2018 ANNUAL REPORT
CANADIAN APARTMENT PROPERTIES REAL ESTATE INVESTMENT TRUST
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.
2018
HIGHLIGHTS AND
OBJECTIVES
HIGHLIGHTS
• Revenues up on continuing high occupancies
and steady increases in average monthly rents
• Conservative 65.7% NFFO payout ratio
underpins strength and sustainability of
monthly cash distributions to Unitholders
• Net Operating Income (“NOI”) rose 11.6%
due to contributions from acquisitions,
increased same property monthly rents,
and lower operating expenses
• Same property NOI increased significantly
by 8.0%
• Normalized Funds From Operations (“NFFO”)
up 15.5%
• Strong accretive growth as NFFO per Unit
up almost 10.0%
• Strong, flexible financial position with
conservative debt and coverage ratios with a
low 3.05% weighted average interest rate
•
Increased ownership position in Irish
Residential Properties REIT plc (“IRES”)
to 18.0%
• Enhanced opportunity for European growth
through proposed sale of Netherlands portfolio
and majority ownership interest in ECREIT
OBJECTIVES
• To provide Unitholders with long-term, stable and predictable
monthly cash distributions;
• To grow NFFO, sustainable distributions and Unit value through
the active management of its properties, accretive acquisitions,
developments, intensifications and strong financial management;
and
• To invest capital within the property portfolio in order to
maximize earnings and cash flow potential and to help ensure
life safety of residents.
2018 SELECTED FINANCIAL HIGHLIGHTS
SINCE 1997 CAPREIT HAS MET ITS GOAL OF DELIVERING
PROFITABLE GROWTH AND STABLE, SUSTAINABLE CASH
DISTRIBUTIONS TO ITS UNITHOLDERS. 2018 WAS YET ANOTHER
RECORD YEAR, DRIVEN BY CONTINUING PORTFOLIO GROWTH,
NEAR-FULL OCCUPANCIES, INCREASING MONTHLY RENTS
AND AN EXPERIENCED, PROVEN MANAGEMENT TEAM.
Year Ended December 31,
2018
2017
Portfolio Performance
Overall Portfolio Occupancy (1)
Overall Portfolio Net Average Monthly Rents (1)
Operating Revenues (000s)
NOI (000s)
NOI Margin
Financial Performance
FFO per Unit – Basic (2)
NFFO per Unit – Basic (2)
Cash Distributions per Unit
FFO Payout Ratio (2)
NFFO Payout Ratio (2)
Liquidity and Leverage
Total Debt to Gross Book Value (1)
Total Debt to Gross Historical Cost (1)
Weighted Average Mortgage Interest Rate (1)
Weighted Average Mortgage Term (years) (1)
Debt Service Coverage (times) (3)
Interest Coverage (times)
Available Liquidity – Acquisition and Operating Facility (000s) (1)
Other
Weighted Average Number of Units – Basic (000s)
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units (1)
Market Capitalization (millions) (1)
98.9%
1,103
688,585
439,056
63.8%
1.995
2.024
1.313
66.7%
65.7%
39.37%
54.54%
3.05%
5.10
1.75
3.44
266,325
142,974
1,791
900
44.30
6,491
$
$
$
$
$
$
$
$
$
98.7%
1,044
638,842
393,258
61.6%
1.806
1.842
1.275
71.7%
70.3%
43.57%
56.24%
3.08%
5.66
1.63
3.19
86,792
135,962
1,924
81
37.32
5,182
$
$
$
$
$
$
$
$
$
Notes
(1) As at December 31.
(2) These measures are not defined by IFRS, do not have standard meanings and may not be
comparable with other industries or companies (see MD&A Section I – Non-IFRS Financial Measures).
For a reconciliation to IFRS, see MD&A Section IV – Non-IFRS Financial Measures.
(3) Based on the trailing four quarters.
CAPREIT
2018 ANNUAL REPORT
1
CAPREIT’S HIGH-QUALITY CANADIAN PORTFOLIO
CAPREIT’S high-quality property portfolio is well-diversified both demographically and
by property type, and is strongly positioned in key Canadian urban markets. Since 1997
CAPREIT has increased its presence in the higher-return luxury and mid-tier demographic
segments while entering the stable and growing manufactured home communities market.
Alberta
6%
British
Columbia
11%
Saskatchewan
1%
BRITISH COLUMBIA
Total Suites
Occupancy (%)
4,695
98.7
ONTARIO
Total Suites
Occupancy (%)
22,144
99.4
Net Avg Monthly Rent $ 1,297
Net Avg Monthly Rent $ 1,321
ALBERTA
Total Suites
Occupancy (%)
QUÉBEC
Total Suites
Occupancy (%)
2,319
98.3
9,999
99.2
Net Avg Monthly Rent $ 1,086
Net Avg Monthly Rent
$ 970
SASKATCHEWAN
Total Suites
Occupancy (%)
NOVA SCOTIA
Total Suites
Occupancy (%)
234
96.2
1,659
98.6
Net Avg Monthly Rent $ 1,035
Net Avg Monthly Rent $ 1,125
PRINCE EDWARD ISLAND
Total Suites
Occupancy (%)
537
98.9
Net Avg Monthly Rent $ 1,027
2
CAPREIT
2018 ANNUAL REPORT
Ontario
53%
Québec
24%
1%
PEI
4%
Nova Scotia
ACROSS CANADA (apartments & MHC)
Total Suites
41,587
Occupancy
99.2%
Net Average
Monthly Rent
$1,204
MANUFACTURED
HOME COMMUNITIES
Our growing MHC portfolio continues to deliver strong
Unitholder returns and stable, sustainable cash flows.
ACROSS CANADA
Total Sites
Occupancy (%)
6,593
97.6
Net Avg Monthly Rent
$ 395
21
3
4
6
5
1. BRITISH COLUMBIA
Total Sites
Occupancy (%)
Net Avg Monthly Rent
272
100.0
$ 455
4. ONTARIO
Total Sites
Occupancy (%)
2,703
99.9
Net Avg Monthly Rent
$ 537
2. ALBERTA
Total Sites
Occupancy (%)
5. PRINCE EDWARD ISLAND
418
99.3
Total Sites
Occupancy (%)
504
99.6
Net Avg Monthly Rent
$ 436
Net Avg Monthly Rent
$ 149
3. SASKATCHEWAN
6. NEW BRUNSWICK
Total Sites
Occupancy (%)
380
99.7
Total Sites
Occupancy (%)
Net Avg Monthly Rent
$ 400
Net Avg Monthly Rent
2,316
93.5
$ 268
CAPREIT
2018 ANNUAL REPORT
3
JODI LIEBERMAN
Chief Human
Resources Officer
MARK KENNEY
President and
Chief Operating
Officer
SCOTT CRYER
Chief Financial
Officer
CORINNE PRUZANSKI
General Counsel
and Corporate Secretary
AT CAPREIT WE HAVE ONE OF THE BEST MANAGEMENT
TEAMS AND OPERATING PLATFORMS IN THE INDUSTRY,
WITH DECADES OF PROVEN EXPERIENCE IN ALL
ASPECTS OF THE RESIDENTIAL RENTAL BUSINESS.
4
CAPREIT
2018 ANNUAL REPORT
REPORT TO
UNITHOLDERS
In 2017 we celebrated twenty years of profitable growth and delivering stable, sustainable
and increasing cash distributions to our Unitholders, transforming CAPREIT into Canada’s
largest multi-family residential REIT. CAPREIT had yet another record year in 2018, with
strong and profitable growth in all our performance benchmarks. Looking ahead, we will
continue to build and strengthen our future through programs and investments that ensure
CAPREIT is the best place to work for our people, the best place to live for our residents
and the best place to invest for our Unitholders.
KEY METRICS
Operating Revenues
($ Thousands)
Acquisitions, high occupancies and
increased average monthly rents
contributed to stable and consistent
growth in operating revenues
Net Operating Income
($ Thousands)
Strong revenue growth combined
with proven management programs
generated stable NOI growth with
industry-leading NOI margins
5
8
5
,
8
8
6
2
4
8
8
3
6
,
,
1
3
8
6
9
5
,
8
9
7
3
3
5
,
1
1
4
6
0
5
6
5
0
9
3
4
,
8
5
2
,
3
9
3
,
7
4
9
6
6
3
,
4
1
6
4
2
3
5
8
8
3
0
3
,
Normalized Funds From
Operations
($ Thousands)
Strong and accretive growth in
NFFO and NFFO per Unit despite
increase in number of Units
outstanding
5
3
3
9
8
2
,
,
4
7
4
0
5
2
8
0
8
1
3
2
,
,
7
2
0
0
0
2
3
5
3
3
8
1
,
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
CAPREIT
2018 ANNUAL REPORT
5
REPORT TO UNITHOLDERS
STRONG
ACCRETIVE GROWTH
CAPREIT HAS GENERATED
SOLID ACCRETIVE GROWTH
WITH CONSERVATIVE
PAYOUT RATIOS THROUGH
ALL ECONOMIC CYCLES.
$ 2.000 –
1.800 –
1.600 –
1.400 –
1.200 –
1.000 –
0.800 –
0.600 –
0.400 –
0.200 –
0.000 –
NFFO per Unit
NFFO Payout Ratio
– 120%
– 100%
– 80%
– 60%
– 40%
– 20%
– 0%
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
ANOTHER RECORD YEAR
Operating revenues for the year ended December 31, 2018
rose 7.8% to $688.6 million, driven by the contribution from
acquisitions, strong rents on turnovers, and higher rental
guidelines increases in Ontario and British Columbia. With this
revenue growth, combined with our focus on innovation, our
proven property management programs, operating efficiency
and cost control, NOI rose a very strong 11.6% to $439.1 million
for the year. We also generated another year of industry-leading
organic growth as NOI for our stabilized property portfolio
increased 8.0% compared to the prior year.
NFFO, our key performance benchmark, increased 15.5% in
2018 to $289.3 million, resulting in another year of accretive
growth as NFFO per Unit rose 9.9% to $2.024 despite the 5.2%
increase in the weighted average number of Units outstanding
during the year. Our payout ratio of distributions declared to
NFFO also remained very conservative at 65.7%.
Importantly, we continue to maintain one of the strongest balance
sheets in our business. Total debt to gross book value ratio was a
conservative 39.4% at year end, well within our guidelines. Our
mortgage portfolio remained well-balanced with a weighted
average term to maturity of 5.1 years, adding to the stability of
our long-term cash flows. We also continue to benefit from a low
cost of debt, with a weighted average interest rate of only 3.05%
at December 31, 2018.
Looking ahead, we will continue to generate value for our
Unitholders by capitalizing on the growth and success demon-
strated over the past 21 years and focusing on initiatives that
build and strengthen our future. Through portfolio growth and
accretive property developments that modernize our asset base,
investments in innovative technology solutions and, most im-
portantly, by leveraging the skills and experience of our people,
we are confident we will build a very exciting future.
STRENGTHENING OUR FUTURE
THROUGH PORTFOLIO GROWTH
AND MODERNIZATION
In 2018 we further enhanced the scale of our property portfolio
with the purchase of 1,791 suites and sites, well-located in our
key target markets, for a total purchase price of $504.7 million.
A number of these acquisitions were newer properties, helping
to meet our goal of modernizing our asset base. With these
purchases, our total property portfolio rose to 51,528 suites and
sites at year end, with a fair value of $10.5 billion. From an initial
6
CAPREIT
2018 ANNUAL REPORT
CAPREIT’S EUROPEAN PORTFOLIO
NETHERLANDS
Since acquiring its first properties in 2016, CAPREIT
has grown its Netherlands portfolio to 3,348 rental
suites in this strong and diverse market. In a proposed
transaction, CAPREIT entered into an agreement
pursuant to which European Commercial Real Estate
Investment Trust (“ECREIT”) will acquire a portfolio of
2,091 rental suites located in the Netherlands from
CAPREIT in 2019. The transaction will be satisfied
through the issuance of ECREIT units to CAPREIT,
which will result in CAPREIT gaining control over
ECREIT. This transaction is
contingent on approval
by ECREIT unitholders
and the TSX/V.
PORTFOLIO BREAKDOWN
Total Suites
Occupancy (%)
3,348
97.9
Net Avg Monthly Rent $ 1,268
PORTFOLIO BREAKDOWN
Total Suites
Occupancy (%)
2,679
99.8
Net Avg Monthly Rent € 1,599
DUBLIN, IRELAND
CAPREIT’s investment in IRES continues to generate
significant benefits for Unitholders. In 2018 fees for
management services rose to $7.3 million, up 17.7%
from 2017. CAPREIT also increased its ownership
interest to 18.0%, and has generated strong returns
including dividends of $5.9 million for 2018.
CAPREIT
2018 ANNUAL REPORT
7
Annualized Monthly Cash Distributions
REPORT TO UNITHOLDERS
INCREASING CASH
DISTRIBUTIONS
CAPREIT REMAINS
FOCUSED ON GENERATING
STABLE, SUSTAINABLE
AND GROWING CASH
DISTRIBUTIONS FOR ITS
UNITHOLDERS.
$1.33
DECEMBER 31, 2018
15
INCREASES IN
21 YEARS
$0.73
DECEMBER 31, 1997
portfolio of 2,900 apartment suites at the time of our initial public
offering in November 1997, we have significantly expanded and
diversified our asset base, transforming CAPREIT into Canada’s
largest multi-family residential REIT.
During the year we also sold certain older, non-core buildings
where we believe we had maximized value, raising funds for more
accretive growth opportunities. We continue to evaluate every
property in our portfolio, selling those that no longer fit our overall
growth strategy and recycling the capital raised into future growth.
To further diversify, we increased our ownership position in
IRES to 18.0%. We continue to manage this high-quality and
profitable property portfolio in Dublin, generating $7.3 million
in fees in 2018, up 17.7% from the prior year. Dividends from
our investment in IRES were $5.9 million for 2018, and with our
increased ownership we expect to see further growth in dividend
income going forward.
We also generated significant portfolio growth in our Netherlands
portfolio in 2018, adding 1,257 rental suites in what remains
a very strong and diverse market. CAPREIT entered into an
agreement pursuant to which European Commercial Real Estate
Investment Trust (“ECREIT”) has agreed to acquire a portfolio
of multi-residential properties located in the Netherlands from
CAPREIT, comprising 2,091 suites in 41 properties. The proposed
transaction would provide CAPREIT with a larger, more direct
and more diverse means to realize opportunities in the vibrant
European multi-residential sector and, as with our investment
in IRES, generate stable and growing cash flows from fees and
dividends.
STRENGTHENING OUR FUTURE
THROUGH ACCRETIVE DEVELOPMENT OPPORTUNITIES
In 2018 we launched an innovative program to accretively grow
our business and build value for our Unitholders through the
selective development of new rental buildings and apartment
suites. We own a number of properties where there is sufficient
land on which to develop new apartment buildings or where we
can create new suites through property intensification. These
investments will generate strong and accretive returns as there
are no land costs associated with this growth. Over the long term
we believe we can add in excess of 10,000 new rental suites,
primarily in Vancouver and Toronto, where demand remains
strong and monthly rents support profitable investment.
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CAPREIT
2018 ANNUAL REPORT
MODERNIZING OUR PORTFOLIO
ACQUIRING NEW PROPERTIES
The acquisition of newer, more modern properties
helps lower the average age of our portfolio and
reduce our overall capital investments.
An example is our agreement to acquire a joint
venture interest in King’s Club in downtown Toronto,
a brand-new luxury property that is currently being
completed and is in lease-up mode.
In 2018 we further expanded our presence in the
vibrant Vancouver market with the acquisition of
The Meridian, a fully occupied luxury property built
in 2017, and Fraser Flats, two brand-new luxury
buildings connected by a state-of-the-art recreation
and amenities pavilion.
ACCRETIVE DEVELOPMENTS
We own a number of properties where there is sufficient land on which to
develop new apartment buildings or where we can create new suites through
property intensification. These investments will generate strong and accre-
tive returns as there are no land costs associated with this growth.
Over the long term we believe we can add in excess of 10,000 new rental
suites, primarily in Vancouver and Toronto, where demand remains strong
and monthly rents support profitable investment.
RECYCLING CAPITAL
We continue to evaluate every property in our portfolio, selling those that no
longer fit our overall growth strategy and recycling the capital raised into more
accretive growth in the future.
Over the past two years we have sold eight older, non-core buildings
where we believe we had maximized value. The disposition of these properties
generated approximately $98.6 million in funds that have been invested in
more accretive and more modern growth opportunities, while reducing the
average age of our overall property portfolio.
CAPREIT
2018 ANNUAL REPORT
9
REPORT TO UNITHOLDERS
STRONG AND
STABLE ORGANIC
GROWTH
AS CAPREIT HAS
GROWN AND DIVERSIFIED
ITS PORTFOLIO, IT HAS
GENERATED CONSISTENTLY
HIGH OCCUPANCIES WITH
GROWING AVERAGE
MONTHLY RENTS.
$ 1200 –
$ 1000 –
$ 800 –
$ 600 –
$ 400 –
$ 200 –
$ 0
–
Average Monthly Rent
Occupancy
– 100%
– 90%
– 80%
– 70%
– 60%
– 50%
– 40%
– 30%
– 20%
– 10%
– 0%
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
For example, two CAPREIT properties are currently under
rezoning applications in Toronto. At 141 Davisville, we can add
146 suites in a new 16-storey infill building as well as new,
modern shared amenities for residents in both the existing and
new building. At 100 Wellesley, a new 10-storey infill building
will add 120 suites to the portfolio, with new shared amenities
for all residents.
We have also identified other properties where we can maximize
density and realize the highest and best use, including a seven-
acre waterfront site in Etobicoke with convenient access to
transit, 11 acres in Pickering, Ontario adjacent to the Pickering
Town Centre and a major GO Transit hub, and a four-acre site
in Surrey, British Columbia ideally located near a prime hub for
Vancouver’s new lower mainland transit extension.
STRENGTHENING OUR FUTURE
THROUGH INNOVATIVE TECHNOLOGIES
We continue to invest in and adopt the latest technologies to
enhance our risk management, market research and operating
efficiency, reduce costs, strengthen relationships with our
residents and, most importantly, do more with less. We exhaus-
tively test any new technology to ensure it aligns with our systems
and our culture of performance. We then roll out the new solution
in a measured approach, matching people with the appropriate
training to maximize the benefits of these investments.
A key example is our in-suite turnover tablet, a software solution
that allows a property manager to maximize revenue by reducing
vacancy time and proactively manage repair and maintenance
costs. The solution saves time by automatically generating
purchase requisitions, improves data quality by reducing errors
and creates a suite history to better manage our resources.
Another new technology, our Operations Manager Checklist,
drives efficient on-site inspections and upgrading of common
areas by consolidating a wide range of tasks and procedures and
generating data to enhance asset utilization analysis.
Going forward, we will be launching innovative technologies
aimed at enhancing our resident experience. Potential new
tenants will be able to review and process their leases on-
line, while existing residents can access and reserve specific
CAPREIT services for their homes. These new resident portals
will enable a lease tracking and request management system
and a centralized building management system that further
strengthen the efficiency of our operating platform.
10
CAPREIT
2018 ANNUAL REPORT
INVESTING IN TECHNOLOGY
IN-SUITE TURNOVER TABLET
Our recently launched in-suite turnover tablet allows our
site staff to maximize revenue by reducing vacancy time and
proactively managing repair and maintenance activities to
minimize disruption for new residents moving in. It saves time
by automatically creating purchase requisitions, reduces errors
in repair scheduling, improves data quality and generates an
accurate suite history for more efficient asset management.
OPERATIONS MANAGER CHECKLIST
Our new, phone-based solution creates an efficient system for
the on-site inspection of common areas. It consolidates a wide
range of tasks, procedures, paperwork and approvals, and
monitors task status to ensure completion. Photographs can be
added to enhance clarity and improve a manager’s focus on
specific tasks. The system also provides enhanced and accurate
data across the portfolio to improve asset management analytics.
NEW TENANT PORTAL
New solutions are being developed to enhance our resident
experience. An online leasing system will allow prospective
residents to complete their lease application using their phone
or computer. For current residents, the portal will enable access
to and reservation of CAPREIT services, and allow us to tailor
personalized messages for them. The data from the portal will
be accessed by new analysis software that tracks leases and
resident service requests through a new centralized building
management system.
CAPREIT
CAPREIT
2018 ANNUAL REPORT
2018 ANNUAL REPORT
11
11
REPORT TO UNITHOLDERS
OVER THE PAST 21 YEARS WE HAVE BUILT ONE OF THE
MOST EFFICIENT OPERATING PLATFORMS IN THE BUSINESS.
LOOKING AHEAD, WE WILL CONTINUE TO STRENGTHEN
OUR OPERATIONS TO ENSURE WE ARE ACHIEVING THE HIGHEST
POSSIBLE RETURNS FOR OUR UNITHOLDERS.
LOOKING AHEAD
AN EXCITING FUTURE
Over the past 21 years we have built what we believe is one
of the most efficient and effective operating platforms in the
business. Through further investments in technology, innovation
and our people, we will continue to strengthen and enhance
our operations to ensure we are achieving the highest possible
returns for our Unitholders. We will continue to drive resident
satisfaction to maintain our high occupancies and steady
increases in average monthly rents. We will modernize our
asset base and reduce the average age of our portfolio with
the acquisition of newer, well-maintained properties, the sale of
older buildings where we have maximized our investment and
the accretive development of new buildings and suites on our
owned properties.
In closing, we thank everyone at CAPREIT for their ongoing
commitment and effort over the past year. It is the hard work of
our people that has led to our 21-year track record of profitable
growth and will continue to drive our success in the years ahead.
We also remember Tom Schwartz, our former Chief Executive
Officer and a founder of CAPREIT, whose vision, leadership
12
CAPREIT
2018 ANNUAL REPORT
and guidance transformed CAPREIT into one of Canada’s
largest residential landlords with an enviable track record of
performance. We look forward to building on Tom’s legacy
through continued profitable growth and increasing Unitholder
value in the years ahead.
Mark Kenney
President and Chief Operating Officer
Michael Stein
Chairman
FINANCIAL
REPORTING
CAPREIT
2018 ANNUAL REPORT
13
Management’s Discussion and Analysis
Consolidated Annual Financial Statements
65 Management’s Responsibility for
Financial Statements
66
Independent Auditor’s Report
68 Consolidated Balance Sheets
69 Consolidated Statements of Income and
Comprehensive Income
70 Consolidated Statements of Unitholders’ Equity
71 Consolidated Statements of Cash Flows
72 Notes to Consolidated Financial Statements
104 Five-Year Review
IBC Unitholder Information
Section I: Overview and Disclaimer
15 Basis of Presentation
15 Forward-Looking Disclaimer
16 Non-IFRS Financial Measures
16 Overview
16 Objectives and Business Strategy
17 Acquisitions and Dispositions
Section II: Key Highlights
19 Summary of Year End 2018 Results of Operations
19 Key Performance Indicators
21 Performance Measures
Section III: Operational and Financial Results
22 Net and Occupied Average Monthly Rents and Occupancy
26 Results of Operations
28 NOI by Region
30 Stabilized NOI by Region
31 Net Income and Other Comprehensive Income
Section IV: Unit Calculations, Non-IFRS Financial Measures
34 Per Unit Calculations
35 Non-IFRS Financial Measures
38 Adjusted Cash Generated from Operating Activities
Section V: Capital Investment, Investment Property,
Capital Structure and Financial Condition
39 Property Capital Investments
40
Investment Properties
41 Development
42 Capital Structure
43 Liquidity and Financial Condition
Section VI: Compliance and Governance Disclosures, Risks and Uncertainties
47 Selected Consolidated Quarterly Information
50 Selected Consolidated Financial Information
50 Accounting Policies and Critical Accounting Estimates,
Assumptions and Judgements
52 Controls and Procedures
53 Risks and Uncertainties
59 Related Party Transactions
60 Commitments and Contingencies
60 Subsequent Events
60 Future Outlook
Section VII: Supplemental Information
62 Property Portfolio
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CAPREIT
2018 ANNUAL REPORT
Management’s Discussion and Analysis
SECTION I
OVERVIEW AND DISCLAIMER
Basis of Presentation
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, 2018, dated February 26, 2019, should be read
in conjunction with CAPREIT’s audited consolidated annual financial
statements for the year ended December 31, 2018.
Forward-Looking Disclaimer
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, occupancy rates,
productivity, projected costs, capital investments, financial results,
taxes, plans and objectives of or involving CAPREIT. Particularly,
statements regarding CAPREIT’s future results, performance,
achievements, prospects, costs, opportunities and financial outlook,
including those relating to acquisition and capital investment
strategies and the real estate industry generally, are forward-looking
statements. In some cases, forward-looking information can be
identified by terms such as “may”, “will”, “should”, “expect”, “plan”,
“anticipate”, “believe”, “intend”, “estimate”, “predict”, “potential”,
“continue” or the negative thereof, or other similar expressions
concerning matters that are not historical facts. Forward-looking
statements are based on certain factors and assumptions regarding
expected growth, results of operations, performance, and business
prospects and opportunities. In addition, certain specific assumptions
were made in preparing forward-looking information, including: that
the Canadian, Irish and Dutch economies will generally experience
growth, which, however, may be adversely impacted by the global
economy; that inflation will remain low; that interest rates will
remain low in the medium term; that Canada Mortgage and Housing
Corporation (“CMHC”) mortgage insurance will continue to be
available and that a sufficient number of lenders will participate in the
CMHC-insured mortgage program to ensure competitive rates; that
the Canadian capital markets will continue to provide CAPREIT with
access to equity and/or debt at reasonable rates; that vacancy rates
for CAPREIT properties will be consistent with historical norms; that
rental rates on renewal will grow at levels similar to the rate of inflation;
that rental rates on turnovers will remain stable; that CAPREIT will
effectively manage price pressures relating to its energy usage;
and, with respect to CAPREIT’s financial outlook regarding capital
investments, assumptions respecting projected costs of construction
and materials, availability of trades, the cost and availability of
financing, CAPREIT’s investment priorities, the properties in which
investments will be made, the composition of the property portfolio
and the projected return on investment in respect of specific capital
investments. Although the forward-looking statements contained
in this MD&A are based on assumptions, Management believes
they are reasonable as of the date hereof; however, there can be
no assurance actual results will be consistent with these forward-
looking statements, and they may prove to be incorrect. Forward-
looking statements necessarily involve known and unknown risks
and uncertainties, many of which are beyond CAPREIT’s control, that
may cause CAPREIT’s or the industry’s actual results, performance,
achievements, prospects and opportunities in future periods to
differ materially from those expressed or implied by such forward-
looking statements. These risks and uncertainties include, among
other things, risks related to: reporting investment properties at fair
value, real property ownership, investment restrictions, operating
risk, energy costs, environmental matters, catastrophic events,
insurance, capital investments, indebtedness, taxation-related risks,
government regulations, controls over financial reporting, other legal
and regulatory risks, the nature of units of CAPREIT (“Trust Units”),
unitholder liability, liquidity and price fluctuation of Units, dilution,
distributions, participation in CAPREIT’s distribution reinvestment
plan, potential conflicts of interest, dependence on key personnel,
general economic conditions, competition for residents, competition
for real property investments, risks related to acquisitions, cyber
security risk and foreign operation and currency risks. There can be
no assurance that the expectations of CAPREIT’s Management will
prove to be correct. For a detailed discussion of risk factors, refer to
CAPREIT’s MD&A contained in CAPREIT’s 2018 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.
CAPREIT
2018 ANNUAL REPORT
15
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, earnings releases and investor conference
calls, CAPREIT discloses financial measures not recognized under
IFRS which do not have standard meanings prescribed by IFRS.
These include stabilized net rental income (“Stabilized NOI”), Funds
From Operations (“FFO”), Normalized Funds From Operations
(“NFFO”), Adjusted Cash Flow from Operations (“ACFO”), FFO
and NFFO per Unit amounts and FFO, NFFO and ACFO payout
ratios, and Adjusted Cash Generated from Operating Activities
(collectively, the “Non-IFRS Measures”). Since these measures are
not recognized under IFRS, they may not be comparable to similar
measures reported by other issuers. CAPREIT presents Non-IFRS
measures because Management believes Non-IFRS measures are
relevant measures of the ability of CAPREIT to earn revenue and to
evaluate its performance 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 accordance with IFRS as indicators
of CAPREIT’s performance or the sustainability of our distributions.
Overview
CAPREIT is an unincorporated open-ended publicly-traded real estate
investment trust and one of Canada’s largest residential landlords,
serving residents in over 51,500 suites and sites across Canada and
in the Netherlands. CAPREIT owns and operates a portfolio of 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
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 primarily 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 by employing
successful operational strategies aimed at long-term ownership. This
focus has contributed to growing net operating income, NFFO 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, 2018, CAPREIT owned interests in 51,528 residential
units, comprised of 44,935 residential suites, and 32 MHC, comprised
of 6,593 land lease sites. As at December 31, 2018, CAPREIT had 897
employees (883 employees as at December 31, 2017).
Objectives and Business Strategy
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 maximize
earnings and cash flow potential and to help ensure life safety of
residents.
•
To meet its objectives, CAPREIT has established the following
strategies:
Customer Service
CAPREIT recognizes that it is in a “people business” and strives to
be recognized as the landlord of choice in all 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 communications to ensure residents’ needs
are met efficiently and effectively, thereby maintaining a high
occupancy level. Numerous initiatives, such as newsletters, special
events, resident committees and other, help to build a true sense of
community at its properties. CAPREIT’s strong sales and marketing
team continues to execute innovative and highly effective strategies
to help attract and retain residents and adapt to changing conditions
in specific markets. In addition, CAPREIT’s lease administration
system improves control of rent-setting by suite, increasing resident
service and enhancing the overall profile of its resident base. These
initiatives are further enhanced by CAPREIT’s strong information
technology platform.
16
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Cost Management
While ensuring the needs of its residents are met, CAPREIT also carefully
monitors operating costs to ensure it is delivering services to residents
both efficiently and cost-effectively. CAPREIT strives to capture
potential economies of scale and cost generated by the growth in its
property portfolio. CAPREIT’s enterprise-wide procurement system
streamlines and centralizes purchasing controls and procedures
and is realizing reduced costs through national master sourcing
contracts, improved pricing and enhanced operating efficiencies.
Capital Investments
CAPREIT strives to acquire newer properties at prices below their
current replacement costs and is committed to improving its
operating performance by investing appropriate capital investments
in order to maintain the productive capacity of its property portfolio
and sustain the portfolio’s rental income-generating potential over
its useful life. CAPREIT continues to invest in innovative technology
solutions that enhance productivity as well as environment-friendly
and energy-saving initiatives that improve 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
economic 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 and modernize its portfolio over the long term
through accretive acquisitions of newer properties that meet its
strategic criteria and, where possible, enhance geographic diversifica-
tion and reduce the average age of the portfolio while capturing
economies of scale and cost synergies, thereby increasing net operating
income. As a component of this growth strategy, CAPREIT will monitor
its portfolio and, from time to time, identify certain non-core, older
properties for divestiture. The funds from these divestitures will
primarily be used to acquire additional, more modern strategic
assets better suited to CAPREIT’s portfolio composition and property
management objectives or to pay down existing debt. Management
believes the continued realization and reinvestment of capital is a
fundamental component of its growth strategy and demonstrates
the success of CAPREIT’s capital investment programs and its ability
to maximize and manage the earnings and cash flow potential of its
property portfolio. Furthermore, Management continues to seek
development opportunities within its portfolio to ensure existing
assets are put towards their most accretive use and to further
modernize the overall portfolio. In addition, Management investigates
opportunities to enter into joint venture relationships which could
potentially develop new multi-unit rental residential properties on
excess land owned by CAPREIT.
Financial Management
CAPREIT takes a conservative approach and strives to manage
its exposure to interest rate volatility by proactively managing its
mortgage debt portfolio to fix and, where possible, reduce average
interest rates, effectively manage the average term to maturity and
stagger maturity dates. In addition, CAPREIT strives to maintain a
conservative overall liquidity position and achieve a balance in its
overall capital resource requirements between debt and equity.
Acquisitions and Dispositions
The following tables summarize property acquisitions and dispositions for the years ended December 31, 2018 and 2017:
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2018
($ Thousands)
April 24, 2018
April 30, 2018
August 7, 2018
August 15, 2018
September 27, 2018
November 13, 2018
December 3, 2018
December 5, 2018
December 5, 2018
Total
Acquisition Financing
Suite
or Site
Count
134
2
90
3
269
11
881
376
25
1,791
Region(s)
Swift Current, SK
Burlington, ON
Langley, BC
New Westminster, BC
Vancouver, BC
New Westminster, BC
The Netherlands
The Netherlands
New Westminster, BC
Total
Acquisition
Costs
5,744
2,404
34,310
2,536
103,169
3,373
253,410
93,396
6,368
504,710
$
$
Assumed
Mortgage
Funding
– (3)
– (3)
21,088
– (3)
– (3)
– (3)
–
–
1,827
22,915
$
$
Subsequent
Acquisition
Financing
–
–
–
–
–
–
104,796 (4)
46,456 (5)
–
151,252
178,018 (6)
$
$
$
Interest
Term to
Maturity
Rate (1)
– (3)
– (3)
2.56%
– (3)
– (3)
– (3)
1.98% (4)
1.98% (5)
2.49%
(Years) (2)
– (3)
– (3)
8.83
– (3)
– (3)
– (3)
7.00 (4)
7.00 (5)
6.17
2.21% (6)
7.5 (6)
(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 881 suites, was financed by a new non-amortizing mortgage of €67.6 million ($104.8 million) with a term to maturity of 7.0 years
with an interest rate of 1.98% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(5) The acquisition, comprised of 376 suites, was financed by a new non-amortizing mortgage of €29.9 million ($46.5 million) with a term to maturity of 7.0 years
with an interest rate of 1.98% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(6) Subsequent acquisition financing of $26.8 million with a weighted average interest rate of 3.49% and a weighted average term to maturity of 10.0 years relates
to properties acquired in 2016 and 2017.
