Canadian Apartment Properties REIT
Annual Report 2021

Plain-text annual report

Investing in Our Future. 2021 Annual Report B 2021 Annual ReportInvesting in Our Future. 1 Investing in Our Future“ Investing in our future builds value” 2 Mark Kenney President and Chief Executive Officer 2021 Annual ReportProfile As Canada’s largest publicly traded provider of quality rental housing, Canadian Apartment Properties REIT (“CAPREIT”) owns or has interests in approximately 70,000 residential apartment suites, townhomes and manufactured housing community sites well-located across Canada, the Netherlands and Ireland as of December 31, 2021. 2021 Highlights & Objectives HIGHLIGHTS OBJECTIVES • Another resilient year despite the pandemic • 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 the life safety of residents. • Focused asset allocation strategy continues to build value • Revenues rise on portfolio growth and increased rents • Proactive and close resident relations drive 99% of rents collected • NFFO up 3.4% on strong operating performance • Solid accretive growth with NFFO per unit rising 2.0% • Strong, flexible balance sheet and liquidity position • Over 99% of mortgage portfolio with low 2.5% fixed interest rate • $1.0 billion increase in fair market value on portfolio investments, strong sector fundamentals • Fully integrated ESG programs delivering value 3 Investing in Our Future2021 Selected Financial Highlights Selected Financial Highlights 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)(3) 2021 2020 $ $ $ $ $ $ 98.1% 1,149 933,137 609,993 65.4% 2.262 2.318 1.409 62.6% 61.0% 36.12% 52.26% 2.47% 5.65 1.97 4.02 $ $ $ $ $ $ 97.5% 1,121 882,643 578,171 65.5% 2.258 2.273 1.380 61.4% 61.0% 35.54% 50.11% 2.56% 5.76 2.01 3.95 Available liquidity – Acquisition and Operating Facility (000s)(1) Available cash and cash equivalents (000s)(1) $ $ 384,510 73,411 $ $ 627,997 121,722 (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. 4 2021 Annual Report “ Investing in our people builds value” 5 Investing in Our FutureCanadian Portfolio Strong & Diversified Portfolio 59,620 Total Suites and Sites 98.6% Residential Occupancy $1,319 Residential Net Average Monthly Rent Canada In Canada, our focus is on growing our portfolio of mid-tier, value-add properties in well-located suburban markets in and around Canada’s largest cities. We have proven our ability to invest in these properties to increase value, while the stability of cash flows results from continuing high stable occupancy, larger average suite size, and affordable rental rates. 10% 4% British Columbia Total Suites Occupancy Net Avg Rent 5,777 99.2% $1,449 0% Saskatchewan Total Suites Occupancy Net Avg Rent 234 97.0% $1,033 Alberta Total Suites Occupancy Net Avg Rent 2,318 98.1% $1,118 41% Ontario Total Suites 24,455 Occupancy Net Avg Rent 99.2% $1,439 As at December 31, 2021 6 21% MHC Total Suites Occupancy Net Avg Rent Québec Total Suites Occupancy 18% 12,201 95.8% $396 10,710 97.2% Net Avg Rent $1,048 Nova Scotia Total Suites Occupancy Net Avg Rent 3,288 98.6% $1,315 Prince Edward Island Total Suites Occupancy Net Avg Rent 637 98.7% $1,103 5% 1% 2021 Annual Report6,545 Total Suites 98.6% Occupancy €927 Net Average Monthly Rent Netherlands As one of Europe’s only fully integrated, professional residential rental property management platforms, our investment in European Residential REIT (ERES) is delivering strong growth in property management fees, while our ownership interest generates solid dividend income. 3,829 Total Suites 99.1% Occupancy €1,678 Net Average Monthly Rent Ireland Since its initial investment in the Dublin residential rental market in 2014, we have received strong and growing property management fee and dividend income from our 18.7% ownership interest in Irish Residential REIT (IRES). Effective January 31, 2022, CAPREIT’s investment management agreement with IRES was terminated. As at December 31, 2021 European Portfolio 7 Investing in Our FutureScott Cryer Chief Financial Officer Corinne Pruzanski General Counsel and Corporate Secretary Jodi Lieberman Chief People, Culture and Brand Officer Mark Kenney President and Chief Executive Officer Since 1997, we have responsibly invested in our assets and our people, building one of Canada’s largest portfolios of residential rental properties and one of the best teams and operating platforms in our business. Going forward, we will continue to build value by Investing in Our Future. 8 2021 Annual ReportReport to Unitholders Report to Unitholders Despite operating for a full year under the significant and unprecedented challenges presented by the COVID-19 pandemic, CAPREIT generated another year of record growth and performance in 2021. Our goals throughout the pandemic were to preserve capital, maintain a strong, flexible financial position, and mitigate risk. Thanks to the experience and dedication of all our teams, we met these objectives and will emerge from the pandemic stronger than ever before. Looking ahead, we are confident in our ability to capitalize on the strong fundamentals in our business, our proven growth programs and asset allocation strategy, and the quality of our asset base to continue building value for our Unitholders. KEY METRICS Operating Revenue (000s) 7 3 1 , 3 3 9 , 3 4 6 2 8 8 4 8 8 7 7 7 , 5 8 5 8 8 6 , , 2 4 8 8 3 6 NOI (000s) 8 5 2 3 9 3 , 6 5 0 9 3 4 , , 3 9 9 9 0 6 1 7 1 , 8 7 5 0 5 1 , 8 0 5 NFFO (000s) , 5 3 3 9 8 2 , 4 7 4 0 5 2 4 9 1 , 2 0 4 8 5 9 8 8 3 , 1 2 1 , 9 3 3 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 9 Investing in Our FutureAnother Record Year 10 2021 Annual ReportReport to Unitholders Operating revenues for the year ended December 31, 2021 rose 5.7% to $993.1 million, driven by our portfolio growth and increasing average monthly rents. With this revenue growth, combined with our proven and successful property management programs, Net Operating Income (NOI) rose 5.5% to $610.0 million for the year. Normalized Funds from Operations (NFFO), our key performance benchmark, increased 3.4% in 2021 to $402.2 million, resulting in another year of accretive growth as NFFO per Unit rose 2.0% to $2.318. Our payout ratio of distributions declared to NFFO remained very conservative at 61.0%. Importantly, we met our goal of maintaining a strong and flexible financial position. Total debt to gross book value was a conservative 36.1% at year end, well within our guidelines and providing the resources and flexibility to maintain our track record of growth. Our mortgage portfolio remained well-balanced with a weighted average term to maturity of 5.7 years, adding to the stability of our long-term cash flows. We also continued to capitalize on low interest rates, reducing our weighted average interest rate to 2.47% at December 31, 2021. Additionally, our liquidity position remains strong and flexible. Including cash, available capacity on our credit lines, our ability to up-finance existing mortgages, and potential financing on our portfolio of $1,180 million unencumbered assets, we had total liquidity available of approximately $1.2 billion at year end. If we were to access all these liquidity resources, our leverage ratio would remain a conservative 40%. ...our liquidity position remains strong and flexible. Our strong performance through the pandemic is further proof that CAPREIT can generate strong and growing returns for Unitholders in both good and bad economic times. Our results are a testament to the exceptional contribution made by our people and the execution of our proven growth programs and asset allocation strategy. Looking ahead, we will continue to invest in our assets, our people, and our future. NFFO per Unit – Inception to 2021 NFFO per Unit – Inception to 2021 NFFO per Unit NFFO Payout Ratio NFFO per Unit NFFO per Unit NFFO Payout Ratio NFFO Payout Ratio 2.400 – 1.900 – 1.400 – 0.900 – 0.400 – 0.000 – 2.000 – 2.000 – 1.800 – 1.800 – 1.600 – 1.600 – 1.400 – 1.400 – 1.200 – 1.200 – 1.000 – 1.000 – 0.800 – 0.800 – 0.600 – 0.600 – 0.400 – 0.400 – 0.200 – 0.200 – 0.000 – 0.000 – ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ‘98 ‘98 ’08 ‘99 ‘99 ’09 ‘00 ‘00 ’10 ‘01 ‘01 ’11 ‘02 ‘02 ’12 ‘03 ‘03 ’13 ‘04 ‘04 ’14 ‘05 ‘05 ’15 ‘06 ‘06 ’16 ‘07 ‘07 ’17 ‘08 ‘08 ’18 ‘09 ‘09 ’19 ‘10 ‘10 ’20 ‘1 1 ‘1 1 ’21 – 120% – 100% – 80% – 60% – 40% – 20% – 0% ‘12 ‘12 ‘13 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 11 – 120% – 100% – 80% – 60% – 40% – 20% – 0% Investing in Our FutureInvesting in Our Assets 12 2021 Annual ReportDuring 2021, we acquired a total of 3,744 residential suites and manufactured housing community (MHC) sites well-located in our target markets for a total purchase price of $1,053.5 million. Our portfolio grew to 66,165 suites and sites with a book value of $17.1 billion at year end, maintaining our position as Canada’s largest multi-family residential REIT. Looking ahead, we will continue to deliver on our proven asset allocation strategy. Our primary focus targets further growth in the Canadian apartment business, expanding our portfolio of primarily value-add properties in the mid-tier segment in well-located suburban markets in Toronto, Vancouver and Montreal – Canada’s three largest cities. We have proven our ability to invest in these assets to increase their value, and the stability of their cash flows is driven by continuing high stable occupancies and affordable rental rates. Our growing development pipeline will also generate future accretive growth. Over the long term, we have the potential to add approximately 10,000 new apartment suites to our portfolio through our intensification and redevelopment initiatives on our owned land. Our second area of growth is the Canadian MHC business. Revenues are highly stable in this sector, and with residents owning their own homes, capital requirements and maintenance needs are significantly reduced. MHC properties also provide another level of diversification by increasing our presence in rural and smaller markets. With home ownership costs rising significantly, MHCs provide a very affordable option. Our third focus is on Europe, where we are generating significant and growing dividend and fee income from our investments in the Netherlands. As one of the only professionally managed operating platforms in Europe, and with access to very low-cost European debt, the opportunities for further growth and enhanced value are significant. We continue to invest in our properties and leading- edge technologies to enhance the value of our asset base and increase its income-producing potential. Our proven capital programs are reducing operating costs through energy saving and other initiatives, making our properties more attractive to current and prospective new residents, increasing our operating efficiency, and helping us meet our ESG commitment to enhanced environmental performance. All of these investments continue to generate strong increases in our net asset value. In 2021, we recorded a $1,049 million gain in the fair value of our income producing properties following a $596 million gain in 2020. With increasing demand and little new supply of rental properties, we believe the value of our asset base will continue to increase, providing another strong driver of Unitholder value over the long term. OUR ASSET ALLOCATION STRATEGY IS WORKING Apartment Focus MHC Focus Europe Focus Portfolio growth is driven by targeting With residents owning their homes, the As one of Europe’s only professionally value-add properties in the mid-tier Canadian MHC sector provides highly managed operating platforms, fee income segment in well-located suburban markets stable and growing revenues with low is increasing from our asset and property in and around Canada’s largest cities. capital and maintenance needs. management services. 13 Investing in Our FutureInvesting in Our People. One of the most important reasons for our success throughout the pandemic, and indeed for the more than twenty-four years since CAPREIT’s founding, is the experience and dedication of our people. We believe we have one of the best operating teams and platforms in the business, and we will continue to invest in our employees, fostering an environment of employee inclusion and engagement to ensure we attract and retain the best and most productive people. We were very proud to have ranked in the “Above Canada Top Quartile Average” for the eighth consecutive year in Kincentric’s 2021 Best Employers Program. Our innovative internal leadership training and coaching programs, our communications and engagement initiatives, including our quarterly “Fireside Chats” with senior management, are building a close and unified team that is highly engaged with CAPREIT’s goals and objectives. Our commitment to diversity is a key element. Building a diverse and inclusive workforce helps us to better interact with and support the communities in which we live and work, enabling us to deliver innovative approaches and solutions both within and outside the organization. Our employee base includes an almost equal gender split between men and women, and we celebrate the more than 61 languages spoken at CAPREIT, a reflection of the diverse makeup of the Canadian population and our resident communities. The pandemic, while presenting us with unprecedented challenges and issues, also allowed us to get closer to our residents. Our new “Resident Portals” now enable residents to conveniently transact directly with us. Through our “Compassionate Care” program, we personally reached out to our residents to check on their well-being and discuss any rent issues they were experiencing, while our innovative rent payment programs assisted many through these challenging times. As a measure of our success, we collected over 99% of our rents through the pandemic and maintained strong occupancies, rising to 98.1% at December 31, 2021. These, and many other resident-focused programs, were invaluable in helping us meet our goals during the pandemic and gaining insight into the needs of our resident community. Many of these innovations will be maintained going forward to ensure we stay close to our customers. 14 2021 Annual Report15 Investing in Our FutureReport to Unitholders Investing in Our Future. 16 Looking ahead, we are confident that our long-term focus on making CAPREIT “The Best Place to Live, Work and Invest” will generate strong and growing value for our Unitholders. Our growing property portfolio meets the increasing demand for more affordable, high-quality homes, and our predominantly suburban locations with larger suites, townhomes and MHC sites attract families seeking more space. Our strong acquisition pipeline and development opportunities are driving accretive portfolio growth, and the low interest rate environment provides the opportunity to acquire properties at strong cap rate spreads with reduced interest costs. Finally, our industry-leading balance sheet, low leverage and significant liquidity position give us the financial capacity and flexibility to maintain our growth objectives for years to come. In closing, we thank everyone at CAPREIT for their ongoing commitment and effort over the last year. We also thank our more than 70,000 resident families for their support. We are very proud of our record performance in what was a very challenging year, a testament to our ongoing commitment to investing in our assets, our people and our future. We look for this progress to continue in the years ahead. Mark Kenney Michael Stein President and Chief Executive Officer Chairman 2021 Annual ReportFinancial Reporting Scott Cryer Chief Financial Officer 17 Investing in Our FutureFinancial Reporting Table of Contents Management’s Discussion and Analysis Consolidated Financial Statements SECTION I: OVERVIEW AND DISCLAIMER Basis of Presentation Forward-Looking Disclaimer Non-IFRS Financial Measures Overview Objectives and Business Strategy SECTION II: KEY HIGHLIGHTS Summary of Year End 2021 Results of Operations Acquisitions and Dispositions Key Performance Indicators Performance Measures SECTION III: OPERATIONAL AND FINANCIAL RESULTS Net and Occupied Average Monthly Rents and Occupancy Results of Operations NOI by Region Stabilized NOI by Region Net Income and Other Comprehensive Income SECTION IV: UNIT CALCULATIONS, NON-IFRS FINANCIAL MEASURES Per Unit Calculations Non-IFRS Financial Measures Adjusted Cash Generated from Operating Activities SECTION V: CAPITAL INVESTMENT, INVESTMENT PROPERTY, CAPITAL STRUCTURE, FINANCIAL CONDITION Property Capital Investments Investment Properties Development Capital Structure Liquidity and Financial Condition Unitholder Taxation SECTION VI: COMPLIANCE AND GOVERNANCE DISCLOSURES, RISKS AND UNCERTAINTIES Selected Consolidated Quarterly Information Selected Consolidated Financial Information Accounting Policies and Critical Accounting Estimates, Assumptions and Judgments Controls and Procedures Risks and Uncertainties Related Party Transactions Commitments and Contingencies Subsequent Events Future Outlook SECTION VII: SUPPLEMENTAL INFORMATION Property Portfolio 19 19 20 20 20 22 23 24 27 28 32 35 36 37 40 41 46 47 48 51 52 52 56 57 60 60 60 61 71 72 72 72 73 Management’s Responsibility for Financial Statements Independent Auditor’s Report Consolidated Balance Sheets 76 77 82 Consolidated Statements of Income and Comprehensive Income 83 Consolidated Statements of Unitholders’ Equity Consolidated Statements of Cash Flows Note 1 Organization of the Trust Note 2 Summary of Significant Accounting Policies Note 3 Critical Accounting Estimates, Assumptions and Judgments Note 4 Recent Investment Property Acquisitions Note 5 Dispositions Note 6 Investment Properties Note 7 Investment in Associate Note 8 Mortgages Receivable Note 9 Other Assets Note 10 Other Current Liabilities Note 11 Accounts Payable and Accrued Liabilities Note 12 ERES Units Held by Non-Controlling Unitholders Note 13 Mortgages Payable Note 14 Bank Indebtedness Note 15 Unit-based Compensation Financial Liabilities Note 16 Unit-Based Compensation Expense Note 17 Exchangeable LP Units Note 18 Unitholders’ Equity Note 19 Distributions on Trust Units Note 20 Financial Instruments, Investment Properties and Risk Management Note 21 Derivative Financial Instruments Note 22 Capital Management Note 23 Income Taxes Note 24 Accumulated Other Comprehensive (Loss) Income Note 25 Interest and Other Financing Costs Note 26 Joint Arrangements Note 27 Supplemental Cash Flow Information Note 28 Revenue and Other Income Note 29 Related Party Transactions Note 30 Commitments Note 31 Contingencies Note 32 Segmented Information Note 33 Subsequent Events 84 85 86 86 97 99 100 101 104 104 105 105 105 106 106 107 108 109 111 111 112 112 116 117 118 119 120 120 120 123 123 126 126 127 127 18 2021 Annual ReportManagement’s Discussion and Analysis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, 2021, dated February 23, 2022, should be read in conjunction with CAPREIT’s audited consolidated annual financial statements for the year ended December 31, 2021. 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, rental rates, productivity, projected costs, capital investments, development and development opportunities, 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, Dutch, German and Belgian economies will generally experience growth, which, however, may be adversely impacted by the global economy and the ongoing health crisis related to the novel coronavirus (“COVID-19”) pandemic and its direct or indirect impacts on the business of CAPREIT. These impacts may include the ability to enforce leases, perform capital expenditure work, increase rents and apply for above guideline increases, obtain financings at favourable interest rates, and the impact and continued availability of government relief programs; 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 renewals will grow at levels similar to the rate of inflation; that rental rates on turnovers will grow; that the difference between in-place and market-based rents will be reduced upon such turnovers and renewals; 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: public health crises, disease outbreaks, 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 Trust 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 the Risks and Uncertainties section in Section VI of this MD&A. Subject to applicable law, CAPREIT does not undertake any obligation to publicly update or revise any forward-looking information. 19 Investing in Our FutureManagement’s Discussion and AnalysisNon-IFRS Financial Measures CAPREIT prepares and releases unaudited condensed consolidated interim financial 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 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, Adjusted Cash Generated from Operating Activities, and Net Trust Expenses (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. These Non-IFRS measures have been assessed for compliance with the new National Instrument 52-112 and a reconciliation of these Non-IFRS measures to the comparable IFRS measures, along with further definitions and discussion, is provided in Section IV under Non-IFRS Financial Measures. The Non-IFRS measures should not be construed as alternatives to net income 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 Canada’s largest publicly-traded provider of quality rental housing. CAPREIT owns or has interests in, and manages, approximately 70,000 residential apartment suites, townhomes and manufactured housing community sites well-located across Canada, in the Netherlands and Ireland as of December 31, 2021. 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 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 April 1, 2020. As at December 31, 2021, CAPREIT had 1,076 employees (1,071 employees as at December 31, 2020). Objectives and Business Strategy CAPREIT’s objectives are to: • Provide holders of Trust Units (“Unitholders”) with long-term, stable and predictable monthly cash distributions; • Grow NFFO, sustainable distributions and Trust Unit value through the active management of its properties, accretive acquisitions, developments and 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 and satisfaction 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 initiatives, are aimed at building 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. 20 2021 Annual ReportManagement’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 synergies 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 both newer properties or value-add properties at prices below their current replacement cost, and is committed to improving its operating performance by investing in 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 or value-add properties that meet its strategic criteria and, where possible, enhance geographic diversification 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 toward their most accretive use and to further modernize the overall portfolio. In addition, management investigates opportunities to enter into joint venture relationships that 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. Environmental, Social and Governance (“ESG”) Strategy Integration – CAPREIT continues to review and refine its multi-year ESG strategy and road map and integrate it into its corporate strategy. The ESG strategy and road map are supported by CAPREIT’s Board of Trustees and all levels of the organization contribute to the implementation of the strategy and achievement of deliverables. This road map allows CAPREIT to better demonstrate its environmental responsibility, attract and retain the best people in the business, build strong relationships with its residents and the communities in which they live, adopt best practice programs in corporate governance, and maintain open and transparent communication with its investors. CAPREIT focuses on several ESG-specific deliverables. Through building in-house ESG subject matter expertise, CAPREIT established the necessary foundation to empower its people to be advocates and enablers of ESG transparency and performance, develop and monitor cross-functional policies, carry out ongoing stakeholder engagements, establish frameworks, platforms and practices to deliver investment-grade data, identify and monitor its progress and build standardized and comprehensive ESG disclosures. In support of CAPREIT’s ongoing commitment to ESG integration and performance, management continues to support submission to the Global Real Estate Sustainability Benchmark, the results of which will inform future cycles of improvement and the evolution of CAPREIT’s strategy going forward. Refer to CAPREIT’s ESG Report for a detailed discussion. The 2021 ESG Report will be issued in May 2022. 