates, which Management
expects will enable CAPREIT to utilize the equity in these properties to fully finance the option exercise prices.
Operating Leasehold Interests Portfolio by Lease Maturity
($ Thousands)
As at December 31, 2016 and 2015
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
(1) As at the acquisition dates of these leasehold interests by a CAPREIT predecessor.
Option Exercise Prices
26th Year
202,071
19,300
14,200
47,200
282,771
$
$
35th Year
242,596
23,150
17,000
56,000
338,746
$
$
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, 2016 and 2015
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
2016
1,000
500
1,216
2,716
$
$
2015
1,000
561
1,246
2,807
$
$
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
INVESTMENT PROPERTIES
Investment property is defined as property held to earn rental income or for capital appreciation or both. Investment property is recog-
nized initially at cost. Subsequent to initial recognition, all investment property is measured using the fair value model, whereby changes
in fair value are recognized for each reporting period in net income.
Management values each investment property based on the most probable price that a property could be sold for in a competitive and
open market as of the specified date under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledge-
ably, and assuming the price is not affected by undue stimulus. This does not contemplate the potential for general declines in real estate
markets or the sale of assets by CAPREIT under financial or other hardship. Each investment property has been valued on a highest and
best use basis but, specifically, does not include any portfolio premium that may be associated with economies of scale from owning a
large portfolio or the 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 reflect the specific history or experience related to CAPREIT and,
in many cases, the stabilized cash flows or net operating income used for appraisal purposes may not reflect the results ultimately real-
ized during future periods.
The fair value of investment properties is established by a qualified, independent appraiser annually. Each quarter, CAPREIT utilizes
market assumptions for rent increases, capitalization and discount rates provided by the 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 financial statements for the year ended December 31, 2016 contained in CAPREIT’s 2016 Annual Report.
The following table summarizes the changes in the investment properties portfolio during the years:
($ Thousands)
As at December 31,
Balance, Beginning of the Period
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 Period
(1) See Property Capital Investments section.
(2) Comprises tenant inducements, straight-line rent and direct leasing costs.
2016
$ 6,863,140
2015
$ 5,749,640
414,668
195,742
918
227,967
949,300
163,208
166
173,242
(58,793)
(1,813)
188
$ 7,642,017
(168,622)
(639)
(3,155)
$ 6,863,140
For the years ended December 31, 2016 and 2015, 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 reflected in the fair value of the investment properties at the measurement date.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 30
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
($ Millions)
As at December 31,
2015
2016
2015
2016
Change Due to Change in
Greater Toronto Area
Other Ontario
Québec
British Columbia
Alberta
Nova Scotia
Saskatchewan
Prince Edward Island
The Netherlands
MHC Land Lease Sites
Total
Fair Value
Rates (1)
$
2,846 $
601
1,434
905
465
237
45
47
–
283
$
6,863 $
70 $
14
9
102
25
5
1
–
–
1
227 $
Stabilized
Forex
NOI (2) Translation
–
125 $
–
–
–
–
–
–
–
–
–
–
25
44
61
(55)
(6)
(3)
2
–
13
206 $
Net
Acquisitions
$
27 $
258
(60)
3
–
17
–
1
92
8
346 $
$
Fair Value
3,068
898
1,427
1,071
435
253
43
50
92
305
7,642
Rates (1)
Rates (1)
4.41%
4.81%
4.94%
4.20%
4.99%
5.62%
5.99%
6.17%
–
6.23%
4.74%
4.30%
4.84%
4.91%
3.72%
4.67%
5.48%
5.76%
6.17%
4.83%
6.23%
4.53%
(1) Weighted average capitalization rates excluding implied capitalization rates on Operating and Land Leasehold Interests. See note 6 to the accompanying
audited consolidated annual financial statements for further valuation assumption details including discount rates as at December 31, 2016 for Operating
and Land Leasehold Interests.
(2) Represents stabilized net operating income.
As at December 31, 2016, 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, 2016
Weighted Average Capitalization Rate
Weighted Average Capitalization Rate
Change (basis points) (1)
+25
–25
Estimated (Decrease) Increase
(410)
413
$
$
(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 the fair value of the total portfolio.
SECTION II
AVER AGE MONTHLY RENTS AND OCCUPANCY
Portfolio Average Monthly Rents (“AMR”) and Occupancy by Demographic Sector
As at December 31,
2016
2015
2016
2015 (1)
Total Portfolio
Properties Owned Prior to
December 31, 2015
Properties
Acquired Since
December 31, 2015
Affordable
Mid-tier
Luxury
Average Residential
AMR
$
910
$ 1,063
$ 1,198
AMR
Occ. %
97.7 $
815
99.1 $ 1,028
98.3 $ 1,152
AMR
Occ. %
95.7 $
880
98.1 $ 1,057
96.6 $ 1,194
AMR
Occ. %
97.5 $
841
99.1 $ 1,029
98.4 $ 1,152
Occ. %
AMR
95.9 $ 1,039
98.1 $ 1,130
96.9 $ 1,609
Occ. %
98.6
98.7
98.1
Suites
$ 1,101
98.7 $ 1,059
97.4 $ 1,099
98.7 $ 1,064
97.5 $ 1,137
98.7
Average MHC Land
Lease Sites
Overall Portfolio
Average
$
378
98.3 $
366
98.2 $
377
98.3 $
366
98.2 $
413
100.0
$ 1,003
98.6 $
963
97.5 $
998
98.6 $
967
97.6 $ 1,095
98.7
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2015.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
AMR is defined as actual residential rents, net of vacancies, divided by the total number of suites in the property, and does not include
revenues from parking, laundry or other sources. Overall average monthly rents for the stabilized residential suite portfolio (properties
owned prior to December 31, 2015) increased in all demographic sectors to $1,099 at December 31, 2016 from $1,064 at December 31,
2015, resulting in a 3.3% increase. Excluding Alberta and Saskatchewan, where Management has strategically reduced rents to increase
occupancy, average monthly rents for the stabilized residential suite portfolio increased a solid 3.9% to $1,102 at December 31, 2016
from $1,061 at December 31, 2015. This was due primarily to a combination of ongoing successful sales and marketing strategies, above
guideline rent increases, and continued strength in the residential rental sector in the majority of CAPREIT’s regional markets. Occupancy
for the stabilized residential suite portfolio increased to 98.7% as at December 31, 2016 compared to 97.5% for last year. For the total
residential portfolio, AMR increased 4.0% at December 31, 2016 compared to the prior year, while occupancies improved to 98.7%
from 97.4% last year.
For the total MHC land lease portfolio, average monthly rents increased to $378 as at December 31, 2016, compared to $366 as at
December 31, 2015 while occupancy remained strong at 98.3%, up from 98.2% last year. Management believes MHC land lease sites
provide secure and stable cash flows due to long-term tenancies, high occupancies, steady increases in average monthly rents, and
significantly lower capital and maintenance costs.
The table below summarizes the changes in the average monthly rent due to suite turnovers and lease renewals compared to the prior year.
Suite Turnovers and Lease Renewals – Total Portfolio
For the Year Ended December 31,
2016
2015
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
Change in AMR % Turnovers
Change in AMR % Turnovers
$
13.0
21.8
19.5
% & Renewals (1)
1.2
2.0
1.8
27.7
78.7
$
20.7
21.6
21.4
% & Renewals (1)
1.9
2.0
1.9
24.8
71.6
(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.
For suite turnovers in the residential suite portfolio (excluding co-ownerships and the Alberta and Saskatchewan regions where
Management has strategically reduced rents to increase occupancy) during the year ended December 31, 2016, average monthly rents
increased strongly by approximately $41 or 3.8% compared to an increase of $29 or 2.7% for last year, primarily due to the strong
rental markets of British Columbia and Ontario.
Overall, suite turnovers in the residential suite portfolio (excluding co-ownerships) during the year ended December 31, 2016, resulted
in average monthly rents increasing by approximately $13 or 1.2%, compared to an increase of approximately $21 or 1.9% for last
year primarily due to the strong rental markets of British Columbia and Ontario, offset by strategically reduced rents in the Alberta and
Saskatchewan rental markets to increase occupancy and higher unit turnover than in previous years.
Pursuant to Management’s focus on increasing overall portfolio rents for the year ended December 31, 2016, average monthly rents on
lease renewals increased by approximately $22 or 2.0%, compared to an increase of approximately $22 or 2.0% for last year. Increased
portfolio diversification helped mitigate geographical risk in particular areas of Canada. Management continues to pursue applications
for AGI in Ontario, 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 2017, the permitted guideline increase in Ontario and British
Columbia has been set to 1.5% and 3.7% respectively.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 32
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio Average Monthly Rents and Occupancy by Geography
Total Portfolio
Properties Owned Prior to
December 31, 2015
Properties
Acquired Since
December 31, 2015
As at December 31,
2016
2015
2016
2015 (1)
AMR
Occ. %
AMR
Occ. %
AMR
Occ. %
AMR
Occ. %
AMR
Occ. %
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
Europe
The Netherlands
Total Residential
$ 1,269
1,186
99.7 $ 1,218
946
99.6
99.1 $ 1,267
951
99.7
99.7 $ 1,218
946
99.9
99.1 $ 1,470
1,395
99.7
100.0
98.9
910
1,176
$ 1,214
894
98.3
99.4
1,126
99.5 $ 1,171
922
97.3
99.1
1,176
99.0 $ 1,217
894
98.4
99.4
1,126
99.6 $ 1,171
883
97.3
99.1
–
99.0 $ 1,177
98.2
–
98.7
$
$
866
967
892
97.6 $
96.9
97.4 $
830
947
859
96.6 $
95.5
96.4 $
866
967
892
97.6 $
96.9
97.4 $
840
947
868
96.7 $
95.5
96.4 $
–
–
–
–
–
–
$ 1,151
1,065
$ 1,124
$ 1,098
1,051
$ 1,060
99.8 $ 1,095
1,017
99.7
99.8 $ 1,070
99.6 $ 1,151
1,069
99.9
99.7 $ 1,126
99.8 $ 1,095
1,017
99.7
99.8 $ 1,070
99.6 $
99.9
99.7 $
–
791
791
–
100.0
100.0
95.0 $ 1,157
1,118
95.9
95.7 $ 1,125
91.5 $ 1,098
1,051
89.9
90.2 $ 1,060
95.0 $ 1,157
1,118
95.9
95.7 $ 1,125
91.5 $
89.9
90.2 $
–
–
–
–
–
–
$ 1,077
96.6 $ 1,004
92.1 $ 1,053
96.4 $ 1,004
92.1 $ 1,603
100.0
$
951
1,030
$ 1,001
98.5 $
99.1
98.9 $
894
1,022
975
951
88.7 $
95.7
1,030
93.2 $ 1,001
98.5 $
99.1
98.9 $
894
1,022
975
88.7 $
95.7
93.2 $
–
–
–
–
–
–
$
982
99.1 $
951
84.8 $
985
99.1 $
951
94.9 $
897
100.0
$
974
98.4 $
–
– $
–
– $
–
– $
974
98.4
Suites
$ 1,101
98.7 $ 1,059
97.4 $ 1,099
98.7 $ 1,064
97.5 $ 1,137
98.7
MHC Land
Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
Total MHC
Land Lease Sites
$
513
423
418
384
141
258
99.9 $
100.0
99.8
99.6
99.8
95.6
500
411
404
353
140
250
99.6 $
96.9
100.0
97.2
95.8
96.8
513
440
418
384
141
258
99.9 $
100.0
99.8
99.6
99.8
95.6
500
411
404
353
140
250
99.6 $
96.9
100.0
97.2
95.8
96.8
621
408
–
–
–
–
100.0
100.0
–
–
–
–
$
378
98.3 $
366
98.2 $
377
98.3 $
366
98.2 $
413
100.0
Total Suites and Sites $ 1,003
98.6 $
963
97.5 $
998
98.6 $
967
97.6 $ 1,095
98.7
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2015.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Overall average monthly rents for the stabilized residential suite portfolio as at December 31, 2016 increased by approximately 3.3%
compared to last year, while occupancies increased to 98.7%. For the total residential suite portfolio, AMR increased by approximately
4.0%, as compared to December 31, 2015, primarily due to a combination of ongoing successful sales and marketing strategies, above
guideline increases, and continued strength in the residential rental sector in the majority of CAPREIT’s regional markets, while occu-
pancies remained strong at 98.7%. 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 specific 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, 2016 and 2015, as well as the amor-
tization 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 (3)
2016
% (1)
2015
% (1)
$
$
$
$
2,870
2,427
12,950
15,377
0.4
2.2
2.6
2,622
0.4
$
$
$
$
1,691
1,652
12,585
14,237
1,504
0.3
2.4
2.7
0.3
(1) As a percentage of total operating revenues.
(2) New Tenant Inducements increased compared to last year primarily due to weakness in the Alberta region.
(3) Bad Debt Expense increased compared to last year due to Alberta and Saskatchewan.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 34
MANAGEMENT’S DISCUSSION AND ANALYSIS
RESULTS OF OPER ATIONS
Total Operating Revenues by Geography
($ Thousands)
For the Year Ended December 31,
Residential Suites
Ontario
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
Québec
Greater Montréal Region
Québec City
British Columbia
Greater Vancouver Region
Victoria
Alberta
Edmonton
Calgary
Nova Scotia
Halifax
Saskatchewan
Saskatoon
Regina
Prince Edward Island
Charlottetown
Europe
The Netherlands / Ireland
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 and MHC Land Lease Sites
2016
2015
$
$
$
$
$
$
$
$
243,067
16,263
24,918
25,648
309,896
92,268
34,715
126,983
44,229
19,806
64,035
6,784
29,506
36,290
$
$
$
$
$
$
$
$
235,037
9,193
17,939
23,613
285,782
65,961
35,046
101,007
33,296
16,360
49,656
6,890
32,455
39,345
$
20,681
$
20,193
$
$
$
1,422
2,857
4,279
5,424
$
$
$
1,500
2,938
4,438
5,136
$
$
156
567,744
$
$
1,072
506,629
$
$
$
17,181
1,107
1,617
1,118
861
7,203
29,087
596,831
$
$
$
16,182
640
1,518
1,027
870
6,932
27,169
533,798
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Results of Operations
($ Thousands)
For the Year Ended December 31,
Operating Revenues
Net Rental Revenues
Other (2)
Total Operating Revenues
Operating Expenses
Realty Taxes
Utilities
Other (3)
Total Operating Expenses
NOI
2016
% (1)
2015
% (1)
$
$
565,099
31,732
596,831
94.7
5.3
100.0
$ 505,188
28,610
533,798
$
94.6
5.4
100.0
(65,462)
(60,759)
(103,663)
(229,884)
366,947
$
11.0
10.2
17.3
38.5
61.5
(59,337)
(54,241)
(95,606)
(209,184)
$ 324,614
11.1
10.2
17.9
39.2
60.8
(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 Expenses
Overall operating expenses increased in the year ended Decem-
ber 31, 2016 compared to last year, due primarily to the increased
size of the portfolio. However, total operating expenses as a
percentage of revenues decreased to 38.5% compared to 39.2%
for last year.
Realty Taxes
For the year ended December 31, 2016, realty taxes as a per-
centage of operating revenues decreased to 11.0% compared to
11.1% last year.
Operating Revenues
For the year ended December 31, 2016, total operating revenues
increased by 11.8% compared to last year, due to the contri-
butions from acquisitions, increased average monthly rents on
stabilized properties, and continuing high stable occupancies. As
CAPREIT continues to enhance the profile of its resident base
and increase the level of service to residents, it expects to realize
further increases in operating and ancillary revenues. Ancillary
revenues, such as parking, laundry and antenna income, increased
by 10.9% for the year ended December 31, 2016.
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
2016
$ 568,484
22,134
$
2015
524,341
20,386
$ 590,618
$
544,727
(1) Based on rent roll as at December 31, net of vacancy loss, tenant
inducements and bad debt for the 12 months ended on such date.
(2) Includes rent roll for all properties owned as at December 31.
The table above shows the estimated Net Rental Revenue Run-
Rate based on average monthly rents in place for CAPREIT’s share
of residential suites and sites as at December 31, 2016 and 2015,
net of average historical vacancy loss, tenant inducements and
bad debt. The estimated annualized Net Rental Revenue Run-
Rate improved by 8.4% to $590.6 million from $544.7 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, 2016 was $561.9 million (2015 – $503.7 million).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 36
MANAGEMENT’S DISCUSSION AND ANALYSIS
Utilities
As a percentage of operating revenues, utility costs for the year ended December 31, 2016 remained stable at 10.2%.
CAPREIT’s utility costs can be highly variable from year to year depending on energy consumption and rates. The table below provides
CAPREIT’s utility costs by type.
($ Thousands)
Year Ended December 31,
Electricity
Natural Gas
Water
Total
(1) As a percentage of total operating revenues.
2016
26,830
15,712
18,217
60,759
% (1)
4.5
2.6
3.1
10.2
$
$
2015
23,257
14,878
16,106
54,241
% (1)
4.4
2.8
3.0
10.2
$
$
For the year ended December 31, 2016, electricity costs as a percentage of total operating revenues remained stable at 4.5% compared
to 4.4% for last year. In dollar terms, electricity costs for the year ended December 31, 2016 increased compared to last year due to the
large number of acquisitions in the past year and higher rates, partially offset by lower consumption on stabilized properties and an
increase in submetered units in Ontario and Alberta. As at December 31, 2016, tenants who pay their hydro charges directly represent
62% of the total 16,474 recently sub-metered suites in Ontario and Alberta.
For the year ended December 31, 2016, natural gas costs as a percentage of total operating revenues decreased to 2.6% compared to
2.8% for last year, primarily due to reduced consumption.
The table below provides information on CAPREIT’s fixed natural gas contracts for the fiscal years remaining 2017, 2018, 2019, and 2020:
Actual (2)
2015
Actual
2016
Estimated
2017
Estimated
2018
Estimated
2019
Estimated
2020
Gas Commodity
Fixed Weighted Average Cost per GJ (1)
Total of CAPREIT’s Actual/Estimated Requirements
Transport
Fixed Weighted Average Cost per GJ (1)
Total of CAPREIT’s Actual/Estimated Requirements
$ 3.75 $
70.0%
3.61 $
2.91 $
2.95 $
2.84 $
66.2%
58.5%
50.7%
48.8%
2.79
32.9%
$ 1.84 $
52.0%
1.59 $
1.25 $
1.00 $
0.96 $
55.3%
69.9%
49.2%
47.6%
0.95
32.9%
(1) Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs.
(2) Based on actual fixed 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 benefits, insurance and advertising, decreased as a percentage of operat-
ing revenues for the year ended December 31, 2016 to 17.3% from 17.9% for last year, primarily due to reduced R&M costs, partially
offset by increased wages compared to last year.
NOI
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 (including MHC home sales) 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 37
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, 2016 and 2015.
($ Thousands)
For the Year Ended December 31,
2016
2015
Increase (Decrease)
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
Europe
Netherlands / Ireland
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
NOI
NOI Margin (%)
151,700
9,558
15,090
15,257
191,605
52,472
19,255
71,727
30,580
14,186
44,766
4,599
17,590
22,189
62.4
58.8
60.6
59.5
61.8
56.9
55.5
56.5
69.1
71.6
69.9
67.8
59.6
61.1
12,588
60.9
710
1,786
2,496
49.9
62.5
58.3
2,716
50.1
127
348,214
81.4
61.3
11,687
847
1,126
771
360
3,942
18,733
366,947
68.0
76.5
69.6
69.0
41.8
54.7
64.4
61.5
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
NOI
NOI Margin (%) Change (%) Change (%) Change (%)
Revenue
Expense
NOI
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
144,294
4,776
10,750
13,814
173,634
37,359
19,227
56,586
22,402
11,113
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
3.4
76.9
38.9
8.6
8.4
39.9
(0.9)
25.7
32.8
21.1
29.0
(1.5)
(9.1)
(7.8)
0.7
51.8
36.7
6.0
5.5
39.1
(2.3)
24.4
25.3
7.1
19.4
3.2
0.6
1.0
5.1
100.1
40.4
10.4
10.3
40.5
0.1
26.8
36.5
27.7
33.6
(3.6)
(14.6)
(12.6)
12,513
62.0
2.4
5.4
0.6
761
1,838
2,599
50.7
62.6
58.6
(5.2)
(2.8)
(3.6)
(3.7)
(2.6)
(3.0)
(6.7)
(2.8)
(4.0)
2,497
48.6
5.6
2.6
8.8
878
307,599
81.9
60.7
(85.4)
12.1
(85.1)
10.3
(85.5)
13.2
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
6.2
73.0
6.5
8.9
(1.0)
3.9
7.1
11.8
(0.6)
73.3
0.6
(9.4)
0.6
4.9
2.0
9.9
9.7
72.9
9.3
19.7
(3.2)
3.1
10.1
13.0
For the year ended December 31, 2016, NOI increased by 13.0% and the NOI margin increased to 61.5% compared to 60.8% for last
year due to reduced R&M costs and vacancies. The significant increase in NOI in specific 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 and NOI margin through a combination of accretive and value-enhancing acquisitions, successful sales and marketing
strategies to improve revenues, and investments in capital programs to enhance the quality and value of its portfolio. For a comprehensive
analysis of stabilized NOI growth or decline compared to last year by geography, refer to the Stabilized Portfolio Performance section.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 38
MANAGEMENT’S DISCUSSION AND ANALYSIS
STABILIZED PORTFOLIO PERFOR M ANCE
($ Thousands)
For the Year Ended December 31,
2016
2015
Increase (Decrease)
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
Stabilized
NOI
NOI Margin (%)
150,647
4,622
11,501
12,963
179,733
29,540
19,255
48,795
20,945
12,069
33,014
3,479
17,590
21,069
62.4
49.8
62.1
60.2
61.8
56.6
55.5
56.1
69.2
71.2
69.9
68.6
59.6
60.9
12,335
60.8
710
1,786
2,496
2,686
300,128
11,687
482
1,126
771
360
3,942
18,368
318,496
39,702
49.9
62.5
58.3
50.4
61.3
68.0
73.5
69.6
69.0
41.8
54.7
64.1
61.5
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Stabilized
NOI
NOI Margin (%) Change (%) Change (%) Change (%)
Revenue
Expense
NOI
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
143,345
4,776
10,750
12,152
171,023
29,027
19,227
48,254
19,441
10,872
30,313
3,622
20,605
24,227
61.3
52.0
59.9
58.9
60.7
56.3
54.9
55.7
67.0
67.8
67.3
68.9
63.5
64.2
3.2
0.9
3.2
4.4
3.2
1.3
(0.9)
0.4
4.3
5.7
4.8
(3.6)
(9.1)
(8.3)
0.3
5.4
(2.4)
1.2
0.4
0.7
(2.3)
(0.5)
(2.7)
(5.5)
(3.7)
(2.7)
0.6
0.2
5.1
(3.2)
7.0
6.7
5.1
1.8
0.1
1.1
7.7
11.0
8.9
(3.9)
(14.6)
(13.0)
12,513
62.0
0.5
3.6
(1.4)
761
1,838
2,599
2,497
291,426
10,656
490
1,030
644
372
3,823
17,015
308,441
39,702
50.7
62.6
58.6
48.6
60.6
65.9
76.6
67.9
62.7
42.8
55.2
62.6
60.7
(5.2)
(2.8)
(3.6)
3.8
1.8
6.2
2.5
6.5
8.9
(1.0)
3.9
5.4
2.0
(3.7)
(2.6)
(3.0)
0.3
(0.1)
(0.6)
16.0
0.6
(9.4)
0.6
4.9
1.1
–
(6.7)
(2.8)
(4.0)
7.6
3.0
9.7
(1.6)
9.3
19.7
(3.2)
3.1
8.0
3.3
Stabilized properties for the year ended December 31, 2016 are defined as all properties owned by CAPREIT continuously since
December 31, 2014, and therefore do not take into account the impact on performance of acquisitions or dispositions completed
during 2016 and 2015. As at December 31, 2016, stabilized suites and sites represent 83.4% of CAPREIT’s overall portfolio (excluding
co-ownerships).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2016, operating revenues
increased by 2.0% and operating costs remained stable compared
to last year. As a result, stabilized NOI increased by 3.3% for
the year ended December 31, 2016. For the fourth quarter of
2016, operating revenues increased by 2.5% and operating costs
decreased by 2.2% compared to the same period in the prior year,
driving a 5.6% increase in stabilized NOI for the three months
ended December 31, 2016.
For the year ended December 31, 2016, the NOI margin for prop-
erties acquired since December 31, 2014 was 61.9%.
Ontario:
NOI for the stabilized Ontario portfolio increased by 5.1% during
the year ended December 31, 2016 compared to last year, primar-
ily due to higher operating revenues and lower R&M and vacan-
cies partially offset by higher utilities and wages. The NOI margin
improved to 61.8% for the year ended December 31, 2016 com-
pared to 60.7% for last year. Management believes the Ontario
portfolio will remain strong and generate steady returns in the
medium term. As discussed earlier, the rent guideline increase for
2017 is 1.5%.
Québec:
NOI for the stabilized Québec portfolio increased by 1.1% during
the year ended December 31, 2016 compared to last year, primar-
ily due to higher operating revenues and lower utilities, offset by
higher vacancies, bad debt, and tenant allowances. For the year
ended December 31, 2016, the NOI margin increased to 56.1%
compared to 55.7% for last year. CAPREIT believes the Québec
rental market will remain stable and generate steady to improving
returns in the medium term.
British Columbia:
NOI for the stabilized British Columbia portfolio increased by
8.9% during the year ended December 31, 2016 compared to last
year, primarily due to higher operating revenues and lower R&M
costs partially offset by higher realty taxes. For the year ended
December 31, 2016, the NOI margin improved to 69.9% from
67.3% for last year. Management believes the British Columbia
portfolio will continue to generate steady returns in the medium
term. The rent guideline increase for 2017 is 3.7%.
Alberta:
NOI for the stabilized Alberta portfolio decreased by 13.0%
during the year ended December 31, 2016 compared to last
year, primarily due to higher bad debt and tenant allowances
and lower rental revenues partially offset by lower vacancies and
R&M costs. For the year ended December 31, 2016, the NOI
margin decreased to 60.9% compared to 64.2% for last 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
further downturn in the local market. In addition, with Alberta
representing only 6.0% 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 1.4%
for the year ended December 31, 2016 compared to last year,
primarily due to higher realty taxes, maintenance and wage
costs and lower parking revenue partially offset by lower tenant
allowances, and utilities. For the year ended December 31, 2016,
the NOI margin decreased to 60.8% from 62.0% for last year.
Management believes its presence primarily in downtown Halifax
locations will serve to maintain or increase occupancy levels and
average monthly rents in the medium term.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 40
MANAGEMENT’S DISCUSSION AND ANALYSIS MHC Land Lease Sites:
NOI for the stabilized MHC land lease sites portfolio increased by 8.0% for the year ended December 31, 2016 compared to last year,
primarily due to higher rental revenue, MHC home sales, and lower R&M costs. For the year ended December 31, 2016, the NOI mar-
gin increased to 64.1% from 62.6% for last year. Management believes its MHC land lease portfolio will provide accretive growth in
the long term.
($ Thousands)
For the Year Ended December 31,
Stabilized NOI
Net Acquisitions NOI (1)
Total NOI
NOI
2016 Margin (%)
61.5
61.9
61.5
$ 318,496
48,451
$ 366,947
NOI
2015 Margin (%)
60.7
62.7
60.8
$ 308,441
16,173
324,614
$
(1) Accounts for the NOI of acquisitions or dispositions completed during 2016 and 2015.