CAPREIT
2018 ANNUAL REPORT
17
MANAGEMENT’S DISCUSSION AND ANALYSIS
ACQUISITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2017
($ Thousands)
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
Suite
or Site
Count
32
256
44
849
54
77
16
56
540
1,924
Region(s)
Victoria, BC
Montréal, QC
Maple Ridge, BC
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
Subsequent
Acquisition
Financing
$
$
– (3)
– (3)
3,713
– (4)
– (5)
– (6)
– (3)
– (3)
– (7)
3,713
$
$
2,999
–
–
147,360
7,474
11,856
–
–
75,540
245,229 (8)
Interest
Term to
Maturity
Rate (1)
2.66%
– (3)
1.94%
2.04% (4)
1.95% (5)
1.87% (6)
– (3)
– (3)
1.37%
(Years) (2)
9.42
– (3)
3.33
7.00 (4)
7.00 (5)
7.00 (6)
– (3)
– (3)
5.00 (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 Liquidity and Financial Condition section).
(4) The acquisition, comprised of 849 suites, was financed by a new non-amortizing mortgage of €100.8 million ($147.4 million) 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 thousand ($889 thousand) and the balance in cash from CAPREIT’s
Acquisition and Operating Facility.
(5) The acquisition was financed by a new non-amortizing mortgage of €5.0 million ($7.5 million) 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, was financed by a new non-amortizing mortgage of €8.0 million ($11.9 million) with a term to maturity of 7.5 years with
an interest rate of 1.87% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(7) The acquisition, comprised of 540 suites, was financed by a new non-amortizing mortgage of €49.9 million ($75.5 million) 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) Total acquisition financing in 2017 amounted to $253.4 million, of which $8.1 million related to properties acquired in 2015 with a weighted average interest rate
of 2.47% and a weighted average term to maturity of 9.9 years.
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2018
($ Thousands)
August 15, 2018
September 6, 2018
October 11, 2018
December 12, 2018
Total
Suite
Count
102
162
419
217
900
Region(s)
Saskatoon, SK
Vancouver, BC
Longueuil, QC
Québec City, QC
Sale Price
10,195
70,000
35,831
24,900
140,926
$
$
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2017
($ Thousands)
February 15, 2017
October 12, 2017
Total
Suite
Count
31
50
81
Region(s)
Saskatoon, SK
Vancouver, BC
Sale Price
2,025
19,800
21,825
$
$
Cash
Proceeds
2,425
49,900
15,168
14,404
81,897
Cash
Proceeds
575
16,160
16,735
$
$
$
$
Mortgage
Discharged
7,476
19,948
20,564
10,224
58,212
$
$
Mortgage
Discharged
1,356
3,595
4,951
$
$
18
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION II
KEY HIGHLIGHTS
Summary of Year End 2018 Results of Operations
Strong Operating Results Supported by Strong
Market Fundamentals
• Growth in revenue and NOI from stabilized properties driven by
higher monthly rents and stronger occupancies compared to last
year
• On turnovers, monthly residential rents for the year ended
December 31, 2018 increased by 11.4% on 21.5% of the Canadian
portfolio , compared to an increase of 7.2% on 24.0% of the Canadian
portfolio for the year ended December 31, 2017
• On renewals, monthly residential rents for the year ended
December 31, 2018 increased by 2.2% on 85.4% of the Canadian
portfolio, compared to an increase of 1.9% on 82.9% of the Canadian
portfolio for the year ended December 31, 2017
• Net Average Monthly Rent (“Net AMR”) for the stabilized portfolio as
at December 31, 2018 increased by 4.9% compared to December 31,
2017, while occupancy increased to 99.0%
• Net AMR increased due to the strong rents on turnovers, higher
rental guideline increases in Ontario and British Columbia, and
above guideline increases
• Year-over-year NOI increased significantly by 8.0% for the stabilized
portfolio for the year ended December 31, 2018, compared to a
year-over-year NOI increase of 2.9% for the stabilized portfolio for
the year ended December 31, 2017
• NOI increased by 11.6% for the year ended December 31, 2018
compared to last year due to contributions from acquisitions,
increased same property monthly rents, and lower operating
expenses
• NOI margin increased to 63.8% for the year ended December 31,
2018 due to higher monthly rents and lower vacancies, repair and
maintenance (“R&M”) costs, wages, utility expenses and realty
taxes as a percentage of operating revenues
Continued Fair Value Increases in Investment Properties
• For the year ended December 31, 2018, the fair value of investment
properties increased by $990.5 million, primarily as a result of
significant NOI growth in 2018 compared to 2017 driven by (i)
significant rental increases on turnovers as current rents are
substantially below market rents, especially in GTA and British
Columbia, (ii) improved NOI margins due to operating efficiencies,
and (iii) continued cap rate compression
Strong and Flexible Balance Sheet
• CAPREIT’s financial position continues to strengthen, with reduced
leverage ratios
• Debt to Gross Book Value (“GBV”) reduced to 39.37% as at
December 31, 2018 from 43.57% at December 31, 2017, due to
increases in fair value of investment properties and equity raise
• Debt Service Coverage (“DSC”) ratio improved to 1.75 compared
to 1.63 as at December 31, 2017 mainly due to significant organic
NOI growth
• Liquidity available on our Credit Facilities is $266.3 million as at
December 31, 2018
• Closed mortgage refinancing for $213.2 million for the year, with
top-ups of $109.5 million, a weighted average term to maturity of
7.0 years and a weighted average interest rate of 3.22%
• CAPREIT’s mortgage weighted average term to maturity and the
weighted average interest rate for the year ended December 31,
2018 are 5.1 years and 3.05%. CAPREIT continues to fix long-
term mortgages to defend against the risk of rising interest rate
environment
Delivering Unitholder Value
• NFFO up 15.5% for the year ended December 31, 2018
• Growth highly accretive as NFFO per Unit was up 9.9% despite a
5.2% increase in weighted average number of Units outstanding
• NFFO payout ratio for the year ended December 31, 2018 improved
to 65.7% from 70.3% last year
Other Key Highlights
•
Increased investment in Irish Residential Properties REIT plc (“IRES”)
from 15.7% as at December 31, 2017 to 18.0% as at December 31,
2018, funded through CAPREIT’s Acquisition and Operating Facility
• Entered into an agreement pursuant to which European Commercial
Real Estate Investment Trust (“ECREIT”) has agreed to acquire a
portfolio of multi-residential properties located in the Netherlands
from CAPREIT, comprising 2,091 suites in 41 properties, subject
to shareholder approval
Key Performance Indicators
To assist Management and investors in monitoring and evaluating
CAPREIT’s achievement of its objectives, CAPREIT has defined a
number of key operating and performance indicators (“KPIs”) to
measure the success of its operating and financial strategies:
Occupancy
Management strives through a focused, hands-on approach for
achieving occupancies matching or greater than market conditions
in each of the geographic regions CAPREIT operates in. Management
believes annual occupancies can be maintained in the 97% to 99%
range over the long term and the trend for gradual increases in same-
property Net AMR will continue, providing the basis for sustainable
year-over-year increases in revenue.
CAPREIT
2018 ANNUAL REPORT
19
MANAGEMENT’S DISCUSSION AND ANALYSIS
Net AMR (previously defined as “AMR”)
Through its active property management strategies, lease adminis-
tration system and proactive capital investment programs, CAPREIT
strives to achieve the highest possible Net AMR 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 expects to achieve an annual NOI margin in the range of
60% to 64% of operating revenues.
FFO and NFFO
CAPREIT is focused on achieving steady increases in these metrics.
Management believes these measures are indicative of CAPREIT’s
operating performance.
Payout Ratio
CAPREIT anticipates a long-term annual NFFO payout ratio of
between 65% and 75%. This ratio is not meant to be a measure of the
sustainability of CAPREIT’s distributions. Although CAPREIT intends
to continue to sustain and grow distributions, the actual amount
of distributions in respect to the CAPREIT Units will depend upon
numerous factors including, but not limited to, the amount of debt
refinancings, tenant inducements, capital expenditures and other
factors that may be beyond the control of CAPREIT.
Portfolio Growth
Management’s objective is to pursue acquisitions and development
opportunities to accretively increase NFFO and continue to further
diversify the portfolio by geography and demographic sector. In
addition, Management investigates opportunities to add new suites
and to enter into joint venture relationships, which could potentially
develop new multi-unit rental residential properties on excess land
owned by CAPREIT.
Leverage Ratios and Terms
CAPREIT takes a proactive approach with its mortgage portfolio,
striving to manage interest expense volatility risk by fixing the lowest
possible average interest rates for long-term mortgages, while
mitigating refinancing risk by prudently managing the portfolio’s
average term to maturity and staggering the maturity dates. For
this purpose, CAPREIT strives to ensure its overall leverage ratios
and interest and debt service coverage ratios are maintained at a
sustainable level. 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. These are all comprised 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 V.
20
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS Performance Measures
The following table presents an overview of certain non-IFRS financial measures of CAPREIT for the years ended December 31, 2018 and
2017. Management believes these measures are useful in assessing CAPREIT’s performance in relation to its objectives and business strategy.
Effective May 2018, monthly cash distributions declared to Unitholders increased to $0.1108 per unit ($1.33 annually) compared to $0.1067
per unit ($1.28 annually) effective March 2017 and $0.1042 ($1.25 annually) as of June 2016.
For the Year Ended December 31,
Portfolio Performance
Overall Portfolio Occupancy(1)
Overall Portfolio Net Average Monthly Rents(1)
Operating Revenues (000s)
NOI (000s)
NOI Margin
Financial Performance
FFO per Unit – Basic(2)
NFFO per Unit – Basic(2)
Cash Distributions Per Unit
FFO Payout Ratio(2)
NFFO Payout Ratio(2)
Liquidity and Leverage
Total Debt to Gross Book Value(1)
Total Debt to Gross Historical Cost(1)
Weighted Average Mortgage Interest Rate(1)
Weighted Average Mortgage Term (years)(1)
Debt Service Coverage (times)(3)
Interest Coverage (times)
Available Liquidity – Acquisition and Operating Facility (000s)(1)
Other
Weighted Average Number of Units – Basic (000s)
Number of Suites and Sites Acquired
Number of Suites Disposed
Closing Price of Trust Units(1)
Market Capitalization (millions)(1)
2018
2017
98.9%
1,103
688,585
439,056
63.8%
1.995
2.024
1.313
66.7%
65.7%
39.37%
54.54%
3.05%
5.10
1.75
3.44
266,325
142,974
1,791
900
44.30
6,491
$
$
$
$
$
$
$
$
$
98.7%
1,044
638,842
393,258
61.6%
1.806
1.842
1.275
71.7%
70.3%
43.57%
56.24%
3.08%
5.66
1.63
3.19
86,792
135,962
1,924
81
37.32
5,182
$
$
$
$
$
$
$
$
$
(1) As at December 31.
(2) These measures are not defined by IFRS, do not have standard meanings and may not be comparable with other industries or companies
(see Section I – Non-IFRS Financial Measures). For a reconciliation to IFRS, see Section IV – Non-IFRS Financial Measures.
(3) Based on the trailing four quarters.
CAPREIT
2018 ANNUAL REPORT
21
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION III
OPERATIONAL AND FINANCIAL RESULTS
Net and Occupied Average Monthly Rents and Occupancy
Net 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.
Occupied AMR is defined as actual residential rents, net of vacancies, divided by the total number of occupied suites in the property, and
does not include revenues from parking, laundry or other sources.
TOTAL PORTFOLIO: NET AMR, OCCUPIED AMR AND OCCUPANCY 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(1)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(2)
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
Net AMR
Occupied AMR
Occupancy %
2018
AMR ($)
2017
AMR
AMR ($) % Change
2018
AMR ($)
2017
AMR
AMR ($) % Change
2018
2017
1,383
1,260
998
1,284
1,321
941
1,054
970
1,336
1,211
1,297
1,165
1,068
1,086
1,315
1,217
946
1,229
1,258
902
998
927
1,235
1,136
1,202
1,105
1,041
1,053
5.2
3.5
5.5
4.5
5.0
4.3
5.6
4.6
8.2
6.6
7.9
5.4
2.6
3.1
1,390
1,261
1,013
1,295
1,329
948
1,065
977
1,356
1,220
1,313
1,181
1,088
1,105
1,323
1,220
962
1,234
1,267
917
1,021
944
1,238
1,138
1,205
1,118
1,068
1,077
1,125
1,101
2.2
1,141
1,127
5.1
3.4
5.3
4.9
4.9
3.4
4.3
3.5
9.5
7.2
9.0
5.6
1.9
2.6
1.2
99.5
99.9
98.5
99.1
99.4
99.3
99.0
99.2
98.5
99.3
98.7
98.6
98.2
98.3
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
98.6
97.7
–
1,035
1,035
1,024
1,066
1,053
(100.0)
(2.9)
(1.7)
–
1,076
1,076
1,024
1,075
1,060
(100.0)
0.1
1.5
–
96.2
96.2
100.0
99.1
99.4
1,027
1,005
2.2
1,038
1,019
1,268
1,209
1,122
1,142
13.0
5.9
1,295
1,221
1,184
1,157
537
455
436
400
149
268
395
1,103
525
441
427
399
145
267
388
1,044
2.3
3.2
2.1
0.3
2.8
0.4
1.8
5.7
538
455
439
401
149
287
405
1,115
525
441
429
399
145
280
395
1,058
1.9
9.4
5.5
2.5
3.2
2.3
0.5
2.8
2.5
2.5
5.4
98.9
98.7
97.9
99.1
94.8
98.8
99.9
100.0
99.3
99.7
99.6
93.5
97.6
98.9
100.0
100.0
99.5
100.0
100.0
95.3
98.3
98.7
(1) The Saskatoon property was disposed of on August 15, 2018.
(2) Includes foreign exchange impact and service charge income. The amounts in Euros for the total portfolio for Net AMR are €812 and €746 as at December 31, 2018
and December 31, 2017, respectively, and for Occupied AMR are €829 and €787 as at December 31, 2018 and December 31, 2017, respectively.
22
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
STABILIZED PORTFOLIO: NET AMR, OCCUPIED AMR AND OCCUPANCY 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(2)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(3)
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
Net AMR
Occupied AMR
Occupancy %
2018
AMR ($)
2017(1)
AMR
AMR ($) % Change
2018
AMR ($)
2017(1)
AMR
AMR ($) % Change
2018
2017
1,383
1,260
998
1,284
1,321
941
1,054
970
1,279
1,211
1,256
1,165
1,068
1,086
1,315
1,217
946
1,229
1,258
914
1,018
940
1,205
1,136
1,182
1,105
1,041
1,053
5.2
3.5
5.5
4.5
5.0
3.0
3.5
3.2
6.1
6.6
6.3
5.4
2.6
3.1
1,390
1,261
1,013
1,295
1,329
948
1,065
977
1,292
1,220
1,267
1,181
1,088
1,105
1,323
1,220
962
1,234
1,267
928
1,040
956
1,208
1,138
1,184
1,118
1,068
1,077
1,125
1,101
2.2
1,141
1,127
1,035
1,066
(2.9)
1,076
1,075
1,027
1,005
2.2
1,038
1,019
5.1
3.4
5.3
4.9
4.9
2.2
2.4
2.2
7.0
7.2
7.0
5.6
1.9
2.6
1.2
0.1
1.9
99.5
99.9
98.5
99.1
99.4
99.3
99.0
99.2
99.0
99.3
99.1
98.6
98.2
98.3
99.4
99.8
98.3
99.6
99.4
98.4
97.8
98.3
99.8
99.9
99.8
98.9
97.5
97.8
98.6
97.7
96.2
99.1
98.9
98.7
1,308
1,204
1,122
1,146
16.6
5.1
1,325
1,215
1,184
1,161
11.9
4.7
98.7
99.2
94.8
98.8
537
455
436
414
149
268
396
1,097
525
441
427
399
145
267
388
1,046
2.3
3.2
2.1
3.8
2.8
0.4
2.1
4.9
538
455
439
416
149
287
406
1,109
525
441
429
399
145
280
395
1,060
2.5
3.2
2.3
4.3
2.8
2.5
2.8
4.6
99.9
100.0
99.3
99.6
99.6
93.5
97.5
99.0
100.0
100.0
99.5
100.0
100.0
95.3
98.3
98.7
(1) Prior year comparable Net and Occupied AMR and occupancy have been restated for properties disposed of since December 31, 2017.
(2) The Saskatoon property was disposed of on August 15, 2018.
(3) Includes foreign exchange impact and service charge income. The amounts in Euros for the stabilized portfolio for Net AMR are €838 and €746 as at
December 31, 2018 and December 31, 2017, respectively, resulting in a Net AMR change of 12.3%. The Occupied AMR for the stabilized portfolio is €849
(€803 excluding service charge income) and €787 (€759 excluding service charge income) as at December 31, 2018 and December 31, 2017, respectively,
resulting in an Occupied AMR change of 7.9%.
Overall Net AMR for the stabilized residential suite portfolio as at
December 31, 2018 increased by approximately 5.1% (including the
Netherlands) and 4.5% (excluding the Netherlands) compared to last
year, while occupancies increased to 99.2%.
The rate of growth in Net AMR has been primarily due to (i) sig-
nificant rental increases on turnover in the strong rental markets of
British Columbia, Ontario and the Netherlands, (ii) a higher rental
guideline increase in Ontario and British Columbia for 2018 compared
to 2017, and (iii) increases due to above guideline increases (“AGI”)
achieved in Ontario.
CAPREIT
2018 ANNUAL REPORT
23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Annual Rental Guidelines as per Rental Board
The chart below presents the annual rental guideline increases in provinces under rent control legislation which impacts lease renewals.
Ontario
British Columbia
2019
1.8%
2.5% (1)
2018
1.8%
4.0%
2017
1.5%
3.7%
(1) On September 26, 2018, British Columbia announced that effective January 1, 2019, the annual allowable rent increase will be 2.5% instead of the
previously announced 4.5%.
Suite Turnovers and Lease Renewals – Total Portfolio
The tables below summarize the changes in the monthly rent due to suite turnovers and lease renewals compared to the prior year.
CANADIAN PORTFOLIO
For the Year Ended December 31,
2018
2017
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
Change in
monthly rent
Turnovers and
Renewals(1)
Change in
monthly rent
Turnovers and
Renewals(1)
$
131.3
26.1
47.2
%
11.4
2.2
4.1
%
21.5
85.4
$
79.4
21.7
34.6
%
7.2
1.9
3.1
%
24.0
82.9
(1) Percentage of suites turned over or renewed during the year based on the total number of residential suites (excluding co-ownerships) held at the end of the year.
THE NETHERLANDS PORTFOLIO
For the Year Ended December 31,
2018
2017
Suite Turnovers
Lease Renewals
Weighted Average of Turnovers and Renewals
Change in
monthly rent
Turnovers and
Renewals(1)
Change in
monthly rent
Turnovers and
Renewals(1)
€
89.1
23.6
31.6
%
11.4
3.1
4.1
%
7.6
54.4
€
166.7
18.2
40.1
%
27.2
2.7
6.4
%
4.4
25.2
(1) Percentage of suites turned over or renewed during the year based on the total number of Netherlands residential suites held at the end of the year.
Overall, suite turnovers in the Canadian residential suite portfolio (excluding co-ownerships) during the year ended December 31, 2018
resulted in monthly rent increasing by approximately $131 or 11.4% compared to an increase of approximately $79 or 7.2% last year, primarily
due to the strong rental markets in British Columbia and Ontario.
Monthly rents on lease renewals on the Canadian residential portfolio (excluding co-ownerships) for the year ended December 31, 2018
increased by approximately $26 or 2.2% compared to an increase of approximately $22 or 1.9% last year.
For the Netherlands portfolio, suite turnovers in the residential suite portfolio during the year ended December 31, 2018 resulted in
monthly rent increasing by approximately €89 or 11.4% compared to an increase of €167 or 27.2% last year. Monthly rents on lease renewals
for the Netherlands portfolio for the year ended December 31, 2018 increased by approximately €24 or 3.1% compared to an increase of €18
or 2.7% last year.
24
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Above Guideline Increases
Management continues to pursue applications in Ontario for AGIs where it believes increases above the annual guideline are supported by
market conditions to raise monthly rents on lease renewals. The maximum allowable annual increase is up to 3% above the annual rental
guideline, with the exception of applications based on an increase in the cost of municipal taxes and charges.
The following table summarizes the status of cumulative AGI applications settled and outstanding.
Applications Settled:
Number of Suites and Sites
Weighted Average Total Increase Approved(1), (2)
Weighted Average Total Increase Applied for(1), (3)
Applications Outstanding:
Number of Suites and Sites
Term Weighted Average Total Increase Applied for(1), (4)
January 1, 2018 –
December 31, 2018
January 1, 2017 –
December 31, 2017
5,309
3.36%
3.86%
2,252
4.90%
3,314
2.76%
2.98%
5,992
3.75%
(1) Weighted by number of impacted suites and sites filed.
(2) For applications settled during the year ended December 31, 2018, the weighted average total increase approved is to apply over a weighted average of
1.68 years (1.60 years for the year ended December 31, 2017).
(3) For applications settled during the year ended December 31, 2018, the weighted average total increase applied for was to apply over a weighted average of
1.64 years (1.57 years for the year ended December 31, 2017).
(4) For applications outstanding as at December 31, 2018, the weighted average total increase applied for was to apply over a weighted average of 1.96 years
(1.44 years as at the year ended December 31, 2017).
Tenant Inducements, Vacancy Loss and Bad Debt Expense
The table below shows the new tenant inducements incurred during the years ended December 31, 2018 and 2017 as well as the amortization
of tenant inducements, loss from vacancies and bad debt expense included in net rental revenue for the same years.
($ Thousands)
For the Year Ended December 31,
New Tenant Inducements Incurred – Residential
New Tenant Inducements Incurred – Commercial
Total New Tenant Inducements Incurred
Tenant Inducements Amortized
Vacancy Loss Incurred
Total Amortization and Loss
Bad Debt Expense
(1) As a percentage of total operating revenues.
2018
1,243
1,111
2,354
1,840
10,568
12,408
2,445
$
$
$
$
$
%(1)
0.3
1.5
1.8
0.4
2017
1,417
1,292
2,709
2,118
12,419
14,537
2,175
$
$
$
$
$
%(1)
0.3
1.9
2.2
0.3
CAPREIT
2018 ANNUAL REPORT
25
MANAGEMENT’S DISCUSSION AND ANALYSIS
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(1)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(2)
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
2018
2018
Revenue (%)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
266,013
24,828
28,921
28,217
347,979
97,227
36,342
133,569
50,837
22,668
73,505
6,854
28,573
35,427
22,816
725
2,916
3,641
6,661
33,147
656,745
17,547
1,466
2,273
1,628
898
8,028
31,840
688,585
38.6
3.6
4.2
4.1
50.5
14.1
5.3
19.4
7.4
3.3
10.7
1.0
4.2
5.2
3.3
0.1
0.4
0.5
1.0
4.8
95.4
2.6
0.2
0.3
0.2
0.1
1.2
4.6
100.0
2017
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) The Saskatoon property was disposed of on August 15, 2018.
(2) In € Thousands, €21,658 and €8,547 for year ended December 31, 2018 and December 31, 2017, respectively.
26
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Estimated Net Rental Revenue Run-Rate
The table below shows the estimated net rental revenue run-rate (net of average historical vacancy loss, tenant inducements and bad debt)
based on Net AMRs in place for CAPREIT’s share of residential suites and sites as at December 31, 2018 and 2017.
($ Thousands)
As at December 31,
Residential Rent Roll(1), (2)
Commercial Rent Roll(1), (2)
Annualized Net Rental Revenue Run-Rate
2018
662,687
23,068
685,755
$
$
2017
615,246
22,596
637,842
$
$
(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 estimated annualized net rental revenue run-rate grew by 7.5% to $685.8 million from $637.8 million, primarily as a result of
acquisitions within the last 12 months and higher rents. Net rental revenue net of dispositions for the 12 months ended December 31, 2018
was $643.6 million (2017 – $605.0 million).
NOI for the Total Portfolio
($ 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
2018
%(1)
2017
%(1)
$
$
651,203
37,382
688,585
(68,488)
(56,913)
(124,128)
(249,529)
439,056
$
$
94.6
5.4
100.0
9.9
8.3
18.0
36.2
63.8
$
$
$
$
605,498
33,344
638,842
(67,078)
(56,744)
(121,762)
(245,584)
393,258
94.8
5.2
100.0
10.5
8.9
19.0
38.4
61.6
(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, 2018, total operating revenues increased by 7.8% compared to last year, due to the contributions from
acquisitions, increased same-property monthly rents and continuing high occupancies.
Operating Expenses
Realty Taxes For the year ended December 31, 2018, realty taxes as a percentage of operating revenues improved to 9.9% compared to 10.5%
last year, partially due to reduced realty taxes in Alberta.
Utilities CAPREIT’s utility costs can be highly variable from year to year depending on energy consumption and rates. The table below provides
CAPREIT’s utility costs by type.
($ Thousands)
For the Year Ended December 31,
Electricity
Natural Gas
Water
Total
(1) As a percentage of total operating revenues.
2018
21,135
15,837
19,941
56,913
$
$
%(1)
3.1
2.3
2.9
8.3
2017
22,490
15,584
18,670
56,744
$
$
%(1)
3.5
2.4
2.9
8.9
CAPREIT
2018 ANNUAL REPORT
27
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the year ended December 31, 2018, operating revenues
increased, and electricity costs decreased resulting in a higher NOI
margin. For the year ended December 31, 2018, electricity costs
decreased compared to last year, primarily due to lower electricity
rates and reduced consumption, as well as the positive impacts of
energy-saving initiatives and sub-metering.
As at December 31, 2018, tenants who pay their hydro charges
directly represented 69% of the total 16,638 recently sub-metered
suites in Ontario, Alberta and Halifax.
For the year ended December 31, 2018, natural gas costs as a
percentage of total operating revenues decreased compared to last
year, primarily due to higher operating revenues.
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
The table below provides information on CAPREIT’s fixed natural
gas contracts for the fiscal years 2019, 2020 and 2021:
Actual(2)
2017
Actual
2018
Estimated
2019
Estimated
2020
Estimated
2021
$ 2.87
65.0%
$ 2.82
69.1%
$ 2.50
81.1%
$ 2.26
73.3%
$ 1.68
61.0%
$ 1.36
75.3%
$ 1.20
80.6%
$ 1.15
81.3%
$ 1.19
73.3%
$ 1.42
61.0%
(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 include R&M
costs, wages and benefits, insurance and advertising expenses. For the
year ended December 31, 2018, other operating expenses improved
as a percentage of operating revenues to 18.0% from 19.0% last year,
primarily due to lower R&M costs, and wages in dollar terms.
NOI Margin
For the year ended December 31, 2018, the NOI margin on the total
portfolio was 63.8% compared to 61.6% last year. The increase in the
NOI margin was due to (i) higher monthly rents on a stabilized basis,
(ii) lower vacancies and (iii) lower R&M costs, wages and realty taxes
as a percentage of operating revenues.
NOI by Region
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.
28
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table shows each region’s NOI and the NOI margin for the years ended December 31, 2018 and 2017.
NOI BY GEOGRAPHY
For the Year Ended December 31,
($ Thousands)
Residential Suites
ONTARIO
Greater Toronto Area
Ottawa
London / Kitchener / Waterloo
Other Ontario
QUÉBEC
Greater Montréal Region
Québec City
BRITISH COLUMBIA
Greater Vancouver Region
Victoria
ALBERTA
Edmonton
Calgary
NOVA SCOTIA
Halifax
SASKATCHEWAN
Saskatoon(2)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(3)
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
2018
2017
Increase (Decrease)
NOI
NOI %(1)
NOI
Margin
(%)
NOI
NOI %(1)
NOI
Margin
(%)
NOI Change
(%)
$ 171,457
16,472
18,377
17,617
$ 223,923
$ 56,466
21,396
$ 77,862
$ 35,630
16,600
$ 52,230
4,667
$
16,820
$ 21,487
$ 14,004
$
$
269
1,745
2,014
$
3,355
39.1
3.7
4.2
4.0
51.0
12.8
4.9
17.7
8.1
3.8
11.9
1.1
3.8
4.9
3.2
0.1
0.4
0.5
0.8
64.5
66.3
63.5
62.4
64.4
58.1
58.9
58.3
70.1
73.2
71.1
68.1
58.9
60.7
$ 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
61.4
$ 13,115
37.1
60.0
55.3
$
$
606
1,770
2,376
50.4
$
2,807
40.4
3.7
4.2
4.2
52.5
13.5
5.0
18.5
8.0
3.8
11.8
1.1
4.2
5.3
3.3
0.2
0.5
0.7
0.7
$ 23,760
$ 418,635
5.3
95.3
$ 11,895
1,152
1,490
1,042
428
4,414
$ 20,421
$ 439,056
2.7
0.3
0.4
0.2
0.1
1.0
4.7
100.0
71.7
63.7
67.8
78.6
65.6
64.0
47.7
55.0
64.1
63.8
$
9,288
$ 374,188
2.4
95.2
$ 11,172
1,101
1,322
758
415
4,302
$ 19,070
$ 393,258
2.8
0.3
0.3
0.2
0.1
1.1
4.8
100.0
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
60.0
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
7.8
12.8
11.8
7.6
8.5
6.4
8.4
7.0
13.2
10.9
12.4
5.4
2.4
3.0
6.8
(55.6)
(1.4)
(15.2)
19.5
155.8
11.9
6.5
4.6
12.7
37.5
3.1
2.6
7.1
11.6
(1) Represents percentage of the portfolio by NOI.
(2) The Saskatoon property was disposed of on August 15, 2018.
(3) In € Thousands, €15,537 and €6,296 for the year ended December 31, 2018 and December 31, 2017, respectively.
The significant improvement in the NOI contribution in 2018 was
primarily the result of acquisitions, higher operating revenues and
reduced operating expenses in certain regions 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 investment 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 last year by region, refer to the Stabilized NOI by Region section.
CAPREIT
2018 ANNUAL REPORT
29
MANAGEMENT’S DISCUSSION AND ANALYSIS
Stabilized NOI by Region
Stabilized properties for the year ended December 31, 2018 are defined as all properties owned by CAPREIT continuously since December 31,
2016 and therefore do not take into account the impact on performance of acquisitions or dispositions completed during 2018 and 2017. As at
December 31, 2018, stabilized suites and sites represented 92.6% of CAPREIT’s total portfolio excluding co-ownerships.
For the Year Ended December 31,
2018
2017
Increase (Decrease)
Stabilized NOI Margin
Revenue
(%) Change (%) Change (%)
Expense NOI Change
(%)
($ 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(6)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(7)
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 Margin
(%)
NOI
$ 171,457
16,472
18,377
17,617
$ 223,923
$ 53,437
20,359
$ 73,796
$ 31,663
16,358
$ 48,021
$
4,667
16,820
$ 21,487
64.5
66.3
63.5
62.4
64.4
58.7
59.2
58.8
69.4
73.3
70.7
68.1
58.9
60.7
NOI
$ 159,065
14,608
16,443
16,367
$ 206,483
$ 50,690
18,634
$ 69,324
$ 28,155
14,800
$ 42,955
$
4,430
16,431
$ 20,861
62.8
61.1
59.7
60.6
62.2
57.6
56.2
57.2
65.8
70.2
67.2
66.5
58.3
59.9
$ 14,004
61.4
$ 13,115
60.0
$
1,745
60.0
$
1,770
60.6
(0.2)
$
2,823
49.3
$
2,753
49.0
1.9
$
5,599
$ 391,398
$ 11,895
1,152
1,490
773
428
4,414
$ 20,152
$ 411,550
46,648
70.1
63.5
67.8
78.6
65.6
63.8
47.7
55.0
64.1
63.5
$
4,753
$ 362,014
$ 11,172
1,101
1,322
758
415
4,302
$ 19,070
$ 381,084
46,648
68.8
61.5
64.4
77.6
62.2
65.1
47.5
55.5
62.1
61.5
15.7
4.6
11.0
(0.9)
1.1
3.3
7.0
4.0
2.9
3.6
2.4
4.5
(8.7)
(1.3)
(2.5)
7.9
2.6
4.8
(3.0)
(1.0)
5.0
3.8
5.0
4.5
4.9
3.5
3.6
3.5
6.6
5.9
6.4
2.8
1.4
1.7
4.4
0.3
(10.3)
(4.9)
(0.4)
(1.0)
0.9
(3.7)
(0.4)
(4.6)
(5.1)
(4.8)
(2.2)
0.1
(0.2)
0.9
1.5
1.3
7.8
12.8
11.8
7.6
8.4 (1)
5.4
9.4
6.5 (2)
12.5
10.5
11.8 (3)
5.3
2.4
3.0 (4)
6.8 (5)
(1.4)
2.5
17.8 (8)
8.1
6.5 (9)
4.6
12.7
2.0
3.1
2.6
5.7
8.0
(1) Lower expenses: lower R&M costs and utility costs, partially offset by higher insurance costs and realty taxes.
