19 97–2 017 • CAPREIT 2017 ANNUAL REPORT
SOLID
GOLD
RECORD
FOR
20 YEARS
THOMAS S.
SCHWARTZ
CAPREIT
PROFILE
Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”) is a growth-oriented investment
trust owning interests in multi-unit residential complexes, including apartment buildings, townhomes and
manufactured home communities (“MHCs”), principally located in or near major urban centres across Canada.
Tom was a founder of CAPREIT in
1997 and its President and CEO from
August 1998 until his death in August
2017. Tom cared deeply about his
business; he was a true gentleman,
a thoughtful leader, and a mentor
to many. Through his exceptional
leadership, his deep industry experience
and his unparalleled reputation, he
made an invaluable contribution to
CAPREIT and the Canadian business
community. However, his greatest
legacy is the team he developed
over the past 20 years at CAPREIT,
people who will continue to build
on the culture of performance
and success he fostered.
2017 HIGHLIGHTS
AND OBJECTIVES
Highlights
• Further strengthened size and scale with
acquisition of 1,924 residential suites for a total
cost of $470.5 million
• Enhanced portfolio diversification with purchase
of 1,520 suites in The Netherlands
• Revenues, NOI and NFFO up again on strong
organic growth and contribution from
acquisitions
• Average monthly rents rose 4.1% with near-full
occupancy of 98.7%
• Continuing strong organic growth with same-
property NOI up 2.9%
• Accretive growth continues with NFFO up 4.0%
to $1.842 per Unit
• Maintained strong conservative NFFO payout
ratio at 70.3%
Objectives
• To provide Unitholders with long-term, stable
and predictable monthly distributions;
• To grow Normalized Funds From Operations
(“NFFO”), sustainable distributions and Unit
value through the active management of our
properties, accretive acquisitions, developments,
intensifications, and strong financial manage-
ment; and
• To invest capital within the property portfolio
in order to ensure the life safety of residents and
maximize earnings and cash flow potential.
Weighted Average Number of Units – Basic (000s)
Year Ended December 31,
Portfolio Performance
Overall Portfolio Occupancy 1
Overall Portfolio Average Monthly Rents 1
Operating Revenues (000s)
NOI (000s)
NOI Margin
Operating Performance (2)
FFO per Unit – Basic
NFFO per Unit – Basic
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
Other
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units 1
Market Capitalization (millions) 5
2017
2016
$
$
$
$
$
$
98.7%
1,044
638,842
393,258
61.6%
1.806
1.842
135,962
1.275
71.7%
70.3%
43.57%
56.24%
3.08%
5.7
1.63
3.19
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
1,924
81
37.32
5,182
$
$
2,552
579
31.37
4,290
$
$
Available Liquidity – Acquisition and Operating Facility (000s) 1
$
86,742
$ 275,922
SOLID
GOLD
RECORD
FOR
20 YEARS
2017 SELECTED FINANCIAL HIGHLIGHTS
Another Year of
Strength and Diversification
2017 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.
Year Ended December 31,
2017
2016
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
98.7%
1,044
638,842
393,258
61.6%
1.806
1.842
135,962
1.275
71.7%
70.3%
43.57%
56.24%
3.08%
5.7
1.63
3.19
86,742
1,924
81
37.32
5,182
$
$
$
$
$
$
$
$
$
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
$
$
Notes
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 in the
Liquidity and Financial Condition section).
6
Payout ratio (a Non-IFRS Measure) is
calculated based on distributions declared
as a percentage of FFO and NFFO.
See Section III for details.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
1
Mark Kenney
Chief Operating
Officer
Corinne Pruzanski
General Counsel
and Corporate Secretary
Roberto Israel
Chief Information Officer
David Ehrlich
President and
Chief Executive Officer
Jodi Lieberman
Chief Human
Resources Officer
Scott Cryer
Chief Financial
Officer
CAPREIT 2017 MESSAGE TO UNITHOLDERS
Twenty Years of Growth and
Superior Performance
2017 was another exceptional year for CAPREIT. Once again we strengthened and diversified our property
portfolio and generated industry-leading organic growth, while continuing to maintain a strong and conservative
financial position. In 2017 we also celebrated 20 years of advancement and superior performance since our
Initial Public Offering in 1997. We look ahead, confident we have the assets, the team and the proven strategies
to continue delivering stable, sustainable and growing returns to our Unitholders for years to come.
1997
Initial Public
Offering
1998
Entered Montréal
market
1999
Internalized
property and asset
management
2000
Launched
innovative DRIP
for Unitholders
2002
Entered Québec
City and Calgary
markets
2003
Entered Halifax and
London markets
2004
ResREIT acquisition
doubled portfolio,
extended presence
from coast to coast
2
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
Scott Cryer
Chief Financial
Officer
SOLID
GOLD
RECORD
FOR
20 YEARS
638,842
596,831
533,798
506,411
477,023
2013
2014
2015
2016
2017
393,258
366,947
324,614
303,885
273,854
2013
2014
2015
2016
2017
250.5
231.8
200.0
183.4
159.4
2013
2014
2015
2016
2017
ANOTHER YEAR OF
RECORD PERFORMANCE
Once again in 2017, we strengthened
our portfolio by acquiring 1,924 residen-
tial suites in our key target markets for
a cost of $470.5 million, further enhanc-
ing and diversifying our asset base. With
this increase in our portfolio, combined
with continuing high stable occupancies,
increasing average monthly rents, and
our successful focus on cost controls and
operational efficiencies, Net Operating
Income (“NOI”) rose a very strong 7.2%
to $393.3 million for the year. For our
stabilized property portfolio, NOI was up
a solid 2.9%, another year of industry-
leading organic growth.
Normalized Funds From Operations
(“NFFO”), our key performance bench-
mark, increased 8.1% for the year to
$250.5 million, resulting in strong accretive
growth as NFFO per Unit rose to $1.842
per Unit, up from $1.772 per Unit in 2016
despite the 4.0% increase in the weighted
average number of Units outstanding
during the year. Our payout ratio of distri-
butions declared to NFFO also remained
very conservative at 70.3%.
Importantly, we continue to maintain one
of the strongest balance sheets in our
business. Total debt to gross book value
OPERATING
REVENUES
($ Thousands)
Acquisitions, high occupancies
and increased average monthly
rents contribute to stable and
consistent growth in operating
revenues
NET OPERATING
INCOME
($ Thousands)
Strong revenue growth combined
with proven management
programs generating stable NOI
growth with industry-leading
NOI margins
NORMALIZED
FUNDS FROM
OPERATIONS
($ Thousands)
Strong and accretive growth
in NFFO and NFFO per unit
despite increases in number of
units outstanding
2007
Entered manu
factured home
communities
market
2011
Marked six years of
consistent organic
growth
2012
Achieved $4.9
billion in assets
2013
Chosen one of
Canada’s 50 Best
Employers
2014
Entered Dublin
Ireland market
2016
Entered The
Netherlands
market
2017
Celebrating 20
years of growth
and success
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3
CAPREIT’S High-Quality
Canadian Portfolio
CAPREIT’S highquality property portfolio is welldiversified both
demographically and by property type, and is strongly positioned in key
Canadian urban markets. Since 1997 CAPREIT has increased its presence
in the higherreturn luxury and midtier demographic segments while
entering the stable and growing manufactured home communities market
Units Breakdown
13%
6%
33%
25% 40%
Dec 31
1997
35%
Dec 31
2017
48%
2017
Total Units
Occupancy
Average Monthly Rent
Luxury
Midtier
Affordable
MHC
48,536
98.9%
$ 1,040
15,773
23,299
3,008
6,456
CANADA
51%
Ontario
22%
Québec
10%
British
Columbia
6%
Alberta
1%
Saskatchewan
5%
New
Brunswick
3%
Nova
Scotia
2%
Prince
Edward
Island
4
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SOLID
GOLD
RECORD
FOR
20 YEARS
50,624
TOTAL SUITE
COUNT
Through a series of accretive acquisitions, CAPREIT has built a
strong and diversified property portfolio, becoming one of Canada’s
largest owners and operators of residential rental properties.
50000
45000
40000
35000
30000
25000
20000
15000
10000
5000
TOTAL SUITE COUNT
2900
0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
STRONG AND
STABLE ORGANIC
GROWTH
As CAPREIT has grown and diversified its portfolio, it has generated
consistently high occupancies with growing average monthly rents.
$ 1000 –
$ 800 –
$ 600 –
$ 400 –
$ 200 –
$ 0
–
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
–
100%
–
–
–
–
–
–
–
–
–
–
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
5
ratio was a conservative 43.6% at
year-end, well within our guidelines. Our
mortgage profile remained well-balanced,
with the weighted average interest rate
declining to 3.08% at December 31,
2017 and a weighted average term to
maturity of 5.7 years, adding to the
stability of our long-term cash flows.
CAPREIT established two key goals with
its initial public offering in 1997: to provide
Unitholders with long-term, stable and
predictable monthly cash distributions,
and to grow distributable income
and Unit value through the active man-
agement of our properties, accretive
acqui sitions, and strong financial man-
agement. 2017 was another year in
which we achieved these objectives,
capping 20 years of growth and superior
performance. As we look ahead, we
will continue to focus on the same
strategies that have led to the remarkable
achievements generated over the past
two decades, as well as pursue accretive
opportunities, such as development,
to continue providing solid growth.
PORTFOLIO
GROWTH
From an initial portfolio of only 2,900
apartment suites in November 1997, all
located within the Greater Toronto Area,
a series of accretive property and port -
fo lio acquisitions over the past 20 years
has significantly expanded our asset
base, transforming CAPREIT into one of
Canada’s largest owners and managers
of residential rental properties.
CAPREIT’S Dublin,
Ireland Investment
CAPREIT acquired its initial properties in Dublin in 2014,
subsequently selling them to Irish Residential Properties
REIT plc (“IRES”), listed on the Irish Stock Exchange, a new
REIT in which CAPREIT currently owns a 15.7% interest,
and has generated strong returns including $7.1 million in
dividends for 2017. In addition, CAPREIT has earned a total
of $6.2 million in property management and other fees
from IRES for 2017.
DUBLIN
Units Breakdown
Total Units
Occupancy
Average Monthly Rent
2,450
99.8%
€1,517
6
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SOLID
GOLD
RECORD
FOR
20 YEARS
– 120%
– 100%
– 80%
– 60%
– 40%
– 20%
– 0%
STRONG ACCRETIVE
GROWTH
CAPREIT has generated solid accretive growth with
conservative payout ratios through all economic cycles.
NFFO per Unit
NFFO Payout Ratio
$ 1.800 –
1.600 –
1.400 –
1.200 –
1.000 –
0.800 –
0.600 –
0.400 –
0.200 –
0.000 –
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
INCREASING CASH
DISTRIBUTIONS
CAPREIT remains focused on generating stable, sustainable
and growing cash distributions for its Unitholders.
Annualized
Monthly
Cash
Distributions
Dec. 31, 1997
$0.73
Dec. 31, 2017
$1.28
INCREASES IN
14
20
YEARS
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
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Recognizing that a strong and diver-
sified property portfolio generates
more stable and secure returns for
our Unitholders, we expanded our
geographic presence from coast
to coast across Canada and, more
recently, internationally with our entry
into the Dublin, Ireland and The Nether-
lands markets. We also increased
our presence in the higher margin
luxury and mid-tier demographic
segments, while maintaining a solid
foothold in the growing affordable
segment. In 2007 we made our first
investment in the manufactured home
communities (“MHCs”) business,
a stable and growing sector of the
rental residential business, and
have grown our portfolio of MHCs,
representing approximately 13%
of our total portfolio.
In 2016 we embarked on a new
approach to accretively grow our
business and build value for our
Unitholders. We own a number of
properties where there is sufficient land
on which we believe we can develop
new apartment buildings, investments
that could generate strong and accretive
returns as there are no land costs
associated with this growth. We are
also partnering with other real estate
companies to bring our residential
rental expertise to new development
opportunities through joint venture
acquisitions and property developments.
Both of these new growth programs
are exciting and very accretive oppor-
tunities for CAPREIT.
CAPREIT’S Portfolio
in The Netherlands
CAPREIT acquired its initial properties in The Netherlands in
November 2016, subsequently growing its portfolio to 2,088
residential suites welllocated in key urban centres across the
country. The $9.3 million in NOI generated by the portfolio in
2017 is expected to grow significantly as recent additions
to The Netherlands portfolio contribute to CAPREIT’s growth
in the years ahead.
NE THERL ANDS
Units Breakdown
24%
37%
39%
Total Units
Occupancy
Average Monthly Rent
Luxury
Midtier
Affordable
2,088
94.8%
€1,122
498
815
775
8
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SOLID
GOLD
RECORD
FOR
20 YEARS
“
Since
CAPREIT’s
founding
in 1997,
we have
consistently
maintained
near-full
occupancies,
averaging
more than
98% over
the past
20 years.
“
ACTIVE
PORTFOLIO
MANAGEMENT
Success in the rental residential busi -
ness is measured by high, stable
occu pancies and achieving the highest
monthly rents in our regional markets.
Since CAPREIT’s founding in 1997,
we have consistently maintained near-
full occupancies, averaging more
than 98% over the past 20 years.
With our highly focused property
investments and our emphasis on
providing our residents with high quality
and safe accommodation, average
monthly rents in our stabilized apart-
ment and townhome portfolio have
consistently grown, generally exceeding
rents in neighbouring non-CAPREIT
properties. Our MHC portfolio
has also generated highly stable
occupancies and average monthly
rents. This focus, combined with the
increases in the size and scale of
our property portfolio, has resulted
in an enviable track record of revenue
growth. We believe this success will
continue going forward.
As our portfolio has grown, we have
also implemented numerous cost
control and operating efficiencies in
order to enhance profitability by capital-
izing on the increase in our size and
scale. Programs such as centralized
purchasing, portfolio-wide contracts
and our highly efficient regional office
operating structure have all contributed
to growth in our NOI and our NOI
margins. As a measure of our success,
our NOI margin for 1998, our first full
year of operations, when we owned only
5,637 suites, was 51.0%. For the year
ended December 31, 2017, our NOI
margin was a much stronger 61.6%,
a clear indication that our strategies
are working.
Another key measure of success is
the increased contribution from our
stabilized portfolio. When we acquire
a property, we immediately apply
our proven sales, marketing, cost
control and operating programs,
combined with focused property
investments, to ensure each property
meets CAPREIT’s high standards. A
stabilized property is one that CAPREIT
has owned for more than two years,
and over the last 12 years we have
generated a track record of consistent
and industry-leading organic growth
in our stabilized portfolio. For the year
ended December 31, 2017, NOI from our
stabilized portfolio rose 2.9%, another
demonstration that our property invest-
ment and management strategies are
realizing significant benefits for
our Unitholders.
STRONG
FINANCIAL
MANAGEMENT
While we have been growing and
investing in our property portfolio, we
have also focused on ensuring we
maintain a highly conservative and flexi-
ble balance sheet and financial position.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
9
“
Over the past
20 years
we have
increased
monthly cash
distributions
14 times,
rising from
an initial
$0.73 per
Unit to $1.28
per Unit in
2017.
“
Over the past 20 years we have
efficiently and effectively accessed
the debt and capital markets while
re-investing the growing cash flows
from our property portfolio to maintain
industry-leading leverage and financial
ratios. We have also capitalized on the
low interest rate period over the past
years to build a very conservative debt
profile with a low weighted average
interest rate. These factors all contribute
to our ability to deliver Unitholders
stable, sustainable and growing
cash distributions going forward while
ensuring we have the financial resources
and flexibility to maintain our track
record of growth and success.
OUR
ULTIMATE
GOAL
At CAPREIT we recognized from the
outset that our ultimate goal was to
provide our Unitholders with stable and
increasing monthly cash distributions
and growing Unit value. Over the
past 20 years we have increased
monthly cash distributions 14 times,
rising from an initial $0.73 per Unit
to $1.28 per Unit in 2017. At the
same time, CAPREIT’s unit value
has risen significantly such that our
Unitholders who invested in our initial
public offering have received a total
return of 1,516%, well above the total
return of 708% for the TSX real estate
index and the 316% for the overall
Toronto Stock Exchange. We are very
proud of what we have accomplished
for our Unitholders, and remain commit-
ted to this key objective going forward.
REMEMBERING
TOM
SCHWARTZ
In August we were all saddened by the
passing of one of CAPREIT’s founders,
President and CEO Tom Schwartz. Under
Tom’s leadership and guidance, CAPREIT
was transformed into one of Canada’s
largest residential landlords with an
enviable track record. However Tom’s
most enduring legacy will be the team
he developed and mentored at CAPREIT,
people who will continue to build on the
culture of entre preneurship, performance
and success he encouraged over the
past 20 years. It is no surprise that Tom’s
focus on people has been recognized,
with CAPREIT being acknowledged
as one of Canada’s best employers, at
the Platinum Level for 5 consecutive
years. At CAPREIT, our team is our most
important asset, and we look forward
to building on Tom’s legacy through
continued growth and increasing
Unitholder value in the years ahead.
DAVID EHRLICH
President and Chief Executive Officer
MICHAEL STEIN
Chairman
10
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
CSR AND
FINANCIAL
REPORTING
CSR AND
FINANCIAL
REPORTING
CORPORATE AND SOCIAL
RESPONSIBILITY REPORTING
SECTION V
57 Selected Consolidated Quarterly
Information
13 Celebrating 20 Years of Responsible and
60 Selected Consolidated Financial
Sustainable Business Practices
14 Corporate Social Responsibility
and Sustainability
Information
SECTION VI
60 Accounting Policies and Critical
Estimates, Assumptions, and
MANAGEMENT’S DISCUSSION
Judgements
AND ANALYSIS
62 Controls and Procedures
SECTION I
19 Forward-Looking Disclaimer
19 Non-IFRS Financial Measures
20 Overview
22 Objectives
22 Business Strategy
23 Key Performance Indicators
24 Performance Measures
25 Property Portfolio
28
Investment Properties
SECTION II
30 Average Monthly Rents
and Occupancy
33 Results of Operations
36 Net Operating Income
37 Stabilized Portfolio Performance
39 Net Income and Other
Comprehensive Income
SECTION III
SECTION VII
63 Risks and Uncertainties
68 Related Party Transactions
69 Commitments and Contingencies
SECTION VIII
70 Subsequent Events
70 Future Outlook
CONSOLIDATED ANNUAL
FINANCIAL STATEMENTS
72 Management’s Responsibility for
Financial Statements
73
Independent Auditor’s Report
74 Consolidated Balance Sheets
75 Consolidated Statements of Income and
Comprehensive Income
76 Consolidated Statements of
Unitholders’ Equity
42 Non-IFRS Financial Measures
77 Consolidated Statements of Cash Flows
42 Per Unit Calculations
78 Notes to Consolidated Financial
SECTION IV
47 Property Capital Investments
51 Capital Structure
52 Liquidity and Financial Condition
Statements
110 Five-Year Review
IBC Unitholder Information
12
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CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
Celebrating Twenty Years
of Responsible and Sustainable Business Practices
In 2017, CAPREIT celebrated twenty years of continued growth. Our proven property
and asset management strategies have led to our track record of success and
remain our platform for future growth.
Each year we continue to share our
progress in meeting established goals
related to our corporate social responsi-
bility and sustainability initiatives. Our
industry leading practices are another
reason we have been able to deliver a
strong, stable and sustainable track
record of growth and success over the
past twenty years.
DAVID EHRLICH
President and Chief Executive Officer
We are very proud to deliver sustainable
growth while focusing on building
strong relationships with our residents,
and strengthening our environmental
stewardship while engaging in the
communities in which we operate. We
have focused on building a business
on a foundation of responsible and
sustainable practices.
Our track record of success over the
past twenty years has been achieved
with the dedication, commitment and full
engagement of our people. At CAPREIT,
we have a talented team dedicated to
meeting CAPREIT’s long-term goals and
objectives. In 2017, we were honoured
to have been selected as a Platinum
Level Aon Hewitt Best Employer in
Canada for a fifth consecutive year for
our outstanding employee engagement.
This recognition is a testament to our
continued focus on cultivating the talent
and potential of our people.
We pride ourselves on the strong and
enduring relationships we have with
our residents who call our apartments
their home. We work hard to ensure
our tenants are satisfied, and throughout
this year will continue to listen to our
residents and focus on areas of improve-
ment. As we grow and expand, we
aim to identify and explore the use of
technology in more open communication
and continuous feedback between
our residents and employees.
Reducing our environmental footprint is
another goal of our sustainable business
practices. We continue to make invest-
ments in energy-efficient initiatives as
well as educating our teams to look for
opportunities to operate and maintain
our buildings more efficiently.
At CAPREIT we also believe in
supporting the communities in which
we operate. In 2017, we encouraged
our residents and employees to partici-
pate in community initiatives. We will
continue to invest in our communities to
ensure they are modern and efficient
while improving the environment in
which we live.
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CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
Corporate Social Responsibility and Sustainability
CAPREIT is Canada’s largest publicly traded residential
landlord, serving more than 50,600 families. CAPREIT owns
and operates a large portfolio of multi-unit residential rental
properties, including apartments, townhomes and manu-
factured home communities, located principally in or near
major urban centres across Canada and The Netherlands.
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 Board of Trustees and Management have made
sustainable business practices a priority, seeking to incor-
porate the principles of sustainability into CAPREIT’s long-term
business strategy, corporate culture and operations. The goals
of this focus are to operate the business safely and more
efficiently, use energy more wisely and produce less waste,
while retaining and attracting the best employees and
residents. Management believes this approach will lead to
better risk management, cost efficiency, innovation, and
operational and sustainable financial performance.
In line with Management’s commitment to best practices in
communication, CAPREIT’s annual reporting incorporates cor-
po rate social responsibility and sustainability information deemed
relevant and material to CAPREIT’s employees, resi dents and
investors. Such reporting will better demonstrate how the busi-
ness is managed and how financial and non-financial objectives
contribute to CAPREIT’s long-term sustainability.
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 longterm, sustainable growing
distributions and profitable growth for Unitholders.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
CORPORATE SOCIAL
RESPONSIBILITY AND
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 volatil-
ity, programs to reduce the consumption of natural resources, targeted capi-
tal investments to enhance the comfort and safety of residents, philanthropic
and charitable efforts, and tenant satisfaction and employee engagement
initiatives. CAPREIT was able to meet and exceed many of the key targets
it set for 2017, benefiting several key stakeholders.
– Recognized as Best Initiative in Waste Reduction Using Data for 5 and
15 Tangreen Court by the City of Toronto Mayor’s Towering Challenge
–
Inducted into the 2017 Burlington Hydro Conservation Hall of Fame
– Embedded an Energy Manager through the Independent Electricity
System Operator (IESO) incentive program to maximize electricity-
saving opportunities in our Ontario portfolio
– Completed the Building Operator Certificate course in energy
efficiency through the Save On Energy Training Incentive program with
14 CAPREIT employees becoming certified building operators
CAPREIT achieved the following goals in 2017:
Employment practices
– Selected as a Platinum Level Aon Hewitt Best Employer in Canada for
a fifth consecutive year for our outstanding employee engagement
– Delivery of nationwide training to create a high-performance culture via
performance management and fostering an environment of innovation
through open communication and continuous feedback
Introduction of our new leadership competency framework aligned
to our management philosophy and business strategy
–
– Expansion of the role-based training for property management
Corporate governance
– Committed to sound corporate governance practices
– Continued improvement in the transparency and timely disclosure
of corporate results and events
– Committed to gender diversity, with women occupying 2 of 7 board
positions and 36% of senior management roles
Investors
–
Increased cash distributions for the nineteenth time since IPO to
$1.28 per Unit annually
professionals in order to foster growth and development
– Continued to maintain conservative total debt to gross book value ratios
– Enhancements to our online Learning Management System (“LMS”)
with customized, industry-specific training content delivered to all
employees in Canada and Ireland
and weighted average term to maturity for the mortgage portfolio
– Maintained a minimum of $130 million of unencumbered assets
– Expanded into new markets with the acquisition of an additional
– Creation of Building Leaders Program, a new Leadership Excellence
and Development (“LEAD”) program that cultivates the leadership
potential of high-performing property managers
– Launch of our human resources information system (“HRIS”) for
all employees in Ireland
1,924 apartment suites in The Netherlands
– Continued stabilized net operating income growth and sustained
overall portfolio occupancy at above 97%
Resident satisfaction
– $38.7 million in structural capital investments for enhanced life safety
FUTURE TARGETS
and property improvement
2018
– Continued to enhance the tenant experience by streamlining customer
relationship management
– Continued to maintain CAP CARES, a 24/7 urgent maintenance
request line for residents
– Preliminary 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
Employment practices
– Delivery of a new recruitment portal and employee onboarding tool
in order to enhance CAPREIT’s ability to attract and retain top talent
– Rollout of a training program focused on the use of our human
resources information system (“HRIS”) as a tool for driving the
accomplishment of business unit goals and objectives
– Continued rollout of a compensation strategy for all CAPREIT
employees that aligns pay with individual performance
partnership with multiple government agencies
– Further enhancements to CAPREIT’s succession planning programs
– Continued to serve free breakfasts to schoolchildren at CAPREIT
via integration of HRIS
properties
– Participated in the Rexall OneWalk to Conquer Cancer to raise funds
for cancer research and patient care
– Engaged residents and employees through participating in several
Resident satisfaction
–
Implement a tenant portal where tenants can place their own work
orders through the system for faster response times
community initiatives such as toy and food drives across the country
– Continue to focus on renovations to improve the quality of life of
Environmental conservation
–
Invested $10.6 M in 2017 in energy-efficiency capital investments to
reduce resource consumption
– Awarded Best Collaboration Customer in Energy Efficiency by Energy
Into Action
our residents
– Enhance the tenant experience by focusing on the resident experience
and empowering residents through a self-service platform
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CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
Affordable housing and philanthropic efforts
– Expand charitable programs to encourage both staff and residents
IN THE MEDIUM TERM
to donate and volunteer their time
– Focusing on continuous succession planning activities in order
Environmental conservation
– Continue with our proven energy conservation measures
– Complete projects with an annual electricity savings target of
2,000,000 kWh of annual electricity reduction
– Upgrade our building automation system platform
– Commission a combined heat and power (“CHP”) pilot project
– Offer Building Operator Certification course to additional CAPREIT
employees
Corporate governance
– Continued commitment to strong governance practices
– Evaluate opportunities to continually improve disclosure
– Enhance enterprise risk management and oversight
to ensure CAPREIT’s sustainable growth
– Continuing the multiphase implementation of HRIS 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 relationships with
other real estate entities to develop new multi-unit rental residential
properties on excess land owned by CAPREIT or other vacant land
available for sale
Ultimately, these will help CAPREIT achieve its goal to:
– Continue to maintain Platinum Level Aon Best Employer in
Canada status
Investors
– Continue to seek accretive acquisitions and development opportunities
– Attain above 98% occupancy while improving average monthly rents
– Attain the lowest energy and water consumption rating in the
that meet our strategic criteria
multi-residential industry
– Raise between $175 million and $225 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 develop our strategic plan for CAPREIT’s development
portfolio
SUSTAINABILITY PERFORMANCE
Employment Practices
CAPREIT’s focus this past year has been the enhancement of our internal
talent pipeline through industry-leading leadership development programs.
As an organization, we feel confident that the investment we have made in
these programs will ensure that we have the top talent required to support
our continued expansion.
CAPREIT’s LEAD Mentoring Program continues to provide employees at
all levels of our organization with the ability to develop their core leadership
competencies and make valuable connections with colleagues through
a formal relationship program. In this program, high-potential employees
develop their management skills set by engaging in projects that cultivate
their ability to present to large groups, build business cases, perform a
cost-benefit analysis, and network with subject-matter experts across
our organization.
CAPREIT’s Building Leaders Program focuses on executive development.
This program is essential to our objective of ensuring appropriate succession
planning within our Operations group. Through this program, high-performing
managers within Operations are provided with individually tailored coaching
and projects to unlock their leadership potential. Particular care is given to
ensuring the alignment of future leaders with CAPREIT’s core leadership
competencies and with developing an executive mindset.
Finally, CAPREIT continues to deliver regularly scheduled leadership
seminars to all employees in order to ensure that we excel at open
communication, collaboration and teamwork at all levels of our organization.
In 2017, the focus of our leadership training was on using performance
management as a driver for creating a high-performance culture.
Through these innovative and diverse programs, CAPREIT will ensure
that our talent pipeline is prepared to meet the challenges of the future.
Our investment in our employees reflects our commitment to ensuring the
stability of our operations while we pursue a strategy of continued growth
and expansion.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
Societal and Resident Satisfaction Practices
CAPREIT’s success is 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
technologies to improve resident experience are currently being explored.
We engaged a national third-party service provider to perform satisfaction
surveys that will take place throughout the next year to measure resident
experiences to focus on areas of improvement. We also developed and
continue to roll out a new suite turnover mobile app to help on-site managers
streamline and improve the suite turnover process, reduce inefficiencies and
enhance resident satisfaction.
Happy and satisfied residents mean lower lease turnover, lower vacancy
loss, fewer repairs and lower maintenance costs, higher average monthly
rents, more resident referrals and a better resident community. Therefore,
Management focuses on resident engagement initiatives to strengthen
tenant relationships.
In addition to a formalized annual resident satisfaction survey, CAP
CARES is an effective and efficient means for residents to communicate
urgent maintenance requests. The program serves to reduce response time
for residents while also addressing and mitigating potentially costly repairs.
Feedback to CAPREIT helps identify areas for improvement and enables
CAPREIT’s team to enhance and deliver resident services provided at its
properties. In 2017, call volumes decreased year over year across all tiers
and in 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 ensure residents enjoy safe, secure and
comfortable homes. In the interest of resident safety and security, building
manuals are maintained at every property in order to provide easily accessible
information on shutdown procedures for all building mechanical systems
in case of an emergency. Efforts are underway to 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 2017, CAPREIT continued to work alongside local
community organizations to assist in providing housing to Syrian refugees
and provided housing to those affected by the fire in Fort McMurray, Alberta.