NET INCOME AND OTHER COMPREHENSIVE INCOME
($ Thousands)
Year Ended December 31,
Net Operating Income
(Less) Plus:
Trust Expenses
Unrealized Gain on Remeasurement of Investment Properties
Realized Loss on Disposition of Investment Properties
Remeasurement of Exchangeable Units
Unit-based Compensation Expenses
Interest on Mortgages Payable and Other Financing Costs
Interest on Bank Indebtedness
Interest on Exchangeable Units
Other Income
Amortization
Severance and Other Employee Costs
Unrealized and Realized (Loss) Gain on Derivative Financial Instruments
Dilution Loss on Equity Accounted Investments
Gain (Loss) on Foreign Currency Translation
Net Income
Other Comprehensive Income
Items That May Be Reclassified Subsequently to Net Income
Amortization of Losses from AOCL to Interest and Other Financing Costs
Change in Fair Value of Derivative Financial Instruments
Change in Fair Value of Investments
Foreign Currency Translation
Reversal of Cumulative Foreign Currency Translation Relating to IRES Ownership Dilution
Other Comprehensive Income
2016
$ 366,947
2015
$ 324,614
(32,129)
227,335
(1,813)
(731)
(19,897)
(112,425)
(4,705)
(200)
17,236
(4,249)
–
(397)
–
4,441
$ 439,413
$
3,105
1,644
3,109
(5,914)
–
1,944
(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
Comprehensive Income
$
441,357
$ 358,387
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Trust Expenses
Trust expenses include costs directly attributable to head office,
such as salaries, trustee fees, professional fees for legal and
advisory services, trustees’ and officers’ insurance premiums,
providing third-party property and asset management services,
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, 2016 to $32.1 million from $22.7 million for last
year due to higher compensation expenses and non-recurring legal
provisions of $2.3 million and $5.5 million related to transactions
that were not completed.
Unrealized Gain on Remeasurement of Investment Properties
CAPREIT recognizes its investment properties at fair value at each
reporting period, with any unrealized gain or loss on remeasure-
ment recognized in the consolidated statements of income and
comprehensive income for the year. A description of the key com-
ponents of the change in the fair value of investment properties is
included in the Investment Properties section.
Realized Loss on Disposition of Investment Properties
For the year ended December 31, 2016, a loss of $1.8 million was
recognized in connection with the property dispositions in the
third quarter of 2016. For the year ended December 31, 2015, a
loss of $0.6 million was recognized in connection with the prop-
erty 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 proper-
ties at the date of disposition.
Remeasurement of Exchangeable Units
CAPREIT accounts for its Exchangeable Units as a financial
liability, remeasures such liability at each reporting period, and
includes this remeasurement in the consolidated statements of
income and comprehensive income. The increase in the market
price of the underlying CAPREIT Trust Units since the last reporting
date resulted in a loss on remeasurement of $0.7 million for the
year ended December 31, 2016 compared to $0.3 million last
year. A description of the key components of the remeasurement
of Exchangeable Units is included in note 11 of CAPREIT’s audited
consolidated annual financial statements for the year ended
December 31, 2016 contained in CAPREIT’s 2016 Annual Report.
Unit-based Compensation Expenses
Unit-based compensation benefits are provided to officers, trustees
and certain employees and are intended to facilitate long-term
ownership of Trust Units and to provide additional incentives by
increasing the participants’ interest, as owners, in CAPREIT. Unit-
based compensation expenses include costs attributable to these
incentive plans, namely the Restricted Unit Rights Plan (“RUR
Plan”), Unit Option Plan (“UOP”), Deferred Unit Plan (“DUP”),
Long-Term Incentive Plan (“LTIP”) and Senior Executive
Long-Term Incentive Plan (“SELTIP”) (see notes 11 and 12 of
CAPREIT’s audited consolidated annual financial statements for
the year ended December 31, 2016 contained in CAPREIT’s 2016
Annual Report).
As a result of CAPREIT being an open-ended mutual fund
trust, whereby each Unitholder of Trust Units is entitled to
redeem their Units in accordance with the conditions specified
in CAPREIT’s DOT, under IFRS the underlying Trust Units
relating to the Unit-based compensation awards are not treated
as equity and are instead considered financial liabilities. As such,
these Unit-based compensation awards must be presented as
liabilities and remeasured at fair value at each reporting date.
Close-ended mutual fund trusts, such as certain of CAPREIT’s
industry peers, are not required to remeasure their respective Unit-
based compensation awards. In such cases, the related expense
is limited to the amortization of the fair value of the award over
the applicable vesting period.
In order to aid comparability with CAPREIT’s peers, the Unit-
based compensation expense has been separated into two
components: (i) the amortization of the grant date fair value of
the award over its vesting period, and (ii) the remeasurement of
awards outstanding at year end at fair value.
As at December 31, 2016, the maximum number of Units issuable
under all of CAPREIT’s Unit-based incentive plans is 9,500,000
Units (December 31, 2015 – 9,500,000). The maximum number
of Units available for future issuance under all Unit incentive
plans as at December 31, 2016 is 1,346,980 Units (December 31,
2015 – 1,750,051 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 CAPREIT’s audited consolidated
annual financial statements for the year ended December 31, 2016
contained in CAPREIT’s 2016 Annual Report.
CAPREIT’s Unit-based compensation expense for the year ended
December 31, 2016 resulted in a loss of $19.9 million compared
to $13.4 million for last year due to the larger increase in the
market price of the underlying CAPREIT Trust Units and higher
DUP and RUR awards amortization expense compared to 2015.
The table below demonstrates the impact of each component of
CAPREIT’s benefit plans on the total compensation expense.
($ Thousands)
Year Ended December 31,
Remeasurement of Unit-based
Compensation Liabilities
Amortization of Fair Value
on Grant Date of Unit-based
2016
2015
$
14,217
$
7,511
Compensation
Total
5,680
5,906
$
19,897
$
13,417
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 42
MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest on Mortgages Payable and Other Financing Costs
Interest on mortgages, which includes the amortization of certain
financing costs, increased for the year ended December 31, 2016
to $112.4 million from $103.8 million for last year due to mort-
gage top-ups and acquisition financings in 2016. As a percentage
of operating revenues, mortgage interest expense decreased to
18.8% for the year ended December 31, 2016 compared to 19.4%
for last year due to refinancing of mortgages at lower interest
rates and higher operating revenues from stabilized properties and
acquisitions. Additional information on the interest on mortgages
payable and other financing costs is included in note 21 to the
accompanying audited consolidated annual financial statements
and the Liquidity and Financial Condition section of this report.
Interest on Bank Indebtedness
Interest on bank indebtedness relates to borrowings under the
Credit Facilities (see Liquidity and Capital Resources section).
Other Income
Other income primarily consists of dividends received from
investments (see note 7 to the accompanying audited consolidated
annual financial statements), income from associate, gains realized
on sale of investments, and asset management and property
management fees.
($ Thousands)
For the Year Ended December 31,
Recurring
Investment Income
Net Profit from Equity
Accounted Investment (1)
Asset and Property
Management Fees
2016
2015
$
1,304
$
1,305
10,600
6,894
5,195
3,316
Non-Recurring (2)
Total
137
17,236
$
825
12,340
$
(1) Includes unrealized gain on remeasurement of IRES investment
properties of $7,006 and $4,024 for the years ended December 31, 2016
and December 31, 2015, respectively.
(2) Includes other interest income and underwriters’ fee relating to sale of
Rockbrook SPV in 2015.
Effective April 11, 2014, CAPREIT entered into an external
management agreement as may be amended from time to time,
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, 2016 are $5.2 million compared to $3.3 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, 2016.
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.
Amortization
These costs represent the amortization of CAPREIT’s head
office property, plant and equipment on a straight-line basis
over their estimated useful lives, ranging primarily between three
and five years.
Severance and Other Employee Costs
For the year ended December 31, 2015, $5.2 million of severance
and other employee costs were incurred, including compensa-
tion costs related to the accelerated vesting of previously-granted
RUR Units.
Unrealized and Realized (Loss) Gain on Derivative
Financial Instruments
i) Interest rate contracts for which hedge accounting
is being applied
As at December 31, 2016, CAPREIT has two interest rate swap
agreements, which include:
a. $65 million interest rate swap agreement fixing the interest
rate at 3.60%, which matures in September 2022. The
agreement effectively converts borrowings on a bankers’
acceptance-based floating rate credit facility to a fixed
rate facility for a ten-year term. The related floating rate
credit facility is for a five-year term. The credit facility was
amended effective June 30, 2016 and expires on June 30,
2021. On expiry of the term it is expected to be refinanced
to match the term of the interest rate swap. At each reporting
date, the hedging derivative will be marked-to-market with
the ineffective portion recognized in net income (unrealized
loss of $0.7 million for the year ended December 31, 2016),
recorded under (loss) gain on derivative financial instruments
on the consolidated statements of income and comprehensive
income for the year ended December 31, 2016.
b. The €45 million credit facility agreement and interest rate
swap agreement fixing the interest rate at 3.22%, which
matures in September 2018, was partially paid down by
€5.0 million on April 21, 2014 therefore deemed the entire
hedge as ineffective and the marked-to-market loss of
approximately $2.0 million on the date of repayment was
recognized in net income in 2014. The new €40 million
interest rate swap agreement was not hedged. See below
for details.
ii) Interest rate contracts for which hedge accounting
is not being applied
The new €40 million interest rate swap agreement effective
April 21, 2014, fixes the interest rate at 2.87% (assuming a
constant margin of 1.65% per annum) and matures in August
2018. This agreement effectively converts borrowings on
a Euribor-based floating rate credit facility to a fixed rate
facility for a five-year term. At each reporting date, the hedging
derivative will be marked-to-market in net income ($0.3 million
unrealized gain for the year ended December 31, 2016).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, fixed 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 agree-
ment fixing the Government of Canada 10-year bond at 1.44%
effective October 29, 2015. The agreement effectively con-
verted mortgage financings 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
financial 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 reclassified 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.
Gain on Foreign Currency Translation
For the year ended December 31, 2016, CAPREIT recognized
a gain on foreign exchange of $4.4 million compared to a loss
of $7.4 million for the same period last 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.
CAPREIT’s Netherlands subsidiary owns and operates properties
in The Netherlands, a foreign jurisdiction. It is exposed to
foreign currency fluctuations arising between the functional
currency of the foreign operation (the euro) and the functional
currency of CAPREIT (the Canadian dollar). As such, CAPREIT
entered into a hedge effective at the date of The Netherlands
acquisition (December 23, 2016). CAPREIT hedged the net
investment in The Netherlands foreign operations with €22.5 mil-
lion euro-denominated debt on CAPREIT’s consolidated balance
sheets. Any foreign currency gains/losses arising from the euro-
denominated debt will be offset by the foreign currency gain/
loss arising from the investment in The Netherlands foreign
operations. The effective portion of foreign exchange gains and
losses on the €22.5 million euro-denominated debt was recognized
in OCI and the ineffective portion was recognized in net income.
The Rockbrook Portfolio acquisition and its subsequent disposition
in the first quarter of 2015 resulted in a 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 4 4
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 financial liabilities under IFRS.
Consequently, all per Unit calculations are considered non-IFRS measures.
The following table explains the number of Units used in calculating non-IFRS financial measures on a per Unit basis:
(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
2016
130,372
161
261
130,794
431
311
701
245
132,482
2015
117,835
161
224
118,220
564
316
608
218
119,926
2016
134,389
161
286
134,836
630
555
718
– (5)
136,739
(1) See note 11 to the accompanying audited consolidated annual financial statements for details of Exchangeable Units.
(2) See notes 11 and 12 to the accompanying audited consolidated annual financial statements for the year ended December 31, 2016 contained
in CAPREIT’s 2016 Annual Report for details of CAPREIT’s Unit-based compensation plans.
(3) Calculated using the treasury method after taking into account the respective subscriptions receivable (see note 12 to the accompanying
audited consolidated annual financial statements).
(4) Calculated using the treasury method after taking into account the exercise prices.
(5) There are 1,488,212 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
$
$
2016
161,483
200
2,730
164,413
(51,780)
(2,730)
109,903
33.2%
2015
$ 142,973
194
3,031
146,198
(44,372)
(3,031)
98,795
32.4%
$
(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 CAPREIT’s audited consolidated annual financial statements for the year ended December 31, 2016 contained in
CAPREIT’s 2016 Annual Report for a discussion of these plans).
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 five trading days immediately
preceding the relevant distribution date.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
The average participation rate in the DRIP and other plans under which distributions are reinvested increased for the year ended Decem-
ber 31, 2016 to 33.2% from 32.4% for last year. The DRIP participation rate is subject to factors beyond Management’s control and
varies between investors.
Distributions declared on Units outstanding under the Unit-based compensation plans in these tables are based on all awards granted
under the RUR Plan, DUP, LTIP and SELTIP (see notes 12 and 13 to the accompanying audited consolidated annual financial statements
for a discussion of these plans). When establishing the level of monthly cash distributions to Unitholders, the Board of Trustees relies on
cash flow information, including forecasts and budgets.
Funds From Operations
FFO is a measure of operating performance based on the funds generated by the business before reinvestment or provision for other capi-
tal needs. FFO as presented is in accordance with the recommendations of the Real Property Association of Canada, with the exception
of the adjustment for amortization of certain other assets. It may not, however, be comparable to similar measures presented by other
real estate trusts or companies in similar or different industries. Management considers FFO to be an important measure of CAPREIT’s
operating performance.
Payout ratios compare total and net distributions declared to these non-IFRS financial measures.
A reconciliation of net income to FFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Net Income
Adjustments:
Unrealized Gain on Remeasurement of Investment Properties
Realized Loss on Disposition of Investment Properties
Remeasurement of Exchangeable Units
Remeasurement of Unit-based Compensation Liabilities
Interest on Exchangeable Units
Corporate Income Taxes
(Gain) Loss on Foreign Currency Translation
FFO Adjustment for Income from Equity Accounted Investments (1)
Unrealized and Realized Loss (Gain) on Derivative Financial Instruments
Net Income Attributable from Non-Controlling Interest
Net FFO Impact Attributable from Non-Controlling Interest
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.
2016
$ 439,413
2015
$ 345,633
(227,335)
1,813
731
14,217
200
7
(4,441)
(6,021)
397
67
(68)
–
4,249
$ 223,229
1.707
$
1.685
$
$ 164,413
73.7%
$ 109,903
$ 113,326
49.2%
(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%
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 4 6
MANAGEMENT’S DISCUSSION AND ANALYSIS
Normalized Funds From Operations
Management considers NFFO to be the key measure of CAPREIT’s operating performance. NFFO is calculated by excluding from FFO
the effects of certain non-recurring items, including amortization of losses on certain hedging instruments previously settled and paid,
mortgage prepayment penalties, offset by the write-off of fair value adjustments on assumed mortgages that were refinanced early, large
acquisition research costs relating to transactions that were not completed, and significant severance and other employee costs. As it is
an operating performance metric, no adjustment is made to NFFO for capital expenditures. NFFO facilitates better comparability to
prior year’s performance and provides a better indicator of CAPREIT’s long-term operating performance. For further information on
CAPREIT’s total property capital investments, please refer to the Property Capital Investments section. See the discussions in the Net
Income section in this MD&A for additional information on hedging instruments currently in place. NFFO is not a measure of sustain-
ability of distributions.
A reconciliation of FFO to NFFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
FFO
Adjustments:
Amortization of losses from AOCL to interest and other financing costs
Net Mortgage Prepayment Cost
Acquisition Research Costs (1)
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
2016
$ 223,229
2015
$ 191,356
3,105
–
5,474
–
$ 231,808
1.772
$
1.750
$
$ 164,413
70.9%
$ 109,903
$ 121,905
47.4%
3,311
123
–
5,237
$ 200,027
1.692
$
1.668
$
$ 146,198
73.1%
$
98,795
$ 101,232
49.4%
(1) Expenses included in trust expenses relates to transactions that were not completed.
NFFO for the year ended December 31, 2016 increased by 15.9% compared to last year, primarily due to contributions from acquisitions
and higher NOI for properties owned prior to December 31, 2015.
For the year ended December 31, 2016, basic NFFO per Unit increased by 4.7% compared to last year, despite an approximate 11%
increase in the weighted average number of Units outstanding resulting from the October 2015 and August 2016 equity offerings (see
Liquidity and Capital Resources section for further details), offset by strong organic NOI growth and contributions from acquisitions.
Management expects per Unit FFO and NFFO and related payout ratios to improve in the medium term as a result of NOI contributions
from recent acquisitions.
Comparing distributions declared to NFFO, the NFFO payout ratio for the year ended December 31, 2016 improved to 70.9% compared
to 73.1% for last year. The effective NFFO payout ratio, which compares NFFO to net distributions paid, improved for the year ended
December 31, 2016 to 47.4% from 49.4% for last year.
Cash Flows From Operating Activities and Distributions Declared
There may be periods where actual distributions declared may exceed cash generated from (utilized in) operating activities after interest
paid, primarily due to weaker performance in certain periods from seasonal fluctuations. These seasonal or short-term fluctuations are
funded, if necessary, with our Acquisition and Operating Facility. CAPREIT determines distributions and the distribution rate by, among
other considerations, its assessment of Adjusted Cash Flow from Operating Activities (a non-IFRS measure). As such, CAPREIT believes
the cash distributions are not an economic return of capital, but a distribution of sustainable adjusted cash flow from operating activities.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table reconciles cash generated from operating activities (per the consolidated financial statements) to Adjusted Cash
Flows from Operating Activities:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Cash Generated From Operating Activities
Adjustments:
Interest Paid
Adjusted Cash Flow from Operating Activities
2016
$ 361,358
2015
$ 292,824
(109,097)
$ 252,261
(100,467)
$ 192,357
As indicated by National Policy 41-201, “Income Trusts and Other Indirect Offerings”, the following table outlines the differences
between Adjusted Cash Flow generated from Operating Activities and total distributions declared, as well as the differences between net
income and total distributions, in accordance with the guidelines.
($ Thousands, except per Unit amounts)
Year Ended December 31,
Net Income
Adjusted Cash Flow from Operating Activities
Total Distributions Declared
Net Distributions Paid
Excess of Net Income over (under) Total Distributions Declared
Excess of Net Income over (under) Net Distributions Declared
Excess of Adjusted Cash Flow from Operating Activities over Total Distributions Declared
Excess of Adjusted Cash Flow from Operating Activities over Net Distributions Declared
2016
$ 439,413
$ 262,350
$ 164,413
$ 109,903
$ 275,000
$ 329,510
$
97,937
$ 152,447
2015
$ 345,633
$ 192,357
$ 146,198
$
98,795
$ 199,435
$ 246,838
46,159
$
93,562
$
Net income is not used as a basis for distributions as it includes fair value changes on investment properties, remeasurement of Unit-based
compensation liabilities, and fair value change on derivative financial instruments, which are not reflective of CAPREIT’s ability to make
distributions. Amounts retained in excess of the declared distributions are used for mortgage principal repayments, tenant allowances,
and capital expenditures requirements.
Adjusted Funds From Operations
Management views AFFO as less reliable or applicable under a gross lease operating structure, as is the case for CAPREIT, because
maintenance property capital investments are not clearly identifiable or do not have a common definition, and it would require significant
judgement to classify property capital investments as maintenance, stabilizing or value enhancing. In addition, there is no definition of
maintenance capital expenditure in the Canadian real estate industry. However, given the current use by investors and other stakeholders of
this non-IFRS financial measure, CAPREIT currently intends to continue presenting an estimate of AFFO. AFFO may not be comparable to
similar measures presented by other real estate trusts or companies in similar or different industries. Management does not rely on AFFO
to operate the business of CAPREIT, plan CAPREIT’s capital spending or determine CAPREIT’s distributions, or the sustainability of such
distributions, thereon. Management views NFFO, adjusted cash flow from operating activities, and disclosure on capital expenditures
within the “Capital Property Investments” section as more relevant metrics for investors.
CAPREIT is committed to providing detailed disclosure on actual and long-term capital expenditures by category which is useful and
meaningful information to all Unitholders (as disclosed in the “Capital Property Investments” section), and its sources of funding (as
disclosed in the “Liquidity and Financial Condition” section).
CAPREIT calculates AFFO by deducting from NFFO an industry-based estimate for maintenance property capital investments on
residential suites 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 48
MANAGEMENT’S DISCUSSION AND ANALYSIS
A reconciliation of NFFO to AFFO is as follows:
($ Thousands, except per Unit amounts)
Year Ended December 31,
NFFO
Adjustments:
Provision for Maintenance Property Capital Investments (1)
Amortization of Fair Value on Grant Date of Unit-based Compensation
AFFO
AFFO per Unit – Basic
AFFO per Unit – Diluted
Distributions Declared
AFFO Payout Ratio
Net Distributions Paid
Excess AFFO Over Net Distributions Paid
Effective AFFO Payout Ratio
2016
$ 231,808
2015
$ 200,027
(18,249)
5,680
$ 219,239
1.676
$
1.655
$
$ 164,413
75.0%
$ 109,903
$ 109,336
50.1%
(16,343)
5,906
$ 189,590
1.604
$
1.581
$
$ 146,198
77.1%
$
$
98,795
90,795
52.1%
(1) Based on an industry estimate of $450 per suite per year and the weighted average number of residential suites during the year (see the Productive
Capacity section).
Cash Generated From Operating Activities to AFFO Reconciliation
In compliance with Canadian Securities Administrators Staff Notice 52-306 (Revised), Non-GAAP Financial Measures, the table below
reconciles cash generated from operating activities to AFFO.
A reconciliation of cash generated from operating activities to AFFO is as follows:
($ 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
Net Income Attributable from Non-Controlling Interest
Net FFO Impact Attributable from Non-Controlling Interest
Acquisition Research Costs
Provision for Maintenance Property Capital Investments
AFFO
2016
$ 361,358
2015
$ 292,824
(104,578)
(14,138)
(4,675)
(138)
200
7
–
–
(6,021)
67
(68)
5,474
(18,249)
$ 219,239
(97,667)
12,921
(3,612)
(122)
194
59
5,237
123
(4,024)
–
–
–
(16,343)
$ 189,590
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION IV
PROPERTY CAPITAL INVESTMENTS
CAPREIT capitalizes all capital investments related to the
improvement of its properties. These investments have the objec-
tive of growing NOI in the future.
An important component of CAPREIT’s property capital invest-
ment strategy is to acquire properties at values significantly below
current replacement costs and improve their operating perfor-
mance by investing annually in order to sustain and grow the port-
folio’s future rental income-generating potential over its useful life.
To achieve its property capital investment objectives, taking into
account CAPREIT’s acquisition history, the soft economic condi-
tions and the availability of competitive pricing from construction
trades at 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 prop-
erty 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 prop-
erties and enhance their future cash flow generating potential.
Management also believes these building improvement programs,
combined with existing suite improvement, common area and
environment-friendly and energy-saving initiatives, will enable
CAPREIT to reposition its portfolio and maintain high occu-
pancy levels throughout any unfavourable economic conditions.
These investments are expected to continue to increase average
monthly rents while improving life safety and resident satisfac-
tion. Management believes strategic investments will position the
portfolio for improved operating performance over the long term.
For the year ended December 31, 2016, CAPREIT made property
capital investments (excluding head office assets) of $195.7 mil-
lion, compared to $163.2 million for last year. Property capital
investments were higher compared to the prior year primarily
due to investments in acquisitions completed in 2015 and 2016,
and higher building, suite and common area improvement costs,
which generally tend to increase NOI more quickly.
In addition, CAPREIT continues to invest in environment-friendly
and energy-saving initiatives, including high-efficiency boilers,
energy-efficient lighting systems and water saving programs,
which have permitted CAPREIT to mitigate potential increases in
utility and R&M costs and have improved overall portfolio NOI
significantly, as discussed in the Results of Operations section.
A breakdown of property capital investments (excluding head office assets) is summarized by category below:
Property Capital Investments by Category
($ Thousands)
Year Ended December 31, 2016
Building Improvements
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Total
Year Ended December 31, 2015
Building Improvements
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Total
Stabilized (1) Net Acquisitions (2)
30,118
31,498
17,338
37,713
12,522
23,149
1,500
2,018
6,609
8,969
5,983
12,821
2,066
3,438
76,136
119,606
Stabilized (1) Net Acquisitions (2)
22,573
37,163
10,565
33,420
7,770
18,814
712
1,484
3,208
7,711
5,267
11,169
702
2,650
50,797
112,411
Total
61,616
55,051
35,671
3,518
15,578
18,804
5,504
195,742
Total
59,736
43,985
26,584
2,196
10,919
16,436
3,352
163,208
%
31.5
28.1
18.2
1.8
8.0
9.6
2.8
100.0
%
36.6
26.9
16.3
1.3
6.7
10.1
2.1
100.0
(1) Properties owned as of December 31, 2011 excluding disposed properties.
(2) Includes properties acquired and disposed of since December 31, 2011.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 50
MANAGEMENT’S DISCUSSION AND ANALYSIS
The significant portfolio growth generated since 2011 has led CAPREIT to adjust its multi-year capital investment programs as acquisi-
tions are expected to have major capital expenditures within the first five years of the purchase. Based on a revised multi-year property
capital investment plan, Management expects CAPREIT to complete property capital investments (excluding the Netherland properties
and development) of approximately $155 million to $165 million during 2017, including approximately $64 million targeted at acqui-
sitions completed since January 1, 2012 and approximately $15 million for high-efficiency boilers and other energy-saving initiatives.
The table below includes estimated 2017 capital expenditures (excluding The Netherlands properties) for intensification for buildings
expected to be completed in 2017. It also presents development costs for 2017, which includes costs related to planning, re-zoning,
architectural surveys, application fees, and building permits.
2017 Capital Expenditure Budget
($ Thousands)
Investment Properties
Building Improvements
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Total Investment Properties
Development
Intensification
Development
Total Development
Total Capital Expenditures
Stabilized (1) Net Acquisitions (2)
18,400
23,900
18,300
2,700
9,400
14,400
2,700
89,800
12,400
13,800
15,400
2,000
5,500
10,300
1,400
60,800
Stabilized (1) Net Acquisitions (2)
1,900
–
1,900
91,700
3,200
31,900
35,100
95,900
Total
30,800
37,700
33,700
4,700
14,900
24,700
4,100
150,600
Total
5,100
31,900
37,000
187,600
%
16.4
20.1
18.0
2.5
7.9
13.2
2.2
80.3
%
2.7
17.0
19.7
100.0
(1) Properties owned as of December 31, 2011 excluding disposed properties.
(2) Includes properties acquired and disposed of since December 31, 2011 excluding The Netherlands properties.
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 2017 through 2020 for properties owned as of December 31, 2016 excluding The
Netherlands properties. Building improvements represent one of the most significant categories of property capital investment at present,
but are expected to decline significantly in the coming years.
Future Investments in Building Improvements
($ Thousands)
2017
2018
2019
2020
Stabilized (1)
Estimated Range
$18,000 – $22,000
$14,000 – $18,000
$16,000 – $20,000
$10,000 – $14,000
Acquisitions (2)
Estimated Range
$11,000 – $15,000
$10,000 – $14,000
$13,000 – $17,000
$6,000 – $10,000
(1) Properties owned as of December 31, 2011 excluding disposed properties.
(2) Includes properties acquired since December 31, 2011 excluding The Netherlands properties.
Management believes CAPREIT has sufficient liquidity and access to top-up financing opportunities (see the Liquidity and Financial
Condition section) to execute the above property capital investment strategy.
CAPREIT continues its multi-phase implementation of an Enterprise Resource Planning (“ERP”) system, and Management believes this
unified platform will continue to drive operational efficiencies in the business. To date, $9.8 million of costs related to this initiative have
been capitalized to property, plant and equipment.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 51
MANAGEMENT’S DISCUSSION AND ANALYSIS
PRODUCTIVE CAPACITY
The primary focus of the following discussion is to discuss CAPREIT’s longer-term goals of enhanced cash flows and value creation to
provide Unitholders with increased total returns and stable Unit distributions through property capital investments.
CAPREIT does not differentiate between the concepts of maintenance and value-enhancing property capital investments. Maintenance
property capital investments are generally not clearly identifiable or have a common definition and would require significant judgement
to classify property capital investments as maintenance, stabilizing or value-enhancing. In addition, there is no defined definition of
maintenance capital expenditure in the Canadian real estate industry.
CAPREIT uses industry estimates for annual overall maintenance capital investments, which 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 annually per residential suite and are expensed to NOI.