21 Investing in Our FutureManagement’s Discussion and AnalysisSECTION II: KEY HIGHLIGHTS Summary of Year End 2021 Results of Operations Key Transactions and Events • CAPREIT continues to invest in accretive opportunities with total acquisitions for the year ended December 31, 2021 amounting to $805 million comprised of interests in 3,245 suites and sites located in Canada, and $249 million comprised of 499 suites located in the Netherlands • During the year, CAPREIT completed another buyout of an operating lease in midtown Toronto, Ontario for a net purchase price of $4.5 million. As of December 31, 2021, CAPREIT has two remaining operating leases • Total dispositions for the year ended December 31, 2021 of $143 million, which included 592 suites located in Ontario and one single family home located in the Netherlands Strong Operating Results • Consistent with prior year, CAPREIT has maintained a very high level of rent collection, with over 99% of rents collected year to date • On turnovers, monthly residential rents for the year ended December 31, 2021 increased by 5.9% on 21.8% of the Canadian portfolio, compared to an increase of 7.9% on 18.7% of the Canadian portfolio for the year ended December 31, 2020 • Net Average Monthly Rent (“Net AMR”) for the stabilized portfolio as at December 31, 2021 increased by 1.9% compared to December 31, 2020, while occupancies increased to 98.1% compared to 97.6% as at December 31, 2020 • Net Operating Income (“NOI”) margin for the total portfolio decreased slightly to 65.4% for the year ended December 31, 2021 from 65.5% for the year ended December 31, 2020 • NFFO per unit was up 2.0% for the year ended December 31, 2021 compared to last year Strong and Flexible Balance Sheet • CAPREIT’s financial position remains strong, with $384.5 million of available liquidity on CAPREIT’s Acquisition and Operating Facility • Management expects to raise between $850 million and $900 million in total mortgage renewals and refinancings for 2022, excluding financings on acquisitions • CAPREIT closed mortgage refinancing of $1,023.4 million for the year ended December 31, 2021, with top-ups of $502.0 million with a weighted average term to maturity of 8.0 years and a weighted average interest rate of 1.97%, and discharges of $86.8 million • For the year ended December 31, 2021, the fair value of investment properties increased by $2,101.3 million. Excluding the impact of net acquisitions, operating lease buyout and foreign exchange, the fair value of investment properties increased by $1,374.5 million for the year ended December 31, 2021 2222 2021 Annual ReportManagement’s Discussion and AnalysisAcquisitions and Dispositions The tables below summarize property acquisitions for the year ended December 31, 2021. Canadian Acquisitions Completed During the Year Ended December 31, 2021 ($ Thousands) May 5, 2021 May 31, 2021 June 2, 2021 June 9, 2021 June 24, 2021 June 25, 2021 July 5, 2021 August 31, 2021(4) September 7, 2021 September 22, 2021(5) October 1, 2021 Suite or Site Count 485 154 228 77 30 548 342 787 193 141 260 Region(s) Oshawa, ON Montréal, QC Victoria, BC Victoria, BC Victoria, BC London, ON Lakeshore, ON Toronto, ON West Kelowna, BC Toronto, ON Québec City, QC Total 3,245 2020 Acquisition financing Total Acquisition Costs $ 105,904 $ Assumed Mortgage Funding Subsequent Acquisition Financing –(3) $ 54,673(3) 31,727 78,306 20,263 9,906 110,461 21,703 165,626 63,385 123,111 74,159 $ 804,551 – – –(3) –(3) –(3) – 18,037 33,702 –(3) –(3) –(3) 8,573 37,225 –(3) 34,077 –(3) – –(3) – –(3) 54,673 $ 146,644(7) $ 131,614 $ The Netherlands Acquisitions Completed During the Year Ended December 31, 2021 Suite or Site Count Region(s) Total Acquisition Costs 104 The Netherlands $ 45,879 $ ($ Thousands) June 30, 2021 June 30, 2021 November 30, 2021 November 30, 2021 December 22, 2021 Total The Netherlands The Netherlands The Netherlands The Netherlands 33 63 162 137 499 Assumed Mortgage Funding Subsequent Acquisition Financing – $ 21,593(6) 13,995(6) – 13,949(6) 41,921(6) 24,839(6) – – – 27,202 29,966 88,732 57,167 $ 248,946 $ – $ 116,297 Interest Rate (%)(1) 1.88(3) 1.78 Term to Maturity (Years)(2) 3.00(3) 4.58 3.08 1.67 –(3) –(3) –(3) –(3) –(3) –(3) 4.08 3.16 4.17 7.68 –(3) –(3) 1.93 0.17 –(3) –(3) 1.84(7) 5.41(7) Interest Rate (%)(1) 1.16(6) 1.16(6) 1.16(6) 1.16(6) 1.16(6) Term to Maturity (Years)(2) 6.00(6) 6.00(6) 5.75(6) 5.75(6) 5.75(6) (1) Weighted average stated interest rate on mortgage funding. (2) (3) (4) (5) (6) Weighted average term to maturity on mortgage funding. The acquisition was funded from CAPREIT’s cash and cash equivalents and CAPREIT’s Acquisition and Operating Facility. CAPREIT purchased the remaining 50% interest in a portfolio of 787 apartment suites and townhouse units. CAPREIT acquired its initial 50% interest on July 31, 2008. Total acquisition cost was increased by $8.0 million, relating to the difference between the agreed upon issuance price of $56.00 per Exchangeable LP Unit and the fair value of the Exchangeable LP Units on the acquisition date. Refer to note 17 of the accompanying audited consolidated annual financial statements for further information. Subsequent acquisition financing obtained is collateralized by a pool of investment properties. The amount of subsequent acquisition financing shown above has been allocated based on fair value of these properties as determined by the lender. The interest rates shown include the corresponding interest rate swaps. (7) Subsequent acquisition financing of $146.6 million relates to properties acquired in 2020. The table below summarizes the dispositions completed during the year ended December 31, 2021. Dispositions Completed During the Year Ended December 31, 2021 Disposition Date September 2, 2021(1) September 29, 2021 October 1, 2021(3) Total Suite Count Region(s) Sale Price Cash Proceeds(4) VTB Issued(2) The Netherlands Toronto, ON Toronto, ON 1 86 506 593 $ $ 461 52,000 90,920 143,381 $ $ 461 $ 5,200 22,730 28,391 $ – 46,800 68,190 114,990 (1) Represents disposition of one individual single family home. (2) Refer to note 8 of the accompanying audited consolidated annual financial statements for further information. (3) CAPREIT disposed of its 33.3% interest in 506 apartment suites. (4) Prior to working capital adjustments. 2323 Investing in Our FutureManagement’s Discussion and Analysis 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. These KPIs may be impacted by and should be read in conjunction with the risks and uncertainties discussed under The COVID-19 Pandemic. Occupancy – Through a focused, hands-on approach, CAPREIT strives to achieve occupancies at or greater than market conditions in each of the geographic regions where it operates. Management believes annual occupancies can be maintained at between 97% to 99% over the long term. Net AMR – Through its active property management strategies, lease administration system and proactive capital investment programs, CAPREIT strives to achieve the highest possible Net AMR in accordance with local market conditions. Management believes same property Net AMR will continue to gradually increase, providing the basis for sustainable year-over-year increases in revenue. Net Operating Income – 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 62% to 66% of operating revenues over the long term. 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 60% and 70%. 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 of 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 sites 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 and the financial covenants in its credit and mortgage agreements. CAPREIT’s credit agreements consist of a revolving acquisition and operating facility, which includes euro LIBOR, USD LIBOR and Canadian dollar borrowings (“Acquisition and Operating Facility”), and the ERES Credit Facility (collectively, the “Credit Facilities”), as described under Liquidity and Financial Condition in Section V. The COVID-19 Pandemic The COVID-19 pandemic has given rise to uncertainty throughout the global economy, which may have various direct or indirect impacts on the global real estate market. CAPREIT continues to monitor this evolving situation with a focus on protecting the health and safety of its employees and tenants and implementing appropriate cautionary measures to address potential risks to its business. CAPREIT has implemented a number of support measures to help ease the burden on its various tenants impacted by the pandemic, including a temporary moratorium on evictions and a freeze on rental increases in Canada. CAPREIT is also reviewing and implementing flexible temporary payment plans on a case-by-case basis. 24 2021 Annual ReportManagement’s Discussion and AnalysisThe long-term impacts of the COVID-19 pandemic on financial forecasts, including the KPIs discussed above, are subject to a degree of uncertainty and remain subject to further review and consideration given the uncertainty associated with the full impact of the COVID-19 pandemic. CAPREIT’s financial position and liquidity remain strong, providing it with the financial resources and flexibility to manage through these challenging times. CAPREIT did not see a substantial impact from the COVID-19 pandemic on the majority of its operational results for the year ended December 31, 2021; however, this may not be indicative of CAPREIT’s future performance. Rent Collection Consistent with prior year, CAPREIT has maintained a very high level of rent collection, with over 99% of rents collected year to date. CAPREIT is closely monitoring its tenant receivables. Update on Rental Revenue Due to the current economic uncertainty, there is a greater risk that CAPREIT’s estimated net rental revenue run-rate may vary from actual rental revenue, and that such variation may be significant. In addition, tenant incentives which are occasionally used to support revenues may fluctuate significantly from historical trends and depend on the length and severity of the COVID-19 pandemic. There are expected delays in the settlement of above guideline increase (“AGI”) applications, and when settled, these increases will be excluded from the government-imposed rent freeze. CAPREIT has started imposing these increases where appropriate. The real estate market has been affected by various measures taken by Canadian federal and provincial governments with regard to the prevention of further spread of COVID-19 and to help individuals and businesses affected by the crisis. Some of the legislative initiatives announced include: • The provinces of Ontario and British Columbia passed legislation to freeze rent increases until December 31, 2021, except for approved above guideline increases. In addition, Ontario and British Columbia have issued rent guideline increases of 1.2% and 1.5% for 2022, respectively. As a result of the expiry of the regulatory rent freeze in Ontario and British Columbia, CAPREIT served tenant notices to 44% of its Canadian tenants, across which the weighted average rental increase was 1.3%, effective January 1, 2022. • The province of Nova Scotia has capped residential rent increases at 2% each year, retroactive to September 1, 2020 until December 31, 2023, and has capped MHC rent increases at 1.9% for 2021 and at 1.0% for 2022. The rental increase rates will stay at the same level if the state of emergency extends beyond 2023 due to the pandemic. • Rental tribunal hearings were rescheduled, suspended or stopped in most provinces at the onset of the health emergency. At this time, most rental tribunal hearings have reopened or have converted to online or telephone hearings. • The federal government had ended the Canada Recovery Benefit (“CRB”) on October 23, 2021 and introduced the Canada Worker Lockdown Benefit (“CWLB”). This new program is effective between October 24, 2021 and May 7, 2022 and will provide $300 a week to eligible workers who are directly impacted by government imposed lockdowns and are not otherwise eligible for EI. The federal government has temporarily expanded the eligibility for the CWLB to include workers subject to capacity limits of 50% or more, effective between December 19, 2021 and February 12, 2022. • The federal government had replaced the expired Canada Emergency Rent Subsidy (“CERS”) with the Tourism and Hospitality Recovery Program (“THRP”) and Hardest Hit Business Recovery Program (“HHBRP”), which provide similar support to the previous program for eligible businesses. The program will be available until May 7, 2022, with the proposed subsidy rates available through to March 13, 2022. Afterwards, the subsidy rates will decrease by half. On December 22, 2021, the federal government announced the Local Lockdown Program to temporarily expand eligibility for wage and rent subsidies. Employers who are subject to capacity limit restrictions of 50% or more with at least a 25% decline in revenue will be eligible for the benefits. 25 Investing in Our FutureManagement’s Discussion and Analysis• The Dutch government has announced rent increase freezes until June 30, 2022 on regulated suites which are subject to rent control. For liberalized suites not subject to rent control previously, the government enacted a rental cap on annual indexation at CPI + 1.0% from May 1, 2021 to April 30, 2024. • Assistance programs, such as wage subsidies, government loans, and tax deferrals have also been enacted by the Dutch government. The above list is not exhaustive and reflects only certain legislation enacted by government. As the situation continues to evolve, the legislation enacted by government may be subject to change. Valuation Due to the COVID-19 pandemic and its ongoing impact on the economy, and specifically its unknown future impact on the real estate market, there is heightened uncertainty surrounding the valuation of investment properties. Consequently, there is a need to apply a higher degree of judgment as it pertains to the forward-looking assumptions that underlie CAPREIT’s valuation methodologies. For the year ended December 31, 2021, the fair value of investment properties increased by $2,101.3 million. Excluding the impact of net acquisitions, operating lease buyout and foreign exchange, the fair value of investment properties increased by $1,374.5 million for the year ended December 31, 2021. Capital Expenditures Capital investments and developments may be impacted by factors such as a lack of access to tenant suites and physical distancing restrictions. CAPREIT expects any potential impact to be short term and will normalize over the long term. As at December 31, 2021, CAPREIT has limited, whenever necessary, its capital investments to those that can be done safely following appropriate physical distancing measures such as non-discretionary exterior work, and those required on an emergency basis or to protect the safety of residents. This has not significantly impacted CAPREIT’s capital expenditure plan for the year. The COVID-19 pandemic may result in delays in development application processing by municipalities. Given the evolving situation, CAPREIT will continue to assess and revise, if necessary, the number of applications to be submitted. Liquidity Management has determined that CAPREIT is in a strong financial position despite the changes in the market and the heightened risk environment. CAPREIT’s Canadian liquidity position as at December 31, 2021 remains strong with: • $384.5 million available on the Acquisition and Operating Facility; and • $1,180.2 million of Canadian investment properties that are not encumbered by mortgages. Refer to note 13 to the accompanying consolidated annual financial statements for further details. In addition, management expects to raise between $850 and $900 million in total mortgage renewals and refinancings for 2022, excluding financings on acquisitions. CAPREIT’s mortgage program has remained stable since the outbreak of the COVID-19 pandemic, with refinancings proceeding as scheduled with favourable interest rates for longer terms, including 10-year terms. The actual refinancing amounts may vary from the forecast. 26 2021 Annual ReportManagement’s Discussion and AnalysisPerformance Measures The following table presents an overview of certain IFRS and non-IFRS financial measures of CAPREIT for the years ended December 31, 2021 and 2020. Management believes these measures are useful in assessing CAPREIT’s performance in relation to its objectives and business strategy. 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)(3) Available liquidity – Acquisition and Operating Facility (000s)(1) Cash and cash equivalents (000s)(1) (1) As at December 31. $ $ $ $ $ $ 2021 2020 $ $ $ $ $ $ 98.1% 1,149 933,137 609,993 65.4% 2.262 2.318 1.409 62.6% 61.0% 36.12% 52.26% 2.47% 5.65 1.97 4.02 97.5% 1,121 882,643 578,171 65.5% 2.258 2.273 1.380 61.4% 61.0% 35.54% 50.11% 2.56% 5.76 2.01 3.95 $ $ 384,510 73,411 $ $ 627,997 121,722 (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. For the Year Ended December 31, Other Measures Weighted average number of units – basic (000s) Number of residential suites and sites acquired(1) Number of suites disposed Closing price of Trust Units on the TSX(2) Market capitalization (millions)(2) (1) Includes a 50% interest in 787 suites. (2) As at December 31. 2021 2020 173,508 3,744 593 59.96 10,539 $ $ 171,123 3,262 194 49.99 8,639 $ $ 27 Investing in Our FutureManagement’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, excluding vacant units, divided by the total number of suites or sites in the property, and does not include revenues from parking, laundry or other sources. Occupied AMR is defined as actual residential rents, excluding vacant units, divided by the total number of occupied suites or sites in the property, and does not include revenues from parking, laundry or other sources. Stabilized AMR includes all properties held as at December 31, 2020 and are not disposed of. Total Portfolio: Net AMR, Occupied AMR and Occupancy by Geography As at December 31 Residential Suites Ontario Greater Toronto Area(1) London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria and Other British Columbia Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands(2) Total residential suites MHC Sites Total MHC sites Total suites and sites Net AMR Occupied AMR 2021 AMR ($) 2020 AMR ($) % Change AMR 2021 AMR ($) 2020 AMR ($) % Change AMR Occupancy % 2021 2020 1,519 1,090 1,395 1,439 1,016 1,138 1,048 1,490 1,069 1,363 1,418 991 1,095 1,016 1,476 1,466 1,398 1,449 1,301 1,413 1,315 1,197 1,108 1,153 1,118 1,056 1,079 1,061 1,103 1,100 1,033 1,319 1,335 1,321 396 1,149 984 1,282 1,375 1,293 390 1,121 1.9 2.0 2.3 1.5 2.5 3.9 3.1 0.7 7.5 2.5 9.9 4.9 6.9 5.4 0.3 5.0 2.9 (2.9) 2.2 1.5 2.5 1,532 1,098 1,402 1,451 1,046 1,169 1,078 1,513 1,078 1,372 1,437 1,025 1,118 1,048 1,491 1,484 1,405 1,460 1,306 1,426 1,334 1,259 1,119 1,209 1,139 1,108 1,223 1,133 1,117 1,109 1,065 1,338 1,354 1,340 414 1,171 1,042 1,311 1,399 1,322 407 1,151 1.3 1.9 2.2 1.0 2.0 4.6 2.9 0.5 7.6 2.4 6.0 1.0 (1.1) 0.5 0.7 2.2 2.1 (3.2) 1.4 1.7 1.7 99.1 99.3 99.5 99.2 97.2 97.3 97.2 99.0 99.6 99.2 98.6 99.0 95.4 98.1 98.7 97.0 98.6 98.6 98.6 95.8 98.1 98.5 99.2 99.4 98.7 96.7 97.9 97.0 98.8 99.6 99.1 95.1 95.3 88.2 93.7 99.2 94.4 97.8 98.3 97.9 95.8 97.5 (1) (2) Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. Includes foreign exchange impact and service charge income. The amounts in euros for the European portfolio for Net AMR are €927 and €882 as at December 31, 2021 and December 31, 2020, respectively, and for Occupied AMR are €941 and €896 as at December 31, 2021 and December 31, 2020, respectively. 28 2021 Annual ReportManagement’s Discussion and AnalysisStabilized Portfolio: Net AMR, Occupied AMR and Occupancy by Geography As at December 31 Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands(2) Total residential suites MHC Sites Total MHC sites Total suites and sites Net AMR Occupied AMR 2021 AMR ($) 2020(1) AMR ($) % Change AMR 2021 AMR ($) 2020(1) AMR ($) % Change AMR Occupancy % 2021 2020 1,515 1,104 1,395 1,444 1,020 1,105 1,041 1,476 1,353 1,441 1,488 1,069 1,363 1,415 991 1,095 1,016 1,466 1,301 1,413 1,315 1,197 1,108 1,153 1,118 1,056 1,079 1,061 1,103 1,100 1,033 1,316 1,321 1,316 396 1,140 984 1,280 1,375 1,292 390 1,119 1.8 3.3 2.3 2.0 2.9 0.9 2.5 0.7 4.0 2.0 9.9 4.9 6.9 5.4 0.3 5.0 2.8 (3.9) 1.9 1.5 1.9 1,527 1,111 1,402 1,455 1,047 1,138 1,070 1,491 1,357 1,452 1,506 1,078 1,372 1,431 1,025 1,118 1,048 1,484 1,306 1,426 1,334 1,259 1,119 1,209 1,139 1,108 1,223 1,133 1,117 1,109 1,065 1,333 1,339 1,334 413 1,162 1,042 1,308 1,399 1,319 407 1,148 1.4 3.1 2.2 1.7 2.1 1.8 2.1 0.5 3.9 1.8 6.0 1.0 (1.1) 0.5 0.7 2.2 1.9 (4.3) 1.1 1.5 1.2 99.2 99.3 99.5 99.2 97.4 97.1 97.3 99.0 99.7 99.2 98.6 99.0 95.4 98.1 98.7 97.0 98.7 98.7 98.7 95.7 98.1 98.8 99.2 99.4 98.9 96.7 97.9 97.0 98.8 99.6 99.1 95.1 95.3 88.2 93.7 99.2 94.4 97.9 98.3 98.0 95.8 97.6 (1) (2) Prior year comparable Net and Occupied AMR and occupancy has been restated for properties disposed of since December 31, 2020. Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. Includes foreign exchange impact and service charge income. The amounts in euros for the stabilized portfolio for Net AMR are €918 and €882 as at December 31, 2021 and December 31, 2020, respectively, resulting in a Net AMR change of 4.1%. The Occupied AMR for the stabilized portfolio is €930 and €896 as at December 31, 2021 and December 31, 2020, respectively, resulting in an Occupied AMR change of 3.8%. The rate of growth in stabilized Net AMR has been primarily due to (i) rental increases on turnover in the rental markets of Ontario, British Columbia and Nova Scotia, (ii) rental increases on renewals where permissible, and (iii) strengthening occupancy rates in Alberta and Nova Scotia. Weighted average gross rent per square foot for Canadian residential suites was approximately $1.65 as at December 31, 2021, a small improvement from December 31, 2020. 29 Investing in Our FutureManagement’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 2022 1.2% 1.5% 2021(1) 0.0% 0.0% 2020(2) 2.2% 2.6% (1) The provinces of Ontario and British Columbia have passed legislation to freeze rent until December 31, 2021. This is further discussed in Section II under The COVID-19 Pandemic. CAPREIT did not issue any rental renewal increases in Ontario and British Columbia during 2021, other than approved above guideline increases in selected suites and sites. As a result, CAPREIT can issue rental renewal increases for the majority of its Ontario and British Columbia portfolio on January 1, 2022. (2) The rent increases were not applicable in certain periods due to the pandemic. Above Guideline Increases Management continues to pursue applications in Ontario for AGIs to raise monthly rents on lease renewals where it believes increases above the annual guideline are supported by market conditions. 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. British Columbia has also announced a change to the annual rental increase formula that will now factor in landlords’ costs for necessary capital expenditures. These buildings which incur eligible capital expenditures will be eligible for AGIs. Effective on July 1, 2021, landlords may apply all eligible capital expenditures made over the previous 18 months for AGIs. In addition, the increase will be capped at 3% each year but may be spread out over 3 years to a maximum of 9% over the 3-year period in addition to normal annual increases. 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) (1) Weighted by number of impacted suites and sites filed. January 1, 2021 – December 31, 2021 January 1, 2020 – December 31, 2020 1,023 0.55% 0.61% 7,879 2.06% 970 2.13% 2.31% 8,138 1.88% (2) (3) (4) For applications settled during the year ended December 31, 2021, the weighted average total increase approved is to apply over a weighted average of 1.0 year (1.8 years for the year ended December 31, 2020). For applications settled during the year ended December 31, 2021, the weighted average total increase applied for was to apply over a weighted average of 1.0 year (1.8 years for the year ended December 31, 2020). For applications outstanding as at December 31, 2021, the weighted average total increase applied for was to apply over a weighted average of 1.4 years (1.3 years for the year ended December 31, 2020). 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, Suite turnovers Lease renewals Weighted average of turnovers and renewals 2021 2020 Change in monthly rent Turnovers and Renewals(1) Change in monthly rent Turnovers and Renewals(1) $ 80.9 15.6 38.7 % 5.9 1.4 3.0 % 21.8 39.8 $ 106.7 16.7 32.7 % 7.9 1.3 2.5 % 18.7 86.5 (1) Percentage of suites turned over or renewed during the year based on the total weighted number of residential suites (excluding co-ownerships) held during the year. 30 2021 Annual ReportManagement’s Discussion and AnalysisThe Netherlands Portfolio For the Year Ended December 31, Suite turnovers Lease renewals Weighted average of turnovers and renewals 2021 Change in monthly rent € % 140.0 16.1 22.8 46.7 2.3 5.1 2020 Turnovers and Renewals(1) Change in monthly rent Turnovers and Renewals(1) % 13.9 54.3 € 82.4 18.9 27.4 % 9.3 2.3 3.2 % 14.2 92.5 (1) Percentage of suites turned over or renewed during the year based on the total weighted number of Dutch residential suites held during the year. Overall, suite turnovers in the Canadian residential portfolio (excluding co-ownerships) during the year ended December 31, 2021 resulted in monthly rent increasing by approximately $81 or 5.9% compared to an increase of approximately $107 or 7.9% for last year, primarily due to the strong rental markets in Ontario, British Columbia and Nova Scotia. The reduced turnover increases are mainly due to the impact of the COVID-19 pandemic as discussed in Section II under The COVID-19 Pandemic. Although there were reduced increases in monthly rent, 22% of the suites in the Canadian residential portfolio turned over during the year ended December 31, 2021, an increase compared to 19% of suites turned over during last year. Additionally, turnover rates have been increasing quarter by quarter in 2021 with fourth quarter monthly rents increasing by approximately $120 or 8.6%. Monthly rents on lease renewals on the Canadian residential portfolio (excluding co-ownerships) for the year ended December 31, 2021 resulted in monthly rent increasing by approximately $16 or 1.4% compared to an increase of approximately $17 or 1.3% for last year. The reduced renewal increases are mainly due to the impact of the COVID-19 pandemic rent freezes as discussed in Section II under The COVID-19 Pandemic. As a result of the expiry of the regulatory rent freeze in Ontario and British Columbia, CAPREIT served tenant notices to 44% of its Canadian tenants, across which the weighted average rental increase was 1.3%, effective January 1, 2022. For the Netherlands portfolio, suite turnovers in the residential suite portfolio during the year ended December 31, 2021 resulted in monthly rent increasing by approximately €140 or 16.1% compared to an increase of approximately €82 or 9.3% last year. The tenant notices for rent renewal increases beginning on July 1, 2021, with a weighted average rental increase of 2.3%, were served to 94% of the Dutch liberalized residential suites, which comprised 54.3% of the total Netherlands portfolio. There were no increases on regulated suites due to the impact of COVID-19 pandemic rent freezes as discussed in Section II under The COVID-19 Pandemic. Given the current market environment with the COVID-19 pandemic, there is a high level of uncertainty establishing current market rents. As such it is difficult to estimate the differential between market rents and current rents. Management expects market rents to stabilize in the medium term. Tenant Inducements, Vacancy Loss and Expected Credit Loss Expense ($ 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 vacancy loss Bad debt allowance recognized as an expense (1) As a percentage of total operating revenues. 2021 7,693 30 7,723 6,781 26,483 33,264 5,708 %(1) 0.7 2.8 3.5 0.6 $ $ $ $ $ $ $ $ $ $ 2020 2,659 – 2,659 1,984 20,417 22,401 5,219 %(1) 0.2 2.3 2.5 0.6 The increase in residential tenant inducements, vacancy loss, and expected credit loss/bad debt expense (“bad debt”) was due to circumstances caused by the COVID-19 pandemic, as discussed in Section II under The COVID-19 Pandemic. 31 Investing in Our FutureManagement’s Discussion and Analysis Results of Operations Total Operating Revenues by Geography(1) For the Year Ended December 31, ($ Thousands) Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria and Other British Columbia Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands(2) Other Europe(3) Total residential suites MHC Sites Total MHC sites Total residential suites and MHC sites (1) Comprised of residential, commercial, and ancillary revenue. 2021 Revenue 332,391 47,297 34,372 414,060 108,219 38,111 146,330 68,698 31,328 100,026 52,702 27,265 7,651 34,916 8,483 2,802 759,319 103,395 10,523 113,918 873,237 (%) 35.7 5.1 3.7 44.5 11.6 4.1 15.7 7.4 3.4 10.8 5.6 2.9 0.8 3.7 0.9 0.3 81.5 11.1 1.1 12.2 93.7 59,900 933,137 6.3 100.0 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2020(4) Revenue 322,080 39,507 27,912 389,499 105,281 36,450 141,731 66,781 26,113 92,894 46,564 28,943 7,783 36,726 8,389 2,842 718,645 95,838 11,130 106,968 825,613 (%) 36.5 4.4 3.2 44.1 11.9 4.1 16.0 7.5 3.0 10.5 5.3 3.3 0.9 4.2 1.0 0.3 81.4 10.9 1.3 12.2 93.6 57,030 882,643 6.4 100.0 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ (2) (3) (4) In € thousands, €69,778 and €62,592 for years ended December 31, 2021 and December 31, 2020, respectively. Comprised of revenues for the commercial properties located in Germany and Belgium. In € thousands, €7,094 for the year ended December 31, 2021 and €7,288 for the year ended December 31, 2020. Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 32 2021 Annual ReportManagement’s Discussion and Analysis Estimated Net Rental Revenue Run-Rate The table below shows the estimated net rental revenue run-rate (net of historical vacancy loss and tenant inducements) based on Net AMRs in place for CAPREIT’s share of residential suites and sites and commercial leases as at December 31, 2021 and 2020. Increases or decreases in net rental revenue run-rate are primarily due to acquisitions or dispositions, respectively, within the last 12 months. ($ Thousands) As at December 31, Residential rent roll(1),(2) Commercial rent roll(1),(2) Annualized net rental revenue run-rate 2021 895,299 31,875 927,174 $ $ 2020 836,035 32,614 868,649 $ $ (1) Based on the rent roll as at December 31, net of vacancy loss and tenant inducements for the 12 months ended on such date. (2) Includes the rent roll for all properties owned as at December 31. Net rental revenue net of dispositions for the 12 months ended December 31, 2021 was $873.4 million (2020 – $831.5 million). NOI Management believes NOI is a key indicator of operating performance in the real estate industry. NOI includes all rental revenues and other related ancillary income (including MHC home sales) generated at the property level, less: (i) related direct costs such as realty taxes, utilities, R&M costs, on-site wages and salaries, insurance costs and bad debts; and (ii) an appropriate allocation of overhead costs. It may not, however, be comparable to similar measures presented by other real estate investment trusts or companies. Stabilized properties for the year ended December 31, 2021 are defined as all properties owned by CAPREIT continuously since December 31, 2019, and therefore do not take into account the impact on performance of acquisitions or dispositions completed during 2021 and 2020. As at December 31, 2021, stabilized suites and sites represented 90.0% of CAPREIT’s total portfolio. ($ Thousands) For the Year Ended December 31, Total NOI Stabilized NOI 2021 2020 %(1) 2021 2020 %(1) Operating Revenues Net rental revenues Other(2) Total operating revenues Operating Expenses Realty taxes Utilities Other(3) Total operating expenses NOI NOI margin $ $ $ $ 884,748 48,389 933,137 (87,698) (68,901) (166,545) (323,144) 609,993 65.4% $ $ $ $ 837,384 45,259 882,643 (81,596) (65,459) (157,417) (304,472) 578,171 65.5% 5.7 6.9 5.7 7.5 5.3 5.8 6.1 5.5 $ $ $ $ 813,816 44,683 858,499 (79,905) (62,913) (151,637) (294,455) 564,044 65.7% $ $ $ $ 805,185 43,361 848,546 (78,070) (61,811) (149,946) (289,827) 558,719 65.8% 1.1 3.0 1.2 2.4 1.8 1.1 1.6 1.0 (1) Represents the year-over-year percentage change. (2) Comprises ancillary income such as parking, laundry and antenna revenue. (3) Comprises R&M, wages, insurance, advertising, legal costs and bad debt. Operating Revenues For the year ended December 31, 2021, total operating revenues for the total and stabilized portfolio increased compared to last year, due to increases in monthly rents on turnovers and renewals offset by increases in vacancy loss and in tenant allowances mainly in the Greater Toronto Area and Greater Montréal Region. Contributions from acquisitions further contributed to higher operating revenues for the total portfolio. 33 Investing in Our FutureManagement’s Discussion and Analysis Operating Expenses Realty Taxes For the year ended December 31, 2021, the stabilized portfolio’s realty tax increased compared to last year, primarily because of the reclassification of tax recoveries from netting against realty tax expenses to increasing commercial lease revenue impacting primarily Québec. 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 Total Utilities Stabilized Utilities 2021 23,359 17,096 28,446 68,901 $ $ 2020 23,322 15,857 26,280 65,459 %(1) 0.2 7.8 8.2 5.3 2021 $ 21,065 15,645 26,203 62,913 $ 2020 21,187 15,076 25,548 61,811 %(1) (0.6) 3.8 2.6 1.8 $ $ $ $ (1) Represents the year-over-year percentage change. The table below breaks down the factors causing the above changes in the stabilized portfolio. Refer to the Operational Efficiency and Resilience section of the 2020 ESG Report for details on our conservation efforts. For the Year Ended December 31, 2021 Decrease due to consumption Increase due to rate Electricity Natural gas Water Total (1.4)% (2.4)% (1.8)% (2.0)% 0.8% 6.2% 4.4% 3.8% Explanation Reduced consumption due to warmer weather, partially offset by increased rates Increased rates due to carbon tax impact, partially offset by reduced consumption due to warmer weather Higher rates, partially offset by lower consumption As at December 31, 2021, tenants who pay their hydro charges directly represented 71% of the total 17,860 sub-metered suites in Ontario, Alberta, and Nova Scotia. Other Operating Expenses Stabilized other operating expenses for the year ended December 31, 2021 increased compared to last year, primarily due to higher R&M costs in Ontario and higher overall insurance costs, partially offset by lower advertising costs, legal and collection costs. The higher R&M costs were primarily due to the increased ability to complete work given restrictions and limitations in connection with the COVID-19 pandemic were less impactful in 2021. The increased insurance costs were driven by higher insurance rates. 34 2021 Annual ReportManagement’s Discussion and Analysis NOI by Region For the Year Ended December 31, 2021 2020(4) ($ Thousands) Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria and Other British Columbia Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands(2) Other Europe(3) Total residential suites MHC Sites Total MHC sites Total suites and sites NOI NOI %(1) NOI Margin (%) NOI NOI %(1) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 213,866 30,338 23,277 267,481 64,781 23,750 88,531 35.2 5.0 3.8 44.0 10.6 3.9 14.5 48,188 7.9 22,598 70,786 3.7 11.6 31,219 5.1 14,822 4,132 18,954 2.4 0.7 3.1 4,448 0.7 1,421 482,840 79,552 8,655 88,207 571,047 0.2 79.2 13.0 1.4 14.4 93.6 38,946 609,993 6.4 100.0 64.3 64.1 67.7 64.6 59.9 62.3 60.5 70.1 72.1 70.8 59.2 54.4 54.0 54.3 52.4 50.7 63.6 76.9 82.2 77.4 65.4 65.0 65.4 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 208,978 26,048 18,350 253,376 64,613 22,465 87,078 36.1 4.5 3.2 43.8 11.2 3.9 15.1 47,081 8.1 18,790 65,871 3.2 11.3 27,014 16,060 4,503 20,563 4,321 1,467 459,690 72,578 8,893 81,471 541,161 4.7 2.8 0.8 3.6 0.7 0.3 79.5 12.6 1.5 14.1 93.6 37,010 6.4 578,171 100.0 Increase (Decrease) NOI Change (%) NOI Margin (%) 64.9 65.9 65.7 65.1 61.4 61.6 61.4 70.5 72.0 70.9 58.0 55.5 57.9 56.0 51.5 51.6 64.0 75.7 79.9 76.2 65.5 64.9 65.5 2.3 16.5 26.9 5.6 0.3 5.7 1.7 2.4 20.3 7.5 15.6 (7.7) (8.2) (7.8) 2.9 (3.1) 5.0 9.6 (2.7) 8.3 5.5 5.2 5.5 (1) Represents percentage of the portfolio by NOI. (2) (3) (4) In € thousands, €53,681 and €47,413 for the years ended December 31, 2021 and December 31, 2020, respectively. Comprised of NOI for the commercial properties located in Germany and Belgium. In € thousands, €5,837 and €5,827 for the years ended December 31, 2021 and December 31, 2020, respectively. Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 35 Investing in Our FutureManagement’s Discussion and Analysis Increase (Decrease) NOI Margin (%) Revenue Change (%) Expense Change (%) NOI Change (%) Stabilized NOI by Region For the Year Ended December 31, 2021 ($ Thousands) Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands Other Europe Total residential suites MHC Sites Total MHC sites Total suites and sites Stabilized suites and sites Stabilized NOI NOI Margin (%) 207,285 26,363 19,354 253,002 62,868 22,957 85,825 46,959 19,285 66,244 64.7 65.7 68.5 65.1 60.0 62.1 60.5 70.3 72.1 70.8 15,228 59.6 14,838 3,018 17,856 54.4 51.8 54.0 4,452 52.5 1,421 444,028 73,497 8,613 82,110 526,138 37,906 564,044 59,553 50.7 64.0 76.9 81.7 77.4 65.8 65.0 65.7 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2020(11) Stabilized NOI 206,749 25,452 17,993 250,194 63,037 22,456 85,493 46,967 18,790 65,757 65.1 66.1 65.7 65.2 61.0 61.6 61.2 70.5 72.0 70.9 14,947 60.2 15,300 3,792 19,092 55.4 58.9 56.0 0.9 4.1 3.1 1.3(1) 1.6 1.5 1.5(2) 0.4 2.5 1.0 2.8 (1.3) (9.5) (2.9)(5) 2.0 5.2 (5.5) 1.8(1) 4.4 0.4 3.4(2) 1.2 2.1 1.5(3) 4.2(4) 0.8 6.0 1.7(6) 4,326 51.7 1.3 (0.4) 1,467 441,276 71,628 8,938 80,566 521,842 36,877 558,719 59,553 51.6 64.3 75.7 81.6 76.4 65.9 64.9 65.8 (1.4)(7) 1.2 1.0 (3.7) 0.5 1.1 2.5 1.2 0.4(8) 2.1 (4.1) (4.0) (4.1)(9) 1.6 2.1(10) 1.6 0.3 3.6 7.6 1.1 (0.3) 2.2 0.4 0.0 2.6 0.7 1.9 (3.0) (20.4) (6.5) 2.9 (3.1) 0.6 2.6 (3.6) 1.9 0.8 2.8 1.0 (1) (2) Higher expenses: higher R&M, bad debt and insurance costs, partially offset by lower utilities and realty taxes. Revenue growth has been impacted by higher vacancy loss and tenant inducements. Higher expenses: higher realty taxes, insurance and bad debt, partially offset by lower R&M. Revenue growth has been impacted by higher vacancy loss and tenant inducements. (3) Higher expenses: higher utilities, partially offset by lower bad debt and R&M. (4) Higher expenses: higher utilities and R&M, partially offset by lower advertising costs. (5) Lower revenues: lower rents, higher rental vacancies and higher tenant incentives. (6) Higher expenses: higher utilities, partially offset by lower advertising costs. (7) Lower revenues: higher tenant incentives. (8) Higher expenses: higher realty taxes, partially offset by lower R&M. (9) In € thousands, NOI of €55,436 and €52,694 for the years ended December 31, 2021 and December 31, 2020, respectively. NOI increased by €2,742 and 5.2%. Lower expenses: lower site costs and R&M, partially offset by higher insurance costs. (10) Higher expenses: higher realty taxes, site costs and wages, partially offset by lower utilities. (11) Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 36 2021 Annual ReportManagement’s Discussion and Analysis Net Income and Other Comprehensive Income ($ Thousands) For the Year Ended December 31, NOI (Less) plus: Trust expenses Unit-based compensation expense Fair value adjustments of investment properties Fair value adjustments of Exchangeable LP Units Fair value adjustments of investments Realized loss on disposition of investment properties Amortization of property, plant and equipment (Loss) gain on non-controlling interest Gain (loss) on derivative financial instruments Interest on Exchangeable LP Units Interest on mortgages payable and other financing costs Interest on bank indebtedness and other financing costs Interest on leases (Loss) gain on foreign currency translation Other income Net income before income taxes Current and deferred income tax expense Net income Other comprehensive (loss) income, including items that may be reclassified subsequently to net income Amortization of losses from (AOCL) AOCI to interest and other financing costs $ 2,440 $ (Loss) gain on foreign currency translation Other comprehensive (loss) income Comprehensive income 2021 2020 $ 609,993 $ 578,171 (51,366) (15,111) 1,048,742 (665) 14,088 (241) (8,250) (38,651) 50,282 (1,119) (148,334) (6,110) (4,900) (6,095) 31,713 $ 1,473,976 (81,181) $ 1,392,795 $ $ (43,268) (5,160) 595,859 (1,230) (3,979) (1,387) (7,668) 24,478 (52,672) (441) (151,722) (7,955) (4,507) 5,982 29,990 954,491 (28,563) 925,928 2,570 86,987 89,557 (115,884) (113,444) $ 1,279,351 $ 1,015,485 37 Investing in Our FutureManagement’s Discussion and Analysis Trust Expenses and Net 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 include costs related to the generation of asset management and services fees to ERES and asset and property management fees to Irish Residential Properties REIT plc (“IRES”). The table below shows trust expenses net of external fees income. While Net Trust Expenses are calculated based on items in the financial statements or supporting notes, Net Trust Expenses itself is not a standardized financial measure under IFRS and may not be comparable to similarly termed financial measures disclosed by other real estate investment trusts or companies in similar or different industries. ($ Thousands) For the Year Ended December 31, Trust expenses attributable to CAPREIT (excluding ERES) $ Trust expenses attributable to ERES Trust Expenses Less: Asset management and services fees income from ERES attributed to ERES non-controlling unitholders(1) Less: Acquisition fees from ERES attributed to ERES non-controlling unitholders(1) Less: Asset and property management fees income from IRES(2) Net Trust Expenses Net Trust Expenses as % of Operating Revenue (1) These fees are eliminated upon consolidation. $ 2021 43,287 8,079 51,366 (2,805) (732) (9,863) 37,966 4.1% 2020 35,370 7,898 43,268 (2,546) (430) (9,592) 30,700 3.5% (2) These amounts are included within other income on the statements of income and comprehensive income. Trust expenses increased for the year ended December 31, 2021 to $51.4 million compared to $43.3 million last year primarily as a result of higher salaries and benefits, compliance expenses, and IT expenses, which were partially offset by lower consulting fees. For the year ended December 31, 2021, trust expenses included non-routine items of approximately $3.7 million related to acquisition research expenses and reorganization costs, compared to approximately $0.8 million non-routine items related to ERES acquisition research costs that were not completed, restructuring costs, and one-time TSX listing and legal fees for the year ended December 31, 2020. With the termination of the investment management agreement (“IMA”) with IRES, CAPREIT will cease to generate asset and property management fees income from IRES and cease to incur certain related trust expenses. For further details please see the Other Income section in Section III of this MD&A. Unit-based Compensation Expense Unit-based compensation expense (recovery) has been separated into two components: (i) the amortization of the fair value at grant date of the award over its vesting period, and (ii) the remeasurement of awards outstanding at period end at fair value. ($ 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 2021 7,914 7,197 15,111 $ $ $ $ 2020 (2,170) 7,330 5,160 38 2021 Annual ReportManagement’s Discussion and Analysis Gain (Loss) on Derivative Financial Instruments The gain (loss) on derivative financial instruments is due to changes in the fair value of derivatives for which hedge accounting is not applied. The gain on derivative financial instruments for the year ended December 31, 2021 primarily relates to changes in foreign exchange rates. CAPREIT uses derivative financial instruments to minimize its exposure to fluctuations in interest rates and foreign exchange rates. These derivative financial instruments allow CAPREIT to take advantage of the low EURIBOR rates, resulting in significant interest savings, and to convert its borrowings to euro-denominated liabilities to hedge against a majority of its euro-denominated assets. See note 21 to the accompanying audited consolidated annual financial statements for further details about derivatives. (Loss) Gain on Non-Controlling Interest For the year ended December 31, 2021, CAPREIT recorded a loss of $38.7 million on ERES units held by non-controlling unitholders. This includes distributions to ERES non-controlling unitholders of $12.8 million for the year ended December 31, 2021. The remaining balance is the mark-to-market gain or loss due to fluctuations in the ERES unit market price. Gain (Loss) on Foreign Currency Translation CAPREIT is exposed to gain/loss on foreign currency translation due to its holdings of assets and liabilities through its investment in IRES, its ERES subsidiary, and foreign-denominated cash and borrowings held by CAPREIT. The following table summarizes the gain or loss recorded in other comprehensive (loss) income and net income on this exposure and its associated derivative instruments. Between December 31, 2020 and December 31, 2021, the euro weakened against the Canadian Dollar from a closing price of 1.5608 to 1.4391. As of December 31, ($ Thousands) Total Foreign Assets(1) Total Foreign Liabilities(2) Net Equity(3) Cross-Currency Swap Net Foreign Exchange Exposure and Gain (Loss) Net Foreign Exchange Exposure – Excluding Non-controlling Interest(3) As of December 31, ($ Thousands) Total Foreign Assets(1) Total Foreign Liabilities(2) Net Equity(3) Cross-Currency Swap Net Foreign Exchange Exposure and Gain (Loss) Net Foreign Exchange Exposure – Excluding Non-controlling Interest(3) 996,190 1,088,665 442,358 646,307 343,199 Balance 1,677,856(4) 761,266 916,590 442,358 474,232 223,402 € € € € € 2021 Other Comprehensive Income (Loss) Net Income Gain (Loss) Total Foreign Exchange Gain (Loss) Balance Year Ended Year Ended Year Ended € 2,084,855(4) $ (221,924) $ 106,040 (115,884) – $ (115,884) $ (1,399) (4,696) (6,095) 44,563 38,468 $ (223,323) 101,344 (121,979) 44,563 $ (77,416) 2020 Other Comprehensive Income (Loss) Net Income Gain (Loss) Total Foreign Exchange Gain (Loss) Year Ended Year Ended Year Ended $ 159,233 $ (72,246) 86,987 – $ 86,987 $ 533 5,449 5,982 (54,661) (48,679) $ 159,766 (66,797) 92,969 (54,661) 38,308 $ (1) (2) (3) Foreign assets are comprised of CAPREIT’s euro cash, ERES assets, and CAPREIT investment in IRES. Foreign exchange gains or losses related to CAPREIT’s euro cash are recorded in foreign currency translation under net income. Foreign exchange gains or losses related to ERES assets and CAPREIT’s investment in IRES are recorded in foreign currency translation under other comprehensive (loss) income. Foreign liabilities are comprised of ERES liabilities and CAPREIT’s euro borrowings: (a) foreign exchange gains or losses related to loans secured by ERES are recorded in foreign currency translation under other comprehensive (loss) income; (b) gains or losses on CAPREIT’s euro borrowings are recorded in foreign currency translation under net income. As at December 31, 2021, net equity includes €891,495 (December 31, 2020 – €737,734) relating to ERES in which CAPREIT has a 66% (December 31, 2020 – 66%) interest. Taking into consideration the non-controlling interest of ERES, net foreign exchange exposure is €343,199 (December 31, 2020 – €223,402). (4) Includes ERES assets of €1,887,685 and CAPREIT’s investment in IRES of €184,162 (December 31, 2020 – €1,499,000 and €168,632, respectively). 39 Investing in Our FutureManagement’s Discussion and Analysis Other Income Other income primarily consists of income received from investments (see note 9 of the accompanying audited consolidated annual financial statements), net profit from investment in associate, asset management and property management fees and profit from sale of MHC homes. ($ Thousands) For the Year Ended December 31, Investment income Net profit from investment in associate(1) Asset and property management fees(2) Interest income from mortgages receivable Profit from sale of MHC inventory(3) Other(4) Total $ $ 2021 1,493 18,455 9,863 778 945 179 $ 31,713 $ 2020 1,226 17,173 9,592 – – 1,999 29,990 (1) (2) CAPREIT’s share of IRES’s investment property fair value change, earnings and foreign exchange effects thereon. For the years ended December 31, 2021 and 2020, CAPREIT’s share of IRES’s investment property fair value gain is $9.3 million and $6.1 million respectively. Other income includes asset and property management fees from IRES, which CAPREIT has an 18.7% ownership in as at December 31, 2021 (December 31, 2020 – 18.8%), and excludes asset and property management fees and service fees from ERES, in which CAPREIT has a 65.8% ownership as at December 31, 2021 (December 31, 2020 – 66.0%). ($ Thousands) For the Year Ended December 31, Total fee income generated Asset and property management fees, acquisition fees and service fees from ERES which are 100% eliminated on consolidation Asset and property management fees from IRES recognized in other income 2021 $ 24,239 14,376 9,863 $ 2020 22,068 12,476 9,592 $ $ (3) Consists of income from sale of MHC home inventory of $3.5 million offset by cost of sales of $2.5 million. Previously, this was included within NOI. (4) The non-recurring other income is mainly due to the interest earned on cash and cash equivalents held in 2020. On January 31, 2022, CAPREIT’s IMA with IRES was terminated, while CAPREIT continues to provide transition services for a period of three months for total fees of approximately $1.5 million. There is no change in the fees earned in the first quarter of 2022. As a result of the termination of the IMA, the impact on CAPREIT’s net income is expected to be approximately $3.0 to $4.0 million for 2022, driven by a decrease in asset and property management fees partially offset by a decrease in related trust expenses. The termination of the IMA will free up a significant amount of head office resources and allow CAPREIT to reallocate its resources to new opportunities. SECTION IV: UNIT CALCULATIONS, NON-IFRS FINANCIAL MEASURES Per Unit Calculations As a result of CAPREIT being an open-ended mutual fund trust, Unitholders are entitled to redeem their Trust Units in accordance with the conditions specified in the DOT. The impact of this redemption feature causes CAPREIT’s Trust Units to be treated as financial liabilities under IFRS. Consequently, all per unit calculations are considered non-IFRS measures. 40 2021 Annual ReportManagement’s Discussion and Analysis The following table explains the number of units used in calculating non-IFRS financial measures on a per unit basis: ($ Thousands) For the Year Ended December 31, Trust Units Exchangeable LP Units(2) Units under the DUP(3) Basic number of units Plus: Unit rights under the RUR Plan(3) Diluted number of units Weighted Average Number of Units Outstanding Number of Units 2021 172,620 705 183 2020 170,685 278 160 173,508 171,123 533 174,041 571 171,694 2021 173,406 1,679 196 175,281 480 175,761 %(1) 98.7 1.0 0.1 99.7 0.3 100.0 (1) Represents percentage of total diluted units. (2) See note 17 to the accompanying audited consolidated annual financial statements for details on Exchangeable LP Units. (3) See notes 15 and 16 to the accompanying audited consolidated annual financial statements for the year ended December 31, 2021 for details of CAPREIT’s unit-based compensation plans. 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 2021 2020 $ 243,348 $ 235,649 1,119 441 1,012 245,479 (75,739) (1,012) 1,013 237,103 (68,108) (1,013) $ 168,728 $ 167,982 31.3% 29.2% (1) Comprises non-cash distributions related to the DUP and the RUR Plan (see notes 15 and 16 to CAPREIT’s accompanying audited consolidated annual financial statements for the year ended December 31, 2021 for a discussion of these plans). Under CAPREIT’s DRIP, a participant may purchase additional units with the cash distributions paid on the eligible units, registered in the participant’s name or held in a participant’s account maintained pursuant to the DRIP. Each participant has the right to receive an additional amount equal to 5% of their monthly distributions reinvested pursuant to the DRIP, which will automatically be paid on each distribution date in the form of additional units. The price at which units will be purchased with cash distributions will be the weighted average trading price for CAPREIT’s Trust Units on the Toronto Stock Exchange (“TSX”) for the five trading days immediately preceding the relevant distribution date. Reinvestments pursuant to the DRIP will increase 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. Exchangeable LP Units are not eligible for the DRIP. 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 (i) the adjustment for unrealized gains or losses on fair value through profit or loss (“FVTPL”) marketable securities, (ii) the adjustment for amortization of property, plant, and equipment, (iii) the one-time write-off of prepaid CMHC premiums on expired mortgages and (iv) the adjustment for non-recurring mortgage prepayment penalties. 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. A reconciliation of net income to FFO is as follows: 41 Investing in Our FutureManagement’s Discussion and Analysis ($ Thousands, except per Unit amounts) For the Year Ended December 31, Net income Adjustments: Fair value adjustments of investment properties Realized loss on disposition of investment properties Remeasurement of Exchangeable LP Units Remeasurement of investments Remeasurement of unit-based compensation liabilities Interest on Exchangeable LP Units Deferred income tax expense(1) Loss (gain) on foreign currency translation FFO adjustment for income from investment in associate (Gain) loss on derivative financial instruments Fair value mark-to-market adjustment on ERES units held by non-controlling unitholders Distributions on ERES units held by non-controlling unitholders Net FFO impact attributable to ERES units held by non-controlling unitholders(2) Amortization of property, plant and equipment Lease principal repayment Prepaid CMHC Premiums write-offs(3) Net mortgage prepayment costs(4) 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 2021 2020 $ 1,392,795 $ 925,928 (1,048,742) (595,859) 241 665 (14,088) 7,914 1,119 77,417 6,095 (9,271) (50,282) 25,895 12,756 (17,138) 8,250 (1,207) – – 392,419 2.262 2.255 245,479 62.6% 168,728 223,691 43.0% $ $ $ $ $ $ 1,387 1,230 3,979 (2,170) 441 26,368 (5,982) (6,141) 52,672 (37,020) 12,542 (16,275) 7,668 (1,157) 14,348 4,429 386,388 2.258 2.250 237,103 61.4% 167,982 218,406 43.5% $ $ $ $ $ $ (1) (2) (3) (4) The adjustment for the year ended December 31, 2021 consists of $76.6 million of deferred income tax expenses as well as $0.8 million tax adjustment related to the 2019 deemed disposition of investment properties associated with the reorganization of legal structure of the Netherlands subsidiaries. The adjustment for the year ended December 31, 2020 consists of $25.2 million of deferred income tax expenses as well as $1.2 million of current income taxes on the disposition of a German investment property. The adjustment is based on applying the 34% weighted average ownership held by ERES non-controlling unitholders (December 31, 2020 – 34%) to ERES’s FFO of $52.5 million (€35.4 million) (December 31, 2020 – $47.9 million or €31.2 million) and adjusting for $2.1 million of acquisition fees in the year ended December 31, 2021 charged by CAPREIT to ERES, which are eliminated upon consolidation. Consists of $5.0 million of expensed CMHC premiums relating to mortgages refinanced during the year ended December 31, 2020 and $9.4 million of expensed prepaid CMHC premiums relating to mortgages refinanced in prior years. Consists of non-recurring mortgage prepayment costs related to mortgages of the bought out operating leasehold properties. There costs were incurred in order to accelerate refinancing and take advantage of the favourable interest rate environment. Normalized Funds From Operations Management considers NFFO to be the key measure of CAPREIT’s operating performance. NFFO is calculated by excluding from FFO the effects of certain items that are not indicative of CAPREIT’s medium and/or long-term performance. These items include amortization of losses on certain hedging instruments previously settled and paid, mortgage prepayment penalties, accelerated vesting of previously granted RUR units, large acquisition research costs relating to transactions that were not completed, one-time IRES internalization expenses impacting FFO adjustment from investment in associate and reorganization, senior management termination, and retirement costs. As it is an operating performance metric, no adjustment is made to NFFO for capital expenditures. NFFO facilitates better comparability than FFO to prior years’ performance and provides a better indicator of CAPREIT’s long-term operating performance. For further information on CAPREIT’s total property capital investments, please refer to the Property Capital Investments in Section V. See discussions under the Net Income and Other Comprehensive Income in Section III for additional information on hedging instruments currently in place. NFFO is not a measure of the sustainability of distributions. A reconciliation of FFO to NFFO is as follows: 42 2021 Annual ReportManagement’s Discussion and Analysis ($ Thousands, except per Unit amounts) For the Year Ended December 31, FFO Adjustments: Amortization of losses from (AOCL) AOCI to interest and other financing costs Mortgage prepayment cost Reorganization, senior management termination, and retirement costs(2) Acquisition research costs(3) IRES internalization expense impact to CAPREIT’s equity pickup(4) NFFO NFFO per unit – basic NFFO per unit – diluted Total distributions declared NFFO payout ratio Net distributions paid Excess NFFO over net distributions paid Effective NFFO payout ratio (1) Represents the year-over-year percentage change. 