(2) Lower expenses: lower wages, partially offset by higher R&M costs and realty taxes.
(3) Lower expenses: lower R&M costs, utility costs and wages, partially offset by higher insurance costs and realty taxes.
(4) Lower expenses: lower realty taxes and wages, partially offset by higher insurance costs and utility costs.
(5) Higher expenses: higher utility costs and wages, partially offset by lower R&M costs and realty taxes.
(6) The Saskatoon property was disposed of on August 15, 2018.
(7) In € Thousands, €3,663 and €3,248 for the year ended December 31, 2018 and December 31, 2017, respectively.
(8) Higher expenses: higher R&M costs and wages, partially offset by lower on-site costs.
(9) Lower expenses: lower R&M costs, partially offset by higher utility costs.
For the year ended December 31, 2018, stabilized NOI increased by 8.0% compared to last year. Furthermore, the NOI margin for the year
ended December 31, 2018 increased to 63.5% from 61.5% last year.
30
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table reconciles stabilized NOI and NOI from net acquisitions to total NOI for the years ended December 31, 2018 and 2017:
($ Thousands)
For the Year Ended December 31,
Stabilized NOI
Net Acquisitions NOI(1)
Total NOI
2018
411,550
27,506
439,056
$
$
NOI
Margin
(%)
63.5
67.3
63.8
2017
381,084
12,174
393,258
$
$
NOI
Margin
(%)
61.5
63.8
61.6
(1) Represents the NOI of acquisitions and dispositions completed during 2018 and 2017.
Net Income and Other Comprehensive Income
($ Thousands)
For the Year Ended December 31,
NOI
(Less) Plus:
Trust Expenses
Fair Value Adjustments of Investment Properties
Realized Loss on Disposition of Investment Properties
Fair Value Adjustments of Exchangeable Units
Fair Value Adjustments of Investments(1)
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 of property, plant and equipment
Gain (Loss) on Derivative Financial Instruments
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(1)
Foreign Currency Translation
Other Comprehensive (Loss) Income
Comprehensive Income
2018
439,056
$
2017
393,258
$
(39,515)
990,529
(2,594)
(840)
3,740
(34,672)
(116,676)
(18,440)
(95)
42,310
(4,976)
13,141
(34,489)
$ 1,236,479
(18,808)
$ 1,217,671
$
2,659
–
–
28,530
31,189
$ 1,248,860
(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
$
$
$
$
(1) Effective January 1, 2018, CAPREIT adopted IFRS 9 Financial Instruments. Under this standard, this investment has been designated as Fair Value through Profit
and Loss (“FVTPL”) whereas previously it was designated as available-for-sale. Under the guidance in this new standard, any mark-to-market gains or losses are
recorded in the statement of income and comprehensive income whereas previously they were recorded through Other Comprehensive Income (“OCI”). The
cumulative mark to market gains/losses have also been reclassified from accumulated OCI to retained earnings on adoption of this standard.
CAPREIT
2018 ANNUAL REPORT
31
MANAGEMENT’S DISCUSSION AND ANALYSIS
Trust Expenses
Trust expenses include costs directly attributable to head office,
such as salaries trustee fees, professional fees for legal and advisory
services, trustees’ and officers’ insurance premiums, providing third-
party property and asset management services, and other general
and administrative expenses, net of amounts allocated to property
operating expenses for properties owned by CAPREIT. Trust expenses
increased for the year ended December 31, 2018 to $39.5 million from
$32.6 million last year, primarily due to higher salaries, consulting fees
and office expenses. For the year ended December 31, 2018, trust
expenses included approximately $4.3 million related to non-routine
items including severances, consulting, legal and general expenses.
Unrealized Gain on Remeasurement of Investment Properties
CAPREIT recognizes its investment properties at fair value at each
report ing period, with any unrealized gain or loss upon remeasure ment
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, 2018, a loss of $2.6 million was
recognized in connection with property dispositions in the third
and fourth quarters of 2018. A loss of $0.5 million was recognized
in connection with property dispositions completed in the first and
fourth quarters of 2017. The loss represents the difference between
the net proceeds after transaction costs from the disposition of each
property compared to the fair value of the respective properties at
the date of disposition.
Unit-based Compensation Expenses
Unit-based compensation benefits are provided to officers, trustees
and certain employees and are intended to facilitate long-term
ownership of Trust Units and provide additional incentives by
increasing the participants’ interest, as owners, in CAPREIT. Unit-
based compensation expenses include costs attributable to these
incentive plans, namely the Restricted Unit Rights Plan (“RUR Plan”),
Unit Option Plan (“UOP”), Deferred Unit Plan (“DUP”), Long-Term
Incentive Plan (“LTIP”) and Senior Executive Long-Term Incentive Plan
(“SELTIP”) (see notes 11 and 12 in CAPREIT’s audited consolidated
annual financial statements for the year ended December 31, 2018,
contained in CAPREIT’s 2018 Annual Report). On April 4, 2014, the
LTIP, SELTIP and UPP were terminated by the trustees of CAPREIT.
As of December 31, 2018, the UOP, LTIP and SELTIP were all settled
and no further awards remain outstanding.
The Unit-based compensation expenses have been separated
into two components: (i) the amortization of the fair value at grant
date of the award over its vesting period, and (ii) the remeasurement
of awards outstanding at year end at fair value.
($ Thousands)
For the Year Ended December 31,
Remeasurement of Unit-based
Compensation Liabilities
Amortization of Fair Value on Grant Date
of Unit-based Compensation
Total
2018
2017
$ 29,428 $ 18,934
5,244
7,140
$ 34,672 $ 26,074
CAPREIT’s remeasurement of unit-based compensation liabilities
for the year ended December 31, 2018 increased to $29.4 million
compared to a remeasurement expense of $18.9 million in the prior
year, primarily due to significant increases in the market price of the
underlying CAPREIT Trust Units in 2018. CAPREIT’s amortization of
fair value on grant date of unit-based compensation expense for the
year ended December 31, 2018 decreased to $5.2 million compared
to $7.1 million in the prior year, primarily due to accelerated RUR
amortization expense relating to a former President and CEO.
Interest on Mortgages Payable and Other Financing Costs
Information on the interest on mortgages payable and other financing
costs is included in note 20 to the accompanying audited consolidated
annual financial statements and included in Liquidity and Financial
Condition in Section V of this report.
Interest on Bank Indebtedness
Interest on bank indebtedness relates to borrowings under the
Credit Facilities (see Liquidity and Financial Condition discussion in
Section V).
Other Income
Other income primarily consists of income received from invest-
ments (see note 7 to the accompanying audited consolidated annual
financial statements), income from investment in associate, gains
realized on the sale of investments, and asset management and
property management fees.
($ Thousands)
For the Year Ended December 31,
Investment Income
Net Profit from Equity-
Accounted Investment(1)
Asset and Property Management Fees(2)
Other
Total
2018
$
1,384 $
2017
1,341
32,633
7,285
1,008
15,345
6,173
62
$ 42,310 $ 22,921
(1) CAPREIT’s share of IRES’ investment property fair value change, earnings
and foreign exchange effects thereon. For the year ended December 31,
2018, CAPREIT’s share of IRES’ investment property fair value gain is
$25.2 million ($9.7 million gain for the year ended December 31, 2017).
(2) Based on investment management agreement with IRES, which owns
properties in Ireland.
32
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Amortization
These costs represent the amortization of CAPREIT’s head office property, plant and equipment on a straight-line basis over its estimated
useful lives, ranging primarily between three and five years.
Unrealized and Realized Loss on Derivative Financial Instruments
($ Thousands)
Net Income (unrealized gain/(loss))
Loan
Balance
65,000
$
US$ 186,436
40,000
€
Start
Date(2)
9/28/2012
6/30/2017
6/30/2014
End
Date(2)
Credit
Facility
Rate
BA + 1.65%
6/30/2021
6/30/2019 US LIBOR + 1.65%
LIBOR + 1.22%
6/30/2017
MHC Loan
US LIBOR(1)
Euro LIBOR
Total
(1) US based loan of USD $186,436 hedged into euros of €163,540 effective July 2017.
(2) The start and end dates represent the term of the swap.
Gain (Loss) on Foreign Currency Translation
($ Thousands)
All-in
Swap
Rate
Three Months
Ended
December 31,
2018
3.60% $ (1,011) $ 1,590 $
1.20%
2.42%
(4,577)
3,636
$ 2,625 $
2017
Year
Ended
December 31,
2018
2017
165 $ 1,922
(14,015)
227
(2,987) $ 13,141 $ (11,866)
12,976
As of December 31,
2018
Other Comprehensive
Gain/(Loss)
FX Net Income
Gain/(Loss)
Total Foreign Exchange
Exposure Gain/(Loss)
Total Foreign Assets(1)
Total Foreign Liabilities(2)
Net Equity
Cross Currency Swap
Net FX Gain/(Loss) Exposure
Total Foreign Assets(1)
Total Foreign Liabilities(2)
Net Equity
Cross Currency Swap
Net FX Gain/(Loss) Exposure
Balance
Year
Ended
Three
Months
Ended
Three
Months
Ended
€ 799,105 $ 44,806 $ 40,912 $
(13,034)
664,374
31,772
134,731
–
–
Three
Months
Ended
– $ 44,806
(41,045)
3,761
3,636
€ 134,731 $ 31,772 $ 28,530 $ (24,375) $ (21,513) $ 7,397
(34,489)
(34,489)
12,976
(28,011)
(28,011)
3,636
(12,382)
28,530
–
Year
Ended
– $
Year
Ended
$ 40,912
(46,871)
(5,959)
12,976
$ 7,017
Other Comprehensive
Gain/(Loss)
FX Net Income
Gain/(Loss)
Total Foreign Exchange
Exposure Gain/(Loss)
2017
Balance
Year
Ended
Three
Months
Ended
€ 475,167 $ 18,055 $ 23,033 $
(13,012)
414,950
5,043
60,217
–
–
(12,543)
10,490
–
Three
Months
Ended
– $
Year
Ended
(1,494)
(1,494)
(4,577)
3,515
3,515
(14,015)
Three
Months
Ended
– $ 18,055
(14,506)
3,549
(4,577)
€ 60,217 $ 5,043 $ 10,490 $ (6,071) $ (10,500) $ (1,028) $
Year
Ended
$ 23,033
(9,028)
$ 14,005
(14,015)
(10)
(1) Foreign assets are comprised of the Netherlands properties and investment in IRES. Gains or losses due to foreign exchange movements are recorded in foreign
currency translation under OCI.
(2) Foreign liabilities are comprised of third-party loans secured by the Netherlands properties and Euro LIBOR borrowings and US LIBOR borrowings: (a) FX gains
or losses related to loans secured by the Netherlands properties are recorded in foreign currency translation under OCI; (b) gain or losses on Euro LIBOR and
US LIBOR borrowings are recorded as foreign currency translation under Net Income; (c) US LIBOR borrowing has a cross-currency swap which converts the
USD loan into a fixed euro-based borrowing. The mark-to-market on the cross-currency swap is recorded as gain or loss on derivative financial instruments in
Net Income.
CAPREIT
2018 ANNUAL REPORT
33
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION IV
UNIT CALCULATIONS, 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 Number of Units
Weighted Average
Number of Units
Outstanding
Number of Units
2018
142,618
85
271
142,974
288
290
579
44
144,175
2017
135,549
146
267
135,962
397
344
826
299
137,828
2018
145,654
–
287
145,941
–
–
578
–(5)
146,519
(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, 2018 contained in CAPREIT’s 2018 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 nil unexercised options outstanding under the UOP.
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 the total number of Units outstanding over
time, 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, 2018 to 28.6% from 30.7% last year. The DRIP
participation rate is subject to factors beyond Management’s control
and varies among investors.
DISTRIBUTION REINVESTMENT PLAN (“DRIP”)
AND NET DISTRIBUTIONS PAID
($ Thousands)
For the Year Ended December 31,
Distributions Declared on Trust Units
Distributions Declared on
Exchangeable Units
Distributions Declared on Awards
Outstanding Under Unit-based
Compensation Plans(1)
Total Distributions Declared
Less:
Distributions on Trust Units Reinvested
Distributions on Unit Awards Reinvested(1)
Net Distributions Paid
Percentage of Distributions Reinvested
2018
2017
$ 187,848 $ 173,072
95
186
2,181
190,124
2,766
176,024
(52,216)
(2,181)
(51,305)
(2,766)
$ 135,727 $ 121,953
30.7%
28.6%
(1) Comprises: (i) non-cash distributions related to the DUP and the RUR plan,
and (ii) retained distributions on LTIP and SELTIP Units (see notes 11 and 12
to CAPREIT’s audited consolidated annual financial statements for the year
ended December 31, 2018 contained in CAPREIT’s 2018 Annual Report for
a discussion of these plans).
34
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Non-IFRS Financial Measures
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 and unrealized gains or losses on fair value
through profit or loss (“FVTPL”) marketable securities. It may not,
however, be comparable to similar measures presented by other
real estate investment 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 Changes in New Accounting Standards section of
this MD&A, CAPREIT has adopted 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 marketable securities classified as FVTPL are
now included in net income, whereas they were recorded in other
comprehensive income (“OCI”) in 2017 and prior years consolidated
financial statements. Based on the FFO definition currently set
forth by REALpac, which was amended in April 2014 and restated in
February 2017, the unrealized gains or losses on FVTPL marketable
securities should be included in FFO. However, CAPREIT believes that
including such unrealized gains or losses 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 FVTPL marketable securities in its calculation of FFO and
(ii) the adjustment for amortization of certain other assets consistent
with prior years.
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 Investments(1)
Remeasurement of Unit-based Compensation Liabilities
Interest on Exchangeable Units
Corporate and Deferred Income Taxes
(Gain)/Loss on Foreign Currency Translation
FFO Adjustment for Income from Equity-Accounted Investments(2)
Unrealized and Realized Loss on Derivative Financial Instruments
Net FFO Impact Attributable to 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
2018
$ 1,217,671
(990,529)
2,594
840
(3,740)
29,428
95
17,872
34,489
(25,159)
(13,141)
9,821
4,976
$ 285,217
1.995
$
1.978
$
$ 190,124
66.7%
$ 135,727
$ 149,490
47.6%
2017
$ 836,811
(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%
(1) Effective January 1, 2018, CAPREIT adopted IFRS 9 Financial Instruments. Under this standard, this investment has been designated as FVTPL whereas
previously it was designated as available-for-sale. Under the guidance in this new standard, any mark-to-market gains or losses are recorded in the statement
of income and comprehensive income whereas previously they were recorded through OCI. The cumulative mark to market gains/losses have also been
reclassified from accumulated OCI to retained earnings on adoption of this standard.
(2) Relates to unrealized gain on remeasurement of investment properties.
CAPREIT
2018 ANNUAL REPORT
35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Normalized Funds From Operations
Management considers NFFO to be the key measure of CAPREIT’s
operating performance. NFFO is calculated by excluding from FFO
the effects of certain non-recurring items, including amortization of
losses on certain hedging instruments previously settled and paid,
mortgage prepayment penalties, offset by the write-off of fair value
adjustments on assumed mortgages that were refinanced early,
accelerated vesting of previously-granted RUR units, pre-development
costs 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
in Section V. See discussions under the Net Income and Other
Comprehensive Income in Section lll 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
Other Employee Costs(1)
NFFO
NFFO per Unit – Basic
NFFO per Unit – Diluted
2018
2017
$ 285,217 $ 245,523
2,659
1,459
–
3,023
324
1,604
$ 289,335 $ 250,474
1.842
$
1.817
$
2.024 $
2.007 $
Total Distributions Declared
NFFO Payout Ratio
$ 190,124 $ 176,024
70.3%
65.7%
Adjusted Cash Flows From Operations and Distributions Declared
As a measure of economic cash flows, CAPREIT calculates ACFO
using guidelines from the white paper published by REALpac, “White
Paper on Adjusted Cashflow From Operations (ACFO) for IFRS”,
dated February 2017 and updated as of February 2018.
There may be periods where actual distributions declared 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. Excess distributions (shortfalls) are funded, if necessary,
with CAPREIT’s DRIP and the Acquisition and Operating Facility.
ACFO is a measure of economic cash flow based on the operat-
ing 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 excep-
tion of the adjustment for investment income. It may not, however, be
comparable to similar measures presented by other real estate invest-
ment trusts or companies in similar or different industries.
The following table reconciles cash generated from operating
activities (per the 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)
Amortization of Other Financing Costs(4)
Non-controlling Interest
Investment Income
2018
2017
$ 431,177 $ 358,941
(114,271)
(111,138)
(51,252)
(1,046)
(6,464)
(216)
7,442
(38,724)
(3,234)
(5,689)
(184)
8,478
$ 265,370 $ 208,450
$ 190,124 $ 176,024
$ 75,246 $ 32,426
84.4%
71.6%
Net Distributions Paid
Excess NFFO over Net Distributions Paid
Effective NFFO Payout Ratio
$ 135,727 $ 121,953
$ 153,608 $ 128,521
48.7%
46.9%
(1) Expenses included in Unit-based compensation expenses relate to
accelerated vesting of previously-granted RUR units.
ACFO
Total Distributions Declared
Excess (Deficit) ACFO over
Distributions Declared
ACFO Payout Ratio
NFFO for the year ended December 31, 2018 increased by 15.5%
compared to last year, primarily due to the contribution from acquisitions
and higher NOI for properties owned prior to December 31, 2017.
For the year ended December 31, 2018, basic NFFO per Unit
increased by 9.9% compared to last year, despite an approximate
5.2% increase in the weighted average number of Units outstanding,
due primarily to 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, 2018 improved to 65.7%
compared to 70.3% last year. The effective NFFO payout ratio, which
compares NFFO to net distributions paid, improved for the year
ended December 31, 2018 to 46.9% from 48.7% last year.
(1) On a quarterly basis, a review of working capital is performed to determine
whether changes in prepaids, receivables, deposits, accounts payable and
other liabilities, security deposits and other non-cash operating assets and
liabilities were attributed to items which were not indicative of sustainable
cash flows available for distribution in line with the ACFO guidance provided
by REALpac. Based on review, it was concluded that no adjustments were
needed.
(2) Non-Discretionary Property Capital Investments for the years ended
December 31, 2018 and 2017 are based on the actual annual 2018 and
annual 2017, respectively. For a reconciliation of actual non-discretionary
property capital investments incurred during the period to forecast, see the
table on the next page.
(3) Comprises tenant inducements and direct leasing costs.
(4) Includes amortization of deferred financing costs, CMHC premiums,
deferred loan costs and fair value adjustments.
For the year ended December 31, 2018, CAPREIT’s ACFO were in
excess of distributions declared by $75.2 million.
36
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below reconciles actual non-discretionary capital invest-
ments incurred to the forecasted amount used in the above ACFO
calculation:
NON-DISCRETIONARY PROPERTY CAPITAL ACTUALS
TO FORECAST RECONCILIATION
($ Thousands)
Year Ended December 31,
Actual
Forecast
Difference
2018
2017
$ 51,252 $ 38,724
56,800
56,029
(18,076)
$
(4,777) $
For the year ended December 31, 2018, CAPREIT’s actual non-
discretionary property capital investments of $51.3 million were
lower than the forecast by approximately $4.8 million, mainly related
to deferral of certain structural and roof projects.
CAPREIT’s capital investments programs are affected by seasonal
cycles, and professional judgement is used by management to
determine timing of property capital investments. Therefore, actual
and forecasted capital investments may differ during the applicable
periods.
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.
Discretionary and Non-Discretionary Property
Capital Investments
Management does not differentiate between maintenance and value-
enhancing property capital investments. Maintenance property cap-
ital investments are generally not clearly identifiable, nor do they have
a common definition and would require significant judgement to clas-
sify property capital investments as maintenance or value-enhan-
cing capital investments. In addition, there is no generally accepted
defi nition of maintenance capital investments in the Canadian real
estate industry. Management has decided to classify property capital
investments into two categories: 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.
Non-Discretionary Property Capital Investments are those invest-
ments 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 effective ness, including its
profitability, through increases in revenues or reductions 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 life and 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 been in the range of $750 to $1,100 per residential suite
annually over the last five years and are expensed to NOI.
Discretionary Property Capital Investments are capital expendi-
tures made to the property that are not essential to operation of
the business in the short term. These investments may enhance
the property’s operating effectiveness, including its profitability,
through increases in revenues or reductions in costs over the long
term. Included in discretionary capital expenditures are items such
as suite and common area improvements, energy-saving initiatives,
equipment, boilers, elevators and risers.
The following table reconciles the actual 2018, 2017 and 2016
Non-Discretionary Property Capital Investments per suite and site:
($ Thousands)
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.
2018 Actual
51,252
$
142,202
193,454
$
$
$
51,252
49,595
1,033
2017 Actual
38,724
$
112,643
151,367
$
$
$
38,724
48,307
802
2016 Actual
58,501
$
133,295
191,796
$
$
$
58,501
46,780
1,251
CAPREIT
2018 ANNUAL REPORT
37
MANAGEMENT’S DISCUSSION AND ANALYSIS
Adjusted Cash Generated From Operating Activities
As required by National Policy 41-201, “Income Trusts and Other
Indirect Offerings”, the following table quantifies cash generated from
operating activities net of interest expense included in cash flow from
financing activities.
($ Thousands)
Year Ended December 31,
Cash Generated From Operating Activities
Adjustments:
Interest expense included in
2018
2017
$ 431,177 $ 358,941
cash flow from financing activities
(114,271)
(111,138)
Adjusted Cash Generated
from Operating Activities
Total Distributions Declared
Excess (shortfall)
$ 316,906 $ 247,803
$ 190,124 $ 176,024
$ 126,782 $ 71,779
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.
CAPREIT does not use net income as a basis for distributions as it
includes fair value change in investment properties, remeasurement of
Unit-based compensation liabilities and fair value change in 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
inducements and capital expenditure requirements.
For the year ended December 31, 2018, CAPREIT’s Adjusted Cash
Generated from Operating Activities exceeded distributions declared
by $126.8 million compared to the prior year, when Adjusted Cash
Generated from Operating Activities exceeded distributions declared
by $71.8 million. As per OSC Staff Notice 51-724, if distributions are in
excess of Adjusted Cash Generated from Operating Activities, then it
represents a return of capital, rather than a return on capital, since they
represent cash payments in excess of cash generated from CAPREIT’s
continuing operations during the period.
Management believes, should it occur, there is adequate overall
liquidity to fund excess distributions given Adjusted Cash Generated
from Operating Activities on an annual basis and through: (i) mortgage
debt secured by its investment properties; and (ii) secured short-term
debt financing with three Canadian chartered banks.
($ Thousands)
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
2018
2017
$ 1,217,671 $ 836,811
$ 316,906 $ 247,803
$ 190,124 $ 176,024
$ 135,727 $ 121,953
$ 1,027,547 $ 660,787
$ 1,081,944 $ 714,858
$ 126,782 $ 71,779
Net Distributions Declared
$ 181,179 $ 125,850
38
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION V:
CAPITAL INVESTMENT, INVESTMENT PROPERTY, CAPITAL STRUCTURE AND FINANCIAL CONDITION
Property Capital Investments
annually. This ensures sustainable growth to maximize the portfolio’s
future rental income-generating potential.
CAPREIT capitalizes all capital investments related to the improve ment
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 significantly below current replace-
ment cost and improve their operating performance by investing
For the year ended December 31, 2018, CAPREIT made property
capital investments (excluding head office assets) of $193.5 million
compared to $151.4 million for last year. Energy-saving initiatives and
suite and common area improvement costs generally tend to increase
NOI more quickly compared to other capital investment categories.
A breakdown of property capital investments (excluding head
office assets) is summarized by category below:
PROPERTY CAPITAL INVESTMENTS BY CATEGORY
($ Thousands)
Year Ended December 31, 2018
Non-Discretionary Property Capital Investments:
Building Improvements
MHC Infrastructural
Life and Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Elevators and Risers
Others
MHC Common Area
Total
($ Thousands)
Year Ended December 31, 2017
Non-Discretionary Property Capital Investments:
Building Improvements
MHC Infrastructural
Life and Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Elevators and Risers
Others
MHC Common Area
Total
Actual Total Portfolio
% of Actual
47,612
1,653
1,987
51,252
53,863
44,342
20,140
13,243
9,056
1,031
527
142,202
193,454
24.6
0.9
1.0
26.5
27.9
22.9
10.4
6.8
4.7
0.5
0.3
73.5
100.0
Actual Total Portfolio(1)
% of Actual
35,665
2,438
621
38,724
56,520
25,752
12,389
10,461
6,936
220
365
112,643
151,367
23.6
1.6
0.4
25.6
37.4
17.0
8.2
6.9
4.6
0.1
0.2
74.4
100.0
(1) Prior year figures have been restated in accordance with the current year classification methodology for comparative purposes.
CAPREIT
2018 ANNUAL REPORT
39
MANAGEMENT’S DISCUSSION AND ANALYSIS
The table below includes estimated 2019 capital expenditures for
buildings expected to be completed in 2019. The following budgeted
capital expenditures may vary from actuals as the planned expenditures
may be accelerated or adjusted as necessary.
2019 CAPITAL EXPENDITURE BUDGET
($ Thousands)
Investment Properties
Non-Discretionary Property
Capital Investments:
Building Improvements
MHC Infrastructural
Life and Safety
Discretionary Property Capital Investments:
Suite Improvements
Common Area
Energy-saving Initiatives
Equipment
Elevators and Risers
Others
MHC Common Area
Total
Actual
Total Portfolio(1)
% of
Actual
59,472
1,705
1,925
63,102
50,948
41,509
18,804
7,602
11,903
3,230
523
134,519
197,621
30.1
0.9
1.0
32.0
25.8
21.0
9.5
3.8
6.0
1.6
0.3
68.0
100.0
(1) The 2019 Capital Expenditure Budget includes the Netherlands budget.
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 2019 through 2022 for
properties owned as of December 31, 2018. The actual cost and
timing may vary from the estimate.
FUTURE INVESTMENTS IN BUILDING IMPROVEMENTS
($ Thousands)
2019
2020
2021
2022
Building Improvements
Estimated Range
$52,000 – $65,000
$39,000 – $48,000
$27,000 – $33,000
$15,000 – $19,000
Management believes CAPREIT has sufficient liquidity (see the
Liquidity and Financial Condition section) to execute the above
property capital investments strategy.
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 neces-
sarily 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, 2018.
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
Gain on Remeasurement at Fair Value
Capitalized Leasing Costs(2)
2018
2017
$ 8,886,556 $ 7,642,017
504,710
198,110
35,324
990,529
1,046
470,510
154,883
12,998
626,953
1,020
Less:
Dispositions
Realized Loss on Dispositions
Investment Properties at Fair Value,
End of the Year
(140,137)
(2,594)
(21,337)
(488)
$ 10,473,544 $ 8,886,556
(1) See Section V – Property Capital Investments, and intensification.
(2) Comprised of tenant inducements, straight-line rent and direct leasing costs.
40
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
A summary of the fair values of CAPREIT’s investment properties and changes, along with key market assumptions, is presented below:
INVESTMENT PROPERTIES BY GEOGRAPHY
($ Millions)
As at,
Greater Toronto Area
Other Ontario
Québec
British Columbia
Alberta
Nova Scotia
Saskatchewan
Prince Edward Island
The Netherlands
MHC Land Lease Sites
Total
Dec 2017
Fair
Value
$ 3,525
1,013
1,493
1,196
413
261
42
64
564
316
$ 8,887
Change Due to Change in
Normalized
Rates(1)(3)
321
56
80
(5)
19
5
–
3
61
9
549
$
$
$
$
$
$
Net
Forex
NOI(2)(3) Translation Acquisitions
–
307
2
99
(60)
70
80
96
–
16
–
8
(10)
–
–
(1)
347
34
6
9
365
638
–
–
–
–
–
–
–
–
35
–
35
$
$
Dec 2018
Fair
Value
$ 4,153
1,170
1,583
1,367
448
274
32
66
1,041
340
$ 10,474
Dec 2017
Dec 2018
Rates(1)
Rates(1)
4.05%
4.58%
4.89%
3.65%
4.63%
5.35%
5.60%
6.06%
4.03%
6.27%
4.39%
3.78%
4.36%
4.63%
3.77%
4.46%
5.25%
5.70%
5.78%
3.80%
6.11%
4.17%
(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, 2018 for Operating
and Land Leasehold Interests.
(2) Represents normalized net operating income for valuation purposes.
(3) Fair Value changes due to changes in Rates and Normalized NOI exclude properties acquired and disposed of during the quarter.
For the years ended December 31, 2018 and 2017, the unrealized gain on remeasurement of investment properties is primarily the result of:
(i) increases in net operating income primarily attributable to the significant growth in rents in 2018 compared to 2017, driven by the substantial
rental increases on turnovers, as current rents are significantly below market rents, especially in major regions such as the GTA, other Ontario
and British Columbia, along with higher NOI margins due to operating efficiencies; and (ii) further compressed capitalization rates supported
by market transactions. The unrealized gain on remeasurement of investment properties is 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.
As at December 31, 2018, 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, 2018
Weighted Average Capitalization Rate
Weighted Average Capitalization Rate
Change (basis points)(1)
+25
–25
Estimated (Decrease) Increase
(592)
663
$
$
(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.
Development
Development is a key component in CAPREIT’s growth and value
creation strategy. CAPREIT’s development program encompasses
a combination of three different approaches that will add new
units to the portfolio: (i) Forward purchase of properties developed
by third parties, (ii) Intensification and infill on excess land with
existing income-producing properties and (iii) Redevelopment.
Through a highest and best use assessment, CAPREIT has identified
approximately 85 potential development sites across Canada with
the opportunity to build well in excess of 10,000 new units focused
primarily in British Columbia and Ontario.
Two infill development projects located in high-priority Toronto
sites are well underway with rezoning application approvals being
negotiated with the city: 141 Davisville Avenue, and 100 Wellesley
Street East. Site plan applications will follow. One conversion
development project has commenced construction, located in
Montréal, Québec at 2525 Cavendish Boulevard.
141 Davisville – The application was submitted in November
2017 and continues to be diligently processed with City of Toronto
staff departments. The proposed application under review includes
146 new units in a proposed 16-storey infill building, with modern
indoor and outdoor amenities, and a number of improvements to the
existing building and site.
100 Wellesley – The application was submitted in July 2017 and con tin-
ues to be diligently processed with City of Toronto staff departments. The
proposed application under review includes 120 new units in a 10-storey
infill building and eight stand-alone townhouse units located in the
downtown core of Toronto, with modern indoor and outdoor amenities,
and a number of improvements to the existing building and site.
CAPREIT
2018 ANNUAL REPORT
41
MANAGEMENT’S DISCUSSION AND ANALYSIS
Capital Structure
CAPREIT defines capital as the aggregate of Unitholders’ equity, debt
financing, unit-based compensation liabilities and Exchangeable
Units. CAPREIT’s objectives when managing capital are to safeguard
its ability to continue to fund distributions to Unitholders, retain a
portion to meet repayment obligations under its mortgages and credit
facilities, and ensure sufficient funds are available to meet capital
commitments. Manage ment aims to maintain an optimal degree of
leverage relative to the GBV 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. 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. 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
in Section V) 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
restrictions and financial covenants under the agreement with
CMHC. Refer to Liquidity and Financial Condition in Section V 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 invest-
ment in the property portfolio and ensure the sources of financing
better reflect the long-term useful lives of the underlying investments.
2525 Cavendish – A Building Permit has been approved and
construction has commenced of 52 new residential rental units
within the existing building’s vacant commercial space. The target
completion date is set and on target for the fall of 2019.
A pipeline of additional rezoning applications for key Canadian
sites is planned to be initiated in 2019.
CAPREIT’s intensification and development costs are summarized
below:
DEVELOPMENT SUMMARY
($ Thousands)
Year Ended December 31, 2018
Intensification
Development
Total for Development
Year Ended December 31, 2017
Intensification
Development
Total for Development
Actual
Total Portfolio
4,656
1,735
6,391
Actual
Total Portfolio(1)
3,516
1,925
5,441
(1) Prior year figures have been restated in accordance with the current year
classification methodology for comparative purposes.