Owing to the gross lease structure of its portfolio, CAPREIT does not divide its property capital investments between the two categories
described above. Instead, CAPREIT uses industry guidelines for maintenance property capital investments to estimate its stabilizing and
value-enhancing property capital investments.
Management believes its increased emphasis on targeted property capital investment programs for its property portfolio is yielding posi-
tive results, as significant benefits are being, and are expected to continue to be, realized through maintaining high occupancy, increasing
average monthly rents and reducing operating costs. These positive results are demonstrated below.
The following table presents the average NOI growth from 2012 through 2016, reflecting a segregation of the portfolio based on the
amount of capital investment per suite. For example, for each year, properties with the highest capital investment per suite were included
in the first quartile, and properties with the lowest capital investment per suite were included in the fourth quartile. NOI growth was
measured for those properties by quartile for the year following the year in which the capital investments were made, with the assumption
that capital investments are undertaken throughout the year and the impact on NOI could reasonably be measured in the following year.
A simple average was calculated covering each of the last five years. To compute the results on a stabilized basis, only those properties
owned prior to 2012 and held as at December 31, 2016 were included in the analysis.
Average NOI Growth by Level of Property Capital Investment Per Suite
Quartile
1st
2nd
3rd
4th
Total
Number of Properties
37
37
37
38
149
Average
Number of Suites
6,844
7,112
6,483
7,022
27,461
% of Total Capital
Investments (1)
51.1%
28.0%
14.4%
6.5%
100.0%
Average
NOI Growth
5.5%
3.1%
4.9%
3.6%
4.3%
(1) As a percentage of total property capital investments over the five-year period to December 31, 2016.
The analysis indicates a positive relationship between capital investments and higher NOI growth rates, which supports Management’s
assertion that continued reinvestment of capital is a fundamental component of CAPREIT’s growth strategy. The analysis demonstrates
the success of CAPREIT’s capital investment programs, which increase the earnings potential of the property portfolio.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 52
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITAL STRUCTURE
CAPREIT defines capital as the aggregate of Unitholders’ equity, debt financing, Unit-based compensation liabilities and Exchangeable
Units. CAPREIT’s objectives when managing capital are to safeguard its ability to continue to fund distributions to Unitholders, to retain
a portion to meet repayment obligations under its mortgages and credit facilities, and to ensure sufficient funds are available to meet
capital commitments. Management aims to maintain an optimal degree of leverage relative to the gross book value of CAPREIT’s assets
depending on a number of factors at any given time, which include expected cash flow requirements, impact on near-term and long-term
financial performance, current and expected state of the credit markets and any risks, among other considerations. Capital adequacy is
monitored against investment and debt restrictions contained in CAPREIT’s DOT and the Credit Facilities agreement.
CAPREIT’s Credit Facilities (see Liquidity and Financial Condition section) require compliance with the financial covenants shown in
the table below. In addition, borrowings must not exceed the borrowing base, calculated as a predefined percentage of the fair value of
the investment properties determined on an annual basis.
In addition, CAPREIT requires compliance with all investment and debt restrictions and financial covenants under the agreement with
CMHC. Refer to the Liquidity and Financial Condition section of this report for further details.
In the short term, CAPREIT utilizes the Credit Facilities to finance its capital investments, which may include acquisitions. In the long
term, equity issuances, mortgage financings and refinancings, including top-ups, are put in place to finance the cumulative investment in
the property portfolio and ensure the sources of financing better reflect the long-term useful lives of the underlying investments.
CAPREIT is in compliance with all the investment and debt restrictions and financial covenants contained in the DOT and the Credit
Facilities. The total capital managed by CAPREIT and the results of compliance with the key covenants are summarized below:
($ Thousands)
As at 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)
2016
$ 3,492,923
26,408
60,278
5,061
4,158,149
$ 7,742,819
2015
$ 3,097,773
168,211
46,163
4,330
3,659,953
$ 6,976,430
Threshold
Maximum 70.00%
Minimum $1,500,000
44.31%
54.36%
$ 4,224,271
45.71%
55.41%
$ 3,710,446
Minimum 1.20
Minimum 1.50
2016
1.63
3.09
2015
1.63
2.96
(1) CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is defined as the
gross book value of CAPREIT’s assets as per CAPREIT’s financial statements, determined on a fair value basis for investment properties, plus accumulated
amortization on property, plant and equipment, CMHC fees, and deferred loan costs. In addition, the DOT provides for investment restrictions on type and
maximum limits on single property investments.
(2) Based on the trailing four quarters.
(3) Based on the historical cost of investment properties, calculated as CAPREIT’s assets, as disclosed under IFRS, plus accumulated amortization on property,
plant and equipment, CMHC fees, and deferred loan costs, and minus fair value adjustment on investment properties.
(4) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and compensation
liabilities or assets, including Exchangeable Units are added back. As at December 31, 2015 the tangible net worth requirement was $1,200,000 and was
amended to $1,500,000 effective June 30, 2016.
(5) As per the Credit Facilities agreement and DOT, the debt service coverage ratio is defined as earnings before interest, depreciation, amortization, income
taxes and other adjustments including non-cash costs (“EBITDA”) less taxes paid divided by the sum of principal and interest payments.
(6) As per the Credit Facilities agreement and DOT, the interest coverage ratio is defined as EBITDA less taxes paid divided by interest payments.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
Management ensures there is adequate overall liquidity by main-
taining sufficient available credit facilities to fund repairs and
maintenance expenditures, property capital investment com-
mitments and distributions to Unitholders, and to provide for
future growth in the business. CAPREIT finances these commit-
ments through: (i) adjusted cash flow from operating activities;
(ii) mortgage debt secured by its investment properties; (iii)
secured short-term debt financing with three 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 sufficient adjusted cash flow from operating activities
to fund the current level of distributions. Management expects
the combination of the current level of funds reinvested from
its DRIP, retained NFFO in excess of distributions declared,
mortgage top-ups and the available borrowing capacity of
the Credit Facilities to be sufficient to fund its ongoing prop-
erty capital investments. For the year ended December 31,
2016, CAPREIT’s NFFO payout ratio was 70.9% compared
to 73.1% for last year, and the effective NFFO payout ratio
was 47.4% compared to 49.4% for last 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 2017 due
to the continuing availability of CMHC-insured financing.
Management does not anticipate any material difficulties in
completing the renewal of mortgages maturing during 2017 of
approximately $119.2 million, which have an effective interest
rate of approximately 4.33%, and refinancing approximately
$108.2 million of principal repayments through 2016 with
new mortgages.
iii) Investment properties with a fair value of $7.4 billion have
been pledged as security as at December 31, 2016. In addi-
tion, CAPREIT has investment properties with a fair value
of approximately $221.6 million as at December 31, 2016
that are not encumbered by mortgages and secure only the
Acquisition and Operating Facility. CAPREIT intends to main-
tain unencumbered investment properties with an aggregate
fair value in the range of $150 million to $180 million over
the long term.
iv) Effective June 30, 2016, CAPREIT amended and restated its
credit agreement to, among other things: (i) increase its credit
facilities to $505.0 million in the aggregate; (ii) increase the
maximum amount of its existing $340.0 million revolving credit
facility to $440.0 million (the “Acquisition and Operating
Facility”); (iii) add an additional lender in the syndicate thereto;
(iv) amend the “conversion date”, for when the revolving
facility converts to a two-year non-revolving term facility, to
June 30, 2017; (v) amend the tangible net worth requirement
to $1,500,000; and (vi) extend the maturity date of the exist-
ing $65.0 million non-revolving term credit facility to June 30,
2021. 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 $440.0 million.
v) Effective December 19, 2016, CAPREIT amended its credit
agreement to increase the euro LIBOR borrowing limit to
€150.0 million from €70.0 million while maintaining the
Acquisition and Operating Facility limit at $440.0 million.
vi) CAPREIT has a $65.0 million credit facility on two of the
MHC land lease sites bearing interest at the bankers’ accep-
tance rate plus 1.4% per annum. This credit facility is a non-
revolving term credit facility, and any principal amount repaid
under this facility may not be reborrowed maturing June 30,
2021. There is an interest rate swap agreement on this facil-
ity, fixing the bankers’ acceptance rate to 2.20%, maturing in
September 2022. The swap agreement fixes the all-in rate of
the loan at 3.60% for a five-year term.
vii) As at December 31, 2016, the euro LIBOR borrowings of
E92.9 million bear interest at the euro LIBOR rate plus a mar-
gin 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, fixing the euro LIBOR rate to
1.22%, maturing in August 2018. The swap agreement fixes
the all-in rate of the loan at 2.87% (assuming a constant mar-
gin of 1.65%) for the remaining three years of the original
five-year term.
viii) On July 11, 2016, CAPREIT announced it had agreed to sell,
subject to regulatory approval, 4,660,000 Units for $32.20
per Unit for aggregate gross proceeds of $150.1 million on a
bought-deal basis with an over-allotment option. The trans-
action closed on August 3, 2016 and under the over-allot-
ment option, 466,000 additional Units were also issued on
August 3, 2016 for gross proceeds of $15.0 million. CAPREIT
used the net proceeds of the offering to repay a portion of its
borrowings under its Acquisition and Operating Facility.
ix) 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 mil-
lion on a bought-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.
x) On March 3, 2015, CAPREIT announced it had agreed to
sell, subject to regulatory approval, 5,050,000 Units for
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 54
MANAGEMENT’S DISCUSSION AND ANALYSIS $27.85 per Unit for aggregate gross proceeds of $140.6 mil-
lion 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 financing
program, and consistent with CMHC’s risk management prac-
tices involving large borrowers, CAPREIT has entered into an
agreement with CMHC (the “Large Borrower Agreement” or
“LBA”). Other than improving the efficiency and consistency of
such processes, the LBA has not materially affected the manner
in which CAPREIT conducts its business or its approach to mort-
gage financing. The LBA provides for, among other things:
iii) The posting of a revolving letter of credit with respect to cer-
tain capital expenditures on a portfolio basis, rather than an
individual property basis; and
iv) Cross-collateralization of mortgage loans for certain CMHC-
insured mortgage lenders.
CAPREIT is in compliance with all its investment and debt
restrictions and financial covenants contained in the DOT, the
LBA and the Credit Facilities. Under the terms of the LBA, total
indebtedness of CAPREIT is limited to the greater of (i) 60% of
Gross Book Value determined on a fair value basis, or (ii) 70%
of Gross Book Value determined on a historical basis, and may
only be increased above such limits with CMHC’s consent. Under
the LBA, financial covenants are not significantly different than
those required under the DOT or Credit Facilities other than as
described above.
i) Enhanced disclosure to CMHC;
ii) Certain financial covenants and commitments and limita-
tions on indebtedness, none of which are inconsistent with
CAPREIT’s current requirements under its DOT and existing
credit and mortgage facilities;
The working capital deficiency, as presented on CAPREIT’s con-
solidated balance sheets as at December 31, 2016, which includes
non-cash Unit-based compensation liabilities, is managed through
the available liquidity under the Credit Facilities as well as the
ongoing refinancing of mortgages payable.
The table below summarizes CAPREIT’s bank indebtedness position as at December 31, 2016 and December 31, 2015:
Acquisition and Operating Facility
($ Thousands)
As at December 31,
Facility
Less:
Euro LIBOR Borrowings (1)
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
(1) Included in mortgages payable.
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)
Weighted Average Mortgage Interest Rate (3)
Weighted Average Mortgage Term to Maturity (years)
2016
$ 440,000
(131,630)
(26,408)
(6,040)
$ 275,922
2.55%
2016
43.97%
44.31%
54.36%
45.09%
1.63
3.09
3.20%
6.1
2015
$ 340,000
(95,434)
(168,211)
(6,040)
70,315
2.56%
$
2015
43.36%
45.71%
55.41%
48.46%
1.63
2.96
3.39%
6.3
(1) Based on the historical cost of investment properties.
(2) Based on the trailing four quarters ended December 31, 2016.
(3) Weighted average mortgage interest rate includes deferred financing 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, 2016 would be 3.3% (December 31, 2015 – 3.52%).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 55
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2016, the overall leverage represented by the ratio of total debt to gross book value was 44.31% compared to 45.71%
for last year. As at December 31, 2016, CAPREIT’s total debt was 45.09% of total market capitalization compared to 48.46% for last year.
The effective portfolio weighted average interest rate has declined from 3.39% as at December 31, 2015 to 3.20% as at December 31,
2016, which Management expects could result in continued interest rate savings in future years. Management believes that as CAPREIT’s
refinancing 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 five-year range or longer and expects to gradually extend the term, while continuing to balance the maturity profile.
Mortgages Payable
CAPREIT takes a conservative approach and actively manages its mortgage portfolio to reduce interest costs while ensuring it is not overly
exposed to interest rate volatility risk. Management takes a portfolio approach to its mortgage debt, proactively staggering maturities
to reduce risk while taking advantage of the current low interest rate environment.
CAPREIT focuses on multi-unit residential real estate, which is eligible for government-backed insurance for mortgages administered by
CMHC, which benefits CAPREIT in two ways:
• CAPREIT obtains lower interest rate spreads for mortgage financing; and
• CAPREIT’s overall renewal risk for mortgage refinancings is reduced as the mortgage insurance premium is transferable between
approved lenders and is effective for the full initial amortization period of the underlying mortgage ranging between 25 and 35 years.
As at December 31,
Percentage of CMHC-Insured Mortgages (1)
Percentage of Fixed-Rate Mortgages
2016
96.6%
97.9%
2015
96.5%
98.9%
(1) Excludes the mortgages on the MHC land lease sites and the euro LIBOR borrowings.
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
Refinanced
Foreign Currency Translation
Less:
Mortgage Repayments
Mortgages Matured
Mortgages Repaid on Dispositions of Investment Properties
Change in Deferred Financing Costs, Fair Value Adjustments, Net
Balance, End of the Year
2016
$ 3,097,773
2015
$ 2,658,454
336,468
25,356
299,300
(4,323)
(102,522)
(130,810)
(26,407)
(1,912)
$ 3,492,923
524,197
3,030
284,779
4,780
(84,890)
(143,328)
(145,917)
(3,332)
$ 3,097,773
The following table presents refinancings for the year ended December 31, 2016 and the weighted average interest rates obtained.
($ Thousands)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Acquisitions
Total and Weighted Average
Original
Mortgage
Amount
27,748
55,895
27,944
19,223
–
130,810
$
$
Original
Stated
Interest
Rate (1)
4.44%
4.14%
5.28%
4.52%
0.00%
4.50%
$
$
New
Mortgage
Amount
48,574
151,792
49,343
49,591
336,468
635,768
New
Stated
Interest
Rate (1),(2)
2.36%
2.58%
2.65%
2.57%
2.21%
2.38%
Weighted
Average
Term on New
Mortgages
(Yrs)
8.1 $
10.0
2.9
9.9
8.4
8.4 $
Top-Up
Amount
20,826
95,897
21,399
30,368
336,468
504,958
(1) Weighted average.
(2) Excludes CMHC and Other Financing Costs and hedge impact.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 56
MANAGEMENT’S DISCUSSION AND ANALYSIS
For purposes of estimating top-up financing potential, the following table provides annualized NOI for those properties with mortgages
maturing over the next five years and beyond. A property’s full NOI is included in the first year in which a mortgage matures. The bal-
ance of mortgages remaining on the same property but maturing in other years is also shown. Management expects to raise between
$175 million and $225 million in total mortgage renewals and refinancings for 2017, excluding financings on acquisitions.
($ Thousands)
As at December 31, 2016
Year of Maturity
2017
2018
2019
2020
2021
2022 Onward
Total
Mortgage
Maturities (1)
119,214
94,652
405,062
222,914
350,202
1,546,727
2,738,771
$
$
$
Mortgages on
the Same Properties
Maturing in
Other Years (1)
75,829
17,290
25,194
(3,278)
(32,852)
(82,183)
–
$
Total
Mortgages
195,043
111,942
430,256
219,636
317,350
1,464,544
2,738,771
$
$
NOI of
Properties
with Maturing
Mortgage(s) (2),(3)
26,227
15,598
45,769
25,985
46,955
200,652
361,186
$
$
(1) Mortgage balance due upon maturity.
(2) NOI for the twelve months ended December 31, 2016.
(3) Projected NOI included for acquisitions since December 31, 2015.
The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at Decem-
ber 31, 2016 is as follows:
($ Thousands)
$
Principal
Repayments
Year
108,240
2017
109,554
2018
2019 (3)
106,184
100,148
2020
2021 (4)
88,920
78,960
2022
60,656
2023
46,497
2024
37,196
2025
15,740
2026
8,939
2027 – 2030
Total
761,034
Deferred Financing Costs, Fair Value Adjustments, Net
Total
$
$
Mortgage
Maturities
119,214
94,652
405,062
222,914
350,202
338,730
249,786
287,744
321,159
298,212
51,096
$ 2,738,771
Mortgage
Balance
227,454
204,206
511,246
323,062
439,122
417,690
310,442
334,241
358,355
313,952
60,035
3,499,805
(6,882)
3,492,923
$
$
$
% of Total
Mortgage Balance
6.5
5.8
14.6
9.2
12.6
11.9
8.9
9.6
10.2
9.0
1.7
100.0
Interest Rate (%) (1),(2)
4.33
3.39
3.08
2.61
3.81
3.08
3.23
3.58
2.75
2.74
3.88
3.20 (2)
(1) Effective weighted average interest rates for maturing mortgages only.
(2) Effective weighted average interest rate includes deferred financing costs and fair value adjustments but excludes CMHC premiums.
Including the amortization of the realized component of the loss on settlement of $32.5 million included in AOCL, the effective portfolio weighted
average interest rate as at December 31, 2016 would be 3.3% (December 31, 2015 – 3.52%).
(3) Included in mortgages payable is a €92.9 million non-amortizing euro LIBOR borrowing.
(4) Included in mortgages payable is a $65.0 million non-amortizing credit facility on two of the MHC land lease sites.
To ensure CAPREIT is not overly exposed to interest rate volatility risk, Management has been successful in staggering the maturity dates
within its mortgage portfolio or entering into long-term financing arrangements.
To reduce its interest cost and cost of capital, Management will continue to leverage its balance sheet strength and the stability of its
property portfolio to fund acquisitions and its capital investment plan, and to refinance its mortgage principal repayments.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 57
MANAGEMENT’S DISCUSSION AND ANALYSIS
Unitholders’ Equity and Units Awarded under Unit-based Compensation Plans
Unitholders’ Equity only represents the issued and outstanding Trust Units, and excludes the Exchangeable Units and any Units issued in
connection with Unit-based incentive plans. For the purposes of the discussion below, Exchangeable Units and Units issued in connection
with Unit-based incentive plans are treated as equity as they have claims similar or identical to those of the Trust Units.
Equity offerings and over-allotments as at December 31, 2016:
($ Thousands, except per Unit amounts)
Period
March 2015
Bought-deal
Over-allotment
Total
October 2015
Bought-deal
Total
August 2016
Bought-deal
Over-allotment
Total
Price
Per Unit
Gross
Proceeds
Transaction
Costs
$
$
27.85
27.85
$
28.70
$
$
32.20
32.20
$
$
$
$
$
$
140,643
14,064
154,707
250,264
250,264
150,052
15,005
165,057
$
$
$
$
$
$
6,491
563
7,054
10,943
10,943
6,902
600
7,502
$
$
$
$
$
$
Net
Proceeds
134,152
13,501
147,653
Units
Issued
5,050,000
505,000
5,555,000
239,321
239,321
8,720,000
8,720,000
143,150
14,405
157,555
4,660,000
466,000
5,126,000
Year Ended December 31,
Market Capitalization ($ thousands)
Number of Units Outstanding
LTIP and SELTIP Units
Deferred Units
RUR Plan Units
Exchangeable Units
Number of Unit Options Outstanding and Exercisable
Ownership by Trustees, Officers and Senior Managers
Normal Course Issuer Bid
On a periodic basis, CAPREIT may apply to the Toronto Stock
Exchange (“TSX”) for approval of a Normal Course Issuer Bid
(“NCIB”). Pursuant to regulations governing NCIBs, CAPREIT
will receive approval to purchase and cancel a specified number of
Trust Units, representing 10% of the public float of its Trust Units
at the time of the TSX approval. The NCIB will terminate on the
earlier of the termination date or at such time as the purchases
under the bid are completed. CAPREIT believes the purchase of its
outstanding Trust Units from time to time may be an appropriate
use of its resources.
The table below summarizes the NCIB programs in place since
January 1, 2015. No Trust Units were acquired and cancelled
under these NCIB programs.
Period Covered Under Each NCIB
July 8, 2014 to July 7, 2015
July 28, 2015 to July 27, 2016
Approval Limit
10,659,524
11,493,069
2016
$
4,289,516
136,739,440
1,185,398
285,876
718,398
161,311
1,488,212
3.2%
UNITHOLDER TA X ATION
For taxable Canadian resident Unitholders, the distributions are
treated as follows for income tax purposes:
Year Ended December 31,
Taxable to Unitholders as
Other Income
Taxable to Unitholders as
Eligible Dividend Income
Taxable to Unitholders as
Capital Gain Income
Income Tax Deferral
Total
Total Effective Non-taxable
Portion of Distributions
2016
2015
24.37%
14.46%
0.00%
0.90%
5.45%
70.18%
100.00%
0.30%
84.34%
100.00%
72.90%
84.49%
The portion of CAPREIT’s distributions to Canadian resident
Unitholders treated as taxable for the year ended December 31,
2016 increased over the prior year primarily due to higher earnings
from operations and higher capital gains and recapture due to dis-
positions in the current year, partially offset by higher distributions
and capital cost allowance.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 58
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION V
SELECTED CONSOLIDATED QUARTERLY INFOR M ATION
Overall Portfolio AMR
Operating
Revenues (000s) (1)
NOI (000s) (1)
NOI Margin (1)
Q4 16
1,003 $
Q3 16
999 $
Q2 16
980 $
Q1 16
971 $
Q4 15
963 $
Q3 15
964 $
Q2 15
976 $
Q1 15
975
$
$ 152,725 $ 151,812 $ 146,656 $ 145,638 $ 142,776 $ 131,812 $ 130,256 $ 128,954
96,274 $ 91,083 $ 84,380 $ 86,427 $ 82,087 $ 81,276 $ 74,824
$
58.0%
60.5%
63.4%
95,210 $
62.3%
57.9%
62.4%
62.3%
62.1%
Net Income (Loss) (000s) $ 124,271 $ 130,663 $ 98,381 $ 86,098 $ 137,375 $
FFO (000s)
NFFO (000s)
Total Debt to
Gross Book Value
(3,727) $ 159,118 $ 52,867
61,424 $ 57,670 $ 46,050 $ 51,640 $ 48,434 $ 50,821 $ 40,461
62,201 $ 58,452 $ 52,295 $ 52,813 $ 51,830 $ 51,665 $ 43,719
58,085 $
58,860 $
43.71%
44.32%
44.31%
44.31%
45.80%
49.27%
45.71%
47.02%
$
$
FFO per Unit – Basic
NFFO per Unit – Basic
$
$
0.432 $
0.437 $
0.464 $
0.470 $
0.449 $
0.455 $
0.360 $
0.409 $
0.408 $
0.417 $
0.411 $
0.440 $
0.434 $
0.441 $
0.364
0.393
Weighted Average
Number of Units (000s)
– Basic
– Diluted
134,585
136,275
132,246
133,991
128,469
130,209
127,816
129,393
126,515
128,056
117,912
119,566
117,081
118,845
111,207
113,076
(1) Includes the results of investment properties owned as at the period-end.
Non-IFRS financial measures are reconciled with IFRS reported amounts in the respective quarterly SEDAR filings.
CAPREIT’s operations are affected by seasonal cycles, and oper-
ating performance in one quarter may not be indicative of oper-
ating performance in any other quarter of the year. The fourth
and first quarters of each year typically tend to generate weaker
performance due to increased energy consumption in the winter
months. There may be periods where actual distributions declared
may exceed cash generated from (utilized in) operating activities
after interest paid primarily due to weaker performance in certain
periods from seasonal fluctuations. These seasonal or short-term
fluctuations are funded, if necessary, with our Acquisition and
Operating Facility. CAPREIT determines distributions and the
distribution rate by, among other considerations, its assessment
of adjusted cash flow from operating activities (a non-IFRS mea-
sure). As such, CAPREIT believes the cash distributions are not
an economic return of capital, but a distribution of adjusted cash
flow from operating activities.
Fourth Quarter
Operating revenues in the fourth quarter of 2016 increased by
7.0% over the same quarter in 2015, while NOI increased by a
significant 10.2%, driven by acquisitions, higher operating rev-
enues and lower realty taxes and R&M costs as a percentage of
total operating revenues compared to the same period last year.
Net income in the fourth quarter of 2016 decreased slightly over
the same period last year to $124.3 million, mainly due to lower
unrealized gain on remeasurement of investment properties of
$65.4 million compared to $81.0 million for the same period last
year and higher Unit-based compensation expenses by $6.9 mil-
lion and interest on mortgage payable and other financing costs
by $1.7 million, partially offset by higher NOI of $8.8 million.
Higher NFFO for the fourth quarter was primarily due to a 5.6%
increase in stabilized property NOI and the NOI contribution
from acquisitions completed over the prior twelve months for the
three months ended December 31, 2016.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 59
MANAGEMENT’S DISCUSSION AND ANALYSIS
The stabilized portfolio performance for the three months ended December 31, 2016 compared to December 31, 2015, is summarized
as follows:
For the Three Months Ended
December 31,
($ 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
2016
NOI
NOI Margin (%)
38,513
1,149
2,989
3,319
45,970
7,502
5,069
12,571
5,411
3,125
8,536
851
4,289
5,140
63.0
49.1
63.4
60.6
62.4
57.7
58.4
58.0
70.0
72.2
70.8
69.6
60.2
61.6
3,104
59.5
52.6
63.3
59.9
50.8
62.1
70.7
69.4
67.2
76.5
37.6
56.0
66.1
62.4
180
458
638
686
76,645
3,179
118
274
218
80
1,027
4,896
81,541
39,702
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2015
Increase (Decrease)
NOI
NOI Margin (%) Change (%) Change (%) Change (%)
Revenue
Expense
NOI
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
36,359
1,183
2,672
3,076
43,290
7,318
4,812
12,130
4,935
2,769
7,704
887
4,690
5,577
61.5
51.1
59.1
59.6
60.8
56.9
55.1
56.2
67.1
67.4
67.2
67.2
60.9
61.9
3.3
1.0
4.1
6.3
3.5
1.1
(0.6)
0.4
5.0
5.4
5.2
(7.3)
(7.4)
(7.4)
(0.9)
5.1
(7.0)
3.8
(0.7)
(0.7)
(7.8)
(3.7)
(4.5)
(9.9)
(6.4)
(14.1)
(5.6)
(6.7)
5.9
(2.9)
11.9
7.9
6.2
2.5
5.3
3.6
9.6
12.9
10.8
(4.1)
(8.6)
(7.8)
3,092
61.2
3.3
8.0
0.4
41.6
61.8
55.3
48.6
60.5
63.3
70.6
67.7
59.9
35.8
55.7
60.8
60.5
(3.9)
(3.3)
(3.5)
3.1
2.2
9.6
6.3
4.6
8.8
0.5
5.1
7.8
2.5
(22.1)
(7.0)
(13.4)
(1.5)
(2.0)
(12.4)
10.6
6.3
(36.2)
(2.2)
4.4
(6.7)
(2.2)
21.6
(1.1)
4.4
7.9
4.9
22.4
4.4
3.8
38.9
5.3
5.7
17.1
5.6
148
463
611
636
73,040
2,598
113
264
157
76
972
4,180
77,220
39,702
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 60
MANAGEMENT’S DISCUSSION AND ANALYSIS
SELECTED CONSOLIDATED FINANCIAL INFOR M ATION
The following table presents a summary of selected financial information for the fiscal years indicated below:
($ Thousands, except per Unit amounts)
Year Ended December 31,
Income Statement
Operating Revenues
Net Income
Distributions
Distributions Declared
Distributions per Unit
Balance Sheet
Investment Properties
Total Assets
Mortgages Payable
Bank Indebtedness
SECTION VI
2016
2015
2014
$
$
596,831
439,413
$
$
533,798
345,633
$
506,411
$ 317,975
$
$
161,483
1.238
$
$
142,973
1.207
$
$
127,496
1.168
$ 7,642,017
$ 7,892,994
$ 3,492,923
26,408
$
$ 6,863,140
$ 7,102,828
$ 3,097,773
168,211
$
$ 5,749,640
$ 5,926,161
$ 2,658,454
$ 113,167
ACCOUNTING POLICIES AND CRITICAL ESTIM ATES, ASSUMPTIONS, AND JUDGEMENTS
New Accounting Policies and Accounting Standards
As at February 27, 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, 2016:
IAS 12, Income Taxes – Deferred Tax
This amendment clarifies (i) the requirements for recognizing
deferred tax assets on unrealized losses; (ii) deferred tax where
an asset is measured at a fair value below the asset’s tax base, and
(iii) certain other aspects of accounting for deferred tax assets.