As of 2017, 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 and
other charitable organizations. For 20 years, 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. But the
Club is much more than a breakfast program: it takes a broader approach
that promotes the core values of engagement, enrichment and empower-
ment, and teams up with communities and local partners to develop
solutions adapted to their specific needs. Throughout 2017, CAPREIT
helped raise significant funds 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 volume of energy used also
determine the volume of greenhouse gas (“GHG”) emissions generated
from CAPREIT’s operations.
CAPREIT believes it can minimize its environmental impact while
improving its long-term financial performance through the optimization of its
utility consumption and by facilitating the reduction of resident waste. Since
inception, CAPREIT has strived to reduce energy and water consumption
in a cost-effective manner, thereby reducing emissions and contributing to
improved overall financial performance.
One of CAPREIT’s key strategies is to evaluate the implementation of
a variety of energy-efficiency initiatives at every property on acquisition
and thereafter on a regular basis by means of newer, cost-effective tech-
nology, allowing even greater reduction 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 equip-
ment 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 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 temperature control for residents’
comfort with efficient energy use. Total expenditures since 2010 on energy
consumption optimization investments amount to $73 million.
The primary form of energy consumed by volume is natural gas, a
clean-burning energy source, used for heating the majority of the property
portfolio. Over the past few years, a number of properties using heating oil
have been converted to natural gas, reducing overall emissions as well as
operating costs.
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CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
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 2013 to 2016, calculated by an independent consulting firm
in accordance with GHG Protocol (including Scopes 1 to 3):
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:
Energy Use Intensity Performance over Prior Years
In Accordance
with GHG Protocol
In Accordance with
GHG Protocol Adjusted
for Impact of Weather
and Occupancy
2016
2015
2014
2013
-4.9%
-7.0%
0.5%
4.5%
-2.3%
-3.6%
-2.5%
-1.8%
– Over 30,000 ultra-low-flow toilets
– Over 65,000 low-flow showerheads and faucet aerators
– Over 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 consumption
calculated by an independent consulting firm in accordance with
GHG Protocol:
Based on stabilized properties using 2010 as a base year
Water Use Intensity Performance over Prior Years
In addition, to optimize electricity consumption, as of December 31,
2017 CAPREIT had installed tenant submetering systems at 96 properties
for electricity submetering and 25 properties for water submetering,
comprising more than 11,000 suites. On lease turnovers, new rental
agreements include metered billing payable by the resident, which acts as
a strong incentive to reduce energy consumption.
The following table demonstrates the 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 2013 to 2016.
Percent Reduction in Electricity Use Intensity over Prior Years
2016
2015
2014
2013
Submetered Properties
Overall Portfolio
Based on stabilized properties using 2010 as a base year
-3.6%
-3.4%
-4.0%
-4.3%
-4.4%
-2.9%
-6.4%
3.1%
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.
2016
2015
2014
2013
In Accordance
with GHG Protocol
Based on stabilized properties using 2010 as a base year
-0.7%
0.0%
-3.4%
-2.8%
CAPREIT maintains a waste-diversion policy and has expanded recycling
initiatives at almost all of its properties. This policy consists of increased
use of blue bins and garbage compactors, adaptation of building waste
collection substructure for recycling, and education of residents about the
benefits of recycling.
CAPREIT’s operations have little or no impact on land contamination.
Prior to the acquisition or refinancing of a property, thorough environmental
studies are 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 twenty 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 our goal to maintain our 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.
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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, 2017
dated February 27, 2018, should be read in conjunction with CAPREIT’s
audited consolidated annual financial statements for the year ended
December 31, 2017.
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. Particularly, statements
regarding CAPREIT’s future results, performance, achievements, prospects,
costs, opportunities and financial outlook, including those relating to acqui-
sition and capital investment strategy and the real estate industry generally,
are forward-looking statements. In some cases, forward-looking informa-
tion 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, Irish, and Dutch econo-
mies will generally experience growth, however, may be adversely impacted
by the global economy; that inflation will remain low; that interest rates
will remain low in the medium term; that Canada Mortgage and Housing
Corporation (“CMHC”) mortgage insurance will continue to be available
and that a 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 relat-
ing 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 availabil-
ity 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 incor-
rect. Forward-looking statements necessarily involve known and unknown
risks and uncertainties, many of which are beyond CAPREIT’s control, that
may cause CAPREIT or the industry’s actual results, performance, achieve-
ments, 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: report-
ing investment properties at fair value, real property ownership, leasehold
interests, co-ownerships, investment restrictions, operating risk, energy
costs and hedging, environmental matters, catastrophic events, 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, foreign tax, government regu-
lations, 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 reinvest-
ment 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 cybersecurity. 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 2017
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 finan-
cial 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 stabilized net rental income (“Stabilized NOI”), Net
Rental Revenue Run-Rate, Funds From Operations (“FFO”), Normalized
Funds From Operations (“NFFO”), Adjusted Cash Flow from Operations
(“ACFO”), and applicable per Unit amounts and payout ratios (collectively,
the “Non-IFRS Measures”). Since Stabilized NOI, Net Rental Revenue Run-
Rate, FFO, NFFO, and ACFO are not measures recognized under IFRS,
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 per-
formance and cash flows. A reconciliation of these Non-IFRS measures
to the comparable IFRS measures, along with further definitions and
discussion, 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 accor-
dance with IFRS as indicators of CAPREIT’s performance or 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 50,600 residents across Canada and The Netherlands. 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 across Canada. CAPREIT’s
concentration on the residential real estate market is aimed at solid year-
over-year income growth in a portfolio with stable occupancy. In addition,
CAPREIT mitigates risk through demographic diversification by operating
properties across the affordable, mid-tier and luxury sectors, as well as through
geographic diversification.
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 May 24, 2017. As at December 31, 2017, CAPREIT
owned interests in 50,624 residential units, comprised of 44,168 residential
suites and 31 manufactured home communities (“MHC”), comprised of 6,456
land lease sites. As at December 31, 2017, CAPREIT had 883 employees
(991 as at December 31, 2016).
The tables below summarize property acquisitions and dispositions for the
years ended December 31, 2017 and 2016:
Acquisitions Completed During the Year Ended December 31, 2017
($ Thousands)
Demographic
Sector
February 28, 2017
May 3, 2017
June 1, 2017
July 12, 2017
August 8, 2017
August 18, 2017
November 17, 2017
November 27, 2017
December 1, 2017
Total
Acquisition Financing
Mid-tier
Mid-tier
Mid-tier
Various (4)
Mid-tier
Various (6)
Luxury
Luxury
Various (7)
Suite
or Site
Count
32
256
44
849
54
77
16
56
540
1,924
Region(s)
Victoria
Montréal
Maple Ridge
The Netherlands
The Netherlands
The Netherlands
Summerside, PEI
Summerside, PEI
The Netherlands
Total
Acquisition
Costs
$
$
4,934
24,059
11,241
257,881
12,691
20,384
2,379
7,814
129,127
470,510
Assumed
Mortgage
Funding
Interest
Term to
Maturity
Rate (1)
(Years) (2)
$
$
$
– (3)
– (3)
3,713
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
3,713
253,375 (8)
– (3)
– (3)
1.94%
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
– (3)
– (3)
3.33
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
1.86% (8)
6.5 (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 Facility (see Liquidity and Financial Condition section).
(4) The acquisition comprised of 849 suites (142 affordable, 606 mid-tier, and 101 luxury) and was financed by a new non-amortizing mortgage of €100,842 ($147,360)
with a term to maturity of 7.5 years with an interest rate of 2.04%, a contribution from a non-controlling interest of €600 ($889), and the balance in cash from CAPREIT’s
Acquisition and Operating Facility.
(5) The acquisition was financed by a new non-amortizing mortgage of €5,043 ($7,474) with a term to maturity of 7.5 years with an interest rate of 1.95% and the balance
in cash from CAPREIT’s Acquisition and Operating Facility.
(6) The acquisition comprised of 77 suites (28 mid-tier and 49 luxury) was financed by a new non-amortizing mortgage of €7,951 ($11,856) with a term to maturity
of 7.5 years with an interest rate of 1.95% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(7) The acquisition comprised of 540 suites (168 affordable, 78 mid-tier, and 294 luxury) was financed by a new non-amortizing mortgage of €49,914 ($75,540) with a term
to maturity of 5.0 years with an interest rate of 1.37% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(8) Subsequent acquisition financing of $8,146 with a weighted average interest rate of 2.47% and a weighted average term to maturity of 9.92 years relates
to properties acquired in 2015.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
Acquisitions Completed During the Year Ended December 31, 2016
($ Thousands)
Demographic
Sector
Suite
or Site
Count
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 (6)
Total
Acquisition Financing
Mid-tier
Mid-tier
Mid-tier
Mid-tier
MHC
Mid-tier
Various
Luxury
Luxury
MHC
Various
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
Assumed
Mortgage
Funding
Interest
Term to
Maturity
Rate (1)
(Years) (2)
$
53,200
1,162
16,630
10,178
8,668
2,643
184,668
17,407
22,813
270
$
– (3)
729 (3)
– (3)
– (3)
– (3)
– (3)
24,627
– (3)
– (3)
– (3)
– (3)
2.04% (3)
– (3)
– (3)
– (3)
– (3)
3.96%
– (3)
– (3)
– (3)
– (3)
3.7 (3)
– (3)
– (3)
– (3)
– (3)
6.3
– (3)
– (3)
– (3)
95,217
412,856
$
– (6)
– (6)
– (6)
$
$
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 ($850), and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
Dispositions Completed During the Year Ended December 31, 2017
($ Thousands)
Demographic
Sector
Suite
Count
Region
Sale Price
February 15, 2017
October 12, 2017
Total
Affordable
Mid-tier
31
50
81
Saskatoon
Vancouver
$
$
2,025
19,800
21,825
Dispositions Completed During the Year Ended December 31, 2016
($ Thousands)
Demographic
Sector
Suite
Count
Region
Sale Price
July 27, 2016
August 22, 2016
September 28, 2016
Total
Mid-tier
Mid-tier
Affordable
145
22
412
579
Montréal
Montréal
Montréal
$
$
24,849
2,340
31,350
58,539
Cash
Proceeds
$
$
575
16,160
16,735
Cash
Proceeds
$
$
12,480
2,282
16,559
31,321
Mortgage
Discharged
$
$
1,356
3,595
4,951
Mortgage
Discharged
$
$
12,085
–
14,322
26,407
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
2 1
MANAGEMENT’S DISCUSSION ANDANALYSIS
OBJECTIVES
CAPREIT’s objectives are to:
• Provide Unitholders with long-term, stable and predictable monthly cash
distributions;
• Grow NFFO, sustainable distributions and Unit value through the active
management of its properties, accretive acquisitions, developments,
intensifications, 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 STRATEGY
To meet its objectives, CAPREIT has established the following strategies:
Customer Service
CAPREIT recognizes that it is in a “people business” and strives to be rec-
ognized as the landlord of choice in all of its chosen markets by providing
its residents with safe, secure and comfortable homes. It takes a hands-on
approach to managing its properties, stressing open and frequent com-
munications 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 condi-
tions in specific markets. In addition, CAPREIT’s lease administration system
improves control of rent-setting by suite, increasing resident service and
enhancing the overall profile of its resident base. These initiatives are further
enhanced by CAPREIT’s strong information technology platform.
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 econo-
mies of scale and cost generated by the growth in its property portfolio.
CAPREIT’s enterprise-wide procurement system streamlines and centralizes
purchasing controls and procedures and is realizing reduced costs through
national master sourcing contracts, improved pricing and enhanced operat-
ing efficiencies.
Capital Investments
CAPREIT strives to acquire properties at prices significantly below their cur-
rent replacement costs and is committed to improving its operating perfor-
mance by investing appropriate capital investments in order to maintain the
productive capacity of its property portfolio and to sustain the portfolio’s
rental income-generating potential over its useful life. CAPREIT continues
to invest in environment-friendly and energy-saving initiatives that improve
overall net operating income. CAPREIT completes a review of its portfolio
and revises its long-term capital investment plan on an annual basis, which
allows Management to ensure capital investments extend the useful eco-
nomic life of CAPREIT’s properties, enhance life safety, maximize earnings
and improve the long-term cash flow potential of its portfolio.
Portfolio Growth
CAPREIT aims to 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 syn-
ergies, 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 primarily be used to acquire additional strategic assets better
suited to CAPREIT’s portfolio composition and property management objec-
tives or to pay down existing debt. Management believes the continued real-
ization 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 resi-
dential 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 man-
age 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.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS KEY PERFORMANCE INDICATORS
To assist Management and investors in monitoring and evaluating CAPREIT’s
achievement of its objectives, CAPREIT has defined a number of key oper-
ating 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 condi-
tions in each of the geographic regions in which CAPREIT operates while
enhancing the overall qualitative profile of its resident base.
Average Monthly Rents
Through its active property management strategies, lease administration
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 statements 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 performance, 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 operat-
ing 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 measure of the sustainability
of CAPREIT’s distributions. Although CAPREIT intends to continue to sus-
tain and grow distributions, the actual amount of distributions in respect to
the CAPREIT Units will depend upon numerous factors, including, but not
limited 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 and development opportu-
nities (particularly via joint ventures) as opportunities arise, subject to market
conditions and available financing, which meet its strategic objectives, serve
to accretively increase NFFO and continue to further diversify the portfolio
by geography and by demographic sector. In addition, Management con-
tinues to prudently investigate 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 or under-utilized
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 aver-
age interest rates while mitigating refinancing risk by prudently managing the
portfolio’s average term to maturity and staggering the maturity dates. For
this purpose, CAPREIT strives to ensure its overall leverage ratios and inter-
est 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, Large Borrower Agreement
with CMHC (“LBA”) and the financial covenants in its credit agreement com-
prised of an acquisition and operating facility, which includes Euro LIBOR
and US LIBOR borrowings (“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 N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
2 3
MANAGEMENT’S DISCUSSION ANDANALYSIS
PERFORMANCE MEASURES
The following table presents an overview of certain non-IFRS financial measures of CAPREIT for the years ended December 31, 2017 and 2016. Management
believes that these measures are useful in assessing CAPREIT’s performance vis-à-vis its objectives, business strategy and KPIs. Effective March 2017,
monthly cash distributions declared to Unitholders increased to $0.1067 per Unit ($1.28 annually) compared to $0.1042 per Unit ($1.25 annually) effective
May 2016, and $0.102 per Unit ($1.22 annually) effective since May 2015.
For the Year Ended December 31,
Portfolio Performance
Overall Portfolio Occupancy (1)
Overall Portfolio Average Monthly Rents (1)
Operating Revenues (000s)
NOI (000s)
NOI Margin
Operating Performance (2)
FFO Per Unit – Basic
NFFO Per Unit – Basic
Weighted Average Number of Units – Basic (000s)
Cash Distributions Per Unit
FFO Payout Ratio (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)
Available Liquidity – Acquisition and Operating Facility (000s) (1)
Other
Number of Suites and Sites Acquired
Number of Suites Disposed (1)
Closing Price of Trust Units
Market Capitalization (millions) (5)
2017
2016
98.7%
1,044
638,842
393,258
61.6%
1.806
1.842
135,962
1.275
71.7%
70.3%
43.57%
56.24%
3.08%
5.7
1.63
3.19
86,792
1,924
81
37.32
5,182
$
$
$
$
$
$
$
$
$
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
$
$
$
$
$
$
$
$
$
(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 above).
(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 based on distributions declared as a percentage of FFO and NFFO. See Section III for details.
2 4
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
PROPERTY PORTFOLIO
Types of Property Interests
CAPREIT’s investments in its property portfolio reflect different forms of prop-
erty interests, including: Fee Simple Interests – Apartments and Townhomes,
Operating Leasehold Interests, Land Leasehold Interests, and Fee Simple
Interests – MHC Land Lease Sites.
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 addi-
tional information).
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 prop-
erty, 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
Land Leasehold Interests CAPREIT owns leasehold interests in three
land parcels in Alberta and one land parcel in British Columbia. CAPREIT
acquired a residential building on each of the four land parcels and pays
ground rent on an annual basis for its use of the land. One land lease matures
in 2045, two mature in 2068 and another matures in 2070. CAPREIT does
not have the unilateral right to acquire the land or extend the lease term at the
maturity of the respective leases (see Portfolio of Land Leasehold Interests
for additional information).
Fee Simple Interests – MHC Land Lease Sites CAPREIT has fee simple inter-
ests 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
2017
%
2016
%
39,302
3,815
1,051
44,168
6,456
50,624
77.6
7.5
2.1
87.2
12.8
100.0
37,450
3,815
1,051
42,316
6,451
48,767
76.8
7.8
2.2
86.8
13.2
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
2017
%
2016
%
3,783
24,114
16,271
44,168
6,456
50,624
7.5
47.6
32.1
87.2
12.8
100.0
3,504
23,117
15,695
42,316
6,451
48,767
7.2
47.4
32.2
86.8
13.2
100.0
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
2 5
MANAGEMENT’S DISCUSSION ANDANALYSIS
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
2017
%
2016
%
15,656
2,377
2,407
1,700
22,140
7,895
2,734
10,629
2,981
1,478
4,459
436
1,884
2,320
1,659
102
234
336
537
30.9
4.7
4.8
3.4
43.8
15.5
5.4
20.9
5.9
2.9
8.8
0.9
3.6
4.5
3.3
0.2
0.5
0.7
1.1
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
1,659
133
234
367
465
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
3.4
0.2
0.5
0.7
1.0
2,088
44,168
4.1
87.2
568
42,316
1.2
86.8
2,703
272
417
246
504
2,314
6,456
50,624
5.3
0.5
0.8
0.6
1.0
4.6
12.8
100.0
2,701
272
415
246
504
2,313
6,451
48,767
5.5
0.6
0.9
0.5
1.0
4.7
13.2
100.0
While maintaining a strong and strategic presence in Ontario’s residential
market, CAPREIT continues to focus on diversifying its geographic portfolio
outside of Ontario by increasing its presence in other markets with strong
fundamentals. CAPREIT continues to look for investment opportunities
that meet its investment criteria and that, where possible, will further its
diversification strategy. The geographic diversification of its portfolio also
enables CAPREIT to mitigate the risks arising from potential downturns in
any specific markets.
CAPREIT continues to target acquisitions on an annualized basis over
the long term.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
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 2033 and an air rights lease 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, 2017 and 2016
Year of Lease Maturity
2033
2034
2035
2037
Total Operating Leasehold Interests Portfolio
Properties
10
2
1
2
15
Suites
3,099
161
200
355
3,815
%
81.3
4.2
5.2
9.3
100.0
26th Year
202,071
$
19,300
14,200
47,200
282,771
$
35th Year
242,596
$
23,150
17,000
56,000
338,746
$
Amount (1)
136,101
13,700
9,000
33,500
192,301
$
$
Option Exercise Prices
Prepaid Lease
(1) As at the acquisition dates of these leasehold interests by a CAPREIT predecessor.
Portfolio of Land Leasehold Interests
In the absence of any new arrangements negotiated between CAPREIT and the landowners of the four parcels on which CAPREIT has land leasehold
interests, CAPREIT’s interests in one property mature in 2045, in two properties in 2068 and in one property in 2070. Generally, each lease provides for
annual ground rent and additional rent calculated from the properties’ operating results. All rental payments associated with land leasehold interests are
included in other operating expenses (see Results of Operations).
Land Leasehold Interests Portfolio by Lease Maturity
($ Thousands)
Year Ended December 31,
Year of Lease Maturity
2045
2068
2070
Total Land Leasehold Interests Portfolio
Suites
473
306
272
1,051
%
45.0
29.1
25.9
100.0
$
$
Annual Ground Rent
2017
1,139
467
1,208
2,814
$
$
2016
1,000
500
1,216
2,716
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
2 7
MANAGEMENT’S DISCUSSION ANDANALYSIS
INVESTMENT PROPERTIES
Investment property is defined as property held to earn rental income or for
capital appreciation or both. Investment property is recognized initially at
cost. Subsequent to initial recognition, all investment property is measured
using the fair value model, whereby changes in fair value are recognized for
each reporting period in net income.
Management values each investment property based on the most
probable price that a property could be sold for in a competitive and open
market as of the specified date under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. This does not contemplate the
potential for general declines in real estate markets or the sale of assets by
CAPREIT under financial hardship or otherwise. 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 realized during
future periods.
The fair value of investment properties is established by qualified,
independent appraisers annually. Each quarter, CAPREIT utilizes market
assumptions for rent increases, capitalization and discount rates provided
by the independent appraisers to determine the fair value of the investment
properties for interim reporting purposes. Capitalization rates employed by
the appraisers 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, 2017 contained in
CAPREIT’s 2017 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 Year
Add:
Acquisitions
Property Capital Investments (1)
Foreign Currency Translation
Unrealized Gain on Remeasurement at Fair Value
Capitalized Leasing Costs (2)
Less:
Dispositions
Realized Loss on Dispositions
Investment Properties at Fair Value, End of the Year
(1) See Property Capital Investments section.
(2) Comprises tenant inducements, straight-line rent and direct leasing costs.
2017
2016
$ 7,642,017
$ 6,863,140
470,510
154,883
12,998
626,953
1,020
414,668
195,742
188
227,967
918
(21,337)
(488)
$ 8,886,556
(58,793)
(1,813)
$ 7,642,017
For the years ended December 31, 2017 and 2016, 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 net operating income
and thus not reflected in the fair value of the investment properties at the measurement date.
2 8
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
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,
2016
2017
2016
2017
Change Due to Change in
Fair Value
Rates (1)
Stabilized
Net
Forex
NOI (2) Translation Acquisitions
Fair Value
Rates (1)
Rates (1)
Greater Toronto Area
Other Ontario
Québec
British Columbia
Alberta
Nova Scotia
Saskatchewan
Prince Edward Island
The Netherlands
MHC Land Lease Sites
Total
$
$
3,068
898
1,427
1,071
435
253
43
50
92
305
7,642
$
$
236
52
13
26
(3)
6
2
1
47
(2)
378
$
$
221
63
28
94
(19)
2
(1)
3
–
13
404
$
$
–
–
–
–
–
–
–
–
13
–
13
$
$
–
–
25
5
–
–
(2)
10
412
–
450
$
$
3,525
1,013
1,493
1,196
413
261
42
64
564
316
8,887
4.30%
4.84%
4.91%
3.72%
4.67%
5.48%
5.76%
6.17%
4.83%
6.23%
4.53%
4.05%
4.58%
4.89%
3.65%
4.63%
5.35%
5.60%
6.06%
4.03%
6.27%
4.39%
(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, 2017 for Operating and Land Leasehold Interests.
(2) Represents stabilized net operating income.
As at December 31, 2017, 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, 2017
Weighted Average Capitalization Rate
Weighted Average Capitalization Rate
Change (basis points) (1)
+25
–25
Estimated (Decrease) Increase
(498)
505
$
$
(1) For Operating Leasehold Interests, CAPREIT applies discount rates to determine the fair value of these properties. However, for the purposes of the above sensitivity analysis,
CAPREIT has utilized the implied capitalization rates for Operating Leasehold Interests to determine the impact on fair value of the total portfolio.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
2 9
MANAGEMENT’S DISCUSSION ANDANALYSIS
SECTION II
AVERAGE MONTHLY RENTS AND OCCUPANCY
Portfolio Average Monthly Rents (“AMR”) and Occupancy by Demographic Sector
Total Portfolio
Properties Owned Prior to
December 31, 2016
Properties
Acquired Since
Dec. 31, 2016 (2)
As at December 31,
2017 (2)
2016
2017
2016 (1)
AMR Occ. %
AMR Occ. %
AMR Occ. %
AMR Occ. %
AMR Occ. %
Affordable
Mid-tier
Luxury
Average Residential Suites
Average MHC Land
Lease Sites
Overall Portfolio Average
972
$
$ 1,101
$ 1,240
$ 1,142
$
388
$ 1,044
98.1
99.0
98.6
98.8
98.3
98.7
910
$
$ 1,063
$ 1,198
$ 1,101
$
378
$ 1,003
97.7
99.1
98.3
98.7
98.3
98.6
955
$
$ 1,102
$ 1,241
$ 1,143
$
388
$ 1,040
98.0
99.2
98.7
98.9
98.3
98.8
911
$
$ 1,063
$ 1,198
$ 1,101
$
378
$ 1,003
97.8
99.1
98.3
98.7
98.3
98.6
$ 1,156
$ 1,079
$ 1,199
$ 1,127
99.0
92.6
97.2
95.0
$
535
$ 1,127
100.0
95.0
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2016.
(2) Under the purchase agreements for a property acquired on May 3, 2017, CAPREIT received monthly escrow payments for the positive differences, if any, between:
(a) 100.0% of the gross rent roll for such month less (b) the actual rent earned for such month, with all applicable sales taxes. CAPREIT continues to receive escrow payments
when the actual gross revenues are less than the threshold up to a maximum of $2.5 million for the property, after which rental revenue will be based on actual occupancy.
The occupancy rates in the tables are reflected at 100.0% for this property.
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,
2016) increased in all demographic sectors to $1,143 at December 31,
2017 from $1,101 at December 31, 2016, resulting in a 3.8% increase. The
increases are due primarily to a combination of ongoing successful sales
and marketing strategies, above-guideline rent increases, suite and build-
ing improvements, 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 98.9% as at December 31, 2017
compared to 98.7% for the prior year. For the total residential portfolio AMR
increased 3.7% at December 31, 2017 compared to the prior year, while
occupancies increased to 98.8% compared to 98.7% last year.
For the total MHC land lease portfolio, average monthly rents increased
to $388 as at December 31, 2017, compared to $378 as at December 31,
2016 while occupancy remained strong at 98.3%. 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,
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
2017
Change in AMR
%
$
79.4
21.7
34.6
7.2
1.9
3.1
% Turnovers
& Renewals (1)
24.0
82.9
2016
Change in AMR
%
$
13.0
21.8
19.5
1.2
2.0
1.8
% Turnovers
& Renewals (1)
27.7
78.7
(1) Percentage of suites turned over or renewed during the year based on the total number of residential suites (excluding co-ownerships and The Netherlands properties)
held at the end of the year.
Overall, suite turnovers in the residential suite portfolio (excluding
co-ownerships and The Netherlands properties) during the year ended
December 31, 2017 resulted in average monthly rents increasing by
approximately $79 or 7.2% compared to an increase of approximately
$13 or 1.2% for the prior 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, 2017, average monthly rents on lease
renewals increased by approximately $22 or 1.9%, compared to an
increase of approximately $22 or 2.0% for the prior year. Increased port-
folio diversification helped mitigate geographical risk in particular areas
of Canada. Management continues to pursue applications for annual
guideline increases (“AGIs”) 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 2018, the permitted guideline increases in Ontario and British
Columbia have been set to 1.8% and 4.0%, respectively.
3 0
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
Portfolio Average Monthly Rents and Occupancy by Geography
Total Portfolio
Properties Owned Prior to
December 31, 2016
Properties
Acquired Since
Dec. 31, 2016
As at December 31,
2017
2016
2017
2016 (1)
AMR Occ. %
AMR Occ. %
AMR Occ. %
AMR Occ. %
AMR Occ. %
Residential Suites
ONTARIO
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
$ 1,315
1,217
946
1,229
$ 1,258
99.4
99.8
98.3
99.6
99.4
98.4
97.8
98.2
99.8
99.9
99.8
98.9
97.5
97.8
$ 1,269
1,186
910
1,176
$ 1,214
$
$
866
967
892
$ 1,151
1,065
$ 1,124
$ 1,098
1,051
$ 1,060
99.7
99.6
98.3
99.4
99.5
97.6
96.9
97.4
99.8
99.7
99.8
95.0
95.9
95.7
$ 1,315
1,217
946
1,229
$ 1,258
$
$
897
998
923
$ 1,235
1,133
$ 1,202
$ 1,105
1,041
$ 1,053
99.4
99.8
98.3
99.6
99.4
98.3
97.8
98.2
99.8
99.9
99.8
98.9
97.5
97.8
$ 1,269
1,186
910
1,176
$ 1,214
$
$
866
967
892
$ 1,154
1,065
$ 1,126
$ 1,098
1,051
$ 1,060
99.7
99.6
98.3
99.4
99.5
97.6
96.9
97.4
99.8
99.7
99.7
95.0
95.9
95.7
$
$
902
998
927
$ 1,235
1,136
$ 1,202
$ 1,105
1,041
$ 1,053
$ 1,101
97.7
$ 1,077
96.6
$ 1,101
97.7
$ 1,077
96.6
$ 1,024
1,066
$ 1,053
100.0
99.1
99.4
$
951
1,030
$ 1,001
98.5
99.1
98.9
$ 1,024
1,066
$ 1,053
100.0
99.1
99.4
$ 1,015
1,030
$ 1,025
100.0
99.1
99.4
$
$
–
–
–
–
–
–
–
–
–
–
$ 1,064
–
$ 1,064
$
–
1,193
$ 1,193
100.0
–
100.0
–
100.0
100.0
$
$
$
$
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
$ 1,005
98.7
$
982
99.1
$ 1,004
99.8
$
982
99.1
$ 1,012
91.7
$ 1,122
$ 1,142
94.8
98.8
$
974
$ 1,101
98.4
98.7
$ 1,076
$ 1,143
96.7
98.9
$
974
$ 1,101
98.4
98.7
$ 1,140
$ 1,127
94.1
95.0
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
525
441
427
399
145
267
388
$ 1,044
100.0
100.0
99.5
100.0
100.0
95.3
98.3
98.7
$
513
423
418
384
141
258
$
378
$ 1,003
99.9
100.0
99.8
99.6
99.8
95.6
98.3
98.6
$
525
441
427
399
145
267
$
388
$ 1,040
100.0
100.0
99.5
100.0
100.0
95.3
98.3
98.8
$
513
423
418
384
141
258
$
378
$ 1,003
99.9
100.0
99.8
99.6
99.8
95.6
98.3
98.6
$
535
–
–
–
–
–
$
535
$ 1,127
100.0
–
–
–
–
–
100.0
95.0
(1) Prior year comparable AMR and occupancy have been restated for properties disposed of since December 31, 2016.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3 1
MANAGEMENT’S DISCUSSION ANDANALYSIS
Overall average monthly rents for the stabilized residential suite portfolio
as at December 31, 2017 increased by approximately 3.8% compared
to the prior year, while occupancies remained stable at 98.9%. For the
total residential suite portfolio, AMR increased by approximately 3.7%, as
compared to December 31, 2016. The increases are 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. Occupancies increased
slightly to 98.8% as at December 31, 2017 compared to 98.7% last year.