2021 2020 $ 392,419 $ 386,388 2,440 2,517 2,747 899 1,172 402,194 2.318 2.311 245,479 61.0% 168,728 233,466 42.0% $ $ $ $ $ $ 2,570 – – – – 388,958 2.273 2.265 237,103 61.0% 167,982 220,976 43.2% $ $ $ $ $ $ %(1) 1.6 (5.1) 100.0 100.0 100.0 100.0 3.4 2.0 2.0 3.5 0.4 5.7 (2) Includes severance and other employee costs relating to reorganization, senior management termination, and retirement. (3) Expenses included in trust expenses and related to transactions that were not completed. (4) Represents the impact of $6.2 million (€4.2 million) of internalization expenses incurred by IRES at CAPREIT’s ownership of 18.7%. FFO and NFFO may be subject to a certain degree of fluctuation from period to period as a result of CMHC premium write-offs which occur upon the refinancing of a mortgage. These write-offs are not added back to FFO or NFFO and as a result may cause fluctuation depending on the timing and amount of mortgages coming due. For further details, please refer to the Liquidity and Financial Condition section found in Section V of the MD&A. NFFO for the year ended December 31, 2021 increased by 3.4% compared to last year, primarily due to the contribution from acquisitions and higher NOI for properties owned prior to December 31, 2019. Asset and property management fees, acquisition fees and service fees received from ERES increased FFO and consequently NFFO by $4.9 million for the year ended December 31, 2021 compared to $4.2 million last year. These fees represent the amount of fees attributed to the ERES units held by non-controlling unitholders based on the weighted average ownership throughout the year. For the year ended December 31, 2021, basic NFFO per unit increased by 2.0% compared to last year, despite an approximate 1.4% increase in the weighted average number of units outstanding. 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, 2021 remained stable at 61.0% compared to last year. The effective NFFO payout ratio, which compares NFFO to net distributions paid, improved for the year ended December 31, 2021 to 42.0% from 43.2% last year. Adjusted Cash Flows From Operations and Distributions Declared As a measure of economic cash flows, CAPREIT calculates ACFO in accordance with the recommendations of REALpac. There may be periods when 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 by the Acquisition and Operating Facility. 43 Investing in Our FutureManagement’s Discussion and Analysis ACFO is a measure of economic cash flow based on the operating cash flows generated by the business, adjusted to deduct items such as interest expense, actual non-discretionary capital expenditures as described below, capitalized leasing costs, tenant improvements and amortization of other financing costs, partially offset by investment income. ACFO as calculated by CAPREIT is in accordance with the corresponding definition recommended by REALpac, with the exception of (i) the adjustment for investment income and (ii) the deduction of the non-controlling interest of ERES. It may not, however, be comparable to similar measures presented by other real estate investment trusts or companies in similar or different industries. The following table reconciles cash generated from operating activities to ACFO: ($ Thousands, except per Unit amounts) For the Year Ended December 31, Cash generated from operating activities Adjustments: Working capital adjustment(1) Interest expense included in cash flow from financing activities(2) Non-discretionary property capital investments(3) Capitalized leasing costs(4) Amortization of other financing costs(5) Investment income(6) Net ACFO impact attributed to ERES units held by non-controlling unitholders(7) Lease principal and interest repayments Tax on disposition(8) ACFO Total distributions declared Excess ACFO over distributions declared ACFO payout ratio 2021 2020(9) $ 551,433 $ 481,356 – (133,665) (78,006) (7,471) (14,574) 8,469 (18,927) (6,107) – 301,152 245,479 55,673 81.5% $ $ $ 18,116 (130,398) (70,545) (3,909) (23,725) 11,670 (12,792) (5,664) 1,155 265,264 237,103 28,161 89.4% $ $ $ (1) On a quarterly basis, a review of working capital is performed to determine whether changes in prepaid expenses, 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. As a result, the one-time current income tax payment of $18.1 million relating to current income tax expense triggered on the acquisition of European Commercial Real Estate Investment Trust (“ECREIT”) on March 29, 2019 was added back for the year ended December 31, 2020. (2) Excludes interest with respect to leases, distributions to ERES non-controlling unitholders, and holders of Exchangeable LP Units. (3) (4) (5) (6) (7) (8) Non-discretionary property capital investments for the year ended December 31, 2021 and 2020 are based on the actual annual 2021 and 2020, respectively. Refer to the “Non-Discretionary Property Capital Actuals to Forecast Reconciliation” for further information. Comprises tenant inducements and direct leasing costs. Includes amortization of deferred financing costs, CMHC premiums, deferred loan costs and fair value adjustments. The investment income in 2020 includes non-recurring interest earned on cash and cash equivalents. In addition, a portion of 2021 dividends from IRES to CAPREIT have not yet been received as at December 31, 2021 due to withholding taxes in Ireland. The adjustment is based on applying the 34% weighted average ownership held by ERES non-controlling unitholders (December 31, 2020 – 34%). Represents $1.2 million of income tax expense on the disposition of a German investment property for the year ended December 31, 2020. (9) Certain 2020 comparative figures have been adjusted to conform with current period presentation. For the year ended December 31, 2021, CAPREIT’s ACFO was in excess of distributions declared by $55.7 million. As per OSC Staff Notice 51-724, if distributions are in excess of ACFO, then it represents a return of capital, rather than a return on capital, since they represent cash payments in excess of cash generated from CAPREIT’s continuing operations during the period. 44 2021 Annual ReportManagement’s Discussion and Analysis The table below reconciles actual non-discretionary capital investments incurred to the forecasted amount: Non-Discretionary Property Capital Actuals to Forecast Reconciliation ($ Thousands) For the Year Ended December 31, Actual Forecast Difference 2021 78,006 80,117 (2,111) $ $ $ $ 2020 70,545 67,801 2,744 For the year ended December 31, 2021, CAPREIT’s actual non-discretionary property capital investments of $78.0 million were lower than the forecast by approximately $2.1 million, mainly due to reduced ability to proceed on planned projects given restrictions and limitations imposed in connection with the COVID-19 pandemic. CAPREIT’s capital investments programs are affected by seasonal cycles, and professional judgment is used by management to determine the timing of property capital investments. Therefore, actual and forecasted capital investments may differ during the applicable periods. Management continues to monitor the rollout of the capital expenditure plan in an effort to continuously improve the accuracy of its capital expenditure budgets. Significant non-discretionary property capital investments 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 judgment 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 capital investments are generally not clearly identifiable, nor do they have a common definition, and would require significant judgment to classify property capital investments as maintenance or value-enhancing capital investments. In addition, there is no generally accepted definition of maintenance capital investments in the Canadian real estate industry. 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 judgment, provides a better measure of economic cash flows. Non-Discretionary Property Capital Investments are those investments management believes are essential for the safety of residents and to ensure the structural integrity of the properties. These investments may enhance the property’s operating effectiveness, including its profitability, through increases in revenues or reductions in costs over the long term. Included in non-discretionary capital expenditures are items such as building improvements, including items such as roof, structural, balcony, sidewalks, windows, brick, electrical, MHC infrastructure investments, and life and safety. Management uses its professional judgment 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 $800 to $1,200 per residential suite annually over the last five years and are expensed to NOI. Discretionary Property Capital Investments are capital expenditures made to the property that are not essential to the operation of the business in the short term. These investments may enhance the property’s operating effectiveness, including its profitability, through increases in revenues or reductions in costs over the long term. Included in discretionary capital expenditures are items such as suite and common area improvements, energy-saving initiatives, equipment, boilers, elevators and risers. The following table presents the actual 2021, 2020 and 2019 Non-Discretionary Property Capital Investments per suite and site: ($ Thousands) Non-discretionary property capital investments Weighted average number of suites and sites Non-discretionary property capital investments per suite and site 2021 Actual 2020 Actual 2019 Actual $ $ 78,006 63,671 1,225 $ $ 70,545 60,929 1,158 $ $ 65,532 55,175 1,188 45 Investing in Our FutureManagement’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, except per Unit amounts) For the Year Ended December 31, Cash generated from operating activities Adjustments: Interest expense included in cash flow from financing activities(1) Adjusted Cash Generated from Operating Activities Total distributions declared Excess 2021 2020 $ 551,433 $ 481,356 (133,665) 417,768 245,479 172,289 $ $ $ (130,398) 350,958 237,103 113,855 $ $ $ (1) Excludes interest with respect to leases, distributions to ERES non-controlling unitholders, and holders of Exchangeable LP Units. The following table outlines the differences between adjusted cash generated from operating activities and total distributions declared, as well as the differences between net income and total distributions, in accordance with the guidelines: ($ Thousands, except per Unit amounts) For the Year Ended December 31, Net income Adjusted Cash Generated from Operating Activities Total distributions declared Net distributions paid Excess of net income over total distributions declared Excess of net income over net distributions paid Excess of Adjusted Cash Generated from Operating Activities over total distributions declared Excess of Adjusted Cash Generated from Operating Activities over net distributions paid 2021 $ 1,392,795 $ $ $ 417,768 245,479 168,728 $ 1,147,316 $ 1,224,067 $ $ 172,289 249,040 2020 925,928 350,958 237,103 167,982 688,825 757,946 113,855 182,976 $ $ $ $ $ $ $ $ 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, 2021, CAPREIT’s Adjusted Cash Generated from Operating Activities exceeded distributions declared by $172.3 million. As per OSC Staff Notice 51-724, if distributions are in excess of Adjusted Cash Generated from Operating Activities, then it represents a return of capital, rather than a return on capital, since they represent cash payments in excess of cash generated from CAPREIT’s continuing operations during the period. Management believes, should it occur, there is adequate overall liquidity to fund excess distributions over Adjusted Cash Generated from Operating Activities on an annual basis through the Acquisition and Operating Facility. 46 2021 Annual ReportManagement’s Discussion and Analysis SECTION V: CAPITAL INVESTMENT, INVESTMENT PROPERTY, CAPITAL STRUCTURE, FINANCIAL CONDITION Property Capital Investments CAPREIT capitalizes all capital investments related to the improvement of its properties. These investments have the objective of growing future NOI, increasing property value over the long term, ensuring life safety and safeguarding of assets. An important component of CAPREIT’s property capital investment strategy is to acquire properties significantly below current replacement cost and improve their operating performance by investing annually. This ensures sustainable growth to maximize the portfolio’s future rental income-generating potential. Energy-saving initiatives and suite and common area improvement costs generally tend to increase NOI more quickly compared to other capital investment categories. A breakdown of property capital investments (excluding head office assets and development) is summarized by category below. Property Capital Investments by Category ($ Thousands) Year Ended December 31, 2021 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, 2020 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 $ 70,583 6,248 1,175 78,006 105,634 71,884 20,506 16,193 2,348 1,399 1,692 219,656 $ 297,662 23.7 2.1 0.4 26.2 35.5 24.1 6.9 5.4 0.8 0.5 0.6 73.8 100.0 Actual Total Portfolio % of Actual $ 64,447 5,495 603 70,545 68,092 51,196 18,574 13,855 6,489 1,459 918 160,583 231,128 $ 27.9 2.4 0.3 30.6 29.4 22.2 8.0 6.0 2.8 0.6 0.4 69.4 100.0 47 Investing in Our FutureManagement’s Discussion and Analysis The table below includes estimated 2022 capital expenditures expected to be completed in 2022. The following budgeted capital expenditures may vary from actuals as the planned expenditures may be accelerated or otherwise adjusted as necessary. 2022 Capital Expenditure Budget ($ Thousands) 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 Budget Total Portfolio % of Budget % of Investment Properties Value $ 64,795 13,164 6,194 84,153 79,837 77,223 36,356 11,035 16,995 2,696 2,498 $ 226,640 310,793 20.8 4.2 2.0 27.0 25.7 24.9 11.7 3.6 5.5 0.9 0.8 73.0 100.0 0.4 0.1 0.0 0.5 0.5 0.5 0.2 0.1 0.1 0.0 0.0 1.4 1.9 Set out in the table below is management’s current estimate, established through consultation with an independent engineering firm, of CAPREIT’s investments in building improvements, including investments in MHC sites, for 2022 through 2025 for properties owned as of December 31, 2021. Future Investments in Building Improvements ($ Thousands) 2022 2023 2024 2025 Building Improvements Estimated Range $58,000 – $72,000 $32,000 – $40,000 $30,000 – $37,000 $32,000 – $39,000 Management believes CAPREIT has sufficient liquidity (see Liquidity and Financial Condition in Section V) to execute the above property capital investment 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. Beginning in the year ended December 31, 2021, CAPREIT appraises some of its Canadian investment properties using valuations prepared by its internal valuation team using generally the same process and methodology as its external appraiser. CAPREIT’s objective is to have a portion of its Canadian investment properties appraised externally every year, on a rotational basis. The partial internalization of valuations for the Canadian portfolio builds synergies within the various CAPREIT sub-functions including Acquisitions, Development, and Asset Management functions. 48 2021 Annual ReportManagement’s Discussion and AnalysisExternal valuations for the Canadian portfolio, where obtained, are performed at year-end with quarterly updates provided on capitalization rates. CAPREIT obtains external valuations for a cross-section of investment properties that represent different geographical locations across the Canadian portfolio. For internal valuations, the appraisal methodologies used are consistent with the practices employed by the external appraiser. The fair values of all of CAPREIT’s European residential portfolio are determined by qualified external appraisers quarterly. The qualified external appraisers hold recognized relevant professional qualifications and have recent experience in the location and category of the respective property. The following table summarizes the changes in the investment properties portfolio during the period: ($ Thousands) For the Year Ended December 31, Balance, beginning of the year Add: Acquisitions Property capital investments(1) Capitalized leasing costs(2) Right-of-use asset(3) Operating lease buyout Fair value adjustments (Loss) gain on foreign currency translation Less: Dispositions Balance, end of the year 2021 2020 $ 15,000,591 $ 13,096,426 1,053,497 314,385 1,313 10,067 4,457 1,048,742 (187,752) 825,681 242,063 659 – 158,565 595,859 138,098 (143,381) (56,760) $ 17,101,919 $ 15,000,591 (1) See Section V – Property Capital Investments, Conversions, Infill, and Redevelopment included within the Development Summary. (2) Comprised of tenant inducements, straight-line rent and direct leasing costs. (3) On April 1, 2021, the basic annual rent of an existing land lease was increased in accordance with the lease agreement, which stipulates that the basic annual rent be renegotiated every 20 years to reflect the land market value. During the year ended December 31, 2021, CAPREIT completed the buyout of another operating lease property for a net buyout price of approximately $4.5 million, resulting in the conversion from an operating leasehold interest, with an option to purchase, to a traditional fee simple property interest, resulting in a fair value gain of $3.1 million. The operating lease buyout coincides with CAPREIT’s strategic initiative of simplifying the company’s ownership structure, increasing net asset value, and strengthening overall liquidity and flexibility. A summary of the fair values of CAPREIT’s investment properties and changes, along with key market assumptions, is presented below. For the year ended December 31, 2021, there was a $2,101.3 million increase in fair value primarily due to capitalization rate compression, new acquisitions, the buyout of one operating lease, progress on the development pipeline, partially offset by foreign exchange loss on the European properties. Excluding the impact of net acquisitions, operating lease buyout and foreign exchange, the fair value of investment properties increased by $1,374.5 million, or 9.2%. 49 Investing in Our FutureManagement’s Discussion and Analysis Investment Properties by Geography Dec 2020 Fair Value Change Due To Dec 2021 Dec 2021 Dec 2020 Net Acquisi- tions Fair Value Adjust- ments Foreign Exchange Translation CAPEX(2) Right-of-Use Asset(4) Fair Value Cap Rates(3) Cap Rates(3) ($ Millions) Fair Value(1) Greater Toronto Area $ 5,964 $ 1,142 2,043 1,619 745 427 95 28 12,063 2,300 638 256 110 106 172 – – – – 644 248 22 $ 123 $ 28 49 24 27 15 2 2 270 29 17 $ $ 446 125 52 78 33 (9) 4 1 730 287 32 – – – – – – – – – (188) – – – – – – 10 – – $ 6,789 1,405 2,250 1,893 805 443 101 31 10 13,717 – – 2,676 709 $ 15,001 $ 914 $ 316 $ 1,049 $ (188) $ 10 $ 17,102 3.25% 3.83% 4.02% 3.69% 4.17% 4.33% 5.13% 5.12% 3.60% 3.55% 5.66% 3.68% For the Year Ended December 31, 2021 Components of Fair Value Adjustments 3.43% 4.00% 4.18% 3.80% 4.43% 4.37% 5.47% 5.51% 3.80% 3.87% 5.96% 3.91% Total 446 125 52 78 33 (9) 4 1 730 287 32 $ 1,049 Capitalization Rates Normalized NOI(5) CAPEX(2) $ 362 $ 207 $ (123) $ 75 82 54 47 1 7 2 630 286 32 948 $ 78 19 48 13 5 (1) 1 370 30 17 417 (28) (49) (24) (27) (15) (2) (2) (270) (29) (17) (316) $ $ Other Ontario Québec British Columbia Nova Scotia Alberta Prince Edward Island Saskatchewan Subtotal Europe MHC Total ($ Millions) Greater Toronto Area Other Ontario Québec British Columbia Nova Scotia Alberta Prince Edward Island Saskatchewan Subtotal Europe MHC Total (1) (2) (3) (4) Certain properties in Other Ontario have been reclassified into Greater Toronto Area. The opening balances have been adjusted to conform with current period presentation. Represents property capital investments and capitalized leasing costs during the year ended December 31, 2021. 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, 2021 for operating and land leasehold interests. Capitalization rates for Europe represent the implied capitalization rates for these properties. On April 1, 2021, the basic annual rent of an existing land lease was increased in accordance with the lease agreement, which stipulates that the basic annual rent be renegotiated every 20 years to reflect the land market value. (5) Represents fair value adjustments due to normalized net operating income for valuation purposes. The table below summarizes the impact of changes in both the capitalization rate and normalized NOI on CAPREIT’s fair value of investment properties. It should be noted that the sensitivity analysis below utilizes the direct capitalization method, where the impact of any short-term changes in NOI on fair value will be overstated. Currently, management believes that any impact to NOI resulting from the COVID-19 pandemic would be short-term in nature. Using a discounted cash flow model, the impact would be much smaller than that shown below. As at December 31, 2021 ($ Millions) Change in Capitalization Rate(1) Change in NOI (2.00)% (1.00)% –% +1.00% (0.50)% $ 2,388 $ 2,586 $ 2,784 $ 2,982 $ (0.25)% – % +0.25 % +0.50 % 918 (340) (1,429) (2,381) 1,100 (170) (1,270) (2,232) 1,283 – (1,111) (2,083) 1,466 170 (952) (1,933) +2.00% 3,179 1,649 340 (793) (1,784) (1) For operating leasehold interests, land leasehold interests and European properties, CAPREIT applies discount rates to determine the fair value of these properties. However, for the purposes of the sensitivity analysis above, CAPREIT has utilized the implied capitalization rates for operating leasehold interests, land leasehold interests and the European properties to determine the impact on fair value of the total portfolio. 50 2021 Annual ReportManagement’s Discussion and Analysis Development Development Progress The development program remains a component of CAPREIT’s growth strategy by allowing for the potential to unlock value within the portfolio’s existing assets through intensification and redevelopment to deliver strong net asset value growth to its Unitholders. CAPREIT’s development strategy encompasses a combination of three different approaches to add new units to the portfolio: (i) forward purchase of newly constructed properties, (ii) intensification through means of conversion and infill of existing income-producing properties (“IPPs”) and (iii) full or partial redevelopment. Development Pipeline Over the long term, CAPREIT has intensification and redevelopment potential in excess of 10,000 units, subject to market conditions, cost of construction, and other factors. Shown below are the number of projects and proposed net new units by major market which are targeted for planning approval assessment in the next 12 months, are pending approval, or are approved: Major Market Greater Toronto Area (GTA) Québec Prince Edward Island Total Pre-Application (# of projects) Active Application (# of projects) Zoning Entitlement (# of projects) Construction (# of projects) 3 1 – 4 – 1 – 1 1(1),(2) – 1(3) 2 – – – – Potential Growth (Estimated # of net new units)(4) 3,454 501 59 4,014 (1) (2) 141 Davisville Avenue, Toronto, Ontario was approved in December 2020 by the Local Planning Appeal Tribunal. The Zoning By-law Amendment permits 120 net new units in a 14-storey infill building. Previously included in the development pipeline are 128 new units at 100 Wellesley Street East in Toronto, Ontario. Management has reassessed the construction costs for the project and decided to halt further development activity at the current time. Upon discussions with CAPREIT’s external valuators, no adjustment was needed as a result of this decision due to the property’s development value potential. (3) CAPREIT is currently assessing market conditions in order to proceed with building permit submission. (4) CAPREIT regularly re-evaluates its assets for highest and best use where the value may be realized through development or sale of a property. Development Summary For the Year Ended December 31, ($ Thousands) Conversion Infill(1) Redevelopment(1) Total for development 2021 Actual Total Portfolio 5,890 1,960 116 7,966 $ $ 2020 Actual Total Portfolio $ 10,936 3,289 1,174 $ 15,399 (1) Infill and Redevelopment costs relate primarily to pre-approval costs such as application, consultant fees, and levies. Development costs include costs related to planning, rezoning, architectural surveys, application fees and building permits. Actual costs may vary as expectations of processing time for development applications become better defined. The regulatory and application processing is subject to factors beyond management’s control and varies between projects. In addition, projects are impacted by variable costs which affect financial viability. As such, CAPREIT is no longer providing forecasted development spending due to the highly variable nature of costs depending on numerous external factors. 