Total development costs for 2018 were lower than the amount fore-
casted in the prior quarter due to Management’s revised expectations
of processing time for development applications. The regulatory and
application processing is subject to factors beyond Management’s
control and varies between projects.
The table below presents the estimated intensification and develop-
ment costs estimated for 2019, which include costs related to planning,
rezoning, architectural surveys, application fees and building permits.
The following budgeted intensification and development costs may
vary from actuals as expectations of processing time for development
applications become better defined.
2019 DEVELOPMENT EXPENDITURE BUDGET
($ Thousands)
Intensification(1)
Development(2)
Total Development Budget
Budget
Total Portfolio
10,208
26,190
36,398
(1) Intensification costs relate to capital expenditures incurred to convert
non-residential elements to revenue-generating residential units, as well as
capital expenditures incurred on the preparation of lots for MHC installation.
(2) Development costs relate primarily to pre-construction costs such as
application and permit fees, consultant fees and levies.
42
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
As at December 31, 2018 CAPREIT is in compliance with all the investment and debt restrictions and financial covenants contained in
the DOT, the LBA and the Credit Facilities. The total capital managed by CAPREIT and the results of compliance with the key covenants and
liquidity metrics 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)
Mortgage Debt to Gross Book Value
Total Debt to Gross Historical Cost(2)
Total Debt to Total Capitalization(3)
Tangible Net Worth(1), (4)
For the four quarters ended
Debt Service Coverage Ratio (times)(1)
Interest Coverage Ratio (times)(1)
2018
$ 3,728,333
567,365
32,805
–
6,316,700
$ 10,645,203
39.37%
34.17%
54.54%
39.82%
$ 6,349,505
2017
$ 3,581,501
446,895
64,561
4,876
4,923,406
$ 9,021,239
43.57%
38.73%
56.24%
41.81%
$ 4,992,842
Threshold
Maximum 70.00%
Minimum $2,100,000
Minimum 1.20
Minimum 1.50
December 31, 2018
1.75
3.44
December 31, 2017
1.63
3.19
(1) See note 17 to the accompanying audited consolidated annual financial statements for details.
(2) 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, minus fair value adjustment on investment properties.
(3) Based on market capitalization as defined in the Performance Measures table of the MD&A, plus total debt.
(4) The tangible net worth requirement as at December 31, 2017 was $1,800,000.
Liquidity and Financial Condition
Liquidity and Capital Resources
Management believes there is adequate overall liquidity to fund R&M
expenditures and property capital investment commitments to provide
for future growth in the business. CAPREIT finances these com-
mitments through: (i) ACFO on an annual basis; (ii) secured short-term
debt financing with three Canadian chartered banks; (iii) mortgage
debt secured by its investment properties; and (iv) equity and funds
reinvested from its DRIP. Management’s assessment of CAPREIT’s
liquidity position continues to be stable for the foreseeable future
based on its evaluation of capital resources as summarized below:
i)
CAPREIT’s business continues to be stable and is expected to
generate sufficient ACFO on an annual basis to fund the current
level of distributions.
ii) CAPREIT’s liquidity position as at December 31, 2018 remains
strong, as the following table highlights:
($ Thousands)
As at December 31, 2018
Credit Facilities Available(1)
Mortgage Top-Ups Committed or
Expected to be Completed in 2019
Total Available Liquidity
$
266,325
129,590
395,915
$
(1) Includes the $200 million temporary Bridge Facility available for three months,
effective November 26, 2018; it cannot be renewed after expiry date.
Subsequent to 2018 year end, CAPREIT closed on an equity raise with
gross proceeds of $287.8 million, which was used to partially pay the
Acquisition and Operating Facility.
Investment properties with a fair value of $10.1 billion have been
pledged as security as at December 31, 2018. In addition, CAPREIT has
investment properties with a fair value of approximately $420.0 million
as at December 31, 2018 that are not encumbered by mortgages
and secure only the Acquisition and Operating Facility. We expect
to have subsequent financings on acquisitions which are currently
unencumbered for approximately $130.3 million. CAPREIT intends to
maintain unencumbered investment properties with an aggregate fair
value in the range of $180 million to $250 million over the long term.
The working capital deficiency, as presented on CAPREIT’s
consolidated balance sheets as at December 31, 2018, is paid through
the Credit Facilities as well as by the ongoing refinancing of mortgages
payable. Management does a liquidity forecast on a monthly basis,
which includes refinancings, property capital investments, potential
acquisitions and potential dispositions to monitor the available
liquidity capacity.
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
2018 ANNUAL REPORT
43
MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPREIT primarily focuses on multi-unit residential real estate in
Canada, which is eligible for government-backed insurance for mort-
gages 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 coverage is transferable between
approved lenders and is effective for the full initial amortization
period of the underlying mortgage ranging between 25 and 35 years.
•
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 the LBA. Other
than improving the efficiency and consistency of such processes
such as underwriting, the LBA has not materially affected the manner
in which CAPREIT conducts its business or its approach to mortgage
financing.
As at December 31,
Percentage of CMHC-Insured Mortgages(1)
Percentage of Fixed-Rate Mortgages
2018
97.5%
100.0%
2017
97.0%
100.0%
Weighted Average Mortgage Interest Rate(2)
Weighted Average Mortgage
Term to Maturity (years)
3.05%
3.08%
5.10
5.66
(1) Excludes the mortgages on the MHC land lease sites and European
financings.
(2) 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 $32.5 million included in AOCL, the effective portfolio
weighted average interest rate as at December 31, 2018 would be
3.13% (December 31, 2017 – 3.17%).
The following table summarizes the changes in the mortgage
portfolio during the periods:
($ Thousands)
As at December 31,
Balance, Beginning of Period
Add:
New Borrowings on Acquisitions
Assumed
Refinanced
Foreign Currency Translation
Less:
Mortgage Principal Amortization(1)
Mortgages Matured
Mortgages Repaid on Dispositions of Investment Properties
Change in Deferred Financing Costs, Fair Value Adjustments, Net
Balance, End of Period
(1) Includes repayment of euro LIBOR borrowing of €5,000 in 2017.
2018
$ 3,581,501
2017
$ 3,492,923
178,018
22,915
213,216
12,382
(116,877)
(103,734)
(58,212)
(876)
$ 3,728,333
253,375
3,713
211,141
12,543
(119,458)
(266,575)
(4,951)
(1,210)
$ 3,581,501
The following table presents refinancings, weighted average interest rates obtained and mortgage top-ups closed or committed up to 2018.
($ Thousands)
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Total and Weighted Average
Acquisitions
Total and Weighted Average
with Acquisitions
$
Original
Mortgage
Amount
3,207
20,138
75,317
5,072
$ 103,734
–
Original(1)
Stated
Interest
Rate
3.64%
1.22%
3.61%
3.99%
3.17%
–
New
Mortgage
Amount
$
3,595
20,138
134,399
55,084
$ 213,216
178,018
New(1), (2)
Stated
Interest
Rate
2.80%
2.75%
3.28%
3.29%
3.22%
2.21%
Weighted
Average
Term on New
Mortgages (Yrs)
5.0
0.5
8.6
5.6
7.0
7.5
$
Top-Up
Financing
Amount
388
–
59,082
50,012
$ 109,482
178,018
$ 103,734
3.17%
$ 391,234
2.76%
7.2
$ 287,500
(1) Weighted average.
(2) Excludes CMHC, other financing costs and impact of hedging.
44
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
For purposes of estimating top-up financing potential, the
following table provides annualized NOI for those properties with
mortgages maturing over the next five years and beyond. A property’s
full NOI is included in the first year in which a mortgage matures.
The balance of mortgages remaining on the same property but
maturing in other years is also shown. Management expects to raise
between $365 million and $415 million in total mortgage renewals
and refinancings for 2019, excluding financings on acquisitions.
($ Thousands)
As at December 31, 2018
Year of
Maturity
2019
2020
2021
2022
2023
2024 Onward
Total
Mortgage Maturities(1)
$
287,151
223,649
349,066
413,064
370,927
1,450,570
$ 3,094,427
Mortgages on the
Same Properties
Maturing in
Other Years(1)
$
$
126,166
50,205
(32,852)
15,603
8,807
(167,929)
–
Total Mortgages
$
413,317
273,854
316,214
428,667
379,734
1,282,641
$ 3,094,427
NOI of Properties
with Maturing
Mortgage(s)(2), (3)
$
$
59,998
34,148
51,276
64,049
55,265
153,933
418,669
(1) Mortgage balance due upon maturity.
(2) NOI for the 12 months ended December 31, 2018.
(3) Projected NOI included for acquisitions since December 31, 2017.
The breakdown of future principal repayments, including mortgage maturities, and effective weighted average interest rates is as follows:
($ Thousands)
As at December 31, 2018
Period
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029–2030
Principal
Amortization
116,802
110,954
100,141
90,549
72,406
57,237
48,425
27,019
10,629
6,383
2,329
642,874
$
$
Deferred Financing Costs, Fair Value Adjustments, Net
Total
$
Mortgage
Maturities
287,151
223,649
349,066
413,064
370,927
228,584
651,950
298,212
135,238
70,414
66,172
$ 3,094,427
$
Mortgage
Balance
403,952
334,603
449,207(3)
503,613(4)
443,333(4)
285,821(4)
700,375(4)
325,231
145,867
76,797
68,501
$ 3,737,300
(8,967)
$ 3,728,333
% of Total
Mortgage
Balance
10.8
9.0
12.0
13.5
11.9
7.6
18.7
8.7
3.9
2.1
1.8
100.0
Interest
Rate (%)(1), (2)
3.46
2.57
3.82
2.86
3.09
3.78
2.51
2.75
2.92
3.41
3.72
3.05(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.
(3) Included in mortgages payable is a $65.0 million non-amortizing credit facility on two of the MHC land lease sites.
(4) Included in mortgages payable are mortgages related to the Netherlands properties, as detailed below:
As at December 31, 2018
Mortgage Balance
Period
2022
2023
2024
2025
Total
€ Thousands
49,914
40,660
–
211,336
301,910
€
€
$ Thousands
77,931
63,482
–
329,867
471,280
$
$
Interest
Rate (%)
1.37
2.05
–
2.00
1.91
CAPREIT
2018 ANNUAL REPORT
45
MANAGEMENT’S DISCUSSION AND ANALYSIS
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.
Unitholders’ Equity and Units Awarded under Unit-based Compensation Plans
Unitholders’ Equity represents the issued and outstanding Trust Units, and excludes the Exchangeable Units and any Units issued in
connection with Unit-based incentive plans. For the purposes of the discussion below, Exchangeable Units and Units issued in connection
with Unit-based incentive plans are treated as equity as they have claims similar or identical to those of the Trust Units.
Equity offerings and over-allotments for the periods ending December 31, 2018:
($ Thousands, except per Unit amounts)
Period
March 2018
Bought-deal
Over-allotment
Total
Price
Per Unit
Gross
Proceeds
Transaction
Costs
Net
Proceeds
Units
Issued
$
$
35.15
35.15
$
$
150,091
22,514
172,605
$
$
6,780
901
7,681
$
$
143,311
21,613
164,924
4,270,000
640,500
4,910,500
Market capitalization and units outstanding:
As at December 31, 2018
Market Capitalization ($ thousands)
Number of Units Outstanding
LTIP and SELTIP Units
Deferred Units
RUR Plan Units
Exchangeable Units
Ownership by Trustees, Officers and Senior Managers
$ 6,490,783
146,518,798
–
286,696
578,120
–
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 TSX approval. The NCIB will terminate on the earlier of the termination date or at such time as
purchases under the NCIB are completed. CAPREIT will continue to evaluate the NCIB program and believes the purchase of its outstanding
Trust Units from time to time may be an appropriate use of its resources. CAPREIT has not obtained approval to purchase since July 27, 2016.
Unitholder Taxation
For taxable Canadian resident Unitholders, the distributions are treated as follows for income tax purposes:
For the year ended December 31,
Taxable to Unitholders as Other Income
Taxable to Unitholders as Capital Gain Income
Income Tax Deferral
Total
Total Effective Non-taxable Portion of Distributions
2018
33.05%
25.07%
41.88%
100.00%
54.41%
2017
15.21%
4.23%
80.56%
100.00%
82.67%
The portion of CAPREIT’s distributions to Canadian resident Unitholders treated as taxable for the year ended December 31, 2018
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.
46
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION VI:
COMPLIANCE AND GOVERNANCE DISCLOSURES, RISKS AND UNCERTAINTIES
Selected Consolidated Quarterly Information
Overall Portfolio Net AMR
Operating Revenues (000s)(1)
NOI (000s)(1), (2)
NOI Margin(1)
Net Income (000s)
FFO (000s)(1), (2)
NFFO (000s)(1), (2)
Total Debt to Gross Book Value
Q4 18
1,103 $
Q3 18
1,079 $
Q1 17
$
1,007
$ 177,667 $ 172,298 $ 170,601 $ 168,019 $ 164,432 $ 161,713 $ 157,087 $ 155,610
$ 111,936 $ 113,850 $ 110,868 $ 102,402 $ 100,300 $ 102,655 $ 98,705 $ 91,598
58.9%
Q2 17
1,015 $
Q3 17
1,029 $
Q1 18
1,054 $
Q4 17
1,044 $
Q2 18
1,065 $
62.8%
66.1%
63.5%
65.0%
60.9%
61.0%
63.0%
$ 736,267 $ 119,594 $ 261,612 $ 100,198 $ 376,960 $ 215,833 $ 102,885 $ 141,133
$ 69,312 $ 77,290 $ 76,165 $ 63,386 $ 61,000 $ 64,685 $ 62,836 $ 57,002
$ 71,414 $ 77,933 $ 76,829 $ 64,095 $ 61,893 $ 67,036 $ 63,608 $ 57,937
43.99%
39.37%
40.48%
40.53%
44.00%
44.76%
41.48%
43.57%
FFO per Unit(1) – Basic
NFFO per Unit(1) – Basic
$
$
0.477 $
0.492 $
0.535 $
0.540 $
0.530 $
0.535 $
0.457 $
0.463 $
0.446 $
0.452 $
0.475 $
0.492 $
0.463 $
0.469 $
0.422
0.429
Weighted Average Number of Units (000s)
– Basic
– Diluted
145,199
145,784
144,431
145,831
143,623
144,982
138,554
140,022
136,824
138,684
136,295
138,131
135,629
137,554
135,076
136,918
(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 operat-
ing 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 ACFO (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.
Fourth Quarter
Operating revenues in the fourth quarter of 2018 increased by 8.0%
over the same quarter in 2017, and NOI increased by a significant
11.6%, 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 2018 increased over the same period last year to
$736.3 million, mainly due to higher unrealized gain on remeasurement
of investment properties of $710.5 million compared to $339.2 million
for the same period last year. Trust expenses for the quarter ended
included approximately $3.0 million related to non-routine items
including severances incurred and consulting costs related to non-
routine matters. Loan interest and mortgage interest increased by
$2.6 million, offset by higher NOI of $11.6 million. Higher NFFO for
the fourth quarter of 2018 was primarily due to an 8.6% increase in
stabilized property NOI and the NOI contribution from acquisitions
completed over the prior 12 months.
CAPREIT
2018 ANNUAL REPORT
47
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following table shows the NOI and the NOI margin attained for each regional market for the periods ended December 31, 2018 and
2017.
NOI BY GEOGRAPHY
For the Three Months Ended December 31,
2018
2017
($ 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(2)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(3)
Total Residential Suites
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
Total MHC Land Lease Sites
Total Suites and Sites
NOI
NOI %(1)
NOI
Margin
(%)
NOI
NOI %(1)
NOI
Margin
(%)
NOI
Change
(%)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
43,180
4,601
4,667
4,487
56,935
13,899
5,494
19,393
9,436
4,188
13,624
1,195
4,150
5,345
3,315
–
422
422
828
38.6
4.1
4.1
4.0
50.8
12.4
4.9
17.3
8.5
3.7
12.2
1.1
3.7
4.8
3.0
–
0.4
0.4
0.7
63.9 $ 39,507
3,635
72.9
4,074
63.1
4,137
61.9
64.3 $ 51,353
56.8 $ 13,263
59.8
4,925
57.6 $ 18,188
69.6 $ 8,068
72.0
3,814
70.3 $ 11,882
68.0 $ 1,139
57.7
4,200
59.7 $ 5,339
56.5 $ 3,333
– $
58.5
58.5 $
130
468
598
49.0 $
768
39.4
3.6
4.1
4.1
51.2
13.2
5.0
18.1
8.0
3.8
11.8
1.1
4.3
5.3
3.3
0.1
0.5
0.6
0.8
6,912
106,774
6.2
95.4
64.0 $ 4,026
63.0 $ 95,487
4.0
95.2
2,917
288
433
305
111
1,108
5,162
111,936
2.6
0.3
0.4
0.3
0.1
1.0
4.6
100.0
66.1 $ 2,783
279
77.8
340
70.9
204
66.0
93
48.9
1,112
54.9
63.7 $ 4,811
63.0 $ 100,298
2.8
0.3
0.2
0.2
0.1
1.1
4.8
100.0
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
9.3
26.6
14.6
8.5
10.9
4.8
11.6
6.6
17.0
9.8
14.7
4.9
(1.2)
0.1
(0.5)
(100.0)
(9.8)
(29.4)
7.8
71.7
11.8
4.8
3.2
27.4
49.5
19.4
(0.4)
7.3
11.6
(1) Represents percentage of the portfolio by NOI.
(2) The Saskatoon property was disposed of on August 15, 2018.
(3) In € Thousands, €4,478 and €2,687 for the three months ended December 31, 2018 and December 31, 2017, respectively.
48
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
The stabilized portfolio performance for the three months ended December 31, 2018 compared to December 31, 2017, is summarized
as follows:
For the Three Months Ended December 31,
2018
2017
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(6)
Regina
PRINCE EDWARD ISLAND
Charlottetown
EUROPE
The Netherlands(7)
Total Residential Suites
MHC Land Lease Sites
Ontario
British Columbia
Alberta
Saskatchewan
Prince Edward Island
New Brunswick
Total MHC Land Lease Sites
Total Suites and Sites
Stabilized Suites and Sites
NOI
Margin
(%)
NOI
NOI
Margin
(%)
Revenue
Change
(%)
Expense
Change
(%)
NOI
Change
(%)
NOI
$ 43,180
4,601
4,667
4,487
$ 56,935
$ 13,282
5,319
$ 18,601
$ 7,951
4,132
$ 12,083
$ 1,195
4,150
$ 5,345
63.9 $ 39,507
3,635
72.9
4,074
63.1
61.9
4,137
64.3 $ 51,353
57.1 $ 12,632
60.6
4,642
58.1 $ 17,274
68.1 $ 7,246
72.2
3,762
69.4 $ 11,008
68.0 $ 1,139
57.7
4,200
59.7 $ 5,339
61.5
59.8
58.2
60.6
61.0
56.6
55.6
56.3
66.1
69.6
67.3
67.8
60.3
61.8
$ 3,315
56.5 $ 3,333
60.6
5.1
3.8
5.6
6.2
5.1
4.2
5.1
4.4
6.5
6.0
6.4
4.6
3.3
3.5
6.7
$
$
422
58.9 $
468
63.3
(2.3)
690
47.7 $
714
50.3
1.9
$ 1,394
$ 98,785
58.9 $ 1,285
62.8 $ 90,774
60.8
60.7
$ 2,917
288
433
208
111
1,108
$ 5,065
$ 103,850
46,648
66.1 $ 2,783
279
77.8
340
70.9
204
68.0
48.9
93
1,112
54.9
63.8 $ 4,811
62.8 $ 95,585
46,648
64.1
77.5
63.3
68.9
42.3
56.4
62.3
60.7
11.9
5.1
1.6
2.8
13.8
3.4
3.2
2.4
2.8
5.0
(1.7)
(30.1)
(6.8)
2.8
(3.9)
2.9
(6.8)
0.3
0.3
(2.8)
(0.7)
3.9
10.1
9.0
17.8
9.6
7.2
17.3
(0.6)
(4.2)
1.2
(9.6)
6.5
(8.7)
5.9
(1.3)
(0.7)
9.3
26.6
14.6
8.5
10.9(1)
5.1
14.6
7.7(2)
9.7
9.8
9.8(3)
4.9
(1.2)
0.1(4)
(0.5)(5)
(9.8)
(3.4)
8.4(8)
8.8
4.8(9)
3.2
27.4
2.0
19.4
(0.4)
5.3
8.6
(1) Lower expenses: lower R&M costs and realty taxes, partially offset by higher insurance costs, on-site costs and wages.
(2) Higher expenses: higher utility costs and wages, partially offset by lower advertising costs, R&M costs and realty taxes.
(3) Lower expenses: lower R&M costs, partially offset by higher realty taxes and insurance costs.
(4) Higher expenses: higher insurance costs, R&M costs and utility costs, partially offset by lower wages.
(5) Higher expenses: higher R&M costs, utility costs and wages, partially offset by lower realty taxes.
(6) The Saskatoon property was disposed of on August 15, 2018.
(7) In € Thousands, €926 and €859 for the three months ended December 31, 2018 and December 31, 2017, respectively.
(8) Higher expenses: higher R&M costs and wages, partially offset by lower on-site costs.
(9) Lower expenses: lower R&M costs, partially offset by higher utility costs.
CAPREIT
2018 ANNUAL REPORT
49
MANAGEMENT’S DISCUSSION AND ANALYSIS
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,
Income Statement
Operating Revenues
Net Income
Distributions
Distributions Declared
Distributions per Unit
Balance Sheet
Investment Properties
Total Assets
Mortgages Payable
Bank Indebtedness
2018
2017
2016
$
688,585
$ 1,217,671
$
$
187,848
1.313
$ 10,473,544
$ 10,842,263
$ 3,728,333
567,365
$
$
$
$
$
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
$
Accounting Policies and Critical Accounting Estimates, Assumptions and Judgements
Impact of accounting standards effective January 1, 2018 on
CAPREIT’s current year financial statements:
IFRS 9, Financial Instruments (“IFRS 9”) The revised IFRS 9
incorporates requirements for the classification and measurement
of financial liabilities over the existing derecognition requirements of
IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9
also introduces new requirements for classifying and measuring
financial assets; specifically, investments in equity instruments can
be designated as “fair value through other comprehensive income”
with only dividends being recognized in profit or loss. IFRS 9 was
further amended in November 2013 to: (i) include guidance on
hedge accounting; (ii) allow entities to early adopt the requirement
to recognize changes in fair value attributable to changes in an
entity’s own credit risk, from financial liabilities designated under
the fair value option, in OCI (without having to adopt the remainder
of IFRS 9); and (iii) remove the previous mandatory effective date of
January 1, 2015.
The final amendment of IFRS 9 as at July 2014 included: (i) a third
measurement category for financial assets – fair value through other
comprehensive income; (ii) a single, forward-looking “expected loss”
impairment model; and (iii) a mandatory effective date for IFRS 9
for annual periods beginning on or after January 1, 2018. CAPREIT
adopted the new standard 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 $8.9 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.
IFRS 15, Revenue from Contracts with Customers CAPREIT had
adopted IFRS 15, Revenue from Contracts with Customers, from
January 1, 2018, which has replaced many reporting standards
commonly used in the real estate industry, including IAS 18, Revenue,
IAS 11, Construction Contracts, and IFRIC 15, ‘Agreements for the
Construction of Real Estate’. The new standard provides a single,
comprehensive revenue recognition model. While early adoption was
permitted for IFRS reporters, this standard is effective for the interim
periods within years beginning on or after January 1, 2018. CAPREIT’s
assessment included a review of relevant contracts for the following
key areas, which CAPREIT believes are within the scope of IFRS 15
including, but not limited to, property and asset management fees.
CAPREIT has assessed the impact of IFRS 15 and has concluded
that the pattern of revenue recognition remained unchanged upon
adoption of the standard.
IAS 40, Investment Property This amendment clarifies when assets
are transferred to, or from, investment properties. This amendment
came into effect on January 1, 2018. CAPREIT has assessed the
impact of this amendment and has concluded that there is no impact
upon adoption of the standard.
50
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 2018:
IFRS 16, Leases This new standard on leases supersedes IAS 17,
Leases, and related interpretations. IFRS 16 sets out the principles
for the recognition, measurement, presentation and disclosure of
leases for both parties to a contract; i.e., the customer (“lessee”) and
the supplier (“lessor”). From a lessee perspective, IFRS 16 eliminates
the classification of leases as either operating leases or finance
leases as required by IAS 17 and, instead, introduces a single lessee
accounting model. IFRS 16 is effective beginning on or after 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 Trust is in the process of evaluating the impact of
IFRS 16 on its consolidated financial statements. The majority of the
Trust’s lease obligations relate to ground leases. Currently, the lease
payments relating to these ground leases are treated as expenses.
The new standard will require recognition of a right-of-use asset with
a corresponding lease obligation liability and shall be recorded along
with the corresponding financing costs. The Trust has elected to apply
the modified retrospective approach.
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 has assessed the impact of IFRIC 23 and
does not expect a significant impact to its consolidated financial
statements.
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
accruals, the amortization of certain assets, accounting for deferred
income taxes and Unit-based compensation liabilities. Changes to
estimates and assumptions may affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the date of the audited consolidated annual financial statements and
the reported amounts of revenue and expenses during the reporting
period. Actual results could also differ from those estimates under
different assumptions and conditions.
Management believes the nature of the business and CAPREIT’s
portfolio is defensive against economic downturns and, therefore, the
current economic conditions have not had as significant an impact on
CAPREIT’s critical accounting estimates as may have been realized
in other industries. However, 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 unusual economic conditions.
Estimates deemed by Management to be more significant, due to
subjectivity, are as follows:
Valuation of Investment Properties Investment properties are
measured at fair value as at the consolidated balance sheet dates.
Any changes in 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, includ-
ing an estimate of future lease payments. Management’s internal
assess ments of fair value are based on a combination of internal fi n-
ancial information and external market data, including components of
net operating income and capitalization rates, all of which are obtained
from an independent appraiser.
Management’s internal valuations and the independent appraisals
are both subject to significant judgement, estimates and assumptions
about market conditions in effect as at the consolidated balance sheet
dates. See note 6 to the accompanying audited consolidated annual
financial statements for a detailed discussion of valuation methods
and the significant assumptions and estimates used.
Valuation of Unit-based Compensation Liabilities The fair value of
Unit-based compensation liabilities is based on assumptions of future
events and involves significant estimates. The basis of valuation
for CAPREIT’s Unit-based compensation liabilities, such as market
assumptions, estimates and valuation methodology, are set out in
note 12 to the accompanying audited consolidated annual financial
statements; however, the fair values as at the reporting date may differ
materially from how they are ultimately recognized if there is volatility
in Trust Unit prices, interest rates or other key assumptions in future
years.
CAPREIT
2018 ANNUAL REPORT
51
MANAGEMENT’S DISCUSSION AND ANALYSIS
Valuation of Derivative Financial Instruments The fair value of a
derivative financial instrument is based on assumptions of future
events and involves significant estimates. The basis of valuation
for CAPREIT’s derivatives is set out in note 15 to the accompanying
audited consolidated annual financial statements; however, the fair
values of derivatives reported may differ from how they are ultimately
recognized if there is volatility in interest rates in future years.
Investment in IRES CAPREIT has determined that its investment in
IRES should be accounted for using the equity method of account-
ing 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’ investment manager and the control exerted over IRES by its
independent Board of Directors and CEO. Management will reassess
this conclusion should its ownership interest or terms of the asset
management agreement change.
As at December 31, 2018, CAPREIT’s executive officers, 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, 2018.
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 estimates including those used by the indepen dent
appraisers 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.
Interest Classification in the Consolidated Statements of Cash Flows
IFRS permits the classification of interest paid as operating cash
flows because they enter into the determination of profit or loss,
or alternatively as financing cash flows because they are costs of
obtaining financial resources. CAPREIT has applied its judgement
and concluded that debt financing, which is used to provide leveraged
returns to its Unitholders, is an integral part of its capital structure
and not directly associated with its principal revenue-producing
activities. Therefore interest paid is classified as a financing activity
in CAPREIT’s consolidated statements of cash flows.
Controls and Procedures
Disclosure Controls and Procedures
CAPREIT’s disclosure controls and procedures are designed to provide
reasonable assurance that information required to be disclosed is
recorded, processed, summarized and reported within the time
periods specified under Canadian securities laws, and include controls
and procedures designed to ensure information is accumulated and
communicated to Management, including the executive officers, to
allow timely decisions regarding required disclosure.
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, 2018, CAPREIT’s executive officers, 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, 2018.
CAPREIT did not make any changes to the design of internal
controls over financial reporting in 2018 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.
52
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 and a
secondary appraiser. 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 a 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.
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.
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 48.2% of the overall portfolio (by number of suites and sites)
in Ontario (30.4% in the GTA), making CAPREIT’s performance
particularly sensitive to economic conditions in and changes
affecting Ontario and, in particular, the GTA.
CAPREIT’s investment properties generate income through rental
payments made by residents. Residential tenant leases are relatively
short, exposing CAPREIT to market rental-rate volatility. Upon the
expiry of any lease, there can be no assurance that such lease will
be renewed or the resident replaced. The terms of any subsequent
lease may be less favourable to CAPREIT than the existing lease.
Renewal rates may be subject to restrictions on increases to the then
current rent (see Government Regulations in this section). As well,
unlike commercial leases, which are generally “net” leases and allow
a landlord to recover expenditures, residential leases are generally
“gross” leases (with the exception of sub-metering of certain utilities
at some properties) under which the landlord is not able to pass on
costs to residents. Moreover, there is no assurance that occupancy
levels achieved to date at the properties will continue to be achieved
and/or that occupancy levels expected in the future will be achieved.
Any one, or a combination, of these factors may adversely affect the
cash available to or the financial position of CAPREIT.
CAPREIT
2018 ANNUAL REPORT
53
MANAGEMENT’S DISCUSSION AND ANALYSIS
Energy Costs As a significant part of CAPREIT’s operating expenses
is 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 its Units. The impact of such fluctuations
could be exacerbated if 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 increase 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
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 their severity,
these events could cause threats to the safety of CAPREIT’s tenants
and significant damage to CAPREIT’s properties and interruptions
to CAPREIT’s normal operations. 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 could 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
expectations 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 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.
54
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 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 market-
place, there are a limited number of lenders from which CAPREIT can
reasonably expect to borrow, and the number of lenders currently
participating in the CMHC-insured mortgage market is even smaller.
Consequently, it is possible that 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 tax under Part XII.2 of the Income Tax Act (“Tax Act”).
The payment of Part XII.2 tax by CAPREIT may have adverse income
tax consequences for certain of CAPREIT’s Unitholders, including
non-resident persons and trusts governed by registered retirement
savings plans, registered disability savings plans, deferred profit-
sharing plans, registered retirement income funds, tax-free savings
accounts and registered education savings plans (“designated
savings plans”), which acquired an interest in CAPREIT directly or
indirectly from another CAPREIT Unitholder. If CAPREIT ceases to
qualify as a “mutual fund trust” or “registered investment” under the
Tax Act and CAPREIT Units cease to be listed on a designated stock
exchange, CAPREIT Units will cease to be qualified investments for
trusts governed by designated savings plans. CAPREIT will endeavour
to ensure CAPREIT Units continue to be qualified investments for
trusts governed by the designated savings plans; however, there can
be no assurance that this will be so. The Tax Act imposes penalties
for the acquisition or holding of non-qualified investments by such
trusts. Unitholders should consult their own tax advisors in this regard,
including as to whether CAPREIT Units are “prohibited investments”
for registered 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;
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;
ii.
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
Investments in the trust are, at any time in the taxation year, listed
or traded on a stock exchange or other public market.
v.
CAPREIT
2018 ANNUAL REPORT
55
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 restructur-
ing, 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 qual-
ify for the REIT Exception. If applicable, the SIFT Rules may have a
material adverse effect on Unitholders’ returns.
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 imposes 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 the change 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 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 various 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 the 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 an 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.
56
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Unitholder Liability Recourse for any liability of CAPREIT is limited
to the assets of CAPREIT. The DOT provides that no Unitholder,
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,
Special Unitholder or annuitant could be successfully challenged on
jurisdictional or other grounds.
Liquidity and Price Fluctuation of Units CAPREIT is an unincorporated
“open-ended” investment trust and its Units are listed on the TSX.
There can be no assurance that an active trading market in the Units
will be sustained.
A publicly traded real estate investment trust will not necessarily
trade at values determined solely by reference to the underlying
value of its real estate assets. The prices at which Units will trade
cannot be predicted. The market price of the Units could be subject
to significant fluctuations in response to variations in quarterly
operating results, distributions and other factors beyond the control
of CAPREIT. One of the factors that may influence the market price
of the Units is the annual yield on the Units. Accordingly, an increase
in market interest rates may lead purchasers of Units to demand a
higher annual yield, which could adversely affect the market price
of the Units. In addition, the securities markets have experienced
significant price and volume fluctuations from time to time in recent
years that often have been unrelated or disproportionate to the
operating performance of particular issuers. These broad fluctuations
may adversely affect the market price of the Units. Accordingly, the
Units may trade at a premium or a discount to the value of CAPREIT’s
underlying assets.