Management believes annual occupancies can be maintained in the 97%
to 98% range over the long term 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 portfolio
and its strategy to further diversify both geographically 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 sustainably increase same-property average monthly
rents and maintain high occupancy levels.
The table below shows the new tenant inducements incurred during the
years ended December 31, 2017 and 2016 as well as the amortization of
tenant inducements, loss from vacancies, and bad debt expense included
in net rental revenue for the same years.
Tenant Inducements, Vacancy Loss, and Bad Debt Expense on Residential Suites and Sites
($ Thousands)
For the Year Ended December 31,
2017
% (1)
2016
% (1)
New Tenant Inducements Incurred (2)
Tenant Inducements Amortized
Vacancy Loss Incurred
Total Amortization and Loss
Bad Debt Expense (3)
$ 2,709
$ 2,118
12,419
$ 14,537
$ 2,175
0.3
1.9
2.2
0.3
$ 2,870
$ 2,427
12,950
$ 15,377
$ 2,622
0.4
2.2
2.6
0.4
(1) As a percentage of total operating revenues.
(2) For the year ended, New Tenant Inducements Incurred decreased in most areas offset by increases in British Columbia.
(3) Bad Debt Expense decreased in most regions compared to last year, partly offset by increases in Nova Scotia and The Netherlands.
3 2
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
RESULTS OF OPERATIONS
Total Operating Revenues by Geography
($ Thousands)
For the Year Ended December 31,
Residential Suites
ONTARIO
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
QUÉBEC
Greater Montréal Region
Québec City
BRITISH COLUMBIA
Greater Vancouver Region
Victoria
ALBERTA
Edmonton
Calgary
NOVA SCOTIA
Halifax
SASKATCHEWAN
Saskatoon
Regina
PRINCE EDWARD ISLAND
Charlottetown
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 Residential Suites and MHC Land Lease Sites
2017
2016
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
253,327
23,925
27,534
27,010
331,796
93,364
35,256
128,620
47,207
21,362
68,569
6,667
28,167
34,834
21,848
1,223
2,921
4,144
5,712
12,623
608,146
17,362
1,419
2,125
1,165
873
7,752
30,696
638,842
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
243,067
16,263
24,918
25,648
309,896
92,268
34,715
126,983
44,229
19,806
64,035
6,784
29,038
35,822
20,681
1,422
2,857
4,279
5,424
156
567,276
17,181
1,107
2,085
1,118
861
7,203
29,555
596,831
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3 3
MANAGEMENT’S DISCUSSION ANDANALYSIS
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
2017
% (1)
2016
% (1)
$
$
$
$
$
605,498
33,344
638,842
94.8
5.2
100.0
(67,078)
(56,744)
(121,762)
(245,584)
393,258
10.5
8.9
19.0
38.4
61.6
$
$
$
$
$
565,099
31,732
596,831
94.7
5.3
100.0
(65,462)
(60,759)
(103,663)
(229,884)
366,947
11.0
10.2
17.3
38.5
61.5
(1) As a percentage of total operating revenues.
(2) Comprises ancillary income such as parking, laundry and antenna revenue.
(3) Comprises R&M, wages, general and administrative, insurance, advertising, and legal costs.
Operating Revenues
For the year ended December 31, 2017, total operating revenues increased
by 7.0% compared to last year, due to the contributions from acquisitions,
increased same-property average monthly rents, and continuing high occu-
pancies. 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 revenues and ancillary revenues. Ancillary revenues,
such as parking, laundry and antenna income, increased by 5.1% for the
year ended December 31, 2017.
Estimated Net Rental Revenue Run-Rate
($ Thousands)
As at December 31,
2017
2016
Residential Rent Roll (1), (2)
Commercial Rent Roll (1), (2)
Annualized Net Rental
Revenue Run-Rate
$
615,246
22,596
$
568,484
22,134
$
637,842
$
590,618
(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
(net of average historical vacancy loss, tenant inducements and bad debt)
based on average monthly rents in place for CAPREIT’s share of residential
suites and sites as at December 31, 2017 and 2016. The estimated annu-
alized net rental revenue run-rate improved by 8.0% to $637.8 million from
$590.6 million, primarily as a result of acquisitions within the last twelve
months and higher rents. Net rental revenue net of dispositions for
the 12 months ended December 31, 2017 was $605.0 million (2016 –
$561.9 million).
Operating Expenses
Overall operating expenses increased in the year ended December 31, 2017
compared to the prior year, primarily due to the increased size of the portfolio.
However, total operating expenses as a percentage of revenues improved
to 38.4% compared to 38.5% for the prior year.
Realty Taxes For the year ended December 31, 2017, realty taxes as a
percentage of operating revenues improved to 10.5% compared to 11.0%
for the prior year.
Utilities As a percentage of operating revenues, utility costs for the year
ended December 31, 2017 improved to 8.9% compared to 10.2% for the
prior year.
CAPREIT’s utility costs can be highly variable from year to year depend-
ing on energy consumption and rates. The table below provides CAPREIT’s
utility costs by type.
($ Thousands)
For the Year Ended
December 31,
2017
% (1)
2016
% (1)
Electricity
Natural Gas
Water
Total
$
$
22,490
15,584
18,670
56,744
3.5
2.4
2.9
8.9
$
$
26,830
15,712
18,217
60,759
4.5
2.6
3.1
10.2
(1) As a percentage of total operating revenues.
For the year ended December 31, 2017, electricity costs as a percentage
of total operating revenues decreased to 3.5% compared to 4.5% for the
prior year. In dollar terms, electricity costs for the year ended December 31,
2017 decreased compared to last year due to lower electricity rates, reduced
3 4
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
consumption, the positive impacts of energy-saving initiatives, sub-metering,
and the Ontario provincial rebate for electricity effective as of January 1,
2017. As at December 31, 2017, tenants who pay their hydro charges
directly represent 66% of the total 16,638 recently sub-metered suites in
Ontario and Alberta.
For the year ended December 31, 2017, natural gas costs as a percent-
age of total operating revenues decreased to 2.4% compared to 2.6% for
the prior year, primarily due to reduced rates.
The table below provides information on CAPREIT’s fixed natural gas
contracts for the fiscal years 2018, 2019, and 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
Actual (2)
2016
Actual
2017
Estimated
2018
Estimated
2019
Estimated
2020
$
$
3.61
66.2%
$
2.87
65.0%
$
2.87
64.4%
1.59
55.3%
$
1.36
75.3%
$
1.05
64.5%
$
$
2.77
58.0%
$
2.70
41.7%
0.97
58.1%
$
0.96
41.7%
(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
repairs and maintenance (“R&M”) costs, wages and benefits, insurance
and advertising, increased as a percentage of operating revenues for
the year ended December 31, 2017 to 19.0% from 17.3% for the prior
year, due primarily to increased R&M expenses, site costs, and insurance
expenses, offset by reductions in other expenses including wages and
legal and collections.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3 5
MANAGEMENT’S DISCUSSION ANDANALYSIS
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.
The following table shows the NOI and the NOI margin attained for each regional market for the years ended December 31, 2017 and 2016.
For the Year Ended December 31,
2017
NOI
NOI Margin (%)
2016
NOI
NOI Margin (%)
Increase (Decrease)
Revenue
NOI
Change (%) Change (%) Change (%)
Expense
($ 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
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
$ 159,065
14,608
16,443
16,367
$ 206,483
$
$
$
$
$
$
53,073
19,732
72,805
31,478
14,975
46,453
4,430
16,431
20,861
62.8
61.1
59.7
60.6
62.2
56.9
56.0
56.6
66.7
70.1
67.8
66.5
58.3
59.9
$ 151,700
9,558
15,090
15,257
$ 191,605
$
$
$
$
$
$
52,472
19,255
71,727
30,580
14,186
44,766
4,599
17,311
21,910
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
61.2
$
13,115
60.0
$
12,588
60.9
4.2
47.1
10.5
5.3
7.1
1.2
1.6
1.3
6.7
7.9
7.1
(1.7)
(3.0)
(2.8)
5.6
(14.0)
2.2
(3.2)
3.2
39.0
12.9
2.4
5.9
1.2
0.4
1.0
15.2
13.7
14.8
2.4
0.1
0.4
7.9
(13.3)
7.5
(0.8)
4.9
52.8
9.0
7.3
7.8
1.2
2.5
1.5
2.9
5.6
3.8
(3.7)
(5.1)
(4.8)
4.2
(14.7)
(0.9)
(4.8)
$
$
$
606
1,770
2,376
2,807
$
9,288
$ 374,188
$
11,172
1,101
1,322
758
415
4,302
$
19,070
$ 393,258
49.6
60.6
57.3
49.1
73.6
61.5
64.4
77.6
62.2
65.1
47.5
55.5
62.1
61.6
710
1,786
2,496
49.9
62.5
58.3
$
$
$
2,716
50.1
5.3
7.3
3.4
$
127
$ 347,935
$
11,687
847
1,405
771
360
3,942
$
19,012
$ 366,947
81.3
61.3
68.0
76.5
67.4
69.0
41.8
54.7
64.3
61.5
8,042.6
7.2
11,400.0
6.7
7,269.8
7.6
1.1
28.2
1.9
4.2
1.4
7.6
3.9
7.0
12.7
22.3
18.1
17.3
(8.6)
5.8
10.3
6.8
(4.4)
30.0
(5.9)
(1.7)
15.3
9.1
0.3
7.2
For the year ended December 31, 2017, NOI increased by 7.2% and the NOI margin increased to 61.6% compared to 61.5% for last year due to
increased operating revenues and lower utility costs as a percentage of operating revenues. The improvement in the NOI contribution was primarily the
result of acquisitions, and higher operating revenues in certain regions of the portfolio in the current year. CAPREIT remains focused on continuing to further
improve NOI and NOI margin through a combination of accretive and value-enhancing acquisitions, successful sales and marketing strategies to further
improve revenues, and investments in capital programs to further reduce costs and enhance the quality and value of its portfolio. For a comprehensive
analysis of stabilized NOI growth or decline compared to the same period last year by region, refer to the Stabilized Portfolio Performance section.
3 6
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
STABILIZED PORTFOLIO PERFORMANCE
For the Year Ended December 31,
2017
2016
Increase (Decrease)
($ Thousands)
Residential Suites
ONTARIO
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
QUÉBEC
Greater Montréal Region
Québec City
BRITISH COLUMBIA
Greater Vancouver Region
Victoria
ALBERTA
Edmonton
Calgary
NOVA SCOTIA
Halifax
SASKATCHEWAN
Saskatoon
Regina
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 (%)
Stabilized
NOI
NOI Margin (%)
$ 157,620
4,750
11,600
16,367
$ 190,337
$
$
$
$
$
$
52,336
19,732
72,068
30,876
14,661
45,537
4,430
16,431
20,861
62.8
50.5
60.3
60.6
62.1
57.2
56.0
56.9
66.7
70.3
67.8
66.5
58.3
59.9
$ 150,792
4,622
11,501
15,257
$ 182,172
$
$
$
$
$
$
50,690
19,255
69,945
30,200
14,125
44,325
4,599
17,311
21,910
62.4
49.8
62.1
59.5
61.7
57.1
55.5
56.6
69.2
71.7
70.0
67.8
59.6
61.2
$
12,273
59.9
$
12,335
60.8
$
$
594
1,770
2,364
$
2,700
$ 346,140
$
11,172
524
1,322
758
415
4,302
$
18,493
$ 364,633
45,000
50.0
60.6
57.5
49.2
61.2
64.4
75.3
62.2
65.1
47.5
55.5
61.7
61.2
$
$
655
1,786
2,441
$
2,686
$ 335,814
$
11,687
482
1,405
771
360
3,942
$
18,647
$ 354,461
45,000
54.7
62.5
60.2
50.4
61.3
68.0
73.5
67.4
69.0
41.8
54.7
64.1
61.5
Revenue
NOI
Change (%) Change (%) Change (%)
Expense
3.9
1.3
3.9
5.3
4.0
3.0
1.6
2.6
6.1
5.9
6.1
(1.7)
(3.0)
(2.8)
0.9
(0.7)
2.2
1.4
3.0
3.3
1.1
6.1
1.9
4.2
1.4
7.6
3.0
3.3
2.9
(0.1)
8.9
2.4
3.1
2.6
0.4
2.0
14.9
11.2
13.8
2.4
0.1
0.4
3.2
9.8
7.5
8.3
5.6
3.7
12.7
(1.2)
18.1
17.3
(8.6)
5.8
9.8
4.0
4.5
2.8
0.9
7.3
4.5
3.3
2.5
3.0
2.2
3.8
2.7
(3.7)
(5.1)
(4.8)
(0.5)
(9.3)
(0.9)
(3.2)
0.5
3.1
(4.4)
8.7
(5.9)
(1.7)
15.3
9.1
(0.8)
2.9
Stabilized NOI represents NOI for properties owned by CAPREIT continuously for two years prior to the current annual reporting year end date.
Stabilized properties for the year ended December 31, 2017 are defined as all properties owned by CAPREIT continuously since December 31, 2015,
and therefore do not take into account the impact on performance of acquisitions or dispositions completed during 2017 and 2016. As at December 31,
2017, stabilized suites and sites represent 91.0% of CAPREIT’s total portfolio.
For the year ended December 31, 2017, operating revenues increased by 3.3% and operating costs increased by 4.0% compared to the prior year.
As a result, Stabilized NOI increased by 2.9% for the year ended December 31, 2017.
For the year ended December 31, 2017, the NOI margin for properties acquired since December 31, 2015, was 66.2%.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3 7
MANAGEMENT’S DISCUSSION ANDANALYSIS
Ontario
NOI for the stabilized Ontario portfolio increased by 4.5% during the year
ended December 31, 2017 compared to the prior year, primarily due to higher
operating revenues, lower utility expenses and vacancies partially offset by
higher R&M costs. The NOI margin increased to 62.1% for the year ended
December 31, 2017 compared to 61.7% for the prior year. Management
believes the Ontario portfolio will remain strong and generate steady returns
in the medium term. The rent guideline increase for 2018 has been set
at 1.8%.
Québec
NOI for the stabilized Québec portfolio increased by 3.0% during the year
ended December 31, 2017 compared to the prior year, primarily due to
higher operating revenues and lower wage expenses partially offset by
higher R&M costs. For the year ended December 31, 2017, the NOI mar-
gin increased to 56.9% compared to 56.6% for the prior year. CAPREIT
believes the Québec rental market will remain stable and generate steady
to improving returns in the medium term.
British Columbia
NOI for the stabilized British Columbia portfolio increased by 2.7% during
the year ended December 31, 2017 compared to the prior year, primar-
ily due to higher operating revenues partially offset by higher R&M costs,
wages and general administration costs. For the year ended December 31,
2017, the NOI margin decreased to 67.8% from 70.0% for the prior year.
Management believes the British Columbia portfolio will continue to gener-
ate steady returns in the medium term. The rent guideline increase for 2018
has been set at 4.0%.
Alberta
NOI for the stabilized Alberta portfolio decreased by 4.8% during the
year ended December 31, 2017 compared to last year, primarily due to
lower operating revenues and higher R&M costs partially offset by lower
vacancies and utilities. For the year ended December 31, 2017, the NOI
margin decreased to 59.9% compared to 61.2% for the prior year.
Management believes its well-located properties and CAPREIT’s proven
property management programs should help to stabilize performance in the
province in the near term until the region returns to its historically robust rental
market. In addition, with Alberta residential NOI representing only 6.1% 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 0.5% for the year
ended December 31, 2017 compared to the prior year, primarily due to
higher operating revenues and lower utility costs partially offset by higher
realty taxes, R&M and vacancies. For the year ended December 31, 2017,
the NOI margin decreased at 59.9% from 60.8% for last year. Management
believes its presence in downtown Halifax locations will serve to maintain or
increase occupancy levels and average monthly rents in the medium term.
MHC Land Lease Sites
NOI for the stabilized MHC land lease sites portfolio decreased by 0.8%
for the year ended December 31, 2017 compared to the prior year, primar-
ily due to higher R&M expenses and lower other income partially offset by
increases in operating revenues. For the year ended December 31, 2017, the
NOI margin decreased to 61.7% from 64.1% for the prior year. Management
believes its MHC land lease portfolio will continue to provide accretive growth
in the long term.
The following table reconciles stabilized NOI and NOI for net acquisitions to total NOI for the year ended December 31, 2017 and 2016:
($ Thousands)
NOI
Margin
For the Year Ended December 31,
2017
(%)
2016
Stabilized NOI
Net Acquisitions NOI (1)
Total NOI
$
$
364,633
28,625
393,258
61.2
65.8
61.6
$
$
354,461
12,486
366,947
NOI
Margin
(%)
61.5
61.5
61.5
(1) Represents the NOI of acquisitions or dispositions completed during 2017 and 2016.
3 8
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
NET INCOME AND OTHER COMPREHENSIVE INCOME
($ Thousands)
For the Year Ended December 31,
NOI
(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 and Other Financing Costs
Interest on Exchangeable Units
Other Income
Amortization
Unrealized and Realized Loss on Derivative Financial Instruments
Gain on Foreign Currency Translation
Net Income Before Income Taxes
Current and Deferred Income Tax Expense
Net Income
Other Comprehensive Income,
Including 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
Other Comprehensive Income
Comprehensive Income
2017
2016
$
393,258
$
366,947
(32,569)
626,953
(488)
(852)
(26,074)
(117,145)
(8,813)
(186)
22,921
(4,434)
(11,866)
3,515
844,220
(7,409)
836,811
3,024
630
4,957
10,490
19,101
855,912
$
$
$
$
(32,122)
227,335
(1,813)
(731)
(19,897)
(112,426)
(4,637)
(200)
17,236
(4,249)
(397)
4,441
439,487
(7)
439,480
3,105
1,644
3,109
(5,914)
1,944
441,424
$
$
$
$
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, 2017 to $32.6 million from $32.1 million for last
year due primarily to $2.7 million in higher salaries, $1.2 million in increased
consulting fees, $1.0 million more in information technology, and
$0.7 million in higher general expenses, with the residual increase in
various other categories in 2017 partially offset by $5.5 million related to
transactions that were not completed in 2016. For the quarter and year
ended 2017, trust expenses included over $2.0 million and $2.8 million,
respectively, related to one-time items including non-executive reorganization
severances incurred, set-up costs related to our Netherlands operations,
and consulting costs.
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 upon remeasurement recognized in
the consolidated statement of income for the period. A description of the
key components of the change in the fair value of investment properties is
included in the Investment Properties section.
Realized Loss on Disposition of Investment Properties
For the year ended December 31, 2017, a loss of $0.5 million was
recognized in connection with the property dispositions in the first quarter
and fourth quarter of 2017. For the year ended December 31, 2016, a loss
of $1.8 million was recognized in connection with the property dispositions
in second quarter of 2016. The loss represents the difference between
the net proceeds after transaction costs from the disposition of each
property compared to the fair value of the respective properties 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
prior reporting date resulted in a loss on remeasurement of $0.9 million for
the year ended December 31, 2017 compared to $0.7 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, 2017, contained in
CAPREIT’s 2017 Annual Report.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
3 9
MANAGEMENT’S DISCUSSION ANDANALYSIS
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 in CAPREIT’s audited
consolidated annual financial statements for the year ended December 31,
2017, contained in CAPREIT’s 2017 Annual Report).
As a result of CAPREIT being an open-ended mutual fund trust,
whereby each Unitholder of the Trust Units is entitled to redeem their Units
in accordance with the conditions specified in CAPREIT’s DOT, under IFRS
the underlying Trust Units relating to the Unit-based compensation awards
are not classified 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 at
fair value. In such cases, the related expense is limited to the amortization of
the fair value on grant date of the award over the applicable vesting period.
In order to aid comparability with CAPREIT’s peers, the Unit-based
compensation expenses have been separated into two components: (i) the
amortization of the fair value at grant date of the award over its vesting period,
and (ii) the remeasurement of awards outstanding at period end at fair value.
As at December 31, 2017, the maximum number of Units issuable
under all of CAPREIT’s Unit-based incentive plans is 9,500,000 Units
(December 31, 2016 – 9,500,000). The maximum number of Units available
for future issuance under all Unit incentive plans as at December 31, 2017
is 1,077,977 Units (December 31, 2016 – 1,346,980 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, 2017, contained in CAPREIT’s
2017 Annual Report.
CAPREIT’s Unit-based compensation expense for the year ended
December 31, 2017 resulted in a loss of $26.1 million compared to
$19.9 million for last year, primarily due to the higher increase in the market
price of the underlying CAPREIT Trust Units in 2016 and $1.6 million of
accelerated vesting in previously-granted RUR units in 2017 compared to
2016. The table below demonstrates the impact of each component of
CAPREIT’s plans on the total compensation expense.
($ Thousands)
For the Year Ended December 31,
2017
2016
Remeasurement of Unit-based
Compensation Liabilities
Amortization of Fair Value
on Grant Date of Unit-based
Compensation
Total
$
18,934
$
14,217
7,140
26,074
$
5,680
19,897
$
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, 2017 to $117.1 million
from $112.4 million for last year, due primarily to increased mortgage top-
ups in 2017. As a percentage of operating revenues, mortgage interest
expense decreased slightly to 18.3% for the year ended December 31, 2017
compared to 18.8% for last year due to refinancing of mortgages at lower
interest rates and higher operating revenues from stabilized properties and
acquisitions. Additional information on the interest on mortgages payable
and other financing costs is included in note 20 to the accompanying audited
consolidated annual financial statements and the Liquidity and Financial
Condition section of this report.
Interest on Bank Indebtedness and Other Financing Costs
Interest on bank indebtedness relates to borrowings under the Credit
Facilities (see Liquidity and Financial Condition discussion) and costs related
to non-controlling interest of a shareholder in CAPREIT’s foreign subsidiaries.
Additional information on non-controlling interest costs is included in note 20
to the accompanying audited consolidated annual financial statements.
Other Income
Other income primarily consists of dividends received from investments
(see note 7 to the accompanying audited consolidated annual financial
statements), income from investment in associate, gains realized on the sale
of investments, and asset management and property management fees.
($ Thousands)
For the Year Ended December 31,
2017
2016
Recurring
Investment Income
Net Profit from Equity-
Accounted Investment (1)
Asset and Property Management Fees
$
1,341
$
1,304
15,345
6,173
10,600
5,195
Non-Recurring
Total
62
22,921
$
137
17,236
$
(1) Includes unrealized gain on remeasurement of IRES investment properties of
$9,707 and $6,021 for the years ended December 31, 2017 and December 31,
2016, respectively.
4 0
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
Effective April 11, 2014, CAPREIT entered into an external management
agreement, as amended from time to time, to perform asset management
and property management services for IRES, which owns properties in
Dublin, Ireland. Asset management and property management fees included
in Other Income for the year ended December 31, 2017 are $6.2 million
compared to $5.2 million in the prior year. Expenses related to the asset
management and property management services are included in Trust
expenses for the year ended December 31, 2017.
iii) Interest rate contracts for which hedge accounting was not being
applied: The €40 million interest rate swap agreement effective April 21,
2014, fixed the interest rate at 2.87% (assuming a constant margin of
1.65% per annum), which matures in August 2018. The €40,000 interest
rate swap agreement was settled in July 2017. This agreement effectively
converted 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 was marked-to-market in net income ($0.2 million unrealized
gain for the year ended December 31, 2017).
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.
Additional information on the above instruments is included in notes 15 and
16 to the accompanying audited consolidated annual financial statements
and the Liquidity and Financial Condition section.
Unrealized and Realized Gain on Derivative Financial Instruments
Interest rate contracts for which hedge accounting is not being applied:
i)
As at December 31, 2017, CAPREIT has an interest rate swap agreement:
$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.
The hedge became ineffective in July 2017. The ineffective portion was
recognized in net income (the ineffective gain component of the hedge of
$1,921 thousand for the year ended December 31, 2017), and recorded
under derivative financial instruments on the consolidated statements of
income and comprehensive income for the year ended December 31,
2017. The accumulated loss recorded in AOCL will be amortized in the
consolidated statements of income from AOCL over the remaining term
of the credit facility.
ii) Interest rate contracts for which hedge accounting is not being applied:
CAPREIT entered into a cross currency swap to (i) hedge a US-based
loan of USD $186,436 into euros of €163,540 effective July 2017 and
(ii) covert the variable interest rate on the US-based loan of LIBOR plus
1.65% to a fixed interest rate of EURIBOR plus 1.65% equalling 1.20%
and maturing in June 2019. The US-based loan was drawn from the
Acquisition and Operating Facility in July 2017. The loss on the hedge
has been recorded under loss on derivative financial instruments on the
consolidated statements of income and comprehensive income for the
year ended December 31, 2017 of $14.0 million and the cumulative
mark-to-market loss of $14.0 million is in other non-current liabilities as
at December 31, 2017.
Gain on Foreign Currency Translation
For the year ended December 31, 2017, CAPREIT recognized a gain on
foreign exchange of $3.5 million compared to a gain of $4.4 million for the
year ended December 31, 2016. The gain on foreign currency translation
recognized in the consolidated statement of income primarily represents the
foreign exchange translation on the US LIBOR and euro LIBOR borrowings
for the investment in Ireland and The Netherlands. The combination of
cross-currency swap (as indicated above) with the US LIBOR borrowing
economically represents a fixed euro-based borrowing where the mark-to-
market on the cross-currency swap is recorded under loss on derivative
financial instruments on the Consolidated Statements of Income and
Comprehensive Income. CAPREIT does not apply hedge accounting for its
investment in Ireland and The Netherlands against the US LIBOR and euro
LIBOR borrowings and cross-currency swap related to it; therefore, the
accounting results may differ from the naturally offsetting asset and liability
exposures to foreign exchange. The foreign exchange gain or loss on the
investment in Ireland and The Netherlands 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 fluctua-
tions 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 million euro-denominated
debt on CAPREIT’s consolidated balance sheets. Any foreign currency
gains/losses arising from the euro-denominated debt was offset by the for-
eign currency gain/loss arising from the investment in The Netherlands for-
eign operations. The effective portion of foreign exchange gains and losses
on the €22.5 million euro-denominated debt was recognized in other com-
prehensive income (“OCI”) and the ineffective portion was recognized in net
income. The hedge became ineffective July 2017 when the euro LIBOR
borrowing was repaid.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
41
MANAGEMENT’S DISCUSSION ANDANALYSIS
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)
For the Year Ended December 31,
Trust Units
Exchangeable Units (1)
Units under the DUP (2)
Basic Number of Units
Plus:
Dilutive Units under the LTIP (2), (3)
Dilutive Units under the SELTIP (2), (3)
Unit 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
2016
2017
Outstanding
Number of Units
2017
135,549
146
267
135,962
397
344
826
299
137,828
130,372
161
261
130,794
431
311
701
245
132,482
136,912
131
260
137,303
470
555
524
– (5)
138,852
(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 audited consolidated annual financial statements for the year ended December 31, 2017 contained in CAPREIT’s 2017 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 1,263,962 unexercised options outstanding under the UOP.
Distribution Reinvestment Plan (“DRIP”) and Net Distributions Paid
($ Thousands)
For the Year Ended December 31,
2017
2016
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
$
$
173,072
186
2,766
176,024
(51,305)
(2,766)
121,953
30.7%
$ 161,483
200
2,730
164,413
(51,780)
(2,730)
$ 109,903
33.2%
(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, 2017 contained in CAPREIT’s 2017 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. Reinvestments pursuant to the DRIP will increase
4 2
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
the total number of Units outstanding overtime, which may result in upward
pressure on the total amount of net distributions paid if those participants
do not elect to join the DRIP or choose cash distributions.
The average participation rate in the DRIP and other plans under which
distributions are reinvested decreased for the year ended December 31,
2017 to 30.7% from 33.2% for the prior 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 capital needs.
FFO as presented is in accordance with the recommendations of the Real
Property Association of Canada (“REALpac”), 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.
As noted in the Future Accounting Changes section of this MD&A,
CAPREIT intends to adopt the new standard IFRS 9 – Financial Instruments
(“IFRS 9”) on the required effective date of January 1, 2018. One impact of
adopting this new standard is that the unrealized gains or losses on available-
for-sale marketable securities will be included in IFRS net income, whereas
they are recorded in other comprehensive income in 2017 and prior years
consolidated financial statements. Based on the FFO definition currently set
forth by REALpac, which was revised in April 2014 and restated in February
2017, the unrealized gains or losses on available-for-sale marketable securi-
ties would be included in FFO effective January 1, 2018. However, CAPREIT
believes that including such unrealized gains or losses on available-for-sale
marketable securities in FFO does not represent the recurring operating
performance of CAPREIT. As a result of the adoption of IFRS 9, effective
January 1, 2018, CAPREIT’s method of calculating FFO will be in compliance
with REALpac’s definition of FFO with the exception of (i) the adjustment for
unrealized gains or losses on available-for-sale marketable securities in its
calculation of FFO and (ii) the adjustment for amortization of certain other
assets consistent with prior years.
Payout ratios compare total distributions declared and net distributions
paid to these non-IFRS financial measures.
A reconciliation of net income to FFO is as follows:
($ Thousands, except per Unit amounts)
For the 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 and Deferred Income Taxes
Gain on Foreign Currency Translation
FFO Adjustment for Income from Equity-Accounted Investments (1)
Unrealized and Realized Loss on Derivative Financial Instruments
Net FFO Impact Attributable from Non-Controlling Interest
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.