This amendment will come into effect for years beginning on or
after January 1, 2017.
IAS 7, Statement of cash flows –
Disclosures related to financing activities
This amendment includes the requirement for disclosures about
changes in liabilities arising from financing activities, including
both changes arising from cash flows and non-cash changes. This
amendment will come into effect on January 1, 2017.
IAS 40, Investment Property
This amendment clarifies when assets are transferred to, or from,
investment properties. This amendment will come into effect on
January 1, 2018.
IFRS 2, Share-based payments
This will be amended to address (i) certain issues related to the
accounting for cash settled awards, and (ii) the accounting for
equity settled awards that include a “net settlement” feature
in respect of employee withholding taxes. This amendment is
effective for years beginning on January 1, 2018.
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classification
and measurement of financial liabilities over the existing
derecognition requirements of IAS 39, Financial Instruments:
Recognition and Measurement. IFRS 9 also introduces new
requirements for classifying and measuring financial assets;
specifically, investments in equity instruments can be designated
as “fair value through other comprehensive income” with only
dividends being recognized in profit or loss. IFRS 9 was further
amended in November 2013 to: (i) include guidance on hedge
accounting; (ii) allow entities to early adopt the requirement
to recognize changes in fair value attributable to changes in
an entity’s own credit risk, from financial liabilities designated
under the fair value option, in OCI (without having to adopt the
remainder of IFRS 9); and (iii) remove the previous mandatory
effective date of January 1, 2015.
The final amendment of IFRS 9 as at July 2014 included: (i) a third
measurement category for financial assets – fair value through other
comprehensive income; (ii) a single, forward-looking “expected
loss” impairment model; and (iii) a mandatory effective date for
IFRS 9 for annual periods beginning on or after January 1, 2018.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from
IAS 39 to IFRS 9. This amendment is effective on adoption
of IFRS 9.
IFRS 15, Revenue from Contracts with Customers
This new standard on revenue recognition supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and related inter-
pretations. The new standard provides a single, comprehensive
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 61
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Estimates deemed by Management to be more significant, due to
subjectivity, are as follows:
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 classification of leases as either operating leases or finance
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.
CAPREIT is currently assessing the impact of the above standards
and amendments but does not expect to be significantly impacted
on adoption in their current form.
Critical Estimates, Assumptions, and Judgements
In preparing the accompanying audited consolidated annual
financial statements in accordance with IFRS, certain accounting
policies require the use of estimates, assumptions and judgements
that in some cases relate to matters that are inherently uncertain,
and which affect the amounts reported in the audited consolidated
annual financial statements and accompanying notes. Areas of
such estimation include, but are not limited to, valuation of
investment properties, remeasurement at fair value of financial
instruments, valuation of accounts receivable, capitalization
of costs, accounting accruals, the amortization of certain
assets, accounting for deferred income taxes, and Unit-based
compensation liabilities. Changes to estimates and assumptions
may affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of
the audited consolidated annual financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Actual results could also differ from those estimates under
different assumptions and conditions.
Management believes the nature of the business and CAPREIT’s
portfolio is defensive against economic downturns and, therefore,
the current economic conditions have not had as significant an
impact on CAPREIT’s critical accounting estimates as may have
been realized in other industries. However, the current economic
conditions impacting the general economy or those more specific
to the housing industry or to CAPREIT could have the potential to
alter accounting estimates and could impact CAPREIT’s financial
condition, changes in financial condition or results of operations.
Disclosures in the MD&A, including specifically the Property
Portfolio, Results of Operations, Property Capital Investments,
Liquidity and Financial Condition and Future Outlook sections,
outline the risks and both the positive and negative impacts on
CAPREIT’s performance that have resulted, or may in the future
result, from the unusual economic conditions.
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 flow method
and include estimating, among other things, future stabilized net
operating income, capitalization rates, reversionary capitalization
rates, discount rates and other future cash flows applicable to
investment properties.
In the case of Leasehold Interests, CAPREIT established the fair
value of such interests using the discounted cash flow method,
including an estimate of future lease payments. Management’s
internal assessments of fair value are based on a combination of
internal financial information and external market data, including
components of net operating income and capitalization rates, all
of which are obtained from an independent appraiser.
Management’s internal valuations and the independent
appraisals are both subject to significant judgement, estimates
and assumptions about market conditions in effect as at the
consolidated balance sheet dates. See note 6 to the accompanying
audited consolidated annual financial statements for a detailed
discussion of valuation methods and the significant assumptions
and estimates used.
Valuation of Unit-based Compensation Liabilities
The fair value of Unit-based compensation liabilities is based on
assumptions of future events and involves significant estimates.
The basis of valuation for CAPREIT’s Unit-based compensation
liabilities, such as market assumptions, estimates and valuation
methodology, are set out in note 12 to the accompanying audited
consolidated annual financial statements; however, the fair values
as at the reporting date may differ materially from how they are
ultimately recognized if there is volatility in Trust Unit prices,
interest rates or other key assumptions in future years.
Valuation of Derivative Financial Instruments
The fair value of a derivative financial instrument is based on
assumptions of future events and involves significant estimates.
The basis of valuation for CAPREIT’s derivatives is set out in
note 15 to the accompanying audited consolidated annual financial
statements; however, the fair values of derivatives reported may
differ from how they are ultimately recognized if there is volatility
in interest rates in future years.
Investment in Irish Residential Properties REIT plc (“IRES”)
CAPREIT has determined that its investment in IRES should be
accounted for using the equity method of accounting given the
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 62
MANAGEMENT’S DISCUSSION AND ANALYSIS 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.
Interest Classification in the Consolidated Statements
of Cash Flows
IFRS permits the classification of interest paid as operating
cash flows because they enter into the determination of profit
or loss, or alternatively as financing cash flows because they are
costs of obtaining financial resources. CAPREIT has applied its
judgement and concluded that debt financing, which is used to
provide leveraged returns to its Unitholders, is an integral part of
its capital structure and not directly associated with its principal
revenue-producing activities. Therefore interest paid is classified
as a financing activity in CAPREIT’s consolidated statements
of cash flows.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
CAPREIT’s disclosure controls and procedures are designed to
provide reasonable assurance that information required to be
disclosed is recorded, processed, summarized and reported within
the time periods specified under Canadian securities laws, and
include controls and procedures designed to ensure information
is accumulated and communicated to Management, including the
President and Chief Executive Officer and the Chief Financial
Officer, to allow timely decisions regarding required disclosure.
As at December 31, 2016, CAPREIT’s President and Chief Exec-
utive Officer and its Chief Financial Officer, 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, 2016.
Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining
adequate internal controls over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external
purposes in accordance with International Financial Reporting
Standards (IFRS). As at December 31, 2016, CAPREIT’s President
and Chief Executive Officer and its Chief Financial Officer, with
the assistance of Management, assessed the effectiveness of the
internal controls over financial 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 financial reporting were
designed and operating effectively as at December 31, 2016.
CAPREIT did not make any changes to the design of internal
controls over financial reporting in 2016 that have materially
affected, or are reasonably likely to materially affect, the internal
controls over financial reporting.
It should be noted that a control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are
met. Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that
all control issues, including instances of fraud, if any, have been
detected. The design of any system of controls is also based in
part on certain 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, defined as either those that,
although unlikely to occur, could have a significant impact on
CAPREIT or those that are significant to CAPREIT’s day-to-day
operations. Investors should carefully consider these risks before
investing in CAPREIT Units.
Related to Reporting Investment Property at Fair Value
CAPREIT holds investment property to earn rental income
or for capital appreciation or both. All investment property is
measured using the fair value model, whereby changes in fair
value are recognized for each reporting period in the consolidated
statements of income and comprehensive income. Management
values each investment property based on the most probable
price that a property could be sold for in a competitive and open
market as of the specified date under all conditions requisite to a
fair sale, such as the buyer and seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue
stimulus. Each investment property has been valued on a highest
and best use basis.
Market assumptions applied for valuation purposes do not
necessarily reflect CAPREIT’s specific history or experience and
the conditions for realizing the fair values through a sale may
change or may not be realized. In addition, there is an inherent
risk related to the reliance on and use of a single appraiser, as
this approach may not adequately capture the range of fair
values that market participants would assign to the investment
properties. CAPREIT mitigates this risk by undertaking a detailed
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 63
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 financial ratios and covenants.
Related to Ownership and Operation of Real Property
Real Property Ownership
Real property investments are relatively illiquid. This illiquidity
will tend to limit the ability of CAPREIT to respond to changing
economic or investment conditions. If CAPREIT were required
to quickly liquidate assets, there is a risk the proceeds realized
from such sale would be less than the book value of the assets
or less than what could be expected to be realized under normal
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 benefit from a broader diversification
of its portfolio by property class.
CAPREIT is committed to preserving the life safety of its residents
and to ensuring its properties are well maintained. CAPREIT
believes that investing back into its properties increases resident
satisfaction, which ultimately makes CAPREIT’s business more
profitable. The multi-unit residential rental business, like any
other real estate enterprise, is capital intensive and is exposed to
various risks associated with maintaining the infrastructure of
its property portfolio. CAPREIT takes into account the capital
maintenance requirements of its properties when determining
future cash flows available for distributions. A significant increase
in capital maintenance requirements could adversely impact the
cash available to CAPREIT.
Leasehold Interests
Some long-term leases and ground leases are subject to elements
of risk. Unlike a freehold interest, a lessee’s interest in a lease may
be affected by mortgage defaults by the lessor, which cannot be
cured by the lessee.
Pursuant to the terms of certain of CAPREIT’s long-term leases,
CAPREIT is responsible for payment of all taxes, utilities,
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 defined 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 flow associated with such properties would no
longer contribute to CAPREIT’s results of operations and could
adversely impact its ability to make distributions to Unitholders.
Co-ownerships
CAPREIT has entered into co-ownership relationships with
third parties. If the properties in the respective portfolios do not
perform as expected, or there is a default on financial obligations,
CAPREIT would risk bearing its proportionate share of any
related losses. CAPREIT aims to reduce this risk by seeking to:
(i) negotiate contractual rights upon default of a partner; (ii) enter
into agreements with financially stable partners; and/or (iii) work
with partners who have a historical record of success.
Investment Restrictions
CAPREIT has been structured and operates in adherence to the
stringent investment restrictions and operating policies set out in
its DOT and as applicable under tax laws relating to real estate
investment trusts (also see Taxation-Related Risks in this section).
These policies cover such matters as the type and location of
properties that CAPREIT can acquire, the maximum leverage
allowed, environmental matters and investment restrictions. In
addition, pursuant to the DOT, CAPREIT’s overall leverage is
limited to 70% of its reported gross book value, unless a majority
of trustees, at their discretion, determine that the maximum
amount of indebtedness shall be based on the appraised value of
the real properties of CAPREIT. As CAPREIT reports gross book
value at fair market value under IFRS, these amounts are not
expected to be materially different.
Operating Risk
CAPREIT is subject to general business risks and to risks inherent
in the multi-residential rental property industry and in the
ownership of real property. These risks include fluctuations in
occupancy levels, the inability to achieve economic rents (including
anticipated increases in rent), controlling bad debt exposure, rent
control regulations, increases in labour costs and other operating
costs, including the costs of utilities, possible future changes
in labour relations, competition from other landlords or the
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 50.9% of the overall portfolio (by number of suites and sites)
in Ontario (32% 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 6 4
MANAGEMENT’S DISCUSSION AND ANALYSIS 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
financial position of CAPREIT.
Energy Costs and Hedging
As a significant part of CAPREIT’s operating expenses are
attributable to energy and energy-related charges and fees,
fluctuations in the price of energy and any related charges and
fees (including transportation costs and commodity taxes) can
have a material impact on the performance of CAPREIT, its ability
to pay distributions and the value of the Units.
From time to time, CAPREIT may enter into agreements to pay
fixed prices on all or certain of its energy requirements (principally
natural gas and electricity in certain markets) to offset the risk of
rising expenditures if prices for these energy commodities increase;
however, if the prices for these energy commodities decline beyond
the levels set in these agreements, CAPREIT will not benefit from
such declines in energy prices and will be required to pay the
higher price contracted for such energy supplies.
CAPREIT enters into new natural gas physical delivery contracts,
fixing a portion of its variable rate natural gas commitments.
The fixed price arrangement is intended to mitigate the risk of
rising natural gas prices over the related period. See the Natural
Gas table in the Results of Operations section for additional
information.
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., fire, flood, injury or death, rental loss, environmental
insurance, etc., with policy specification limits and deductibles
as deemed appropriate based on the nature of the risk, historical
experience and industry standards. There are some types of
losses, including those of a catastrophic nature, that are generally
uninsurable or not economically feasible to insure, or that might
be subject to insurance coverage limitations, such as large
deductibles or co-payments. There can be no assurance that claims
in excess of the insurance coverage or claims not covered by the
insurance coverage will not arise or that liability coverage will
continue to be available on acceptable terms. In addition, should
an uninsured or underinsured loss occur, CAPREIT could lose its
investment in, and anticipated profits and cash flows from, one or
more of its properties but would continue to be obligated to repay
any recourse mortgage indebtedness on such properties. These
types of events/losses could adversely affect the performance of
CAPREIT, its ability to make distributions and the market value
of the Units.
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 sufficient capital
to carry out its planned property capital investment and repair
and refurbishment programs to upgrade its properties or be
exposed to operating business risks arising from structural failure,
electrical or mechanical breakdowns, fire or water damage, etc.,
which may result in significant loss of earnings to CAPREIT. A
significant increase in capital investment requirements or difficulty
in securing financing or the availability of financing on reasonable
terms could adversely impact the cash available to CAPREIT and
its ability to pay distributions.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 65
MANAGEMENT’S DISCUSSION AND ANALYSIS Related to Financing
Indebtedness
A portion of CAPREIT’s cash flow is devoted to servicing its
debt, and there can be no assurance that CAPREIT will continue
to generate sufficient cash flow from operations to meet required
interest and principal payments. CAPREIT has and will continue
to have substantial outstanding consolidated indebtedness
comprising mainly property mortgages and indebtedness under its
Credit Facilities. CAPREIT is subject to the risks associated with
debt financing, including the risk that CAPREIT may be unable
to make interest or principal payments or meet loan covenants,
the risk that defaults under a loan could result in cross defaults
or other lender rights or remedies under other loans, and the risk
that existing indebtedness may not be able to be refinanced or
that the terms of such refinancing may not be as favourable as
the terms of existing indebtedness or expectation of future interest
rates. In such circumstances, CAPREIT could be required to seek
renegotiation of such payments or obtain additional equity, debt or
other financing, and its ability to make property capital investments
and distributions to Unitholders could be adversely affected.
CAPREIT currently has access to the government-backed mortgage
insurance program through the National Housing Act, which is
administered by CMHC. CAPREIT entered into the LBA with
CMHC during the third quarter of 2010. There can be no guarantee
that the provisions of the mortgage insurance program will not be
changed in the future so as to make the costs of obtaining mortgage
insurance prohibitive or so as to restrict access to the insurance
program. To the extent that any financing requiring CMHC consent
or approval is not obtained or that such consent or approval is
only available on unfavourable terms, CAPREIT may be required
to finance a conventional mortgage which may be less favourable
to CAPREIT than a CMHC-insured mortgage.
CAPREIT’s Acquisition and Operating Facility of $440 mil-
lion matures on June 30, 2019. CAPREIT’s Acquisition and
Operating Facility is at a floating interest rate and, accordingly,
changes in short-term borrowing rates will affect CAPREIT’s
costs of borrowing. CAPREIT’s financial condition and results
of operations would be adversely affected if it were unable to
obtain financing or cost-effective financing. As at the date hereof,
it is difficult to forecast the future state of the commercial loan
market. If, because of CAPREIT’s level of indebtedness, the level
of cash flows, lenders’ perceptions of CAPREIT’s creditworthiness
or other reasons, Management is unable to renew, replace or
extend the Credit Facilities on acceptable terms, or to arrange for
alternative financing, CAPREIT may be required to take measures
to conserve cash until the markets stabilize or until alternative
credit arrangements or other funding can be arranged, if such
financing is available on acceptable terms, or at all. Such measures
could include deferring property capital investments, dispositions
of one or more properties on unfavourable terms, reducing or
eliminating future cash distributions or other discretionary uses
of cash, or other more severe actions. Also, disruptions in the
credit markets and uncertainty in the economy could adversely
affect the banks that currently provide the Credit Facilities, could
cause the banks or a bank to elect not to participate in any new
Credit Facilities sought, or could cause other banks that are not
currently participants in the Credit Facilities to be unwilling or
unable to participate in any such new facility.
Furthermore, given the relatively small size of the Canadian
marketplace, there are a limited number of lenders from which
CAPREIT can reasonably expect to borrow and the number of
lenders currently participating in the CMHC-insured mortgage
market is even smaller. Consequently, it is possible that financing
which CAPREIT may require in order to grow and expand its
operations upon the expiry of the term of existing financing, or
the refinancing of any particular property owned by CAPREIT
or otherwise, may not be available or may not be available on
favourable terms.
Interest Rate Hedging
CAPREIT currently uses, and may use in the future, interest rate
hedging arrangements or incur fees to early refinance certain
mortgages prior to their maturity to manage its exposure to
interest rate volatility. Such hedging activities may not prove
successful and may not have a positive impact on the results of
operations or financial condition.
In general, hedging activities may subject CAPREIT to additional
costs, such as transaction fees or breakage costs, if these
arrangements are terminated. In addition, although Management
enters into such hedge contracts with financially sound
counterparties in order to mitigate the risk that the counterparty
may fail to honour its obligations, the risk cannot be mitigated
completely.
Related to Taxes and Regulations
Taxation-Related Risks
CAPREIT currently qualifies as a mutual fund trust for Canadian
income tax purposes. It is the current policy of CAPREIT
to distribute all of its taxable income to Unitholders and it is
therefore generally not subject to tax on such amount. In order to
maintain its current mutual fund trust status, CAPREIT is required
to comply with specific restrictions regarding its activities and the
investments held by it. If CAPREIT were to cease to qualify as a
“mutual fund trust”, the consequences could be adverse.
There can be no assurance that Canadian federal income tax laws in
respect of the treatment of mutual fund trusts will not be changed
in a manner that adversely affects CAPREIT or its Unitholders. If
CAPREIT ceases to qualify as a “mutual fund trust”, CAPREIT
will be required to pay a tax under Part XII.2 of the Income Tax
Act (“Tax Act”). The payment of Part XII.2 tax by CAPREIT may
have adverse income tax consequences for certain of CAPREIT’s
Unitholders, including non-resident persons and trusts governed
by registered retirement savings plans, registered disability savings
plans, deferred profit-sharing plans, registered retirement income
funds, tax-free savings accounts and registered education savings
plans (“designated savings plans”), which acquired an interest in
CAPREIT directly or indirectly from another CAPREIT Unitholder.
If CAPREIT ceases to qualify as a “mutual fund trust” or “registered
investment” under the Tax Act and CAPREIT Units cease to be
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 66
MANAGEMENT’S DISCUSSION AND ANALYSIS listed on a designated stock exchange, CAPREIT Units will cease
to be qualified investments for trusts governed by designated
savings plans. CAPREIT will endeavour to ensure CAPREIT Units
continue to be qualified investments for trusts governed by the
designated savings plans; however, there can be no assurance that
this will be so. The Tax Act imposes penalties for the acquisition
or holding of non-qualified investments by such trusts. Unitholders
should consult their own tax advisors in this regard, including
as to whether CAPREIT Units are “prohibited investments” for
registered retirement savings plans, registered retirement income
funds or tax-free savings accounts.
A REIT is defined under the SIFT Rules as a trust that is resident
in Canada throughout the taxation year and that satisfies all of
the following criteria:
i) At each time in the taxation year, the total fair market value
at that time of all non-portfolio properties that are qualified
REIT properties held by the trust is at least 90% of the total
fair market value at that time of all non-portfolio properties
held by the trust;
ii) Not less than 90% of the trust’s gross REIT revenue for the
taxation year is from one or more of the following: rent from
real or immovable properties, interest, dispositions of real or
immovable properties that are capital properties, dividends,
royalties, and dispositions of eligible resale properties;
iii) Not less than 75% of the trust’s gross REIT revenue for the
taxation year is from one or more of the following: rent from
real or immovable properties, interest from mortgages, or
hypothecs, on real or immovable properties, and dispositions
of real or immovable properties that are capital properties;
iv) At each time in the taxation year an amount that is equal to
75% or more of the equity value of the trust at that time is
the amount that is the total fair market value of all properties
held by the trust, each of which is a real or immovable
property that is a capital property, an eligible resale property,
an indebtedness of a Canadian corporation represented by a
bankers’ acceptance, a property described by either paragraph
(a) or (b) of the definition “qualified investment” in section 204,
or a deposit with a credit union; and
v) Investments in the trust are, at any time in the taxation year,
listed or traded on a stock exchange or other public market.
For this purpose, “real or immovable property” includes a
security of any trust, corporation or partnership that itself
satisfies the above criteria in (i)–(iv) above, but does not include
any depreciable property of a prescribed class for which the rate
of capital cost allowance exceeds 5%.
Excluded from the definition of a SIFT is a partnership, such as
CAPLP and CAPLP2, that is not publicly traded and of which the
equity (and equity-like debt) is wholly owned by any combination
of a SIFT, a REIT or a taxable Canadian corporation. If CAPREIT
does not qualify for the REIT Exception at any point in time in a
given future year, the SIFT Rules will apply to CAPREIT for that
taxation year. To the extent that CAPREIT does not qualify for
the REIT Exception, CAPREIT will consider alternative measures,
including restructuring, assuming that these measures are in the
best interests of its Unitholders, in order to qualify for the REIT
Exception in the following year. No assurances can be given that
CAPREIT will continue to qualify for the REIT Exception. If
applicable, the SIFT Rules may have a material adverse effect on
Unitholders’ returns.
CAPREIT or its subsidiaries may be reassessed for taxes from
time to time. Such reassessments, together with associated interest
and penalties, could adversely affect CAPREIT and CAPREIT’s
Unitholders.
Harmonization of Federal Goods and Services
Tax and Provincial Sales Tax
Both Ontario and British Columbia harmonized their respective
provincial sales tax (“PST”) with the federal goods and services
tax (“GST”) into the harmonized sales tax (“HST”), effective
July 1, 2010. Currently, there is generally no HST on residential
rents (i.e., they are generally HST exempt). As input tax credits
for HST paid can only be claimed if the payments are in respect
of commercial activities and as renting residential properties is
not a commercial activity, CAPREIT is not able to claim input
tax credits for HST paid. In the future, the effect of increasing
the HST rate or extending its application to a variety of new
business input costs presently not subject to HST means landlords
will have to absorb the additional tax costs on business inputs.
Effective April 1, 2013, however, British Columbia reverted back
to the original PST and federal GST. British Columbia consumers
pay PST on those goods and services that were subject to PST
before the implementation of the HST and all permanent PST
exemptions were re-implemented.
Government Regulations
Multi-unit residential rental properties are subject to rent control
legislation in most provinces in Canada. Each province in which
CAPREIT operates maintains distinct regulations with respect to
tenants’ and landlords’ rights and obligations. The legislation in
various degrees provides restrictions on the ability of a landlord to
increase rents above an annually prescribed guideline or requires
the landlord to give tenants sufficient notice prior to an increase
in rent or restricts the frequency of rent increases permitted during
the year. The annual rent increase guidelines as per applicable
legislation attempt to link the annual rent increases to some
measure of changes in the cost of living index over the previous
year. The legislation also, in most cases, provides for a mechanism
to ensure rents can be increased above the guideline increases for
extraordinary costs. As a result of rent controls, CAPREIT may
incur property capital investments in the future that will not be
fully recoverable from rents charged to the tenants.
Applicable legislation may be further amended in a manner
that may adversely affect the ability of CAPREIT to maintain
the historical level of cash flow from its properties. In addition,
applicable legislation provides for compliance with several
regulatory matters involving tenant evictions, work orders,
health and safety issues or fire and maintenance standards, etc.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 67
MANAGEMENT’S DISCUSSION AND ANALYSIS An amendment to the Residential Tenancies Act, 2006, enacted
on June 19, 2012, set Ontario’s annual rent increase guideline to
no more than 2.5% beginning in 2013.
Controls over Financial Reporting
CAPREIT maintains information systems, procedures and controls
over financial reporting. Because of the inherent limitations in all
control systems, including well-designed and operated systems, no
control system can provide complete assurance that the objectives
of the control system will be met. Furthermore, no evaluation
of controls can provide absolute assurance that all control
issues, including instances of fraud, if any, will be detected or
prevented. These inherent limitations include, without limitation,
the 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 defined by the Tax Act, CAPREIT is
not a “mutual fund” as defined by applicable securities legislation.
Securities like the Units are hybrids in that they share certain
attributes common to both equity securities and debt instruments.
The Units do not represent a direct investment in the business of
CAPREIT and should not be viewed by investors as shares or
interests in CAPREIT or any other company or entity. The Units
do not represent debt instruments and there is no principal amount
owing to Unitholders under the Units. Each Unit represents an
equal, undivided, beneficial interest in CAPREIT.
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 significant fluctuations in response to variations in quarterly
operating results, distributions and other factors beyond the control
of CAPREIT. One of the factors that may influence the market
price of the Units is the annual yield on the Units. Accordingly,
an increase in market interest rates may lead purchasers of Units
to demand a higher annual yield, which could adversely affect
the market price of the Units. In addition, the securities markets
have experienced significant price and volume fluctuations from
time to time in recent years that often have been unrelated or
disproportionate to the operating performance of particular issuers.
These broad fluctuations may adversely affect the market price
of the Units. Accordingly, the Units may trade at a premium or a
discount to the value of CAPREIT’s underlying assets.
In addition, changes in CAPREIT’s creditworthiness or perceived
creditworthiness may affect the market price or value and/or the
liquidity of the Units.
The DOT imposes various restrictions on Unitholders. Non-
residents and non-Canadian partnerships are prohibited from
beneficially 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 68
MANAGEMENT’S DISCUSSION AND ANALYSIS 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 differences, this may be dilutive.
Distributions
Cash distributions are not guaranteed. Distributions on the Units
are established by the Board of Trustees and are subject to change
at the discretion of the Board of Trustees. While CAPREIT has
historically made monthly cash distributions to Unitholders, the
actual amount of distributions paid in respect of the Units will
depend upon numerous factors, all of which are susceptible to a
number of risks and other factors beyond the control of CAPREIT.
The market value of the Units will deteriorate if CAPREIT is
unable to meet its distribution targets in the future, and that
deterioration may be significant. In addition, the composition of
the cash distributions for tax purposes may change over time and
may affect the after-tax return for Unitholders.
Distribution Reinvestment Plan (“DRIP”) Participation
Participation by Unitholders in CAPREIT’s DRIP is determined by
factors such as CAPREIT’s overall performance and also by many
factors outside the control of Management such as, but not limited
to, market trends, general economic conditions, and the liquidity
and credit crisis. Declining DRIP participation may adversely affect
funds available for distribution to Unitholders, to make interest
and principal payments or to make property capital investments.