In addition, changes in CAPREIT’s creditworthiness or perceived
creditworthiness may affect the market price or value and/or 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 Unit-
holders’ approval. Unitholders have no pre-emptive right in connection
with any 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 such
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 could
be significant. In addition, the composition of the cash distributions
for tax purposes may change over time and could 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
and general economic conditions. 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.
CAPREIT
2018 ANNUAL REPORT
57
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 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
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.
Global economic uncertainty is increasing due to events such
as Brexit as well as increasingly protectionist trade policies around
the world, which could potentially impact Canadian trade and lead to
impact on the Canadian economy at large. This could have an impact
on employment in the markets in which CAPREIT operates and in
turn have an adverse effect on CAPREIT.
Competition for Residents The real estate business is competitive.
Numerous other developers, managers and owners of properties
compete with CAPREIT in seeking residents. Competition for
residents also comes from opportunities for individual home
ownership, including condominiums, which can be particularly
attractive when home mortgage loans are available at relatively low
interest rates. The existence of competing developers, managers
and owners and competition for CAPREIT’s residents could have an
adverse effect on CAPREIT’s ability to lease suites in its properties and
on the rents charged, and may increase leasing and marketing costs
and refurbishing costs necessary to lease and release suites, all of
which could adversely affect CAPREIT’s revenues and, consequently,
its ability to meet its obligations and pay distributions. For example,
increased condominium construction in the GTA could impact the
rental market and affect residential rental fundamentals. In addition,
any increase in the supply of available rental accommodation in the
markets in which CAPREIT operates or may operate could have an
adverse effect on CAPREIT.
Furthermore, low interest rates may encourage residents to
purchase condominiums or other types of housing, which could result
in a reduction in demand for rental properties. Changes in interest
rates may also have effects on vacancy rates, rent levels, refurbishing
costs and other factors affecting CAPREIT’s business and 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
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 representa-
tions 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.
Cyber Security Risk CAPREIT may be vulnerable to cyber security
incidents given its reliance on information technology systems.
Third-party vendors, such as cloud host providers and software and
application providers and consultants, may also expose CAPREIT to
cyber security incidents.
Sources of cyber security incidents include employees visiting
websites that contain malicious code, phishing attacks, social
engineering, ransomware attacks, software vulnerabilities that
provide hackers access to computers and networks, and lost or
stolen computers, laptops, iPads, handheld devices and removable
data storage media.
58
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
A cyber security incident can lead to: (a) unauthorized access
to confidential information, including proprietary and personal
information, particularly that belonging to CAPREIT and its tenants,
vendors and employees, (b) personal information being compromised
leading to identity theft, fraudulent activities and direct losses to
stakeholders, including tenants and employees, (c) destruction
or corruption of data (in particular, tenant data), (d) lost revenues,
(e) disruption to operations, including delays in processing rental
applications and rent payments and the time and attention required
by management to investigate and respond to a cyber security
incident, (f) remediation costs, including to restore or recover lost
data, (g) litigation, fines and liabilities, including third-party liabilities,
for failure to comply with applicable privacy and data protection laws
or contractual obligations, (h) regulatory investigations, (i) reputational
damage to CAPREIT and (j) increased insurance premiums.
CAPREIT has implemented a number of preventative measures and
mitigation techniques to lessen the risks of cyber security incidents.
Employees receive annual awareness training on data privacy
and protection. Access to proprietary and personal information 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). CAPREIT also has in place a disaster recovery plan and
has engaged a third party to assist in monitoring and detecting cyber
security threats. Additionally, CAPREIT maintains cyber security
insurance coverage and continues to monitor and assess the risks
surrounding collection, usage, storage, protection, and retention/
destruction practices of proprietary and personal information. These
measures, however, do not guarantee that CAPREIT’s financial results
will not be negatively impacted by such an incident.
The board of trustees and management as a whole are responsible
for CAPREIT’s cyber security strategy. All cyber security incidents are
to be reported to CAPREIT’s Privacy Officer and IT security team in
order to determine whether CAPREIT has any notification or reporting
obligations to third parties or regulatory agencies.
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
IRES Transactions
As at December 31, 2018, CAPREIT has an 18.0% share ownership
in IRES and has determined that it has significant influence over
IRES. In May and November 2018, the former CEO of CAPREIT, David
Ehrlich, exercised 11,793,333 and 716,667 IRES options, respectively,
and sold the shares issued to him by IRES to CAPREIT. The exercising
of these shares by the former CEO resulted in CAPREIT’s share
ownership in IRES increasing to 18.0% from 15.7%, prior to May 2018.
The share ownership 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.
Included in other income is $7.3 million and $6.2 million, respectively,
for the years ended December 31, 2018 and 2017 from asset manage-
ment and property management fees. Expenses related to the asset
and property management services are included in trust expenses.
For further details, see note 23 in CAPREIT’s audited consolidated
annual financial statements for the year ended December 31, 2018
contained in CAPREIT’s 2018 Annual Report.
Transactions with Key Management Personnel
CAPREIT had the following transactions with key management
personnel, the former President and Chief Executive Officer, and
trustees. In 2017, the loans outstanding to key management personnel,
the former President and Chief Executive Officer, and trustees for
indebtedness relating to the SELTIP and LTIP as at December 31,
2017 was $7.0 million. This amount is taken into con sideration when
calculating the fair value of the Unit-based compensation financial
liabilities. Key management personnel are eligible to participate in the
EUPP. In addition, certain key management personnel also participate
in the RUR, and trustees currently participate in the DUP. Pursuant
to employee contracts, key management personnel are entitled to
termination benefits that provide for payments of up to 36 months of
benefits (based on base salary, bonus and other benefits), depending
on cause.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive income
is comprised of:
($ Thousands)
For the Year Ended December 31,
Short-term employee benefits
Unit-based compensation –
grant date amortization
Unit-based compensation –
fair value remeasurement
Other benefits
Total
2018
$
3,337 $
2,683
6,020
2017
3,432
3,255
6,687
3,739
2,983
10,255
1,604
$ 12,742 $ 18,546
CAPREIT
2018 ANNUAL REPORT
59
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 would 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 AGI established by the Landlord and Tenant
Board (“the Board”) with the exception of any rents above the approved
AGI approved by the Board (as described below). 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 govern-
ment 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.
•
•
•
Commitments and Contingencies
From time to time, CAPREIT enters into commitments for fixed-price
natural gas, hydro and land lease agreements, as outlined in note 25 to
the accompanying audited consolidated annual financial statements.
CAPREIT is contingently liable under guarantees provided to certain
of CAPREIT’s lenders 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.
Subsequent Events
On January 4, 2019, CAPREIT announced that it has closed on its
previously announced issue and sale of 5,500,000 units for $45.50 per
unit for aggregate gross proceeds of $250.3 million to a syndicate of
underwriters led by RBC Capital Markets on a bought-deal basis. On
January 11, 2019, CAPREIT announced that it has closed the issuance
of an additional 825,000 units for $45.50 per unit for aggregate gross
proceeds of $37.5 million (the “Over-Allotment Offering”), pursuant to
the exercise of the over-allotment option. 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.
On February 26, 2019, CAPREIT announced that it has completed
the acquisition of a portfolio of 21 properties in six urban centres
in the Netherlands, totalling 511 residential suites, for a purchase
price of €98.0 million. The acquisition was funded by CAPREIT’s
Acquisition and Operating Facility.
On February 26, 2019, CAPREIT announced that its Board of
Trustees had approved a 3.8% increase in monthly cash distributions
to $0.1150 per Unit, or $1.38 per Unit on an annualized basis. The
increase is effective with the March 2019 distribution payable on
April 15, 2019 to Unitholders of record as at March 29, 2019.
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 Net AMR while stabilizing
average occupancies in the range of 97% to 99% 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.
60
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS CAPREIT is currently assessing the above proposed changes to
utilize it for alternative forms of financing for development opportunities.
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.
Third, Management directs its efforts on its building infrastructure
improvement programs to upgrade properties across the portfolio and
to reposition it 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.
First, Management maintains a focus on maximizing occupancy
and Net AMR in accordance with local conditions in each of its markets.
Since its inception in May 1997, CAPREIT’s hands-on management
style focuses on resident communications and capital investment
programs aimed at increasing the long-term value of its properties.
A significant component of CAPREIT’s ability to manage annual
rental increases is determined by the AGI established by certain
provincial governments, currently Ontario and British Columbia,
under rent control legislation. In the Provinces of Ontario and British
Columbia, the guideline increase for 2019 was set at 1.8% and 2.5%,
respectively. In 2018, the rent guideline increase was 1.8% in Ontario
and 4.0% in British Columbia. 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 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 Net AMR, 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 currently indeterminable due to the
inherent uncertainties associated with the adjudication process and
the impact of tenant turnover at the affected properties.
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. In addition, it evaluates all energy-
purchasing programs to reduce or stabilize overall net energy costs.
Fourth, CAPREIT continues to prudently focus on accretive
acquisitions that meet its strategic criteria and enhance CAPREIT’s
geographic diversification. From time to time, CAPREIT may also
identify certain non-core assets for sale that do not conform to its
current portfolio composition or operating strategies, or where
Management believes their value has been maximized. Management
believes the realization and reinvestment of capital are fundamental
components of its growth strategy and demonstrate the success of its
investment programs. In addition, Management has recently entered
into and continues to prudently investigate the opportunity to enter into
joint venture relationships with other real estate entities to potentially
develop new multi-unit rental residential properties. Management has
also recently accessed the viability of development and validated the
potential to build over 10,000 net new apartments by way of infill on
vacant land to be realized over the next 10 years.
Fifth, CAPREIT continues to manage interest costs by leveraging
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
capital structure, leverage and coverage ratios and strive to further
improve its payout ratio. Management believes its successful equity
financing and mortgage refinancing programs have resulted in CAPREIT
possessing one of the strongest balance sheets in its industry, well
suited to delivering consistent, stable and secure monthly cash
distributions over the long term.
CAPREIT
2018 ANNUAL REPORT
61
MANAGEMENT’S DISCUSSION AND ANALYSIS
SECTION VII
SUPPLEMENTAL INFORMATION
Property Portfolio
Types of Property Interests
CAPREIT’s investments in its property portfolio reflect different forms
of property interests, including: Fee Simple Interests – Apartments and
Townhomes, Operating Leasehold Interests, Land Leasehold Interests
and Fee Simple Interests – MHC Land Lease Sites.
Fee Simple Interests – Apartments and Townhomes The majority of
CAPREIT’s investment in its property portfolio is in the form of fee
simple interests, representing freehold ownership of the properties
subject only to typical encumbrances, such as mortgages.
Operating Leasehold Interests CAPREIT owns leasehold interests
in 15 properties located in the Greater Toronto Area. The leases mature
between 2033 and 2037. While separate lease arrangements exist
for each property, the general structure is common across all leases:
each lease is for a 35-year term and the rent for the entire lease term
was fully paid at the time the leasehold interest was acquired. Each
lease also provides CAPREIT with a purchase option exercisable
between the 26th and 35th year of the lease term. In the case of one
of the properties, the purchase option entitles CAPREIT to acquire
a prepaid operating leasehold interest in the property maturing in
2072 (see Portfolio of Operating Leasehold Interests for additional
information).
Land Leasehold Interests CAPREIT owns leasehold interests in
three land parcels in Alberta and one land parcel in British Columbia.
CAPREIT acquired a residential building on each of the four land parcels
and pays ground rent on an annual basis for its use of the land. One
land lease matures in 2045, two mature in 2068 and another matures
in 2070. CAPREIT does not have the unilateral right to acquire the
land or extend the lease term at the maturity of the respective leases
(see Portfolio of Land Leasehold Interests for additional information).
Fee Simple Interests – MHC Land Lease Sites CAPREIT has fee simple
interests in 32 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
2018
40,069
3,815
1,051
44,935
6,593
51,528
%
77.8
7.4
2.0
87.2
12.8
100.0
2017
39,302
3,815
1,051
44,168
6,456
50,624
%
77.6
7.5
2.1
87.2
12.8
100.0
62
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio Diversification
CAPREIT’s property portfolio continues to be diversified by geography and balanced among asset types. Management’s long-term goal is to
further enhance the geographic diversification and defensive nature of its portfolio through acquisitions and development.
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
2018
%
2017
%
15,658
2,377
2,407
1,702
22,144
7,482
2,517
9,999
3,217
1,478
4,695
435
1,884
2,319
1,659
–
234
234
537
30.4
4.6
4.7
3.3
43.0
14.5
4.9
19.4
6.2
2.9
9.1
0.8
3.7
4.5
3.2
–
0.5
0.5
1.0
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
3,348
44,935
6.5
87.2
2,088
44,168
4.1
87.2
2,703
272
418
380
504
2,316
6,593
51,528
5.3
0.5
0.8
0.7
1.0
4.5
12.8
100.0
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
While maintaining a strong and strategic presence in Ontario’s vibrant 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
2018 ANNUAL REPORT
63
MANAGEMENT’S DISCUSSION AND ANALYSIS
Portfolio of Operating Leasehold Interests
CAPREIT has the option to acquire fee simple interests in 14 of the
properties, which are exercisable between the 26th and 35th years
of the respective leases. In the case of a 15th property, comprised of
327 suites, CAPREIT’s option entitles it to acquire a prepaid operating
leasehold interest in the property maturing in 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 $339 million if each of the options were
exercised in the 26th and 35th years, respectively, of the lease terms.
If CAPREIT elected to exercise any option prior to the maturity of the
lease term, CAPREIT would be entitled to receive a pro rata amount
of the prepaid lease amount based on the remaining lease term.
In addition, under certain circumstances, the option price may be
reduced by the unamortized portion of capital expenditures incurred
during the final 10 years of the lease term.
The mortgages on each of these 15 properties are scheduled
to be fully repaid by their respective option exercise dates, which
Management expects will enable CAPREIT to utilize the equity in
these properties to fully finance the option exercise prices.
OPERATING LEASEHOLD INTERESTS PORTFOLIO BY LEASE MATURITY
($ Thousands)
As at December 31, 2018 and 2017
Option Exercise Prices
Year of Lease Maturity
2033
2034
2035
2037
Total Operating Leasehold Interests Portfolio
Properties
10
2
1
2
15
Suites
3,099
161
200
355
3,815
%
81.3
4.2
5.2
9.3
100.0
26th Year
$ 202,071
19,300
14,200
47,200
$ 282,771
35th Year
$ 242,596
23,150
17,000
56,000
$ 338,746
Prepaid Lease
Amount(1)
$ 136,101
13,700
9,000
33,500
$ 192,301
(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 matures 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).
Annual Ground Rent
2018
2017
$ 1,174 $ 1,139
467
1,208
$ 2,828 $ 2,814
430
1,224
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
64
CAPREIT
2018 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management’s Responsibility for Financial Statements
The accompanying consolidated financial statements and information
included in this Annual Report have been prepared by the manage
ment of CAPREIT in accordance with International Financial Reporting
Standards, and include amounts based on management’s informed
judgements and estimates. Management is responsible for the
integrity and objectivity of these consolidated financial statements.
The financial information presented elsewhere in this Annual Report
is consistent with that in the consolidated financial statements in all
material respects.
To assist management in the discharge of these responsibilities,
management has established the necessary internal controls, based
on the criteria set forth in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in 2013. These internal controls are designed
to ensure that our financial records are reliable for preparing finan
cial statements; other financial information, transactions are properly
authorized and recorded; and assets are safeguarded.
As at December 31, 2018, our President and Chief Operating Officer
(in his capacity as Chief Executive Officer) and Chief Financial Officer
evaluated, or caused an evaluation under their direct supervision,
of the design and operating effectiveness of our internal controls
over financial reporting (as defined in National Instrument 52109,
Certification of Disclosure in Issuers’ Annual and Interim Filings)
and, based on that evaluation, determined that our internal controls
over financial reporting were appropriately designed and operating
effectively.
PricewaterhouseCoopers LLP, the independent auditors appointed
by the Unitholders, have examined the consolidated financial
statements in accordance with Canadian generally accepted auditing
standards to enable them to express to the Unitholders their opinion
on the consolidated financial statements. Their report as auditors is
set forth below.
The consolidated financial statements have been further reviewed
and approved by the Board of Trustees and its Audit Committee.
This committee meets regularly with management and the
auditors, who have full and free access to the Audit Committee.
February 26, 2019
Mark Kenney
President and
Chief Operating Officer
Scott Cryer
Chief Financial Officer
CAPREIT
2018 ANNUAL REPORT
65
Independence
We are independent of the Trust in accordance with the ethical
requirements that are relevant to our audit of the consolidated
financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
Other information
Management is responsible for the other information. The other
information comprises the Management’s Discussion and Analysis
and the information, other than the consolidated financial statements
and our auditor’s report thereon, included in the annual report.
Our opinion on the consolidated financial statements does not cover
the other information and we do not express any form of assurance
conclusion thereon.
In connection with our audit of the consolidated financial statements,
our responsibility is to read the other information identified above
and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our
knowledge obtained in the audit, or otherwise appears to be materially
misstated.
If, based on the work we have performed, we conclude that there is
a material misstatement of this other information, we are required to
report that fact. We have nothing to report in this regard.
Responsibilities of management and those
charged with governance for the consolidated
financial statements
Management is responsible for the preparation and fair presentation
of the consolidated financial statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is
responsible for assessing the Trust’s ability to continue as a going
concern, disclosing, as applicable, matters related to going concern
and using the going concern basis of accounting unless management
either intends to liquidate the Trust or to cease operations, or has no
realistic alternative but to do so.
Those charged with governance are responsible for overseeing the
Trust’s financial reporting process.
INDEPENDENT AUDITOR’S REPORT
Independent auditor’s report
To the Unitholders of Canadian Apartment Properties
Real Estate Investment Trust
Our opinion
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the financial position of
Canadian Apartment Properties Real Estate Investment Trust and its
subsidiaries (together, the Trust) as at December 31, 2018 and 2017,
and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board (IFRS).
What we have audited
The Trust’s consolidated financial statements comprise:
•
the consolidated balance sheets as at December 31, 2018 and
2017;
the consolidated statements of income and comprehensive
income for the years then ended;
the consolidated statements of unitholders’ equity for the years
then ended;
the consolidated statements of cash flows for the years then
ended; and
the notes to the consolidated financial statements, which include
a summary of significant accounting policies.
•
•
•
•
Basis for opinion
We conducted our audit in accordance with Canadian generally
accepted auditing standards. Our responsibilities under those
standards are further described in the Auditor’s responsibilities for the
audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
66
CAPREIT
2018 ANNUAL REPORT
INDEPENDENT AUDITOR’S REPORT
Auditor’s responsibilities for the audit of the
consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the
consolidated financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in
accordance with Canadian generally accepted auditing standards will
always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated
financial statements.
As part of an audit in accordance with Canadian generally accepted
auditing standards, we exercise professional judgment and maintain
professional skepticism throughout the audit. We also:
•
Identify and assess the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error,
design and perform audit procedures responsive to those risks,
and obtain audit evidence that is sufficient and appropriate to
provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting
from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit
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 Trust’s internal control.
• Evaluate the appropriateness of accounting policies used and the
reasonableness of accounting estimates and related disclosures
made by management.
• Conclude on the appropriateness of management’s use of the going
concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events
or conditions that may cast significant doubt on the Trust’s ability
to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial
statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained
up to the date of our auditor’s report. However, future events or
conditions may cause the Trust to cease to continue as a going
concern.
• Evaluate the overall presentation, structure and content of the
consolidated financial statements, including the disclosures,
and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair
presentation.
• Obtain sufficient appropriate audit evidence regarding the financial
information of the entities or business activities within the Trust to
express an opinion on the consolidated financial statements. We
are responsible for the direction, supervision and performance of
the group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding,
among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in
internal control that we identify during our audit.
We also provide those charged with governance with a statement
that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships
and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent
auditor’s report is LeeAnne Kovacs.
Chartered Professional Accountants,
Licensed Public Accountants
Toronto, Ontario
February 26, 2019
CAPREIT
2018 ANNUAL REPORT
67
Note
6
7
7
9
10
11, 12
8
18
9
11, 12
8
11
19
2018
2017
$ 10,473,544
307,375
10,780,919
35,631
25,713
61,344
$ 10,842,263
$ 3,324,381
567,365
13,336
926
26,428
3,932,436
403,952
19,469
108,427
9,875
35,261
–
16,143
593,127
$ 4,525,563
$ 2,855,701
28,846
3,432,153
$ 6,316,700
$ 10,842,263
$ 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
Consolidated Balance Sheets
(CA$ Thousands)
As at December 31,
Non-Current Assets
Investment properties
Other noncurrent assets
Current Assets
Other current assets
Cash and cash equivalents
Non-Current Liabilities
Mortgages payable
Bank indebtedness
Unitbased compensation financial liabilities
Other noncurrent liabilities
Deferred income tax liability
Current Liabilities
Mortgages payable
Unitbased 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 (“AOCL”)
Retained earnings
See accompanying notes to consolidated financial statements.
Signed on behalf of the Trustees
Harold Burke
Trustee
Michael Stein
Trustee
68
CAPREIT
2018 ANNUAL REPORT
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
Unitbased 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
Fair value adjustments of investments
Gain (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 (Loss) Income
Comprehensive Income
See accompanying notes to consolidated financial statements.
Note
2, 23
12
6
5
11
2
16
20
23
18
19
16, 19
2, 19
2018
2017
$
688,585
$
638,842
(68,488)
(181,041)
(249,529)
439,056
(39,515)
(34,672)
990,529
(2,594)
(4,976)
(840)
3,740
13,141
(135,211)
(34,489)
42,310
1,236,479
(18,808)
$ 1,217,671
$
2,659
–
–
28,530
31,189
$
$ 1,248,860
(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
$
$
$
$
CAPREIT
2018 ANNUAL REPORT
69
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Unitholders’ Equity
(CA$ Thousands)
Note
2
13
13
12,13
12,13
12,13
12,13
12,13
12
Unit
Capital
Accumulated
Other
Retained Comprehensive
Loss
Earnings
Total
$ 2,523,419
–
2,523,419
$ 2,393,472
8,858
2,402,330
$
6,515
(8,858)
(2,343)
$ 4,923,406
–
4,923,406
170,534
51,490
48,772
273
2,146
25,097
32,185
1,785
332,282
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
170,534
51,490
48,772
273
2,146
25,097
32,185
1,785
332,282
–
–
–
1,217,671
–
1,217,671
–
31,189
31,189
1,217,671
31,189
1,248,860
14
14
–
–
–
$ 2,855,701
(171,705)
(16,143)
(187,848)
$ 3,432,153
$
–
–
–
28,846
(171,705)
(16,143)
(187,848)
$ 6,316,700
Unit
Capital
Accumulated
Other
Retained Comprehensive
Loss
Earnings
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,037
51,732
7,599
2,051
13,010
5,401
1,587
82,417
Note
13
13
12,13
12,13
12,13
12,13
12
–
–
–
836,811
–
836,811
–
19,101
19,101
836,811
19,101
855,912
14
14
–
–
–
$ 2,523,419
(158,358)
(14,714)
(173,072)
$ 2,393,472
$
–
–
–
6,515
(158,358)
(14,714)
(173,072)
$ 4,923,406
Unitholders’ Equity, January 1, 2018
Change in Accounting Standard
Restated Unitholders’ Equity, January 1, 2018
Unit Capital
New Units Issued
Distribution Reinvestment Plan
Unit Option Plan
Deferred Unit Plan
RUR Plan
LongTerm Incentive Plan
Senior Executive LongTerm 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, 2018
Unitholders’ Equity, January 1, 2017
Unit Capital
New Units Issued
Distribution Reinvestment Plan
Unit Option Plan
Deferred Unit Plan
RUR Plan
LongTerm 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
See accompanying notes to consolidated financial statements.
70
CAPREIT
2018 ANNUAL REPORT
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Cash Flows
(CA$ Thousands)
For the Year Ended December 31,
CASH PROVIDED BY (USED IN):
Operating Activities
Net income
Items related to operating activities not affecting cash:
Fair value adjustments – investment properties
Fair value adjustments – exchangeable units
Fair value adjustments – investments
Loss on disposition of investment properties
(Gain) Loss on derivative financial instruments
Amortization
Unitbased compensation expenses
Straightline rent adjustment
Deferred income tax expense
Net profit from equityaccounted investments
Foreign currency translation
Net income items related to financing and investing activities
Changes in noncash operating assets and liabilities
Cash Provided by Operating Activities
Investing Activities
Acquisition of investment properties
Capital investments
Acquisition of investments
Disposition of investment properties
Change in restricted cash
Investment 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
Settlement of redemption liability
Proceeds on issuance of Units
Net cash distributions to Unitholders
Cash (Used) Provided by Financing Activities
Changes in Cash and Cash Equivalents During the Year
Effect of exchange rate changes on cash
Cash and Cash Equivalents, Beginning of the Year
Cash and Cash Equivalents, End of the Year
(1) 2017 comparative balances have been restated to conform with current year presentation.
See accompanying notes to consolidated financial statements.
Note
2
5
16
7, 19, 20
22
22
22
22
24
22
22
8
22
22
2018
2017(1)
$ 1,217,671
$
836,811
(990,529)
840
(3,740)
2,594
(13,141)
14,100
34,672
(87)
18,794
(32,634)
34,489
283,029
116,650
31,498
431,177
(482,152)
(203,784)
(25,443)
81,872
(1,045)
7,442
(623,110)
391,234
(116,877)
(103,734)
(2,412)
(3,469)
(114,271)
85,981
(16,611)
208,948
(134,929)
193,860
(273)
2,200
23,786
25,713
$
(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
23,786
–
–
23,786
$
CAPREIT
2018 ANNUAL REPORT
71
CONSOLIDATED FINANCIAL STATEMENTS
Notes to Consolidated Financial Statements
December 31, 2018 (C$ 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, 2018, CAPREIT
holds 78.0 million (December 31, 2017 – 65.5 million) ordinary shares,
representing 18.0% (December 31, 2017 – 15.7%) of the issued share
capital of IRES. Refer to note 24 for further details.
In addition, CAPREIT holds its Netherlands properties through
Netherlands 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 state-
ments in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board (“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 26, 2019.
b) Basis of presentation
These consolidated annual financial statements have been prepared
on a going concern basis, presented in Canadian dollars, which is
also CAPREIT’s functional currency, and have been prepared on an
historical cost basis except for:
i)
Investment properties and certain financial instruments, which
are stated at fair value; and
ii) Certain Unit-based compensation accounts, which are stated at
fair value.
c) Principles of consolidation
i) Subsidiaries These consolidated annual financial statements
comprise the assets and liabilities of all subsidiaries and the
results of all subsidiaries for the financial period. CAPREIT and
its subsidiaries are collectively referred to as “CAPREIT” in these
consolidated annual financial statements. Subsidiaries are all
entities over which CAPREIT has control. CAPREIT controls an
entity when CAPREIT is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to
affect those returns through its power over the entity.
Subsidiaries are fully consolidated from the date control
commences and deconsolidated from the date control ceases.
Where CAPREIT consolidates a subsidiary in which it does not have
100% ownership and where the non-controlling interest portion
contains an option, the non-controlling interest is classified as a
financial liability.
ii) Joint Arrangements CAPREIT has joint arrangements in and
joint control of a number of properties. CAPREIT has assessed
the nature of its joint arrangements and determined them to
be joint operations. Joint operations are accounted for using
the proportionate consolidation method. For joint operations,
CAPREIT recognizes its share of revenues, expenses, assets and
liabilities, which are included in their respective descriptions in
the consolidated balance sheets and consolidated statements
of income and comprehensive income. In general, CAPREIT has
recourse against all of the assets of the joint operations in the
event that CAPREIT is called on to pay liabilities in excess of its
proportionate share.
72
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All balances and effects of transactions between joint opera
tions 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 postacquisition 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 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 Standard (“IAS”) 40, Investment
Property (“IAS 40”), and has chosen the fair value model to account for
investment properties in its 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’slength 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, often 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 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 annually by qualified external appraisers. 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.
CAPREIT
2018 ANNUAL REPORT
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 was acquired.
When an acquisition does not represent a business as defined
under IFRS 3, CAPREIT classifies these properties or 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. Acquisitionrelated transaction
costs are capitalized to the property.
f) Presentation of non-current assets classified as held-for-sale
Investment properties are reclassified to assets heldforsale when
criteria set out in IFRS 5, Noncurrent Assets Held for Sale and
Discontinued Operations, are met. CAPREIT presents noncurrent
assets classified as heldforsale 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
noncurrent assets heldforsale and not discontinued operations. If
a group of assets heldforsale 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 heldforsale, 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 presented within other noncurrent
assets on the consolidated balance sheets. These items are amortized
on a straightline basis over their estimated useful lives ranging
from three to five years or, in the case of leasehold improvements,
are amortized over the shorter of the lease term and their estimated
useful lives ranging from 10 to 15 years.
h) Tenant inducements
Incentives such as cash, rentfree periods and movein allowances
may be provided to lessees to enter into a lease. These incentives
are capitalized and amortized on a straightline 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 noncurrent 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
Determination of Fair Value
For the year ended December 31, 2018
Financial assets and financial liabilities Under IFRS 9, financial assets
and financial liabilities are initially recognized at fair value and are
subsequently accounted for based 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”), amortized cost, or fair value
through other comprehensive income (“FVOCI”). Amortized cost is
determined using the effective interest method.
Classification of financial instruments The following summarizes the
type and measurement CAPREIT has applied to each of its significant
categories of financial instruments:
Type
Measurement Base
Financial assets
Cash and cash equivalents
Restricted cash
Other receivables
Investments
Amortized cost
Amortized cost
Amortized cost
Fair value through profit or loss
Financial liabilities
Mortgages payable
Bank indebtedness
Accounts payable and accrued
liabilities and other liabilities
Security deposits
Exchangeable Units
Amortized cost
Amortized cost
Amortized cost
Amortized cost
Amortized cost
74
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents and restricted cash Cash and cash equiv
alents include cash and shortterm 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.
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 noncurrent
assets. Loans and other receivables are included in other assets on the
consolidated balance sheets and are accounted for at amortized cost.
Investments 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 noncurrent. Derivatives are also categorized as
FVTPL unless designated as hedges.
Financial liabilities Such financial liabilities are recorded initially at
fair value and subsequently at amortized cost and include all liabilities
other than derivatives or liabilities, which are accounted for at fair
value.
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.
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 below.
Derivatives not designated as a hedging relationship are measured
at fair value with changes recognized directly through the consolidated
statements of income and comprehensive income within net income.
For the year ended December 31, 2017
Financial assets and financial liabilities Under IAS 39, 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, availableforsale, other liabilities or heldtomaturity.
Classification of financial instruments The following summarizes the
classification and measurement CAPREIT has elected to apply to each
of its significant categories of financial instruments:
Type
Classification
Measurement
Financial assets
Cash and cash equivalents Loans and receivables Amortized cost
Loans and receivables Amortized cost
Restricted cash
Loans and receivables Amortized cost
Other receivables
Availableforsale
Investments
Fair value
Financial liabilities
Mortgages payable
Bank indebtedness
Accounts payable and
accrued liabilities
and other liabilities
Security deposits
Exchangeable Units
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Other liabilities
Other liabilities
Other liabilities
Amortized cost
Amortized cost
Amortized cost
CAPREIT
2018 ANNUAL REPORT
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents and restricted cash Cash and cash
equivalents include cash and shortterm 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
noncurrent assets. Loans and other receivables are included in other
assets on the consolidated balance sheets and are accounted for at
amortized cost.
Available-for-sale Investments are measured at fair value at each
consolidated balance sheet date and the difference between
the fair value of the asset and its cost basis is included in other
comprehensive income (“OCI”). Differences included in accumulated
other comprehensive 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 is to be recognized.
Income on availableforsale 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 noncurrent. 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
availableforsale 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
of 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 below.
Derivatives not designated as a hedging relationship are
measured at fair value with changes 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 freestanding
derivative; and the combined instrument or contract is not measured
at fair value. These embedded derivatives are measured at fair value
with changes 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.
76
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS k) Hedging relationships
Prior to January 1, 2018 under IAS 39, 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 eurodenominated debt on CAPREIT’s consolidated
balance sheets. Any foreign currency gains or losses arising from the
eurodenominated 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
eurodenominated debt was recognized in OCI and the ineffective
portion was recognized in net income. The hedge was discontinued
in July 2017 when the eurodenominated debt was repaid.
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 noncurrent. Bank indebtedness is
recognized at amortized cost and the amortization of related financing
costs is 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). No Exchangeable Units were out
standing as of December 31, 2018.
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 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 changes in the fair
value of cash flow hedges, and derivatives. The components of AOCL
are disclosed in note 19.
p) Revenue recognition
IFRS 15 For the year ended December 31, 2018, CAPREIT has adopted
IFRS 15. The new revenue recognition standard recognizes revenue
using a uniform, fivestep model. The five steps are as follows:
1. Identify the contract(s) with the customer
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognize revenue as the performance obligations are satisfied
External asset and property management fees are recognized when
services under the agreement are performed, and spread over the
course of the year, as management services represent a series of
services that are substantially the same and have the same pattern
of transfer.