2017
2016
$
836,811
$
439,480
(626,953)
488
852
18,934
186
7,409
(3,515)
(9,707)
11,866
4,718
4,434
245,523
1.806
1.781
176,024
71.7%
121,953
123,570
49.7%
$
$
$
$
$
$
(227,335)
1,813
731
14,217
200
7
(4,441)
(6,021)
397
(68)
4,249
223,229
1.707
1.685
164,413
73.7%
109,903
113,326
49.2%
$
$
$
$
$
$
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
4 3
MANAGEMENT’S DISCUSSION ANDANALYSIS
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, accelerated vesting of
previously-granted RUR units, and large acquisition research costs relating
to transactions that were not completed. 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 under
the Net Income section in this MD&A for additional information on hedging
instruments currently in place. NFFO is not a measure of sustainability of
distributions.
A reconciliation of FFO to NFFO is as follows:
($ Thousands, except per Unit amounts)
For the 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)
Other Employee Costs (2)
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
2017
2016
$
245,523
$
223,229
3,023
324
–
1,604
250,474
1.842
1.817
176,024
70.3%
121,953
128,521
48.7%
$
$
$
$
$
$
3,105
–
5,474
–
231,808
1.772
1.750
164,413
70.9%
109,903
121,905
47.4%
$
$
$
$
$
$
(1) Expenses included in trust expenses relates to transactions that were not completed.
(2) Expenses included in Unit-based compensation expenses relate to accelerated vesting of previously-granted RUR Units.
NFFO for the year ended December 31, 2017 increased by 8.1%
compared to last year, primarily due to the contribution from acquisitions,
and higher NOI for properties owned prior to December 31, 2016.
For the year ended December 31, 2017, basic NFFO per Unit increased
by 4.0% compared to last year, despite an approximate 4.0% increase in
the weighted average number of Units outstanding, offset by strong organic
NOI growth and contributions from acquisitions. Management expects per
Unit FFO and NFFO and related payout ratios to strengthen further in the
medium term as a result of NOI contributions from recent acquisitions.
Comparing total distributions declared to NFFO, the NFFO payout ratio
for the year ended December 31, 2017 improved to 70.3% compared to
70.9% for last year. The effective NFFO payout ratio, which compares NFFO
to net distributions paid, increased for the year ended December 31, 2017
to 48.7% from 47.4% for the prior year, both well within CAPREIT’s annual
target. CAPREIT anticipates a long-term annual NFFO payout ratio in the
70% to 80% range.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
Adjusted Cash Flows From
Operations and Distributions Declared
As a measure of economic cash flows, CAPREIT calculates Adjusted Cash
Flows from Operations (“ACFO”) using guidelines from the recently published
whitepaper by REALpac, “White Paper on Adjusted Cashflow From
Operations (ACFO) for IFRS” dated February, 2017. As a result, CAPREIT
no longer presents adjusted FFO, which was a previously presented Non-
IFRS measure. CAPREIT’s method of calculating adjusted FFO may have
differed from that of other real estate entities and, accordingly, may not
have been comparable to such amounts reported by other issuers in prior
quarters. Management did not rely on adjusted FFO to operate the business
of CAPREIT, plan CAPREIT’s capital spending or determine CAPREIT’s
distributions, or the sustainability of such distributions.
There may be periods where actual distributions declared may exceed
ACFO due to weaker performance in certain periods from seasonal
fluctuations, regional market volatility, or from year to year based on the
timing of property capital investments and the impact of acquisitions.
These shortfalls are funded, if necessary, with CAPREIT’s Acquisition and
Operating Facility.
ACFO is a measure of economic cash flow based on the operating
cash flows generated by the business adjusted to deduct items such as
interest expense, non-discretionary capital expenditures as described below,
capitalized leasing costs, tenant improvements, and amortization of other
financing costs, partially offset by investment income. ACFO as calculated by
CAPREIT is in accordance with the corresponding definition recommended
by REALpac, with the exception of the adjustment for investment income.
It may not, however, be comparable to similar measures presented by other
real estate trusts or companies in similar or different industries.
The following table reconciles cash generated from operating activities
(per consolidated financial statements) to ACFO:
($ Thousands, except per Unit amounts)
For the Year Ended December 31,
Cash Generated From Operating Activities
Adjustments: (1)
Interest expense included in cash flow from financing activities
Non-Discretionary Property Capital Investments (2)
Capitalized Leasing Costs (3)
Tenant Improvements
Amortization of Other Financing Costs (4)
Non-controlling Interest
Investment Income
ACFO
Total Distributions Declared
Excess (Deficit) ACFO Over Distributions Declared
ACFO Payout Ratio
2017
2016 (5)
$
358,941
$
357,360
(111,138)
(38,724)
(3,124)
(110)
(5,689)
(184)
8,478
208,450
176,024
32,426
84.4%
$
$
$
(109,097)
(58,501)
(3,679)
(559)
(4,674)
(1)
4,519
185,368
164,413
20,955
88.7%
$
$
$
(1) Changes in working capital have not been adjusted in the ACFO calculation on the basis that the changes in prepaids, receivables, deposits, accounts payables and
other liabilities, security deposits, and other non-cash operating assets and liabilities are considered normal course of operating the company.
(2) Based on the actual 2017 and 2016 Non-Discretionary Property Capital Investments per suite and site multiplied by the weighted average number of residential suites and
sites during the period. The Non-Discretionary Property Capital Investments per suite and site for 2017 and 2016 on an annual basis is $802 and $1,251, respectively, applied
equally throughout the year. The weighted average number of residential suites and sites for year ended December 31, 2017 and 2016 is 48,307 and 46,780, respectively.
(3) Comprises tenant inducements and direct leasing costs.
(4) Includes amortization of deferred financing costs, CMHC premiums, deferred loan costs and fair value adjustments.
(5) Amounts presented for the year ended December 31, 2016 and year ended December 31, 2017, have been presented in accordance with the calculation of ACFO described
above and are not comparable to other measures such as adjusted FFO presented in prior periods.
For the year ended December 31, 2017, CAPREIT’s 2017 actual non-
discretionary property capital investments of $38.7 million were lower than
the 2017 forecast non-discretionary property capital by approximately
$18.5 million. The reasons for the variance are mainly related to deferral
of certain structural and roof projects, and certain programs that were
completed under the forecasted costs.
Significant non-discretionary property capital investment programs are
usually completed within three to five years. Actual completion of such
projects may differ from the forecasted timelines as they are longer term in
nature and professional judgement is applied to forecast completion dates.
The projects deferred in 2017 are expected to be completed in the near
term, and will be appropriately included in the florecast.
For the year ended December 31, 2017, CAPREIT’s ACFO exceeded
distributions by $32.4 million compared to $21.0 million for the same period
last year. The increase in the current year relates to lower non-discretionary
property capital investments required.
Management does not differentiate between maintenance and value-
enhancing property capital investments. Maintenance property capital
investments are generally not clearly identifiable, nor do they have a com-
mon definition and would require significant judgement to classify property
capital investments as maintenance or value-enhancing capital investments.
In addition, there is no generally accepted definition of maintenance capital
investments in the Canadian real estate industry. As a result, Management
does not differentiate between maintenance and value-enhancing, and has
instead determined to classify property capital investments into two catego-
ries: discretionary and non-discretionary. Management is of the view that
this classification, while still requiring a degree of professional judgement,
provides a better measure of economic cash flows.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
4 5
MANAGEMENT’S DISCUSSION ANDANALYSIS
Non-discretionary Property Capital Investments are those investments
Management believes are essential for the safety of residents and to ensure
the structural integrity of the properties. These investments may enhance
the property’s operating effectiveness including its profitability through
increases in revenues or reduction in costs over the long-term. Included
in non-discretionary capital expenditures are items such as building
improvements, which include items such as roof, structural, balcony,
sidewalks, windows, brick, electrical, MHC infrastructure investments,
and fire safety. Management uses its professional judgement to include
other capital expenditure categories that could impact the safety of
residents. These Non-discretionary Property Capital Investments are in
addition to regular R&M costs, which have historically averaged in the
range of $800 to $850 per residential suite annually and are expensed
to NOI. Repairs and maintenance costs incurred during the year 2017
of close to $1,100 per suite were above the expected annual run rate of
between $800 to $850 per suite, as many programs were accelerated
during the year.
Discretionary Property Capital Investments are capital expenditures
made to the property that are not essential to operation of the business in the
short-term. These investments may enhance the property’s operating effec-
tiveness, including its profitability through increases in revenues or reduction
in costs over the long-term. Included in discretionary capital expenditures are
items such as suite improvements, common area, energy-saving initiatives,
equipment, boilers, elevators, and appliances.
The following table reconciles the actual 2017, 2016, and 2015 Non-
Discretionary Property Capital Investments per suite and site:
($ Thousands, except per Unit amounts)
Non-Discretionary Property Capital Investments (1)
Discretionary Property Capital Investments (1), (2)
Total Property Capital Investments (2)
Non-Discretionary Property Capital Investments
Weighted Average Number of Suites and Sites
Non-Discretionary Property Capital Investments per Suite and Site
(1) See Property Capital Investments section for further details.
(2) Excludes property capital investments relating to development and intensification.
2017
38,724
112,743
151,467
38,724
48,307
802
$
$
$
$
2016
58,501
133,295
191,796
58,501
46,780
1,251
$
$
$
$
2015
57,307
103,743
161,050
57,307
41,990
1,365
$
$
$
$
To compute Non-discretionary Property Capital Investments under
ACFO, Non-discretionary Property Capital Investments per suite and site
is multiplied by that period’s weighted average number of suites and sites.
Non-discretionary Property Capital Investments reflects forecasted or actual
investments incurred and is applied equally throughout the year.
therefore actual and forecasted capital investments may differ during the
applicable periods. As such, the forecasted Non-Discretionary Property
Capital Investments per suite and site by quarter is subject to change based
on revisions to that year’s forecast in subsequent quarters.
The 2017 Non-discretionary Property Capital Investments has decreased
compared to the amount reported in the prior quarter, mainly due to certain
deferred capital expenditure initiatives.
CAPREIT’s capital investments programs are affected by seasonal cycles,
Adjusted Cash Generated from Operating Activities
As indicated by National Policy 41-201, “Income Trusts and Other Indirect
Offerings”, the following table quantifies cash generated from operating activi-
ties net of interest expense included in cash flow from financing activities.
($ Thousands, except per Unit amounts)
Year Ended December 31,
Cash Generated From Operating Activities
Adjustments
Interest expense included in cash flow from financing activities
Adjusted Cash Generated from Operating Activities
Total Distributions Declared
Excess
2017
2016
$
358,941
$
357,360
(111,138)
247,803
176,024
71,779
$
$
$
(109,097)
248,263
164,413
83,850
$
$
$
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MANAGEMENT’S DISCUSSION ANDANALYSIS
The following table outlines the differences between adjusted cash 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)
For the Year Ended December 31,
Net Income
Adjusted Cash Generated from Operating Activities
Total Distributions Declared
Net Distributions Paid
Excess of Net Income over Total Distributions Declared
Excess of Net Income over Net Distributions Paid
Excess of Adjusted Cash Generated from Operating Activities over Total Distributions Declared
Excess of Adjusted Cash Generated from Operating Activities over Net Distributions Declared
2017
2016
$
$
$
$
$
$
$
$
836,811
247,803
176,024
121,953
660,787
714,858
71,779
125,850
$
$
$
$
$
$
$
$
439,480
248,263
164,413
109,903
275,067
329,577
83,850
138,360
CAPREIT does not use net income 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
expenditure requirements.
For the year ended December 31, 2017, CAPREIT’s Adjusted Cash
Generated from Operating Activities exceeded distributions declared by
$71.8 million compared to $83.9 million for the same period last year. As
per OSC Staff Notice 51-724, distributions in excess of Adjusted Cash
Generated from Operating Activities represents a return of capital, rather
than a return on capital, since they represent cash payments in excess of
cash generated from CAPREIT’s continuing operations during the period.
Management ensures there is adequate overall liquidity through: (i) ACFO;
(ii) mortgage debt secured by its investment properties; (iii) secured short-
term debt financing with three Canadian chartered banks; and (iv) equity
financing to fund repairs and maintenance expenditures and property capital
investment commitments and distributions to Unitholders and to provide for
future growth in the business, primarily through acquisitions.
SECTION IV
PROPERTY CAPITAL INVESTMENTS
CAPREIT capitalizes all capital investments related to the improvement
of its properties. These investments have the objective of growing future
NOI, increasing property value over the long term, ensuring life safety and
safeguarding of assets.
An important component of CAPREIT’s property capital investment
strategy is to acquire properties at costs significantly below current
replacement costs and improve their operating performance by investing
annually in order to sustain and grow the portfolio’s future rental income-
generating potential over its useful life.
To achieve its property capital investment objectives, taking into
account CAPREIT’s acquisition history, recent soft economic conditions
and the availability of competitive pricing from construction trades at the
time, in 2009, CAPREIT formulated and embarked on a multi-year capital
investment plan that accelerates spending on planned building improvement
programs, including upgrading parking garages, balconies and other
structural improvements. These investments are closely connected to
CAPREIT’s property acquisitions, many of which were anticipated at the
time of such acquisitions and were included in the acquisition analysis,
to ensure such transactions are accretive. Management believes these
investments will increase the productive capacity, the useful economic life
and the operating capabilities of CAPREIT’s properties and enhance their
future cash 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 relatively high
occupancy levels throughout any unfavourable economic conditions.
These investments are expected to continue to increase average monthly
rents relative to market condition while improving life safety and resident
satisfaction. Management believes strategic investments will position the
portfolio for improved operating performance over the long term.
For the year ended December 31, 2017, CAPREIT made property capital
investments (excluding head office assets) of $156.8 million, compared
to $195.7 million for last year. Overall property capital investments were
comparable to the prior year with stabilized properties lower at $100.4 million
compared to $119.4 million in the prior year, offset by higher investments
in acquisitions completed over the past five years. Energy-saving initiatives
and suite and common area improvement costs generally tend to increase
NOI more quickly compared to other capital investment categories.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
4 7
MANAGEMENT’S DISCUSSION ANDANALYSIS
CAPREIT continues to invest in environment-friendly and energy-
saving initiatives, including high-efficiency boilers, energy-efficient
lighting systems and water saving programs, which have permitted
CAPREIT to mitigate potential increases in utility and R&M costs and have
improved overall portfolio NOI significantly, as discussed in the Results
of Operations section.
A breakdown of property capital investments (excluding head office
assets) is summarized by category below:
Property Capital Investments by Category
($ Thousands)
Year Ended December 31, 2017
Stabilized (1), (3)
Acquisitions (2)
Total
Net
Non-discretionary Property Capital Investments:
Building Improvements
MHC Land Lease Sites
Fire Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Development:
Intensification
Development
Total
18,811
1,474
369
20,654
34,242
21,021
2,286
9,562
8,812
3,654
79,577
100,231
856
–
856
101,087
35,665
2,438
621
38,724
51,570
26,342
3,045
12,208
14,532
4,946
112,643
151,367
3,516
1,925
5,441
156,808
16,854
964
252
18,070
17,328
5,321
759
2,646
5,720
1,292
33,066
51,136
2,660
1,925
4,585
55,721
Net
Year Ended December 31, 2016
Stabilized (1), (3)
Acquisitions (2)
Total
Non-discretionary Property Capital Investments:
Building Improvements
MHC Land Lease Sites
Fire Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Development:
Intensification
Total
(1) Properties owned as of December 31, 2012, excluding disposed properties.
(2) Includes properties acquired and disposed of since December 31, 2012.
(3) Comprises 35,040 residential suites and sites as at December 31, 2012.
28,844
151
497
29,492
37,549
23,078
2,008
8,443
12,807
3,427
87,312
116,804
2,496
119,300
28,086
589
334
29,009
17,502
12,593
1,510
6,304
5,997
2,077
45,983
74,992
1,450
76,442
56,930
740
831
58,501
55,051
35,671
3,518
14,747
18,804
5,504
133,295
191,796
3,946
195,742
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
%
22.7
1.6
0.4
24.7
32.9
16.8
1.9
7.8
9.3
3.2
71.9
96.6
2.2
1.2
3.4
100.0
%
29.1
0.4
0.4
29.9
28.1
18.2
1.8
7.5
9.7
2.8
68.1
98.0
2.0
100.0
MANAGEMENT’S DISCUSSION ANDANALYSIS
CAPREIT’s capital investments programs are affected by seasonal
cycles, and professional judgement used by management to determine
timing of property capital investments, therefore actual and forecasted capi-
tal investments may differ during the applicable periods. The 2017 Actual
figures decreased for Non-discretionary Property Capital Investments,
Discretionary Property Capital Investments and Development compared to
the amount forecasted in the prior quarter. These decreases are due to the
change in timing and scope of existing capital investment projects, while
the Development Forecast is lower primarily due to Management’s revised
expectation of processing time for development applications. The regula-
tory and application processing is subject to factors beyond Management’s
control and varies between projects.
The significant portfolio growth generated since 2011 has led
CAPREIT to adjust its multi-year capital investment programs, as acqui-
sitions are expected to have major capital expenditures within the
first five years of purchase. Based on a revised multi-year property
capital investment plan, Management expects CAPREIT to complete
property capital investments (excluding development and intensification) of
approximately $185 million to $195 million in 2018, including approximately
$50 million targeted at acquisitions completed since January 1, 2014, and
approximately $25 million for high-efficiency boilers and other energy-
saving initiatives.
The table below includes estimated 2018 capital expenditures for
intensification for buildings expected to be completed in 2018. It also
presents development costs for 2018, which include costs related to
planning, rezoning, architectural surveys, application fees, and building
permits. The following budgeted capital expenditures may vary from actuals
as the planned expenditures may be accelerated or adjusted as necessary.
2018 Capital Expenditure Budget
($ Thousands)
Investment Properties
Stabilized (1)
Acquisitions (2)
Total
%
Net
Non-discretionary Property Capital Investments:
Building Improvements
MHC Land Lease Sites
Fire Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Boilers and Elevators
Appliances
Development
Intensification
Development
Total Development
Total Capital Expenditures
(1) Properties owned as of December 31, 2013 excluding disposed properties.
(2) Includes properties acquired and disposed of since December 31, 2013.
39,600
3,500
1,000
44,100
31,500
29,900
3,800
10,300
17,400
4,900
97,800
13,500
200
700
14,400
10,400
9,200
1,100
2,400
7,700
1,200
32,000
Net
Stabilized (1)
Acquisitions (2)
3,600
8,400
12,000
153,900
1,900
–
1,900
48,300
53,100
3,700
1,700
58,500
41,900
39,100
4,900
12,700
25,100
6,100
129,800
Total
5,500
8,400
13,900
202,200
26.3%
1.8%
0.8%
28.9%
20.7%
19.3%
2.4%
6.3%
12.4%
3.0%
64.1%
%
2.7%
4.3%
7.0%
100.0%
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4 9
MANAGEMENT’S DISCUSSION ANDANALYSIS
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, including investments to MHC land lease sites, for 2018 through 2021 for properties owned as of December 31, 2017.
Future Investments in Building Improvements
($ Thousands)
2018
2019
2020
2021
(1) Properties owned as of December 31, 2012 excluding disposed properties.
(2) Includes properties acquired since December 31, 2012.
Stabilized (1)
Estimated Range
$ 36,000 – $ 40,000
$ 20,000 – $ 24,000
$ 16,000 – $ 20,000
$ 6,000 – $ 10,000
Acquisitions (2)
Estimated Range
$ 15,000 – $ 19,000
$ 6,000 – $ 10,000
$ 4,000 – $ 8,000
$ 1,000 – $ 4,000
Management believes CAPREIT has sufficient liquidity (see the Liquidity
and Financial Condition section) to execute the above property capital invest-
ment strategy.
The following table presents the weighted average NOI growth from
2013 through 2017, 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, 2017 were
included in the analysis.
Average NOI Growth by Level of Property Capital Investment Per Suite
Quartile
1st
2nd
3rd
4th
Number
of Properties
43
44
44
44
175
Average
Number of Suites
8,944
8,959
7,958
7,734
33,595
% of Total Capital
Investments (1)
58.3%
25.1%
11.8%
4.8%
100.0%
Weighted
Average
NOI Growth (2)
3.0%
3.8%
4.2%
3.3%
3.6%
(1) As a percentage of total property capital investments over the five-year period to December 31, 2017.
(2) Weighted based on NOI
1st and 2nd quartiles have relatively higher non-discretionary capital
investments and higher capital investments in Alberta and Nova Scotia
regions as percentage of capital investments compared to the 3rd and
4th quartiles. Alberta and Nova Scotia regions have lower NOI growth
due to external market drivers compared to regions such as Ontario and
British Columbia.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
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 must comply with all investment and debt restric-
tions 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. 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)
2017
2016
$ 3,581,501
446,895
64,561
4,876
4,923,406
$ 9,021,239
$ 3,492,923
26,408
60,278
5,061
4,158,149
$ 7,742,819
Threshold
Maximum 70.00%
Minimum $1,800,000
43.57%
56.24%
$ 4,992,824
44.31%
54.36%
$ 4,223,488
Minimum 1.20
Minimum 1.50
2017
1.63
3.19
2016
1.63
3.09
(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.
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,
of total assets, or (ii) 70% of gross book value, determined on a historical basis, of total assets, and may only be increased above such limits with CMHC’s consent.
(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, 2016, the tangible net worth requirement was $1,500,000, which was amended to $1,800,000 effective
November 24, 2017.
(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.
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5 1
MANAGEMENT’S DISCUSSION ANDANALYSIS
LIQUIDITY AND FINANCIAL CONDITION
Liquidity and Capital Resources
Management ensures there is adequate overall liquidity to fund repairs and
maintenance expenditures, discretionary property capital investment com-
mitments and distributions to Unitholders and to provide for future growth
in the business. CAPREIT finances these commitments through: (i) ACFO;
(ii) mortgage debt secured by its investment properties; (iii) secured short-
term debt financing with three Canadian chartered banks; and (iv) equity and
funds reinvested from its DRIP. 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 ACFO to fund the current level of distributions. Management
expects the combination of the current level of funds reinvested from
its DRIP, ACFO in excess of distributions declared, mortgage top-
ups and the available borrowing capacity of the Credit Facilities to be
sufficient to fund its ongoing discretionary property capital investments.
ii) Management believes CAPREIT is well-positioned to meet its mortgage
renewals and refinancing goals for 2018 due to the continuing availability
of CMHC-insured financing. Management does not anticipate any mate-
rial difficulties in completing the renewal of mortgages maturing during
2018 of approximately $118.0 million, which have an effective interest
rate of approximately 3.08%, and refinancing approximately $115.3 million
of principal repayments through 2018 with new mortgages.
iii) Investment properties with a fair value of $8.6 billion have been pledged
as security as at December 31, 2017. In addition, CAPREIT has invest-
ment properties with a fair value of approximately $304.7 million as at
December 31, 2017 that are not encumbered by mortgages and secure
only the Acquisition and Operating Facility. CAPREIT intends to maintain
unencumbered investment properties with an aggregate fair value in the
range of $150 million to $180 million over the long term.
iv) Effective June 30, 2017, CAPREIT amended its credit agreement to,
among other things: (i) allow for US base rate and US LIBOR advances,
and (ii) amend the “conversion date”, when the revolving facility converts
to a two-year non-revolving term facility, to June 30, 2018.
v) Effective June 30, 2016, CAPREIT amended its credit agreement to,
among other things: (a) increase its credit facilities to $505.0 million in the
aggregate; (b) increase the maximum amount of its existing $340.0 million
revolving credit facility to $440.0 million (the “Acquisition and Operating
Facility”); (c) add an additional lender in the syndicate thereto; (d) amend
the tangible net worth requirement to $1,500 million; and (e) extend
the maturity date of the existing $65.0 million five-year non-revolving
term credit facility to June 30, 2021. In respect to the Acquisition and
Operating Facility, effective December 19, 2016, the aggregate amount
of euro LIBOR borrowings at any time shall not exceed €150.0 million
while the Canadian dollar equivalent of the aggregate principal amount of
all advances (including the euro LIBOR and US LIBOR borrowings) under
the Acquisition and Operating Facility shall not exceed $440.0 million.
Effective November 24, 2017, CAPREIT amended its credit agreement
to, among other things: (a) increase its Acquisition and Operating Facility
by $100.0 million to $540.0 million and (b) amend the tangible net worth
requirement to $1,800 million.
vi) In respect to the Acquisition and Operating Facility, the aggregate amount
of euro LIBOR borrowings at any time shall not exceed €150.0 million
while the Canadian dollar equivalent of the aggregate principal amount of
all advances (including the euro LIBOR and US LIBOR borrowings) under
the Acquisition and Operating Facility shall not exceed $540.0 million.
vii) CAPREIT has a $65.0 million credit facility on two of the MHC land lease
sites maturing June 30, 2021, 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. There is an interest rate swap agreement on this facility,
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.
viii) As at December 31, 2017, CAPREIT has US LIBOR borrowings of USD
$187.0 million that bears the US LIBOR rate plus a margin of 1.65%
per annum. CAPREIT entered into a cross-currency swap to hedge the
US LIBOR borrowings of USD $187.0 million effective July 2017 and
converted the variable interest rate on the US LIBOR borrowings plus
1.65% to a fixed interest rate of EURIBOR plus 1.65% equalling 1.20%
and maturing in June 2019.
ix) CAPREIT has euro LIBOR borrowings of €47.0 million included in bank
indebtedness that bears interest at the euro LIBOR rate plus a margin of
1.65% per annum. The margins are 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 on June 30, 2020.
x) 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 transaction closed on August 3, 2016, and under
the over-allotment 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.
In order to maintain and enhance its CMHC-insured financing program,
and consistent with CMHC’s risk management practices involving large
borrowers, CAPREIT has entered into an 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 man-
ner in which CAPREIT conducts its business or its approach to mortgage
financing. The LBA provides for, among other things:
i) Enhanced disclosure to CMHC;
ii) Certain financial covenants and commitments and limitations on
indebtedness, none of which are inconsistent with CAPREIT’s current
requirements under its DOT and existing credit and mortgage facilities;
iii) The posting of a revolving letter of credit with respect to certain
capital expenditures on a portfolio basis, rather than an individual property
basis; and
iv) Cross-collateralization of mortgage loans for certain CMHC-insured
mortgage lenders.
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2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
CAPREIT is in compliance with all its investment and debt restrictions and
financial covenants contained in the DOT, the LBA and the Credit Facilities.
Under the terms of the LBA, total indebtedness of CAPREIT is limited to
the greater of: (i) 60% of Gross Book Value determined on a fair value basis,
or (ii) 70% of Gross Book Value determined on a historical basis, and may
only be increased above such limits with CMHC’s consent. Under the LBA,
financial covenants are not significantly different than those required under
the DOT or Credit Facilities other than as described above.
The working capital deficiency, as presented on CAPREIT’s consolidated
balance sheets as at December 31, 2017, 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, 2017 and December 31, 2016:
Acquisition and Operating Facility
($ Thousands)
As at December 31,
Facility
Less:
US LIBOR Borrowings
Euro LIBOR Borrowings
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 (4)
Debt Service Coverage Ratio (times) (2)
Interest Coverage Ratio (times) (2)
Weighted Average Mortgage Interest Rate (3)
Weighted Average Mortgage Term to Maturity (years)
2017
2016
$
540,000
$ 440,000
(234,592)
(70,744)
(141,559)
(6,313)
86,792
1.82%
$
–
(131,630) (1)
(26,408)
(6,040)
$ 275,922
2.55%
2017
38.73%
43.57%
56.24%
41.81%
1.63
3.19
3.08%
5.66
2016
43.97%
44.31%
54.36%
45.09%
1.63
3.09
3.20%
6.10
(1) Based on the historical cost of investment properties.
(2) Based on the trailing four quarters ended December 31, 2017.
(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, 2017
would be 3.17% (December 31, 2016 – 3.3%).
(4) Based on the market capitalization as defined in the Performance Measures table of the MD&A, plus total debt.
As at December 31, 2017, the overall leverage represented by the ratio
of total debt to gross book value was 43.57% compared to 44.31% for last
year. As at December 31, 2017, CAPREIT’s total debt was 41.81% of total
market capitalization compared to 45.09% for last year.
The effective portfolio weighted average interest rate has declined from
3.20% as at December 31, 2016 to 3.08% as at December 31, 2017, 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 still be scope to further reduce the effective port folio
weighted average interest rate based on foreseeable market conditions,
although with rising rates, this opportunity may be limited. 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.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
5 3
MANAGEMENT’S DISCUSSION ANDANALYSIS
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 under-
lying mortgage ranging between 25 and 35 years.
As at December 31,
2017
2016
Percentage of
CMHC-Insured Mortgages (1)
Percentage of
97.0%
Fixed-Rate Mortgages
100.0%
96.6%
97.9%
(1) Excludes the mortgages on the MHC land lease sites and European financings.
The following table summarizes the changes in the mortgage portfolio during the periods:
($ Thousands)
As at December 31,
Balance, Beginning of the Year
Add:
New Borrowings on Acquisitions
Assumed
Refinanced
Foreign Currency Translation
Less:
Mortgage Repayments (2)
Mortgages Matured (3)
Mortgages Repaid on Dispositions of Investment Properties
Change in Deferred Financing Costs, Fair Value Adjustments, Net
Balance, End of the Year (1)
2017
2016
$ 3,492,923
$ 3,097,773
253,375
3,713
211,141
12,543
(119,458)
(266,575)
(4,951)
(1,210)
$ 3,581,501
336,468
25,356
299,300
(4,323)
(102,522)
(130,810)
(26,407)
(1,912)
$ 3,492,923
(1) Included in mortgages payable as at December 31, 2016 is a €92,900 ($131,630) non-amortizing euro LIBOR borrowing.
(2) Includes repayment of euro LIBOR borrowing of €5,000.
(3) In July 2017, euro LIBOR borrowings on the Acquisition and Operating Facility of €87,900 ($129,336), classified as mortgages payable, were repaid.