Additionally, such effects may adversely affect Unit prices.
Potential Conflicts of Interest
CAPREIT may be subject to various conflicts of interest because
certain of the trustees and officers of CAPREIT are engaged in a
wide range of real estate and other business activities. CAPREIT
may become involved in transactions which conflict with the
interests of the foregoing.
The trustees may from time to time deal with persons, firms,
institutions or corporations with which CAPREIT may be dealing,
or which may be seeking investments similar to those desired by
CAPREIT. The interests of these persons could conflict with those
of CAPREIT. In addition, from time to time these persons may be
competing with CAPREIT for available investment opportunities.
CAPREIT’s DOT contains “conflicts of interest” provisions
requiring trustees to disclose material interests in material
contracts and transactions and to refrain from voting thereon.
Dependence on Key Personnel
The success of CAPREIT depends to a significant extent on the
efforts and abilities of its executive officers and other members of
Management, as well as its ability to attract and retain qualified
personnel to manage existing operations and future growth.
Although CAPREIT has entered into employment agreements
with certain of its key employees, it cannot be certain that any of
those persons will not voluntarily terminate his or her employment
with CAPREIT.
The loss of an executive officer or other key employee could have
a material adverse effect on the business, operating results or
financial condition of CAPREIT.
Related to the Real Estate Industry
General Economic Conditions and Competition for Residents
All real property investments are subject to elements of risk. The
real value of real property and any improvements thereto depends
on the credit and financial stability of residents and on the vacancy
rates of such properties. The properties generate revenue through
rental payments made by residents. CAPREIT is affected by
changes in general economic conditions (such as the availability
and cost of mortgage funds), local real estate markets (such as
an oversupply of space or a reduction in demand for real estate
in the area), government regulations, changing demographics,
competition from other available rental premises, including new
developments, and various other factors. If a significant number of
residents are unable to meet their obligations under their leases or
if a significant amount of available space in the properties becomes
vacant and cannot be leased on economically favourable lease
terms, cash available for distribution may be adversely affected.
The real estate business is competitive. Numerous other
developers, managers and owners of properties compete with
CAPREIT in seeking residents. Competition for residents also
comes from opportunities for individual home ownership,
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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 69
MANAGEMENT’S DISCUSSION AND ANALYSIS Furthermore, low interest rates may encourage residents to
purchase condominiums or other types of housing, which could
result in a reduction in demand for rental properties. Changes in
interest rates may also have effects on vacancy rates, rent levels,
refurbishing costs and other factors affecting CAPREIT’s business
and profitability, including its financing costs.
CAPREIT will maintain its focus on maximizing occupancy and
average monthly rents in accordance with local conditions in
each of its markets. Since its inception in May 1997, CAPREIT’s
hands-on management style, focus on resident communications
and capital investment programs aimed at increasing the long-
term value of its properties have contributed to a strong track
record of stable portfolio occupancy and average monthly rents.
Competition for Real Property Investments
CAPREIT competes for suitable real property investments with
individuals, corporations and institutions (both Canadian and
foreign) and other real estate investment trusts that are presently
seeking, or which may seek in the future, real property investments
similar to those desired by CAPREIT. A number of these investors
may have greater financial resources than those of CAPREIT,
or operate without the investment or operating restrictions of
CAPREIT or according to more flexible conditions. An increase in
the availability of investment funds and/or an increase in interest
in real property investments may tend to increase competition for
real property investments, thereby increasing purchase prices and
reducing the yield on them.
Continued Growth
CAPREIT expects it will have opportunities to acquire properties
that will be accretive and enable CAPREIT to increase cash flow
to Unitholders, but there can be no assurance that this will be
the case. Furthermore, as CAPREIT’s intention is to distribute a
substantial proportion of its NFFO, the ability of CAPREIT to
fund growth will be dependent on external sources of funding.
Lack of availability of such funds could limit the future growth
of CAPREIT. In addition, CAPREIT’s ability to grow may involve
the disposition of non-core or underperforming properties, which
may be affected by market conditions and other factors.
Acquisitions
CAPREIT’s external growth prospects will depend in large
part on identifying suitable acquisition opportunities that meet
CAPREIT’s investment criteria and satisfy its rigorous due
diligence process. In addition, external growth prospects will
be affected by competition for acquisition opportunities, the
purchase price, ability to obtain adequate financing or financing
on reasonable terms, consummating acquisitions (including
obtaining necessary consents) and effectively integrating and
operating the acquired properties. Acquired properties may not
meet financial or operational expectations due to unexpected
costs associated with acquiring the property, as well as the
general investment risks inherent in any real estate investment or
acquisition, including future refinancing risks. Moreover, newly
acquired properties may require significant Management attention
or property capital investments that would otherwise be allocated
to other properties. If CAPREIT is unable to manage its growth
and integrate its acquisitions effectively, its business, operating
results and financial condition could be adversely affected.
Acquisition agreements entered into with third parties may
be subject to unknown, unexpected or undisclosed liabilities
which could have a material adverse impact on the operations
and financial results of CAPREIT. CAPREIT’s due diligence
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 financial capacity of such vendors.
Cybersecurity Risk
CAPREIT’s information resources include tenant and vendor
information, enterprise resource system, financial information,
and employee data. A cybersecurity incident is considered to be
any adverse event that threatens the confidentiality, integrity or
availability of CAPREIT’s information resources. A cybersecurity
incident can lead to unauthorized access and fraudulent activities
surrounding personal information, particularly that belonging to
CAPREIT’s tenants, vendors, and employees. This could result in
direct losses to stakeholders, including tenants and employees,
potential liability to third parties, operational interruption,
and reputational damage to CAPREIT. CAPREIT continues to
invest in and place greater reliance on technology; therefore,
there are risks posed to CAPREIT’s systems. CAPREIT takes
data privacy and protection seriously and remains adaptable
to constant technical and legislative change. Employees receive
annual awareness training on this subject. Access to personal data
is controlled through physical security (e.g. locked offices and
storage locations, alarm monitoring, cameras) and IT security
mechanisms (e.g. password protection, firewalls, antivirus, and
encryption). Additionally, CAPREIT maintains cybersecurity
insurance coverage and continues to monitor and assess risks
surrounding collection, usage, storage, protection, and retention/
destruction practices of personal data. These measures, however,
do not guarantee that its financial results will not be negatively
impacted by such an incident.
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. In addition,
CAPREIT acquired a portfolio of properties in the Netherlands on
December 23, 2016. The Irish and Dutch real estate markets differ
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 hires locally-based employees or asset and property
management companies 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
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 70
MANAGEMENT’S DISCUSSION AND ANALYSIS presentation currency is the Canadian dollar, while the functional
currency of CAPREIT’s foreign operations and the investment in
IRES is the euro. CAPREIT will in part mitigate this risk through
the use of euro-denominated debt.
CAPREIT’s Netherlands subsidiary owns and operates properties
in The Netherlands, a foreign jurisdiction. It is exposed to foreign
currency fluctuations arising between the functional currency
of the foreign operation (the euro) and the functional currency
of CAPREIT (the Canadian dollar). As such, CAPREIT entered
into a hedge effective at the date of The Netherlands acquisition
(December 23, 2016). CAPREIT hedged the net investment in The
Netherlands foreign operations with E22,500 euro-denominated
debt on CAPREIT’s consolidated balance sheets. Any foreign
currency gains/losses arising from the euro-denominated debt
will be offset by the foreign currency gain/loss arising from the
investment in The Netherlands foreign operations. The effective
portion of foreign exchange gains and losses on the E22,500
euro-denominated debt was recognized in OCI and the ineffective
portion was recognized in net income.
RELATED PARTY TR ANSACTIONS
On March 25, 2015, CAPREIT invested €23.5 million in addition
to its initial investment in Ordinary Shares of IRES as part of
IRES’s €215.0 million secondary equity offering. As at Decem-
ber 31, 2016, CAPREIT has a 15.7% share ownership in IRES
and has determined that it has significant influence 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 financial statements.
Effective April 11, 2014, CAPREIT’s wholly-owned subsidiary,
IRES Fund Management Limited (“IRES FM”), entered into an
external management agreement, amended from time to time, to
perform certain property and asset management services for IRES.
On October 28, 2015, IRES FM 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 FM 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. The investment management agreement between IRES
FM and IRES came into effect, pursuant to which IRES pays 3.0%
per annum of its gross rental income as property management fees
and 0.5% per annum of its net asset value as asset management
fees to IRES FM. The investment management agreement governs
the provision of portfolio management, risk management and
other related services to IRES by IRES FM. It has an initial term
of five years, unless it is duly terminated pursuant to a provision
of the investment management agreement, and thereafter shall
continue in force for consecutive five-year periods.
Included in other income is $5.2 million for the year ended
December 31, 2016 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, 2016.
David Ehrlich is the CEO and a director of the IRES board. He is
also a trustee of CAPREIT. Thomas Schwartz is a director (non-
executive) of the IRES board. He is also a trustee and the President
and Chief Executive Officer of CAPREIT and each of its Canadian
subsidiaries, and director of each of its Irish subsidiaries. Officers
and key management personnel of CAPREIT were granted options
of IRES relating to the initial and secondary equity offerings.
In 2016, David Ehrlich was awarded $0.5 million RURs and
effective 2017, he will be awarded RURs on a quarterly basis and
not entitled to DUPs as per his amended employment agreement.
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 first 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, 2016 were $7.2 million and $6.0 million,
respectively (December 31, 2015 – $7.6 million and $6.5 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 benefits that provides for
payments of up to 36 months of benefits (based on base salary,
bonus and other benefits) depending on cause.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 71
MANAGEMENT’S DISCUSSION AND ANALYSIS
Key management personnel and trustee compensation included in
the consolidated statements of income and comprehensive income
is comprised of:
of the sale totalling approximately $1.4 million with an interest
rate of 4.12% and the remaining proceeds were used to repay a
portion of the Acquisition and Operating Facility.
($ Thousands)
Year Ended December 31,
Short-term employee benefits
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Severance and other benefits (1)
Total
2016
3,400
$
2015
4,468
$
3,763
7,163
4,012
8,480
13,662
–
20,825
$
6,103
2,074
16,657
$
(1) Costs related to the departure of the former Chief Accounting Officer
are included in severance and other employee costs.
In 2012, as previously disclosed, Intraurban Management Services
Inc., a company owned by Thomas Schwartz, terminated its
contract for construction management services with CAPREIT
and effectively sold its business to a third party. That transaction
contemplated aggregate payments by such third party of $1.85 mil-
lion. The final payment of $0.4 million payable to Intraurban was
paid in the fourth quarter of 2016.
CAPREIT leases office space from a company in which Thomas
Schwartz has an 18% beneficial interest. The rent paid for the
office space (which is based on fair market rents at the date the
lease was entered into) for the year ended December 31, 2016 was
$1.0 million (2015 – $0.9 million), excluding property operating
costs, and has been expensed as trust expenses. In 2012, the lease
was amended to extend for an additional three years, expiring
on October 31, 2017, and the minimum annual rental payments
for the extended period are $0.5 million, before HST, per year.
COMMITMENTS AND CONTINGENCIES
From time to time, CAPREIT enters into commitments for fixed
price natural gas, hydro and land lease agreements, as outlined
in note 25 to the accompanying audited consolidated annual
financial statements.
CAPREIT is contingently liable under guarantees provided to
certain of CAPREIT’s lenders in the event of defaults and with
respect to litigation and claims that arise in the ordinary course
of business. These matters are generally covered by insurance. In
the opinion of Management, any liability that may arise from such
contingencies would not be expected to have a material adverse
effect on the consolidated financial statements of CAPREIT.
SECTION VIII
SUBSEQUENT EVENTS
On February 15, 2017, CAPREIT completed the disposition of a
31-suite property located in Saskatoon, Saskatchewan for a sale
price of $2.0 million. The mortgage was repaid with proceeds
On February 16, 2017, CAPREIT announced it has waived con-
ditions and will acquire a luxury 256-suite residential apartment
property located in the Côte-Saint-Luc neighbourhood in the
Greater Montréal area. The purchase price, to be initially financed
in cash from CAPREIT’s Acquisition and Operating credit facil-
ity, is $23.5 million. Closing of the transaction is expected on or
before May 3, 2017.
On February 27, 2017, CAPREIT announced that its Board of
Trustees had approved a 2.4% increase in monthly cash distribu-
tions to $0.1067 per Unit, or $1.28 per Unit on an annualized
basis. The increase is effective with the March 2017 distribu-
tion payable on April 17, 2017 to Unitholders of record as at
March 31, 2017.
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 NOI over this period.
CAPREIT believes the strong defensive characteristics of its
property portfolio, due to diversification by both geography and
demographic sector, will serve to mitigate the negative impact
of any future unfavourable economic conditions that certain
regions may experience. CAPREIT intends to continue to seek
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 defined a number of strategies to capitalize on its
strengths and achieve its objectives of providing Unitholders with
stable and predictable monthly cash distributions while growing
distributions and Unit value over the long term.
First, Management maintains a focus on maximizing occupancy
and average monthly rents in accordance with local conditions in
each of its markets. Since its inception in May 1997, CAPREIT’s
hands-on management style, focus on resident communications
and capital investment programs aimed at increasing the long-
term value of its properties have contributed to a strong track
record of stable portfolio occupancy and average monthly rents.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 72
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-efficient boilers and lighting systems, and is evaluating
all energy-purchasing programs to reduce or stabilize overall net
energy costs.
Third, Management continues to direct its efforts on its building
infrastructure improvement programs to upgrade properties across
the portfolio and to reposition the portfolio by completing value-
enhancing capital investments. These investments are expected
to enhance the life safety of residents, improve the portfolio’s
long-term cash flow generating potential and increase its useful
life over the long term.
Fourth, CAPREIT continues to prudently focus on accretive
acquisitions that meet its strategic criteria and enhance
CAPREIT’s geographic diversification. From time to time,
CAPREIT may also identify certain non-core assets for sale
that do not conform to its current portfolio composition or
operating strategies, or where Management believes 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 refinancing
risk in any single year. Management believes that as a result of
the continuing availability of financing insured by CMHC that
is at lower cost than is currently available under conventional
mortgages, CAPREIT is well positioned to meet its financing and
refinancing objectives at reasonable costs over the medium term.
CAPREIT will continue to maintain its conservative approach
to its capital structure, leverage and coverage ratios and strive
to further improve its payout ratio. Management believes its
successful equity financing and mortgage refinancing programs
have resulted in CAPREIT possessing one of the strongest balance
sheets in its industry, well suited to delivering consistent, stable
and secure monthly cash distributions over the long term.
A significant component of CAPREIT’s ability to manage annual
rental increases is determined by the annual guideline increases
established by certain provincial governments, currently in
Ontario and British Columbia, under rent control legislation
that CAPREIT must adhere to in setting annual rental rates
for renewing tenants. In the Provinces of Ontario and British
Columbia, the guideline increase for 2017 has been set at 1.5%
and 3.7%, respectively. In 2016, the rent guideline increase has
been set at 2.0% in Ontario 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 filed applications for completed property capital
investments and/or unusually high increases in realty taxes, as
well as one application relating to an unusually high increase
in water costs. In addition, CAPREIT continues to assess the
viability of a number of additional AGI applications. The impact
of these AGI applications could be significant at the property
level; however, it is presently indeterminable due to the inherent
uncertainties associated with the adjudication process and the
impact of tenant turnover at the affected properties.
The following table summarizes the status of cumulative AGI
applications filed as at December 31, 2016 and December 31,
2015 for the last 3 years:
December 31,
Number of Suites and Sites Filed
2016
10,371
2015
9,587
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)
66
58
4.00%
1.86
4.14%
1.91
10
13
2.56%
1.26
3.53%
1.56
(1) Weighted by number of impacted suites filed.
(2) Represents the number of years over which the AGI application is
expected to apply.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 73
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S RESPONSIBILITY
FOR FINANCIAL STATEMENTS
The accompanying consolidated financial 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
financial statements. The financial information presented elsewhere
in this Annual Report is consistent with that in the consolidated
financial 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 financial records are
reliable for preparing financial statements; other financial
information, transactions are properly authorized and recorded;
and assets are safeguarded.
As at December 31, 2016, our Chief Executive Officer and Chief
Financial Officer 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 financial
statements in accordance with Canadian generally accepted
auditing standards to enable them to express to the Unitholders
their opinion on the consolidated financial statements. Their
report as auditors is set forth below.
The consolidated financial statements have been further reviewed
and approved by the Board of Trustees and its Audit Committee.
This committee meets regularly with management and the
auditors, who have full and free access to the Audit Committee.
February 27, 2017
Thomas Schwartz
President and
Chief Executive Officer
Scott Cryer
Chief Financial Officer
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 74
INDEPENDENT
AUDITOR’S REPORT
February 27, 2017
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 consoli-
dated balance sheets as at December 31, 2016 and December 31,
2015 and the consolidated statements of income and comprehensive
income, unitholders’ equity and cash flows for the years then ended,
and the related notes, which comprise a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the
consolidated financial statements
Management is responsible for the preparation and fair presen-
tation of these consolidated financial statements in accordance
with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits
in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material mis-
statement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and
fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the circum-
stances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained in our audits is
sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of CAPREIT
and its subsidiaries as at December 31, 2016 and December 31,
2015 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
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 75
CONSOLIDATED FINA NCI A L STATEMENTS
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 financial liabilities
Other non-current liabilities
Current Liabilities
Mortgages payable
Unit-based compensation financial liabilities
Accounts payable and accrued liabilities
Other current liabilities
Security deposits
Exchangeable Units
Distributions payable
Unitholders’ Equity
Unit Capital
Accumulated other comprehensive loss (“AOCL”)
Retained earnings
Non-controlling interest
Note
6
7
7
9
10
11, 12
8
9
11, 12
8
11
19
See accompanying notes to consolidated financial statements.
Signed on behalf of the Trustees
2016
2015
$ 7,642,017
222,072
7,864,089
$ 6,863,140
205,939
7,069,079
28,905
$ 7,892,994
33,749
$ 7,102,828
$ 3,265,469
26,408
12,717
4,126
3,308,720
227,454
47,561
92,704
8,464
29,975
5,061
14,123
425,342
$ 3,734,062
$ 2,441,002
(12,586)
1,729,733
4,158,149
783
$ 4,158,932
$ 7,892,994
$ 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
–
$ 3,659,953
$ 7,102,828
Thomas Schwartz
Trustee
Michael Stein
Trustee
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 76
CONSOLIDATED FINA NCI A L STATEMENTS
CONSOLIDATED STATEMENTS OF
INCOME AND COMPREHENSIVE INCOME
Note
12
6
5
20
11
16
21
19
16
19
19
19
(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
Fair value adjustments of Exchangeable Units
(Loss) gain on derivative financial instruments
Interest and other financing costs
Foreign currency translation
Dilution loss on equity accounted investments
Other income
Net Income
Other Comprehensive Income
Items That May Be Reclassified Subsequently to Net Income
Amortization of losses from AOCL
to interest and other financing costs
Change in fair value of derivative financial instruments
Change in fair value of investments
Foreign currency translation
Reversal of foreign currency translation
relating to IRES ownership dilution
Other Comprehensive Income
Comprehensive Income
Total Net Income Attributable to:
Unitholders of the Trust
Shareholders of Subsidiaries
Net Income
Comprehensive Income Attributable to:
Unitholders of the Trust
Shareholders of Subsidiaries
Comprehensive Income
See accompanying notes to consolidated financial statements.
2016
2015
$
596,831
$
533,798
(59,337)
(149,847)
(209,184)
324,614
(22,707)
(13,417)
173,242
(639)
(2,799)
(5,237)
(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
$
$
$
$
345,633
–
345,633
(65,462)
(164,422)
(229,884)
366,947
(32,129)
(19,897)
227,335
(1,813)
(4,249)
–
(731)
(397)
(117,330)
4,441
–
17,236
439,413
$
3,105
1,644
3,109
(5,914)
–
1,944
441,357
439,480
(67)
439,413
$
$
$
$
$
$
$
441,424
(67)
441,357
$
$
358,387
–
358,387
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 77
CONSOLIDATED FINA NCI A L STATEMENTS
CONSOLIDATED STATEMENTS OF
UNITHOLDERS’ EQUITY
(CA$ Thousands)
Unit Capital
Note
Retained Accumulated Other
Earnings Comprehensive Loss
Non-Controlling
Interest
Total
$ 2,222,747
$ 1,451,736
$
(14,530)
$
–
$ 3,659,953
Unitholders’ Equity, January 1, 2016
Unit Capital
New Units issued
Distribution Reinvestment Plan
Deferred Unit Plan
RUR Plan
Long-Term Incentive Plan
Employee Unit Purchase Plan
13
13
12, 13
12, 13
12, 13
12
Contribution from Non-controlling Interests
Retained Earnings and
Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
14
14
Unitholders’ Equity, December 31, 2016
157,523
51,035
110
732
7,547
1,308
218,255
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
439,480
–
439,480
–
1,944
1,944
–
–
–
$ 2,441,002
(147,360)
(14,123)
(161,483)
$ 1,729,733
–
–
–
(12,586)
$
$
–
–
–
–
–
–
–
850
(67)
–
(67)
–
–
–
783
(CA$ Thousands)
Unit Capital
Note
Retained Accumulated Other
Earnings Comprehensive Loss
Non-Controlling
Interest
$ 1,761,313
$ 1,249,076
$
(27,284)
$
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
13
13
12, 13
12, 13
12, 13
12, 13
386,988
44,206
6,473
116
963
14,380
Senior Executive
Long-Term Incentive Plan
Employee Unit Purchase Plan
Retained Earnings and
Other Comprehensive Income
Net income
Other comprehensive income
12, 13
12
7,162
1,146
461,434
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
345,633
–
345,633
–
12,754
12,754
Distributions on Trust Units
Distributions declared and paid
Distributions payable
14
14
Unitholders’ Equity, December 31, 2015
–
–
–
$ 2,222,747
(129,900)
(13,073)
(142,973)
$ 1,451,736
–
–
–
(14,530)
$
$
See accompanying notes to consolidated financial statements.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 78
157,523
51,035
110
732
7,547
1,308
218,255
850
439,413
1,944
441,357
(147,360)
(14,123)
(161,483)
$ 4,158,932
Total
$ 2,983,105
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)
$ 3,659,953
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
CONSOLIDATED FINA NCI A L STATEMENTS
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
Loss on disposition of investment properties
Loss (gain) on derivative financial instruments
Amortization
Unit-based compensation expenses
Straight-line rent adjustment
Dilution loss on equity accounted investments
Foreign currency adjustment
Note
5
16
7, 19, 21
Net income items related to financing and investing activities
Changes in non-cash operating assets and liabilities
Cash Provided by Operating Activities
Investing Activities
Acquisition of investment properties
Capital investments
Acquisition of investments
Disposition of investment properties
Change in restricted cash
Investment and other income received
Cash Used in Investing Activities
Financing Activities
Mortgage financings
Mortgage principal repayments
Mortgages repaid on maturity
Financing costs on mortgages payable
CMHC premiums on mortgages payable
Interest paid
Bank indebtedness
Proceeds on issuance of Units
Net cash distributions to Unitholders
Cash Provided by Financing Activities
23
23
23
23
23
23
23
23
23
2016
2015
$
439,413
$ 345,633
(227,335)
731
1,813
397
12,029
19,897
138
–
(4,441)
242,642
104,578
14,138
361,358
(387,689)
(197,493)
–
31,321
(846)
4,519
(550,188)
635,768
(102,522)
(130,810)
(3,730)
(11,492)
(109,097)
(141,803)
161,914
(109,398)
188,830
(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
Changes in Cash and Cash Equivalents During the Year
Cash and Cash Equivalents, Beginning of the Year
Cash and Cash Equivalents, End of the Year
See accompanying notes to consolidated financial statements.
–
–
–
–
–
–
$
$
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 79
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(CA$ Thousands, except Unit and per Unit amounts)
December 31, 2016
1. ORGANIZATION OF THE TRUST
2. SUMM ARY OF SIGNIFICANT
ACCOUNTING POLICIES
Canadian Apartment Properties Real Estate Investment Trust
(“CAPREIT”) owns interests in multi-unit residential rental prop-
erties, including apartments, townhomes and manufactured home
communities (“MHC”), principally located in and near major
urban centres across Canada. CAPREIT’s net assets and operat-
ing 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 governed under the laws of the Province of Ontario by a
Declaration of Trust (“DOT”) dated February 3, 1997, as most
recently amended and restated on June 12, 2014. CAPREIT com-
menced 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 established under the laws
of the Province of Manitoba pursuant to a limited partnership
agreement dated June 26, 2007, and as amended on April 1, 2008,
owns directly or indirectly the beneficial interest of all its proper-
ties 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 investment management agree-
ment to perform 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,
2016, 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.
a) Statement of compliance
CAPREIT has prepared these consolidated annual financial
statements in accordance with International Financial Reporting
Standards (“IFRS”) applicable to the preparation of consolidated
annual financial statements. These policies have been consistently
applied to all years presented, unless stated otherwise.
These consolidated annual financial statements were approved by
CAPREIT’s Board of Trustees on February 27, 2017.
b) Basis of presentation
These consolidated annual financial statements have been pre-
pared on a going concern basis, presented in Canadian dollars,
which is also CAPREIT’s functional currency, and have been pre-
pared on an historical cost basis except for:
i) Investment properties and certain financial instruments, which
are stated at fair value; and
ii) Certain Unit-based compensation accounts, which are stated
at fair value.
c) Principles of consolidation
i) Subsidiaries
These consolidated annual financial statements comprise the
assets and liabilities of all subsidiaries and the results of all sub-
sidiaries for the financial period. CAPREIT and its subsidiaries
are collectively referred to as “CAPREIT” in these consolidated
annual financial statements. Subsidiaries are all entities over
which CAPREIT has control. CAPREIT controls an entity when
CAPREIT is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those
returns through its power over the entity.
Subsidiaries are fully consolidated from the date control com-
mences and deconsolidated from the date control ceases. Where
CAPREIT consolidates a subsidiary in which it does not have
100% ownership, the non-controlling interest is classified as a
component of equity.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 80
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 consolida-
tion method. For joint operations, CAPREIT recognizes its share
of revenues, 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 significant
influence, but not control. Generally, CAPREIT is considered to
exert significant influence when it directly or indirectly holds 20%
or more of the voting power of the investee. However, determining
significant influence is a matter of judgement and specific circum-
stances; therefore, holding less than 20% of an entity does not
necessarily preclude an entity from having significant influence as
the entity may exert significant influence through representation
on the board of trustees, direction of management or through
contractual agreements.
The financial results of CAPREIT’s associates are included in
CAPREIT’s consolidated financial statements using the equity
method, whereby the investment is carried on the consolidated
balance sheets at cost, adjusted for CAPREIT’s proportionate
share of post-acquisition changes in CAPREIT’s share of the net
assets of the associate. CAPREIT’s share of profits and losses
is recognized in other income in the consolidated statements of
income and comprehensive income. The standard provides an
exception to recognizing the share of the net assets of the associ-
ate if the reporting periods of the entity and the investee are not
aligned, provided the information used in preparing the financial
statements is not more than three months old. The standard fur-
ther requires adjustments to this information for any significant
transactions or events that may have occurred between the enti-
ty’s reporting date and its investee’s most recent reporting date.
CAPREIT has applied this guidance in accounting for its invest-
ment 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
recoverable 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 prop-
erties 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 knowledge-
able 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 pur-
pose of producing rental income, capital appreciation, or both.
CAPREIT’s investments in its property portfolio reflect different
forms of property interests, including: (i) Fee Simple Interests –
Apartments and Townhomes, (ii) Operating Leasehold Interests,
(iii) Land Leasehold Interests and (iv) Fee Simple Interests –
Manufactured Home Communities Land Lease Sites. These four
forms of property interests meet the definition of investment
property and are classified and accounted for as such. All invest-
ment properties are recorded at their fair value at their respective
acquisition dates and are subsequently stated at fair value at each
consolidated balance sheet date, with any gain or loss arising from
a change in fair value recognized within operating income in the
consolidated statements of income and comprehensive income for
the period. For Operating Leasehold Interests, all of which are
held under a prepaid operating lease, CAPREIT has classified all
such interests as finance leases, including the fair value of options
to purchase, and these are accounted for and presented as invest-
ment properties.