51 Investing in Our FutureManagement’s Discussion and Analysis Capital Structure In the short term, CAPREIT utilizes the Credit Facilities, where necessary, to finance its capital investments, which may include acquisitions. In the long term, equity issuances, mortgage financings and refinancings, including top-ups, are put in place to finance the cumulative investment in the property portfolio and ensure the sources of financing better reflect the long-term useful lives of the underlying investments. As at December 31, 2021, CAPREIT is in compliance with all the investment and debt restrictions and financial covenants contained in the DOT and the Credit Facilities. The total capital managed by CAPREIT and the results of compliance with the key covenants and liquidity metrics are summarized below: ($ Thousands) As at Mortgages payable Bank indebtedness Unitholders’ equity Exchangeable LP Units 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) For the four quarters ended(4) Debt service coverage ratio (times)(1) Interest coverage ratio (times)(1) December 31, 2021 December 31, 2020 $ 6,100,065 $ 5,401,202 310,866 10,399,886 100,684 118,553 9,273,702 16,632 $ 16,911,501 $ 14,810,089 36.12% 34.37% 52.26% 37.82% 35.54% 34.78% 50.11% 38.98% Threshold Maximum 62.50% Minimum of $5,000,000 $ 10,522,332 $ 9,307,613 Minimum 1.40 Minimum 1.65 December 31, 2021 December 31, 2020 1.97 4.02 2.01 3.95 (1) See note 22 to the accompanying audited consolidated annual financial statements for details. (2) (3) (4) 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, prepaid CMHC premiums and deferred loan costs, minus fair value adjustment on investment properties. Based on market capitalization as defined in the Performance Measures table in Section II of the MD&A, plus total debt. CAPREIT’s FFO payout ratio did not exceed 100% for the trailing four quarters ended December 31, 2021. As at December 31, 2021, CAPREIT is in compliance with its debt covenant on the FFO payout ratio. Liquidity and Financial Condition Liquidity and Capital Resources Management believes there is adequate overall liquidity to fund property capital investment commitments to provide for future growth in the business. CAPREIT finances these commitments through: (i) ACFO on an annual basis; (ii) the Acquisition and Operating Facility; (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) ii) 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. CAPREIT’s Canadian liquidity position as at December 31, 2021 remains strong with $384.5 million available on the Acquisition and Operating Facility. 52 2021 Annual ReportManagement’s Discussion and Analysis CAPREIT has investment properties with a fair value of approximately $1,182.4 million as at December 31, 2021 that are not encumbered by mortgages. Of these, $893.3 million of the investment properties are located in Canada and secure only the Acquisition and Operating Facility. $274.2 million of these investment properties also carry a negative pledge relating to the ERES Credit Facility. Refer to note 14 to the accompanying consolidated annual financial statements for further details. CAPREIT intends to maintain unencumbered investment properties with an aggregate fair value in the range of $800 million to $900 million over the medium term. The majority of CAPREIT’s MHC sites are included in this pool. The working capital deficiency, as presented on CAPREIT’s consolidated balance sheet as at December 31, 2021, is funded through the DRIP and the Credit Facilities. Management does a liquidity forecast on a monthly basis which includes refinancings, property capital investments, potential acquisitions and potential dispositions to monitor the available capacity. Mortgages Payable CAPREIT is in compliance with all of its CMHC and lender requirements. ($ Thousands) As at December 31, Percentage of CMHC-insured mortgages(1) Percentage of fixed-rate mortgages(2) Weighted average mortgage interest rate(3) Weighted average mortgage term to maturity (years)(4) Cross-currency interest rate swaps(5) Weighted average interest rate on swaps – pay Weighted average interest rate on swaps – receive Weighted average remaining term to maturity on swaps (years) (1) Excludes mortgages on the MHC sites and European financings. 2021 98.5% 99.1% 2.47% 5.65 2020 98.7% 99.3% 2.56% 5.76 $ 675,319 $ 675,765 0.24% 1.18% 2.39 0.24% 1.19% 3.29 (2) Taking into consideration interest rate swaps where hedge accounting is not being applied, 100% of mortgages are subject to fixed rates. (3) (4) Weighted average mortgage interest rate includes deferred financing costs, fair value adjustments, and prepaid CMHC premiums on an effective interest rate basis. Including the amortization of the realized component of the loss on settlement of $32.5 million included in accumulated other comprehensive (loss) income, the effective portfolio weighted average interest rate as at December 31, 2021 would be 2.52% (December 31, 2020 – 2.61%). The mortgages on the Canadian and European properties have a weighted average term to maturity of 6.1 years and 3.9 years (December 31, 2020 – 6.1 years and 4.4 years), respectively. (5) Euro equivalent of €442.4 million (December 31, 2020 – €442.4 million) and excludes ERES cross-currency interest rate swaps. During 2021, CAPREIT’s Large Borrower Agreement (“LBA”) with CMHC expired. The expiry of the LBA has not affected the manner in which CAPREIT conducts its business or its approach to mortgage financing, including the use of CMHC financing. CAPREIT continues to obtain CMHC financing under substantively similar provisions. Based on new cross-currency interest rate swaps entered in late 2020 and early January 2021, the weighted average all-in effective interest rate on the total Canadian swapped debt of $675.3 million is 0.85%. The swaps have been staggered between one to five years to take advantage of the low rates, with a current weighted average swap term of 2.39 years as at December 31, 2021. 53 Investing in Our FutureManagement’s Discussion and Analysis The following table presents refinancings, weighted average interest rates obtained, and mortgage top-ups closed or committed up to 2021: ($ Thousands) The Canadian Portfolio First Quarter Second Quarter Third Quarter Fourth Quarter Acquisitions Original Mortgage Amount Original Stated Interest Rate New Mortgage Amount $ 89,073 121,578 162,152 88,391 – 1.76% $ 3.90% 2.80% 3.20% –% 38,363 344,753 329,409 198,070 201,317 Total and Weighted Average $ 461,194 2.97% $ 1,111,912 The ERES Portfolio Refinancings Acquisitions 60,181 – Total and Weighted Average $ 60,181 2.05% –% 2.05% $ 112,756 116,297 229,053 Weighted Average New Stated Interest Rate(1) Weighted Average Term on New Mortgages (Years) 2.23% 2.40% 1.90% 2.20% 1.85% 2.11% 1.16% 1.16% 1.16% 7.6 9.9 6.1 8.5 4.8 7.5 6.0 5.8 5.9 $ Net Top-Up Financing Amount (50,710)(2) 223,175(2) 167,257(2) 109,679 201,317 $ 650,718 52,575 116,297(3) 168,872 $ Grand Total and Weighted Average $ 521,375 2.86% $ 1,340,965 1.95% 7.3 $ 819,590 (1) Excludes prepaid CMHC premiums, other financing costs and impact of hedging. (2) (3) Includes $86.8 million of mortgage discharges not refinanced, including the repayment of the non-revolving $65.0 million credit facility on two of the MHC sites. ERES financing obtained is collateralized by a pool of investment properties. The amount of refinancing and acquisition financing shown above has been allocated based on fair value of these properties as determined by the lender. The interest rates shown include the corresponding interest rate swaps. Management expects to raise between $850 and $900 million in total mortgage renewals and refinancings for 2022, excluding financings on acquisitions, while continuing to benefit from the low interest rate environment. As a strategy, CAPREIT leverages CMHC insurance to get access to stable financing at lower interest rates than would be available with conventional mortgage financing or other forms of debt. The premiums associated with the initial mortgage financing along with any additional premiums on future expected mortgage renewals or refinancing are analyzed to ensure the all-in cost of CMHC financing continues to be CAPREIT’s cheapest form of debt. CMHC premiums are amortized over the amortization period of the underlying mortgage loans when incurred. If CAPREIT fully refinances an existing mortgage, any unamortized prepaid CMHC premiums and fees associated with the existing mortgages on that property will be written off through interest and other financing costs in the period in which full refinancing occurs. CAPREIT accelerates the amortization for prepaid CMHC premiums for mortgages that management intends to fully refinance within the next year, from the date the decision is made to refinance to the date the mortgage is due to be refinanced. During the year ended December 31, 2021, CMHC amortization expense including net write-offs of CMHC premiums on refinancings amounted to $10.0 million. CMHC amortization expense, including write-offs, for next year is expected to be in the range of $10.0 million to $11.0 million, depending on refinancing activity. Due to the timing of refinancing activities, a larger portion of the expense is expected to be incurred in the first half of the year. 54 2021 Annual ReportManagement’s Discussion and Analysis For purposes of estimating top-up financing potential, the following table provides annualized NOI for those properties with mortgages maturing over the next five years and beyond. A property’s full NOI is included in the first year in which a mortgage matures. The balance of mortgages remaining on the same property but maturing in other years is also shown. As at December 31, 2021 ($ Thousands) Year of Maturity Mortgage Maturities(1) Mortgages on the Same Properties Maturing in Other Years(1) $ 15,603 187,410 115,318 31,145 (11,287) (338,189) NOI of Properties with Maturing Total Mortgages Mortgage(s)(2),(3) $ 501,841 $ 594,979 595,265 838,315 771,241 1,991,748 74,552 72,929 52,821 93,202 79,126 175,234 547,864 $ 486,238 407,569 479,947 807,170 782,528 2,329,937 $ 5,293,389 $ – $ 5,293,389 $ 2022 2023 2024 2025 2026 2027 onwards Total (1) Mortgage balance due upon maturity. (2) NOI for the 12 months ended December 31, 2021. (3) Projected NOI included for acquisitions since December 31, 2020. The breakdown of CAPREIT’s Canadian dollar-denominated future principal repayments, including mortgage maturities, and effective weighted average interest rates as at December 31, 2021 is as follows: As at December 31, 2021 ($ Thousands) Period 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031–2036 $ Principal Amortization 154,070 136,642 123,741 114,445 91,667 70,573 63,664 69,790 35,614 62,847 $ Mortgage Maturities 414,407 321,223 366,124 480,388 505,956 265,238 268,091 289,874 290,875 926,816 $ Mortgage Balance 568,477 457,865 489,865 594,833 597,623 335,811 331,755 359,664 326,489 989,662 $ 923,053 $ 4,128,992 $ 5,052,044 % of Total Mortgage Balance 11.3 9.1 9.7 11.8 11.8 6.6 6.6 7.1 6.5 19.5 100.0% Interest Rate (%)(1),(2) 3.23 3.39 2.93 2.57 2.40 2.70 2.73 2.83 2.27 2.74 2.69% Deferred financing costs, fair value adjustments and prepaid CMHC premiums, net Total Weighted average term to maturity (years) (120,815) 4,931,229 $ 6.07 (1) Effective weighted average interest rates for maturing mortgages only. (2) Effective weighted average interest rate includes the amortization of deferred financing costs, prepaid CMHC premiums, and fair value adjustments. 55 Investing in Our FutureManagement’s Discussion and Analysis The breakdown for ERES of future principal repayments, including mortgage maturities, and effective weighted average interest rates as at December 31, 2021 is as follows: As at December 31, 2021 ($ Thousands) Period 2022 2023 2024 2025 2026 2027 Deferred financing costs and fair value adjustments, net Total Weighted average term to maturity (years) Principal Amortization Mortgage Maturities Mortgage Balance ($) $ 3,152 $ 71,831 $ 74,983 € 3,163 2,556 410 – – 86,346 113,823 326,782 276,572 289,043 89,509 116,379 327,192 276,572 289,043 $ 9,281 $ 1,164,397 $ 1,173,678 € Mortgage Balance (€) 52,104(3) 62,198(3) 80,869(3) 227,301(3) 192,184(3) 200,850(3) 815,506 % of Total Mortgage Balance 6.4 7.6 9.9 27.9 23.6 24.6 Interest Rate (%)(1),(2) 1.43 1.08 1.39 1.87 1.47 1.29 100.0% 1.52% (4,842) $ 1,168,836 3.93 (1) Effective weighted average interest rates for maturing mortgages only. (2) Effective weighted average interest rate includes deferred financing costs and fair value adjustments. (3) Included in mortgages payable are non-amortizing mortgages from ERES. Unitholders’ Equity and Units Awarded under Unit-based Compensation Plans Unitholders’ Equity represents the issued and outstanding Trust Units, and excludes the Exchangeable LP Units and any units issued in connection with unit-based incentive plans. Market capitalization and units outstanding are as follows: As at December 31, 2021 Market capitalization ($ Thousands) Total number of units outstanding Trust Units Deferred units RUR Plan units Exchangeable LP Units Ownership by trustees, officers and other senior management $ 10,538,673 175,761,719 173,406,406 196,423 479,700 1,679,190 0.7% Unitholder Taxation Portions of the distributions received by taxable Canadian Unitholders are characterized as other income, capital gain income, or return of capital. While return of capital is not immediately taxable, it reduces the tax cost of Units, and thus will increase future gain for Unitholders on the sale of the Units. The deferral rate is the portion of distributions treated as return of capital. For the year ended December 31, 2021, Unitholders may expect to be allocated capital gain as a result of CAPREIT’s disposal of some properties. The capital gain will decrease the deferral for Unitholders compared to a year when no dispositions occurred. As CAPREIT expands its presence in Europe, the deferral rate may decrease. Also, Unitholders may expect the deferral rate to decrease gradually as depreciation claimed to offset taxable income diminishes over time. However, an increase in CAPREIT’s payout ratio will increase the deferral rate. 56 2021 Annual ReportManagement’s Discussion and Analysis SECTION VI: COMPLIANCE AND GOVERNANCE DISCLOSURES, RISKS AND UNCERTAINTIES Selected Consolidated Quarterly Information Q4 21 Q3 21 Q2 21 Q1 21 Q4 20 Q3 20 Q2 20 Q1 20 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(3) 1,143 $ 1,149 $ 1,105 $ $ 240,678 $ 236,097 $ 228,856 $ 227,506 $ 225,238 $ 221,420 $ 219,925 $ 216,060 $ 153,429 $ 158,126 $ 151,786 $ 146,652 $ 148,646 $ 148,234 $ 143,233 $ 138,058 63.9% 1,115 $ 1,118 $ 1,121 $ 1,113 $ 1,104 $ 66.0% 66.9% 65.1% 64.5% 63.7% 66.3% 67.0% $ 644,959 $ 190,213 $ 453,561 $ 104,062 $ 484,958 $ 300,075 $ 61,262 $ 79,633 $ 97,270 $ 102,962 $ 97,503 $ 94,684 $ 99,311 $ 100,342 $ 94,056 $ 92,513 $ 100,353 $ 105,819 $ 100,080 $ 95,942 $ 99,985 $ 101,114 $ 94,712 $ 93,147 35.86% 36.12% 35.21% 37.20% 36.37% 35.70% 35.54% 36.02% FFO per unit(1) – basic NFFO per unit(1) – basic $ $ 0.556 $ 0.593 $ 0.564 $ 0.573 $ 0.610 $ 0.579 $ 0.549 $ 0.556 $ 0.577 $ 0.585 $ 0.551 $ 0.581 $ 0.589 $ 0.555 $ 0.544 0.547 Weighted average number of units (000s) – basic Weighted average number of units (000s) – diluted 175,089 173,495 172,950 172,469 172,054 171,628 170,588 170,206 175,567 173,985 173,512 173,072 172,616 172,188 171,175 170,780 (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. (3) Certain comparative figures have been adjusted to conform with current period presentation. CAPREIT’s operations are affected by seasonal cycles, and operating performance in one quarter may not be indicative of operating performance in any other quarter of the year. The fourth and first quarters of each year typically tend to generate weaker performance due to increased energy consumption in the winter months. There may be periods where actual distributions declared may exceed cash generated from (utilized in) operating activities after interest paid, primarily due to weaker performance in certain periods from seasonal fluctuations. These seasonal or short-term fluctuations are funded, if necessary, with our Acquisition and Operating Facility. CAPREIT determines its annual distributions and the annual 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 2021 increased by 6.9% over the same quarter in 2020, and NOI increased by 3.2%, driven by acquisitions and higher operating revenues. Net income in the fourth quarter of 2021 increased over the same period last year to $645.0 million, mainly due to higher fair value adjustments of investment properties of $568.3 million compared to $398.4 million for the same period last year. Loan interest and mortgage interest decreased by $13.7 million due to a large one-time CMHC premium amortization adjustment recorded in the prior year. Higher NFFO for the fourth quarter of 2021 was primarily due to NOI contribution from acquisitions completed over the prior 12 months offset by a 2.0% decrease in stabilized property. The decrease in stabilized property NOI was mainly driven by increases in R&M costs, tenant incentives and utilities. The increased R&M costs are mainly due to the increased ability to complete work given restrictions and limitations in connection with the COVID-19 pandemic were less impactful in the fourth quarter of 2021. 57 Investing in Our FutureManagement’s Discussion and Analysis The following table shows the NOI and the NOI margin attained for each regional market for the periods ended December 31, 2021 and 2020. 2021 2020(4) Increase (Decrease) NOI NOI %(1) NOI Margin (%) NOI NOI %(1) NOI Margin (%) NOI Change (%) NOI by Geography For the Three Months Ended December 31, ($ Thousands) Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria and Other British Columbia Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Europe The Netherlands(2) Other Europe(3) Total residential suites MHC sites Total MHC sites Total suites and sites Total Canadian residential suites $ 121,756 $ 54,511 7,995 5,860 $ 68,366 $ 14,956 6,307 $ 21,263 $ 11,712 6,592 $ 18,304 7,532 3,634 1,116 4,750 $ $ $ 1,182 359 $ $ $ 20,627 1,913 22,540 $ 144,296 35.8 5.2 3.8 44.8 9.7 4.1 13.8 7.6 4.3 11.9 4.9 2.4 0.7 3.1 0.8 0.2 79.5 13.4 1.2 14.6 94.1 63.4 $ 62.4 67.7 63.7 $ 52,690 7,101 4,995 64,786 54.8 $ 61.2 56.6 $ 16,289 5,737 22,026 67.6 $ 70.8 68.7 $ 12,457 4,653 17,110 55.1 7,007 52.0 $ 53.9 52.5 $ 3,857 1,104 4,961 55.3 $ 1,137 50.7 318 61.7 $ 117,345 19,370 77.5 $ 85.9 $ 78.1 $ 21,578 63.8 $ 138,923 2,208 35.4 4.8 3.4 43.6 11.0 3.9 14.9 8.4 3.1 11.5 4.7 2.6 0.7 3.3 0.8 0.2 79.0 13.0 1.5 14.5 93.5 64.8 66.1 66.7 65.1 61.7 61.9 61.7 74.6 71.4 73.7 55.9 56.3 55.7 56.2 53.7 45.8 64.3 76.8 79.9 77.1 66.0 66.5 66.0 3.5 12.6 17.3 5.5 (8.2) 9.9 (3.5) (6.0) 41.7 7.0 7.5 (5.8) 1.1 (4.3) 4.0 12.9 3.8 6.5 (13.4) 4.5 3.9 (6.1) 3.2 $ 9,133 $ 153,429 5.9 100.0 62.4 $ 9,723 63.7 $ 148,646 6.5 100.0 (1) Represents percentage of the portfolio by NOI. (2) (3) (4) In € thousands, €14,309 and €12,464 for the three months ended December 31, 2021 and December 31, 2020, respectively. Comprised of NOI for the commercial properties located in Germany and Belgium. In € thousands, €1,331 for the three months ended December 31, 2021 and €1,421 for the three months ended December 31, 2020. Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 58 2021 Annual ReportManagement’s Discussion and Analysis The stabilized portfolio performance for the three months ended December 31, 2021 compared to December 31, 2020, is summarized as follows: Three Months Ended December 31, 2021 2020(9) Increase (Decrease) Stabilized NOI NOI Margin (%) Stabilized NOI NOI Margin (%) Revenue Change (%) Expense Change (%) NOI Change (%) ($ Thousands) Residential Suites Ontario Greater Toronto Area London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Europe The Netherlands Other Europe Total residential suites MHC sites Total MHC sites Total suites and sites Stabilized suites and sites $ 51,602 6,548 4,902 $ 63,052 $ 14,423 5,511 $ 19,934 $ 11,403 4,801 $ 16,204 63.7 $ 64.6 68.9 64.2 $ 51,936 6,567 4,638 63,141 54.9 $ 59.9 56.2 $ 15,706 5,727 21,433 67.6 $ 70.5 68.4 $ 12,342 4,653 16,995 $ 3,791 56.4 $ 3,564 3,634 857 $ 4,491 52.0 52.9 52.2 $ 3,859 852 4,711 $ 1,182 55.3 $ 1,139 $ 359 $ 18,599 1,913 $ 20,512 $ 129,525 50.7 $ 318 62.1 $ 111,301 18,547 77.6 $ 85.9 78.3 $ 20,846 64.2 $ 132,147 2,299 $ 9,343 $ 138,868 59,553 64.0 $ 9,589 64.2 $ 141,736 59,553 Total Canadian residential suites $ 109,013 64.9 66.7 66.4 65.2 60.9 61.8 61.1 74.7 71.4 73.7 58.1 56.3 56.5 56.4 53.8 45.8 64.6 76.7 83.1 77.4 66.3 66.4 66.3 1.1 2.9 2.0 1.3(1) 1.9 (0.7) 1.2(2) 2.0 4.4 2.7 9.5 2.0 7.4 2.9 1.1 2.0 1.9 (0.9) (19.5) (2.8) 1.2 1.1 1.2 4.3 9.4 (5.4) 4.1(1) 17.5 4.3 14.0(2) 30.4 7.4 23.3(3) 13.9(4) 12.0 16.2 12.8(5) (2.0) (7.2)(6) 9.0 (4.8) (32.8) (6.9)(7) 7.6 8.4(8) 7.6 (0.6) (0.3) 5.7 (0.1) (8.2) (3.8) (7.0) (7.6) 3.2 (4.7) 6.4 (5.8) 0.6 (4.7) 3.8 12.9 (2.1) 0.3 (16.8) (1.6) (2.0) (2.6) (2.0) (1) (2) Higher expenses: higher R&M and bad debt, partially offset by lower utilities and realty taxes. Revenue growth has been impacted by higher tenant inducements. Higher expenses: higher R&M, realty taxes, and utilities, partially offset by lower advertising costs. Revenue growth has been impacted by higher tenant inducements. (3) Higher expenses: higher R&M and utilities costs, partially offset by lower bad debt. (4) Higher expenses: higher R&M and utilities costs, partially offset by lower advertising costs. (5) Higher expenses: higher utilities, R&M, and bad debt, partially offset by advertising costs. (6) Lower expenses: lower R&M costs. (7) In € Thousands, €14,235 and €13,425 for the three months ended December 31, 2021 and December 31, 2020, respectively. NOI increased by €810 and 6.0%. Lower expenses: lower site costs and R&M, partially offset by higher bad debt. (8) Higher expenses: higher R&M and realty taxes, partially offset by lower utilities. (9) Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 59 Investing in Our FutureManagement’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 2021 2020 2019(1) $ 933,137 $ 1,392,795 $ $ 243,348 1.409 $ $ $ $ 882,643 925,928 235,649 1.380 $ $ $ $ 780,780 1,195,447 218,136 1.372 $ 17,101,919 $ 17,712,973 $ 6,100,065 $ 310,866 $ 15,000,591 $ 13,096,426 $ 15,499,131 $ 13,938,182 $ $ 5,401,202 118,553 $ $ 4,228,805 623,893 (1) Certain 2019 comparative figures have been adjusted to conform with current period presentation. Accounting Policies and Critical Accounting Estimates, Assumptions and Judgments Summary of Significant Accounting Policies A summary of significant accounting policies can be found in note 2 to CAPREIT’s consolidated annual financial statements for the year ended December 31, 2021. Critical Accounting Estimates, Assumptions, and Judgments A summary of accounting estimates, assumptions and judgments can be found in note 3 to CAPREIT’s consolidated annual financial statements for the year ended December 31, 2021. 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. As at December 31, 2021, 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, 2021. 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 independent 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. 60 2021 Annual ReportManagement’s Discussion and Analysis 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 IFRS. As at December 31, 2021, 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, 2021. CAPREIT did not make any changes to the design of internal controls over financial reporting in 2021 that have materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting. Risks and Uncertainties There are certain risks inherent in an investment in the Trust 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 Trust Units. COVID-19 and Other Public Health Crises Public health crises, including the ongoing health crisis related to the COVID-19 pandemic, or relating to any other virus, flu, epidemic, pandemic or any other similar disease or illness (each a “Health Crisis”) could adversely impact CAPREIT, including through: a general or acute decline in economic activity in the countries and regions in which CAPREIT’s properties and investments are located; increased unemployment, reduced immigration, closure of college and university campuses, household consolidation (young adults moving back in with their parents), supply shortages, mobility restrictions and other quarantine measures; increased government regulation, inability to access governmental programs or processes on a timely basis, efficacy of governmental relief efforts; and the quarantine or contamination of one or more of CAPREIT’s properties. Contagion in a property or market in which CAPREIT operates could negatively impact its occupancy, reputation or attractiveness of that market. Furthermore, increased government regulation relating to a Health Crisis could result in legislation or regulations that may restrict CAPREIT’s ability to enforce material provisions under its leases among other potential adverse impacts. All of these occurrences may have a material adverse effect on the business, cash flows, financial condition and results of operations of CAPREIT, including, but not limited to: the ability to implement rent increases; rent collection and receivables; vacancy levels; mortgage renewals and refinancings on attractive terms; submission and processing of various applications and approvals; deferral of certain capital expenditures and R&M expenditures; valuation of investment properties; and CAPREIT’s ability to meet its debt covenants. The current public health crisis has also resulted in general economic slowdown and increased volatility in financial markets. In addition to impacting CAPREIT’s Trust Unit price, this may create difficulty in raising capital in debt and equity markets, which could in turn adversely impact CAPREIT’s strategy. While various governments and central banks have announced or implemented a range of measures targeted to alleviate these impacts and encourage economic growth, the impact of these measures remains uncertain, particularly in the short term. In the medium to long term, government debt accumulated as a result of relief measures may lead to tax increases for consumers and businesses. The duration and impact of the COVID-19 pandemic on CAPREIT remains unknown at this time. As such, it is not possible to reliably estimate the length and severity of COVID-19 related impacts on the financial results and operations of CAPREIT. 61 Investing in Our FutureManagement’s Discussion and AnalysisRelated to Reporting Investment Property at Fair Value CAPREIT holds investment property to earn rental income, for capital appreciation or both. All investment properties are 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. An appraisal is an estimate of market value, and caution should be used in evaluating data with respect to appraisals. It is a measure of value based on information gathered in the investigation, appraisal techniques employed and reasoning both quantitative and qualitative, leading to an opinion of value. Market assumptions applied for appraisals and 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 limited number of appraisers, 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, which includes a comparison of assumptions used by appraisers to the corresponding benchmarks derived from management’s own observations of market transactions. Downturns in the real estate market could negatively affect CAPREIT’s operating revenues and cash flows; such a downturn could also significantly impact the fair values of CAPREIT’s investment properties, as well as certain of its financial ratios and covenants. Related to Ownership and Operation of Real Property Real Property Ownership Real property investments are relatively illiquid. This illiquidity will tend to limit the ability of CAPREIT to respond to changing economic or investment conditions. If CAPREIT were required to quickly liquidate assets, there is a risk the proceeds realized from such a sale would be less than the carrying 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 property taxes and the costs of utilities, as well as 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 43.7% of the overall portfolio (by number of suites and sites) in Ontario (27.0% in the GTA), making CAPREIT’s performance particularly sensitive to economic conditions in and changes affecting Ontario and, in particular, the GTA. 62 2021 Annual ReportManagement’s Discussion and Analysis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). In addition, the ongoing COVID-19 pandemic could result in legislation or regulations that may restrict CAPREIT’s ability to enforce material provisions under its leases (see “COVID-19 and Other Public Health Crises” under 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 financial position of CAPREIT. 