The following table presents refinancings for the year ended December 31, 2017 and the weighted average interest rates obtained:
($ Thousands)
First Quarter
Second Quarter
Third Quarter (3)
Fourth Quarter
Acquisitions
Total and Weighted Average
Original
Mortgage
Amount
24,021
79,484
163,070
–
–
266,575
$
$
Original
Stated
Interest
Rate (1)
4.55%
4.59%
2.53%
–
–
3.33%
New
Mortgage
Amount
45,280
139,005
26,856
–
253,375
464,516
$
$
New
Stated
Interest
Rate (1), (2)
2.97%
2.60%
2.26%
–
1.86%
2.21%
Weighted
Average
Term on New
Mortgages
(Yrs)
9.9
8.7
3.3
–
6.5
7.3
Top-Up
Financing
Amount
21,259
59,521
(136,214)
–
253,375
197,941
$
$
(1) Weighted average.
(2) Excludes CMHC, other financing costs, and hedge impact.
(3) Includes the settlement of Euro LIBOR borrowings on the Acquisition and Operating Facility of €87,900 ($129,336).
5 4
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
For purposes of estimating top-up financing potential, the following
table provides annualized NOI for those properties with mortgages matur-
ing over the next five years and beyond. A property’s full NOI is included
in the first year in which a mortgage matures. The balance of mortgages
remaining on the same property but maturing in other years is also shown.
Management expects to raise between $175 million and $225 million
in total mortgage renewals and refinancings for 2018 excluding financings
on acquisitions.
($ Thousands)
As at December 31, 2017
Year of Maturity
2018
2019
2020
2021
2022
2023 onward
Total
Mortgages
on the Same
Properties Maturing
in Other Years (1)
$
$
17,290
56,001
50,205
(32,852)
(55,565)
(35,079)
–
$
Mortgage
Maturities (1)
118,005
273,324
226,193
349,066
412,277
1,500,226
$ 2,879,091
$
Total
Mortgages
135,295
329,325
276,398
316,214
356,712
1,465,147
$ 2,879,091
NOI of
Properties
with Maturing
Mortgage(s) (2), (3)
18,954
$
47,341
32,526
47,735
57,181
178,518
382,255
$
(1) Mortgage balance due upon maturity.
(2) NOI for the twelve months ended December 31, 2017.
(3) Projected NOI included for acquisitions since December 31, 2016.
The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at December 31, 2017
is as follows:
($ Thousands)
Year
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028–2030
Total
Deferred Financing Costs, Fair Value Adjustments, Net
Total
Principal
Repayments
115,283
$
111,811
105,871
94,726
84,905
66,918
52,940
43,824
22,559
6,220
5,445
710,502
$
$
Mortgage
Maturities
118,005
273,324
226,193
349,066
412,277
310,988
401,478
321,159
298,212
117,292
51,097
$ 2,879,091
$
Mortgage
Balance
233,288
385,135
332,064
443,792 (3)
497,182
377,906
454,418
364,983
320,771
123,512
56,542
$ 3,589,593
(8,092)
$ 3,581,501
% of Total
Mortgage Balance
6.5
10.7
9.3
12.4
13.9
10.5
12.7
10.2
8.9
3.4
1.5
100.0
Interest
Rate (%)(1), (2)
3.08
3.40
2.60
3.83
2.88
3.06
3.23
2.75
2.74
3.05
3.73
3.08 (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, 2017
would be 3.17% (December 31, 2016 – 3.30%).
(3) Included in mortgages payable is a $65.0 million non-amortizing credit facility on two of the MHC land lease sites.
To ensure CAPREIT is not overly exposed to interest rate volatility risk, Management has been successful in staggering the maturity dates within its
mortgage portfolio or entering into long-term financing arrangements.
To reduce its interest cost and cost of capital, Management will continue to leverage its balance sheet strength and the stability of its property portfolio
to fund acquisitions and its capital investment plan, and to refinance its mortgage principal repayments.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
5 5
MANAGEMENT’S DISCUSSION ANDANALYSIS
Unitholders’ Equity and Units Awarded under Unit-based
Compensation Plans
Unitholders’ Equity only represents the issued and outstanding Trust Units,
and excludes the Exchangeable Units and any Units issued in connection
with Unit-based incentive plans. For the purposes of the discussion below,
Exchangeable Units and Units issued in connection with Unit-based incen-
tive plans are treated as equity as they have claims similar or identical to
those of the Trust Units.
Equity offerings and over-allotments for the periods ending December 31,
2017 and December 31, 2016:
($ Thousands, except per Unit amounts)
Period
August 2016
Bought-deal
Over-allotment
Total
Price
Per Unit
$
$
32.20
32.20
Gross
Proceeds
$
$
150,052
15,005
165,057
Transaction
Costs
$
$
6,902
600
7,502
Net
Proceeds
$
$
143,150
14,405
157,555
As at 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
Units
Issued
4,660,000
466,000
5,126,000
$
2017
5,181,885
138,850,084
1,025,398
260,159
521,980
130,655
1,263,962
1.0%
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 NCIB 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, 2016. No Trust Units were acquired and cancelled under these
NCIB programs.
Period Covered under the NCIB
July 28, 2015 to July 27, 2016
Approval Limit
11,493,069
Unitholder Taxation
For taxable Canadian resident Unitholders, the distributions are treated as follows for income tax purposes:
For the Year Ended December 31,
2017
2016
Taxable to Unitholders as Other Income
Taxable to Unitholders as Capital Gain Income
Income Tax Deferral
Total
Total Effective Non-taxable Portion of Distributions
15.21%
4.23%
80.56%
100.00%
82.67%
24.37%
5.45%
70.18%
100.00%
72.90%
The portion of CAPREIT’s distributions to Canadian resident Unitholders
treated as taxable for the year ended December 31, 2017 decreased
over the prior year primarily due to higher distributions and other
taxable deductions, lower capital gain and recapture, offset by lower
capital cost allowance and higher earnings from operations in the
current year.
5 6
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
MANAGEMENT’S DISCUSSION ANDANALYSIS
SECTION V
SELECTED CONSOLIDATED QUARTERLY INFORMATION
Q4 17
Q3 17
Q2 17
Q1 17
Q4 16
Q3 16
Q2 16
Q1 16
Overall Portfolio AMR
1,044
Operating Revenues (000s) (1) $ 164,432
NOI (000s) (1), (2)
$ 100,300
NOI Margin (1)
61.0%
$
1,029
$
$ 161,713
$ 102,655
63.5%
1,015
$
$ 157,087
98,705
$
62.8%
1,007
$
$ 155,610
91,598
$
58.9%
1,003
$
$ 152,725
95,210
$
62.3%
999
$
$ 151,812
96,274
$
63.4%
980
$
$ 146,656
91,083
$
62.1%
971
$
$ 145,638
84,380
$
57.9%
Net Income (Loss) (000s)
FFO (000s) (1), (2)
NFFO (000s) (1), (2)
Total Debt to Gross
Book Value
$ 376,960
61,000
$
61,893
$
$ 215,833
64,685
$
67,036
$
$ 102,885
62,836
$
63,608
$
$ 141,133
57,002
$
57,937
$
$ 124,338
58,085
$
58,860
$
$ 130,663
61,424
$
62,201
$
$
$
$
98,381
57,670
58,452
$
$
$
86,098
46,050
52,295
43.57%
44.76%
44.00%
43.99%
44.31%
44.31%
47.02%
45.80%
FFO per Unit (1) – Basic
NFFO per Unit (1) – Basic
$
$
0.446
0.452
$
$
0.475
0.492
$
$
0.463
0.469
$
$
0.422
0.429
$
$
0.432
0.437
$
$
0.464
0.470
$
$
0.449
0.455
$
$
0.360
0.409
Weighted Average
Number of Units (000s)
– Basic
– Diluted
136,824
138,684
136,295
138,131
135,629
137,554
135,076
136,918
134,585
136,275
132,246
133,991
128,469
130,209
127,816
129,393
(1) Includes the results of investment properties owned as at the period-end.
(2) Non-IFRS financial measures are reconciled with IFRS reported amounts in the respective quarterly SEDAR filings.
CAPREIT’s operations are affected by seasonal cycles, and operating
performance in one quarter may not be indicative of operating performance
in any other quarter of the year. The fourth and first quarters of each year
typically tend to generate weaker performance due to increased energy
consumption in the winter months. 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 adjusted cash flow from operating activities.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
5 7
MANAGEMENT’S DISCUSSION ANDANALYSIS
Fourth Quarter
Operating revenues in the fourth quarter of 2017 increased by 7.7% over the
same quarter in 2016, and NOI increased by a significant 5.3%, driven by
acquisitions, higher operating revenues and lower realty taxes and utility costs
as a percentage of total operating revenues compared to the same period last
year. Net income in the fourth quarter of 2017 increased over the same period
last year to $377.0 million, mainly due to higher unrealized gain on remeasure-
ment of investment properties of $339.2 million, compared to $65.4 million for
the same period last year. Trust expenses for the quarter ended included over
$2.0 million related to one-time items including non-executive reorganization
severances incurred, set-up costs related to our Netherlands operations, and
legal and advisory costs related to non-recurring matters. Unit-based
compensation expenses increased by $6.1 million and interest on mortgages
payable and other financing costs increased by $1.0 million, partially offset
by higher NOI of $5.1 million. Higher NFFO for the fourth quarter was primarily
due to a 0.8% increase in stabilized property NOI and the NOI contribution
from acquisitions completed over the prior twelve months for the three
months ended December 31, 2017.
The following table shows the NOI and the NOI margin attained for each
regional market for the periods ended December 31, 2017 and 2016.
NOI by Geography
For the Three Months Ended
December 31,
($ 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
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
2017
NOI
NOI Margin (%)
2016
NOI
NOI Margin (%)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
39,507
3,635
4,074
4,137
51,353
13,263
4,925
18,188
8,068
3,814
11,882
1,139
4,200
5,339
3,333
130
468
598
768
4,026
95,487
$
2,783
279
340
204
93
1,112
$
4,811
$ 100,298
61.5
59.8
58.2
60.6
61.0
55.4
55.5
55.4
66.9
69.5
67.7
67.8
60.3
61.8
60.6
44.1
63.3
57.8
50.9
73.8
60.9
64.1
77.5
63.3
68.9
42.3
56.4
62.3
61.0
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
38,994
3,632
4,255
3,901
50,782
12,612
5,069
17,681
7,842
3,681
11,523
1,127
4,208
5,335
63.1
62.3
63.1
59.6
62.8
56.7
58.4
57.2
69.4
72.4
70.3
68.9
60.1
61.7
3,312
59.6
180
458
638
691
127
90,089
3,179
263
355
218
80
1,027
5,122
95,211
52.6
63.3
59.9
50.0
81.3
62.1
70.7
75.8
67.0
76.5
37.6
56.0
66.5
62.3
5 8
2 0 17 A N N U A L R E P O R T C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
Increase (Decrease)
Revenue
NOI
Change (%) Change (%) Change (%)
Expense
4.1
4.3
3.9
4.3
4.1
7.6
2.3
6.1
6.7
8.0
7.1
2.8
(0.6)
0.0
(1.0)
(13.7)
2.1
(3.0)
9.3
7.6
(3.4)
3.8
1.3
3.9
3.3
7.6
0.3
7.7
8.7
11.1
17.7
1.8
9.0
10.8
9.5
10.4
15.2
19.5
16.4
6.5
(1.2)
(0.0)
(3.3)
1.9
1.9
1.9
7.4
–
6.7
18.4
(3.6)
12.6
37.3
(4.5)
6.7
12.9
11.5
1.3
0.1
(4.3)
6.1
1.1
5.2
(2.8)
2.9
2.9
3.6
3.1
1.1
(0.2)
0.1
0.6
(27.8)
2.2
(6.3)
11.1
–
8.3
(12.5)
6.1
(4.2)
(6.4)
16.3
8.3
(6.1)
5.3
MANAGEMENT’S DISCUSSION ANDANALYSIS
The stabilized portfolio performance for the three months ended December 31, 2017 compared to December 31, 2016, 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
2017
NOI
NOI Margin (%)
2016
NOI
NOI Margin (%)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
39,122
1,188
2,801
4,137
47,248
13,014
4,925
17,939
7,935
3,727
11,662
1,139
4,200
5,339
3,125
130
468
598
700
86,611
2,783
135
340
204
93
1,112
4,667
91,278
45,000
61.4
49.7
57.4
60.6
60.7
56.1
55.5
55.9
66.9
69.7
67.8
67.8
60.3
61.8
60.6
44.1
63.3
57.8
50.5
60.4
64.1
76.7
63.3
68.9
42.3
56.4
61.9
60.5
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
38,636
1,148
2,990
3,901
46,675
12,658
5,069
17,727
7,744
3,648
11,392
1,127
4,208
5,335
63.1
49.0
63.5
59.6
62.4
56.9
58.4
57.3
69.5
72.5
70.4
68.9
60.1
61.7
3,104
59.5
164
458
622
686
85,541
3,179
119
355
218
80
1,027
4,978
90,519
45,000
55.6
63.3
61.0
50.8
61.9
70.7
70.0
67.0
76.5
37.6
56.0
66.1
62.1
Increase (Decrease)
Revenue
NOI
Change (%) Change (%) Change (%)
Expense
4.0
2.1
3.7
4.3
4.0
4.3
2.3
3.7
6.3
6.3
6.3
2.8
(0.6)
0.0
(1.2)
–
2.1
1.5
2.7
3.7
(3.4)
3.5
1.3
3.9
3.3
7.6
0.2
3.5
8.8
0.8
21.0
1.8
8.5
6.2
9.5
7.1
15.0
17.1
15.6
6.5
(1.2)
(0.0)
(4.0)
26.0
1.9
9.8
3.3
7.7
18.4
(19.6)
12.6
37.3
(4.5)
6.7
12.8
8.0
1.3
3.5
(6.3)
6.1
1.2
2.8
(2.8)
1.2
2.5
2.2
2.4
1.1
(0.2)
0.1
0.7
(20.7)
2.2
(3.9)
2.0
1.3
(12.5)
13.5
(4.2)
(6.4)
16.3
8.3
(6.3)
0.8
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T 2 0 17 A N N U A L R E P O R T
5 9
MANAGEMENT’S DISCUSSION ANDANALYSIS
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table presents a summary of selected financial information for the fiscal years indicated below:
($ Thousands, except per Unit amounts)
Year Ended December 31,
2017
2016
2015
Income Statement
Operating Revenues
Net Income
Distributions
Distributions Declared
Distributions per Unit
Balance Sheet
Investment Properties
Total Assets
Mortgages Payable
Bank Indebtedness
SECTION VI
$
$
$
$
638,842
836,811
173,072
1.275
$ 8,886,556
$ 9,187,170
$ 3,581,501
446,895
$
$
$
$
$
596,831
439,480
161,483
1.238
$ 7,642,017
$ 7,892,994
$ 3,492,923
26,408
$
$
$
$
$
533,798
345,633
142,973
1.207
$ 6,863,140
$ 7,102,828
$ 3,097,773
168,211
$
ACCOUNTING POLICIES AND CRITICAL ESTIMATES, ASSUMPTIONS, AND JUDGEMENTS
Impact of accounting standards effective January 1, 2017
on CAPREIT’s current year financial statements:
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 came 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 came into effect
on January 1, 2017. CAPREIT has applied this standard, which discloses
the changes in mortgage liability and bank indebtedness liability. Please
refer to note 22.
Future accounting changes
As at February 27, 2018, 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 2017:
IFRS 9, Financial Instruments (“IFRS 9”) The revised IFRS 9 incorpo-
rates 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 guid-
ance 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 mea-
surement category for financial assets – fair value through other comprehen-
sive 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. During 2017, CAPREIT performed an assessment
of key areas within the scope of IFRS 9 which includes, but is not limited to,
the classification and measurement of mortgages and loans receivable and
available-for-sale securities, as well as additional disclosures required by
IFRS 7, “Financial Instruments – Disclosure” upon initial adoption of IFRS 9.
CAPREIT intends to adopt the new standards on the required effective date
of January 1, 2018 and will not restate comparative information. Quoted
equity instruments currently held as available-for-sale financial assets with
unrealized gains and losses recorded in OCI will, instead, be measured at
fair value through profit or loss, which will increase volatility due to unreal-
ized gains and losses being recorded in profit or loss. The available-for-sale
cumulative unrealized gain of $8.9 million related to those securities, which
is currently presented as accumulated OCI, will be reclassified to retained
earnings upon adoption. CAPREIT does not expect a significant impact
on its balance sheet or equity, as a result of this change in classification
and measurement.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
IFRS 15, Revenue from Contracts with Customers This new standard
on revenue recognition supersedes IAS 18, Revenue, IAS 11, Construction
Contracts and related interpretations. The new standard provides a single,
comprehensive revenue recognition model. While early adoption is per-
mitted for IFRS reporters, this standard is effective for the interim periods
within years beginning on or after January 1, 2018. CAPREIT’s assessment
includes a review of relevant contracts for the following key areas which
CAPREIT believes are in scope of IFRS 15 including, but not limited to,
laundry, cable, common area maintenance recoveries, and property and
asset management fees. CAPREIT has assessed the impact of IFRS 15 and
has concluded that the pattern of revenue recognition will remain unchanged
upon adoption of the standard. The impact may be limited to additional note
disclosure on the disaggregation of its revenue streams. CAPREIT intends
to adopt the new standard on the required effective date on a modified
retrospective basis without restatement of prior period comparatives.
Management believes the nature of the business and CAPREIT’s port-
folio is defensive against economic downturns and, therefore, the current
economic conditions have not had as significant an impact on CAPREIT’s
critical accounting estimates as may have been realized in other industries.
However, the current economic conditions impacting the general economy
or those more specific to the housing industry or to CAPREIT could have
the potential to alter accounting estimates and could impact CAPREIT’s
financial condition, changes in financial condition or results of operations.
Disclosures in the MD&A, including specifically the Property Portfolio,
Results of Operations, Property Capital Investments, Liquidity and Financial
Condition and Future Outlook sections, outline the risks and both the positive
and negative impacts on CAPREIT’s performance that have resulted, or may
in the future result, from the unusual economic conditions.
Estimates deemed by Management to be more significant, due to sub-
jectivity, 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 recogni-
tion, 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, intro-
duces 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. The
Company is currently assessing the impact of IFRS 16 to its consolidated
financial statements.
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.
IFRIC 23, Uncertainty over Income Tax Treatments This new IFRS inter-
pretation clarifies how the recognition and measurement requirements of IAS
12, Income Taxes, are applied where there is uncertainty over income tax
treatments and is effective for years beginning on or after January 1, 2019.
CAPREIT is currently assessing the impact of the above standards and
amendments.
Critical Estimates, Assumptions, and Judgements
In preparing the accompanying audited consolidated annual financial state-
ments 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 accru-
als, 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.
Investment properties are measured
Valuation of Investment Properties
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 capitaliza-
tion 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 state-
ments 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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 remunera-
tion as IRES’s investment manager and the control exerted over IRES by
its independent Board of Directors. Management will reassess this conclu-
sion 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 financ-
ing 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 rea-
sonable 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, 2017, CAPREIT’s President and Chief Executive
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, 2017.
Management has designed an adequate and appropriate control
framework for the fair value assessment processes to ensure values reported
accurately reflect market conditions. For the fair value assessment process
of investment properties and Unit-based compensation, these controls
include a comprehensive review of the assumptions and estimate, including
those used by the independent appraiser or third parties on an annual basis,
as well as multiple levels of reviews of such key assumptions and data within
CAPREIT by Management with final approval by the Board of Trustees on
an interim and annual basis.
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,
2017, 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, 2017.
CAPREIT did not make any other changes to the design of internal
controls over financial reporting in 2017 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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 could have a significant impact on
CAPREIT if they were to occur 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, 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 for which such property could be sold in an open, competitive
market as of a specified date. Such valuation takes into account all requisite
conditions to a fair sale, such as the buyer and seller each acting prudently
and knowledgeably, and the assumption that such 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 review of
the assumptions utilized by the appraiser in its valuation, which includes a
comparison of such assumptions to the corresponding 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; such a downturn could also significantly impact the fair
values of CAPREIT’s investment properties, as well as certain of its 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.
Leasehold Interests CAPREIT has options to acquire fee simple interests
in 14 of its operating leasehold interest properties, which are exercisable
between the 26th and 35th year of each property’s respective lease. In
the case of the 15th such 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.
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.
However, fluctuations in the capitalization rates of CAPREIT’s properties
could impact these fair values and CAPREIT’s debt covenant compliance.
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 49.1% of the
overall portfolio (by number of suites and sites) in Ontario (30.9% in the
GTA), making CAPREIT’s performance particularly sensitive to economic
conditions in and changes affecting Ontario and, in particular, the GTA.
CAPREIT’s investment properties generate income through rental
payments made by residents. Residential tenant leases are relatively short,
exposing CAPREIT to market rental-rate volatility. Upon the expiry of any
lease, there can be no assurance that such lease will be renewed or the
resident replaced. The terms of any subsequent lease may be less favourable
to CAPREIT than the existing lease. Renewal rates may be subject to
restrictions on increases to the then current rent (see Government Regulations
in this section). As well, unlike commercial leases, which are generally “net”
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 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. The
impact of such fluctuations could be exacerbated where such energy costs
cannot be hedged.
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
resulting from the rise in the prices of these energy commodities; however,
if the prices of 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 for such energy supplies
in accordance with these agreements.
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.
Catastrophic Events CAPREIT’s properties may be impacted by acts of
nature, such as climate-related events. Depending on severity, these events
could cause threats to the safety of CAPREIT’s tenants and significant dam-
age to CAPREIT’s properties and interruptions to CAPREIT’s normal opera-
tions. CAPREIT may be required to incur significant unanticipated costs
to manage the impact of these events. Management of the impact of a
catastrophic event would also result in time and effort being diverted from
CAPREIT’s day-to-day operations. There is also a possibility that CAPREIT’s
ability to generate revenues from impacted properties would be significantly
impaired. The increased costs, time, effort and potential revenue loss could
be more significant if multiple properties or operating regions are impacted
by catastrophic events within a relatively short time frame.
Insurance
It is CAPREIT’s policy to maintain a comprehensive insurance
program to cover general liabilities, such as fire, flood, injury or death, rental
loss and environmental insurance, with limits and deductibles as deemed
appropriate based on the nature of the risk, historical experience and industry
standards. However, there are some types of losses, including those of a
catastrophic nature, that are generally uninsurable or not economically feasible
to insure, or which may be subject to insurance coverage limitations, such
as large deductibles, co-payments or limitations in policy language. There
can be no assurance that insurance coverage will continue to be available on
commercially acceptable terms.
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.
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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
CAPREIT’s Acquisition and Operating Facility matures on June 30, 2020.
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.
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 sav-
ings plans”), which acquired an interest in CAPREIT directly or indirectly from
another CAPREIT Unitholder. If CAPREIT ceases to qualify as a “mutual fund
trust” or “registered investment” under the Tax Act and CAPREIT Units cease
to be listed on a designated stock exchange, CAPREIT Units will cease to
be qualified investments for trusts governed by designated savings plans.
CAPREIT will endeavour to ensure CAPREIT Units continue to be qualified
investments for trusts governed by the designated savings plans; however,
there can be no assurance that this will be so. The Tax Act imposes penalties
for the acquisition or holding of non-qualified investments by such trusts.
Unitholders should consult their own tax advisors in this regard, including
as to whether CAPREIT Units are “prohibited investments” for registered
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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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.
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.
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.
Controls over Financial Reporting CAPREIT maintains information
systems, procedures and controls over financial reporting. As a result
of inherent limitations in all control systems, there cannot be 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. If CAPREIT or its advisors fail to
monitor and become aware of changes in applicable laws and regulations or
if CAPREIT fails to comply with these changes in an appropriate and timely
manner, it could result in fines and penalties, litigation, or other significant
costs, as well as significant time and effort to remediate any violations.
Additionally, such violations could result in reputational damage to CAPREIT
both from an operating and investment perspective.
Related to CAPREIT’s Securities, Organization and Structure
Nature of CAPREIT Trust Units Trust Units are not traditional equity
investments and Trust 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 Trust Units are not “deposits” within the meaning of the
Canada Deposit Insurance Corporation Act and are not insured under the
provisions of that Act or any other legislation. Furthermore, CAPREIT is not
a trust company and, accordingly, it is not registered under any trust and
loan company legislation as it does not carry on or intend to carry on the
business of a trust company. In addition, although CAPREIT is intended to
qualify as a “mutual fund trust” as defined by the Tax Act, CAPREIT is not a
“mutual fund” as defined by applicable securities legislation.
Securities like the Trust Units are hybrids in that they share certain
attributes common to both equity securities and debt instruments. The Trust
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 Trust Units do not represent debt instruments
and there is no principal amount owing to Trust Unitholders under the Trust
Units. Each Trust Unit represents an equal, undivided, beneficial interest in
CAPREIT as compared to all other Trust Units of the same class.
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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 and collectively
owning more than 49% of the outstanding Units (on a non-diluted or diluted
basis). These restrictions may limit (or inhibit the exercise of) the rights of
certain non-resident persons and partnerships to acquire Units, to continue
to hold Units, or to initiate and complete take-over bids in respect of the
Units. As a result, these restrictions may limit the demand for Units from
certain Unitholders and other investors and, thereby, adversely affect the
liquidity and market value of the Units.
Dilution Subject to applicable laws, CAPREIT is authorized to issue an
unlimited number of Units for the consideration, and on the terms and
conditions, that the Board of Trustees determines, without Unitholders’
approval. Unitholders have no pre-emptive right in connection with any such
further issuance. The Board of Trustees has the discretion to issue additional
Units in other circumstances pursuant to CAPREIT’s various incentive plans.
Any issuance of additional Units may have a dilutive effect on the holders
of Units. Furthermore, timing differences may occur between the issuance
of additional Units and the time the proceeds may be used to invest in new
properties. Depending on the duration of such timing difference, this may
be dilutive.
Distributions Cash distributions are not guaranteed. Distributions on the
Units are established by the Board of Trustees and are subject to change at
the discretion of the Board of Trustees. While CAPREIT has historically made
monthly cash distributions to Unitholders, the actual amount of distributions
paid in respect of the Units will depend upon numerous factors, all of which
are susceptible to a number of risks and other factors beyond the control
of CAPREIT. The market value of the Units will deteriorate if CAPREIT is
unable to meet its distribution targets in the future, and that deterioration
may be 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 upon the vacancy rates of such properties. The
properties generate revenue through rental payments made by residents.
CAPREIT is affected by changes in general economic conditions (such as
the availability and cost of mortgage funds), local real estate markets (such
as an oversupply of space or a reduction in demand for real estate in the
area), government regulations, changing demographics, competition from
other available rental premises, including new developments, and various
other factors. If a significant number of residents are unable to meet their
obligations under their leases or if a significant amount of available space
in the properties becomes vacant and cannot be leased on economically
favourable lease terms, cash available for distribution may be adversely
affected.
The real estate business is competitive. Numerous other developers,
managers and owners of properties compete with CAPREIT in seeking
residents. Competition for residents also comes from opportunities for
individual home ownership, 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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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.
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.
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
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 employs a number of cybersecurity risk mitigation techniques.
Employees receive annual awareness training on data privacy and protection.
Access to personal data is controlled through physical security (e.g., locked
offices and storage locations, alarm monitoring, and security 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 the risks surrounding
collection, usage, storage, protection, and retention/destruction practices of
personal data. These measures, however, do not guarantee that CAPREIT’s
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 Dutch properties
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. Additionally, these foreign markets may differ from Canadian
markets with respect to laws and regulations, economic conditions, and
market norms. Operating success in these foreign markets will depend on
CAPREIT’s ability to recognize these differences and adapt its business
model accordingly. CAPREIT’s growth in foreign jurisdictions also requires
management oversight and resources that may have been otherwise
focused on its Canadian properties. Additionally, it is possible that CAPREIT’s
subsidiaries and involvement in foreign operations will expose CAPREIT to
foreign currency risk, as CAPREIT’s functional and presentation currency
is the Canadian dollar, while the functional currency of CAPREIT’s foreign
operations and its investment in IRES is the euro.
RELATED PARTY TRANSACTIONS
As at December 31, 2017, 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 7
to the accompanying audited consolidated annual financial statements.
CAPREIT’s wholly-owned subsidiary, IRES Fund Management Limited
(“IRES FM”), is an alternative investment fund manager under the European
Union (Alternative Investment Fund Managers) Regulation, 2013 (the “AIFM
Regulations”) for IRES. The investment management agreement between
IRES FM and IRES stipulates that IRES pays 3.0% per annum of its gross
rental income as property management fees and 0.5% per annum of its net
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MANAGEMENT’S DISCUSSION ANDANALYSIS
asset value together with relevant reimbursements 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 $6.2 million and $5.2 million, respectively,
for the year ended December 31, 2017 and 2016 from asset management
and property management fees. Expenses related to the asset and property
management services are included in trust expenses.
David Ehrlich resigned as Chief Executive Officer of IRES effective
November 1, 2017 to take up the role of President and Chief Executive Officer
of CAPREIT. Effective November 1, 2017, Mr. Ehrlich is not entitled to receive
any further remuneration from IRES under his employment agreement dated
December 12, 2016 between IRES and Mr. Ehrlich. Mr. Ehrlich continues to
serve on the board of IRES as a non-executive director, as the investment
manager’s nominee. He does not receive any fees from IRES in this role.
Prior thereto, effective January 1, 2017, in addition to being an employee
of IRES, Mr. Ehrlich became an employee of CAPREIT Limited Partnership
pursuant to an employment agreement dated December 13, 2016 between
CAPREIT Limited Partnership and Mr. Ehrlich (under which he carried
out management services related to IRES under the services agreement
and investment management agreement) (the “CAPREIT Employment
Agreement”). The CAPREIT Employment Agreement terminated effective
November 1, 2017, upon Mr. Ehrlich’s resignation as Chief Executive Officer
of IRES.