The fair value of all of CAPREIT’s investment properties is deter-
mined by qualified external appraisers annually. Management reg-
ularly undertakes a review of its investment property valuation
between external appraisal dates to assess the continuing validity
of the underlying assumptions, such as cash flows, capitalization
rates and discount rates. These assumptions are tested against
market information obtained from an independent appraisal firm.
Where increases or decreases are warranted, the carrying values of
CAPREIT’s investment properties are adjusted. See notes 3 and 6
for a detailed discussion of the significant assumptions, estimates
and valuation methods used.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS e) Property asset acquisitions
At the time of acquisition of a property or a portfolio of invest-
ment 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 propor-
tionately to CAPREIT.
When determining whether the acquisition of an investment prop-
erty or a portfolio of investment properties is a business combina-
tion 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 defined
under IFRS 3, CAPREIT classifies these properties or a portfolio
of properties as an asset acquisition. Identifiable assets acquired
and liabilities assumed in an asset acquisition are measured ini-
tially at their fair values at the acquisition date. Acquisition-
related transaction costs are capitalized to the property.
f) Presentation of non-current assets classified as held-for-sale
Investment properties are reclassified to assets held-for-sale when
criteria set out in IFRS 5, Non-current Assets Held for Sale and
Discontinued Operations, are met. CAPREIT presents non-cur-
rent assets classified as held-for-sale and their associated liabilities
separately from other assets and liabilities on the consolidated
balance sheets and in the notes beginning from the period in which
they were first classified as “for sale”. The sale of one or a group
of investment properties by CAPREIT will generally be presented
as non-current assets held-for-sale and not discontinued opera-
tions. If a group of assets held-for-sale is considered to meet the
definition of a discontinued operation, then income or expense
recognized in the consolidated statements of income and compre-
hensive income relating to that group of assets is presented sepa-
rately from continuing operations. A discontinued operation is a
component of operations that represents a separate major line of
business or geographic area of operations that has been disposed
of or is held-for-sale, or is a subsidiary acquired exclusively with
a view to resale.
g) Property, plant and equipment
Property, plant and equipment are stated at historical cost less
accumulated depreciation and mainly comprise head office and
regional offices leasehold improvements, corporate and informa-
tion 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 five years, or, in the case of leasehold
improvements, are amortized over the shorter of the lease term
and their estimated useful lives ranging from 10 to 15 years.
h) Tenant inducements
Incentives such as cash, rent-free periods and move-in allowances
may be provided to lessees to enter into a lease. These incentives
are capitalized and amortized on a straight-line basis over the
term of the lease as a reduction of rental revenue. The carrying
amounts of the tenant inducements are included in the fair value
of investment properties.
i) Prepaid CMHC premiums
Fees and insurance premiums paid to Canada Mortgage and
Housing Corporation (“CMHC”) are presented within other non-
current assets. They are amortized over the amortization period of
the underlying mortgage loans when incurred (initial amortization
period is typically 25 to 35 years) and are included in interest and
other financing costs in the consolidated statements of income and
comprehensive income.
j) Financial instruments
Financial assets and financial liabilities
Financial assets and financial liabilities are initially recognized
at fair value and are subsequently accounted for based on their
classification as described below. Their classification depends on
the purpose for which the financial instruments were acquired or
issued, their characteristics and CAPREIT’s designation of such
instruments. The standards require that all financial assets and
financial liabilities be classified as fair value through profit or
loss (“FVTPL”), loans and receivables, available-for-sale, other
liabilities or held-to-maturity.
Classification of financial instruments
The following summarizes the classification and measurement
CAPREIT has elected to apply to each of its significant categories
of financial instruments:
Type
Financial assets
Cash and cash
equivalents
Restricted cash
Other receivables
Investments
Classification
Measurement
Loans and receivables Amortized cost
Loans and receivables Amortized cost
Loans and receivables Amortized cost
Available-for-sale
Fair value
Financial liabilities
Mortgages payable Other liabilities
Bank indebtedness Other liabilities
Accounts payable
and accrued
liabilities and
other liabilities Other liabilities
Security deposits
Other liabilities
Exchangeable Units Other liabilities
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents and restricted cash
Cash and cash equivalents include cash and short-term invest-
ments with an original maturity of three months or less. Restricted
cash does not meet the definition of cash and cash equivalents
and is included in other assets on the consolidated balance sheets.
Interest earned or accrued on these financial assets is included in
other income.
Loans and receivables
Such receivables arise when CAPREIT provides services to a third
party, such as a tenant, and are included in current assets, except
for those with maturities more than 12 months after the consoli-
dated balance sheet date, which are classified as non-current assets.
Loans and receivables are included in other assets on the consoli-
dated balance sheets and are accounted for at amortized cost.
Available-for-sale
Investments are measured at fair value at each consolidated bal-
ance sheet date and the difference between the fair value of the
asset and its cost basis is included in other comprehensive income
(“OCI”). Differences included in accumulated other comprehen-
sive loss (“AOCL”) are transferred to net income when the asset
is removed from the consolidated balance sheets or an impairment
loss on the asset has to be recognized. Income on available-for-sale
investments is recognized as earned and included in other income.
Other liabilities
Such financial liabilities are recorded at amortized cost and
include all liabilities other than derivatives or liabilities, which
are designated to be accounted for at fair value.
FVTPL
Financial instruments in this category are recognized initially and
subsequently at fair value. Gains and losses arising from changes
in fair value are presented within net income in the consolidated
statements of income and comprehensive income in the period
in which they arise. Financial assets and liabilities at FVTPL are
classified as current, except for the portion expected to be real-
ized or paid more than 12 months after the consolidated balance
sheet date, which is classified as non-current. Derivatives are also
categorized as FVTPL unless designated as hedges.
Transaction costs
Transaction costs related to financial assets classified as FVTPL
are expensed as incurred. Transaction costs related to loans and
receivables and other liabilities, measured at amortized cost, are
netted against the carrying value of the asset or liability and amor-
tized over the expected life of the instrument using the effective
interest rate method. Transaction costs relating to available-for-
sale financial assets are included in the cost of the asset on initial
recognition.
Determination of fair value
The fair value of a financial instrument on initial recognition is
generally the transaction price, which is the fair value of the con-
sideration given or received. Subsequent to initial recognition,
the fair value of financial instruments is remeasured based on
relevant market data. CAPREIT classifies the fair value for each
class of financial instrument based on the fair value hierarchy.
The fair value hierarchy distinguishes between market value data
obtained from independent sources and CAPREIT’s own assump-
tions about market value. See note 15 for a detailed discussion
of valuation methods used for financial instruments quoted in
an active market and instruments valued using observable data.
Derivatives
Derivative financial instruments are initially recognized at fair
value on the date a derivative contract is entered into and subse-
quently remeasured at fair value. The method of recognizing the
resulting gain or loss depends on whether the derivative financial
instrument is designated as a hedging instrument and, if so, the
nature of the item being hedged. For CAPREIT’s accounting
policy on hedging, see k) Hedging relationships section below.
Derivatives not designated in a hedging relationship are measured
at fair value with changes therein recognized directly through the
consolidated statements of income and comprehensive income
(loss) within net income.
Embedded derivatives
Derivatives embedded in other financial instruments or contracts
are separated from their host contracts and accounted for as deriv-
atives when their economic characteristics and risks are not closely
related to those of the host contract; the terms of the embedded
derivative are the same as those of a free-standing derivative;
and the combined instrument or contract is not measured at fair
value. These embedded derivatives are measured at fair value with
changes therein recognized within net income in the consolidated
statements of income and comprehensive income.
CAPREIT has concluded that it does not have any outstanding
contracts or financial instruments with embedded derivatives that
require bifurcation.
k) Hedging relationships
CAPREIT has designated its interest rate swap agreement and for-
ward interest rate contracts as cash flow hedges. At the inception
of a transaction, CAPREIT documents the relationship between
hedging instruments and hedged items, as well as its risk man-
agement 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 deriva-
tives used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items. The effective portion of
changes in the fair value of derivatives that are designated and
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS qualify as cash flow hedges is recognized in other comprehensive
income. The gain or loss relating to the ineffective portion is rec-
ognized immediately in the consolidated statements of income
and comprehensive income under net income. Should a hedging
relationship become ineffective and/or hedge accounting become
no longer appropriate, previously unrealized gains and losses
remain within AOCL and are amortized to the relevant item in
the consolidated statements of income and comprehensive income
in the same periods during which the hedged items affect earnings,
while future changes in the fair value of the hedging derivatives
are recognized within net income in the consolidated statements
of income and comprehensive income.
CAPREIT’s Netherlands subsidiary owns and operates properties
in The Netherlands, a foreign jurisdiction. It is exposed to for-
eign currency fluctuations arising between the functional currency
of the foreign operation (the euro) and the functional currency
of CAPREIT (the Canadian dollar). As such, CAPREIT entered
into a hedge effective at the date of The Netherlands acquisition
(December 23, 2016). CAPREIT hedged the net investment in The
Netherlands foreign operations with €22,500 euro-denominated
debt on CAPREIT’s consolidated balance sheets. Any foreign
currency gains/losses arising from the euro-denominated debt
will be offset by the foreign currency gain/loss arising from the
investment in The Netherlands foreign operations. The effective
portion of foreign exchange gains and losses on the €22,500 euro-
denominated debt was recognized in OCI and the ineffective por-
tion was recognized in net income.
l) Mortgages payable and bank indebtedness
Mortgages payable are recognized at amortized cost using the
effective interest rate method. Under the effective interest rate
method, any transaction fees, costs and discounts directly related
to the mortgage are recognized within interest and other financing
costs in the consolidated statements of income and comprehen-
sive income over the expected term of the mortgage. Mortgage
maturities and repayments due more than 12 months after the
consolidated balance sheet date are classified as non-current.
m) Exchangeable Units
Issued and outstanding Units of CAPLP are exchangeable on
demand for Trust Units (“Exchangeable Units”). As the Trust
Units are redeemable at the holder’s option, the Exchangeable
Units are classified as current liabilities. The distributions on the
Exchangeable Units are recognized in the consolidated statements
of income and comprehensive income (loss) as interest expense
under IFRS and the interest payable at the reporting date is reported
under other current liabilities on the consolidated balance sheets.
These Exchangeable Units are remeasured at each reporting date
at their amortized cost, which approximates fair value, as they are
considered to be puttable instruments under IAS 32, with changes
in the carrying amount recognized as fair value adjustments of
Exchangeable Units within net income in the consolidated state-
ments of income and comprehensive income (loss).
n) Comprehensive income
Comprehensive income includes net income and other compre-
hensive income (loss). Other comprehensive income (loss) includes
changes in the fair value of investments, foreign currency transla-
tion relating to foreign operations, and the effective portion of
cash flow hedges less any amounts reclassified to interest and
other financing costs and the associated income taxes.
o) Accumulated Other Comprehensive Loss (“AOCL”)
AOCL is included on the consolidated balance sheets as Unitholders’
Equity and includes foreign currency translation relating to foreign
operations and the unrealized gains and losses of the changes in
the fair value of cash flow hedges, derivatives and investments. The
components of AOCL are disclosed in note 19.
p) Revenue recognition
CAPREIT recognizes rental revenue using the straight-line
method, whereby the total amount of rental revenue to be received
from all leases is accounted for on a straight-line basis over the
term of the related leases. The difference between the rental rev-
enue recognized and the amounts contractually due under the
lease agreements is accrued as rent receivable, which is included
as a component of investment properties on the consolidated
balance sheets.
Other income includes interest, dividends and management
fees. Interest and dividend income are recognized as earned.
Management fees are recorded as the services are provided.
q) Borrowing costs and interest on mortgages payable
Interest and other financing costs 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 benefits are provided to officers, trustees
and certain employees and are intended to facilitate long-term own-
ership of Trust Units and provide additional incentives by increas-
ing the participants’ interest, as owners, in CAPREIT. Unit-based
compensation liabilities are classified as current, except for the por-
tion expected to be realized or paid beyond 12 months of the con-
solidated balance sheet date, including amounts where CAPREIT
has the unconditional right to defer settlement of vested awards.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPREIT accounts for its Unit-based compensation plans using the fair value-based method, under which compensation expense is rec-
ognized 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 Mark-to-Market until
Secured loan
Secured loan
Additional Units
Additional Units
N/A
Loan repaid
Loan repaid
Settled
Settled
Exercised
(1) For definitions of these plans refer to notes 11, 12 and 13.
(2) Vesting one-third on grant date, and one-third on each of the subsequent two grant anniversary dates.
(3) Vesting of the options is subject to satisfaction of performance criteria over the annual reporting period.
t) Consolidated statements of cash flows
Cash and cash equivalents consist of cash on hand, balances
with banks, and investments in money market instruments with
an original term to maturity of 90 days or less at acquisition.
Investing and financing activities that do not require the use of
cash or cash equivalents are excluded from the consolidated state-
ments of cash flows and are disclosed separately in the notes to
the consolidated annual financial statements.
u) Income taxes
CAPREIT is taxed as a Mutual Fund Trust for income tax pur-
poses 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.
w) Foreign currency translation
The consolidated financial statements are presented in Canadian
dollars, which is the functional currency of CAPREIT and the
presentation currency for the consolidated financial statements.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the
transactions. At the end of each reporting period, foreign currency
denominated monetary assets and liabilities are translated into the
functional currency using the prevailing rate of exchange at the
consolidated balance sheet date. Foreign exchange gains and losses
resulting from the settlement of such transactions, and from the
translation at period end exchange rates of monetary assets and
liabilities denominated in foreign currencies, are recognized in the
consolidated statements of income and comprehensive income.
Foreign exchange gains and losses are presented in the consoli-
dated statements of income and comprehensive income.
CAPREIT and its wholly-owned subsidiaries satisfied certain con-
ditions available to Real Estate Investment Trusts (“REITs”) (the
“REIT Exception”) under amendments to the Tax Act intended to
permit a corporate income tax rate of nil as long as the specified
conditions continue to be met.
CAPREIT has foreign subsidiaries in number of countries with
varying statutory rates of taxation. Judgement is required in the
estimation of income taxes and deferred income tax assets and
liabilities, in each of CAPREIT’s operating jurisdictions. Income
taxes may be paid on occasion where activities relating to the for-
eign subsidiaries are considered to be taxable in those countries.
In determining the functional currency of CAPREIT’s foreign sub-
sidiaries, CAPREIT considers factors such as (i) the currency that
mainly influences sales prices for goods and services and the coun-
try whose competitive forces and regulations mainly determine the
sale prices of those goods and services and (ii) the currency that
mainly influences labour, material and other costs of providing
goods and services. The functional currency for CAPREIT’s Irish
and Dutch subsidiaries is the euro.
The results and financial position of all the subsidiaries that have
a functional currency different from the presentation currency are
translated into the presentation currency as follows:
v) Earnings per Unit
As a result of the redemption feature of CAPREIT’s Trust Units,
these Units are considered financial liabilities under IAS 33,
Earnings per Share, and they may not be considered as equity
for the purposes of calculating net income on a per Unit basis.
Consequently, CAPREIT has elected not to report an Earnings per
Unit calculation, as permitted under IFRS.
i. Assets and liabilities for each balance sheet presented are trans-
lated at the closing rate of the date of that balance sheet;
ii. Income and expenses for each statement of comprehensive
income are translated at average exchange rates; and
iii. All resulting exchange differences are recognized in other com-
prehensive income
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On consolidation, exchange differences arising from the transla-
tion of the net investment in foreign operations, and of borrow-
ings and other currency instruments designated as hedges of such
investments, are taken into other comprehensive income. When
a foreign operation is partially disposed of or sold, exchange dif-
ferences that were recorded in equity are recognized in the con-
solidated statements of net income and comprehensive income.
x) Non-controlling interest
Non-controlling interest represents equity interests in subsidiaries
owned by outside parties. The share of net assets, net earnings
and other comprehensive income of subsidiaries attributable to
non-controlling interest is reported in equity.
y) IFRIC 21, Levies
This is an interpretation of IAS 37, Provisions, Contingent
Liabilities and Contingent Assets. IAS 37 sets out criteria for the
recognition of a liability, one of which is the requirement for
the entity to have a present obligation as a result of a past event
(known as an obligating event). The interpretation clarifies that
the obligating event that gives rise to a liability to pay a levy is
the activity described in the relevant legislation that triggers the
payment of the levy. This standard is applicable to annual report-
ing periods beginning on or after January 1, 2014. CAPREIT has
assessed the standard and completed an analysis of the govern-
ment levies that CAPREIT is subject to, and determined it does
not impact CAPREIT on adoption in its current form.
z) Future accounting changes
As at February 27, 2017, 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, 2016:
IAS 12, Income Taxes – Deferred Tax
This amendment clarifies (i) the requirements for recognizing
deferred tax assets on unrealized losses; (ii) deferred tax where
an asset is measured at a fair value below the asset’s tax base, and
(iii) certain other aspects of accounting for deferred tax assets.
This amendment will come into effect for years beginning on or
after January 1, 2017.
IAS 7, Statement of cash flows – Disclosures related
to financing activities
This amendment includes the requirement for disclosures about
changes in liabilities arising from financing activities, including
both changes arising from cash flows and non-cash changes. This
amendment will come into effect on January 1, 2017.
IAS 40, Investment Property
This amendment clarifies when assets are transferred to, or from,
investment properties. This amendment will come into effect on
January 1, 2018.
IFRS 2, Share-based Payments
This will be amended to address (i) certain issues related to the
accounting for cash settled awards, and (ii) the accounting for
equity settled awards that include a “net settlement” feature
in respect of employee withholding taxes. This amendment is
effective for years beginning on January 1, 2018.
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classification
and measurement of financial liabilities over the existing derecog-
nition requirements of IAS 39, Financial Instruments: Recog ni tion
and Measurement. IFRS 9 also introduces new requirements for
classifying and measuring financial assets; specifically, investments
in equity instruments can be designated as “fair value through other
comprehensive income” with only dividends being recognized in
profit or loss. IFRS 9 was further amended in November 2013
to: (i) include guidance on hedge accounting, (ii) allow entities
to early adopt the requirement to recognize changes in fair value
attributable to changes in an entity’s own credit risk, from financial
liabilities designated under the fair value option, in OCI (without
having to adopt the remainder of IFRS 9); and (iii) remove the
previous mandatory effective date of January 1, 2015.
The final amendment of IFRS 9 as at July 2014 included: (i) a third
measurement category for financial assets – fair value through other
comprehensive income; (ii) a single, forward-looking “expected
loss” impairment model; and (iii) a mandatory effective date for
IFRS 9 for annual periods beginning on or after January 1, 2018.
IFRS 7, Financial Instruments – Disclosure
Amended to require additional disclosures on transition from IAS 39
to IFRS 9. This amendment is effective on adoption of IFRS 9.
IFRS 15, Revenue from Contracts with Customers
This new standard on revenue recognition supersedes IAS 18,
Revenue, IAS 11, Construction Contracts and related interpre-
tations. 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 classification of leases as either operating leases or finance
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.
CAPREIT is currently assessing the impact of the above standards
and amendments.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. CRITICAL ACCOUNTING ESTIM ATES, ASSUMPTIONS, AND JUDGEMENTS
The preparation of consolidated annual financial statements in
accordance with IFRS requires the use of estimates, assumptions
and judgements that in some cases relate to matters that are
inherently uncertain, and which affect the amounts reported in
the consolidated annual financial statements and accompanying
notes. Areas of such estimation include, but are not limited
to: valuation of investment properties, remeasurement at fair
value of financial instruments, valuation of accounts receivable,
capitalization of costs, accounting accruals, the amortization of
certain assets, accounting for deferred income taxes and Unit-
based compensation financial liabilities. Changes to estimates
and assumptions may affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the consolidated annual financial 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.
The estimates deemed to be more significant, due to subjectivity
and the potential risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial
year, are discussed below.
i) Valuation of investment properties
Investment properties are measured at fair value as at the
consolidated balance sheet dates. Any changes in the fair
value are included within net income in the consolidated
statements of income and comprehensive income. Fair value
is supported by independent external valuations or detailed
internal valuations using market-based assumptions, each
in accordance with recognized valuation techniques. The
techniques used comprise both the capitalized net operating
income method and the discounted cash flow method and
include estimating, among other things (all considered Level
3 inputs), future stabilized net operating income, capitalization
rates, reversionary capitalization rates, discount rates and
other future cash flows applicable to investment properties.
Fair values for investment properties are classified as Level 3
in the fair value hierarchy as disclosed in note 15.
The fair value of investment properties is established annually
by qualified, independent appraisers. Each quarter, CAPREIT
utilizes market assumptions for rent increases, capitalization
and discount rates provided by an external appraisal firm
to determine the fair value of the investment properties for
interim reporting purposes. Capitalization rates employed by
the appraisal firm are based on recently closed transactions,
generally within the last three months, and other current
market indicators for similar properties.
CAPREIT’s internal valuations and the independent
appraisals are both subject to significant judgements,
estimates and 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 significant
assumptions and estimates used.
ii) Valuation of financial instruments
The fair value of derivative assets and liabilities is based on
assumptions that involve significant estimates. The basis of
valuation for CAPREIT’s derivatives is set out in note 15. The
fair values of derivatives reported may differ materially from
the amount they are ultimately settled for if there is volatility
between the valuation date and settlement date.
iii) Unit-based compensation
The fair values of Unit-based compensation financial liabilities
are based on assumptions that involve significant estimates. The
basis of valuation for CAPREIT’s Unit-based compensation
financial liabilities is set out in note 12; however, the fair values
as at the reporting date may differ materially from how they
are ultimately recognized if there is volatility in listed Unit
prices, interest rates or other key assumptions between the
valuation date and settlement date. Market assumptions,
estimates and valuation methodology are discussed in note 12.
iv) Investment in Irish Residential Properties
REIT plc (“IRES”)
CAPREIT has determined that its investment in IRES should
be accounted for using the equity method of accounting
given the 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 investment
management agreement change.
v) Classification of Interest Paid on
Consolidated Statements of Cash Flows
IFRS permits the classification of interest paid as operating
cash flows because they enter into the determination of profit
or loss, or alternatively as financing cash flows because they are
costs of obtaining financial resources. CAPREIT has applied
its judgement and concluded that debt financing, which is used
to provide leveraged returns to its Unitholders, is an integral
part of its capital structure and not directly associated with its
principal revenue-producing activities. Therefore, interest paid
is classified as a financing activity in CAPREIT’s consolidated
statements of cash flows.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. RECENT INVESTMENT PROPERTY ACQUISITIONS
CAPREIT completed the following investment property acquisitions since January 1, 2015, which have contributed to the operating
results effective from their respective acquisition dates:
For the Year Ended December 31, 2016
January 20, 2016
April 12, 2016
April 26, 2016
May 11, 2016
May 11, 2016
June 15, 2016
June 30, 2016 (4)
September 15, 2016
September 30, 2016
December 1, 2016
December 23, 2016 (5)
Suite or
Site Count
670
12
71
55
144
21
850
71
87
3
568
2,552
Region(s)
London
Charlottetown
Greater Toronto Area
Greater Toronto Area
Fort St. John
Victoria
Ottawa
Halifax
London
Bowmanville and
Grand Bend
The Netherlands
Total
Acquisition
Costs
53,200 $
$
1,162
16,630
10,178
8,668
2,643
184,668
17,407
22,813
270
95,217
$
412,856 $
Assumed
Mortgage
Funding
– (3)
729
– (3)
– (3)
– (3)
– (3)
24,627
– (3)
– (3)
– (3)
– (3)
25,356 (4)
Interest
Rate (1)
– (3)
2.04%
– (3)
– (3)
– (3)
– (3)
3.96%
– (3)
– (3)
– (3)
– (3)
Term to
Maturity
(Years) (2)
– (3)
3.7
– (3)
– (3)
– (3)
– (3)
6.3
– (3)
– (3)
– (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 five properties consisting of 850 suites (185 affordable and 665 mid-tier suites) located in Ottawa, Ontario. The acquisition
was financed by the assumption of a $24,627 mortgage maturing in November 2022 with an interest rate of 3.96%, new CMHC insured 10 year mortgage
financings aggregating to $106,122 with a weighted average interest rate of 2.38% and the balance in cash from CAPREIT’s Acquisition and
Operating Facility.
(5) The acquisition was financed by a new non-amortizing mortgage of €40,660 ($57,261) maturing January 1, 2024 with an interest rate of 2.05%,
a contribution from a non-controlling interest of €600 ($850), and the balance in euro cash from CAPREIT’s Acquisition and Operating Facility presented
in mortgage payable.
For the Year Ended December 31, 2015
January 28, 2015 (3)
February 18, 2015
March 31, 2015
June 15, 2015
June 30, 2015
July 31, 2015
September 14, 2015
September 30, 2015
November 1, 2015
December 17, 2015
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 Vancover Area
Montréal
Bowmanville and
Grand Bend
Victoria
Total
Acquisition
Costs
Assumed
Mortgage
Funding
$ 125,416 $
31,092
54,500
5,479
13,010
17,070
170,611
502,276
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (5)
372
29,474
949,300 $
$
– (4)
3,030
3,030
Interest
Term to
Maturity
Rate (1)
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (5)
– (4)
1.8%
(Years) (2)
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (4)
– (5)
– (4)
4.2
(1) Weighted average stated interest rate on mortgage funding.
(2) Weighted average term to maturity on mortgage funding.
(3) The Rockbrook Portfolio acquisition is the first 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.
(4) The acquisition was funded from CAPREIT’s Acquisition and Operating Facility (see note 10).
(5) The acquisition was funded from CAPREIT’s Bridge Increase and Acquisition and Operating Facility (see note 10).
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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. DISPOSITIONS
The tables below summarize the dispositions completed since January 1, 2015. These dispositions do not meet the definition of discon-
tinued operations under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
Dispositions Completed During the Year Ended December 31, 2016
Disposition Date
July 27, 2016
August 22, 2016
September 28, 2016
Suite Count
145
22
412
579
Region
Montréal
Montréal
Montréal
Dispositions Completed During the Year Ended December 31, 2015
Disposition Date
March 31, 2015
February 18, 2015
Suite Count
270
260
530
Regions
Dublin, Ireland (1)
Toronto
Sale Price
24,849 $
2,340
31,350
58,539 $
$
$
Cash
Proceeds
12,480 $
2,282
16,559
31,321 $
Mortgage
Discharged
12,085
–
14,322
26,407
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, 2016, a loss of $1,813 was recognized in connection with the property dispositions in the third quarter of
2016. 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 loca-
tion, considering the highest and best use of the asset, with any
gain or loss arising from a change in fair value recognized in the
consolidated statements of income and comprehensive income
for the period. Valuations do not take into account any potential
portfolio premium.
The fair values of all of CAPREIT’s investment properties are
determined by qualified external appraisers annually. The qualified
external appraisers hold a recognized relevant professional
qualification and have recent experience in the location and cat-
egory of the respective property. Each quarter, CAPREIT utilizes
market assumptions for rent increases, capitalization and discount
rates provided by the external appraisers to determine the fair
value of the investment properties. Capitalization rates employed
by the appraisers are based on recently closed transactions for
similar properties. To the extent that the stabilized forecasted cash
flows of an investment property change significantly in a quarter,
the fair value of the investment property would be re-assessed by
the external appraisers and the fair value adjusted accordingly.
Fair values for investment properties are classified as Level 3 in
the fair value hierarchy, as disclosed in note 15. On an annual
basis, CAPREIT verifies all major inputs (as detailed above) to
the valuation and reviews the results with the external appraisers
for all independent valuations. On a quarterly basis, the market
assumptions for rent increases, capitalization and discount rates
provided by the external appraisers are verified in determining the
fair value of the investment properties.