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 monitoring its properties or disposed of by or on behalf of CAPREIT at other locations. The failure to monitor, remove or remediate any such substances, if any, may adversely affect CAPREIT’s ability to sell its real estate, or to borrow using such real estate as collateral, and could potentially result in regulatory enforcement proceedings and/or private claims against CAPREIT. Although CAPREIT is not aware of any material non-compliance with environmental laws at any of its properties nor is it aware of any pending or threatened investigations or actions by environmental regulatory authorities in connection with any of its properties, or any material pending or threatened claims relating to environmental conditions at its properties, no assurance can be given that environmental laws will not result in significant liability to CAPREIT in the future or otherwise adversely affect CAPREIT’s business, financial condition or results of operations. Environmental laws and regulations can change rapidly and CAPREIT may become subject to more stringent environmental laws and regulations in the future. Compliance with more stringent environmental laws and regulations could have a material adverse effect on CAPREIT’s business, financial condition or results of operations. CAPREIT has formal policies and procedures to review and monitor environmental exposure. CAPREIT has made, and will continue to make, the necessary capital expenditures for compliance with environmental laws and regulations. Refer to CAPREIT’s ESG report for more details on our supporting policies and programs. 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. 63 Investing in Our FutureManagement’s Discussion and AnalysisPrivacy and Cyber Security Risk CAPREIT may be vulnerable to privacy and cyber security incidents given its reliance on processing personal and business confidential information using information technology systems. Given the increased work from home policies as a result of the COVID-19 pandemic, CAPREIT’s reliance on using information technology systems is further elevated during this time period. Third-party vendors, such as cloud host providers and software and application providers and consultants, may also expose CAPREIT to cyber security or privacy incidents. As technology continues to become more sophisticated and complex, governments are responding with stricter legislation, requiring higher levels of data protection. In Canada, CAPREIT is subject to federal and provincial privacy, anti-spam, and data protection laws. In Europe, CAPREIT and its Dutch subsidiaries are required to comply with the EU General Data Protection Regulation (GDPR). Under GDPR, CAPREIT and its subsidiaries are classified as either data processors, sub-processors or controllers, based on their function with regards to processing of EU personal data. Controllers and (sub)processors may share liability, to varying degrees, in the event of a breach. Non-compliance with either of the Canadian or Europeans laws would also expose CAPREIT and/or its subsidiaries to the risks above. A cyber security and/or privacy incident can lead to: (a) unauthorized access to or disclosure of business confidential and personal information, belonging to CAPREIT and its tenants, employees or vendors, (b) identity theft, fraudulent activities and direct losses to stakeholders, including tenants and employees, (c) destruction or corruption of data affecting timeliness or accuracy of financial reporting, (d) lost revenues, (e) disruption to operations, including delays in processing rental applications and rent payments and the time, (f) attention required by management to investigate and respond to a cyber security incident, (g) remediation costs, including to restore or recover lost data, (h) litigation, fines and liabilities, including third-party liabilities, for failure to comply with applicable privacy and data protection laws or contractual obligations, (i) regulatory investigations, ( j) increased insurance premiums and (k) reputational damage to CAPREIT. CAPREIT has implemented processes, procedures and controls to help mitigate these risks. However, these measures, as well as increased awareness of risks of a cyber-incidents, do not guarantee that its financial results will not be negatively impacted by such an incident. Climate Change Climate change presents a multi-faceted risk for CAPREIT considering its investment in and management of real estate assets in multiple geographical territories. Increases in the frequency and magnitude of climate-related risks such as floods, fires, windstorms and ice storms in certain locales can lead to increased capital expenditure, repairs and maintenance and interruptions to the operation. Ongoing operating costs such as energy costs can potentially be impacted by more extreme weather, and anticipation of more frequent and severe weather events may have an adverse effect on insurance premiums. Investment properties in areas that are more prone to weather-related events may be subject to adverse effects on valuations. In addition, transitioning to a low carbon economy will drive extensive regulatory, market, and technology changes to address mitigation and adaptation requirements related to climate change. How CAPREIT meets these challenges will also impact our reputation. Regulatory changes may include those related to carbon pricing, a shift to low emission energy sources, the adoption of energy efficiency measures and technology, and changes to building codes to allow for climate resiliency and mitigation. Market changes may include adjustments in the goods and services purchased by CAPREIT as well as shifts in the preferences of occupants. Technology is moving towards more climate-friendly options including renewable energy, battery storage and energy efficiency equipment. CAPREIT’s reputation is important to all stakeholders and will include considerations of the company’s demonstrated understanding of climate-related financial risk and its plan to manage (mitigate or adapt to) these risks. Lenders, investors, credit rating agencies and regulators are increasingly viewing climate change as an important issue that requires greater consideration. A lack of investment strategy, and operational management plan concerning climate change may have an adverse effect on CAPREIT’s ability to raise funds via debt and/or equity, as well as related investment returns and sentiment. 64 2021 Annual ReportManagement’s Discussion and AnalysisCAPREIT is evaluating the potential impact of climate change related considerations with a view to developing a climate risk and resiliency strategy in order to understand and address material risks. In the event that material risks are identified, such strategy will support CAPREIT’s investment and development decisions and the ongoing management of CAPREIT’s standing investments. Additionally, CAPREIT maintains a strong insurance program that considers the impacts of weather-related events by providing coverage for property damage and business interruption. 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 impacts, 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. Captive Insurance Captive insurance risk is the exposure to financial loss resulting from a wholly-owned subsidiary reinsuring certain risks related to CAPREIT. The captive insurance program was created to reduce CAPREIT’s overall insurance costs. The wholly owned subsidiary will reinsure the first $10 million per claim under CAPREIT’s property insurance program and the first $2 million per claim under CAPREIT’s general liability insurance program. CAPREIT’s aggregate liability for claims made on an annual basis under the reinsurance agreement is limited to $25 million. 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, 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 (excluding ERES) currently has access to the government-backed mortgage insurance program through the National Housing Act, which is administered by CMHC. 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. 65 Investing in Our FutureManagement’s Discussion and AnalysisCAPREIT’s Credit Facilities are 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, 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 marketplace, there are a limited number of lenders from which CAPREIT can reasonably expect to borrow, and the number of lenders currently participating in the CMHC-insured mortgage market is even smaller. Consequently, it is possible that financing which CAPREIT may require in order to grow and expand its operations in Canada, 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 Regulations and Taxes Rent Control 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 circumstances. 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. In the Netherlands, rental properties where rent is greater than the government prescribed rent control threshold are subject to rent control, which includes a limit on the amount of starting rent that can be charged, as well as the amount of annual rent increases. The lack of availability of affordable housing and related housing policy and regulations is continuing to increase in prominence as a topic of concern at the various levels of government. Accordingly, through different approaches, governments may enact policy or amend legislation in a manner that may have a material adverse effect on the ability of CAPREIT to grow or maintain the historical level of cash flow from its properties. In addition, laws and regulations providing for compliance with various housing matters involving tenant evictions, work orders, health and safety issues or fire and maintenance standards, etc., including in relation to the ongoing COVID-19 pandemic, may become more stringent in the future. CAPREIT may incur increased operating costs as part of its compliance with any such additional government legislation and regulations relating to housing matters, which may have an adverse effect on revenues. 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. 66 2021 Annual ReportManagement’s Discussion and Analysis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 Trust Unitholders. If CAPREIT ceases to qualify as a “mutual fund trust”, the income tax considerations would be materially and adversely different in certain respects and there may be 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 Unitholder. If CAPREIT ceases to qualify as a “mutual fund trust” or “registered investment” under the Tax Act and Trust Units cease to be listed on a designated stock exchange, Trust Units will cease to be qualified investments for trusts governed by designated savings plans. CAPREIT will endeavour to ensure Trust 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 Trust Units are “prohibited investments” for registered retirement savings plans, registered retirement income funds, registered disability savings plans, registered education savings plans, or tax-free savings accounts. There are rules under the Tax Act (the “SIFT Rules”) that apply to specified investment flow-through trusts or partnerships (“SIFTs”), and their beneficiaries or partners. Under the SIFT Rules, certain distributions will not be deductible in computing the SIFT’s taxable income and the SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to Canadian corporations. The SIFT Rules do not apply to certain real estate investment trusts that satisfy a number of technical tests relating to the nature of the revenue and investments of the trust for the particular taxation year (the “REIT Exemption”). Although CAPREIT expects to qualify for the REIT Exemption throughout 2022 and in future years, there can be no assurance that CAPREIT will not be subject to the SIFT Rules. If the SIFT Rules apply, the impact to Unitholders will depend in part on the status of the Unitholder and, in part on the amount of income distributed which would not be deductible by CAPREIT in computing its income in a particular year, and on what portions of CAPREIT’s distributions constitute “non-portfolio earnings”, other than income and returns of capital. To the extent that CAPREIT does not qualify for the REIT Exception, CAPREIT will consider alternative measures, including restructuring, assuming that these measures are in the best interests of its Unitholders, to qualify for the REIT Exception in the following year. There can be no assurance that Canadian federal income tax laws, the judicial interpretation thereof, or the administrative and assessing practices and policies of the Canada Revenue Agency (“CRA”) or the Minister of Finance (Canada) will not change in a manner that adversely affects CAPREIT, its affiliates or the Unitholders. In addition, the Tax Act may impose additional withholding or other taxes on distributions made by CAPREIT to Unitholders that are non-residents and these taxes and any reduction thereof under a tax treaty between Canada and a foreign jurisdiction may change from time to time. There is also a risk that the tax laws and treaties of the foreign jurisdictions where CAPREIT operates may change in the future. Any such changes could adversely affect the taxes payable, including withholding taxes, the effective tax rate in those jurisdictions and the portion of distributions which would be income for Canadian income tax purposes. Any such changes may have a material adverse effect on Unitholders’ returns. CAPREIT has foreign subsidiaries in a number of countries with varying statutory rates of taxation. Judgment 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 where activities carried on by the foreign subsidiaries are considered to be taxable in those countries. CAPREIT has foreign subsidiaries that are subject to the tax laws of foreign jurisdictions. Distributions from those foreign subsidiaries may be subject to withholding tax, which may increase the overall taxes payable by CAPREIT and its subsidiaries, and reduce the amount of cash available for distribution to Unitholders. For Canadian income tax purposes, any such foreign withholding tax incurred by CAPREIT will generally be allocated to CAPREIT Unitholders and such Unitholders may be entitled to claim a foreign tax credit in respect of such taxes. 67 Investing in Our FutureManagement’s Discussion and AnalysisIn addition, there is a risk that the tax laws and treaties of the foreign jurisdictions may change in the future. Any such changes could adversely affect the taxes payable, including withholding taxes, the effective tax rate in the jurisdictions in which the foreign subsidiaries operate and the portion of distributions which would be income for Canadian income tax purposes. Any such changes may have a material adverse effect on Unitholders’ returns. 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 judgments 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. 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. 68 2021 Annual ReportManagement’s Discussion and AnalysisLiquidity and Price Fluctuation of Trust Units CAPREIT is an unincorporated “open-ended” investment trust and its Trust Units are listed on the TSX. There can be no assurance that an active trading market in the Trust 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 Trust Units will trade cannot be predicted. The market price of the Trust 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 Trust Units is the annual yield on the Trust Units. Accordingly, an increase in market interest rates may lead purchasers of Trust Units to demand a higher annual yield, which could adversely affect the market price of the Trust 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 Trust Units. Accordingly, the Trust 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 Trust 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 Trust 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 Trust Units, to continue to hold Trust Units, or to initiate and complete takeover bids in respect of the Trust Units. As a result, these restrictions may limit the demand for Trust Units from certain Unitholders and other investors, and thereby adversely affect the liquidity and market value of the Trust Units. Dilution Subject to applicable laws, CAPREIT is authorized to issue an unlimited number of Trust Units and 25,840,600 Preferred Units for the consideration, and on the terms and conditions, that the Board of Trustees determines, without Unitholders’ approval. Unitholders have no pre-emptive right in connection with any further issuance. The Board of Trustees has the discretion to issue additional units in other circumstances pursuant to CAPREIT’s various incentive plans, subject to limits imposed by the TSX. 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 Trust Unit prices. Risk Related to CAPREIT’s Investment in ERES CAPREIT currently beneficially owns, controls or exercises direction over 142 million ERES Class B LP Units and 10.2 million ERES units, which upon the exchange of the ERES Class B LP Units into ERES units, represents approximately 66% of the issued and outstanding units of ERES, on a fully diluted basis. For further details, please see the Related Party section in Section VI of the MD&A. The trading price of ERES units may be volatile, and subject to fluctuations due to market conditions and other factors, which are often unrelated to operating results and beyond CAPREIT’s control. Fluctuations in the market price and valuations of CAPREIT’s holdings in ERES may affect the price of the Trust Units. 69 Investing in Our FutureManagement’s Discussion and Analysis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. Certain trustees of CAPREIT are also trustees of ERES, and certain CAPREIT employees are officers of ERES, which may give rise to conflicts of interest with their roles at CAPREIT and ERES. The ERES declaration of trust provides that certain matters which have the potential to give rise to a conflict of interest between ERES and CAPREIT or with any related party of CAPREIT, must be approved by a majority of the non-restricted ERES trustees, in addition to a majority of the ERES trustees generally. CAPREIT’s DOT contains “conflicts of interest” provisions requiring trustees to disclose material interests in material contracts and transactions and to refrain from voting thereon. Dependence on Key Personnel The success of CAPREIT depends to a significant extent on the efforts and abilities of its executive officers and other members of management, as well as its ability to attract and retain qualified personnel to manage existing operations and future growth. The loss of an executive officer or other key employee could lead to material disruption to the business. Human Resources Shortages CAPREIT relies on qualified staff to manage its buildings, service tenants, and provide back-office support. A shortage of available, qualified employees may impact CAPREIT’s service delivery and the overall tenant experience. Additionally, a shortage of available, and qualified staff may lead to upward pressure on wages. 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 depend 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 and the impact of the COVID-19 pandemic), local real estate markets (such as an oversupply of space or a reduction in demand for real estate in the area), government regulations, changing demographics, competition from other available rental premises, including new developments, and various other factors. If a significant number of residents are unable to meet their obligations under their leases or if a significant amount of available space in the properties becomes vacant and cannot be leased on economically favourable lease terms, cash available for distribution may be adversely affected. The global economy may face increasing uncertainty due to trade protectionism, disputes and political events 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. 70 2021 Annual ReportManagement’s Discussion and Analysis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 re-lease 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. Foreign Operation and Currency Risks In connection with CAPREIT’s investment in IRES and its investment and management of ERES and its investment in IRES, the Irish, Dutch, Belgian and German 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 ERES and IRES is the euro. Related Party Transactions A summary of related party transactions can be found in note 29 to CAPREIT’s consolidated annual financial statements for the year ended December 31, 2021. 71 Investing in Our FutureManagement’s Discussion and AnalysisCommitments and Contingencies A summary of commitments and contingencies can be found in notes 30 and 31 to CAPREIT’s consolidated annual financial statements for the year ended December 31, 2021. Subsequent Events A summary of subsequent events can be found in note 33 to CAPREIT’s consolidated annual financial statements for the year ended December 31, 2021. Future Outlook CAPREIT believes the multi-unit residential rental business will continue to strengthen in the majority of the markets in which it operates over the long term. With strong market fundamentals, and through its proven property and asset management programs, CAPREIT 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, which may be temporarily impacted by the COVID-19 pandemic. CAPREIT also anticipates operating revenues will benefit from programs that enhance ancillary revenues, including fees for parking, commercial leases, laundry, cable, telecommunications and other income sources. In addition, numerous successful cost management initiatives are proving effective, leading to stable and growing same property NOI over the long term. CAPREIT believes the strong defensive characteristics of its property portfolio, due to diversification by geography in Canada and the Netherlands, and by property type, including its strong presence in the Canadian MHC business, will serve to mitigate the negative impact of any future unfavourable economic conditions that certain regions may experience (please refer to “COVID-19 and Other Public Health Crises” above). CAPREIT continues to evaluate opportunities to expand and diversify its property portfolio through accretive acquisitions at below replacement cost where management believes it can enhance returns on investment by increasing and stabilizing occupancy, growing Net AMRs, reducing operating costs, improving environment performance and/or enhancing property values through capital investment and property improvement programs. CAPREIT is also targeting modernizing and reducing the average age of its property portfolio by acquiring newer, recently constructed properties where management believes it can enhance returns on investment through its established property management platform. Newer properties require less repair and maintenance or capital improvement costs. While CAPREIT’s strategy is to remain principally focused on its core Canadian markets, CAPREIT continues to consider select opportunities in other geographic markets. CAPREIT has defined a number of strategies to capitalize on its strengths and achieve its objectives of providing Unitholders with stable and predictable monthly cash distributions while growing distributions and unit value over the long term: • CAPREIT 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 has focused on ensuring it maintains strong relations with its residents while its capital investment and property improvement programs are aimed at enhancing the lives of its residents and ensuring properties and amenities meet their needs. • CAPREIT continues to invest in and adopt the latest technologies and solutions to enhance CAPREIT’s risk management, market research and operating efficiency, while reducing costs and strengthening relationships with its residents. • CAPREIT’s building infrastructure improvement programs are designed to upgrade and reposition properties through 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 the portfolio’s useful life over the long term and may also enhance the environment performance of the assets. From time to time, CAPREIT may identify certain non-core assets for sale that do not conform to its current portfolio composition or operating strategies, or where CAPREIT believes their value has been maximized. CAPREIT believes the realization and reinvestment of capital from such non-core property dispositions are fundamental components of its growth strategy and demonstrate the success of its investment programs. 72 2021 Annual ReportManagement’s Discussion and AnalysisCAPREIT will prudently investigate the opportunity to develop new multi-residential properties on land it owns, as well as add new rental suites in certain properties where the opportunity exists. Such investments are accretive as no land costs are incurred and serve to further modernize and reduce the average age of its portfolio. CAPREIT believes its current portfolio provides the opportunity to add new rental suites over time through its development and intensification initiatives, primarily in major markets where demand remains strong and monthly rents support profitable investment. 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 and lengthening mortgage terms within its mortgage portfolio to reduce exposure to refinancing risk. CAPREIT believes that, with the continuing availability of lower cost CMHC-insured financing, CAPREIT is well positioned to meet its financing and refinancing objectives at reasonable costs. CAPREIT maintains a conservative approach to its capital structure, leverage and coverage ratios to further improve its distribution payout ratio. CAPREIT 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. In April 2021, the federal government unveiled the proposed 2021 budget which included a wide variety of changes including spending measures and income tax changes. Upon initial examination, these tax changes are expected to have minimal to no impact on CAPREIT. As discussed in context in various sections of this MD&A, management continues to monitor the potential impact to CAPREIT of the COVID-19 pandemic and assess and implement, as applicable, various measures designed to help ensure the health and safety of our communities and to mitigate the potential areas of risk to our business. The COVID-19 pandemic may also have an impact on certain aspects of the economy such as supply chains and inflation. Various costs including trust expenses, wages, and repairs and maintenance costs are expected to further increase in 2022 due to inflationary cost pressures. 