Mr. Ehrlich received the following compensation under the CAPREIT
Employment Agreement. On February 28, 2017, Mr. Ehrlich received a one-
time grant equal to $500 in RURs in accordance with the terms of CAPREIT’s
Amended and Restated RUR Plan, dated May 27, 2014, as amended from
time to time. Pursuant to the terms of the CAPREIT Employment Agreement,
he was also entitled to be granted $150 in RURs on an annual basis. For
the year ended December 31, 2017, Mr. Ehrlich received $75 in RURs, with
the remaining $50 payable subsequent to year end.
CAPREIT had the following transactions with key management personnel,
the former President and CEO, and trustees. The loans outstanding to key
management personnel, the former President and CEO, and trustees for
indebtedness relating to the SELTIP and LTIP as at December 31, 2017 and
2016 were $7,180 and $5,953, respectively. These amounts are taken into
consideration when calculating the fair value of the Unit-based compensation
financial liabilities. Key management personnel are eligible to participate in
the EUPP. In addition, certain key management personnel also participate in
the RUR, and trustees currently participate in the DUP. Pursuant to employee
contracts, key management personnel are entitled to termination benefits
that provide for payments of up to 36 months of benefits (based on base
salary, bonus and other benefits) depending on cause.
Key management personnel and trustee compensation included in
the consolidated statements of income and comprehensive income is
comprised of:
($ Thousands)
For the Year Ended December 31,
2017
2016
Short-term employee benefits
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Other benefits (1)
Total
$
3,432
$
3,400
3,255
6,687
10,255
1,604
18,546
$
3,763
7,163
13,662
–
20,825
$
(1) Represents the accelerated vesting of previously-granted RUR Units relating
to the former President and CEO.
CAPREIT leases office space from a company in which a former officer had
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, 2017 was $1.1 million (2016 – $1.0 million) excluding property
operating costs, and has been expensed as trust expenses. In 2017, the
above lease was amended and extended to October 2022 with a new mini-
mum annual rental payment of $611 from November 2017 to October 2022.
COMMITMENTS AND CONTINGENCIES
From time to time, CAPREIT enters into commitments for fixed-price
natural gas, hydro and land lease agreements, as outlined in note 24 to the
accompanying audited consolidated annual financial statements.
CAPREIT is contingently liable under guarantees provided to certain of
CAPREIT’s lenders for certain non-recourse debt 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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
SECTION VIII
SUBSEQUENT EVENTS
On February 22, 2018, CAPREIT announced that it has agreed to sell,
subject to regulatory approval, 4,270,000 units at a price of $35.15 per unit
for aggregate gross proceeds of $150.1 million to a syndicate of underwriters
led by RBC Capital Markets on a bought-deal basis. CAPREIT has granted
the underwriters an over-allotment option, exercisable in whole or in part
up to 30 days after closing of the Offering, to purchase up to an additional
640,500 units to cover over-allotments, if any. CAPREIT intends to use the
net proceeds to partially repay the Acquisition and Operating Facility and
the remainder, if any, for future acquisitions, capital expenditures and for
general trust purposes.
FUTURE OUTLOOK
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 geographic markets.
On April 20, 2017, the Ontario government announced it will be
introducing a bill in the legislature, which was passed, and changed the
Residential Tenancies Act, 2006. The changes include extending rent control
to units built after 1991, which were previously exempt. The change means
annual rent increases for all tenants will be in accordance with the annual
guideline increase established by the Landlord and Tenant Board (“the
Board”) with the exception of any rents above the approved annual guideline
increase approved by the Board (as described below). As of December 31,
2017, only 3.7% of CAPREIT’s total Ontario portfolio consisted of properties
built after 1991. Additionally, as a resident-focused landlord, CAPREIT has
consistently adhered to the government mandated rent guideline increase
in the Province of Ontario for all of its Ontario properties, including those
constructed after 1991.
Another proposed change is new incentives to developers for the
construction of affordable rental housing. The key incentive will be an up-front
provincial rebate of development cost charges. The government intends to
free up more provincial land for building affordable housing, both for sale
and for rental.
Effective May 15, 2017, CMHC introduced enhancements to its multi-unit
mortgage loan insurance which are:
• Extending its affordable housing flexibilities to existing rental properties,
including Social Housing projects with up to five years remaining in the
operating agreement, to support the preservation of existing affordable
housing. Previously, affordable housing flexibilities were only available for
new rental properties.
•
• Expanding its definition of affordability to recognize federal, provincial,
territorial or municipal housing objectives. The new affordability criteria
also aligns with other CMHC initiatives and is intended to incent housing
developers into the affordable rental housing market.
Introducing greater underwriting flexibilities to better support key multi-
unit market segments that address the rental housing needs of Canadians
including standard apartments, student housing, single room occupancy
(“SRO”) projects, retirement homes, and supportive housing projects.
Greater underwriting flexibility is provided surrounding non-residential
space, furnished suites, bulk leases, amortization periods, off-campus
student housing, second mortgages, non-recourse lending and personal
guarantee requirements.
Introducing a revised premium schedule aligned with CMHC’s
continued participation in market segments that address the rental
needs of Canadians, and is reflective of the risks associated with those
segments. The revised premium schedule also supports the expansion
and preservation of affordable housing units. Premium surcharges will
no longer be collected for construction advances, release of rental
achievement holdback, student housing or retirement homes.
•
CAPREIT is currently assessing the impact of the above proposed
changes and continues to monitor any new future developments.
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.
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MANAGEMENT’S DISCUSSION ANDANALYSIS
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 infra-
structure improvement programs to upgrade properties across the port-
folio 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 diver-
sification. 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 lever-
aging its balance sheet strength and the stability of its property portfolio to
reduce borrowing costs 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 capi-
tal structure, leverage and coverage ratios and strive to further improve its
payout ratio. Management believes its successful equity financing and mort-
gage 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 Province of Ontario and British
Columbia, the guideline increase for 2018 was set at 1.8% and 4.0%,
respectively. In 2017, the rent guideline increase has been set at 1.5%
in Ontario and in British Columbia has been set at 3.7%. 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 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, 2017 and December 31, 2016 for the last
three years:
December 31,
2017
2016
Number of Suites and Sites Filed
14,573
10,371
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)
61
2.84%
1.66
66
4.00%
1.86
39
3.75%
1.58
10
2.56%
1.26
(1) Weighted by number of impacted suites filed.
(2) Represents the number of years over which the AGI application is expected
to apply.
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7 1
MANAGEMENT’S DISCUSSION ANDANALYSIS
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, manage-
ment 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; trans-
actions are properly authorized and recorded; and assets are safeguarded.
As at December 31, 2017, 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 finan-
cial reporting (as defined in National Instrument 52-109, Certification of
Disclosure in Issuers’ Annual and Interim Filings) and, based on that evalu-
ation, 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, 2018
DAVID EHRLICH
President and
Chief Executive Officer
SCOTT CRYER
Chief Financial Officer
7 2
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
Independent Auditor’s Report
February 27, 2018
To the Unitholders of Canadian Apartment
Properties Real Estate Investment Trust
We have audited the accompanying consolidated financial statements of
Canadian Apartment Properties Real Estate Investment Trust (CAPREIT)
and its subsidiaries, which comprise the consolidated balance sheets as at
December 31, 2017 and December 31, 2016 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
financial statements
Management is responsible for the preparation and fair presentation of
these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud
or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards
require that we comply with ethical requirements and plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor’s judgment, including
the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s
preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements presents fairly, in all
material respects, the financial position of CAPREIT and its subsidiaries as
at December 31, 2017 and December 31, 2016 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
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7 3
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Balance Sheets
(CA$ Thousands)
As at December 31,
Non-Current Assets
Investment properties
Other non-current assets
Current Assets
Other current assets
Cash and cash equivalents
Non-Current Liabilities
Mortgages payable
Bank indebtedness
Unit-based compensation financial liabilities
Other non-current liabilities
Deferred income tax liability
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 income (loss) (“AOCL”)
Retained earnings
See accompanying notes to consolidated financial statements.
Signed on behalf of the Trustees
Note
6
7
7
9
10
11, 12
8
18
9
11, 12
8
11
19
2017
2016
$ 8,886,556
244,217
9,130,773
32,611
23,786
56,397
$ 9,187,170
$ 3,348,213
446,895
9,898
20,645
7,263
3,832,914
233,288
54,662
81,411
9,547
32,352
4,876
14,714
430,850
$ 4,263,764
$ 2,523,419
6,515
2,393,472
$ 4,923,406
$ 9,187,170
$ 7,642,017
222,072
7,864,089
28,905
–
28,905
$ 7,892,994
$ 3,265,469
26,408
12,717
4,909
–
3,309,503
227,454
47,561
92,704
8,464
29,975
5,061
14,123
425,342
$ 3,734,845
$ 2,441,002
(12,586)
1,729,733
$ 4,158,149
$ 7,892,994
DAVID EHRLICH
Trustee
MICHAEL STEIN
Trustee
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C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Statements of Income and Comprehensive Income
(CA$ Thousands)
For the Year Ended December 31,
Operating Revenues
Revenue from investment properties
Operating Expenses
Realty taxes
Property operating costs
Net Rental Income
Trust expenses
Unit-based compensation expenses
Fair value adjustments of investment properties
Realized loss on disposition of investment properties
Amortization of property, plant and equipment
Fair value adjustments of Exchangeable Units
Loss on derivative financial instruments
Interest and other financing costs
Foreign currency translation
Other income
Net Income Before Income Taxes
Current and Deferred Income Tax Expense
Net Income
Other Comprehensive Income,
Including 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
Other Comprehensive Income
Comprehensive Income
See accompanying notes to consolidated financial statements.
Note
12
6
5
11
16
20
18
19
16, 19
19
2017
2016
$
638,842
$
596,831
(67,078)
(178,506)
(245,584)
393,258
(32,569)
(26,074)
626,953
(488)
(4,434)
(852)
(11,866)
(126,144)
3,515
22,921
844,220
(7,409)
836,811
3,024
630
4,957
10,490
19,101
855,912
$
$
$
$
(65,462)
(164,422)
(229,884)
366,947
(32,122)
(19,897)
227,335
(1,813)
(4,249)
(731)
(397)
(117,263)
4,441
17,236
439,487
(7)
439,480
3,105
1,644
3,109
(5,914)
1,944
441,424
$
$
$
$
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7 5
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Statements of Unitholders’ Equity
(CA$ Thousands)
Unitholders’ Equity, January 1, 2017
Unit Capital
New Units Issued
Distribution Reinvestment Plan
Unit Option Plan
Deferred Unit Plan
RUR Plan
Long-Term Incentive Plan
Employee Unit Purchase Plan
Retained Earnings and Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
Unitholders’ Equity, December 31, 2017
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
Retained Earnings and Other Comprehensive Income
Net income
Other comprehensive income
Distributions on Trust Units
Distributions declared and paid
Distributions payable
Unitholders’ Equity, December 31, 2016
Note
13
13
12, 13
12, 13
12, 13
12, 13
12
14
14
Note
13
13
12, 13
12, 13
12, 13
12
14
14
See accompanying notes to consolidated financial statements.
7 6
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Accumulated
Other
Retained Comprehensive
(Loss) Income
Earnings
Unit
Capital
Total
$ 2,441,002
$ 1,729,733
$
(12,586)
$ 4,158,149
1,037
51,732
7,599
2,051
13,010
5,401
1,587
82,417
–
–
–
–
–
–
–
–
–
–
–
836,811
–
836,811
–
–
–
$ 2,523,419
(158,358)
(14,714)
(173,072)
$ 2,393,472
$
–
–
–
–
–
–
–
–
19,101
19,101
–
–
–
6,515
1,037
51,732
7,599
2,051
13,010
5,401
1,587
82,417
836,811
19,101
855,912
(158,358)
(14,714)
(173,072)
$ 4,923,406
Accumulated
Other
Retained Comprehensive
(Loss) Income
Earnings
Unit
Capital
Total
$ 2,222,747
$ 1,451,736
$
(14,530)
$ 3,659,953
157,523
51,035
110
732
7,547
1,308
218,255
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
439,480
–
439,480
–
1,944
1,944
157,523
51,035
110
732
7,547
1,308
218,255
439,480
1,944
441,424
–
–
–
$ 2,441,002
(147,360)
(14,123)
(161,483)
$ 1,729,733
–
–
–
(12,586)
(147,360)
(14,123)
(161,483)
$ 4,158,149
$
CONSOLIDATED
FINANCIAL
STATEMENTS
Consolidated Statements of Cash Flows
(CA$ Thousands)
For the Year Ended December 31,
2017
2016
Note
5
16
7, 19, 20
22
22
22
22
22
22
22
22
CASH PROVIDED BY (USED IN):
Operating Activities
Net income
Items related to operating activities not affecting cash:
Fair value adjustments – investment properties
Fair value adjustments – Exchangeable Units
Loss on disposition of investment properties
Loss on derivative financial instruments
Amortization
Unit-based compensation expenses
Straight-line rent adjustment
Deferred income tax expense
Net profit from equity-accounted investments
Foreign currency translation
Net income items related to financing and investing activities
Changes in non-cash operating assets and liabilities
Cash Provided by Operating Activities
Investing Activities
Acquisition of investment properties
Capital investments
Disposition of investment properties
Change in restricted cash
Investment income received
Cash Used in Investing Activities
Financing Activities
Mortgage financings
Mortgage principal repayments
Mortgages repaid on maturity
Financing costs
CMHC premiums on mortgages payable
Interest paid
Bank indebtedness
Proceeds on issuance of Units
Net cash distributions to Unitholders
Cash Provided by Financing Activities
Changes in Cash and Cash Equivalents During the Year
Cash and Cash Equivalents, Beginning of the Year
Cash and Cash Equivalents, End of the Year
See accompanying notes to consolidated financial statements.
$
836,811
$
439,480
(626,953)
852
488
11,866
13,146
26,074
(231)
7,263
(15,344)
(3,515)
250,457
107,562
922
358,941
(471,330)
(163,728)
16,734
(121)
8,478
(609,967)
464,516
(119,458)
(266,575)
(2,928)
(4,902)
(111,138)
427,925
8,121
(120,749)
274,812
(227,335)
731
1,813
397
12,029
19,897
138
–
(10,600)
(4,441)
232,109
104,578
20,673
357,360
(382,783)
(197,493)
31,321
(846)
4,519
(545,282)
635,768
(102,522)
(130,810)
(4,638)
(11,492)
(109,097)
(141,803)
161,914
(109,398)
187,922
23,786
–
23,786
$
–
–
–
$
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7 7
Notes to Consolidated Financial Statements
December 31, 2017
(CA$ Thousands, except Unit and per Unit amounts)
1
ORGANIZATION OF THE TRUST
2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”)
owns interests in multi-unit residential rental properties, including apartments,
townhomes and manufactured home communities (“MHC”), principally
located in and near major urban centres across Canada. CAPREIT’s net
assets and operating results are substantially derived from income producing
real estate located in Canada, where it is also domiciled.
CAPREIT converted from a closed-end real estate investment trust to
an open-ended mutual fund trust on January 8, 2008, and is governed
under the laws of the Province of Ontario by a Declaration of Trust (“DOT”)
dated February 3, 1997, as most recently amended and restated on May 24,
2017. CAPREIT commenced active operations on February 4, 1997 when
it acquired an initial portfolio of properties and became a reporting issuer
on May 21, 1997, pursuant to an initial public offering prospectus dated
May 12, 1997.
CAPREIT Limited Partnership (“CAPLP”) is a wholly-owned consolidated
subsidiary of CAPREIT 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 properties along with the related mortgages and all the corporate
debt obligations of CAPREIT.
CAPREIT’s wholly-owned subsidiary, IRES Fund Management Limited,
entered into an external investment management agreement 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, 2017, CAPREIT holds 65.5 million ordinary shares
representing 15.7% of the issued share capital of IRES.
In addition, CAPREIT holds its Netherland properties through Netherlands
partnerships with partners that hold a nominal interest in such partnerships.
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, 2018.
b) Basis of presentation
These consolidated annual financial statements have been prepared on a
going concern basis, presented in Canadian dollars, which is also CAPREIT’s
functional currency, and have been prepared on an historical cost basis
except for:
i)
Investment properties and certain financial instruments, which are stated
at fair value
ii) Certain Unit-based compensation accounts, which are stated at fair value;
and
iii) Certain reclassifications have been made to the prior year’s financial
statements to enhance comparability with the current year’s financial
statements following CAPREIT’s presentation of the non-controlling
interest as a non-current liability. Previously, non-controlling interest of the
shareholders of subsidiaries was presented in equity. The non-controlling
interest related to the subsidiaries in The Netherlands has been classified
as a financial liability as a result of a put option feature at the discretion of
the minority shareholder, which allows it to require CAPREIT to purchase
its interest at a future date.
As a result, certain line items in 2016 have been amended in the
statement of financial position, statement of profit or loss and other
comprehensive income, statement of changes in equity and statements of
cash flow, and the related notes to the financial statements. Comparative
figures have been adjusted to conform to the current year’s presentation.
The items that were reclassified in the 2016 financial statements are as
follows: $783 of non-controlling interest in unitholder equity reclassified to
non-current liability, and $67 of net loss related to non-controlling interest
net loss reclassified to interest and other financing costs.
c) Principles of consolidation
i) Subsidiaries These consolidated annual financial statements comprise
the assets and liabilities of all subsidiaries and the results of all subsidiar-
ies for the financial period. CAPREIT and its subsidiaries are collectively
referred to as “CAPREIT” in these consolidated annual financial state-
ments. Subsidiaries are all entities over which CAPREIT has control.
CAPREIT controls an entity when CAPREIT is exposed to, or has rights
to, variable returns from its involvement with the entity and has the ability
to affect those returns through its power over the entity.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Subsidiaries are fully consolidated from the date control commences
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 financial liability.
ii) Joint arrangements CAPREIT has joint arrangements in and joint con-
trol of a number of properties. CAPREIT has assessed the nature of its
joint arrangements and determined them to be joint operations. Joint
operations are accounted for using the proportionate consolidation
method. For joint operations, CAPREIT recognizes its share of revenues,
expenses, assets and liabilities, which are included in their respective
descriptions in the consolidated balance sheets and consolidated state-
ments 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
circumstances; 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 associate if the reporting periods of the entity and the investee
are not aligned, provided the information used in preparing the financial
statements is not more than three months old. The standard further
requires adjustments to this information for any significant transactions
or events which may have occurred between the entity’s reporting date
and its investee’s most recent reporting date. CAPREIT has applied this
guidance in accounting for its investment in IRES.
At each reporting date, CAPREIT evaluates whether there is objective
evidence that its interest in an associate is impaired. The entire carrying
amount of the associate is compared to the 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 properties under
International Accounting Standards (“IAS”) 40, Investment Property (“IAS
40”), and has chosen the fair value model to account for its investment
properties in the consolidated annual financial statements. Fair value
represents the amount at which the properties could be exchanged between
a knowledgeable and willing buyer and a knowledgeable and willing seller in
an arm’s-length transaction at the date of valuation.
CAPREIT’s investment properties have been valued on a highest and best
use basis and do not include any portfolio premium that may be associated
with economies of scale from owning a large portfolio or the consolidation
value from having compiled a large portfolio of properties over a long period
of time, many through individual property acquisitions.
Investment properties comprise investment interests held in land and
buildings (including integral equipment) held for the purpose of producing
rental income, capital appreciation, or both. CAPREIT’s investments in its
property portfolio reflect different forms of property interests, including:
(i) Fee Simple Interests – Apartments and Townhomes, (ii) Operating
Leasehold Interests, (iii) Land Leasehold Interests and (iv) Fee Simple
Interests – Manufactured Home Communities Land Lease Sites. These four
forms of property interests meet the definition of investment property and are
classified and accounted for as such. All investment properties are recorded
at their fair value at their respective acquisition dates and are subsequently
stated at fair value at each consolidated balance sheet date, with any gain
or loss arising from a change in fair value recognized within operating income
in the consolidated statements of income and comprehensive income for
the period. For Operating Leasehold Interests, all of which are held under
a prepaid operating lease, CAPREIT has classified all such interests as
finance leases, including the fair value of options to purchase, and these
are accounted for and presented as investment properties.
The fair value of all of CAPREIT’s investment properties is determined by
qualified external appraisers annually. Management regularly undertakes a
review of its investment property valuation between external appraisal dates
to assess the continuing validity of the underlying assumptions, such as
cash flows, capitalization rates and discount rates. These assumptions are
tested against market information obtained from an independent appraisal
firm. Where increases or decreases are warranted, the carrying values of
CAPREIT’s investment properties are adjusted. See notes 3 and 6 for a
detailed discussion of the significant assumptions, estimates and valuation
methods used.
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7 9
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
e) Property asset acquisitions
At the time of acquisition of a property or a portfolio of investment properties,
CAPREIT evaluates whether the acquisition is a business combination or
asset acquisition. IFRS 3, Business Combinations (“IFRS 3”) is only applicable
if it is considered that a business has been acquired. A business, according
to IFRS 3, is defined as an integrated set of activities and assets conducted
and managed for the purpose of providing a return to investors or lower
costs or other economic benefits directly and proportionately to CAPREIT.
When determining whether the acquisition of an investment property or
a portfolio of investment properties is a business combination or an asset
acquisition, CAPREIT applies judgement when determining whether an
integrated set of activities is acquired in addition to the property or portfolio
of properties. Activities can include whether employees were assumed in
the acquisition or an operating platform has been acquired.
When an acquisition does not represent a business as defined under
IFRS 3, CAPREIT classifies these properties or a portfolio of properties as
an asset acquisition. Identifiable assets acquired and liabilities assumed in
an asset acquisition are measured initially at their fair values at the acquisition
date. Acquisition-related transaction costs are capitalized to the property.
f) Presentation of non-current assets classified as held-for-sale
Investment properties are reclassified to assets held-for-sale when criteria
set out in IFRS 5, Non-current Assets Held for Sale and Discontinued
Operations, are met. CAPREIT presents non-current assets classified as
held-for-sale and their associated liabilities separately from other assets and
liabilities on the consolidated balance sheets and in the notes beginning
from the period in which they were first classified as “for sale”. The sale
of one or a group of investment properties by CAPREIT will generally
be presented as non-current assets held-for-sale and not discontinued
operations. If a group of assets held-for-sale is considered to meet the
definition of a discontinued operation, then income or expense recognized in
the consolidated statements of income and comprehensive income relating
to that group of assets is presented separately from continuing operations.
A discontinued operation is a component of operations that represents a
separate major line of business or geographic area of operations that has
been disposed of or is held-for-sale, or is a subsidiary acquired exclusively
with a view to resale.
g) Property, plant and equipment
Property, plant and equipment are stated at historical cost less accumulated
depreciation and mainly comprise head office and regional offices leasehold
improvements, corporate and information technology systems, and are pre-
sented 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 improve-
ments, 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 clas-
sification 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
Financial liabilities
Mortgages payable
Bank indebtedness
Accounts payable
and accrued
liabilities and other
liabilities
Security deposits
Exchangeable Units
Classification
Measurement
Loans and receivables
Loans and receivables
Loans and receivables
Available-for-sale
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
Fair value
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Cash and cash equivalents and restricted cash Cash and cash equiva-
lents include cash and short-term investments with an original maturity of
three months or less. Restricted cash does not meet the definition of cash
and cash equivalents and is included in other assets on the consolidated
balance sheets. Interest earned or accrued on these financial assets is
included in other income.
Loans and other receivables Such receivables arise when CAPREIT
provides services to a third party, such as a tenant, and are included in
current assets, except for those with maturities more than 12 months after
the consolidated balance sheet date, which are classified as non-current
assets. Loans and other receivables are included in other assets on the
consolidated balance sheets and are accounted for at amortized cost.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Available-for-sale Investments are measured at fair value at each consoli-
dated balance sheet date and the difference between the fair value of the
asset and its cost basis is included in other comprehensive income (“OCI”).
Differences included in accumulated other comprehensive income (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 realized 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 amortized over the
expected life of the instrument using the effective interest rate method.
Transaction costs relating to available-for-sale financial assets are included
in the cost of the asset on initial recognition.
Determination of fair value The fair value of a financial instrument on initial
recognition is generally the transaction price, which is the fair value of the
consideration given or received. Subsequent to initial recognition, the fair
value of financial instruments is remeasured based on relevant market data.
CAPREIT classifies the fair value for each class of financial instrument based
on the fair value hierarchy. The fair value hierarchy distinguishes between
market value data obtained from independent sources and CAPREIT’s own
assumptions 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 subsequently
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 within net income.
Embedded derivatives Derivatives embedded in other financial instruments
or contracts are separated from their host contracts and accounted for as
derivatives when their economic characteristics and risks are not closely
related to those of the host contract; the terms of the embedded derivative
are the same as those of a free-standing derivative; and the combined
instrument or contract is not measured at fair value. These embedded
derivatives are measured at fair value with changes therein recognized within
net income in the consolidated statements of income and comprehensive
income.
CAPREIT has concluded that it does not have any outstanding contracts
or financial instruments with embedded derivatives that require bifurcation.
k) Hedging relationships
CAPREIT has designated its interest rate swap agreement and forward
interest rate contracts as cash flow hedges. At the inception of a transaction,
CAPREIT documents the relationship between hedging instruments and
hedged items, as well as its risk management objectives and strategy for
undertaking various hedging transactions. CAPREIT also documents, both
at hedge inception and on an ongoing basis, its assessment of whether
the derivatives used in hedging transactions are highly effective in offsetting
changes in cash flows of hedged items. The effective portion of changes in the
fair value of derivatives that are designated and qualify as cash flow hedges is
recognized in other comprehensive income. The gain or loss relating to the
ineffective portion is recognized immediately in the consolidated statements
of income and comprehensive income under net income. Should a hedging
relationship become ineffective and/or hedge accounting become no longer
appropriate, previously unrealized gains and losses remain within AOCL and
are amortized to the relevant item in the consolidated statements of income
and comprehensive income in the same periods during which the hedged
items affect earnings, while future changes in the fair value of the hedging
derivatives are recognized within net income in the consolidated statements
of income and comprehensive income.
CAPREIT’s Netherlands subsidiaries own and operate 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 or
losses arising from the euro-denominated debt was 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
portion was recognized in net income. The hedge was discontinued in July
2017 when the euro-denominated debt was repaid.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
l) Mortgages payable and bank indebtedness
Mortgages payable are recognized at amortized cost using the effective
interest rate method. Under the effective interest rate method, any transaction
fees, costs and discounts directly related to the mortgage are recognized
within interest and other financing costs in the consolidated statements
of income and comprehensive 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. Bank
indebtedness is recognized at amortized cost and the amortization of related
financing costs are recognized within interest and other financing costs in
the consolidated statements of income and comprehensive income over the
contractual term of the debt.
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 as interest expense under
IFRS and the interest payable at the reporting date is reported under other
current liabilities on the consolidated balance sheets. These Exchangeable
Units are remeasured at each reporting date at their amortized cost, which
approximates fair value, as they are considered to be puttable instruments
under IAS 32, with changes in the carrying amount recognized as fair value
adjustments of Exchangeable Units within net income in the consolidated
statements of income and comprehensive income (loss).
n) Comprehensive income
Comprehensive income includes net income and other comprehensive
income (loss). Other comprehensive income (loss) includes changes in the fair
value of investments, foreign currency translation 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 Income (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 revenue recognized and the amounts contractually due
under the lease agreements is accrued as rent receivable, which is included
as a component of investment properties on the consolidated balance sheets.
Other income includes interest, dividends and management fees. Interest
and dividend income are recognized as earned. Management fees are
recorded as the services are provided.
q) Borrowing costs and interest on mortgages payable
Interest and other financing costs 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 ownership of Trust
Units and provide additional incentives by increasing the participants’ interest,
as owners, in CAPREIT. Unit-based compensation liabilities are classified
as current, except for the portion expected to be realized or paid beyond
12 months of the consolidated balance sheet date, including amounts where
CAPREIT has the unconditional right to defer settlement of vested awards.
CAPREIT accounts for its Unit-based compensation plans using the fair
value-based method, under which compensation expense is recognized
over the vesting period. The key drivers of recognition and measurement of
compensation expense are summarized as follows:
Incentive Plan (1)
LTIP
SELTIP
DUP
RUR Plan
UOP
Type
Issued Units
Issued Units
Rights
Rights
Options
Vesting
Period
2 years (2)
2 years (2)
Grant date
3 years
Reporting period (3)
Type of
Amortization
Graded
Graded
Immediate
Straight-line
Straight-line
Distributions
Applied to
Secured loan
Secured loan
Additional Units
Additional Units
N/A
Mark-to-
Market until
Loan repaid
Loan repaid
Settled
Settled
Exercised
(1) For 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.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
t) Consolidated statements of cash flows
Cash and cash equivalents consist of cash on hand, balances with banks,
and investments in money market instruments with an original term to
maturity of 90 days or less at acquisition. Investing and financing activities
that do not require the use of cash or cash equivalents are excluded from
the consolidated statements of cash flows and are disclosed separately in
the notes to the consolidated annual financial statements.
u) Income taxes
CAPREIT is taxed as a Mutual Fund Trust for income tax purposes and
intends, at the discretion of the Board of Trustees, to distribute its income for
income tax purposes each year to Unitholders to such an extent that it would
not be liable for income tax under Part I of the Income Tax Act (Canada)
(“Tax Act”). Accordingly, no provision for current income taxes payable is
required, with the exception of income earned in subsidiaries that reside in
foreign jurisdictions, as discussed below. For a comprehensive discussion
of CAPREIT’s liability for tax purposes, see note 18.
CAPREIT and its wholly-owned subsidiaries satisfied certain conditions
available to Real Estate Investment Trusts (“REITs”) (the “REIT Exception”)
under amendments to the Tax Act intended to permit a corporate income
tax rate of nil as long as the specified conditions continue to be met.
CAPREIT 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.
Deferred income tax is recognized, using the asset and liability method,
on temporary differences arising between the tax bases of assets and
liabilities and their carrying amounts in the consolidated financial statements.