Discussion of the valuation process, the valuation methodology
(as mentioned below), key inputs and results is held between
CAPREIT and the qualified external appraisers at least once every
quarter, in line with CAPREIT’s quarterly reporting dates.
Changes in Level 3 fair values are analyzed at each reporting date
as part of the quarterly valuation discussion between CAPREIT
and the qualified external appraisers. As part of this discussion,
the external valuators present a report that explains the reasons
for the fair value movements.
To determine fair value, CAPREIT first considers whether it can
use current prices in an active market for a similar property in
the same location and condition. CAPREIT has concluded there
is insufficient market evidence on which to base investment prop-
erty valuation using this approach, and has therefore determined
to use the Direct Income Capitalization (“DC”) and Discounted
Cash Flow (“DCF”) methods to arrive at the fair value of the
investment properties. Investment properties have been valued
using the following methods and key assumptions:
a) Fee Simple and MHC Land Lease Sites
CAPREIT utilizes the DC method. Under this method, capital-
ization rates are applied to a stabilized net operating income
(“NOI”) representing market-based NOI assumptions (prop-
erty revenue less property operating expenses adjusted for
market-based assumptions such as long-term vacancy rates,
management fees, R&M costs, and general and administra-
tion costs). The most significant assumption is the capitaliza-
tion rate for each specific 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 valua-
tion date. Generally, an increase in stabilized NOI will result
in an increase to the fair value of an investment property. An
increase in the capitalization rate will result in a decrease in
the fair value of an investment property. The capitalization rate
magnifies the effect of a change in stabilized NOI, with a lower
capitalization rate resulting in a greater effect of a change in
stabilized NOI than a higher capitalization rate.
b) Operating Leasehold Interests
CAPREIT utilizes the DCF method. Under this method, dis-
count rates are applied to the forecasted cash flows reflecting
market-based leasing assumptions for that specific property as
well as assumptions about renewal and new leasing activity.
The most significant assumption is the discount rate applied
over the initial term of the lease. The discount rate is generally
the appropriate weighted average cost of capital that reflects
the risk of the cash flows for the investment property. In the
case of one property, the forecasted cash flows are adjusted
for contractual air rights payments and the discount rate is
adjusted for uncertainty regarding the renegotiation of the air
rights lease at the end of the term. Generally, an increase in
forecasted cash flows will result in an increase to the fair value
of an investment property. An increase in the discount rate will
result in a decrease to the fair value of an investment property.
c) Options to Purchase the Related Operating
Leasehold Interests
CAPREIT utilizes the DC method at the reversion date (option
exercise date) to estimate the future value, which is then dis-
counted to a present value. Under this method, the stabilized
income is adjusted to a projected NOI as at the end of the
operating lease term and the capitalization rate is adjusted to
a “reversionary capitalization rate” reflecting the incremental
risk associated with future uncertainty. The value of the option
is then determined based on the difference between the esti-
mated 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”).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d) Land Leasehold Interests
CAPREIT utilizes the DCF method for properties that are subject to land or air rights leases. Under this method, discount rates are
applied to the forecasted cash flows reflecting market-based leasing assumptions for that specific property as well as assumptions about
renewal and new leasing activity. The most significant assumption is the discount rate applied over the term of the lease. Forecasted
cash flows are reduced for contractual land lease payments and the discount rates reflect the uncertainty regarding the renegotiation
of land lease payments during and at the end of the term of the leases.
A summary of the market assumptions and ranges for each type of property interest along with their fair values as at December 31, 2016
and December 31, 2015, is presented below:
As at December 31, 2016
Type of Interest
Fee Simple Interests –
Apartments and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests (2),(3),(4)
Land Leasehold Interests (2)
Total Investment Properties
As at December 31, 2015
Type of Interest
Fee Simple Interests –
Apartments and Townhomes
MHC Land Lease Sites
Operating Leasehold Interests (2),(3),(4)
Land Leasehold Interests (2)
Total Investment Properties
$
$
$
WA NOI /
Fair Value Cash Flow (1)
Rate Type
6,524,337
305,250
627,740
184,690
7,642,017
2,411
2,538
3,361
3,812
Capitalization rate
Capitalization rate
Discount rate (5)
Discount rate
WA NOI /
Fair Value Cash Flow (1)
Rate Type
5,786,430
282,820
598,690
195,200
2,395
2,428
3,254
3,665
Capitalization rate
Capitalization rate
Discount rate (5)
Discount rate
$
6,863,140
Max
7.93%
7.00%
6.25%
6.50%
Max
7.96%
7.14%
6.50%
6.75%
Weighted
Average
Min
2.90%
4.26%
5.50%
6.50%
4.54%
6.23%
5.70%
6.50%
Weighted
Average
Min
3.25%
4.41%
5.75%
6.75%
4.69%
6.23%
5.92%
6.75%
(1) Weighted average (“WA”) net operating income (“NOI”) or cash flow by property fair value.
(2) The fair values of Operating Leasehold Interests subject to a contractual air rights lease and Land Leasehold Interests subject to land leases reflect the
estimated 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 $149,140 and $127,700
as at December 31, 2016 and December 31, 2015, respectively.
(4) The weighted average remaining lease term on Operating Leasehold Interests is 16.8 years as at December 31, 2016 (December 31, 2015 – 17.8 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, 2016 and December 31, 2015.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of carrying amounts of investment properties by type
Fee Simple and
MHC Land Lease Sites
$ 6,069,250
$
Operating
Leasehold
Interests
598,690
$
Land
Leasehold
Interests
195,200
For the Year Ended December 31, 2016
Balance at the beginning of the year
Additions:
Acquisitions
Property capital investments
Capitalized leasing costs (1)
Foreign currency translation
Dispositions
Realized loss on disposition of investment properties
Unrealized fair value adjustments
Balance of Investment Properties at end of the year
414,668
172,629
700
188
(58,793)
(1,813)
232,758
$ 6,829,587
(1) Comprises tenant inducements, straight-line rent and direct leasing costs.
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
Realized loss on dispositions of investment properties
Unrealized fair value adjustments
Balance of Investment Properties at end of the year
Fee Simple and
MHC Land Lease Sites
$ 4,986,030
949,300
140,205
271
(3,155)
(168,622)
(639)
165,860
$ 6,069,250
(1) Comprises tenant inducements, straight-line rent and direct leasing costs.
–
16,073
33
–
–
–
12,944
627,740
Operating
Leasehold
Interests
559,560
–
18,087
17
–
–
–
21,026
598,690
$
$
$
$
$
$
–
7,040
185
–
–
–
(17,735)
184,690
Land
Leasehold
Interests
204,050
–
4,916
(122)
–
–
–
(13,644)
195,200
Total
$ 6,863,140
414,668
195,742
918
188
(58,793)
(1,813)
227,967
$ 7,642,017
Total
$ 5,749,640
949,300
163,208
166
(3,155)
(168,622)
(639)
173,242
$ 6,863,140
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
2016
2015
$
34,526
(21,365)
13,161
74,174
1,345
25,958
107,434
222,072
$
$
$
5,559
13,137
6,975
3,234
28,905
$
$
$
$
26,350
(17,109)
9,241
66,787
1,101
22,850
105,960
205,939
4,753
15,220
6,129
7,647
33,749
(1) Consists of head office and regional offices’ leasehold improvements, corporate and information technology systems.
(2) Represents prepaid CMHC premiums on mortgages payable, net of accumulated amortization, of $20,250 (December 31, 2015 – $16,900).
(3) Represents deferred loan costs related to the revolving credit facilities, net of accumulated amortization, of $8,486 (December 31, 2015 – $7,822).
(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 reclassified 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 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. As at December 31, 2016, CAPREIT concluded that it continues to exert significant
influence over IRES. CAPREIT will continue to reassess this conclusion should its ownership interest or terms of the investment 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 (€)
8. OTHER LIABILITIES
As at December 31,
Other Non-Current Liabilities
Hedge liability
Total
Other Current Liabilities
Mortgage interest payable
Total
Note
16(a),(b),(c)
2016
2015
15.7%
65,500,000
1.17
15.7%
65,500,000
1.17
2016
2015
$
$
$
$
4,126
4,126
8,464
8,464
$
$
$
$
5,856
5,856
8,008
8,008
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. MORTGAGES PAYABLE
As at December 31, 2016, mortgages payable bear interest at a weighted average effective rate of 3.30% (December 31, 2015 – 3.52%),
and mature between 2017 and 2030. The effective interest rate as at December 31, 2016 includes 0.10% (December 31, 2015 – 0.12%)
for the amortization of the realized component of the loss on settlement of derivative financial instruments of $32,494 included in AOCL.
Approximately 97.9% of CAPREIT’s mortgages payable are financed at fixed interest rates as at December 31, 2016. Investment prop-
erties at fair value of $7,420,427 have been pledged as security as at December 31, 2016. CAPREIT has investment properties with a
fair value of $221,590 as at December 31, 2016 that are not encumbered by mortgages and secure only the Acquisition and Operating
Facility. As at December 31, 2016, unamortized deferred financing costs of $11,544 and fair value adjustments of ($4,662) are netted
against mortgages payable.
Future principal repayments for the period ending December 31 for the years indicated are as follows:
As at December 31, 2016
2017
2018
2019 (1)
2020
2021 (2)
Subsequent to 2021
Deferred financing costs and fair value adjustments
Total Portfolio
As at December 31,
Represented by:
Mortgages Payable – non-current (1),(2)
Mortgages Payable – current
Principal
Amount
$
227,454
204,206
511,246
323,062
439,122
1,794,715
3,499,805
(6,882)
$ 3,492,923
% of Total
Principal
6.5
5.8
14.6
9.2
12.6
51.3
100.0
2016
2015
$ 3,265,469
227,454
$ 3,492,923
$ 2,858,622
239,151
$ 3,097,773
(1) Included in mortgages payable as at December 31, 2016 is a €92,900 ($131,630) non-amortizing euro LIBOR borrowing. See note 10 for further details.
(2) Included in mortgages payable as at December 31, 2016 is a $65,000 non-amortizing credit facility on two of the MHC land lease sites.
10. BANK INDEBTEDNESS
Effective June 30, 2016, CAPREIT amended and restated its credit agreement to, among other things: (i) increase its credit facilities
to $505,000 in the aggregate; (ii) increase the maximum amount of its existing $340,000 revolving credit facility to $440,000 (the
“Acquisition and Operating Facility”); (iii) add an additional lender in the syndicate thereto; (iv) amend the “conversion date”, for when
the revolving facility converts to a two-year non-revolving term facility, to June 30, 2017; (v) amend the tangible net worth requirement
to $1,500,000; and (vi) extend the maturity date of the existing $65,000 five-year non-revolving term credit facility to June 30, 2021. 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 $440,000. Effective December 19, 2016, CAPREIT amended its credit agreement
to increase the euro LIBOR borrowing limit to €150,000 from €70,000 while maintaining the Acquisition and Operating Facility limit
at $440,000.
CAPREIT’s Credit Facilities include the $440,000 Acquisition and Operating Facility, and the existing $65,000 five-year non-revolving
term credit facility (collectively, the “Credit Facilities”). The $65,000 five-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, 2016, CAPREIT has euro LIBOR
borrowings of €92,900 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, 2019. 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 94
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Acquisition and Operating Facility
As at December 31,
Facility
Less:
Euro LIBOR borrowings (1)
Bank indebtedness
Letters of credit
Available borrowing capacity
Weighted average floating interest rate
(1) Included in mortgages payable. Refer to note 9 for further details.
2016
$ 440,000
2015
$ 340,000
(131,630)
(26,408)
(6,040)
$ 275,922
2.55%
(95,434)
(168,211)
(6,040)
70,315
2.56%
$
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 Plan (“RUR Plan”) (each of which is more fully
described in note 12). As at December 31, 2016, the maximum number of Units issuable under all of CAPREIT’s Unit-based incentive
plans is 9,500,000 Units (December 31, 2015 – 9,500,000). The maximum number of Units available for future issuance under all Unit
incentive plans as at December 31, 2016 is 1,346,980 Units (December 31, 2015 – 1,750,051 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 Decem-
ber 31, 2016 and 2015 are as follows:
(Number of Units)
Year Ended December 31, 2016
Units, Unit Rights and Unit Options outstanding
UOP
DUP
RUR
SELTIP /
LTIP (1)
Exch.
Units (2)
Total
as at January 1, 2016
1,334,432
248,076
586,313 1,445,398
161,311 3,775,530
Issued, cancelled or granted during the year:
Issued or granted
Exercised or settled
Distributions reinvested
Units, Unit Rights and Unit Options outstanding
153,780
–
–
34,481
(7,500)
10,819
131,772
(28,364)
28,677
–
(260,000)
–
–
–
–
320,033
(295,864)
39,496
as at December 31, 2016
1,488,212
285,876
718,398 1,185,398
161,311 3,839,195
(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
(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 $5,061 as at
December 31, 2016 (December 31, 2015 – $4,330), which approximates the closing price of the Trust Units.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes the change in the total Unit-based compensation financial liabilities for the years ended December 31, 2016
and December 31, 2015, including the settlement of such liabilities through the issuance of Trust Units.
As at December 31,
Total Unit-based compensation financial liabilities, beginning of the year
Unit-based compensation expenses
Early vesting of RURs (1)
Settlement of Unit-based compensation awards for Trust Units
Total Unit-based compensation financial liabilities, end of the year
The Unit-based compensation financial liabilities comprise:
As at December 31,
Current
LTIP
SELTIP
DUP
RUR Plan
UOP
Non-Current
RUR Plan
Total Unit-based compensation financial liabilities, end of the year
$
$
$
2016
46,163
19,679
–
(5,564)
60,278
2015
48,686
13,226
1,307
(17,056)
46,163
$
$
2016
2015
13,757
11,192
8,968
5,391
8,253
47,561
$
14,309
8,414
6,657
5,453
4,350
39,183
12,717
60,278
$
6,980
46,163
$
(1) Represents the accelerated vesting of previously-granted RUR Units relating to the departure of the former Chief Accounting Officer which has been
recognized in severance and other employee costs in the consolidated statements of income and comprehensive income.
Units or Unit-based compensation financial liabilities
held by trustees, officers and other senior management
As at December 31, 2016, 3.2% (December 31, 2015 – 3.3%)
of all Trust Units outstanding were held by trustees, officers and
other senior management of CAPREIT.
Normal course issuer bid (“NCIB”)
The table below summarizes the NCIB programs in place since
January 1, 2015. 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
Approval Limit
11,493,069
10,659,524
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. UNIT-BASED COMPENSATION EXPENSES
These costs represent Unit-based compensation expenses, which
include fair value remeasurement at each reporting date recog-
nized over the respective vesting periods for each plan for the
years ended December 31, 2016 and 2015, as follows:
Year Ended December 31,
UOP
LTIP
SELTIP
DUP
RUR Plan
EUPP
Unit-based compensation
$
2016
3,903
3,913
2,778
2,544
6,541
218
$
2015
2,461
4,047
1,149
1,644
3,925
191
expenses
$
19,897
$
13,417
a) UOP
Under the terms of the UOP, options are granted to trustees,
officers and key employees based on a performance incentive for
improved service and enhancing profitability. 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 compensa-
tion 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 August 3, 2016, the President and CEO was granted 153,780
options at an exercise price of $32.40 with an expiration date of
August 2, 2026 with a fair value of $4.07 per option at the date
of grant. The vesting of the options granted in 2016 is subject
to satisfaction of performance criteria over the annual reporting
period before they may be exercisable. As at December 31, 2016,
the options granted in 2016 have vested.
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 expiration date of October 8, 2025. The vesting of the options
granted in 2015 is subject to satisfaction of performance crite-
ria over the annual reporting period before they may be exercis-
able. 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 Decem-
ber 31, 2016 and 2015 is presented below. All Unit options are
exercisable as at December 31, 2016 and 2015.
(Number of Units)
For the Year Ended December 31,
Balance, beginning of the year
Granted
Exercised
Balance, end of the year
2016
1,334,432
153,780
–
1,488,212
2015
1,134,182
428,250
(228,000)
1,334,432
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:
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
2016
1,488,212
25.33
$
2015
1,334,432
24.52
$
1.4
4.0
7.0
19.4
1.1
4.5
7.7
20.6
$
5.55
$
3.26
b) LTIP and SELTIP
The Board of Trustees awarded LTIP and SELTIP Units, subject
to the attainment of specified performance objectives, to cer-
tain officers and key employees (collectively the “Participants”).
SELTIP Units were awarded to the Chief Executive Officer and
a former Chief Financial Officer of the Trust. The Participants
subscribed for Units of CAPREIT at a purchase price equal to
the weighted average trading price of the Units for five trading
days prior to issuance. The purchase price is payable in instal-
ments, with an initial instalment of 5% paid when the Units are
issued. The balance, represented by Instalment Receipts, is due
over a term not exceeding ten years for the LTIP and 30 years in
the case of the SELTIP. Participants are required to pay interest
at ten-year and 30-year fixed rates, respectively, based on the
Trust’s fixed borrowing rate for long-term mortgage financing,
and are required to apply cash distributions received by them
on these Units toward the payment of interest and the remaining
instalments. In the case of the SELTIP, following the tenth anni-
versary, cash distributions shall be applied to pay interest only
and any excess will be distributed to the Participants. Participants
may pre-pay any remaining instalments at their discretion. The
Instalment Receipts are non-recourse to the Participants and are
secured by the Units as well as the distributions on the Units. If a
Participant fails to pay interest and/or principal, CAPREIT may
elect to reacquire or sell the Units in satisfaction of the outstand-
ing amounts.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 97
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 outstand-
ing. The terms of the LTIP and SELTIP continue in effect as long as any awards pursuant to the LTIP and SELTIP remain outstanding.
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
2016
2015
LTIP
890,683
(260,000)
630,683
SELTIP
554,715
–
554,715
LTIP
1,407,683
(517,000)
890,683
SELTIP
817,914
(263,199)
554,715
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
2016
LTIP
9,800
(3,607)
6,193
$
$
SELTIP
$ 7,499
(319)
$ 7,180
2015
LTIP
$
$
16,095 $
(6,295)
9,800 $
SELTIP
11,309
(3,810)
7,499
The Instalment Receipts are recognized as a deduction from Unit-based compensation liability. During the years ended December 31,
2016 and 2015, interest payments in the amounts of $696 and $982, respectively, were applied to the outstanding Unit-based compensa-
tion 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
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 (1)
Weighted average risk-free rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit value
$
$
$
2016
630,683
4.62
15.15
9.57
8.13
0.8
4.0
1.6
19.1
21.81
$
$
$
$
2016
554,715
4.96
17.84
12.74
1.80
1.7
4.0
19.3
23.7
20.18
$
$
$
$
2015
890,683
4.61
15.56
10.78
8.89
0.5
4.5
2.3
18.3
16.06
$
$
$
$
2015
554,715
4.96
17.84
13.35
2.20
1.4
4.5
20.3
24.8
15.15
$
(1) Balance at maturity is based on the assumption SELTIP will be held till the end of the 30-year term.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 five trading days immediately preceding the date on which board compensation is payable. The maximum
Elected Percentage in respect of 2016 is 100% (2015 – 100%) of a trustee’s annual board compensation of $75 for 2016 and 2015.
The Deferred Units earn notional distributions based on the same distributions paid on the Units, and such notional distributions are
used to acquire additional Deferred Units (“Distribution Units”). The Deferred Units and additional Distribution Units are credited to
each trustee’s Deferred Unit account and are not issued to the trustee until the trustee elects to withdraw such Units. Each trustee may
elect to withdraw up to 20% of the Deferred Units credited to their Deferred Unit account only once in a five-year period. The fair value
of the Distribution Units represents the closing price of the Units on the TSX on the distribution date.
The fair value of such Units represents the closing price of the Units on the TSX on the last trading day on which the Units traded prior
to the reporting date, representing the fair value of the redemption price.
The details of the Units issued under the DUP are shown below:
December 31,
2016
2015
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
$
$
21.87 $
30.94
30.02
21.24
23.85 $
Fair Value
per Unit
26.84
–
–
–
31.37
Number
of Units
248,076
34,481
10,819
(7,500)
285,876
Weighted Avg.
Issue Price
$
$
20.48 $
27.99
27.63
21.54
21.87 $
Fair Value
per Unit
25.13
–
–
–
26.84
Number
of Units
206,726
37,488
9,664
(5,802)
248,076
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 specified performance objectives to certain officers and key employees (collectively the
“Participants”). The purpose of the RUR Plan is to provide its Participants with additional incentive and to further align the interests of
its Participants with Unitholders through the use of RURs which, on vesting, are exercisable for Units. RUR Plan Units will be issued from
treasury on vesting. The RURs vest in their entirety on the third anniversary of the grant date. The RURs earn notional distributions in
respect of each distribution paid on RURs commencing from the grant date and such notional distributions are used to calculate additional
RURs (“Distribution RURs”), which are accrued for the benefit of the Participants. The Distribution RURs are credited to the Participants
only when the underlying RURs on which the Distribution RURs are earned become vested. The fair value of the Distribution RURs is
based on the five-business-day weighted average closing price of the Units on the TSX prior to the distribution date.
The fair value of the RURs represents the closing price of the Units on the TSX on the last trading day on which the Units traded prior
to the reporting date, representing the fair value of the redemption price.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The details of the RURs granted under the RUR Plan (including the Distribution RURs) are as follows:
December 31,
2016
2015
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
$
$
22.78 $
28.64
29.95
20.14
24.25 $
Fair Value
per Unit
26.84
–
–
–
31.37
Number
of Units
586,313
131,772
28,677
(28,364)
718,398
Weighted Avg.
Issue Price
$
$
21.19 $
27.27
27.53
22.53
22.78 $
Fair Value
per Unit
25.13
–
–
–
26.84
Number
of Units
506,041
123,620
26,375
(69,723)
586,313
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.
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 with-
out Unitholder approval. No certificates for fractional Units will be issued and fractional Units will not entitle the holders thereof to vote.
By virtue of CAPREIT being an open-ended mutual fund trust, Unitholders of Trust Units are entitled to redeem their Units at any
time at prices determined and payable in accordance with the conditions specified in the DOT. As a result, under IFRS, Trust Units are
defined as financial liabilities; however, for the purposes of financial statement classification and presentation, the Trust Units may be
presented as equity instruments as they meet the puttable instrument exemption under IAS 32, Financial Instruments: Presentation. For
the purposes of presenting earnings on a per Unit basis as well as for Unit-based compensation plans, CAPREIT’s Trust Units are not
treated as equity instruments.
The number of issued and outstanding Trust Units (excluding Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s
incentive plans) is as follows:
For the Year Ended December 31,
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
Ref
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
2016
2015
127,139,897
110,088,079
5,126,000
1,791,680
43,542
3,529
23,810
–
260,000
–
134,388,458
14,275,000
1,688,603
41,385
4,061
34,570
228,000
517,000
263,199
127,139,897
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 10 0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
a) New Units Issued
August 2016 (the “August 2016 Equity Offering”)
Bought-Deal (August 3, 2016)
Over-allotment (August 3, 2016)
Total
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
Price
per Unit
Gross
Proceeds
Transaction
Costs
Net
Proceeds
Units
Issued
$
$
32.20
32.20
$ 150,052
15,005
$ 165,057
$
$
6,902
600
7,502
$ 143,150
14,405
$ 157,555
4,660,000
466,000
5,126,000
$
28.70
$ 250,264
$ 250,264
$
$
10,943
10,943
$ 239,321
$ 239,321
8,720,000
8,720,000
$
$
27.85
27.85
$ 140,643
14,064
$ 154,707
$
$
6,491
563
7,054
$ 134,152
13,501
$ 147,653
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 rein-
vested in additional Units.
c) Employee Unit Purchase Plan (“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.
d) Deferred Unit Plan (“DUP”)
During 2016, in accordance with the DUP, one trustee exercised
7,500 Deferred Units, out of which 3,529 DUP Units were settled
for an equivalent number of Trust Units, and the remaining DUP
Units were cancelled in consideration for withholding taxes owed
on the Trust Units issued. During 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 consider-
ation for withholding taxes owed on the Trust Units issued.
e) Restricted Unit Rights Plan (“RUR Plan”)
During 2016, 28,364 RUR Units were settled, out of which 23,810
RUR Units were settled for an equivalent number of Trust Units,
and the remaining RUR Units were cancelled in consideration of
withholding taxes owned to the Trust Units issued. During 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 with-
holding taxes owed on the Trust Units issued. In addition, during
2015, 2,285 RUR Units were cancelled.
f) Unit Option Plan (“UOP Plan”)
During 2015, 228,000 options were exercised and an equivalent
number of Trust Units were issued.
g) Long-Term Incentive Plan (“LTIP”)
During 2016, 260,000 Units previously issued were settled.
During 2015, 497,000 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”)
During 2015, 263,199 Units previously issued were settled.
The remaining instalments were repaid in full in respect of the
settled Units.
14. DISTRIBUTIONS ON TRUST UNITS
CAPREIT paid distributions to its Unitholders in accordance with
its DOT. Distributions declared by its Board of Trustees were
paid monthly, on or about the 15th day of each month. Effective
June 2016, monthly cash distributions declared to Unitholders
increased to $0.1042 ($1.25 annually) compared to $0.1017
($1.22 annually) since May 2015 and $0.098 per Unit ($1.18
annually) since June 2014.
Year Ended December 31,
Distributions declared
on Trust Units
Distributions per Unit
2016
2015
$
$
161,483
1.238
$ 142,973
1.207
$
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FINANCIAL INSTRUMENTS, INVESTMENT PROPERTIES AND RISK M ANAGEMENT
a) Fair value of financial instruments
The fair value of CAPREIT’s financial assets and liabilities, except as noted below and elsewhere in the consolidated annual financial
statements, approximates their carrying amount due to the short-term and variable rate nature of these instruments.
As at December 31, 2016, the fair value of CAPREIT’s mortgages payable is estimated to be $3,569,000 (December 31, 2015 – $3,237,000)
due to changes in interest rates since the dates the individual mortgages were financed and the impact of the passage of time on the
primarily fixed rate nature of CAPREIT’s mortgages. The fair value of the mortgages payable is based on discounted future cash flows
using rates that reflect current rates for similar financial instruments with similar duration, terms and conditions, which are considered
Level 2 inputs (as described below).
CAPREIT has classified and disclosed the fair value for each class of financial instrument based on the fair value hierarchy in accordance
with IFRS 13. The fair value hierarchy distinguishes between market value data obtained from independent sources and CAPREIT’s own
assumptions about market value. The hierarchy levels are defined below:
Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs based on factors other than quoted prices included in Level 1, 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 significance of a particular input to the fair value measurement in its entirety requires judgement, and
considers factors specific to the asset or liability.
The following table presents CAPREIT’s estimates of assets and liabilities measured at fair value on a recurring basis based on information
available to management as at December 31, 2016, and aggregated by the level in the fair value hierarchy within which those measure-
ments fall. These estimates are not necessarily indicative of the amounts CAPREIT could ultimately realize.
Recurring Measurements
Assets
Investment properties
Fee simple and MHC land lease sites
Operating leasehold interests
Land leasehold interests
Investments
Liabilities
Derivative financial intruments – interest
Derivative financial intruments – interest euro
Total
Level 1
Quoted prices in
active markets for identical
assets and liabilities
Level 2
Significant
other observable
inputs
Level 3
Significant
unobservable
inputs
Total
$
– $
–
–
25,958 (2)
– $ 6,829,587 (1) $ 6,829,587
–
627,740
–
184,690
–
25,958
627,740 (1)
184,690 (1)
–
–
–
$
25,958
$
(2,608) (3)
(2,608)
(1,518) (3)
(1,518)
(4,126) $ 7,642,017 $ 7,663,849
–
–
(1) Fair values for investment properties are calculated using the direct income capitalization and discounted cash flow methods, which results in these
measurements being classified as Level 3 in the fair value hierarchy. See note 6 for detailed information on the valuation methodologies and fair value
reconciliation.