Common area maintenance recoveries are recognized over time,
as they represent a series of services that are substantially the same
and have the same pattern of transfer to commercial tenants.
For further details on the adoption of IFRS 15, see note 2(z).
CAPREIT
2018 ANNUAL REPORT
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IAS 18 and IAS 17 CAPREIT recognizes rental revenue using the
straightline method, whereby the total amount of rental revenue to
be received from all leases is accounted for on a straightline 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 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 noncurrent 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
Unitbased compensation benefits are provided to officers, trustees
and certain employees and are intended to facilitate longterm
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 Unitbased compensation plans using
the fair valuebased method, under which compensation expense is
recognized over the vesting period. The key drivers of the 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
Straightline
Straightline
Distributions
Applied to
Secured loan
Secured loan
Additional Units
Additional Units
N/A
Markto
Market until
Loan repaid
Loan repaid
Settled
Settled
Exercised
(1) For definitions of these plans refer to notes 11, 12 and 13.
(2) Vesting onethird on grant date and onethird on each of the subsequent two grant anniversary dates.
(3) Vesting of the options is subject to satisfaction of performance criteria over the annual reporting period.
t) Consolidated statements of cash flows
Cash and cash equivalents consist of cash on hand, balances
with banks and investments in money market instruments with an
original term to maturity of 90 days or less at acquisition. Investing
and financing activities that do not require the use of cash or cash
equivalents are excluded from the consolidated 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 by 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 whollyowned 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.
78
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the closing rate at the date of the balance sheet;
ii. 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
recorded in 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
Noncontrolling 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 noncontrolling 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.
z) Impact of accounting standards effective January 1, 2018 on
CAPREIT’s current year financial statements:
IFRS 9, Financial Instruments (“IFRS 9”)
The revised IFRS 9 incorporates requirements for the classification
and measurement of financial liabilities over the existing derecognition
requirements of IAS 39, Financial Instruments: Recognition and
Measure ment. 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 (“FVOCI”) with only dividends being recognized
in profit or loss. IFRS 9 was further amended in November 2013 to:
(i) include guidance on hedge accounting; (ii) allow entities to early
adopt the requirement to recognize changes in fair value attributable
to changes in an entity’s own credit risk, from financial liabilities
designated under the fair value option, in other comprehensive
income (“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 – FVOCI; (ii) a
single, forwardlooking “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 fair value through profit or loss securities, as well
as additional disclosures required by IFRS 7, “Financial Instruments –
Disclosure”, upon initial adoption of IFRS 9. CAPREIT has adopted the
new standards on the required effective date of January 1, 2018 and
has not restated comparative information. Quoted debt instruments
previously held as availableforsale financial assets with unrealized
gains and losses recorded in OCI are instead measured at fair value
through profit or loss, which will increase volatility due to unrealized
gains and losses being recorded in profit or loss, with prior period
adjustments reclassified to retained earnings.
CAPREIT
2018 ANNUAL REPORT
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IFRS 9, Financial Instruments – Impact of adoption
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition,
classification and measurement of financial assets and financial
liabilities, derecognition of financial instruments, impairment of
financial assets and hedge accounting.
Investments Quoted debt instruments previously held as available
forsale financial assets with unrealized gains and losses recorded
in OCI will, instead, be measured at fair value through net income.
CAPREIT has adopted the new standards on the required effective
date of January 1, 2018 and will not restate comparative information.
The adjustments arising from the new standard are not reflected in
the balance sheet as at December 31, 2017, but are recognized in the
opening balance sheet on January 1, 2018.
The cumulative unrealized gain of $8,858 related to fair value
through profit or loss investments, which was previously presented
as accumulated OCI, has been reclassified to retained earnings upon
adoption.
The total impact on the group’s retained earnings as at January 1,
IFRS 15, Revenue from Contracts with Customers (“IFRS 15”)
IFRS 15, Revenue from Contracts with Customers – Impact of
adoption CAPREIT has adopted IFRS 15, Revenue from Contracts with
Customers, from January 1, 2018 which has replaced many reporting
standards commonly used in the real estate industry, including IAS 18
‘Revenue’, IAS 11, ‘Construction Contracts’, and IFRIC 15, ‘Agreements
for the Construction of Real Estate’. The new standard provides a single,
comprehensive revenue recognition model. While early adoption was
permitted for IFRS reporters, this standard is effective for the interim
periods within years beginning on or after January 1, 2018. CAPREIT’s
assessment included a review of relevant contracts for the following
key areas which CAPREIT believes are within the scope of IFRS 15
including, but not limited to, 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. CAPREIT has adopted the new standard on
the required effective date on a modified retrospective basis without
restatement of prior period comparatives. Refer to note 22 for further
details.
Impact on
AOCL
Impact on
Retained Earnings
$
6,515
$ 2,393,472
aa) Future accounting changes
As at February 26, 2019, 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, 2018:
2018 is as follows:
Opening balances
January 1, 2018
Reclassify investments from
availableforsale to fair value
through profit or loss
Adjustment from adoption of
IFRS 9 on January 1, 2018
Opening adjusted balances
(8,858)
(8,858)
8,858
8,858
January 1, 2018
$
(2,343)
$ 2,402,330
IFRS 9, Financial Instruments – Accounting policies
Hedging There was no impact on hedge accounting treatment from
adoption of the new accounting standard.
Impairment of Financial Assets Under IFRS 9, there is a new expected
credit loss model, resulting in the requirement to revise impairment
methodology for two classes of financial assets:
• Debt investments carried at amortized cost
• Debt instruments carried at FVOCI
Upon assessment, CAPREIT has determined there is no material impact
regarding the above.
80
CAPREIT
2018 ANNUAL REPORT
IFRS 16, Leases This new standard on leases supersedes IAS 17,
Leases, and related interpretations. IFRS 16 sets out the principles
for the recognition, measurement, presentation and disclosure of
leases for both parties to a contract: i.e. the customer (‘lessee’) and
the supplier (‘lessor’). From a lessee perspective, IFRS 16 eliminates
the classification of leases as either operating leases or finance
leases as required by IAS 17 and, instead, introduces a single lessee
accounting model. IFRS 16 is effective beginning on or after 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 Trust is in the process of evaluating the impact of
IFRS 16 on its consolidated financial statements. The majority of the
Trust’s lease obligations relate to ground leases. Currently, the lease
payments relating to these ground leases are treated as expenses.
The new standard will require recognition of a rightofuse asset with
a corresponding lease obligation liability and shall be recorded along
with the corresponding financing costs. The Trust has elected to apply
the modified retrospective approach.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Unitbased compensation financial liabilities.
Changes to estimates and assumptions may affect the reported
amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the consolidated annual financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates under different assumptions and conditions.
The estimates deemed to be more significant, due to subjectivity
and the potential risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year, are
discussed below.
i) Valuation of investment properties
Investment properties are measured at fair value as at the
consolidated balance sheet dates. Any changes in 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 amounts they are
ultimately settled for if there is volatility between the valuation date
and settlement date.
iii) Unit-based compensation
The fair values of Unitbased compensation financial liabilities are
based on assumptions that involve significant estimates. The basis of
valuation for CAPREIT’s Unitbased 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’ 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 revenueproducing
activities. Therefore, interest paid is classified as a financing activity
in CAPREIT’s consolidated statements of cash flows.
CAPREIT
2018 ANNUAL REPORT
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Recent Investment Property Acquisitions
CAPREIT completed the following investment property acquisitions since January 1, 2018, which have contributed to the operating results
effective from their respective acquisition dates:
For the Year Ended December 31, 2018
($ Thousands)
April 24, 2018
April 30, 2018
August 7, 2018
August 15, 2018
September 27, 2018
November 13, 2018
December 3, 2018
December 5, 2018
December 5, 2018
Total
Suite or
Site Count
134
2
90
Region(s)
Swift Current, SK
Burlington, ON
Langley, BC
3 New Westminster, BC
269
Vancouver, BC
11 New Westminster, BC
The Netherlands
The Netherlands
25 New Westminster, BC
881
376
1,791
$
Total
Acquisition
Costs
5,744
2,404
34,310
2,536
103,169
3,373
253,410
93,396
6,368
$ 504,710
Assumed
Mortgage
Funding
Subsequent
Acquisition
Financing
$
$
– (3)
– (3)
21,088
– (3)
– (3)
– (3)
–
–
1,827
22,915
$
–
–
–
–
–
–
104,796 (4)
46,456 (5)
–
151,252
Interest
Rate (1)
– (3)
– (3)
2.56%
– (3)
– (3)
– (3)
1.98% (4)
1.98% (5)
2.49%
Term to
Maturity
(Years) (2)
– (3)
– (3)
8.83
– (3)
– (3)
– (3)
7.00 (4)
7.00 (5)
6.17
(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.
(4) The acquisition, comprised of 881 suites, was financed by a new nonamortizing mortgage of €67,554 ($104,796) with a term to maturity of 7.0 years with an
interest rate of 1.98% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(5) The acquisition, comprised of 376 suites, was financed by a new nonamortizing mortgage of €29,946 ($46,456) with a term to maturity of 7.0 years with an
interest rate of 1.98% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
For the Year Ended December 31, 2017
($ Thousands)
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
Suite or
Site Count
32
Region(s)
Victoria, BC
256 Montréal, QC
44 Maple Ridge, BC
The Netherlands
The Netherlands
The Netherlands
Summerside, PEI
Summerside, PEI
The Netherlands
849
54
77
16
56
540
1,924
$
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
$
$
Subsequent
Acquisition
Financing
$
2,999
–
–
147,360
7,474
11,856
–
–
75,540
$ 245,229 (8)
Interest
Rate (1)
2.66%
– (3)
1.94%
2.04% (4)
1.95% (5)
1.87% (6)
– (3)
– (3)
1.37%
Term to
Maturity
(Years) (2)
9.42
– (3)
3.33
7.00 (4)
7.00 (5)
7.00 (6)
– (3)
– (3)
5.00 (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.
(4) The acquisition, comprised of 849 suites, was financed by a new nonamortizing 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 noncontrolling interest of €600 ($889) and the balance in cash from CAPREIT’s Acquisition and
Operating Facility.
(5) The acquisition was financed by a new nonamortizing 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, was financed by a new nonamortizing mortgage of €7,951 ($11,856) with a term to maturity of 7.5 years with an interest
rate of 1.87% and the balance in cash from CAPREIT’s Acquisition and Operating Facility.
(7) The acquisition, comprised of 540 suites, was financed by a new nonamortizing 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) Total acquisition financing in 2017 amounted to $253,375, of which $8,146 related to properties acquired in 2015 with a weighted average interest rate of 2.47%
and a weighted average term to maturity of 9.9 years.
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.
82
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Dispositions
The tables below summarize the dispositions completed since January 1, 2017. These dispositions do not meet the definition of discontinued
operations under IFRS 5, Noncurrent Assets Held for Sale and Discontinued Operations.
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2018
Disposition Date
August 15, 2018
September 6, 2018
October 11, 2018
December 12, 2018
Total
Suite Count
102
162
419
217
900
Region(s)
Saskatoon, SK
Vancouver, BC
Longueuil, QC
Québec City, QC
Sale Price
10,195
70,000
35,831
24,900
140,926
$
$
Cash Proceeds
2,425
$
49,900
15,168
14,404
81,897
$
DISPOSITIONS COMPLETED DURING THE YEAR ENDED DECEMBER 31, 2017
Disposition Date
February 15, 2017
October 12, 2017
Total
Suite Count
31
50
81
Region(s)
Saskatoon, SK
Vancouver, BC
Sale Price
2,025
19,800
21,825
$
$
Cash Proceeds
575
$
16,160
16,735
$
$
Mortgage Discharged
7,476
19,948
20,564
10,224
58,212
$
$
Mortgage Discharged
1,356
3,595
4,951
$
For the years ended December 31, 2018 and 2017, a loss of $2,594 and $488, respectively, was recognized in connection with property
dispositions. The loss represents the difference between the net proceeds after transaction costs from the dispositions 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’slength 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 annually by qualified external appraisers. 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 assump
tions 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 reassessed 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 indepen
dent valuations. On a quarterly basis, market assumptions for rent
increases, capitalization and discount rates provided by the external
appraisers are used 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 assumptions (property revenue less property
operating expenses adjusted for marketbased assumptions
such as longterm vacancy rates, management fees, R&M costs,
and general and administration costs). The most significant
assumption is the capitalization rate for each specific property.
The capitalization rate is based on the actual location, size and
quality of the property, taking into account any available market
CAPREIT
2018 ANNUAL REPORT
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
data at the valuation date. Generally, an increase in stabilized NOI
will result in an increase to the fair value of an investment property.
An increase in the capitalization rate will result in a decrease to
the fair value of an investment property. The capitalization rate
magnifies the effect of a change in stabilized NOI, with a lower
capitalization rate 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 marketbased 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 risk 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 exer
cise 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 capitali
zation 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 riskadjusted discount rate (the “option dis
count 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 marketbased leasing assumptions for that specific
property as well as assumptions about renewal and new leas
ing activity. The most significant assumption is the discount rate
applied over the term of the lease. Forecasted cash flows are
reduced for contractual land lease payments and the discount
rates reflect 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, 2018 and
December 31, 2017, is presented below:
As at December 31, 2018
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, 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
Fair
Value
WA NOI /
Cash Flow (1)
Rate Type
$ 9,078,457
341,890
873,067
180,130
$ 10,473,544
3,236
2,629
4,133
3,623
Capitalization rate
Capitalization rate
Discount rate(5)
Discount rate
Fair
Value
WA NOI /
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
Max
7.19%
7.31%
6.00%
7.00%
Max
7.59%
7.50%
6.00%
6.50%
Weighted
Average
Min
2.91%
5.11%
5.50%
6.50%
4.10%
6.11%
5.57%
6.81%
Weighted
Average
Min
2.95%
4.67%
5.50%
6.35%
4.33%
6.27%
5.58%
6.43%
(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 $325,817 as at December 31,
2018 (December 31, 2017 – $230,520).
(4) The weighted average remaining lease term on Operating Leasehold Interests is 14.8 years as at December 31, 2018 (December 31, 2017 – 15.8 years).
(5) Represents the discount rate used to determine the fair value of 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, 2018 and December 31, 2017.
84
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECONCILIATION OF CARRYING AMOUNTS OF INVESTMENT PROPERTIES BY TYPE
For the Year Ended December 31, 2018
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
Fair value adjustments
Balance of Investment Properties at end of the year
Fee Simple and
MHC Land
Lease Sites
$ 7,961,816
504,710
176,404
216
35,324
(140,137)
(2,594)
884,608
$ 9,420,347
(1) Comprises tenant inducements, straightline rent and direct leasing costs.
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 dispositions of investment properties
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
(1) Comprises tenant inducements, straightline rent and direct leasing costs.
Operating
Leasehold
Interests
738,990
$
Land
Leasehold
Interests
185,750
$
–
16,909
50
–
–
–
117,118
873,067
Operating
Leasehold
Interests
627,740
–
11,279
419
–
–
–
99,552
738,990
$
$
$
–
4,797
780
–
–
–
(11,197)
180,130
Land
Leasehold
Interests
184,690
–
3,997
868
–
–
–
(3,805)
185,750
$
$
$
Total
$ 8,886,556
504,710
198,110
1,046
35,324
(140,137)
(2,594)
990,529
$ 10,473,544
Total
$ 7,642,017
470,510
154,883
1,020
12,998
(21,337)
(488)
626,953
$ 8,886,556
CAPREIT
2018 ANNUAL REPORT
85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Other Assets
As at
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)
Fair value through profit or loss Investment(5)
Investment in associate(4)
Total
Other Current Assets
Prepaid expenses
Other receivables
Restricted cash
Deposits
Total
December 31, 2018
December 31, 2017
$
$
$
$
46,151
(30,757)
15,394
74,695
1,182
34,655
181,449
307,375
6,702
9,887
8,141
10,901
35,631
$
$
$
$
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
(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 $27,395 (December 31, 2017 – $24,014).
(3) Represents deferred loan costs related to the revolving credit facilities net of accumulated amortization of $10,091 (December 31, 2017 – $9,263).
(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’ investment manager, and the control and influence exerted over IRES by its independent
Board of Directors and CEO. As at December 31, 2018, CAPREIT concluded that it continues to exert significant influence over IRES as the greater share
ownership increases the level of influence CAPREIT has over IRES. CAPREIT will continue to reassess this conclusion should its ownership interest or the
terms of the asset management agreement change. Refer to note 24 for further details.
(5) Refer to note 2 for details on change of accounting treatment due to IFRS 9 adoption.
The table below discloses CAPREIT’s ownership in IRES and IRES’ share price:
As at
IRES Investment
Share ownership (%)
Number of IRES shares
IRES share price (€)
8. Other Liabilities
As at
Other Non-Current Liabilities
Derivative liability
Redemption liability(1)
Total
Other Current Liabilities
Mortgage interest payable
Total
December 31, 2018
December 31, 2017
18.0%
78,010,000
1.35
15.7%
65,500,000
1.50
Note
16
December 31, 2018
December 31, 2017
$
$
$
$
926
–
926
9,875
9,875
$
$
$
$
14,071
6,574
20,645
9,547
9,547
(1) The noncontrolling 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. As at December 31, 2018, the option has been
exercised with settlement occurring in December 2018.
86
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Mortgages Payable
As at December 31, 2018, mortgages payable bear interest at a
weighted average effective rate of 3.05% (December 31, 2017 – 3.17%)
and mature between 2018 and 2030. The effective interest rate as at
December 31, 2018 includes 0.08% (December 31, 2017 – 0.10%) for
the amortization of the realized component of the loss on settlement
of derivative financial instruments of $32,494 included in AOCL. As
at December 31, 2018, 100.0% of CAPREIT’s mortgages payable are
financed at fixed interest rates. Investment properties at fair value of
$10,053,514 have been pledged as security as at December 31, 2018.
CAPREIT has investment properties with a fair value of $420,030 as at
December 31, 2018 that are not encumbered by mortgages and secure
only the Acquisition and Operating Facility. As at December 31, 2018,
unamortized deferred financing costs of $10,497 and fair value loss
of $1,530 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, 2018
2019
2020
2021
2022
2023
Subsequent to 2023
Deferred financing costs and fair value adjustments
Total Portfolio
As at
Represented by:
Mortgages Payable – noncurrent(1)
Mortgages Payable – current
$
Principal
Amount
403,952
334,603
449,207
503,613 (1)
443,333 (2)
1,602,592 (2)
3,737,300
(8,967)
$ 3,728,333
% of Total
Principal
10.8
9.0
12.0
13.5
11.9
42.8
100.0
December 31, 2018
December 31, 2017
$ 3,324,381
403,952
$ 3,728,333
$ 3,348,213
233,288
$ 3,581,501
(1) Included in mortgages payable as at December 31, 2018 is a $65,000 nonamortizing credit facility on two of the MHC land lease sites.
(2) Included in mortgages payable are mortgages related to the Netherlands properties, as detailed below:
As at December 31, 2018
2022
2023
Subsequent to 2023
Total
Principal Amount
€ Thousands
49,914
40,660
211,336
301,910
€
€
$ Thousands
77,931
63,482
329,867
471,280
$
$
Interest
Rate (%)
1.37
2.05
2.00
1.91
CAPREIT
2018 ANNUAL REPORT
87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Bank Indebtedness
Effective June 28, 2018, CAPREIT amended its credit agreement to
amend the “conversion date” for when the revolving facility converts
to a twoyear nonrevolving term facility to June 30, 2019.
Effective November 26, 2018, CAPREIT amended its credit
agreement to, among other things: (i) increase its Acquisition and
Operating Credit Facility by $100,000 to $640,000, (ii) amend the
aggregate amount of Euro Libor borrowings at any time to a maximum
of €200,000, and (iii) amend the tangible net worth requirement to
$2,100,000. CAPREIT also increased its Acquisition and Operating
Facility by $200,000 for three months via a Bridge Facility.
CAPREIT’s Credit Facilities include the $840,000 Acquisition and
Operating Facility and the existing $65,000 fiveyear nonrevolving
term credit facility (collectively, the “Credit Facilities”). The $65,000
fiveyear nonrevolving term credit facility bears interest at the
bankers’ acceptance rate plus 1.4% per annum (included in mortgages
payable). The Acquisition and Operating Facility matures on June 30,
2021 and 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 Credit Facilities are subject to compliance with the
various provisions of the Credit Facilities in order to fund operations,
acquisitions, capital improvements, letters of credit and other uses.
As at December 31, 2018
Facility(3)
Less:
USD LIBOR Borrowings(1)
Euro LIBOR Borrowings(2)
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
As at December 31, 2017
Facility
Less:
USD LIBOR Borrowings
Euro LIBOR Borrowings
Bank Indebtedness
Letters of Credit
Available Borrowing Capacity
Weighted Average Floating Interest Rate
Acquisition and
Operating Facility
840,000
$
(255,105)
(312,260)
–
(6,310)
266,325
1.45%
$
Acquisition and
Operating Facility
540,000
$
(234,592)
(70,744)
(141,559)
(6,313)
86,792
1.82%
$
(1) As at December 31, 2018, CAPREIT has US LIBOR borrowings of USD
$187,000 that bear the US LIBOR rate plus a margin of 1.65% per annum.
(2) CAPREIT has euro LIBOR borrowings of €200,000 included in bank
indebtedness that bears interest at the euro LIBOR rate plus a margin of
1.65% per annum, subject to a floor of 0%.
(3) Includes a $200,000 Bridge Facility in place for three months, effective
November 26, 2018.
88
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. Unit-based Compensation Financial Liabilities and Exchangeable Units
Units are issuable pursuant to CAPREIT’s Unitbased 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, 2018, the maximum number of Units issuable under all of CAPREIT’s Unitbased incentive plans is 9,500,000 Units
(December 31, 2017 – 9,500,000). The maximum number of Units available for future issuance under all Unit incentive plans as at December 31,
2018 is 887,823 Units (December 31, 2017 – 1,077,977 Units).
On April 4, 2014, the LongTerm Incentive Plan (“LTIP”), the Senior Executive LongTerm 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 remained outstanding
under the original terms of such plans. As at December 31, 2018, no further awards remained outstanding under the LTIP and SELTIP.
The Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s incentive plans and Exchangeable Units as at December 31,
2018 and 2017 are as follows:
Year Ended December 31, 2018
(Number of Units)
Units, Unit Rights and Unit Options outstanding
as at January 1, 2018
Issued, cancelled or granted during the year:
Issued or granted
Exercised or settled
Cancelled
Distributions reinvested
Units, Unit Rights and Unit Options outstanding
as at December 31, 2018
Year Ended December 31, 2017
(Number of Units)
Units, Unit Rights and Unit Options outstanding
as at January 1, 2017
Issued, cancelled or granted during the year:
Issued or granted
Exercised or settled
Cancelled
Distributions reinvested
Units, Unit Rights and Unit Options outstanding
as at December 31, 2017
UOP
DUP
RUR
SELTIP/
LTIP (1)
Exch.
Units (2)
Total
1,263,962
260,159
521,980 1,025,398
130,655 3,202,154
–
(1,263,962)
–
–
23,903
(5,924)
–
8,558
111,146
–
(58,603) (1,025,398)
–
(14,591)
–
18,188
–
135,049
(130,655) (2,484,542)
(14,591)
26,746
–
–
–
286,696
578,120
–
–
864,816
UOP
DUP
RUR
SELTIP/
LTIP (1)
Exch.
Units (2)
Total
1,488,212
285,876
718,398 1,185,398
161,311 3,839,195
–
(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
(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) Exchangeable Units are entitled to distributions equivalent to distributions on Trust Units, must be exchanged solely for Trust Units on a oneforone 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 $0 as at December 31, 2018 (December 31, 2017 –
$4,876), which approximates the closing price of the Trust Units. All Exchangeable Units have been exercised as at December 31, 2018.
The table below summarizes the change in the total Unitbased compensation financial liabilities for the years ended December 31, 2018
and 2017, including the settlement of such liabilities through the issuance of Trust Units.
As at
Total Unitbased compensation financial liabilities, beginning of the year
Unitbased compensation expenses
Settlement of Unitbased compensation awards for Trust Units(1)
Total Unitbased compensation financial liabilities, end of the year
(1) Refer to note 21(g) for further details.
$
December 31, 2018
64,560
34,373
(66,128)
32,805
$
$
December 31, 2017
60,278
25,809
(21,527)
64,560
$
CAPREIT
2018 ANNUAL REPORT
89
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Unitbased compensation financial liabilities comprise:
As at
Current
LTIP
SELTIP
DUP
RUR
UOP
Non-Current
RUR
Total Unitbased compensation financial liabilities, end of the year
December 31, 2018
December 31, 2017
$
–
–
12,695
6,774
–
19,469
13,336
32,805
$
$
$
14,039
14,620
9,703
4,874
11,426
54,662
9,898
64,560
Units or Unit-based compensation financial liabilities held by trustees, officers and other senior management
As at December 31, 2018, 1.0% (December 31, 2017 – 1.0%) of all Trust Units outstanding were held by trustees, officers and other senior
management of CAPREIT.
12. Unit-based Compensation Expenses
These costs represent Unitbased 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, 2018 and 2017, as follows:
A summary of Unit option activity for the years ended December 31,
2018 and 2017 is presented below. All Unit options are exercisable as
at December 31, 2018 and 2017.
For the Year Ended
December 31, 2018
December 31, 2017
(Number of Units)
Balance, beginning of the year
Granted
Exercised
Balance, end of the year
1,263,962
–
(1,263,962)
–
1,488,212
–
(224,250)
1,263,962
The fair value of Unit Options is determined as at the grant date
and subsequent interim and annual valuations are determined by
adjusting marketbased 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:
As at
Number of Units
Weighted average issue price
Weighted average
riskfree rate (%)
Weighted average
distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average
Unit option value
December 31, 2018
–
–
$
–
–
–
–
–
$
December 31, 2017
1,263,962
26.22
$
1.9
3.4
6.4
17.0
$
9.04
For the Year Ended
UOP
LTIP
SELTIP
DUP
RUR Plan
EUPP
Unitbased Compensation
Expenses
$
December 31, 2018
4,201
7,730
11,036
3,263
8,143
299
$
December 31, 2017
6,220
3,647
3,428
2,790
9,724
265
$
34,672
$
26,074
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.
90
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 10 years for the LTIP and
30 years in the case of the SELTIP. Participants are required to pay
interest at 10year and 30year fixed rates, respectively, based on the
Trust’s fixed borrowing rate for longterm mortgage financing, and are
required to apply cash distributions received on these Units toward
the payment of interest and the remaining instalments. In the case of
the SELTIP, following the 10th anniversary, cash distributions shall
be applied to pay interest only and any excess will be distributed to
the Participants. Participants may prepay any remaining instalments
at their discretion. The Instalment Receipts are nonrecourse 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. No further awards under the LTIP and SELTIP plans
remain outstanding as at December 31, 2018.
The fair value of LTIP and SELTIP awards is determined by using an
option pricing model that uses marketbased valuation assumptions.
The details of the Units issued under the LTIP and SELTIP are as
Year Ended December 31,
Number of Units
Balance, beginning of the year
Settled during the year
Balance, end of the year
shown below:
2018
LTIP
470,683
(470,683)
–
SELTIP
554,715
(554,715)
–
2017
LTIP
630,683
(160,000)
470,683
SELTIP
554,715
–
554,715
The details of the LTIP and SELTIP Instalment Receipts are as shown below:
Year Ended December 31,
Instalment Receipts
Balance, beginning of the year
Principal repayments during the year
Balance, end of the year
2018
2017
LTIP
3,667
(3,667)
–
$
$
SELTIP
6,822
(6,822)
–
$
$
LTIP
6,193
(2,526)
3,667
$
$
SELTIP
7,180
(358)
6,822
$
$
The Instalment Receipts are recognized as a deduction from Unit
based compensation liability. During the years ended December 31,
2018 and 2017 interest payments in the amounts of $435 and
$582, respectively, were applied to the outstanding Unitbased
compensation liability. The outstanding balance of the instalments
receivable is used in determining the fair value of the Units and the
related fair value adjustments.
The following table summarizes the marketbased rates and
assumptions as well as projections of certain inputs used in
determining the fair values using an option pricing model for LTIP
and SELTIP Units outstanding at the respective measurement dates.
LTIP
As at December 31,
Number of Units
Weighted average loan rate (%)
Weighted average issue price
Weighted average loan
balance per Unit – current
Weighted average loan
balance per Unit – at maturity
Weighted average riskfree rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit value
2018
–
–
–
–
–
–
–
–
–
–
$
$
$
$
2017
470,683
4.55
$ 14.32
$
7.50
$
6.70
1.7
3.4
0.9
13.6
$ 29.83
CAPREIT
2018 ANNUAL REPORT
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SELTIP
As at December 31,
Number of Units
Weighted average loan rate (%)
Weighted average issue price
Weighted average loan balance
per Unit – current
Weighted average loan balance
per Unit – at maturity
Weighted average riskfree rate (%)
Weighted average distribution yield (%)
Weighted average expected years
Weighted average volatility (%)
Weighted average Unit value
2018
–
–
–
–
–
–
–
–
–
–
$
$
$
$
2017
554,715
4.96
$ 17.84
$ 12.07
$
1.42
2.0
3.4
18.3
20.6
$ 26.36
c) DUP
The DUP gives the nonexecutive 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 2018 is 100% (2017 – 100%) of a trustee’s annual board
compensation of $85 for 2018 and $75 for 2017.
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 fiveyear 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:
Outstanding, beginning of the year
Granted during the year
Additional Unit distributions
Settled during the year
Outstanding, end of the year
December 31, 2018
December 31, 2017
Weighted Avg
Issue Price
24.34
$
42.78
41.75
28.65
26.31
$
Fair Value
per Unit
37.32
–
–
–
44.30
$
$
Number
of Units
260,159
23,903
8,558
(5,924)
286,696
Weighted Avg
Issue Price
23.85
$
34.32
33.70
25.03
24.34
$
Fair Value
per Unit
31.37
–
–
–
37.32
$
$
Number
of Units
285,876
24,787
10,204
(60,708)
260,159
92
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
d) RUR Plan
In 2010, CAPREIT adopted the RUR Plan as the primary plan through
which longterm incentive compensation will be awarded. The
RUR Plan was approved by the 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 fivebusiness day
weighted average closing price of the Units on the TSX prior to the
distribution date.
The fair value of the RURs represents the closing price of the Units
on the TSX on the last trading day on which the Units traded prior
to the reporting date, representing the fair value of the redemption
price.
The details of the RURs granted under the RUR Plan (including the
Distribution RURs) are as follows:
Outstanding, beginning of the year
Granted during the year
Additional Unit distributions
Settled or cancelled during the year
Outstanding, end of the year
December 31, 2018
December 31, 2017
Weighted Avg
Issue Price
27.11
$
36.35
41.49
28.01
29.23
$
Fair Value
per Unit
37.32
–
–
–
44.30
$
$
Number
of Units
521,980
111,146
18,187
(73,194)
578,119
Weighted Avg
Issue Price
24.25
$
32.02
33.46
24.33
27.11
$
Fair Value
per Unit
31.37
–
–
–
37.32
$
$
Number
of Units
718,398
161,369
29,456
(387,243)
521,980
e) EUPP
The EUPP grants all employees the right to receive an additional amount equal to 20% of the Units they acquire, paid in the form of additional
Units. This additional amount is expensed as compensation on issuance of the Units.
13. Unitholders’ Equity
All Trust Units outstanding are fully paid, have no par value and are
voting Trust Units. 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, 2018, no
Preferred Units or Special Voting 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 openended 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 Unitbased compensation plans, CAPREIT’s Trust
Units are not treated as equity instruments.