Deferred income tax is determined using tax rates (and laws) that have been
enacted or substantively enacted by the consolidated balance sheet date,
and are expected to apply when the related deferred income tax asset is
realized or the deferred income tax liability is settled. Deferred income tax
assets are recognized only to the extent that it is probable that future taxable
profit will be available against which the temporary differences can be utilized.
The carrying amount of a deferred tax asset is reduced to the extent that it
is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or all of that deferred tax asset to be utilized. Any such
reduction is reversed to the extent that it becomes probable that sufficient
taxable profit will be available.
v) Earnings per Unit
As a result of the redemption feature of CAPREIT’s Trust Units, these Units
are considered financial liabilities under IAS 33, Earnings per Share, and they
may not be considered as equity for the purposes of calculating net income
on a per Unit basis. Consequently, CAPREIT has elected not to report an
Earnings per Unit calculation, as permitted under IFRS.
w) Foreign currency translation
The consolidated financial statements are presented in Canadian dollars,
which is the functional currency of CAPREIT and the presentation currency
for the consolidated financial statements.
Foreign currency transactions are translated into the functional currency
using the exchange rates prevailing at the dates of the transactions. At the
end of each reporting period, foreign currency denominated monetary assets
and liabilities are translated into the functional currency using the prevailing
rate of exchange at the consolidated balance sheet date. Foreign exchange
gains and losses resulting from the settlement of such transactions, and from
the translation at period end exchange rates of monetary assets and liabilities
denominated in foreign currencies, are recognized in the consolidated
statements of income and comprehensive income. Foreign exchange gains
and losses are presented in the consolidated statements of income and
comprehensive income.
In determining the functional currency of CAPREIT’s foreign subsidiaries,
CAPREIT considers factors such as (i) the currency that mainly influences
sale prices for goods and services and the country 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:
i) Assets and liabilities for each balance sheet presented are translated at
ii)
the closing rate at the date of that balance sheet;
Income and expenses for each statement of income and comprehensive
income are translated at average exchange rates; and
iii) All resulting exchange differences are recognized in other comprehensive
income
On consolidation, exchange differences arising from the translation of the
net investment in foreign operations, and of borrowings and other currency
instruments designated as hedges of such investments, are taken into other
comprehensive income. When a foreign operation is partially disposed of or
sold, exchange differences that were recorded in equity are recognized in
the consolidated statements of income and comprehensive income.
x) Non-controlling interest
Non-controlling interest represents the interest of the minority shareholders
in CAPREIT’s foreign subsidiaries. The share of net assets, net earnings and
other comprehensive income of subsidiaries attributable to non-controlling
interest is reported as a financial liability as a result of a put option feature.
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.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
z) Impact of accounting standards effective January 1, 2017 on
CAPREIT’s current year financial statements:
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 came 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 came into effect
on January 1, 2017. CAPREIT has applied this standard, which discloses
the changes in mortgage liability and bank indebtedness liability. Please
refer to note 22.
aa) Future accounting changes
As at February 27, 2018, 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, 2017:
IFRS 9, Financial Instruments (“IFRS 9”) The revised IFRS 9 incorpo-
rates 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 guid-
ance 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. During 2017, CAPREIT
performed an assessment of key areas within the scope of IFRS 9 which
includes, but not limited to, the classification and measurement of mortgages
and loans receivable and available-for-sale securities, as well as additional
disclosures required by IFRS 7, “Financial Instruments – Disclosure” upon
initial adoption of IFRS 9. CAPREIT intends to adopt the new standards
on the required effective date of January 1, 2018 and will not restate
comparative information. Quoted equity instruments currently held as
available-for-sale financial assets with unrealized gains and losses recorded
in OCI will, instead, be measured at fair value through profit or loss, which
will increase volatility due to unrealized gains and losses being recorded in
profit or loss. The available-for-sale cumulative unrealized gain of $8,858
related to those securities, which is currently presented as accumulated
OCI, will be reclassified to retained earnings upon adoption. CAPREIT does
not expect a significant impact on its balance sheet or equity, as a result of
this change in classification and measurement.
IFRS 15, Revenue from Contracts with Customers This new standard on
revenue recognition supersedes IAS 18, Revenue, IAS 11, Construction
Contracts and related interpretations. The new standard provides a single,
comprehensive revenue recognition model. While early adoption is permit-
ted for IFRS reporters, this standard is effective for the interim periods
within years beginning on or after January 1, 2018. CAPREIT’s assessment
includes a review of relevant contracts for the following key areas which
CAPREIT believes are in scope of IFRS 15 including, but not limited to, laun-
dry, cable, common area maintenance recoveries, and property and asset
management fees. CAPREIT has assessed the impact of IFRS 15 and has
concluded that the pattern of revenue recognition will remain unchanged
upon adoption of the standard. The impact may be limited to additional
note disclosure on the disaggregation of its revenue streams. CAPREIT
intends to adopt the new standard on the required effective date on modi-
fied retrospective basis without restatement of prior period comparatives.
IFRS 16, Leases This new standard on leases supersedes IAS 17, Leases
and related interpretations. IFRS 16 sets out the principles for the recogni-
tion, 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. The Company is currently
assessing the impact of IFRS 16 to its consolidated financial statements.
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.
IFRIC 23, Uncertainty Over Income Tax Treatments This new IFRS
interpretation clarifies how the recognition and measurement requirements of
IAS 12, Income Taxes, are applied where there is uncertainty over income tax
treatments and is effective for years beginning on or after January 1, 2019.
CAPREIT is currently assessing the impact of the above standards and
amendments.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
3
CRITICAL ACCOUNTING ESTIMATES, ASSUMPTIONS, AND JUDGEMENTS
The preparation of consolidated annual financial statements in accordance
with IFRS requires the use of estimates, assumptions and judgements that
in some cases relate to matters that are inherently uncertain, and which
affect the amounts reported in the consolidated annual financial statements
and accompanying notes. Areas of such estimation include, but are not
limited to: valuation of investment properties, remeasurement at fair value
of financial instruments, valuation of accounts receivable, 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 liabili-
ties 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 financ-
ing activity in CAPREIT’s consolidated statements of cash flows.
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8 5
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
4
RECENT INVESTMENT PROPERTY ACQUISITIONS
CAPREIT completed the following investment property acquisitions since January 1, 2016, which have contributed to the operating results effective from
their respective acquisition dates:
For the Year Ended December 31, 2017
Suite or
Site Count
32
256
44
849
54
77
16
56
540
1,924
February 28, 2017
May 3, 2017
June 1, 2017
July 12, 2017
August 8, 2017
August 18, 2017
November 17, 2017
November 27, 2017
December 1, 2017
Region(s)
Victoria
Montréal
Maple Ridge
The Netherlands
The Netherlands
The Netherlands
Summerside, PEI
Summerside, PEI
The Netherlands
$
Total
Acquisition
Costs
4,934
24,059
11,241
257,881
12,691
20,384
2,379
7,814
129,127
470,510
$
Assumed
Mortgage
Funding
$
$
– (3)
– (3)
3,713
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
3,713
Interest
Rate (1)
– (3)
– (3)
1.94%
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
Term to
Maturity
(Years) (2)
– (3)
– (3)
3.33
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
(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 of 849 suites (142 affordable, 606 mid-tier, and 101 luxury) and was financed by a new non-amortizing mortgage of €100,842 ($147,360) with a
term to maturity of 7.5 years with an interest rate of 2.04%, a contribution from a non-controlling interest of €600 ($889), and the balance in cash from CAPREIT’s Acquisition
and Operating Facility.
(5) The acquisition was financed by a new non-amortizing mortgage of €5,043 ($7,474) with a term to maturity of 7.5 years with an interest rate of 1.95% and the balance in cash
from CAPREIT’s Acquisition and Operating Facility.
(6) The acquisition comprised of 77 suites (28 mid-tier and 49 luxury) was financed by a new non-amortizing mortgage of €7,951 ($11,856) with a term to maturity of 7.5 years
with an interest rate of 1.95% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(7) The acquisition comprised of 540 suites (168 affordable, 78 mid-tier, and 294 luxury) was financed by a new non-amortizing mortgage of €49,914 ($75,540) with a term to
maturity of 5.0 years with an interest rate of 1.37% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
For the Year Ended December 31, 2016
Suite or
Site Count
670
12
71
55
144
21
850
71
87
3
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)
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
$
Assumed
Mortgage
Funding
– (3)
729
– (3)
– (3)
– (3)
– (3)
24,627
– (3)
– (3)
– (3)
95,217
412,856
$
– (3)
25,356
$
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 mortgages payable.
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.
8 6
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
5
DISPOSITIONS
The tables below summarize the dispositions completed since January 1, 2016. These dispositions do not meet the definition of discontinued operations
under IFRS 5, Non-current Assets Held for Sale and Discontinued Operations.
Dispositions Completed During the Year Ended December 31, 2017
Disposition Date
February 15, 2017
October 12, 2017
Suite Count
31
50
81
Region
Saskatoon
Vancouver
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
Sale Price
2,025
19,800
21,825
$
$
Sale Price
24,849
2,340
31,350
58,539
$
$
Cash
Proceeds
575
16,160
16,735
Cash
Proceeds
12,480
2,282
16,559
31,321
$
$
$
$
Mortgage
Discharged
1,356
3,595
4,951
$
$
Mortgage
Discharged
12,085
–
14,322
26,407
$
$
For the year ended December 31, 2017 and 2016, a loss of $488 and $1,813, respectively, was recognized in connection with the property dispositions.
The loss represents the difference between the net proceeds after transaction costs from the disposition compared to the fair value of the respective
properties at the date of disposition.
6
INVESTMENT PROPERTIES
Valuation basis
Investment properties are carried at fair value, which is the amount at which
the individual properties could be sold between willing parties in an arm’s-
length transaction, based on current prices in an active market for similar
properties in the same location, considering the highest and best use of the
asset, with any gain or loss arising from a change in fair value recognized in
the consolidated statements of income and 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
recognized relevant professional qualifications and have recent experience in
the location and category of the respective property. Each quarter, CAPREIT
utilizes market assumptions for rent increases, capitalization and discount
rates provided by the external appraisers to determine the fair value of the
investment properties. Capitalization rates employed by the appraisers are
based on recently closed 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 property valuation using this approach, and
has therefore determined to use the Direct Income Capitalization (“DC”)
and Discounted Cash Flow (“DCF”) methods to arrive at the fair value of the
investment properties. Investment properties have been valued using the
following methods and key assumptions:
a) Fee Simple and MHC Land Lease Sites CAPREIT utilizes the DC
method. Under this method, capitalization rates are applied to a stabilized
net operating income (“NOI”) representing market-based NOI assump-
tions (property revenue less property operating expenses adjusted for
market-based assumptions such as long-term vacancy rates, manage-
ment fees, R&M costs, and general and administration costs). The most
significant assumption is the capitalization rate for each specific property.
The capitalization rate is based on the actual location, size and quality
of the property, taking into account any available market data at the
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8 7
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
valuation date. Generally, an increase in stabilized NOI will result in an
increase to the fair value of an investment property. An increase in the
capitalization rate will result in a decrease in the fair value of an invest-
ment property. The capitalization rate magnifies the effect of a change in
stabilized NOI, with a lower capitalization rate causing more change in
stabilized NOI than would a higher capitalization rate.
b) Operating Leasehold Interests CAPREIT utilizes the DCF method. Under
this method, discount rates are applied to the forecasted cash flows
reflecting market-based leasing assumptions for that specific property
as well as assumptions about renewal and new leasing activity. The most
significant assumption is the discount rate applied over the initial term
of the lease. The discount rate is generally the weighted average cost of
capital that is appropriate to the cash flow risks 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 discounted to a present
value. Under this method, the stabilized income is adjusted to a projected
NOI as at the end of the operating lease term and the capitalization rate
is adjusted to a “reversionary capitalization rate” reflecting the incremental
risk associated with future uncertainty. The value of the option is then
determined based on the difference between the estimated fair value
of the property at such date and the option buyout price, discounted
back to its present value using a risk-adjusted discount rate (the “option
discount rate”).
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 mar-
ket-based leasing assumptions for that specific property as well as
assumptions about renewal and new leasing activity. The most signifi-
cant assumption is the discount rate applied over the term of the lease.
Forecasted cash 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, 2017 and
December 31, 2016, is presented below:
As at December 31, 2017
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, 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
WA NOI/
Fair Value
Cash Flow (1)
Rate Type
$ 7,645,106
316,710
738,990
185,750
$ 8,886,556
2,834
2,608
3,622
4,142
Capitalization rate
Capitalization rate
Discount rate (5)
Discount rate
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
Max
7.59%
7.50%
6.00%
6.50%
Max
7.93%
7.00%
6.25%
6.50%
Weighted
Average
Min
2.95%
4.67%
5.50%
6.35%
4.33%
6.27%
5.58%
6.43%
Weighted
Average
Min
2.90%
4.26%
5.50%
6.50%
4.54%
6.23%
5.70%
6.50%
(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 $230,520 and $149,140, respectively,
as at December 31, 2017 and December 31, 2016.
(4) The weighted average remaining lease term on Operating Leasehold Interests is 15.8 years as at December 31, 2017 (December 31, 2016 – 16.8 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 net operating income growth of 2.9% has been assumed as at December 31, 2017 and December 31, 2016.
8 8
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Reconciliation of carrying amounts of investment properties by type
For the Year Ended December 31, 2017
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
For the Year Ended December 31, 2016
Balance at the beginning of the year
Additions:
Acquisitions
Property capital investments
Capitalized leasing costs (1)
Dispositions
Realized loss on dispositions of investment properties
Unrealized fair value adjustments
Balance of Investment Properties at end of the year
Fee Simple
and MHC Land
Lease Sites
$ 6,829,587
470,510
139,607
(267)
12,998
(21,337)
(488)
531,206
$ 7,961,816
Fee Simple
and MHC Land
Lease Sites
$ 6,069,250
414,668
172,629
700
(58,793)
(1,813)
232,758
$ 6,829,587
(1) Comprises tenant inducements, straight-line rent and direct leasing costs.
Operating
Leasehold
Interests
627,740
$
–
11,279
419
–
–
–
99,552
738,990
$
Operating
Leasehold
Interests
598,690
$
–
16,073
33
–
–
12,944
627,740
$
Land
Leasehold
Interests
184,690
$
–
3,997
868
–
–
–
(3,805)
185,750
$
Land
Leasehold
Interests
195,200
$
–
7,040
185
–
–
(17,735)
184,690
$
Total
$ 7,642,017
470,510
154,883
1,020
12,998
(21,337)
(488)
626,953
$ 8,886,556
Total
$ 6,863,140
414,668
195,742
918
(58,793)
(1,813)
227,967
$ 7,642,017
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8 9
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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 associate (4)
Total
Other Current Assets
Prepaid expenses
Other receivables
Restricted cash
Deposits
Total
2017
2016
$
$
$
$
40,462
(25,795)
14,667
75,140
1,153
30,915
122,342
244,217
5,947
9,178
7,096
10,390
32,611
$
$
$
$
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
(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 $24,014 (December 31, 2016 – $20,250).
(3) Represents deferred loan costs related to the revolving credit facilities net of accumulated amortization of $9,264 (December 31, 2016 – $8,486).
(4) 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, 2017, 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 asset
management agreement change. Refer to note 23 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
Redemption liability (1)
Total
Other Current Liabilities
Mortgage interest payable
Total
2017
2016
15.7%
65,500,000
1.50
15.7%
65,500,000
1.17
2017
14,071
6,574
20,645
9,547
9,547
$
$
$
$
2016
4,126
783
4,909
8,464
8,464
$
$
$
$
Note
16
(1) The non-controlling interest related to the subsidiaries in The Netherlands has been classified as a financial liability as a result of a put option feature which allows the minority
shareholder at its discretion to require CAPREIT to purchase its interest at a future date.
9 0
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
9
MORTGAGES PAYABLE
As at December 31, 2017, mortgages payable bear interest at a weighted
average effective rate of 3.17% (December 31, 2016 – 3.30%), and mature
between 2018 and 2030. The effective interest rate as at December 31,
2017 includes 0.10% (December 31, 2016 – 0.10%) for the amortization of
the realized component of the loss on settlement of derivative financial
instruments of $32,494 included in AOCL. Approximately 100.0% of
CAPREIT’s mortgages payable are financed at fixed interest rates as at
December 31, 2017. Investment properties at fair value of $8,581,816 have
been pledged as security as at December 31, 2017. CAPREIT has invest-
ment properties with a fair value of $304,740 as at December 31, 2017 that
are not encumbered by mortgages and secure only the Acquisition and
Operating Facility. As at December 31, 2017, unamortized deferred financing
costs of $11,630 and fair value adjustments of ($3,538) 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, 2017
2018
2019
2020
2021
2022
Subsequent to 2022
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
% of Total
Principal
$
233,288
385,135
332,064
443,792 (1)
497,182
1,698,132
3,589,593
(8,092)
$ 3,581,501
6.5
10.7
9.3
12.4
13.9
47.2
100.0
2017
2016
$ 3,348,213
233,288
$ 3,581,501
$ 3,265,469
227,454
$ 3,492,923
(1) Included in mortgages payable as at December 31, 2017 is a $65,000 non-amortizing credit facility on two of the MHC land lease sites.
(2) Included in mortgages payable as at December 31, 2016 is a €92,900 ($131,630) non-amortizing euro LIBOR borrowing. It was repaid in 2017.
See note 10 for further details.
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9 1
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
10
BANK INDEBTEDNESS
Effective June 30, 2017, CAPREIT amended its credit agreement to, among
other things: (i) allow for US base rate and US LIBOR advances and (ii) amend
the “conversion date” for when the revolving facility converts to a two-year
non-revolving term facility to June 30, 2018.
Effective June 30, 2016, CAPREIT amended 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 tangible
net worth requirement to $1,500,000; and (v) extend the maturity date of the
existing $65,000 five-year non-revolving term credit facility to June 30, 2021.
In respect of the Acquisition and Operating Facility, effective December 19,
2016, the aggregate amount of euro LIBOR borrowings at any time shall
not exceed €150,000 while the Canadian dollar equivalent of the aggregate
principal amount of all advances (including the euro LIBOR and US LIBOR
borrowings) under the Acquisition and Operating Facility shall not exceed
$440,000. Effective November 24, 2017, CAPREIT amended its credit
agreement to, among other things: (i) increase its Acquisition and Operating
Credit Facility by $100,000 to $540,000 and (ii) amend the tangible net worth
requirement to $1,800,000.
CAPREIT’s Credit Facilities include the $540,000 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,
2017, CAPREIT has US LIBOR borrowings of USD $187,000 that bears
the US LIBOR rate plus a margin of 1.65% per annum. CAPREIT has euro
LIBOR borrowings of €47,000 included in bank indebtedness that bears
interest at the euro LIBOR rate plus a margin of 1.65% per annum. The
margins are 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, 2020. 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.
Acquisition and Operating Facility
As at December 31,
Facility
Less:
USD LIBOR borrowings
Euro LIBOR borrowings
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.
2017
2016
$
540,000
$
440,000
(234,592)
(70,744)
(141,559)
(6,313)
86,792
1.82%
$
(131,630)(1)
(26,408)
(6,040)
275,922
2.55%
$
9 2
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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, 2017, the maximum number of Units issuable under all of
CAPREIT’s Unit-based incentive plans is 9,500,000 Units (December 31,
2016 – 9,500,000). The maximum number of Units available for future
issuance under all Unit incentive plans as at December 31, 2017 is 1,077,977
Units (December 31, 2016 – 1,346,980 Units).
On April 4, 2014, the Long-Term Incentive Plan (“LTIP”), the Senior
Executive Long-Term Incentive Plan (“SELTIP”), and the Unit Purchase
Plan (“UPP”) were terminated by the trustees of CAPREIT, although awards
previously granted under the LTIP and SELTIP remain outstanding under the
original terms of such plans.
The Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s incentive plans and Exchangeable Units as at December 31, 2017 and
2016 are as follows:
(Number of Units)
Year Ended December 31, 2017
UOP
DUP
RUR
LTIP (1)
SELTIP/
Exch.
Units (2)
Total
Units, Unit Rights and Unit Options outstanding as at January 1, 2017
Issued, cancelled or granted during the year:
1,488,212
285,876
718,398 1,185,398
161,311 3,839,195
Issued or granted
Exercised or settled
Cancelled
Distributions reinvested
Units, Unit Rights and Unit Options
outstanding as at December 31, 2017
(Number of Units)
Year Ended December 31, 2016
–
(224,250)
–
–
24,787
(60,708)
–
10,204
161,369
(383,597)
(3,646)
29,456
–
(160,000)
–
–
–
(30,656)
–
–
186,156
(859,211)
(3,646)
39,660
1,263,962
260,159
521,980 1,025,398
130,655 3,202,154
UOP
DUP
RUR
LTIP (1)
SELTIP/
Exch.
Units (2)
Total
Units, Unit Rights and Unit Options outstanding as at January 1, 2016
Issued, cancelled or granted during the year:
1,334,432
248,076
586,313 1,445,398
161,311 3,775,530
Issued or granted
Exercised or settled
Distributions reinvested
Units, Unit Rights and Unit Options
outstanding as at December 31, 2016
153,780
–
–
34,481
(7,500)
10,819
131,772
(28,364)
28,677
–
(260,000)
–
–
–
–
320,033
(295,864)
39,496
1,488,212
285,876
718,398 1,185,398
161,311 3,839,195
(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 130,655 Exchangeable Units are entitled to distributions equivalent to distributions on Trust Units, must be exchanged solely for Trust Units on a one-for-one
basis, and are exchangeable at any time at the option of the holder. An equivalent number of Special Voting Units were issued at the same time as the Exchangeable Units.
The holders of these Units have no entitlement to any share of or interest in the distributions or net assets of CAPREIT. Through Special Voting Units, holders of Exchangeable
Units are entitled to an equivalent number of votes at all meetings of Unitholders or in respect of any written resolution of Unitholders equal to the number of Exchangeable Units
held. The carrying value of these Units is measured at an amortized cost of $4,876 as at December 31, 2017 (December 31, 2016 – $5,061), which approximates the closing
price of the Trust Units.
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9 3
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
The table below summarizes the change in the total Unit-based compensation financial liabilities for the years ended December 31, 2017 and 2016,
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
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
UOP
Non-Current
RUR
Total Unit-based compensation financial liabilities, end of the year
$
$
$
2017
60,278
25,809
(21,527)
64,560
2017
14,039
14,620
9,703
4,874
11,426
54,662
9,898
64,560
$
2016
46,163
19,679
(5,564)
60,278
2016
13,757
11,192
8,968
5,391
8,253
47,561
12,717
60,278
$
$
$
$
Units or Unit-based compensation financial liabilities held by trustees, officers and other senior management
As at December 31, 2017, 1.0% (December 31, 2016 – 3.2%) 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, 2016. No Trust Units were acquired and cancelled under these NCIB
programs.
Period covered under the NCIB
July 28, 2015 to July 27, 2016
Approval Limit
11,493,069
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
12
UNIT-BASED COMPENSATION EXPENSES
These costs represent Unit-based compensation expenses, which include
fair value remeasurement at each reporting date recognized over the
respective vesting periods for each plan for the years ended December 31,
2017 and 2016, as follows:
The fair value of Unit Options is determined as at the grant date and
subsequent interim and annual valuations are determined by adjusting
market-based valuation assumptions used in arriving at the estimated fair
value. The weighted average assumptions utilized to arrive at the estimated
fair value for the outstanding grants at the respective periods were as follows:
Year Ended December 31,
$
UOP
LTIP
SELTIP
DUP
RUR Plan
EUPP
Unit-based Compensation Expenses $
2017
6,220
3,647
3,428
2,790
9,724
265
26,074
2016
3,903
3,913
2,778
2,544
6,541
218
19,897
$
$
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 former President and
CEO’s employment agreement was amended to provide that during his
term, the former President and CEO would be awarded options to acquire
three percent (3%) of the number of Units issued by the Trust pursuant to
any equity offering or acquisition transaction (not including pursuant to any
compensation 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 former President and CEO was granted
153,780 options at an exercise price of $32.40 with an expiration date of
August 3, 2026 with an intrinsic 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.
A summary of Unit option activity for the years ended December 31,
2017 and 2016 is presented below. All Unit options are exercisable as at
December 31, 2017 and 2016.
(Number of Units)
For the Year Ended December 31,
2017
2016
Balance, beginning of the year
Granted
Exercised
Balance, end of the year
1,488,212
–
(224,250)
1,263,962
1,334,432
153,780
–
1,488,212
As at December 31,
2017
2016
Number of Units
Weighted average issue price
Weighted average risk-free rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit option value
1,263,962
26.22
$
1.9
3.4
6.4
17.0
9.04
$
1,488,212
25.33
$
1.4
4.0
7.0
19.4
5.55
$
b) LTIP and SELTIP
The Board of Trustees awarded LTIP and SELTIP Units, subject to the
attainment of specified performance objectives, to certain officers and key
employees (collectively the “Participants”). SELTIP Units were awarded to
the former 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 instalments, with an initial
instalment of 5% paid when the Units are issued. The balance, represented
by Instalment Receipts, is due over a term not exceeding ten years for the
LTIP and 30 years in the case of the SELTIP. Participants are required to pay
interest at ten-year and 30-year fixed rates, respectively, based on the Trust’s
fixed borrowing rate for long-term mortgage financing, and are required to
apply cash distributions received by them on these Units toward the payment
of interest and the remaining instalments. In the case of the SELTIP, following
the tenth anniversary, cash distributions shall be applied to pay interest only
and any excess will be distributed to the Participants. Participants may pre-
pay any remaining instalments at their discretion. The Instalment Receipts
are non-recourse to the Participants and are secured by the Units as well
as the distributions on the Units. If a Participant fails to pay interest and/or
principal, CAPREIT may elect to reacquire or sell the Units in satisfaction of
the outstanding amounts.
The LTIP and SELTIP were terminated on April 4, 2014 by the Trustees
of CAPREIT, although awards previously granted remain outstanding. 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.
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9 5
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
The details of the Units issued under the LTIP and SELTIP are as shown below:
Year Ended December 31,
2017
2016
Number of Units
Balance, beginning of the year
Settled during the year
Balance, end of the year
LTIP
630,683
(160,000)
470,683
SELTIP
554,715
–
554,715
LTIP
890,683
(260,000)
630,683
SELTIP
554,715
–
554,715
The details of the LTIP and SELTIP Instalment Receipts are as shown below:
Year Ended December 31,
2017
2016
Instalment Receipts
Balance, beginning of the year
Principal repayments during the year
Balance, end of the year
LTIP
6,193
(2,526)
3,667
$
$
SELTIP
7,180
(358)
6,822
$
$
LTIP
9,800
(3,607)
6,193
$
$
SELTIP
7,499
(319)
7,180
$
$
The Instalment Receipts are recognized as a deduction from Unit-based
compensation liability. During the years ended December 31, 2017 and
2016 interest payments in the amounts of $582 and $696, respectively,
were applied to the outstanding Unit-based compensation liability. The
outstanding balance of the instalment receivable is used in determining the
fair value of the Unit and the related fair value adjustments.
The following table summarizes the market-based rates and assumptions
as well as projections of certain inputs used in determining the fair values
using an option pricing model for LTIP and SELTIP Units outstanding at the
respective measurement dates.
LTIP
As at December 31,
2017
2016
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
$
470,683
4.55
14.32
7.50
6.70
1.7
3.4
0.9
13.6
29.83
630,683
4.62
15.15
9.57
8.13
0.8
4.0
1.6
19.1
21.81
$
$
$
$
SELTIP
As at December 31,
2017
2016
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
$
554,715
4.96
17.84
12.07
1.42
2.0
3.4
18.3
20.6
26.36
554,715
4.96
17.84
12.74
1.80
1.7
4.0
19.3
23.7
20.18
$
$
$
$
(1) Balance at maturity is based on the assumption SELTIP will be held till the end of
the 30 year term.
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
2017 is 100% (2016 – 100%) of a trustee’s annual board compensation of
$75 for 2017 and 2016.
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NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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,
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
23.85
34.32
33.70
25.03
24.34
$
2017
Fair Value
per Unit
31.37
–
–
–
37.32
$
$
Number
of Units
285,876
24,787
10,204
(60,708)
260,159
$
Weighted Avg.
Issue Price
21.87
30.94
30.02
21.24
23.85
$
2016
Fair Value
per Unit
26.84
–
–
–
31.37
$
$
Number
of Units
248,076
34,481
10,819
(7,500)
285,876
d) RUR Plan
In 2010, CAPREIT adopted the RUR Plan as the primary plan through
which long-term incentive compensation will be awarded. The RUR Plan
was approved by Unitholders on May 19, 2010. The Human Resources
and Compensation Committee of the Board of Trustees may award RURs,
subject to the attainment of specified performance objectives to certain
officers and key employees (collectively the “Participants”). The purpose
of the RUR Plan is to provide its Participants with additional incentive and
to further align the interests of its Participants with Unitholders through
the use of RURs which, on vesting, are exercisable for Units. RUR Plan
Units will be issued from treasury on vesting. The RURs vest in their
entirety on the third anniversary of the grant date. The RURs earn notional
distributions in respect of each distribution paid on RURs commencing
from the grant date and such notional distributions are used to calculate
additional RURs (“Distribution RURs”), which are accrued for the benefit
of the Participants. The Distribution RURs are credited to the Participants
only when the underlying RURs on which the Distribution RURs are earned
become vested. The fair value of the Distribution RURs is based on the
five-business-day weighted average closing price of the Units on the TSX
prior to the distribution date.
The fair value of the RURs represents the closing price of the Units on the
TSX on the last trading day on which the Units traded prior to the reporting
date, representing the fair value of the redemption price.
The details of the RURs granted under the RUR Plan (including the Distribution RURs) are as follows:
December 31,
Outstanding, beginning of the year
Granted during the year
Additional Unit distributions
Settled or cancelled during the year
Outstanding, end of the year
$
Weighted Avg.