(2) CAPREIT’s investments (excluding CAPREIT’s equity accounted investment in IRES) are accounted for as available-for-sale and are measured at fair value
based on the quoted market price in an active market of the asset.
(3) The valuation of the interest rate swap instrument is determined using widely accepted valuation techniques including discounted cash flow analysis on
the expected cash flows of the derivatives. The fair value is determined using the market standard methodology of netting the discounted future fixed cash
payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves)
derived from observable market interest rate curves. If the total mark-to-market value is positive, CAPREIT will consider a current value adjustment to
reflect the credit risk of the counterparty and if the total mark-to-market value is negative CAPREIT will consider a current value adjustment to reflect
CAPREIT’s own credit risk in the fair value measurement of the interest rate swap agreements.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although CAPREIT has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hier-
archy, 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, 2016, CAPREIT has assessed the significance of the impact of
the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjust-
ment is not significant to the overall valuation of the derivative. As a result, CAPREIT has determined that the derivative valuations in
their entirety should be classified as Level 2 of the fair value hierarchy.
b) Risk management
The main risks arising from CAPREIT’s financial instruments are interest rate, liquidity, credit and foreign currency risks. CAPREIT’s
approach to managing these risks is summarized as follows:
Interest rate risk
CAPREIT is subject to the risks associated with debt financing, including the risk that mortgages and credit facilities will not be able
to be refinanced on terms as favourable as those of the existing indebtedness. In addition, interest on CAPREIT’s bank indebtedness is
subject to floating interest rates. CAPREIT is also subject to the risks associated with changes in interest rates or different financing terms
from the hedging derivative assumptions, which may result in the hedging relationship being ineffective, causing volatility in earnings.
For the years ended December 31, 2016 and 2015, 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
+100
–100
+100
–100
Increase (decrease) in net income
Increase (decrease) in OCI
2016
(1,382)
1,382
–
–
1,150
(1,116)
$
$
$
$
$
$
2015
(933)
933
–
–
1,623
(1,592)
$
$
$
$
$
$
2016
–
–
3,550
(3,757)
–
–
$
$
$
$
$
$
2015
–
–
4,160
(4,155)
–
–
$
$
$
$
$
$
CAPREIT’s objective in managing interest rate risk is to minimize the volatility of earnings. As at December 31, 2016, interest rate risk
has been minimized as approximately 97.9% (December 31, 2015 – 98.9%) of the mortgages payable are financed at fixed interest rates,
with maturities staggered over a number of years.
Liquidity risk
Liquidity risk is the risk that CAPREIT may encounter difficulties in accessing capital and refinancing its financial obligations as they
come due. Approximately 96.6% of CAPREIT’s mortgages are CMHC-insured (excluding $261,859 of mortgages on the MHC), which
reduces the risk in refinancing mortgages. CAPREIT’s overall risk for mortgage refinancings is further reduced as the unamortized mort-
gage 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 refinancing of maturing debt, CAPREIT staggers
the maturity dates of its mortgage portfolio over a number of years.
In addition, CAPREIT manages its overall liquidity risk by maintaining sufficient available credit facilities and unencumbered assets to
fund its ongoing operational and capital commitments, distributions to Unitholders, and to provide future growth in its business. As at
December 31, 2016, CAPREIT had undrawn lines of credit in the amount of $275,922 (December 31, 2015 – $70,315).
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The contractual maturities and repayment obligations of CAPREIT’s financial liabilities as at December 31, 2016 are as follows:
Mortgages payable
Bank indebtedness
Mortgage interest (1)
Bank indebtedness interest (1)
Other liabilities
Security deposits
Exchangeable Units
Distributions payable
(1) Based on current in-place interest rates for the remaining term to maturity.
Credit risk
Credit risk is the risk that: (i) counterparties to contractual
financial obligations will default; and (ii) the possibility that
CAPREIT’s residents may experience financial difficulty and be
unable to meet their rental obligations.
CAPREIT monitors its risk exposure regarding obligations with
counterparties through the regular assessment of counterparties’
credit positions.
CAPREIT mitigates the risk of credit loss with respect to residents
by evaluating the creditworthiness of new residents, obtaining
security deposits wherever permitted by legislation, and geograph-
ically 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 recog-
nized in the consolidated statements of income and comprehen-
sive 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.
2017
227,454
–
103,146
673
101,168
29,975
5,061
14,123
481,600
2018–2019
715,452
26,408
183,058
673
1,518
–
–
–
927,109
$
$
2020–2021
762,184
–
135,862
333
–
–
–
–
898,379
$
$
2022 onward
$ 1,794,715
–
139,536
–
2,608
–
–
–
$ 1,936,859
$
$
Foreign currency risk
Foreign currency risk is the financial risk exposure to unan-
ticipated changes in the exchange rate between two currencies.
CAPREIT is exposed to foreign currency risk as CAPREIT’s func-
tional and presentation currency is Canadian dollars while the
functional currency of CAPREIT’s fund management subsidiary
in Dublin, Ireland, investment in IRES and CAPREIT’s subsidiary
in The Netherlands is the euro.
CAPREIT manages and mitigates the exposure to foreign currency
risk on its investment in IRES and subsidiary in The Netherlands
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 recog-
nized in the consolidated statement of income. The gain or loss on
foreign currency translation relating to CAPREIT’s Netherlands
subsidiary and the euro LIBOR borrowings is recognized in other
comprehensive income.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 104
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. REALIZED AND UNREALIZED GAINS AND LOSSES ON DERIVATIVE FINANCIAL INSTRUMENTS
a) Contracts for which hedge accounting is no longer effective
(i) During 2005, CAPREIT entered into interest rate forward contracts aggregating to $145,740 (the “Interest Rate Forward
Contracts”) to hedge its exposure to the potential rise in interest rates for refinancings of mortgages maturing in 2009.
CAPREIT settled these Interest Rate Forward Contracts in 2009. The associated cumulative unamortized loss of $9,908 included in
AOCL at September 30, 2008 is being amortized to mortgage interest expense over the original terms of the hedged contracts. For
the year ended December 31, 2016, $784 (December 31, 2015 – $986) was amortized from AOCL to mortgage interest expense.
b) Contracts for which hedge accounting is being applied
(i) CAPREIT has a $65,000 interest rate swap agreement fixing the bankers’ acceptance rate at 2.20%, which matures in September
2022, for which hedge accounting is being applied. The agreement effectively converts borrowings on a bankers’ acceptance-based
floating rate credit facility to a fixed rate facility for a 10-year term (see note 9 for further details). The related floating rate credit
facility is for a five-year non-revolving term with an effective interest rate of 3.60%, and any principal that is repaid may not be
reborrowed. The credit facility was amended effective June 30, 2016 and expires on June 30, 2021. On expiry of the term, it is
expected to be refinanced to match the term of the interest rate swap. The ineffective loss component of the hedge of $725 has
been recorded under (loss) gain on derivative financial instruments on the consolidated statements of income and comprehensive
income for the year ended December 31, 2016 and the cumulative mark-to-market loss of $2,608 is in other non-current liabilities
as at December 31, 2016.
The interest rate swap agreement has been summarized as follows:
As at December 31,
Hedge liability, beginning of the year
Change in intrinsic value
Hedge liability, end of the year
Hedge liability in AOCL, beginning of the year
Change in intrinsic value in OCI
Hedge liability in AOCL, end of the year
2016
(3,527)
919
(2,608)
(3,527)
1,644
(1,883)
$
$
$
$
2015
(886)
(2,641)
(3,527)
(886)
(2,641)
(3,527)
$
$
$
$
(ii) CAPREIT’s Netherlands subsidiary owns and operates properties in The Netherlands, a foreign jurisdiction. It is exposed to foreign
currency fluctuations arising between the functional currency of the foreign operation (the euro) and the functional currency of
CAPREIT (the Canadian dollar). As such, CAPREIT entered into a hedge effective at the date of The Netherlands acquisition
(December 23, 2016). CAPREIT hedged the net investment in The Netherlands foreign operations with €22,500 euro-denominated
debt on CAPREIT’s consolidated balance sheets. Any foreign currency gains/losses arising from the euro-denominated debt will be
offset by the foreign currency gain/loss arising from the investment in The Netherlands foreign operations. The effective portion
of foreign exchange gains and losses on the €22,500 euro-denominated debt was recognized in OCI.
(iii) In June 2011, CAPREIT entered into a hedging program, which effectively hedged interest rates on approximately $312,000 of
mortgages maturing between September 2011 and June 2013. The maturing mortgages have been refinanced for 10-year terms
and as a result bear interest rates between a floor rate of 3.00% and a ceiling rate of 3.62%, before the credit spread. The change
in the intrinsic value of the forward interest rate hedge has been included in OCI (see note 19). The hedging program matured in
June 2013, for which hedge accounting was being applied. The ineffective portion and the difference between the settled amount
and the mark-to-market has been recognized in net income. All contracts have been settled.
The forward interest rate hedge liability has been summarized as follows:
As at December 31,
Hedge liability in AOCL, beginning of the year
Amortization from AOCL to interest and other financing costs
Hedge liability in AOCL, end of the year
2016
(15,121)
2,288
(12,833)
$
$
2015
(17,409)
2,288
(15,121)
$
$
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 105
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Contracts for which hedge accounting is not being applied
17. CAPITAL M ANAGEMENT
(i) CAPREIT had quarterly foreign currency exchange
contracts aggregating to €2,800, which settled between
December 2013 and matured quarterly up till September
2015, which fixed the exchange rate between the euro and
the Canadian dollar, for which hedge accounting was not
being applied. All foreign currency exchange contracts have
settled since September 2015. 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, 2016, CAPREIT has a €40,000
interest rate swap agreement fixing the EURIBOR rate at
1.22%, which matures in August 2018, for which hedge
accounting is not being applied. The agreement effectively
converts borrowings on a EURIBOR-based floating rate
credit facility to a fixed rate facility for a five-year term
(see note 9 for further details). The mark-to-market gain
for 2016 of $328 has been recorded in net income and
the cumulative mark-to-market loss of $1,518 (including
$693 of crystalized loss previously recognized) is in other
liabilities as at December 31, 2016.
(iii) In October 2015, CAPREIT settled the $100,000 forward
interest hedge agreement fixing the Government of Canada
10-year bond at 1.44% effective October 29, 2015 and the
realized gain for 2015 of $416 has been recorded in net
income. The agreement effectively converted anticipated
mortgage financings of $100,000 for a 10-year term.
CAPREIT defines capital as the aggregate of Unitholders’ equity,
mortgages payable, bank indebtedness, Unit-based compensation
financial liabilities, and Exchangeable Units. CAPREIT’s objectives
when managing capital are to safeguard its ability to continue
to fund its distributions to Unitholders, to meet its repayment
obligations under its mortgages and credit facilities, and to ensure
sufficient funds are available to meet capital 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 financial covenants. In addition, borrowings must not
exceed the borrowing base, calculated at a predefined percentage
to the market value of the properties.
In the short term, CAPREIT utilizes the Credit Facilities to finance
its capital investments, which may include acquisitions. In the
long term, equity issuances, mortgage financings and refinancings,
including “top-ups”, are put in place to finance the cumulative
investment in the property portfolio and ensure that the sources of
financing better reflect the long-term useful lives of the 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 determined on a fair value basis or (ii) 70% of
gross book value determined on a historical basis, and may only
be increased above such limits with CMHC’s consent.
The LBA provides for, among other things: (i) certain financial
covenants and limitations on indebtedness; (ii) the posting
of a 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.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 106
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The total capital managed by CAPREIT and the results of its compliance with the key covenants are summarized as follows:
As at December 31,
Mortgages payable
Bank indebtedness
Unit-based compensation financial liabilities
Exchangeable Units
Unitholders’ equity
Total capital
Total debt to gross book value (1)
Tangible net worth (3)
Debt service coverage ratio (times) (2),(4)
Interest coverage ratio (times) (2),(5)
2016
$ 3,492,923
26,408
60,278
5,061
4,158,932
$ 7,743,602
2015
$ 3,097,773
168,211
46,163
4,330
3,659,953
$ 6,976,430
Threshold
Maximum 70.00%
Minimum $1,500,000
44.31%
$ 4,224,271
45.71%
$ 3,710,446
Minimum 1.20
Minimum 1.50
1.63
3.09
1.63
2.96
(1) CAPREIT’s DOT limits the maximum amount of total debt to 70% of the gross book value (“GBV”) of CAPREIT’s total assets. GBV is defined as
the gross book value of CAPREIT’s assets as per CAPREIT’s financial statements, determined on a fair value basis for the investment properties, plus
accumulated amortization on property, plant and equipment, CMHC fees and deferred loan costs. In addition, the DOT provides for investment restrictions
on type and maximum limits on single property investments.
(2) Based on the trailing four quarters.
(3) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unit-based rights and compensation
liabilities or assets, including Exchangeable Units added back. As at December 31, 2015 the tangible net worth requirement was $1,200,000 and was
amended to $1,500,000 effective June 30, 2016.
(4) As per the Credit Facilities agreement and DOT, the debt service coverage ratio is defined as earnings before interest, income taxes, depreciation and
amortization and other adjustments, including non-cash costs (“EBITDA”), less income taxes paid divided by the sum of principal and interest payments.
(5) As per the Credit Facilities agreement and DOT, the interest coverage ratio is defined as EBITDA less taxes paid divided by interest payments.
18. DEFERRED INCOME TA XES
For 2015 and 2016, CAPREIT is taxed as a “mutual fund trust” as defined 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 qualify as a Real Estate Investment
Trust eligible for the REIT Exception to the SIFT rules. The Trust expects to distribute all of its taxable income to its unitholders,
accordingly no provision for income tax has been made. Income tax obligations relating to the distributions from CAPREIT are with
the individual unitholder.
CAPREIT has foreign subsidiaries in a number of countries with varying statutory rates of taxation. Judgement is required in the
estimation of income taxes and deferred income tax assets and liabilities, in each of CAPREIT’s operating jurisdictions. Income taxes
may be paid on occasion where activities relating to the foreign subsidiaries are considered to be taxable in those countries.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 107
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. ACCUMULATED OTHER COMPREHENSIVE LOSS
As at December 31,
AOCL balance, beginning of the year
Other comprehensive income:
Amortization from AOCL to interest and other financing costs (1),(2)
Change in fair value of derivative financial instruments (note 16(b))
Change in fair value of investments
Foreign currency translation
Reversal of cumulative foreign currency translation relating to IRES ownership dilution
Other comprehensive income
AOCL balance, end of the year
As at December 31,
AOCL comprises:
Loss on derivative financial instruments
Cumulative realized loss (1)
Accumulated amortization to interest and other financing costs
Unamortized balance of loss on cash flow hedges previously settled
Loss on interest rate swap agreements
Loss on forward interest rate hedge (2)
Accumulated amortization to interest and other financing costs
Change in fair value of investments
Cumulative (loss) gain on foreign currency translation
Reversal of cumulative foreign currency translation relating to IRES ownership dilution
Cumulative realized gain on sale of investments
AOCL balance, end of the year
2016
(14,530)
$
2015
(27,284)
$
3,105
1,644
3,109
(5,914)
–
1,944
(12,586)
2016
(9,908)
7,920
(130)
(1,883)
(22,884)
10,051
6,733
(2,781)
3,127
(2,831)
(12,586)
$
$
$
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)
$
$
$
(1) The cumulative realized loss on derivative financial instruments aggregating to $9,908 will be amortized to net income as mortgage interest expense over
periods ending December 2016 to September 2022, being the original terms of the hedged contracts. The estimated amount of the amortization that is
expected to be reclassified to net income from AOCL in the next 12 months is $713.
(2) The realized loss component of the $22,884 OCI loss on forward interest rate hedges is $22,585, which will be amortized to net income as mortgage
interest expense over the original 10-year term of the hedged contracts. The estimated amount of the amortization expected to be reclassified to net income
from AOCL in the next 12 months is $2,283.
20. SEVER ANCE AND OTHER EMPLOYEE COSTS
22. JOINT ARR ANGEMENTS
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.
CAPREIT’s share of the assets, liabilities, revenues, expenses
and cash flows from joint arrangement activities is summarized
as follows:
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
2016
$ 108,927
2015
100,886
$
3,499
2,909
4,705
199
$ 117,330
3,988
194
107,977
$
(1) Includes amortization of deferred financing costs, fair value adjustments
and OCI hedge interest of $3,616 (December 31, 2015 – $2,976).
(2) Includes amortization of deferred loan costs of $664
(December 31, 2015 – $1,038).
Year Ended December 31,
Assets
Liabilities
Revenues
Expenses
Net income
2016
$ 203,874
75,493
15,938
4,289
11,649
$
2015
196,113
77,462
15,612
(2,455)
18,067
Cash provided by (used in):
Operating activities
Financing activities
Investing activities
$
$
$
8,914
(7,071)
(2,566)
$
$
$
9,011
(7,100)
(1,564)
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 108
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SUPPLEMENTAL CASH FLOW INFORMATION
a) Net income items related to investing and financing activities
d) Capital investments
Year Ended December 31,
Dividend and interest income
Interest paid on
Exchangeable Units
Interest paid on
mortgages payable
Interest paid on bank
indebtedness
Net disbursement
2016
4,519
$
2015
1,611
$
(199)
(194)
Year Ended December 31,
Capital investments
Change in capital investments
included in accounts payable
and other liabilities
(104,853)
(97,300)
Net disbursement
2016
$ (203,918)
2015
$ (169,456)
6,425
$ (197,493)
(4,571)
$ (174,027)
(4,045)
$ (104,578)
(2,973)
(98,856)
$
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 (disbursement)
2016
(807)
2015
(1,763)
$
$
(1,826)
2,002
(908)
4,906
(493)
2,866
(8,360)
(644)
(6,417)
(21)
8,330
2,934
14,138
(581)
1,999
(12,921)
$
$
c) Net cash distributions to Unitholders
Year Ended December 31,
Distributions declared
to Unitholders
Add:
Distributions payable
2016
2015
$ (161,483)
$ (142,973)
at beginning of year
(13,073)
(11,045)
e) Acquisition of investment properties
Year Ended December 31,
Acquired properties
Fair value adjustment
of assumed debt
Assumed debt
Deposit on purchases
Contributions from
2016
$ (414,668)
2015
$ (949,300)
773
25,356
–
374
3,030
12,510
non-controlling interest
Net disbursement
850
$ (387,689)
–
$ (933,386)
f) Disposition of investment properties
Year Ended December 31,
Proceeds
Closing costs
Mortgages assumed by
$
2016
60,606
(2,878)
2015
$ 170,450
(529)
purchasers and discharged
Net proceeds
(26,407)
31,321
$
(145,917)
24,004
$
g) Issuance of Trust Units
Year Ended December 31,
Issuance of Trust Units
Settlement of Unit-based
Compensation Awards
for Trust Units
Net proceeds
2016
$ 167,220
2015
$ 417,228
(5,306)
$ 161,914
(16,074)
$ 401,154
Less:
Distributions payable
at end of year
Less:
Distributions to
participants in the DRIP
Net disbursement
51,035
$ (109,398)
44,206
(96,739)
$
14,123
13,073
24. RELATED PARTY TR ANSACTIONS
a) On March 25, 2015, CAPREIT invested €23,500 in addition to
its initial investment in Ordinary Shares in IRES as part of IRES’s
€215,000 secondary equity offering. As at December 31, 2016,
CAPREIT has a 15.7% share ownership in IRES and has deter-
mined that it has significant influence over IRES. The share own-
ership is held through a wholly-owned subsidiary of CAPREIT,
Irish Residential Properties Fund. See note 5 for a more detailed
description.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 109
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective April 11, 2014, CAPREIT’s wholly-owned subsidiary,
IRES Fund Management Limited (“IRES FM”), entered into an
external management agreement, amended from time to time, to
perform certain property and asset management services for IRES.
On October 28, 2015, IRES FM 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 FM 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. The investment management agreement between IRES
FM and IRES came into effect, pursuant to which IRES pays 3.0%
per annum of its gross rental income as property management fees
and 0.5% per annum of its net asset value as asset management
fees to IRES FM. The investment management agreement governs
the provision of portfolio management, risk management and
other related services to IRES by IRES FM. It has an initial term
of five years, unless it is duly terminated pursuant to a provision
of the investment management agreement, and thereafter shall
continue in force for consecutive five-year periods.
Included in other income for the year ended December 31, 2016
is $5,188 (2015 – $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, 2016. The amount receivable from IRES as
at December 31, 2016 is $8,024 (2015 – $5,544).
David Ehrlich is the CEO and a director of the IRES board. He is
also a trustee of CAPREIT. Thomas Schwartz is a director (non-
executive) of the IRES board. He is also a trustee and the president
and chief executive officer of CAPREIT and each of its Canadian
subsidiaries and director of each of its Irish subsidiaries. Officers
and key management 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 €150,000 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, 2016 were $7,180 and
$5,953, respectively (December 31, 2015 – $7,499 and $6,417,
respectively). These amounts are taken into consideration when
calculating the fair value of the Unit-based compensation financial
liabilities. Key management personnel are eligible to participate
in the EUPP. In addition, certain key management personnel also
participate in the RUR, and trustees currently participate in the
DUP. Pursuant to employee contracts, key management personnel
are entitled to termination benefits that provides for payments of
up to 36 months of benefits (based on base salary, bonus and other
benefits) depending on cause.
Key management personnel and trustee compensation included in
the consolidated statements of income and comprehensive income
comprises:
Year Ended December 31,
Short-term employee benefits
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Severance and other benefits (1)
Total
2016
3,400
$
2015
4,468
$
3,763
7,163
4,012
8,480
13,662
–
20,825
$
6,103
2,074
16,657
$
(1) Costs related to the departure of the former Chief Accounting Officer are
included in severance and other employee costs for 2015.
c) In 2012, as previously disclosed, Intraurban Management
Services Inc., a company owned by a senior officer and trustee of
CAPREIT, terminated its contract for construction management
services with CAPREIT and effectively sold its business to a third
party. That transaction contemplated aggregate payments by such
third party of $1,850. The final payment of $364 was paid in the
fourth quarter of 2016.
d) CAPREIT has a lease for office space with a company in which
an officer has an 18% beneficial interest. The rent paid for the office
space for the years ended December 31, 2016 and 2015 was $1,035
and $942, respectively, excluding property operating costs, and has
been expensed as trust expenses. The lease expires on October 31,
2017. CAPREIT is in the process of renewing the lease. Minimum
annual rental payments for next year are as follows:
Minimum annual rent
2017
419
$
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 110
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. COMMITMENTS
Natural gas
Through the combination of fixed and variable price contracts, CAPREIT is committed as at December 31, 2016, in the aggregate amount
of $14,572 for its natural gas and transport requirements. These commitments, which range from one to three years, fix the price of
natural gas and transport for a portion of CAPREIT’s requirements as summarized below.
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
2017
2018
2019
2020
$
$
2.91
58.5%
$
2.95
50.7%
$
2.84
48.8%
1.25
69.9%
$
1.00
49.2%
$
0.96
47.6%
$
$
2.79
32.9%
0.95
32.9%
(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, 2016 and 2015, total expenses under these four leases were $2,716 and $2,808, respectively.
Annual lease payments under these four leasehold interests are included in property operating costs. Minimum annual rent for the next
five years and thereafter under these four leases is as follows:
Minimum annual rent
$
2017
1,323
$
2018
1,323
$
2019
1,323
$
2020
1,323
2021
$
1,323 $
Thereafter
38,676
Property capital investments
Commitments primarily related to capital investments in investment properties of $36,484 were outstanding as at December 31, 2016
(December 31, 2015 – $29,247).
26. CONTINGENCIES
CAPREIT is contingently liable under guarantees provided to certain of CAPREIT’s lenders in the event of default, and with respect
to litigation and claims that arise in the ordinary course of business. Matters relating to litigation and claims are generally covered by
insurance, or have been provided for in Trust expenses where appropriate.
27. SUBSEQUENT EVENTS
On February 15, 2017, CAPREIT completed the disposition of a 31-suite property located in Saskatoon, Saskatchewan for a sale price
of $2,025. The mortgage was repaid with proceeds of the sale totalling approximately $1,356 with an interest rate of 4.12% and the
remaining proceeds were used to repay a portion of the Acquisition and Operating Facility.
On February 16, 2017, CAPREIT announced it has waived conditions and will acquire a luxury 256-suite residential apartment property
located in the Côte-Saint-Luc neighbourhood in the Greater Montréal Area. The purchase price, to be initially financed in cash from
CAPREIT’s Acquisition and Operating credit facility, is $23,500. Closing of the transaction is expected on or before May 3, 2017.
On February 27, 2017, CAPREIT announced that its Board of Trustees had approved a 2.4% increase in monthly cash distributions
to $0.1067 per Unit, or $1.28 per Unit on an annualized basis. The increase is effective with the March 2017 distribution payable on
April 17, 2017 to Unitholders of record as at March 31, 2017.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 111
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIVE YEAR REVIEW
($ Thousands, except per Unit amounts)
Year Ended December 31,
2016
2015
2014
2013
2012
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 (%)
$
$
$
$
$
596,831
366,947
61.5
439,413
231,808
164,413
70.9
72.9
$
$
$
$
$
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
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
$
$
1.772
1.238
130,794
48,767
47,612
$ 7,642,017
$ 4,158,149
98.6
$
$
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
44.0
3.09
3.20
6.1
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
Inception (%)
Unit Price at End of Year
1,182
31.37
$
950
26.84
$
839
25.13
$
652
21.25
$
736
24.90
$
(1) Includes deferred financing costs and fair value adjustments.
C A NA DI A N A PA RTMENT PROPERTIES R E A L ESTATE IN V ESTMENT TRUST 2016 A NNUA L R EPORT / 112
UNITHOLDER INFORMATION
BOARD OF TRUSTEES
OFFICERS
HEAD OFFICE
Michael Stein
Chairman and Chief Executive
Officer of MPI Group Inc.
Thomas Schwartz
President and Chief
Executive Officer
Thomas Schwartz
President and Chief
Executive Officer
Michael Stein
Chairman
David Ehrlich
Chief Executive Officer, Irish
Residential Properties REIT plc
Harold Burke 1
Senior Vice President
of Taxation, DREAM
Unlimited Corp
Stanley Swartzman 2, 3, 4
Corporate Director
Scott Cryer
Chief Financial Officer
Mark Kenney
Chief Operating Officer
Roberto Israel
Chief Information Officer
Jodi Lieberman
Chief Human Resources
Officer
Elaine Todres 3, 4
President,
Todres Leadership Counsel
Corinne Pruzanski
General Counsel and
Corporate Secretary
David Sloan 1, 2
Corporate Director
Edwin Hawken 1, 2
Corporate Director
Paul Harris 1, 3, 4
Partner, Davis, Ward, Phillips
and Vineberg LLP (a law firm)
NOTES TO BOARD OF TRUSTEES:
1 Audit Committee
2 Investment Committee
3 Governance and Nominating
Committee
4 Human Resources and
Compensation Committee
11 Church Street, Suite 401
Toronto, Ontario M5E 1W1
Tel: 416.861.9404
Fax: 416.861.9209
INVESTOR INFORMATION
Analysts, Unitholders and
others seeking financial data
should visit CAPREIT’s website
at www.caprent.com or
www.capreit.net or contact:
Thomas Schwartz
President and Chief
Executive Officer
Tel: 416.861.9404
E-mail: ir@capreit.net
Website
www.caprent.com or
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 2014 – April 2015:
$0.098 ($1.18 annually)
May 2015 – May 2016:
$0.102 ($1.22 annually)
June 2016 – December 2016:
$0.104 ($1.25 annually)
Annual Unitholders’ Meeting
The Annual Meeting of
Unitholders will be held at
4:30 p.m. EDT on
Wednesday, May 24, 2017 at
One King West Hotel
1 King Street West
Toronto, Ontario M5H 1A1
PLATINUM | CANADA | 2017
We are very proud to have been selected as one of Canada’s Best Employers for the
fourth consecutive year in 2016. Our people are our most important asset, and it is
their engagement and commitment that allow us to continue striving for excellence
and to be the best in our business.
www.capreit.net