CAPREIT
2018 ANNUAL REPORT
93
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of issued and outstanding Trust Units (excluding Units, Unit Rights and Unit Options issued or outstanding under CAPREIT’s
incentive plans) is as follows:
For the Year Ended December 31,
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
SELTIP
Units outstanding, end of the year
a) New Units Issued in 2018
Ref
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
2018
136,911,892
4,910,500
130,655
1,304,098
42,950
5,924
58,603
1,263,962
470,683
554,715
145,653,982
2017
134,388,458
–
30,656
1,617,392
46,833
60,708
383,595
224,250
160,000
–
136,911,892
March 2018 (the “March 2018 Equity Offering”)
BoughtDeal (March 15, 2018)
Overallotment (March 15, 2018)
Total
Price
per Unit
Gross
Proceeds
Transaction
Costs
Net
Proceeds
Units
Issued
$
$
35.15
35.15
$
$
150,091
22,514
172,605
$
$
6,780
901
7,681
$ 143,311
21,613
$ 164,924
4,270,000
640,500
4,910,500
b) Exchangeable Units
During 2018, pursuant to the terms of the Exchangeable Units,
130,655 Exchangeable Units were exchanged for 130,655 Trust
Units. During 2017, pursuant to the terms of the Exchangeable Units,
30,656 Exchangeable Units were exchanged for 30,656 Trust 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 additional Units. The total consideration for Units
issued represents the amount of cash distributions reinvested in
additional 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.
e) Deferred Unit Plan (“DUP”)
During 2018, in accordance with the DUP, one trustee exercised
5,924 Deferred Units, which were settled for an equivalent number
of Trust Units. During 2017, in accordance with the DUP, two former
trustees exercised 60,708 Deferred Units, which were settled for an
equivalent number of Trust Units.
f) Restricted Unit Rights Plan (“RUR Plan”)
During 2018, 58,603 RUR Units were settled for an equivalent
number of Trust Units and 14,591 RUR Units were cancelled. During
2017, 387,243 RUR Units were settled, out of which 383,595 RUR
Units were settled for an equivalent number of Trust Units and the
remaining RUR Units were settled in cash.
g) Unit Option Plan (“UOP Plan”)
During 2018, 1,263,962 options were exercised and an equivalent
number of Trust Units were issued. During 2017, 224,250 options
were exercised and an equivalent number of Trust Units were issued.
h) Long-Term Incentive Plan (“LTIP”)
During 2018 and 2017, 470,683 and 160,000 Units previously issued
were settled. The remaining instalments were repaid in full in respect
of the settled Units.
i) Senior Executive Long-Term Incentive Plan (“SELTIP”)
During 2018, 554,715 Units previously issued were settled.
The remaining instalments were repaid in full in respect of the
settled Units.
94
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Distributions on Trust Units
CAPREIT paid distributions to its Unitholders in accordance with
its DOT. Distributions declared by its Board of Trustees were paid
monthly, on or about the 15th day of each month. Effective May 2018,
monthly cash distributions declared to Unitholders increased to
$0.1108 ($1.33 annually) compared to $0.1067 ($1.28 annually)
effective March 2017.
For the Year Ended December 31,
Distributions declared
on Trust Units
Distributions per Unit
2018
2017
$ 187,848 $ 173,072
1.275
$
1.313 $
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 shortterm
and variable rate nature of these instruments.
As at December 31, 2018, the fair value of CAPREIT’s mortgages
payable is estimated to be $3,646,000 (December 31, 2017 –
$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 typically based on CAPREIT’s own assumptions as there is
little, if any, related market activity.
CAPREIT’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgement and
considers factors specific to the asset or liability.
The following table presents CAPREIT’s estimates of assets
and liabilities measured at fair value on a recurring basis based on
information available to management as at December 31, 2018, 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
Derivative financial instruments – interest rate hedge
$
–
–
–
34,655 (2)
–
–
–
–
–
108 (3)
$ 9,420,347 (1)
873,067 (1)
180,130 (1)
–
–
$ 9,420,347
873,067
180,130
34,655
108
Liabilities
Derivative financial instruments – crosscurrency swap
Total
–
34,655
$
$
(1,038) (3)
(930)
–
$ 10,473,544
(1,038)
$ 10,507,269
(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 FVTPL and are measured at fair value based on the
quoted market price in an active market of the asset.
(3) The valuation of the interest rate swap and crosscurrency swap instruments is determined using widely accepted valuation techniques including discounted
cash flow analysis on the expected cash flows of the derivatives. The fair value is determined using the market standard methodology of netting the discounted
future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest
rates (forward curves) derived from observable market interest rate curves. If the total marktomarket value is positive, CAPREIT will consider a current value
adjustment to reflect the credit risk of the counterparty, and if the total marktomarket 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.
CAPREIT
2018 ANNUAL REPORT
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Although CAPREIT has determined that the majority of the inputs used
to value its derivatives fall within Level 2 of the fair value 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. As at December 31,
2018, 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.
b) Risk management
The main risks arising from CAPREIT’s financial instruments are
interest rate, liquidity, credit and foreign currency risks. CAPREIT’s
approach to managing these risks is summarized as follows:
Interest rate risk CAPREIT is subject to the risks associated with
debt financing, including the risk that mortgages and credit facilities
will not be able to be refinanced on terms as favourable as those of
the existing indebtedness. In addition, interest on CAPREIT’s bank
indebtedness is subject to floating interest rates. CAPREIT is also
subject to the risks associated with changes in interest rates or
different financing terms from the hedging derivative assumptions,
which may result in the hedging relationship being ineffective,
causing volatility in earnings.
For the years ended December 31, 2018 and 2017, 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
Crosscurrency swap(1)
Crosscurrency swap(1)
Change in interest rates
Increase (decrease) in net income
Increase (decrease) in OCI
(basis points)
+100
–100
+100
–100
+100
–100
2018
(674)
674
2,293
(2,381)
1,256
(1,262)
$
$
$
$
$
$
2017
(936)
936
–
–
7,981
572
$
$
$
$
$
$
2018
–
–
–
–
–
–
$
$
$
$
$
$
2017
–
–
2,863
(3,002)
–
–
$
$
$
$
$
$
(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, 2018, interest rate risk
has been minimized as approximately 100.0% (December 31, 2017 –
97.9%) of the mortgages payable are financed at fixed interest rates,
with maturities staggered over a number of years.
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 97.5% of CAPREIT’s mortgages
are CMHCinsured (excluding $536,281 of mortgages on the MHC),
which reduces the risk in refinancing mortgages. CAPREIT’s overall
risk in mortgage refinancings is further reduced as the unamortized
mortgage insurance premiums are transferable between approved
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
and distributions to Unitholders, and to provide future growth in its
business. As at December 31, 2018, CAPREIT had undrawn lines of
credit in the amount of $266,325 (December 31, 2017 – $86,792).
The contractual maturities and repayment obligations of CAPREIT’s
financial liabilities as at December 31, 2018 are as follows:
Mortgages payable
Bank indebtedness
Mortgage interest(1)
Bank indebtedness interest(1)
Other liabilities
Security deposits
Exchangeable Units
Distributions payable
2018(2)
403,952
–
103,233
8,214
118,302
35,261
–
16,143
685,105
$
$
$
2019–2020
783,810
567,365
172,132
4,096
926
–
–
–
$ 1,528,329
$
2021–2022
946,946
–
118,636
–
–
–
–
–
$ 1,065,582
2023 onward
$ 1,602,592
–
91,934
–
–
–
–
–
$ 1,694,526
(1) Based on current inplace interest rates for the remaining term to maturity.
(2) Estimates of the amounts as at December 31, 2018.
96
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, crosscurrency 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
marktomarket on the crosscurrency swap and foreign exchange
translation on the US LIBOR and euro LIBOR borrowings are recognized
in the consolidated statements of income.
16. Realized and Unrealized Gains and Losses on Derivative Financial Instruments
a) Contracts for which hedge accounting is being applied
(i) In June 2011, CAPREIT entered into a hedging program, which effec
tively hedged interest rates on approximately $312,000 of mortgages
maturing between September 2011 and June 2013. The maturing
mortgages have been refinanced for 10year 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 applied. The ineffective portion and the
difference between the settled amount and the marktomarket has
been recognized in net income. All contracts have been settled.
The forward interest rate derivative liability has been summa
rized as follows:
As at
Derivative liability in AOCL, beginning of the year
Amortization from AOCL to interest and other financing costs
Derivative liability in AOCL, end of the year
b) Contracts for which hedge accounting is no longer effective
(ii) 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, 2018, $358 (December 31, 2017
– $712) was amortized from AOCL to mortgage interest expense.
$
December 31, 2018
(10,547)
2,277
(8,270)
$
$
December 31, 2017
(12,833)
2,286
(10,547)
$
(iii) 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 eurodenominated
debt on CAPREIT’s consolidated balance sheet. Any foreign
currency gains/losses arising from the eurodenominated 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 ceased in
July 2017 when the eurodenominated debt was repaid.
CAPREIT
2018 ANNUAL REPORT
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(iv) As at December 31, 2018, 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
not being applied. The agreement effectively converts borrowings
on a bankers’ acceptancebased floating rate credit facility to a
fixed rate facility for a 10year term (see note 9 for further details).
The related floating rate credit facility is for a fiveyear nonrevolving
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 in July 2017. The
ineffective gain component of the derivative of $166 for the year
ended December 31, 2018 has been recorded under derivative
financial instruments on the consolidated statements of income
and comprehensive income, and the cumulative marktomarket
gain of $109 is in other noncurrent liabilities as at December 31,
2018. 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
Derivative liability, beginning of the year
Change in intrinsic value
Derivative asset (liability), end of the year
$
December 31, 2018
(57)
166
109
$
$
December 31, 2017
(2,608)
2,551
(57)
$
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 was not applied. The €40,000 interest rate
swap agreement was settled in July 2017.
(ii) In June 2017, CAPREIT entered into a crosscurrency swap to (i)
hedge a USbased loan of USD $186,436 into €163,540 effective
July 2017 and (ii) convert the variable interest rate on the USbased
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 USbased
loan was drawn from the Acquisition and Operating Facility in
July 2017. The gain on the derivative has been recorded under
gain (loss) on derivative financial instruments in the consolidated
statements of income and comprehensive income for the year
ended December 31, 2018 of $12,975 and the cumulative mark
tomarket loss of $1,035 is in other noncurrent liabilities as at
December 31, 2018.
17. Capital Management
CAPREIT defines capital as the aggregate of Unitholders’ equity,
mortgages payable, bank indebtedness, Unitbased 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, meet its repayment obligations under
its mortgages and credit facilities, and 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
“topups”, are put in place to finance the cumulative investment
in the property portfolio and ensure that the sources of financing
better reflect the longterm useful lives of the underlying investments.
Under the terms of CAPREIT’s large borrower agreement (“LBA”)
with CMHC, total indebtedness of CAPREIT is limited to the greater
of (i) 60% of gross book value determined on a fair value basis or (ii)
70% of gross book value determined on a historical basis, and may
only be increased above such limits with CMHC’s consent.
The LBA provides for, among other things: (i) certain financial
covenants and limitations on indebtedness; (ii) the posting of a
revolving letter of credit with respect to certain capital expenditures
on a portfolio rather than an individual property basis; and (iii)
crosscollateralization of mortgage loans for certain CMHCinsured
mortgage lenders.
98
CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total capital managed by CAPREIT and the results of its compliance with the key covenants are summarized as follows:
As at
Mortgages Payable
Bank Indebtedness
Unitbased Compensation Liabilities
Exchangeable Units
Unitholders’ Equity
Total Capital
Total Debt to Gross Book Value(1)
Tangible Net Worth(2)
Debt Service Coverage Ratio (times)(3)(4)
Interest Coverage Ratio (times)(3)(5)
December 31, 2018
$ 3,728,333
567,365
32,805
–
6,316,700
$ 10,645,203
December 31, 2017
$ 3,581,501
446,895
64,561
4,876
4,923,406
$ 9,021,239
Threshold
Maximum 70.00%
Minimum $2,100,000
39.37%
$ 6,349,505
43.57%
$ 4,992,842
Minimum 1.20
Minimum 1.50
1.75
3.44
1.63
3.19
(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) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ Equity and Unitbased rights and compensation liabilities
or assets, including Exchangeable Units added back. The tangible net worth requirement is $2,100,000 (2017 – $1,800,000).
(3) Based on the trailing four quarters.
(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 noncash 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. Income Taxes
For 2017 and 2018, CAPREIT is taxed as a “mutual fund trust” as
defined under the Income Tax Act (Canada) (the “Tax Act”) and con
tinues 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 specified investment flow
through (“SIFT”) rules. The Trust expects to distribute all of its taxable
income to its unitholders; accordingly, no provision for income tax has
been made. Income tax obligations relating to the distributions from
CAPREIT are with the individual unitholder.
CAPREIT has foreign subsidiaries in a number of countries with
varying statutory rates of taxation. Judgement is required in the estima
tion 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.
For 2018, 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 deferred tax expense attributable
to the Netherlands amounting to $18,794 for the year ended
December 31, 2018. On December 18, 2018, the Dutch Senate
accepted the Dutch Tax Plan 2019, including the measure to reduce
the corporate tax rate from 25% in 2019 to 23.9% in 2020 and to 20.5%
in 2021. The 20% rate for profits less than 200 thousand euros will be
reduced to 19% in 2019, to 17.5% in 2020 and to 15% in 2021. The
tax liability is determined by applying the new rates prescribed in the
new legislation and the existing income and capital gains tax rate of
25%, where applicable, to temporary differences between the carrying
amounts of investment properties and their respective tax basis. The
difference in tax and book basis is €49,411 recorded for the year ended
December 31, 2018. As at December 31, 2018 and 2017, CAPREIT has
a tax liability of $26,428 and $7,263, respectively.
CAPREIT
2018 ANNUAL REPORT
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(3)
Foreign currency translation
Other comprehensive income
AOCL balance, end of year
AOCL comprises:
Loss on derivative financial instruments
Cumulative realized loss(1)
Accumulated amortization to interest and other financing costs
Unamortized balance of loss on cash flow hedges previously settled
Loss 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(3)
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(3)
AOCL balance, end of year
2018
(2,343)
$
2017
(12,586)
$
2,659
–
–
28,530
31,189
28,846
$
3,024
630
4,957
10,490
19,101
6,515
$
December 31, 2018
December 31, 2017
$
$
(9,908)
8,991
(82)
(1,253)
(22,884)
14,614
–
36,241
3,127
–
28,846
$
$
(9,908)
8,633
(106)
(1,253)
(22,884)
12,337
11,689
7,711
3,127
(2,831)
6,515
(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 $270.
(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 10year 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 $2,269.
(3) Refer to note 2 for details on changes in accounting treatment due to IFRS 9 adoption.
20. Interest and Other Financing Costs
21. Joint Arrangements
CAPREIT’s share of the assets, liabilities, revenues, expenses and cash
flows from joint arrangement activities is summarized as follows:
Year Ended December 31,
Assets
Liabilities
Revenues
Expenses and other adjustments
Net income
Cash provided by (used in):
Operating activities
Financing activities
Investing activities
2018
2017
$ 242,141 $ 219,600
73,090
70,702
16,421
16,882
(6,938)
(6,984)
23,359
25,593
$ 10,870 $
(7,911)
(2,637)
8,943
(7,927)
(1,200)
For the Year Ended December 31,
Interest on mortgages payable(1)
Amortization of CMHC premiums and fees
Interest on bank indebtedness
and other deferred costs(2)
Interest on Exchangeable Units
Noncontrolling interest costs(3)
2018
2017
$ 112,762 $ 113,335
3,810
3,914
3,911
8,404
186
95
10,036
4,902
$ 135,211 $ 126,144
(1) Includes amortization of deferred financing costs, fair value adjustments
and OCI hedge interest of $4,381 (December 31, 2017 – $4,124).
(2) Includes amortization of deferred loan costs of $828 (December 31, 2017
– $778).
(3) Represents costs related to the noncontrolling interest of the minority
shareholders in CAPREIT’s foreign subsidiaries.
100 CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. Supplemental Cash Flow Information
a) Net income items related to investing and financing activities
Year Ended December 31,
Dividend and interest income
Interest paid on Exchangeable Units
Interest paid on mortgages payable
Interest paid on bank indebtedness
Noncash noncontrolling interest costs
Net disbursement
$
2018
2017
8,478
(186)
(107,805)
(3,147)
(4,902)
$ (116,650) $ (107,562)
7,442 $
(115)
(106,593)
(7,563)
(9,821)
b) Changes in non-cash operating assets and liabilities
Year Ended December 31,
Prepaid expenses
Tenant inducements, direct leasing
costs and other adjustments
Other receivables
Deposits
Accounts payable and other liabilities
Security deposits
Net disbursement
2018
(956) $
2017
(425)
$
8,350
(811)
(1,910)
23,733
3,092
$ 31,498 $
5,640
3,948
(1,725)
(8,931)
2,415
922
d) Capital investments
For the Year Ended December 31,
Capital investments
Change in capital investments included
in accounts payable and other liabilities
Net disbursement
2018
2017
$ (203,799) $ (160,819)
15
(2,909)
$ (203,784) $ (163,728)
e) Acquisition of investment properties
For the Year Ended December 31,
Acquired properties
Fair value adjustment of assumed debt
Assumed debt
Deposit on purchases
Contributions from noncontrolling interest
Net disbursement
f) Disposition of investment properties
For the Year Ended December 31,
Proceeds
Closing costs
Mortgages assumed by purchasers
and discharged
Net proceeds
2018
2017
$ (504,710) $ (470,510)
9
3,713
(5,431)
889
$ (482,152) $ (471,330)
(1,972)
22,915
1,399
216
2018
2017
$ 140,926 $ 21,825
(140)
(842)
(58,212)
(4,951)
$ 81,872 $ 16,734
c) Net cash distributions to Unitholders
Year Ended December 31,
Distributions declared to Unitholders
Add: Distributions payable
at beginning of year
Less: Distributions payable
2018
2017
$ (187,848) $ (173,072)
(14,714)
(14,123)
g) Issuance of Trust Units
at end of year
16,143
14,714
Less: Distributions to participants
in the DRIP
Net disbursement
51,490
51,732
$ (134,929) $ (120,749)
For the Year Ended December 31,
Issuance of Trust Units
Conversion of Exchangeable Units
2018
2017
$ 280,793 $ 30,685
to Trust Units
(5,716)
(1,037)
Settlement of Unitbased Compensation
Awards for Trust Units
Net proceeds
(66,129)
$ 208,948 $
(21,527)
8,121
CAPREIT
2018 ANNUAL REPORT 101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24. Related Party Transactions
a) IRES Transactions
As at December 31, 2018, CAPREIT has an 18.0% share ownership in
IRES and has determined that it has significant influence over IRES. In
May and November 2018, the former CEO of CAPREIT, David Ehrlich,
exercised 11,793,333 and 716,667 IRES options, respectively, and sold
the shares issued to him by IRES to CAPREIT. The exercising of these
shares by the former CEO resulted in CAPREIT’s share ownership in
IRES increasing to 18.0% from 15.7% prior to May 2018. The share
ownership is held through a whollyowned subsidiary of CAPREIT,
Irish Residential Properties Fund. See note 7 for a more detailed
description.
Included in other income for the year ended December 31, 2018 is
$7,285 (2017 – $6,173) 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, 2018 is $1,237 (December 31, 2017 – $2,911).
For further details, see note 23.
b) Transactions with Key Management Personnel
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, 2018 were nil (December 31, 2017 – $7,180). These
amounts were taken into consideration when calculating the fair value
of the Unitbased compensation financial liabilities. Key management
personnel are eligible to participate in the EUPP. In addition, certain
key management personnel also participate in the RUR and trustees
currently participate in the DUP. Pursuant to employee contracts,
key management personnel are entitled to termination benefits that
provide for payments of up to 36 months of benefits (based on base
salary, bonus and other benefits), depending on cause.
Key management personnel and trustee compensation included
in the consolidated statements of income and comprehensive income
comprises:
For the Year Ended December 31,
($ Thousands)
Shortterm employee benefits
Unitbased compensation –
grant date amortization
Unitbased compensation –
fair value remeasurement
Other benefits
Total
2018
$
3,337 $
2,683
6,020
2017
3,432
3,255
6,687
3,739
2,983
10,255
1,604
$ 12,742 $ 18,546
h) Mortgage Portfolio
The following table summarizes the movement in mortgages payable
during the period:
As at December 31,
($ Thousands)
Balance, Beginning of Period
Add:
New Borrowings on Acquisitions
Refinanced
Less:
Mortgage Principal Amortization(1)
Mortgages Matured
Mortgages Repaid on Dispositions
of Investment Properties
Noncash Adjustments:
Assumed
Foreign Currency Translation
Change in Deferred Financing Costs,
Fair Value Adjustments, Net
Balance, End of Period
2018
2017
$ 3,581,501 $ 3,492,923
178,018
213,216
253,375
211,141
(116,877)
(103,734)
(119,458)
(266,575)
(58,212)
(4,951)
22,915
12,382
3,713
12,543
(876)
(1,210)
$ 3,728,333 $ 3,581,501
(1) Includes repayment of euro LIBOR borrowing of €5,000 in 2017.
23. Revenues
In accordance with the adoption of IFRS 15, Revenue from Contracts
with Customers, Management has evaluated the lease and non
lease components of its revenue and has determined the following
allocation:
For the Year Ended December 31,
External Property Management Fee
External Asset Management Fee
Other Revenue
$
2018
2017
2,632
3,539
7,402
$ 14,664 $ 13,573
2,337 $
4,904
7,423
Please refer to note 2 for further details.
Other Income
Other Income comprises external property management fees and
external asset management fees of $7,241, equity pickup of $32,646
and other income of $2,393.
102 CAPREIT
2018 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. Commitments
Natural gas
Through the combination of fixed and variable price contracts, CAPREIT is committed as at December 31, 2018 in the aggregate amount of
$13,385 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
2019
2.50
81.1%
1.15
81.3%
$
$
2020
2.26
73.3%
1.19
73.3%
$
$
2021
1.68
61.0%
1.42
61.0%
$
$
(1) Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs.
Land Leasehold Interests
Four of the investment properties have ground leases with various expiry dates (subject to revisions at periodic intervals) between March 31,
2045 and March 31, 2070. One land lease matures in 2045, two mature in 2068 and another matures in 2070. Generally, each lease provides
for annual rent and additional rent calculated from the results of property operations. During the years ended December 31, 2018 and 2017,
total expenses under these four leases were $2,828 and $2,814, 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
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 $30,063 were outstanding as at December 31, 2018
(December 31, 2017 – $25,010).
26. Contingencies
27. 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 December 11, 2018, CAPREIT entered into an agreement
pursuant to which European Commercial Real Estate Investment
Trust (“ECREIT”) will acquire a portfolio of multiresidential properties
located in the Netherlands from CAPREIT in 2019. The transaction
will be satisfied primarily through the issuance of ECREIT units to
CAPREIT. This transaction is contingent on approval by ECREIT
unitholders and the TSX/V.
On January 4, 2019, CAPREIT announced that it has closed on its
previously announced issue and sale of 5,500,000 units for $45.50
per unit for aggregate gross proceeds of $250,250 to a syndicate of
underwriters led by RBC Capital Markets on a boughtdeal basis. On
January 11, 2019, CAPREIT announced that it has closed the issuance
of an additional 825,000 units for $45.50 per unit for aggregate gross
proceeds of $37,538 (the “OverAllotment Offering”), pursuant to
the exercise of the overallotment option. CAPREIT used the net
proceeds to partially repay the Acquisition and Operating Facility.
On February 26, 2019, CAPREIT announced that it has completed
the acquisition of a portfolio of 21 properties in six urban centres in
the Netherlands, totalling 511 residential suites, for a purchase price
of €98,000. The acquisition was funded by CAPREIT’s Acquisition and
Operating Facility.
On February 26, 2019, CAPREIT announced that its Board of
Trustees had approved a 3.8% increase in monthly cash distributions
to $0.1150 per Unit, or $1.38 per Unit on an annualized basis. The
increase is effective with the March 2019 distribution payable on
April 15, 2019 to Unitholders of record as at March 29, 2019.
CAPREIT
2018 ANNUAL REPORT 103
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2018
2017
2016
2015
2014
$
$
688,585
439,056
63.8
$ 1,217,671
289,335
$
190,124
$
65.7
54.4
$
$
2.024
1.313
142,974
51,528
50,373
$ 10,473,544
$ 6,316,700
98.9
$
$
$
$
$
$
$
$
$
$
$
$
$
$
638,842
393,258
61.6
836,811
250,474
176,024
70.3
82.7
596,831
366,947
61.5
439,413
231,808
164,413
70.9
72.9
$
$
$
$
$
533,798
324,614
60.8
345,633
200,027
146,198
73.1
84.5
1.842
1.275
135,962
50,624
49,469
8,886,556
4,923,406
98.7
$
$
1.772
1.238
130,794
48,767
47,612
$ 7,642,017
$ 4,158,149
98.6
$
$
1.692
1.207
118,220
46,790
45,635
$ 6,863,140
$ 3,659,953
97.5
34.2
3.44
3.05
5.1
38.7
3.19
3.08
5.7
44.0
3.09
3.20
6.1
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
1,883
44.30
$
1,516
37.32
$
1,182
31.37
$
950
26.84
$
839
25.13
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 (%)
Nontaxable 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.
104 CAPREIT
2018 ANNUAL REPORT
2018
CORPORATE SOCIAL
RESPONSIBILITY AND
SUSTAINABILITY
REPORT
2018 HIGHLIGHTS AND ACCOMPLISHMENTS
900+
64%
CAPREIT employees
across Canada
of employees promoted
from Individual
Contributor (Employee)
to Manager level in 2018
were female
STAKEHOLDER ENGAGEMENT INITIATIVES
RESIDENTS
COMMUNITY
• Annual resident
appreciation events
• Building newsletters
• CAPCares
• Corporate website
• National resident survey
• Social media
• Summer Palooza
• Community boards
• Corporate website
• Fundraising
• Social media
• Sponsorship events
• Volunteer work
2018
CORPORATE
SOCIAL RESPONSIBILITY
AND SUSTAINABILITY
REPORT
TABLE OF CONTENTS
106 Highlights and Accomplishments
106 Stakeholder Engagement Initiatives
108
112
Integrity in Governance
We maintain the highest standards of
corporate governance and stakeholder
engagement, including timely disclosure
and transparency in reporting.
Investing in Communities
Our success is driven by our intention
to build strong relationships with our
residents and the communities in which
we operate.
114 Our People
We attract and retain high performers
while cultivating a culture of excellence
through providing learning and develop-
ment opportunities to our employees.
119 Managing Our Operational Footprint
We optimize our operational footprint
by conserving resources and striving to
maintain tenant comfort in the
communities we serve.
122 The Future of Our ESG Stewardship
We enable and influence the integration
of environmental, social and governance
considerations into day-to-day operations
and decision-making.
106 CAPREIT
2018 ANNUAL REPORT
$130K+
49:51
$17M
11,457
MWh
raised over two years
for Rexall OneWalk
in support of cancer
research
gender split between
self-identifying women
and men at CAPREIT
invested in resource
conservation strategies
in 2018
of electricity savings
in Ontario through
Project Enlighten
ENVIRONMENT
EMPLOYEES
INVESTORS
• Environmental assessments
• Municipal conservation programs
• Participation in BOMA Canada’s
Climate Resiliency Committee
• Participation in REALpac’s
Environmental Social & Governance
Committee
• Site remediation and site monitoring
• Monthly calls with Operations
leadership group
• Quarterly meetings of Operations
• Annual General Meeting
• Corporate website
• Dedicated email account for investor
senior management
relations
• Press releases
• Quarterly conference calls
• Building tours with investors
• One-on-one meetings with
institutional investors
• Semi-annual conferences of all
Operations leadership group
• Annual national education sessions
for all employees (including core
policy and compliance)
• Annual conference of all corporate
departments
• Training and education
• Team-building and employee
engagement activities
“Town hall” meetings
•
• Employee engagement surveys
• Leadership development
programming
• Recognition programs
CAPREIT
2018 ANNUAL REPORT 107
INTEGRITY IN GOVERNANCE
WE MAINTAIN THE HIGHEST STANDARDS OF CORPORATE GOVERNANCE
AND STAKEHOLDER ENGAGEMENT, INCLUDING TIMELY DISCLOSURE AND
TRANSPARENCY IN REPORTING.
Since CAPREIT’s inception, we have kept the protection and promotion of our stakeholders’
interests top of mind through our governance policies and procedures. Our core values of
excellence, integrity and accountability are reflected in our governance framework, by which
we ensure that corporate governance procedures are followed. Our Board of Trustees prides
itself on integrity and honesty in its practices.
• The appointment and evaluation of
senior management;
• Overseeing the communications policy
of CAPREIT;
• Ensuring the integrity of CAPREIT’s
internal controls and management
information systems;
• The creation of position descriptions
for the Board and for the President and
Chief Operating Officer;
•
• The implementation of structures and
procedures to ensure the Board can
function independently of management;
Implementing a process for assess-
ing the effectiveness of the Board as a
whole, the committees of the Board and
the contribution of individual trustees;
• Reviewing the adequacy and form of
compensation of trustees and ensur-
ing it realistically reflects the respon-
sibilities and risks involved in being a
trustee; and
• Assessing the Board’s responsibilities
and performance under its mandate.
The Board approves the strategic plans of
CAPREIT (taking into account the risks and
opportunities of CAPREIT’s business) and
makes major policy decisions. It devotes
time at several meetings each year to
review major strategic initiatives to ensure
that the proposed actions are in accor-
dance with Unitholder objectives.
The Board of Trustees has delegated
certain responsibilities to four commit-
tees, each of which is comprised solely of
independent trustees:
• The Audit Committee is responsible
for the review of the consolidated financial
statements, accounting policies and report-
ing procedures of CAPREIT. In addition, it
is responsible for reviewing, on an annual
basis, the principal risks that CAPREIT
faces, and considering whether adequate
systems are in place to manage such risks
and that such systems appear effective.
It also supervises the activities of CAPREIT’s
Director, Internal Audit. All members of
the Audit Committee are required to be
“independent” as defined in National
Instrument 52-110;
THE BOARD OF TRUSTEES
The number of trustees is currently fixed
at eight. As of December 31, 2018, the
trustees were Harold Burke, Gina Cody,
David Ehrlich, Paul Harris, Jamie Schwartz,
Michael Stein, Stanley Swartzman and
Elaine Todres.
Under the Trust’s mandate, a major-
ity of the Board must be independent of
management and free from any business
or other relationship which could, or could
reasonably be perceived to, materially
interfere with a trustee’s ability to act with
a view to the best interests of the Trust
and its Unitholders. Currently, seven out
of eight Board members are independent.
In addition to assuming responsibility for
the stewardship of the Trust, the Board of
Trustees is specifically charged with:
• Providing oversight over CAPREIT’s
strategic planning process;
• The identification of the principal risks
associated with the business of CAPREIT
and the implementation of appropriate
systems to manage these risks;
108 CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY 50%
of CAPREIT’s
executive officers are
women
25%
of CAPREIT’s
Board of Trustees
are women
• The Human Resources and
Compensation Committee reviews mat-
ters relating to human resources, including
compensation of trustees and officers of
CAPREIT. All of the members of the Human
Resources and Compensation Committee
must at all times be “independent”, as
defined in NI 58-101;
• The Governance and Nominating
Committee reviews matters relating to
the governance of CAPREIT, including the
nomination of trustees. All of the mem-
bers of the Governance and Nominating
Committee must at all times be “indepen-
dent”, as defined in NI 58-101;
OUR ETHICS AND VALUES
• The Investment Committee is re-
sponsible for reviewing investment and
disposition proposals of CAPREIT, subject
to such authority as the trustees may
delegate to the officers of CAPREIT, and to
perform such other duties as the trustees
may delegate pursuant to Article 8 of the
Declaration of Trust.
Our vision is to be the premier
residential real estate landlord in
Canada, employer of choice and
investment of choice among our industry
through cultivating an ethical culture
that inspires sustainable growth.
A high standard of ethics and values is
fundamental to our company’s business
philosophy. Our beliefs, values, codes of
conduct and ethics are rooted in both the
culture and expectations of CAPREIT.
The Board carries out its responsibilities directly through the Audit Committee, Human Resources and
Compensation Committee, Governance and Nominating Committee and Investment Committee and such other committees
as it may establish. For more information about CAPREIT’s Board Committees, visit
www.snl.com/IRW/CommitteeChart/4105050.
CAPREIT
2018 ANNUAL REPORT 109
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITYBOARD OF TRUSTEESAudit CommitteeHuman Resources and Compensation CommitteeGovernance and Nominating CommitteeInvestment Committee EXECUTIVE LEADERSHIP AND SENIOR MANAGEMENT
CODE OF BUSINESS ETHICS
AND CONDUCT
CAPREIT is committed to maintaining high
standards of integrity and accountability
in conducting our business. This code of
business ethics and conduct (the “Code”)
establishes a framework of guidelines and
principles to govern and encourage ethical
and professional behaviour in conducting
our business.
The principles outlined in the Code are
intended to:
(i) establish a minimum standard of con-
duct by which all employees, trustees
and officers are expected to abide;
(ii) protect the business interests of
CAPREIT and its employees, trustees
and officers;
(iii) maintain CAPREIT’s reputation for
integrity; and
(iv) facilitate compliance by CAPREIT em-
ployees, trustees and officers with appli-
cable legal and regulatory obligations.
Specifically, the Code addresses honesty
and integrity in following the law, conflicts
of interest, workplace behaviour, confiden-
tiality, privacy and protecting CAPREIT’s
assets, whistleblower procedures, informa-
tion security, disclosure controls and inter-
nal controls. This Code applies to all trust-
ees, officers and employees of CAPREIT
and its affiliates. The guidelines set out in
this Code may be further supplemented
from time to time by specific divisional or
departmental policies.
110
CAPREIT
2018 ANNUAL REPORT
CAPREIT’S LEADERSHIP COMPETENCIES In developing
a strong and focused organization, the CAPREIT 7Cs (our seven leadership
competencies) are the values driving our journey toward sustainable growth.
Creative: We are willing to challenge
the status quo, value innovative ideas,
listen to everyone and collaborate and
share ideas across the organization.