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 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 two properties located in the Greater Toronto Area as at December 31, 2021, compared to three properties as at December 31, 2020. The leases mature in 2034 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. Land Leasehold Interests – CAPREIT owns ground leasehold interests in three land parcels in Alberta and one land parcel in British Columbia, as well as an air leasehold interest in the space occupied by an apartment in the Greater Toronto Area. 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 lease matures in 2045, two mature in 2068, one matures in 2070 and another matures in 2072. 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 76 MHCs, whereby CAPREIT owns the sites, which it rents to residents. 73 Investing in Our FutureManagement’s Discussion and Analysis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 Portfolio Diversification 2021 52,314 274 1,376 53,964 12,201 66,165 % 79.1 0.4 2.1 81.6 18.4 100.0 2020 50,219 339 1,376 51,934 11,856 63,790 % 78.7 0.5 2.2 81.4 18.6 100.0 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(1) London / Kitchener / Waterloo Ottawa Québec Greater Montréal Region Québec City British Columbia Greater Vancouver Region Victoria and Other British Columbia Nova Scotia Halifax Alberta Calgary Edmonton Prince Edward Island Charlottetown Saskatchewan Regina Total Canadian residential suites Europe The Netherlands Total residential suites MHC Sites Total MHC sites Total suites and sites 2021 % 2020 % 17,897 3,808 2,750 24,455 7,933 2,777 10,710 3,743 2,034 5,777 3,288 1,775 543 2,318 637 234 47,419 6,545 53,964 12,201 66,165 27.0 5.7 4.2 36.9 12.0 4.2 16.2 5.7 3.1 8.8 5.0 2.7 0.8 3.5 1.0 0.3 71.7 9.9 81.6 18.4 100.0 17,862 3,261 2,750 23,873 7,771 2,517 10,288 3,551 1,697 5,248 3,288 1,775 544 2,319 637 234 45,887 6,047 51,934 11,856 63,790 27.9 5.1 4.3 37.3 12.2 3.9 16.1 5.6 2.7 8.3 5.1 2.8 0.9 3.7 1.0 0.4 71.9 9.5 81.4 18.6 100.0 (1) Other Ontario has been reclassified into Greater Toronto Area. Prior year comparative figures have been adjusted to conform with current period presentation. 74 2021 Annual ReportManagement’s Discussion and Analysis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. Portfolio of Operating Leasehold Interests CAPREIT has the option to acquire fee simple interests in two of the properties, which are exercisable between the 26th and 35th years of the respective leases. In 2021, CAPREIT completed the early buyout of one operating lease and converted the property into a fee simple interest. Please see Section V – Investment Properties for further details. 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 $42 million to $50 million if each of the options were exercised in the 26th and 35th years, respectively, of the lease terms. If CAPREIT elected to exercise any option prior to the maturity of the lease term, CAPREIT would be entitled to receive a pro rata amount of the prepaid lease amount based on the remaining lease term. In addition, under certain circumstances, the option price may be reduced by the unamortized portion of capital expenditures incurred during the final 10 years of the lease term. The mortgages on each of these two properties are scheduled to be fully repaid by their respective option exercise dates, which management expects will enable CAPREIT to utilize the equity in these properties to fully finance the option exercise prices. Operating Leasehold Interests Portfolio by Lease Maturity ($ Thousands) As at December 31, 2021 Year of Lease Maturity Properties Suites 2034 2037 Total Operating Leasehold Interests portfolio 1 1 2 75 199 274 (1) As at the acquisition dates of these leasehold interests by a CAPREIT predecessor. Portfolio of Land Leasehold Interests Option Exercise Prices % 27.4 72.6 26th Year 35th Year 11,400 30,600 13,650 36,000 Prepaid Lease Amount(1) 7,775 21,000 100.0 $ 42,000 $ 49,650 $ 28,775 In the absence of any new arrangements negotiated between CAPREIT and the landowners of the five investment properties on which CAPREIT has Land Leasehold Interests, CAPREIT’s interests in one property matures in 2045, in two properties in 2068, one property in 2070 and another property in 2072. Generally, each lease provides for annual ground rent or air rights rent and additional rent calculated from the properties’ operating results. All variable rental payments associated with Land Leasehold Interests are included in other operating expenses (see Results of Operations) with the fixed portion capitalized as per IFRS 16 and amortized. Land Leasehold Interests Portfolio by Lease Maturity ($ Thousands) Year Ended December 31, Year of Lease Maturity 2045 2068 2070 2072 Total Land Leasehold Interests portfolio Suites 471 306 272 327 1,376 $ % 34.2 22.2 19.8 23.8 100.0 $ Annual Rent 2021 3,450 1,405 1,477 572 6,904 $ $ 2020 2,947 1,370 1,157 648 6,122 75 Investing in Our FutureManagement’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 management of CAPREIT in accordance with International Financial Reporting Standards, and include amounts based on management’s informed judgments 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 CAPREIT’s financial records are reliable for preparing financial statements; other financial information and transactions are properly authorized and recorded; and assets are safeguarded. As at December 31, 2021, CAPREIT’s President and Chief Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their direct supervision, of the design and operating effectiveness of CAPREIT’s internal controls over financial reporting (as defined in National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings) and, based on that evaluation, determined that CAPREIT’s internal controls over financial reporting were appropriately designed and operating effectively. PricewaterhouseCoopers LLP, the independent auditor 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 auditor is set forth below. The consolidated financial statements have been further reviewed and approved by the Board of Trustees on the recommendation of the Audit Committee. This committee meets regularly with management and the auditor, who have full and free access to the Audit Committee. February 23, 2022 Mark Kenney President and Chief Executive Officer Scott Cryer Chief Financial Officer 76 2021 Annual 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, 2021 and 2020, 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, 2021 and 2020; 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 significant accounting policies and other explanatory information. 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. 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. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2021. These matters were PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Valuation of investment properties: Canadian Fee Simple Interests - Apartments and Townhomes, Manufactured Home Communities Land Lease Sites and certain European residential interests. Refer to note 2 – Summary of Significant Accounting Policies, note 3 – Critical Accounting Estimates, Assumptions and Judgments and note 6 – Investment Properties to the consolidated financial statements. The Trust’s investment properties are measured at fair value as at the consolidated balance sheet dates. Total investment properties as at December 31, 2021 have a fair value of $17,102 million and include Canadian Fee Simple Interests - Apartments and Townhomes, Manufactured Home Communities ("MHC") Land Lease Sites and certain of the Trust’s European residential interests through their 66% ownership interest in European Residential Real Estate Investment Trust (the European residential interests) with a combined fair value of $16,720 million. Fair value is determined in accordance with recognized valuation techniques. The techniques used comprise both the Direct Income Capitalization ("DC") and the Discounted Cash Flow ("DCF") methods. Management is responsible for determining the fair value of the Trust’s investment properties, using either qualified internal or external independent appraisers, depending on the size and geography of each property. Critical judgments are made by management in respect of the fair values of investment properties. For the Canadian Fee Simple Interests and MHC Land Lease Sites, the Trust utilizes the DC method. Under the DC method, capitalization rates are applied to a stabilized net operating income ("NOI") Our approach to addressing the matter included the following procedures, among others: For a sample of Canadian Fee Simple Interests and MHC Land Lease Sites, tested how management determined the fair value, which included the following:  Evaluated the appropriateness of the DC method used.  Tested the underlying data used in the DC method.  Evaluated the reasonableness of the following critical assumptions: – Capitalization rates, by comparing to current industry data or comparable market transactions, as applicable; and – Stabilized NOI, by: ○ Comparing stabilized property revenue to budgets and actual performance. ○ Comparing stabilized property expenses to actual performance, market data and budgets, where applicable. Professionals with specialized skill and knowledge in the field of real estate valuations further assisted us in evaluating the reasonableness of the capitalization rates and stabilized NOI. For the European residential interests, valued using the DC Method, tested how management determined the fair value, which included the following:  Evaluated the appropriateness of the valuation method used. Key audit matter How our audit addressed the key audit matter reflecting market-based NOI assumptions. For the European residential interests, the Trust utilizes a DCF method and a DC method (the valuation methods). The most critical assumptions used in the DCF method include the stabilized cash flows, the discount rate applied over the term of the cash flows and the terminal capitalization rate. The most critical assumptions used in the DC method include the stabilized NOI and the capitalization rates. Stabilized cash flows and stabilized NOI incorporate various assumptions including property revenue and property operating expenses. We considered this a key audit matter due to: i) significant audit effort required to test the fair value of the Canadian Fee Simple Interests - Apartments and Townhomes, MHC Land Lease Sites and the European residential interests determined by management, ii) critical judgments made by management through their use of qualified internal or external independent appraisers when determining the fair value including the development of the critical assumptions, and iii) a high degree of complexity in assessing audit evidence to support the critical assumptions made by management. In addition, the audit effort involved the use of professionals with specialized skill and knowledge in the field of real estate valuations. Other information  For a sample of properties, tested the underlying data, and evaluated critical assumptions, such as property revenue and property operating expenses, used in the valuation method. Professionals with specialized skill and knowledge in the field of real estate valuations assisted us in evaluating the valuation methods of the European residential interests by:  Evaluating the reasonableness of the fair value of the European residential interests by developing an independent point estimate of the fair value using a DC method. This involved the use of available market data to independently develop assumptions related to capitalization rates and stabilized NOI, which incorporated various assumptions including property revenue and property operating expenses.  Comparing the independent point estimate to management’s estimate to evaluate the reasonableness of management’s estimate. 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. 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. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Lee-Anne Kovacs. Chartered Professional Accountants, Licensed Public Accountants Toronto, Ontario February 23, 2022 Consolidated Balance Sheets Consolidated Financial Statements Note December 31, 2021 December 31, 2020 (CA$ thousands) As at Non-current assets Investment properties Investment in associate Mortgages receivable Derivative asset Other non-current assets Total non-current assets Current assets Derivative asset Other current assets Cash and cash equivalents Total current assets Total assets Non-current liabilities Mortgages payable Bank indebtedness Unit-based compensation financial liabilities ERES units held by non-controlling unitholders Derivative liability Deferred income tax liability Lease liabilities Total non-current liabilities Current liabilities Mortgages payable Bank indebtedness Unit-based compensation financial liabilities Derivative liability Accounts payable and accrued liabilities Other current liabilities Security deposits Exchangeable LP Units Distributions payable Total current liabilities Total liabilities Unitholders’ equity Unit capital 6 7 8 21 9 21 9 13 14 15, 16 12 21 23 13 14 15, 16 21 11 10 17 $ 17,101,919 $ 15,000,591 246,505 114,990 22,420 89,957 17,575,791 257,210 – 778 73,810 15,332,389 8,506 55,265 73,411 137,182 $ 17,712,973 55 44,965 121,722 166,742 $ 15,499,131 $ 5,456,605 $ 4,811,131 310,866 14,272 356,695 1,157 133,974 48,316 104,810 14,123 328,535 8,023 59,964 36,565 6,321,885 5,363,151 643,460 – 22,623 2,816 141,499 15,492 43,675 100,684 20,953 991,202 590,071 13,743 19,624 15,366 131,888 13,985 41,218 16,632 19,751 862,278 $ 7,313,087 $ 6,225,429 $ 4,194,093 $ 4,103,912 (43,397) 6,249,190 70,047 5,099,743 $ 10,399,886 $ 17,712,973 $ 9,273,702 $ 15,499,131 Accumulated other comprehensive (loss) income 24 Retained earnings Total unitholders’ equity Total liabilities and unitholders’ equity See accompanying notes to the consolidated annual financial statements. 82 2021 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 Total operating expenses Net rental income Trust expenses Unit-based compensation expense Fair value adjustments of investment properties Fair value adjustments of Exchangeable LP Units Fair value adjustments of investments Realized loss on disposition of investment properties Amortization of property, plant and equipment (Loss) gain on non-controlling interest Gain (loss) on derivative financial instruments Interest and other financing costs (Loss) gain on foreign currency translation Other income Net income before income taxes Current and deferred income tax expense Net income Other comprehensive (loss) income, including items that may be reclassified subsequently to net income Amortization of losses from (AOCL) AOCI to interest and other financing costs (Loss) gain on foreign currency translation Other comprehensive (loss) income Comprehensive income See accompanying notes to the consolidated annual financial statements. Note 2021 2020 28 $ 933,137 $ 882,643 (87,698) (235,446) (323,144) 609,993 (51,366) (15,111) 1,048,742 (665) 14,088 (241) (8,250) (38,651) 50,282 (160,463) (6,095) 31,713 1,473,976 (81,181) (81,596) (222,876) (304,472) 578,171 (43,268) (5,160) 595,859 (1,230) (3,979) (1,387) (7,668) 24,478 (52,672) (164,625) 5,982 29,990 954,491 (28,563) $ 1,392,795 $ 925,928 $ 2,440 (115,884) $ (113,444) $ 1,279,351 $ $ $ 2,570 86,987 89,557 1,015,485 16 6 17 5 12 21 25 28 23 24 24 Investing in Our Future 83 Consolidated Financial Statements Consolidated Statements of Unitholders’ Equity (CA$ thousands) Unitholders’ equity, January 1, 2021 $ 4,103,912 $ 5,099,743 $ 70,047 $ 9,273,702 Note Unit capital Retained earnings Accumulated other comprehensive income (loss) Total Unit capital Distribution Reinvestment Plan RUR Plan Employee Unit Purchase Plan Total unit capital Net income and other comprehensive loss Net income Other comprehensive loss Total net income and other comprehensive loss Distributions on Trust Units Distributions declared and paid Distributions payable Total distributions on Trust Units 18 16, 18 16, 18 19 19 75,739 11,463 2,979 90,181 – – – – – – – – – – 1,392,795 – 1,392,795 (222,395) (20,953) (243,348) – – – – – (113,444) (113,444) – – – 75,739 11,463 2,979 90,181 1,392,795 (113,444) 1,279,351 (222,395) (20,953) (243,348) Unitholders’ equity, December 31, 2021 $ 4,194,093 $ 6,249,190 $ (43,397) $ 10,399,886 Unitholders’ equity, January 1, 2020 $ 4,013,941 $ 4,409,464 $ (19,510) $ 8,403,895 Note Unit capital Retained earnings Accumulated other comprehensive income (loss) Total Unit capital Distribution Reinvestment Plan Settlement of Exchangeable Units LP Units RUR Plan Employee Unit Purchase Plan Total unit capital 18 17 16, 18 16, 18 Net income and other comprehensive income Net income Other comprehensive income Total net income and other comprehensive income Distributions on Trust Units Distributions declared and paid Distributions payable Total distributions on Trust Units Unitholders’ equity, December 31, 2020 19 19 68,108 15,321 3,882 2,660 89,971 – – – – – – 4,103,912 $ $ – – – – – 925,928 – 925,928 (215,898) (19,751) (235,649) 5,099,743 $ – – – – – – 89,557 89,557 – – – 70,047 68,108 15,321 3,882 2,660 89,971 925,928 89,557 1,015,485 (215,898) (19,751) (235,649) 9,273,702 $ See accompanying notes to the consolidated annual financial statements. 84 2021 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 LP Units Fair value adjustments – investments Mark-to-market loss (gain) on ERES units Loss on disposition of investment properties (Gain) loss on derivative financial instruments Amortization Unit-based compensation expense Straight-line rent adjustment Deferred income tax expense Net profit from investment in associate Unrealized foreign currency loss (gain) Net income items related to financing and investing activities Changes in non-cash operating assets and liabilities Cash provided by operating activities Investing activities Acquisition of investment properties Capital investments Operating lease buyout Acquisition of investment in associate 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 Lease payments Financing costs CMHC premiums on mortgages payable Interest paid on mortgages and bank indebtedness Bank indebtedness Proceeds on issuance of Trust Units, net of issuance costs Net cash distributions Cash 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 See accompanying notes to the consolidated annual financial statements. Note 2021 2020 $ 1,392,795 $ 925,928 (1,048,742) (595,859) 12 5 21 9, 24, 25 16 23 28 27 27 27 27 6, 27 29 27 27 27 27 27 27 27 27 665 (14,088) 25,895 241 (50,282) 25,242 15,111 (188) 76,642 (18,455) 6,095 151,848 (11,346) 551,433 (839,975) (299,419) (4,457) – 29,194 (1,798) 8,469 1,230 3,979 (37,020) 1,387 52,672 33,963 5,160 (180) 25,213 (17,173) (5,982) 143,078 (55,040) 481,356 (685,398) (244,857) (127,819) (8,020) 33,312 (258) 11,670 (1,107,986) (1,021,370) 1,340,965 (149,996) (521,375) (6,107) (8,547) (23,447) (133,665) 189,305 3,138 (177,774) 512,497 (44,056) (4,255) 121,722 $ 73,411 $ 1,529,964 (136,087) (353,966) (5,664) (7,025) (34,994) (130,398) (498,783) 2,476 (180,071) 185,452 (354,562) (1,044) 477,328 121,722 Investing in Our Future 85 Notes to Consolidated Financial Statements December 31, 2021 (CA $ thousands, except unit and per unit amounts) 1. Organization of the Trust Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”) owns and manages 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, and in Europe. CAPREIT converted from a closed-ended mutual fund 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 April 1, 2020. CAPREIT commenced active operations on February 4, 1997 when it acquired an initial portfolio of properties. CAPREIT became a reporting issuer on May 21, 1997 pursuant to an initial public offering prospectus of its units (“Trust Units”) dated May 12, 1997. CAPREIT Limited Partnership (“CAPLP”), a subsidiary of CAPREIT established under the laws of the Province of Manitoba pursuant to a limited partnership agreement dated June 26, 2007, and as most recently amended and restated on June 22, 2020, owns directly or indirectly the beneficial interest of all its properties along with the related mortgages and all the debt obligations of CAPREIT. As at December 31, 2021, CAPREIT directly and indirectly holds a 66% (December 31, 2020 – 66%) ownership of publicly traded European Residential Real Estate Investment Trust (“ERES”), which operates primarily in the Netherlands, with the remaining 34% (December 31, 2020 – 34%) held by non-controlling unitholders. CAPREIT owns units of ERES (“ERES units”) and Class B Limited Partnership units (“ERES Class B LP Units”) of ERES Limited Partnership (“ERES LP”). ERES Class B LP Units are exchangeable, on a one-for-one basis, for ERES units at the option of the holder, and have economic and voting rights through special voting units of ERES that are equivalent, in all material respects, to ERES units. 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. 2. Summary of Significant Accounting Policies a) Statement of Compliance CAPREIT has prepared these consolidated annual financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) 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 23, 2022. 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 a historical cost basis except for: investment properties and certain financial instruments, which are stated at fair value; certain unit-based compensation accounts, which are stated at fair value; i) ii) iii) ERES units held by non-controlling unitholders, which are stated at fair value; and iv) Class B limited partnership units of CAPLP (“Exchangeable LP Units”), which are stated at fair value. 86 2021 Annual ReportNotes to Consolidated Financial StatementsIn these consolidated annual financial statements, all values are rounded to the nearest thousand ($000), except unit or per unit amounts or when otherwise noted. Certain prior year figures have been restated to conform with current year presentation. 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 contains an option or a redemption feature, the non-controlling interest is classified as a financial liability. On consolidation of subsidiaries, CAPREIT eliminates in full intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities of the group. International Accounting Standard (“IAS”) 12, Income Taxes (“IAS 12”), applies to temporary differences that arise from the elimination of profits and losses resulting in intragroup transactions. 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. For joint operations, CAPREIT recognizes its share of revenues, expenses, assets and liabilities, which are included in their respective descriptions in the consolidated balance sheets and consolidated statements of income and comprehensive income. In general, CAPREIT has recourse against all of the assets of the joint operations in the event that CAPREIT is called on to pay liabilities in excess of its proportionate share. All balances and effects of transactions between joint operations and CAPREIT have been eliminated to the extent of CAPREIT’s interest in the joint operations. iii) Investment in Associates An associate is an entity over which the investor has significant influence, but not control. Generally, CAPREIT is considered to exert significant influence when it directly or indirectly holds 20% or more of the voting power of the investee. However, determining significant influence is a matter of judgment and specific circumstances; therefore, holding less than 20% of an entity does not necessarily preclude an entity from having significant influence as the entity may exert significant influence through representation on the Board of Trustees, direction of management or through contractual agreements. The financial results of CAPREIT’s associates are included in CAPREIT’s consolidated financial statements using the equity method, whereby the investment is carried on the consolidated balance sheets at cost, adjusted for CAPREIT’s proportionate share of post-acquisition changes in CAPREIT’s share of the net assets of the associate. CAPREIT’s share of profits and losses is recognized in other income in the consolidated statements of income and comprehensive income. IFRS 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 Irish Residential REIT plc (“IRES”). At each reporting date, CAPREIT evaluates whether there is objective evidence that its interest in an associate is impaired. If impairment indicators exist, 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. 87 Investing in Our FutureNotes to Consolidated Financial Statementsd) Investment Properties CAPREIT considers its income properties to be investment properties under 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’s-length transaction at the date of valuation. CAPREIT’s investment properties have been valued on a highest and best use basis and do not include any portfolio premium that may be associated with economies of scale from owning a large portfolio or the consolidation value from having compiled a large portfolio of properties over a long period of time, 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 cost, including transaction costs, 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 net income in the consolidated statements of income and comprehensive income for the period. For Operating Leasehold Interests, all of which are held under prepaid operating leases, CAPREIT measures all such interests at fair value, including the fair value of options to purchase, and these are accounted for and presented as investment properties. The fair value of CAPREIT’s investment properties is determined at each balance sheet date by either qualified internal or external independent appraisers, depending on the size and geography of each property. 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. Investment properties are derecognized either when they have been disposed of or when they are permanently withdrawn from use and no future economic benefit is expected from their disposal. The difference between the net disposal proceeds and the carrying amount of the asset is recognized in profit or loss in the period of derecognition. e) Property 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 an 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 that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. 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 judgment 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. Under IFRS 3, CAPREIT has the option to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. The optional concentration test will be applied on a case-by-case basis. The acquisition method of accounting is used for acquisitions meeting the definition of a business combination. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred to the acquirer and the liabilities incurred by the acquirer. For each business combination, CAPREIT measures the non-controlling interest in the acquiree at fair value if the acquiree is a real estate investment trust (“REIT”) or at the proportionate share of the acquiree’s identifiable net assets if the acquiree is a corporation. Any transaction costs incurred with respect to the business combination are expensed in the period incurred. 