Issue Price
24.25
32.02
33.46
24.33
27.11
$
2017
Fair Value
per Unit
31.37
–
–
–
37.32
$
$
Number
of Units
718,398
161,369
29,456
(387,243)
521,980
$
Weighted Avg.
Issue Price
22.78
28.64
29.95
20.14
24.25
$
2016
Fair Value
per Unit
26.84
–
–
–
31.37
$
$
Number
of Units
586,313
131,772
28,677
(28,364)
718,398
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.
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9 7
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
13
UNITHOLDERS’ EQUITY
All Trust Units outstanding are fully paid, have no par value and are
voting Trust Units. The authorized capital of CAPREIT consists of an
unlimited number of Units, an unlimited number of Special Voting Units
and 25,840,600 Preferred Units. As at December 31, 2017, no Preferred
Units were issued and outstanding. Trust Units represent a Unitholder’s
proportionate undivided beneficial interest in CAPREIT. No Trust Unit has
any preference or priority over another. No Unitholder has or is deemed
to have any right of ownership in any of the assets of CAPREIT. Each Unit
confers the right to one vote at any meeting of Unitholders and to participate
pro rata in any distributions by CAPREIT and, in the event of termination
of CAPREIT, in the net assets of CAPREIT remaining after satisfaction of
all liabilities. Units will be issued in registered form and are transferable.
Issued and outstanding Units may be subdivided or consolidated from
time to time by the trustees without Unitholder approval. No 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
Exchangeable Units
Distribution Reinvestment Plan (“DRIP”)
EUPP
DUP
RUR Plan
UOP
LTIP
Units outstanding, end of the year
a) New Units Issued in 2016
Ref
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
2017
2016
134,388,458
127,139,897
–
30,656
1,617,392
46,833
60,708
383,595
224,250
160,000
136,911,892
5,126,000
–
1,791,680
43,542
3,529
23,810
–
260,000
134,388,458
August 2016 (the “August 2016 Equity Offering”)
Bought-Deal (August 3, 2016)
Over-allotment (August 3, 2016)
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
b) Exchangeable Units
During 2017, pursuant to the terms of the Exchangeable Units, 30,656
Exchangeable Units were exchanged for 30,656 Trust Units.
d) 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.
c) Distribution Reinvestment Plan (“DRIP”)
The terms of the DRIP grant participants the right to receive an additional
amount equal to 5% of their monthly distributions paid in the form of addi-
tional Units. The total consideration for Units issued represents the amount
of cash distributions reinvested in additional Units.
e) Deferred Unit Plan (“DUP”)
During 2017, in accordance with the DUP, two former trustees exercised
60,708 Deferred Units and were settled for an equivalent number of Trust
Units. 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.
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C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
f) Restricted Unit Rights Plan (“RUR Plan”)
During 2017, 387,243 RUR Units were settled, out of which 383,595 RUR
Units were settled for an equivalent number of Trust Units, 3,646 RUR Units
were cancelled, and the remaining RUR Units were settled in cash. 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 owed on the
Trust Units issued.
g) Unit Option Plan (“UOP Plan”)
During 2017, 224,250 options were exercised and an equivalent number of
Trust Units were issued.
h) Long-Term Incentive Plan (“LTIP”)
During 2017 and 2016, 160,000 Units and 260,000 Units, respectively,
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 March 2017, monthly cash
distributions declared to Unitholders increased to $0.1067 ($1.28 annually)
compared to $0.1042 ($1.25 annually) since June 2016 and $0.1017 ($1.22
annually) since May 2015.
Year Ended December 31,
2017
2016
Distributions declared
on Trust Units
Distributions per Unit
$
$
173,072
1.275
$
$
161,483
1.238
15
FINANCIAL INSTRUMENTS, INVESTMENT
PROPERTIES AND RISK MANAGEMENT
a) Fair value of financial instruments
The fair value of CAPREIT’s financial assets and liabilities, except as noted
below and elsewhere in the consolidated annual financial statements,
approximates their carrying amount due to the short-term and variable rate
nature of these instruments.
As at December 31, 2017, the fair value of CAPREIT’s mortgages payable
is estimated to be $3,554,000 (December 31, 2016 – $3,569,000) 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.
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9 9
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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, 2017, and aggregated by the level in the fair value hierarchy within which those measurements fall. These estimates are
not necessarily indicative of the amounts CAPREIT could ultimately realize.
Level 1
Quoted prices in
active markets for identical
assets and liabilities
Level 2
Significant
other observable
inputs
Level 3
Significant
unobservable
inputs
Total
Recurring Measurements
Assets
Investment properties
Fee simple and MHC land lease sites
Operating leasehold interests
Land leasehold interests
Investments
Liabilities
Derivative financial instruments – interest
Derivative financial instruments – cross currency swap
Total
$
$
–
–
–
30,915 (2)
–
–
30,915
$
$
–
–
–
–
$ 7,961,816 (1)
738,990 (1)
185,750 (1)
–
$ 7,961,816
738,990
185,750
30,915
(57) (3)
(14,014) (3)
(14,071)
–
–
$ 8,886,556
(57)
(14,014)
$ 8,903,400
(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 valuations of the interest rate swap and cross-currency swap instruments are 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.
Although CAPREIT has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit
valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default
by CAPREIT itself. As at December 31, 2017, CAPREIT has assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of the derivative. As a
result, CAPREIT has determined that the derivative valuations in their entirety should be classified as Level 2 of the fair value hierarchy.
10 0
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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 year ended December 31, 2017 and 2016, a 100 basis point change in interest rates would have the following effect:
Floating rate debt
Floating rate debt
Interest rate swap agreements
Interest rate swap agreements
Euro interest rate swap agreements
Euro interest rate swap agreements
Cross currency swap (1)
Cross currency swap (1)
Change in
interest rates
(basis points)
+100
–100
+100
–100
+100
–100
+100
–100
Increase (decrease) in net income
Increase (decrease) in OCI
2017
(936)
936
–
–
–
–
7,981
572
$
$
$
$
$
$
$
$
2016
(1,382)
1,382
–
–
1,150
(1,116)
–
–
$
$
$
$
$
$
$
$
2017
–
–
2,863
(3,002)
–
–
–
–
$
$
$
$
$
$
$
$
2016
–
–
3,550
(3,757)
–
–
–
–
$
$
$
$
$
$
$
$
(1) Represents the parallel interest rate shift of both the LIBOR and EURIBOR forward rates.
CAPREIT’s objective in managing interest rate risk is to minimize the
volatility of earnings. As at December 31, 2017, interest rate risk has been
minimized as approximately 100.0% (December 31, 2016 – 97.9%) of
the mortgages payable are financed at fixed interest rates, with maturities
staggered over a number of years.
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.
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 97.0% of CAPREIT’s mortgages are CMHC-insured
(excluding $372,647 of mortgages on the MHC), which reduces the risk
in refinancing mortgages. CAPREIT’s overall risk for mortgage refinancings
is further reduced as the unamortized mortgage insurance premiums
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, 2017,
CAPREIT had undrawn lines of credit in the amount of $86,792 (December 31,
2016 – $275,922).
The contractual maturities and repayment obligations of CAPREIT’s financial liabilities as at December 31, 2017 are as follows:
Mortgages payable
Bank indebtedness
Mortgage interest (1)
Bank indebtedness interest (1)
Other liabilities
Security deposits
Exchangeable Units
Distributions payable
2018
233,288
–
103,526
8,151
90,958
32,352
4,876
14,714
487,865
$
$
$
2019–2020
717,199
446,895
177,369
12,205
20,588
–
–
–
$ 1,374,256
$
2021–2022
940,974
–
127,871
–
57
–
–
–
$ 1,068,902
2023 onward
$ 1,698,132
–
113,935
–
–
–
–
–
$ 1,812,067
(1) Based on current in-place interest rates for the remaining term to maturity.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
2 0 17 A N N U A L R E P O R T
10 1
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Credit risk Credit risk is the risk that: (i) counterparties to contractual financial
obligations will default; and (ii) the possibility that CAPREIT’s residents may
experience financial difficulty and be unable to meet their rental obligations.
CAPREIT monitors its risk exposure regarding obligations with
counterparties through the regular assessment of counterparties’ credit
positions.
CAPREIT mitigates the risk of credit loss with respect to residents
by evaluating the creditworthiness of new residents, obtaining security
deposits wherever permitted by legislation and geographically diversifying
its portfolio.
CAPREIT monitors its collection experience on a monthly basis and
ensures that a stringent policy is adopted to provide for all past due amounts.
All residential accounts receivable balances exceeding 30 days are written
off to bad debt expense and recognized in the consolidated statements of
income and comprehensive income. Subsequent recoveries of amounts
previously written off are credited in the consolidated statements of income
and comprehensive income. Accordingly, no allowance for doubtful accounts
is established. The maximum exposure to credit risk at the reporting date is
the carrying value of the tenant receivables.
Foreign currency risk Foreign currency risk is the financial risk exposure
to unanticipated changes in the exchange rate between two currencies.
CAPREIT is exposed to foreign currency risk as CAPREIT’s functional and
presentation currency is the Canadian dollar while the functional currency
of CAPREIT’s fund management subsidiary in Dublin, Ireland, investment in
IRES and CAPREIT’s subsidiaries in The Netherlands is the euro.
CAPREIT manages and mitigates the exposure to foreign currency risk
on its investment in IRES and subsidiaries in The Netherlands with its US
LIBOR borrowings, cross-currency swap, and euro LIBOR borrowings. The
gain or loss on foreign currency translation relating to CAPREIT’s subsidiaries
in Dublin, Ireland, and the Netherlands and IRES investment is recognized
in other comprehensive income. The mark-to-market on the cross-currency
swap and foreign exchange translation on the US LIBOR and euro LIBOR
borrowings are recognized in the consolidated statement of income.
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, 2017, $712 (December 31, 2016 – $784) was amortized
from AOCL to mortgage interest expense.
ii) CAPREIT’s Netherlands subsidiaries own and operate properties in The
Netherlands, a foreign jurisdiction. They are 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 sheet. Any
foreign currency gains/losses arising from the euro-denominated debt
was 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. The hedge became ineffective July 2017 when the
euro-denominated debt was repaid.
iii) As at December 31, 2017, 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 hedge became ineffective July 2017. The ineffective
gain component of the hedge of $1,921 for the year ended December 31,
2017 has been recorded under derivative financial instruments on the
consolidated statements of income and comprehensive income, and the
cumulative mark-to-market loss of $57 is in other non-current liabilities
as at December 31, 2017. The accumulated loss recorded in AOCL will
be amortized in the consolidated statements of income from AOCL over
the remaining term of the credit facility.
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
2017
(2,608)
2,551
(57)
(1,883)
630
(1,253)
$
$
$
$
2016
(3,527)
919
(2,608)
(3,527)
1,644
(1,883)
$
$
$
$
10 2
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
b) Contracts for which hedge accounting is being applied
i)
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
2017
2016
$
$
(12,833)
2,286
(10,547)
$
$
(15,121)
2,288
(12,833)
c) Contracts for which hedge accounting is not being applied
i) CAPREIT had 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 €40,000 interest rate swap
agreement was settled in July 2017. The agreement effectively converted
borrowings on a EURIBOR-based floating rate credit facility to a fixed rate
facility for a five-year term. The mark-to-market gain for the year ended
December 31, 2017 of $227 has been recorded in net income.
ii)
In June 2017, CAPREIT entered into a cross-currency swap to (i) hedge
a US-based loan of USD $186,436 into €163,540 effective July 2017
and (ii) convert the variable interest rate on the US-based loan of LIBOR
plus 1.65% to a fixed interest rate of EURIBOR plus 1.65% equalling
1.20% and maturing in June 2019. The US-based loan was drawn from
the Acquisition and Operating Facility in July 2017. The loss on the hedge
has been recorded under loss on derivative financial instruments on
the consolidated statements of income and comprehensive income for
the year ended December 31, 2017 of $14,014 and the cumulative
mark-to-market loss of $14,014 is in other non-current liabilities as at
December 31, 2017.
17
CAPITAL MANAGEMENT
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 of 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 indebted-
ness of CAPREIT is limited to the greater of (i) 60% of gross book value
determined on a fair value basis or (ii) 70% of gross book value determined
on a historical basis, and may only be increased above such limits with
CMHC’s consent.
The LBA provides for, among other things: (i) certain 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 N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
2 0 17 A N N U A L R E P O R T
10 3
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
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 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)
2017
2016
$ 3,581,501
446,895
64,561
4,876
4,923,406
$ 9,021,239
$ 3,492,923
26,408
60,278
5,061
4,158,149
$ 7,742,819
Threshold
Maximum 70.00%
Minimum $1,800,000
43.57%
$ 4,992,842
44.31%
$ 4,223,488
Minimum 1.20
Minimum 1.50
1.63
3.19
1.63
3.09
(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.
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,
of total assets or (ii) 70% of gross book value, determined on a historical basis, of total assets and may only be increased above such limits with CMHC’s consent.
(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, 2016, the tangible net worth requirement was $1,500,000 and was amended to $1,800,000 effective
November 24, 2017.
(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 TAXES
For 2016 and 2017, 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 to 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 vary-
ing 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.
The Netherlands deferred tax liability is as follows:
As at December 31,
2017
2016
Deferred Tax Liability
Related to Difference in Tax and Book Basis for Investment Properties
Total
$
$
7,263
7,263
$
$
–
–
CAPREIT did not record any taxable income attributable to the Netherlands
subsidiaries for the year ended December 31, 2017. Therefore, the
current income tax was nil. The income tax rate on taxable income in the
Netherlands is 20% on the first 200 thousand euros and 25% on the remaining
taxable income. CAPREIT recorded a deferred tax liability attributable to the
Netherlands amounting to $7,263 for the year ended December 31, 2017,
representing the difference in tax and book basis for investment properties
of €19,444 and applying a capital gains tax rate of 25%.
10 4
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
19
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the Year Ended December 31,
AOCL balance, beginning of 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
Other comprehensive income
AOCL balance, end of 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
Gain (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 gain (loss) on foreign currency translation
Reversal of cumulative foreign currency translation relating to IRES ownership dilution
Cumulative realized gain on sale of investments
AOCL balance, end of the year
2017
2016
$
(12,586)
$
(14,530)
3,024
630
4,957
10,490
19,101
6,515
2017
(9,908)
8,633
(106)
(1,253)
(22,884)
12,337
11,689
7,711
3,127
(2,831)
6,515
$
$
$
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)
$
$
$
(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 2017 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 $358.
(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 $2,276.
20
INTEREST AND OTHER FINANCING COSTS
21
JOINT ARRANGEMENTS
For the Year Ended December 31,
2017
2016
CAPREIT’s share of the assets, liabilities, revenues, expenses and cash
flows from joint arrangement activities is summarized as follows:
Year Ended December 31,
2017
2016
Interest on mortgages payable (1)
Amortization of
CMHC premiums and fees
Interest on bank indebtedness
and other deferred costs (2)
Interest on Exchangeable Units
Non-controlling interest costs (3)
$ 113,335
$ 108,926
3,810
3,500
3,911
186
4,902
$ 126,144
4,704
200
(67)
$ 117,263
Assets
Liabilities
Revenues
Expenses and other adjustments
Net income
(1) Includes amortization of deferred financing costs, fair value adjustments and OCI
hedge interest of $4,124 (December 31, 2016 – $3,616).
(2) Includes amortization of deferred loan costs of $778 (December 31, 2016 – $664).
(3) Represents costs related to the non-controlling interest of the minority
shareholders in CAPREIT’s foreign subsidiaries.
Cash provided by (used in):
Operating activities
Financing activities
Investing activities
$ 219,600
73,090
16,421
(6,938)
23,359
$ 203,874
75,493
15,938
4,289
11,649
$
8,943
(7,927)
(1,200)
$
8,914
(7,071)
(2,566)
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
2 0 17 A N N U A L R E P O R T
10 5
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
22
SUPPLEMENTAL CASH FLOW INFORMATION
a) Net income items related to investing and financing activities
e) Acquisition of investment properties
For the Year Ended December 31,
2017
2016
For the Year Ended December 31,
2017
2016
Dividend and Interest Income
Interest paid on Exchangeable Units
Interest paid on mortgages payable
Interest paid on bank indebtedness
Non-cash non-controlling
interest costs
Net disbursement
$
8,478
(186)
(107,805)
(3,147)
$
4,519
(199)
(104,853)
(4,045)
(4,902)
$ (107,562)
–
$ (104,578)
Acquired properties
Fair value adjustment
of assumed debt
Assumed debt
Deposit on purchases
Contributions from
non-controlling interest
Net disbursement
$ (470,510)
$ (414,668)
9
3,713
(5,431)
773
25,356
4,906
889
$ (471,330)
850
$ (382,783)
b) Changes in non-cash operating assets and liabilities
For the Year Ended December 31,
2017
2016
Prepaid expenses
Tenant inducements, direct leasing
costs, and other adjustments
Other receivables
Deposits
Accounts payable and other liabilities
Security deposits
Net receipts
$
(425)
$
(807)
5,640
3,948
(1,725)
(8,931)
2,415
922
(1,826)
2,002
(493)
18,863
2,934
$ 20,673
$
f) Disposition of investment properties
For the Year Ended December 31,
2017
2016
Proceeds
Closing costs
Mortgages assumed by purchasers
and discharged
Net proceeds
$ 21,825
(140)
$ 60,606
(2,878)
(4,951)
$ 16,734
(26,407)
$ 31,321
g) Issuance of Trust Units
c) Net cash distributions to Unitholders
For the Year Ended December 31,
2017
2016
For the Year Ended December 31,
2017
2016
$ (173,072)
$ (161,483)
Issuance of Trust Units
Conversion of Exchangeable
Units to Trust Units
Settlement of Unit-based
Compensation Awards
$ 30,685
$ 167,220
(1,037)
–
(21,527)
8,121
$
(5,306)
$ 161,914
(14,123)
(13,073)
for Trust Units
Net proceeds
14,714
14,123
51,732
$ (120,749)
51,035
$ (109,398)
Distributions declared to Unitholders
Add:
Distributions payable at
beginning of year
Less:
Distributions payable at end of year
Less:
Distributions to participants
in the DRIP
Net disbursement
d) Capital investments
For the Year Ended December 31,
2017
2016
Capital investments
Change in capital investments
included in accounts payable
and other liabilities
Net disbursement
$ (160,819)
$ (203,918)
(2,909)
$ (163,728)
6,425
$ (197,493)
10 6
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
h) Mortgage Portfolio
The following table summarizes the movement in mortgages payable dur-
ing the year:
i) Bank Indebtedness
The following table summarizes the movement in bank indebtedness
during the year:
As at December 31,
($ Thousands)
2017
2016
December 31,
($ Thousands)
Balance, Beginning of the Year
New Borrowings on Acquisitions
Refinanced
Mortgage Repayments (2)
Mortgages Matured (3)
Mortgages Repaid on Dispositions
of Investment Properties
Non-cash Adjustments:
Assumed
Foreign Currency Translation
Change in Deferred Financing Costs,
Fair Value Adjustments, Net
Balance, End of the Year (1)
$ 3,492,923
253,375
211,141
(119,458)
(266,575)
$ 3,097,773
336,468
299,300
(102,522)
(130,810)
Balance, Beginning of Year
Borrowings
Repayments
US LIBOR borrowings (1)
Non-cash Adjustments
(4,951)
(26,407)
Balance, End of Year
Foreign Currency Exchange
2017
2016
$ 26,408
1,052,991
(859,934)
234,869
$ 168,211
4,655,256
(4,797,059)
–
(7,438)
$ 446,895
–
$ 26,408
3,713
12,543
25,356
(4,323)
(1,210)
$ 3,581,501
(1,912)
$ 3,492,923
(1) During the year, US LIBOR borrowings of USD $187,000 ($234,869 as at
December 31, 2017) were drawn on the Acquisition and Operating Facility.
Euro LIBOR borrowings on the facility in the prior year were classified as
mortgages payable.
(1) Included in mortgages payable as at December 31, 2016 is a €92,900 ($131,630)
non-amortizing euro LIBOR borrowing.
(2) Includes repayment of euro LIBOR borrowing of €5,000.
(3) In July 2017, euro LIBOR borrowings on the Acquisition and Operating Facility of
€87,900 ($129,336), classified as mortgages payable, were repaid.
23
RELATED PARTY TRANSACTIONS
a)
As at December 31, 2017, CAPREIT has a 15.7% share ownership in IRES
and has determined that it has significant influence over IRES. The share
ownership is held through a wholly-owned subsidiary of CAPREIT, Irish
Residential Properties Fund. See note 5 for a more detailed description.
CAPREIT’s wholly-owned subsidiary, IRES Fund Management Limited
(“IRES FM”), is an alternative investment fund manager under the European
Union (Alternative Investment Fund Managers) Regulation, 2013 (the “AIFM
Regulations”) for IRES. The investment management agreement between
IRES FM and IRES stipulates that 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 together with relevant reimbursements 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, 2017 is $6,173
(2016 – $5,195) from asset management and property management fees.
Expenses related to the asset and property management services are included
in trust expenses. The amount receivable from IRES as at December 31, 2017
is $2,911 (December 31, 2016 – $8,024).
David Ehrlich resigned as Chief Executive Officer of IRES effective
November 1, 2017 to take up the role of President and Chief Executive Officer
of CAPREIT. Effective November 1, 2017, Mr. Ehrlich is not entitled to receive
any further remuneration from IRES under his employment agreement dated
December 12, 2016 between IRES and Mr. Ehrlich. Mr. Ehrlich continues to
serve on the board of IRES as a non-executive director, as the investment
manager’s nominee. He does not receive any fees from IRES in this role.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
2 0 17 A N N U A L R E P O R T
10 7
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Prior thereto, effective January 1, 2017, in addition to being an employee
of IRES, Mr. Ehrlich became an employee of CAPREIT Limited Partnership
pursuant to an employment agreement dated December 13, 2016 between
CAPREIT Limited Partnership and Mr. Ehrlich (under which he carried
out management services related to IRES under the services agreement
and investment management agreement) (the “CAPREIT Employment
Agreement”). The CAPREIT Employment Agreement terminated effective
November 1, 2017, upon Mr. Ehrlich’s resignation as Chief Executive Officer
of IRES.
Mr. Ehrlich received the following compensation under the CAPREIT
Employment Agreement. On February 28, 2017, Mr. Ehrlich received a one-
time grant equal to $500 in RURs in accordance with the terms of CAPREIT’s
Amended and Restated RUR Plan, dated May 27, 2014, as amended from
time to time. Pursuant to the terms of the CAPREIT Employment Agreement,
he was also entitled to be granted $150 in RURs on an annual basis. For the
year ended December 31, 2017, Mr. Ehrlich received $75 in RURs, with the
remaining $50 payable subsequent to year end.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive income
comprises:
For the Year Ended December 31,
($ Thousands)
2017
2016
Short-term employee benefits
Unit-based compensation
– grant date amortization
Unit-based compensation
– fair value remeasurement
Other benefits (1)
Total
$
3,432
$
3,400
3,255
6,687
10,255
1,604
18,546
$
3,763
7,163
13,662
–
20,825
$
(1) Represents the accelerated vesting of previously-granted RUR Units relating to the
former President and CEO.
b)
CAPREIT had the following transactions with key management personnel,
the former President and CEO, and trustees. The loans outstanding to
key management personnel, the former President and CEO, and trustees
for indebtedness relating to the SELTIP and LTIP as at December 31,
2017 and 2016 were $7,180 and $5,953, 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 provide for payments of up to
36 months of benefits (based on base salary, bonus and other benefits)
depending on cause.
c)
CAPREIT has a lease for office space with a company in which a former
officer had an 18% beneficial interest. The rent paid for the office space for
the year ended December 31, 2017 and 2016 was $1,069 and $1,035,
respectively, excluding property operating costs, and has been expensed
as trust expenses. In 2017, the above lease was amended and extended
to October 2022 with a new minimum annual rental payment of $611 from
November 2017 to October 2022. Minimum rental payments for these
years are as follows:
Minimum rent
2018
611
2019
611
$
$
2020–
2022
$ 1,731
10 8
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
24
COMMITMENTS
Natural gas
Through the combination of fixed and variable price contracts, CAPREIT is committed as at December 31, 2017, in the aggregate amount of $12,001
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
(1) Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs.
2018
2.87
64.4%
1.05
64.5%
$
$
2019
2.77
58.0%
0.97
58.1%
2020
2.70
41.7%
0.96
41.7%
$
$
$
$
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, 2017 and 2016, total expenses under these four
leases were $2,814 and $2,716, 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
2018
1,323
$
2019
1,323
$
2020
1,323
$
2021
1,323
$
2022
1,323
Thereafter
37,353
$
$
Property capital investments
Commitments primarily related to capital investments in investment properties of $25,010 were outstanding as at December 31, 2017 (December 31,
2016 – $36,484).
25
CONTINGENCIES
26
SUBSEQUENT EVENTS
CAPREIT is contingently liable under guarantees provided to certain of
CAPREIT’s lenders in the event of default, and with respect to litigation
and claims that arise in the ordinary course of business. Matters relating
to litigation and claims are generally covered by insurance, or have been
provided for in Trust expenses where appropriate.
On February 22, 2018, CAPREIT announced that it has agreed to sell, sub-
ject to regulatory approval, 4,270,000 units at a price of $35.15 per unit for
aggregate gross proceeds of $150,091 to a syndicate of underwriters led
by RBC Capital Markets on a bought-deal basis. CAPREIT has granted
the underwriters an over-allotment option, exercisable in whole or in part
up to 30 days after closing of the Offering, to purchase up to an additional
640,500 units to cover over-allotments, if any. CAPREIT intends to use the
net proceeds to partially repay the Acquisition and Operating Facility and
the remainder, if any, for future acquisitions, capital expenditures and for
general trust purposes.
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
2 0 17 A N N U A L R E P O R T
10 9
NOTES TOCONSOLIDATED FINANCIALSTATEMENTS
Five-Year Review
($ Thousands, except per Unit amounts)
Year Ended December 31,
Operating Revenues
Net Operating Income (“NOI”)
Net Operating Income Margin (%)
Net Income
Normalized Funds From Operations (“NFFO”)
Cash Distributions
NFFO Payout Ratio (%)
Non-taxable Distributions (%)
Normalized Funds from Operations
NFFO per Unit – Basic
Cash Distributions per Unit
Weighted Average Number of Units (000s)
Number of Suites and Sites – total
Number of Suites and Sites – CAPREIT’s share
Investment Properties
Unitholders’ Equity
Overall Portfolio Occupancy (%)
Mortgage Debt to Gross Book Value (%)
Interest Coverage (times)
Weighted Average Mortgage Interest Rate (%) (1)
Weighted Average Mortgage Term (years)
Cumulative Compounded Return
Since Inception (%)
Unit Price at Year End
(1) Includes deferred financing costs and fair value adjustments.
2017
2016
2015
2014
2013
$
$
$
$
$
638,842
393,258
61.6
836,811
250,474
176,024
70.3
82.7
$
$
1.842
1.275
135,962
50,624
49,469
$ 8,886,556
$ 4,923,406
98.7
38.7
3.19
3.08
5.7
$
$
$
$
$
596,831
366,947
61.5
439,413
231,808
164,413
70.9
72.9
$
$
1.772
1.238
130,794
48,767
47,612
$ 7,642,017
$ 4,158,149
98.6
44.0
3.09
3.20
6.1
$
$
$
$
$
533,798
324,614
60.8
345,633
200,027
146,198
73.1
84.5
$
$
1.692
1.207
118,220
46,790
45,635
$ 6,863,140
$ 3,659,953
97.5
43.4
2.96
3.39
6.3
$
$
$
$
$
506,411
303,885
60.0
317,975
183,353
131,044
71.5
74.3
$
$
1.675
1.168
109,456
41,688
40,533
$ 5,749,640
$ 2,983,105
97.9
44.6
2.82
3.66
6.3
$
$
$
$
$
477,023
273,854
57.4
267,678
159,375
119,256
74.8
89.0
$
$
1.562
1.138
102,064
41,552
40,397
$ 5,459,218
$ 2,757,469
98.0
44.0
2.62
3.76
6.0
1,516
37.32
1,182
31.37
$
950
26.84
839
25.13
652
21.25
$
$
$
$
110
2 0 17 A N N U A L R E P O R T
C A N A D I A N A PA R T M E N T P R O P E R T I E S R E A L E S TAT E I N V E S T M E N T T R U S T
Unitholder Information
BOARD OF TRUSTEES
OFFICERS
HEAD OFFICE
Michael Stein 2
Chairman and Chief Executive
Officer of MPI Group Inc.
David Ehrlich
President and Chief
Executive Officer
David Ehrlich
President and Chief
Executive Officer of CAPREIT
Michael Stein
Chairman
Harold Burke 1
Senior Vice President
of Taxation, DREAM
Unlimited Corp.
Scott Cryer
Chief Financial Officer
Mark Kenney
Chief Operating Officer
Stanley Swartzman 2, 3, 4
Corporate Director
Roberto Israel
Chief Information Officer
Dr. Elaine Todres 3, 4
President,
Todres Leadership Counsel
Jodi Lieberman
Chief Human Resources
Officer
Dr. Gina Cody 1, 2
Corporate Director
Paul Harris 1, 3, 4
Corporate Director
Corinne Pruzanski
General Counsel and
Corporate Secretary
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:
David Ehrlich
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 Distributions per Unit
May 2015 – May 2016:
$0.102 ($1.22 annually)
June 2016 – February 2017:
$0.104 ($1.25 annually)
March 2017 – December 2017:
$0.107 ($1.28 annually)
Annual Unitholders’ Meeting
The Annual Meeting of
Unitholders will be held at
4:30 p.m. EDT on
Wednesday, June 6, 2018 at
One King West Hotel
1 King Street West
Toronto, Ontario M5H 1A1
We are very proud to have been selected as one of Canada’s Best Employers for the fifth
consecutive year in 2017. 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.
BESTEMPLOYER
PLATINUM | CANADA | 2017
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