Ambitious: Achieving high per-
formance, pushing for the best,
remaining positive and overcoming
challenges.
Proactive: Taking the initiative, over-
looking boundaries, leading teams
and acting on opportunities will culti-
vate a positive, “can do” attitude.
Results focused: Achieving results,
monitoring success, adjusting actions
and giving feedback will ensure we
are continuously improving.
Executive minded: Balancing the
short- and long-term views of our
business, maintaining our composure
when faced with challenges, building
strong teams and communicating a
clear vision are ways in which we can
be more executive minded.
Investment minded: When we
make decisions to spend or invest,
we balance the impact on short- and
long-term growth. Improving financial
returns is the goal, which we can
achieve through the use of good judge-
ment and the optimization of capital.
Thoughtful: By taking the time to value
the common good, respecting others,
winning support and earning trust, we
can maximize team effectiveness.
WHISTLEBLOWER POLICY
The purpose of the Whistleblower Policy
(the “Policy”) is to provide individuals,
including trustees, officers and employees,
with a process for disclosing complaints or
concerns regarding inaccurate or incom-
plete reporting or recording of financial
transactions (including financial statement
disclosure, theft, fraud or misrepresenta-
tion of assets), internal control violations,
organizational matters, compliance with
laws, policies and procedures, safety and
security issues, insider trading and unethi-
cal practices (including Code violations).
As part of CAPREIT’s commitment to
continuous improvement in the way we
do business, we have also made arrange-
ments with an independent service
provider, ClearView Strategic Partners Inc.
(“ClearView”), to provide employees with
a confidential and anonymous means to
communicate specific types of activities.
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY “
AS THE GLOBAL RISK LANDSCAPE CONTINUES TO EVOLVE,
CAPREIT HAS IDENTIFIED RESPONSES AND STRATEGIES
TO ADDRESS CLIMATE-RELATED FACTORS THAT COULD
AFFECT OUR CORE BUSINESS, INCLUDING PHYSICAL RISKS,
POLICY CHANGES AND ECONOMIC IMPERATIVES.
“
OPERATIONAL RISK MANAGEMENT
We recognize a growing trend in
managing and reporting on climate-
related risk and opportunities affecting
our operational performance and we
are committed to continue managing
operational risk in accordance with
high principles of risk management.
As the global risk landscape continues to
evolve and intensify, CAPREIT has identi-
fied applicable responses and strategies to
address climate-related factors that could
affect our core business, including physical
risks, policy changes and economic imper-
atives. In considering how these factors
create risk and opportunities for the man-
agement of our real estate assets, as well
as the acquisition and development of our
building assets, we preserve our reputa-
tion with our investors and stakeholders by
keeping on top of emerging issues, while
assessing long-term decision horizons.
Key Risk Management Committees
The Risk Management Committee assists
the Board in fulfilling its oversight of risk
management and governance in the fol-
lowing areas: (i) identification of risks inher-
ent in the company’s business, strategy,
capital structure and operating plans, (ii)
establishing processes, guidelines, poli-
cies and reports for monitoring risks, and
(iii) organization and performance of the
company’s enterprise risk management
(“ERM”) function. In addition, the com-
mittee assists the Audit Committee of the
Board in fulfilling its responsibility to assist
the Board in the oversight of risk assess-
ment and risk management processes.
Corporate Cause Committee
The Corporate Cause Committee research-
es and selects charitable organizations
for CAPREIT to partner with to establish
an enterprise-wide social and charitable
purpose. CAPREIT is committed to benefit-
ing local communities through various
activities and leading by example to make
a tangible difference for our residents and
the community. The committee’s primary
duties and responsibilities are to: (i) review,
evaluate and oversee the company’s enter-
prise-wide charitable giving strategy and
funding guidelines, (ii) review, evaluate and
oversee the performance of the company’s
long-term commitment to the communi-
ties it serves, and (iii) monitor donations by
providing reporting to the membership on
a scheduled basis.
Disclosure Committee
The Disclosure Committee reports to the
Board and is constituted to oversee the
company’s disclosure activities and assist
the Board in fulfilling its corporate respon-
sibilities. The committee’s purpose is to
review all public disclosure to ensure the
highest level of transparency and compli-
ance with the regulatory requirements
and best practices to which CAPREIT is
subject.
ESG Steering Committee
Launched in September 2018, the purpose
of our ESG Steering Committee is to pro-
vide leadership, and inform and enable the
integration of environmental, social and
governance factors (ESG) into CAPREIT’s
strategic objectives. The committee sup-
ports the company and the Board in fulfilling
the oversight, management and governance
of ESG risk factors in the following areas:
(i) identification of ESG factors inherent in
CAPREIT’s business, strategy, capital struc-
ture and operating plans, (ii) establishing
policies, guidelines, processes, reporting
and monitoring of ESG risk factors, and
(iii) developing guidance and organization
for the disclosure of the company’s ESG
performance to stakeholders.
FORWARD-LOOKING STATEMENT
}}
The Risk Management Committee will continue its review of
existing and new frameworks for delivering and supporting the risk
management principles outlined in the company’s Declaration of
Trust. The Risk Management Committee, which meets regularly to discuss
enterprise risks, will continue to seek out opportunities to optimize risk
management efforts.
CAPREIT
2018 ANNUAL REPORT 111
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
INVESTING IN COMMUNITIES
OUR SUCCESS IS DRIVEN BY OUR INTENTION TO BUILD STRONG
RELATIONSHIPS WITH OUR RESIDENTS AND THE COMMUNITIES IN
WHICH WE OPERATE.
Fully committed to investing in both our residents and the communities we serve, CAPREIT
places a high value on social responsibility. Established this year, the CAPREIT Corporate
Cause Committee is designed to engage the entire organization in philanthropic initiatives.
The committee is comprised of executives,
senior managers, managers, head office
employees and site staff from across the
country, including staff members from
our operations in the Netherlands. The
main purpose of this committee is to
deepen our commitment to our communi-
ties and find meaningful ways in which
CAPREIT can add social value through
its breadth and reach.
Whether we are sponsoring, volunteering
or fundraising for a third-party organization
or an initiative of our own, CAPREIT takes
a hands-on approach to giving back. We
are proud to say that we foster a culture of
philanthropy, whether the recipients of our
continued efforts are our residents or the
community at large.
CAPREIT AND ITS EMPLOYEES SUPPORTED 45+ COMMUNITY CHARITABLE INITIATIVES IN 2018:
Alberta Children’s Hospital • Bowmanville Hospital Foundation • CAPREIT Angel Project • CAPREIT Student Breakfast
Program • Children’s Foundation (Adopt-A-Family) of Guelph and Wellington • Community Connection Whitby
Covenant House • Daily Bread Food Bank • Diabetes Canada • Furniture Bank • Heart and Stroke Foundation of Canada
– Big Bike • Hearth Place Cancer Support Centre • Knightsbridge and Kings Cross Community Clean Up • Ronald
McDonald House • Room to Read • San Romanoway Revitalization Association (SRRA) • Scatcherd Scramble Charity
Second Harvest • Spring H.O.P.E. Food Drive • St. Felix Centre • Summer Palooza • Taste of Jane and Finch • Resident
appreciation BBQs across Canada • The Calgary Food Bank • The Journey Neighbourhood Centre • The Scott Mission
112
CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
1ST
CAPREIT WON TWO 2018 FRPO MAC AWARDS,
FOR COMMUNITY ENGAGEMENT AND BEST
LOBBY RENOVATION
KEY PHILANTHROPIC ENGAGEMENTS
Rexall’s OneWalk to Conquer Cancer
is CAPREIT’s most prominent charitable
cause based on funds raised. CAPREIT’s
fundraising participation is to honour Tom
Schwartz’s, our longtime CEO, lengthy
battle with prostate cancer. In 2017,
CAPREIT’s executive team considered
aligning our fundraising efforts with various
cancer organizations before deciding to
support OneWalk due to its affiliation with
The Princess Margaret Cancer Centre, a
world-leading cancer research institute.
Since then, CAPREIT has raised close to
$130,000 and is looking forward to continu-
ing its growing contribution.
For over 20 years, the Breakfast Club of
Canada has been nourishing children’s
potential by ensuring as many as possi-
ble have access to a healthy meal before
school. Providing an environment that al-
lows children’s self-esteem to flourish, the
Breakfast Club of Canada takes a broader
approach that promotes the core values of
engagement, enrichment and empower-
ment, teaming up with communities and
local partners to develop solutions adapted
to each child’s specific needs. Throughout
2018, CAPREIT helped raise significant
funds on behalf of the Breakfast Club of
Canada through employee and corporate
donations.
To help working families in need of assis-
tance, CAPREIT has over the past 15 years
formed long-term partnerships with
housing agencies across Canada to
provide well-managed, high-quality accom-
modation that would otherwise be
out of reach for many families. CAPREIT
has been a long-time partner of Interval
House, Canada’s first centre for female
survivors of intimate partner violence. As
part of the Her Home Housing Project at
Interval House, CAPREIT has offered rent-
geared-to-income housing to women who
have courageously left abuse behind and
started new lives.
RESIDENT EXPERIENCE
This year, CAPREIT engaged a national
third-party service provider to perform a
portfolio-wide resident satisfaction survey,
focused on measuring the resident expe-
rience across the country. In addition to
our proprietary survey, CAPREIT also par-
ticipated in the second annual Canadian
Multi-Res Tenant Rental Survey with
peer property management companies
to measure satisfaction and provide an
industry benchmark by which to measure
CAPREIT’s performance. Nearly 3,000
residents participated in CAPREIT’s survey,
with over 10,000 participating in the indus-
try benchmark survey. This year served as
a year of discovery, and the results will be
shared in our 2019 CSR report.
Our executive leadership team places
great emphasis on customer care and
the importance of defining our resident
experience. From social media monitoring
and engagement with our resident base
of followers, to creating personal connec-
tions and elevating service models and
technology, our Tenant Experiences Team
promotes interaction with our residents
across all channels, utilizing new, innova-
tive tools and processes to ensure an
elevated resident experience nationally.
CAPREIT has been hard at work this year
laying the foundation for a Resident Portal
to promote greater efficiency, transpar-
ency and communication with our valued
residents. The portal will allow residents
to book an elevator, make maintenance
requests, and facilitates mass communica-
tion via site staff. The second phase of this
initiative will be an online account platform
and system for residents to access their
lease and other documents. The Resident
Portal will launch in 2019.
FORWARD-LOOKING STATEMENT
}}
We will continue to maintain our community impact by
identifying locally-based partnerships and initiative opportunities
that support our neighbourhoods.
CAPREIT
2018 ANNUAL REPORT 113
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
OUR PEOPLE
WE ATTRACT AND RETAIN HIGH PERFORMERS WHILE CULTIVATING
A CULTURE OF EXCELLENCE THROUGH PROVIDING LEARNING AND
DEVELOPMENT OPPORTUNITIES TO OUR EMPLOYEES.
We take pride in hiring, training and mentoring the best people in the industry. Our people
are the backbone of our business, and that’s why CAPREIT prides itself in having one of the
strongest HR departments in the residential real estate industry. Since 2012, we have been
selected a Platinum-level Aon Best Employer in Canada for our outstanding employee
engagement. After six consecutive years of excellence, we maintain our core objectives of
attracting top talent and high performers, while providing learning and development
opportunities.
DIVERSITY BY THE NUMBERS >> AS OF DECEMBER 2018, WOMEN REPRESENT…
50%
of executive
officers
44%
of senior
management
team
50%
of participants
in LEAD Mentoring
and Management
Training Programs
64%
of employees
promoted to
management-level
positions
114
CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY BESTEMPLOYER
PLATINUM | CANADA | 2018
CAPREIT HAS MAINTAINED
PLATINUM-LEVEL AON BEST
EMPLOYER IN CANADA STATUS
FOR THE PAST SIX YEARS
As of December 2018, CAPREIT:
• Employs over 900 people
• Has maintained Platinum-Level Aon
Best Employer in Canada status six
years running
• Has employees who speak 61 different
languages
• Celebrates a 49% and 51% gender split
between self-identified women and men
• Invested over $1.1 million in annual
training, education and professional
development.
Our focus this past year has been to en-
hance our internal talent pipeline through
leadership development programs. We have
developed a new leadership competency
framework aligned to our management
philosophy and business strategy. We have
also expanded our role-based training for
property management professionals to
foster growth and development. As an orga-
nization, we feel confident that the invest-
ment we have made in these programs will
ensure we have the top talent required to
support our continued expansion.
CAPREIT is dedicated to providing em-
ployees with competitive remuneration,
generous benefits, training, educational
opportunities and career advancement.
Going above and beyond what is expected
is our way of showing our appreciation
to the talented individuals who make up
our company. Thus, we provide a compre-
hensive benefits package to our full-time
employees.
KEY EMPLOYEE PROGRAMS
Following a successful pilot launch in
August 2018, we implemented a new re-
cruitment and employee onboarding tool
called espace* Recruit for our Operations
group. This powerful new tool enhances
CAPREIT’s ability to attract and retain top
talent, an increasing priority in today’s
labour market. Process automation and
streamlining have alleviated the volume of
recruitment-related activities for our hiring
managers, allowing them to better focus
their attention on achieving performance
objectives for our properties. We will
expand our rollout of espace* Recruit to
include our corporate hiring managers in
2019 and enhance functionality through-
out the year.
In 2018, we made enhancements to our
online Learning Management System
(LMS) with customized, industry-specific
training content. We place an emphasis on
training and development for our valued
employees in order to facilitate a high-
performance culture. We also introduced
a custom training seminar on fostering an
environment of performance and innova-
tion through open communication, col-
laboration and continuous feedback.
CAPREIT’s LEAD Mentoring Program
continues to provide employees at all
levels of our organization with the ability
to develop their leadership competen-
cies and make valuable connections with
colleagues through a formal coaching
program. In this program, high-potential
WHAT DO CAPREIT EMPLOYEES
HAVE TO SAY ABOUT LEAD?
“The program challenged me
to get out of my comfort zone
and sharpen some of my
skills.” – Marc Blanchard,
Operations Manager
“The LEAD program was a safe
environment for me to face my
public speaking fears. I was
presented with the right tools to
develop into a confident speaker.”
– Robyn Labodi, Revenue Analyst
“The program helped me identify
my career goals and get to know
more about my peers in a fun,
engaging environment across
different regions and in different
contexts.” – Maria Elena Alvarez,
Training Facilitator
CAPREIT
2018 ANNUAL REPORT 115
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
EMPLOYEE BENEFITS
• Employee & Family Assistance
Program (EFAP)
• Employee Savings Program (ESP)
• Flexible benefits plan (including
health, dental, vision care,
paramedical, prescription
drugs, out-of-province and
out-of-country coverage,
emergency travel assistance,
life and accidental death and
dismemberment (AD&D)
• Paid sick leave
• Performance-based bonuses
• Personal day (paid time off)
• Professional association
reimbursement
• Referral bonuses
• Short-term and long-term
disability coverage
• Summer hours
• Tuition reimbursement
• Vacation (paid time off)
• Waiving of first and last month’s
deposit at CAPREIT properties
employees develop their management
skills by engaging in projects that cultivate
their ability to present to large groups,
build business cases, perform cost-benefit
analyses and network with subject-matter
experts across our organization.
pipeline is prepared to meet future growth
opportunities. Our investment in employ-
ees reflects our commitment to ensuring
the stability of our operations while we
pursue a strategy of continued growth and
expansion.
CAPREIT’s Building Leaders Program
focuses on executive development. The
Building Leaders Program is a burgeoning
Leadership Excellence and Development
(“LEAD”) program that cultivates the
leadership potential of high-performing
property managers. This program is essen-
tial to our objective of ensuring appropriate
succession planning within our Operations
group. Through this program, high-per-
forming managers within Operations are
provided with individually tailored coach-
ing and projects to unlock their leader-
ship potential. Particular care is given to
ensuring the alignment of future leaders
with CAPREIT’s leadership competencies
and encouraging the development of an
executive mindset.
At CAPREIT, we feel confident that these
diverse programs will ensure that our talent
EMPLOYEE RECOGNITION
CAPREIT understands that making em-
ployees feel valued is an important part
of corporate culture. Recognition matters
because it increases engagement, encour-
ages trust in leaders, enhances employee
retention and reinforces the culture of the
company. When employees feel valued,
they are happier, appreciate their leader-
ship team more and stay at the organiza-
tion for a longer period of time, making for
a stronger and more sustainable company.
CAPREIT Kudos is a peer-to-peer nomi-
nated monthly recognition program. Each
month, our Internal Communications team
receives email shout-outs from employees
who would like to nominate their col-
leagues for the efforts they have put forth
in their work, improving the overall sense
of camaraderie at CAPREIT.
Employees use CAPREIT ACES Awards
to recognize colleagues who excel in their
role, demonstrating qualities such as going
above and beyond, conscientiousness,
an exceptional work ethic and providing
exemplary service.
FORWARD-LOOKING STATEMENT
}}
As a reflection of our commitment to workplace diversity, CAPREIT
has initiated the process of developing a diversity and inclusion
road map that will be translated into a formal policy in 2019.
116
CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY 61 DIFFERENT LANGUAGES ARE SPOKEN
AMONG CAPREIT EMPLOYEES
The CAPREIT Star Award is a new
recognition program in which winners are
selected based on a strong track record
of stellar performance plus an outstanding
contribution to their portfolio over the
past year.
In honour of our co-founder, past president
and CEO, the Tom Schwartz Legacy was
established in 2018. This is a peer-nomi-
nated program for which an annual recipi-
ent will be chosen for embodying all of the
factors in CAPREIT’s leadership competen-
cy framework. The winning nominee will
be chosen by a committee comprised of
members of our senior management team.
ENVIRONMENTAL, HEALTH AND SAFETY
STANDARDS AND TRAINING
KEY POLICIES IMPLEMENTED
We are accountable for assessing and
mitigating environmental, health and
safety risks by ensuring our stakehold-
ers are kept informed of and safe from
preventable incidents.
Hazard Identification and Control Policy
This policy will allow the company to obtain
an accurate representation of the health
and safety hazards and risks affecting its
operations and personnel to assist the
organization in implementing necessary
preventative and corrective actions.
CAPREIT’s environmental, health and
safety program ensures all employees
are properly trained and understand the
potential hazards inherent in their job
functions. We monitor compliance with
applicable legislation, training, incident
investigations, and developments in health
and safety-related policies, programs and
procedures for all applicable stakeholders.
Our policies and programs, incident report-
ing process and safety culture are under a
continuous process of improvement. This
year has served as the benchmarking year
to measure the effectiveness of our latest
training courses, policies, procedures and
initiatives related to health and safety.
Incident and Injury Reporting Policy
and Procedures
This policy requires that all incidents,
near misses and injuries be reported im-
mediately to a member of management.
CAPREIT is committed to providing the
resources and support required to help
workers recover quickly and safely.
Incident and Injury Investigation Policy
This policy will allow the company to iden-
tify hazards, determine root causes and
implement preventative and/or corrective
measures to avoid or minimize the severity
of future workplace incidents, near misses
and injuries.
FORWARD-LOOKING STATEMENT
}} The EHS team plans to instill a safety culture in the organization,
where all employees are engaged and proactive about EHS.
CAPREIT
2018 ANNUAL REPORT 117
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
ADDITIONAL EHS-BASED POLICIES AND PROCEDURES IN 2018 INCLUDE:
IN REVIEW
IN DEVELOPMENT
IMPLEMENTED
• EHS Management Software
Occupational Health and
•
Safety Audit
•
Manual Material Handling
and Back Safety
• Occupational Health and Safety
• Asbestos Management Program
• Confined Space
• Contractor and Sub-Contractor
• Emergency Preparedness
• Fire Safety
• First Aid
• Hot Work
• Lock-out/Tag-out
• Occupational Health and Safety
Seminar
• Personal Protective Equipment
• Respiratory Protection
• Working Alone
• Working at Heights
• Workplace Inspections
ONGOING THIRD-PARTY DELIVERED COURSES:
IN DEVELOPMENT
IMPLEMENTED
• Emergency Preparedness
• Hazardous Substance Spill Clean-up
• Incident and Injury Investigation
• Incident and Injury Reporting
• Noise and Hearing Loss Prevention
• Sharps
• Working Alone
• Electrical Hazards
• Hazard Identification and Control
• Ladder Safety
• Office Safety
•
OHS for Ontario Supervisors
and Managers
• OHS for Ontario Workers
• PPE Basics
• WHMIS 2015
• Workplace Inspections
118
CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY MANAGING OUR OPERATIONAL FOOTPRINT
WE OPTIMIZE OUR OPERATIONAL FOOTPRINT BY CONSERVING
RESOURCES AND STRIVING TO MAINTAIN TENANT COMFORT IN THE
COMMUNITIES WE SERVE.
CAPREIT has demonstrated an ongoing commitment to sustainability through integrating
environmentally responsible strategies and practices into every aspect of operating our
business. By optimizing energy consumption at our buildings, enabling employees and
tenants with conservation and waste diversion tools, and implementing sustainability
practices across our portfolio, we seek not only to do our part in reducing adverse impacts
on the environment but also to deliver sustainable returns to our unitholders.
As an industry-recognized leader in energy,
water and waste management, CAPREIT
continuously invests in conservation
measures across our portfolio. In 2018,
we invested $17 million into improving the
operational performance of our buildings
– reducing our utility consumption and
increasing tenant comfort and satisfaction
in the process.
For existing buildings, new acquisitions
and potential developments, CAPREIT con-
tinuously audits and benchmarks proper-
ties to find opportunities to implement new
conservation projects. We partner with
industry experts to design, evaluate and
execute projects using both proven and
leading-edge technologies.
ENERGY CONSERVATION MEASURES
NATURAL GAS
ELECTRICITY
• Building Automation Systems (BAS)
• Heat Recovery Technology (HRT)
• Heated garage CO monitoring
system
• Heated Make-Up Air (MUA)
replacement
• Mid- and high-efficiency boilers
• Radiator cleaning and heat
reflectors
• Chiller replacement
• Combined Heat & Power (CHP)
• Demand Control Ventilation
• Heat recovery technology
•
In-suite smart thermostats
• LED lighting fixtures and controls
• Sub-metering
KEY PROJECT HIGHLIGHTS
Energy
Boiler Retrofits
CAPREIT implemented four major boiler
retrofit projects in Québec, including
new high-efficiency condensing boilers,
make-up air heat recovery and enhanced
building automation. These projects have
the environmental effect of reducing GHG
emissions by 830 tons, the equivalent of
removing 238 cars from our streets.
Total Investment
$2.1 million
Energy Subsidies
$1.2 million
Project Payback
GHG Reduction
4.6 years
830 tons CO2
Combined Heat & Power (CHP)
CAPREIT successfully implemented its
first CHP projects at 10 San Romanoway in
Toronto. The 260 kW system is expected to
reduce annual utility costs at the pilot site
by 25%, while generating approximately
60% of the electricity used by the building.
On the emergency power side, CHP has
CAPREIT
2018 ANNUAL REPORT 119
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
Projects featured (from left to
right): Boiler retrofit in Québec
and CHP in Ontario.
In-Suite Lighting Consumption
in Ontario (MWh)
Total Reduction in Electricity Use
per Suite Since 2010 (MWh)
)
h
W
M
(
I
I
Y
T
C
R
T
C
E
L
E
20,000
15,000
10,000
5,000
0
Up to
70%
electricity
savings in
MWh/suite
19.1%
electricity
savings in
MWh/suite
3.4%
electricity
savings in
MWh/suite
) 2.50
e
t
i
u
S
/
h
W
M
(
I
I
I
S
G
N
V
A
S
Y
T
C
R
T
C
E
L
E
L
A
T
O
T
2.00
1.50
1.00
0.50
0
Facility Electrical
Demand
Breakdown
CHP Generated
Electricity (kWh)
Grid Supplied
Electricity (kWh)
)
h
W
k
(
I
I
Y
T
C
R
T
C
E
L
E
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
J F M A M J
J A S O N D
Pre-retrofit
Post-retrofit
Sub-metered
Buildings
Non-sub-metered
Buildings
not only increased back-up power capacity,
providing tenants with more service
during an outage, but also improved
resiliency through modular power plant
design. Three additional projects are in
the pipeline for Toronto with completion
anticipated in 2020.
Project Enlighten
Project Enlighten involves the upgrade of
all in-suite light fixtures to LEDs across our
portfolio in Ontario. With over 210,000
light bulbs replaced across 103 sites in
2018, the project is estimated to provide
11,456 MWh in electricity savings at all
Ontario sites. This has the environmental
effect of taking approximately 565 cars off
the road, or planting 22,000 trees. CAPREIT
is making major headway on project com-
pletion at an additional 60 sites, estimated
for early 2019.
energy consumption. CAPREIT evaluates
the impacts on a quarterly basis to ensure
our investments provide long-term value.
Tenant Sub-metering
To encourage residents to effectively
manage the reduction of their in-suite
use, close to 11,450 units are currently
sub-metered for electricity consumption.
The reduction in annual electricity use
intensity on a per suite basis in sub-
metered buildings amounts to 19% over
a seven-year period compared to annual
electricity savings of close to 3.5% for the
overall non-sub-metered portfolio over the
same period. On lease turnovers, new
rental agreements include metered billing
payable by the resident, which acts as
a strong incentive for tenants to reduce
For 2019, our goal is to install sub-meters
in all eligible new acquisitions and in
existing buildings where the opportunity
arises for sub-meter installation.
Through the rollout of energy conservation
initiatives on a per suite basis, CAPREIT
obtained energy savings of 12% in eMWh/
suite and equivalent reductions in our
Scope 1, Scope 2 and Scope 3 GHG emis-
sions over the past four years. The reported
data are compared against adjusted
his torical years as per the GHG Protocol
conducted by a third-party consultant.
120 CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
Canada’s Clean50 offers recognition to Canada’s leaders
in sustainability for their contribution to clean capitalism.
Dan Rames, CAPREIT’s Director of Energy Management, was
recognized in 2018 for his efforts in building an internal culture
of conservation and sustainable living by delivering on retrofits,
individual unit metering and
tenant engagement programs.
Dan’s work continues to prove
that sustainability makes a lot
of “cents.”
eMWh/Suite
eMWh/Unit
Average (eMWh)
tCO2e/Suite
tCO2e/Suite
Average
Water
Consumption
Reduction
m3/Suite
Average
20.64
19.17
18.26
18.22
3.11
2.88
2.72
2.74
120.55
120.40
119.67
115.26
h
W
M
e
25.00
20.00
15.00
10.00
5.00
0.00
e
2
O
C
t
3.20
3.10
3.00
2.90
2.80
2.70
2.60
2.50
125.00
120.00
115.00
3
m
110.00
105.00
100.00
2014
2015
2016
2017
2014
2015
2016
2017
2014
2015
2016
2017
Water
Water-Efficient Fixtures
CAPREIT evaluates the installation of the
latest water-efficient fixtures available on
the market. Since 2010, the portfolio has
saved 15% in water consumption through
the installation of:
• Over 18,000 ultra-high-efficiency toilets
• Over 17,000 low-flow showerheads
and aerators
• Over 3,000 high-efficiency laundry
machines
In the past four years, CAPREIT has
managed an annual water consumption
reduction of 4% as a result of water
conservation initiatives. The reported data
are compared against adjusted historical
years as per the GHG Protocol conducted
by a third-party consultant.
Waste
Waste Diversion at Every Level
CAPREIT is committed to reducing the
volume of unnecessary waste going to
landfills. To improve waste diversion efforts
at all our sites, we have implemented
several strategies which include introduc-
ing recycling and composting solutions to
our tenants through signage and training,
installing garbage compactors to reduce
the number of bin pickups, ensuring there
are no pre-existing contaminations prior to
property acquisition, and revitalizing
existing residential properties to facilitate
greater urban density, which ultimately
reduces pollution.
FORWARD-LOOKING STATEMENT
}}
We are looking to implement additional conservation processes
to strengthen building-level decision-making, allocate capital,
uncover industry best practices and further operational
performance across the portfolio.
CAPREIT
2018 ANNUAL REPORT 121
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
THE FUTURE OF OUR
ENVIRONMENTAL, SOCIAL
AND GOVERNANCE (ESG)
STEWARDSHIP
WE ENABLE AND INFLUENCE THE INTEGRATION OF ENVIRONMENTAL,
SOCIAL AND GOVERNANCE CONSIDERATIONS INTO DAY-TO-DAY
OPERATIONS AND DECISION-MAKING.
ESG performance benchmarking and disclosure are becoming increasingly valued and
expected by both investors and industry standards across the real estate industry. As a leader
in residential housing, CAPREIT recognizes and responds to this trend by establishing the
necessary building blocks to gain a better understanding of its exposure to ESG-related risks
and opportunities. Therefore, the implementation of an ESG strategy is intended to future-
proof continued effective management of our day-to-day operations and drive sustainable,
long-term growth and profitability.
KEY ESG DELIVERABLES
CAPREIT established an ESG Committee
that represents a cross-section of
CAPREIT’s business and provides ESG-
related risk management and governance
oversight through:
•
Identification of inherent ESG risks
• Monitoring ESG risks through formal-
ized processes, guidelines, policies
and reports
• Organization and performance of ESG
reporting and disclosure requirements
We completed a Global Real Estate
Sustainability Benchmark (GRESB) pre-
assessment, which is a global assessor
of the sustainability performance of real
estate assets and their managers. Through
this exercise, CAPREIT identified eight
opportunities for immediate improvement
affecting our current operational practices.
122 CAPREIT
2018 ANNUAL REPORT
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY For more information on CAPREIT’s
2018 Corporate Social Responsibility
and Sustainability Report and other
related matters, please contact:
IR@capreit.net
Corporate Head Office
11 Church Street, Suite 401
Toronto, ON M5E 1W1
Some of the opportunities identified
include:
• Formalizing and documenting
operational performance policies
and standards
• Stakeholder engagement programs
• Supply chain initiatives
These results are being used by CAPREIT’s
ESG and CSR Committees to inform a set
of wide-ranging operational and corporate
sustainability projects. All findings have
been included in the ESG Committee’s
Action Plan for further assessment and
implementation.
In 2018, we initialized a Taskforce on
Climate Related Financial Disclosure
(TCFD) aligned climate-related risks and
opportunities assessment to begin the
process of gaining a better understand-
ing of business-relevant and climate-
related factors. A voluntary climate-related
financial risk disclosure, the TCFD offers
participants a more effective measure and
evaluation of their own risks and those of
their suppliers and competitors. As such,
the assessment process focused on re-
viewing CAPREIT’s current operations and
disclosure process, industry peer bench-
marking and identifying opportunities to
deliver on shareholder expectations.
As a hallmark of our commitment, we
engaged an award-winning risk manage-
ment and sustainability software devel-
oper to implement our Environmental
Management System (EMS) in 2019,
which will align with the Global Reporting
Initiative (GRI) and GRESB reporting
metrics. Building investor-grade data
will support the tracking, monitoring and
actioning of key performance indicators in
the areas of, among others, environmental
health and safety, operational sustainability
and risk management, along with guiding
the implementation, adoption and perfor-
mance of related policies and procedures
going forward.
FORWARD-LOOKING STATEMENT
}}
We are looking to complete a Materiality Assessment, formalize
a Corporate Social Responsibility (CSR) Committee and Corporate
Green Teams, and build in-house ESG subject matter expertise
to further strengthen the adoption of an ESG culture within CAPREIT.
CAPREIT
2018 ANNUAL REPORT 123
CORPORATE SOCIAL RESPONSIBILITY AND SUSTAINABILITY
Unitholder Information
BOARD OF TRUSTEES
OFFICERS
HEAD OFFICE
Michael Stein 2
Chairman and Chief Executive
Officer of MPI Group Inc.
Michael Stein
Chairman
Mark Kenney
President and
Chief Operating Officer
Scott Cryer
Chief Financial Officer
Jodi Lieberman
Chief Human Resources
Officer
Corinne Pruzanski
General Counsel and
Corporate Secretary
David Ehrlich
Harold Burke 1
Senior Vice President
of Taxation, DREAM
Unlimited Corp.
Stanley B. Swartzman 2, 3, 4
Corporate Director and
Lead Trustee
Dr. Elaine Todres 3, 4
Chief Executive Officer of
Todres Leadership Counsel
Dr. Gina Cody 1, 2, 3
Corporate Director
Paul Harris 1, 3, 4
Corporate Director
Jamie Schwartz 2, 4
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
T: 416.861.9404
F: 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:
Mark Kenney
President and
Chief Operating Officer
T: 416.861.9404
E: 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
T: 1.800.663.9097
E: 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
June 2016 – February 2017:
$0.1042 ($1.25 annually)
March 2017 – April 2018:
$0.1067 ($1.28 annually)
May 2018 – December 2018:
$0.1108 ($1.33 annually)
ANNUAL UNITHOLDERS’ MEETING
The Annual Meeting of
Unitholders will be held at
4:30 p.m. EDT on
Wednesday, June 13, 2019 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 sixth consecutive year
in 2018. 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 | 2018
www.capreit.net