88 2021 Annual ReportNotes to Consolidated Financial Statements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. Acquisition-related transaction costs are capitalized to the property. f) Presentation of Non-current Assets Classified as Held-for-Sale Investment properties are reclassified to assets held-for-sale when criteria set out in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations (“IFRS 5”), are met. CAPREIT presents non-current assets classified as held-for-sale and their associated liabilities separately from other assets and liabilities on the consolidated balance sheets and in the notes beginning from the period in which they were first classified as “for sale” and the sale is highly probable. The sale of one or a group of investment properties by CAPREIT will generally be presented as non-current assets held-for-sale and not discontinued operations. If a group of assets held-for-sale is considered to meet the definition of a discontinued operation, then income or expense recognized in the consolidated statements of income and comprehensive income relating to that group of assets is presented separately from continuing operations. A discontinued operation is a component of operations that represents a separate major line of business or geographic area of operations that has been disposed of or is held-for-sale, or is a subsidiary acquired exclusively with a view to resale. g) Property, Plant and Equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and mainly comprise head office and regional offices leasehold improvements, corporate assets and information technology systems, and are presented within other non-current assets on the consolidated balance sheets. These items are amortized on a straight-line basis over their estimated useful lives, ranging from three to 10 years or, in the case of leasehold improvements, are amortized over the shorter of the lease term and their estimated useful lives, ranging from 10 to 15 years. h) Tenant Inducements Incentives such as cash, rent-free periods and move-in allowances may be provided to lessees to enter into a lease. These incentives are capitalized and amortized on a straight-line basis over the term of the lease as a reduction of rental revenue. The carrying amounts of the tenant inducements are included in the fair value of investment properties. i) Financial Instruments Financial assets and financial liabilities Under IFRS 9, Financial Instruments (“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. At each reporting date, financial assets measured at amortized cost are assessed for impairment under an expected credit loss (“ECL”) approach. CAPREIT applies the simplified approach, which uses lifetime ECLs, for other receivables, which consist primarily of tenant receivables. CAPREIT monitors its collection rate on a monthly basis and ensures that all past due amounts are provided for. CAPREIT measures the ECL allowance of its mortgage receivables at an amount equal to the 12-month ECL at initial recognition or if there has been no significant increase in credit risk of the mortgage receivables since initial recognition. CAPREIT will increase the loss allowance of the mortgage receivables to an amount equal to the lifetime ECL if there has been a significant increase in credit risk of the mortgage receivables since initial recognition. 89 Investing in Our FutureNotes to Consolidated Financial StatementsClassification of financial instruments The following summarizes the type and measurement CAPREIT has applied to each of its significant categories of financial instruments: Type Financial assets Cash and cash equivalents Restricted cash Other receivables Mortgages receivable Investments Derivative financial assets Financial liabilities Mortgages payable Bank indebtedness Accounts payable and accrued liabilities, and other liabilities Security deposits Exchangeable LP Units ERES units held by non-controlling unitholders Derivative financial liabilities Measurement base Amortized cost Amortized cost Amortized cost Amortized cost Fair value through profit or loss Fair value through profit or loss(1) Amortized cost Amortized cost Amortized cost Amortized cost Fair value through profit or loss Fair value through profit or loss Fair value through profit or loss(1) (1) CAPREIT has previously designated some of its interest rate swap agreements and forward interest rate contracts as cash flow hedges. 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. Cash and cash equivalents and restricted cash Cash and cash equivalents include cash and short-term investments with an original maturity of three months or less. Restricted cash does not meet the definition of cash and cash equivalents and is included in other current 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 non-current assets. Other receivables are included in other assets on the consolidated balance sheets and are accounted for at amortized cost. Mortgages receivable Mortgages receivable arise when CAPREIT disposes of investment properties and provides the purchaser with a vendor takeback mortgages (“VTB”). The VTB is a financial asset under IFRS 9 and is measured initially at fair value and subsequently at amortized cost. Mortgages receivable are included in non-current assets, except for those with maturities within 12 months after the consolidated balance sheet date, which are classified as current assets. 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 at FVTPL are classified as current, except for the portion expected to be realized or paid more than 12 months after the consolidated balance sheet date, which is classified as non-current. 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. 90 2021 Annual ReportNotes to Consolidated Financial StatementsTransaction costs Transaction costs related to financial assets classified as FVTPL are expensed as incurred. Transaction costs related to financial assets and financial 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 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 Hedging Relationships below. Derivatives not designated as hedging relationships are measured at fair value with changes recognized directly through the consolidated statements of income and comprehensive income within net income. Hedging Relationships CAPREIT has previously designated some of its interest rate swap agreements 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 (loss) 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 accumulated other comprehensive (loss) income (“(AOCL) AOCI”) 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. j) Leases IFRS 16, Leases (“IFRS 16”) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. From a lessee point of view, leases impacted by IFRS 16 encompass CAPREIT’s four land lease parcels in Alberta and British Columbia, an air rights lease and leased office space. These leases are recorded as right-of-use assets with corresponding lease liabilities derived by discounting the future payments of each lease by the rate implicit in the lease, where determinable, or the incremental borrowing rate specific to the lease. These right-of-use assets related to land and air rights leases meet the definition of investment property under IAS 40; therefore, the fair value model is applied to those assets. Interest expense on the lease liabilities and fair value gain (loss) on the right-of-use assets is recorded through CAPREIT’s consolidated statements of income and comprehensive income. These land and air rights lease payments are calculated based upon a specified minimum payment, and at several intervals throughout the lease term, are recalculated based upon land values on a specified date. CAPREIT measures lease liabilities at the present value of lease payments to be made over the lease term. These lease liabilities are determined based on future fixed and in-substance fixed payments, and excludes any variable payments. Variable payments are calculated as a percentage of revenues, net operating income, etc. and are recognized as an expense in the period in which the event or condition that triggers the payment occurs. Right-of-use assets, not meeting the definition of investment property, are measured at cost less any accumulated amortization and are included within other assets. Such right-of-use assets are depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. For other leases of low-value assets or short-term leases that end within 12 months of the commencement date and which have no renewal or purchase option, CAPREIT has elected to apply the recognition exemptions specified in IFRS 16, allowing CAPREIT to continue to expense the lease payments in the period in which they are incurred. 91 Investing in Our FutureNotes to Consolidated Financial Statementsk) MHC Home Inventory MHC home inventory consists of homes which CAPREIT intends to sell in the ordinary course of business. These homes are sold to tenants on CAPREIT’s MHC sites. In accordance with IAS 2, Inventories (“IAS 2”), MHC home inventory is recorded at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less selling costs and any costs of completion, if applicable. MHC home inventory is reviewed for impairment at each reporting date. An impairment loss is recognized in the consolidated statements of income and comprehensive income if the carrying value of the inventory exceeds its net realizable value. When the circumstances that previously caused inventory to be impaired no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the impairment loss previously recorded is reversed. MHC home inventory is included within other current assets unless CAPREIT does not expect to sell these assets in the ordinary course of business within the next 12 months after the reporting date. Transfers between MHC home inventory and investment property occur if there is a change in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment property based on CAPREIT’s intentions and when there is observable evidence of a change in use. l) Mortgages Payable and Bank Indebtedness Mortgages payable are recognized at amortized cost using the effective interest rate method. Under the effective interest rate method, any transaction fees, costs and discounts directly related to the mortgage are recognized within interest and other financing costs in the consolidated statements of income and comprehensive income over the expected term of the mortgage. Mortgage maturities and repayments due more than 12 months after the consolidated balance sheet date are classified as non-current. Bank indebtedness is recognized at amortized cost and the amortization of related financing costs is recognized within interest and other financing costs in the consolidated statements of income and comprehensive income over the contractual term of the debt. Fees and insurance premiums paid to Canada Mortgage and Housing Corporation (“CMHC”) are netted against mortgages payable. They are amortized over the amortization period of the underlying mortgage loans when incurred (initial amortization period is typically 25 to 35 years) and amortization expenses are included in interest and other financing costs in the consolidated statements of income and comprehensive income. If CAPREIT fully refinances an existing mortgage, any unamortized prepaid CMHC premiums and fees associated with the existing mortgages on that property will be written off through interest and other financing costs in the period in which full refinancing occurs. CAPREIT accelerates the amortization for prepaid CMHC premiums for mortgages that management intends to fully refinance within the next year, from the date the decision is made to refinance to the date the mortgage is due to be refinanced. Any premium credits received upon refinancing will be capitalized and amortized over the new amortization period. Similarly, if CAPREIT discharges an existing mortgage, any unamortized prepaid CMHC premiums and fees associated with that mortgage will be written off through interest and other financing costs in the period in which the discharge occurs. If CAPREIT renews a mortgage, CAPREIT will continue to amortize the existing prepaid CMHC premiums and fees associated with the existing mortgage over the remaining amortization period. Interest and other financing costs include mortgage interest, which is expensed at the effective interest rate, and transaction costs incurred in connection with the revolving credit facilities, which are capitalized and presented as other non-current assets and amortized over the term of the facility to which they relate. m) Exchangeable LP Units Issued and outstanding Exchangeable LP Units are exchangeable on demand for Trust Units. As the Trust Units are redeemable at the holder’s option, the Exchangeable LP Units are classified as current liabilities. The distributions on the Exchangeable LP 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 accounts payable and accrued liabilities on the consolidated balance sheets. These Exchangeable LP Units are remeasured at each reporting date at fair value, as they are considered to be puttable instruments under IAS 32, Financial Instruments: Presentation (“IAS 32”), with changes in the fair value recognized as fair value adjustments of Exchangeable LP Units within net income in the consolidated statements of income and comprehensive income. 92 2021 Annual ReportNotes to Consolidated Financial Statementsn) Captive Insurance Effective as of March 5, 2021, CAPREIT is self-insured for the first $10,000 per claim under CAPREIT’s property insurance program and the first $2,000 per claim under CAPREIT’s general liability insurance program, through a reinsurance agreement between CAPREIT’s wholly-owned captive insurance company and a licensed Canadian insurance company. Pursuant to the reinsurance agreement, CAPREIT’s aggregate liability for claims made on an annual basis is limited to $25,000. Claims and expenses are reported when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated. o) Comprehensive Income and Accumulated Other Comprehensive (Loss) Income Comprehensive income includes net income and other comprehensive (loss) income. Other comprehensive (loss) income includes (loss) gain on 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. (AOCL) AOCI is included on the consolidated balance sheets as Unitholders’ equity and includes gains and losses from 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) AOCI are disclosed in note 24. p) Revenue Recognition Under IFRS 15, Revenue from Contracts with Customers (“IFRS 15”), revenue is recognized using a uniform, five-step model. The five steps are as follows: Identify the contract(s) with the customer 1. 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 considered non-lease components and are within the scope of IFRS 15. They 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, except insurance and utility recoveries, and service charges are considered non-lease components and are within the scope of IFRS 15. They 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. Revenue from the sale of MHC home inventory is within the scope of IFRS 15 and is recognized at the point in time when CAPREIT transfers control of the asset to the purchaser, which happens on the closing date. Upon closing of the transaction, the purchaser has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Revenue from the sale of MHC home inventory is included in other income in the statements of income and comprehensive income. Revenue from investment properties, including property tax, insurance and utility recoveries, is within the scope of IFRS 16 and is recognized using the straight-line method, whereby the total amount of revenue from investment properties to be received from all leases is accounted for on a straight-line basis over the term of the related leases. The difference between the revenue from investment properties recognized and the amounts contractually due under the lease agreements is accrued as rent receivable, which is included as a component of other current assets on the consolidated balance sheets. q) Unit-based Compensation and Incentive Plans Unit-based compensation benefits are provided to officers, trustees and certain employees and are intended to facilitate long-term ownership of Trust Units and provide additional incentives by increasing the participants’ interest, as owners, in CAPREIT. Unit-based compensation liabilities are classified as current, except for the portion expected to be realized or paid beyond 12 months of the consolidated balance sheet date, including amounts where CAPREIT has the unconditional right to defer settlement of vested awards. 93 Investing in Our FutureNotes to Consolidated Financial StatementsCAPREIT accounts for its unit-based compensation plans using the fair value-based method, under which compensation expense is recognized over the vesting period. The key drivers of the recognition and measurement of compensation expense are summarized as follows: Incentive Plan(1) DUP RUR Plan ERES UOP Type Rights Rights Options Vesting Period Type of Amortization Distributions Applied To Mark-to-Market Until Grant date 3 years(2) 3 years(3) Immediate Straight-line Graded Additional units Additional units N/A Settled Settled Exercised (1) For definitions of these plans refer to notes 15 and 16. (2) Vesting fully on the third grant anniversary date. (3) Vesting one-third on each grant anniversary date. r) 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. 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 judgment and concluded that debt financing, which is used to provide leveraged returns to holders of Trust Units (“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. s) 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 23. CAPREIT and its subsidiaries satisfied certain conditions available to 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 operating subsidiaries in a number of countries with varying statutory rates of taxation. Judgment 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 where activities carried on by the foreign subsidiaries are considered to be taxable in those countries. Deferred income tax relating to foreign subsidiaries 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. 94 2021 Annual ReportNotes to Consolidated Financial Statementst) Earnings per Unit As a result of the redemption feature of CAPREIT’s Trust Units, these Trust Units are considered financial liabilities under IAS 33, Earnings per Share (“IAS 33”), and are not considered equity for the purposes of calculating net income on a per unit basis. Consequently, CAPREIT does not report an Earnings per Unit calculation, as permitted under IFRS. u) 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. Non-monetary items that are measured at their historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. 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 European 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. ii. assets and liabilities for each balance sheet presented are translated at the closing rate at the date of the balance sheet; income and expenses for each statement of income and comprehensive income are translated at average exchange rates; and iii. all resulting exchange differences are recognized in other comprehensive income. On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are recorded in other comprehensive (loss) 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. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. v) ERES Units Held by Non-Controlling Unitholders ERES units are redeemable at the option of the holder and therefore are considered puttable instruments that meet the definition of a financial liability under IAS 32. Although IAS 32 allows ERES to classify these units as equity on its own balance sheet, this exception is not available to CAPREIT, and therefore the non-controlling interest that these ERES units represent is classified as a liability on the consolidated balance sheet and is measured at fair value, with changes in the fair value recorded as fair value adjustment on non-controlling interest in the consolidated statements of income and comprehensive income. 95 Investing in Our FutureNotes to Consolidated Financial Statementsw) Goodwill Goodwill is not amortized but tested for impairment annually, or more frequently if there are indicators of impairment. Goodwill is allocated to the group of cash-generating units (“CGU”) that are expected to benefit from the synergies of the combination, at the lowest level at which goodwill is monitored for internal management purposes, and not larger than an operating segment (a goodwill CGU). CAPREIT evaluates whether goodwill may be impaired by determining whether the recoverable amount is less than the carrying amount for the goodwill CGU. Impairment losses relating to goodwill cannot be reversed in future periods. x) Reportable Operating Segments Reportable operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. CAPREIT has determined that its chief operating decision-maker is the President and Chief Executive Officer (“CEO”). y) Impact of Accounting Standards Effective January 1, 2021 on CAPREIT’s Current Year Consolidated Financial Statements Interest Rate Benchmark Reform (Phase 2) The IASB published “Interest Rate Benchmark Reform – Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16)” in relation to the modification of financial assets, financial liabilities and lease liabilities, specific hedge accounting requirements, and disclosure requirements applying IFRS 7 to accompany the amendments regarding modifications and hedge accounting. The IASB introduced a practical expedient for modifications required as a direct consequence of the IBOR reform and made on an economically equivalent basis, which are accounted for by updating the effective interest rate. All other modifications are accounted for using the current IFRS requirements. A similar practical expedient is proposed for lessee accounting applying IFRS 16. Under the amendments, hedge accounting is not discontinued solely because of the IBOR reform, but hedging relationships must be amended to reflect modifications to the hedged item, hedging instrument and hedged risk. Amended hedging relationships should meet all qualifying criteria to apply hedge accounting, including effectiveness requirements. The amendments are effective for annual periods beginning on or after January 1, 2021, and are applied retrospectively, with earlier application permitted. CAPREIT adopted the amendments on January 1, 2021 and assessed that there is no impact on transition in the current reporting period based on current transactions in place. The credit facilities that CAPREIT and ERES entered into in 2021 upon expiry of the previous ones contain benchmark replacement clauses relating to the IBOR reform. As such, CAPREIT does not expect that there will be a material impact in future reporting periods in relation to changes due to the interest rate benchmark reform. Refer to note 14 for further information on credit facilities. z) Future Accounting Changes IAS 1, Presentation of Financial Statements (“IAS 1”) The IASB issued “Classification of Liabilities as Current or Non-Current (Amendments to IAS 1)” in January 2020, affecting the presentation of liabilities in the statement of financial position. The narrow-scope amendments to IAS 1 clarify that liabilities are classified as either current or non-current, depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date. The amendments also clarify what IAS 1 means when it refers to the “settlement” of a liability. The amendments must be applied retrospectively in accordance with the normal requirements of IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”). The amendments are effective for annual periods beginning on or after January 1, 2023 (in accordance with “Classification of Liabilities as Current or Non-Current – Deferral of Effective Date (Amendment to IAS 1)” issued by the IASB in July 2020), with earlier application permitted. In November 2021, the IASB issued an exposure draft proposing amendments to the January 2020 amendments to IAS 1. The proposed amendments would modify the requirements introduced by the January 2020 amendments on how an entity classifies debt and other financial liabilities as current or non-current, particularly in circumstances when an entity’s right to defer settlement of a liability is subject to compliance with conditions. The exposure draft also proposes to defer the effective date of the 2020 amendments to no earlier than January 1, 2024. The IASB has tentatively decided that the proposed amendments would be applied retrospectively. The amendments have not been early adopted by CAPREIT. CAPREIT is currently assessing any potential impact of this amendment. 96 2021 Annual ReportNotes to Consolidated Financial Statements3. Critical Accounting Estimates, Assumptions and Judgments The preparation of consolidated annual financial statements in accordance with IFRS requires the use of estimates, assumptions and judgments 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, valuation of the investment in IRES, capitalization of costs, accounting accruals, the amortization of certain assets, accounting for deferred income taxes and determining whether an acquisition is a business combination or an asset acquisition. 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 or judgments deemed to be more significant, due to subjectivity and the potential risk of causing a significant 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 determined in accordance with recognized valuation techniques. The techniques used comprise both the Direct Income Capitalization (“DC”) and the Discounted Cash Flow (“DCF”) methods, 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 20. The valuation of investment properties is subject to significant judgments, 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 20. The fair values of derivatives reported may differ significantly from the amounts they are ultimately settled for if there is volatility between the valuation date and settlement date. iii) Investment in 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 judgment when considering the extent of its ownership interest in IRES, the level of its involvement, responsibilities and remuneration as IRES’s investment manager, and the control exerted over IRES by its independent board of directors. Management reassesses this conclusion when its ownership interest or the terms of the investment management agreement change. iv) Business Combination Accounting for business combinations under IFRS 3 applies when it is determined that a business has been acquired. IFRS 3 defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities. 97 Investing in Our FutureNotes to Consolidated Financial StatementsA business generally consists of inputs, processes applied to those inputs, and resulting outputs that are, or will be, used to generate revenues. In the absence of such criteria, a group of assets is deemed to have been acquired. If goodwill is present in a transferred set of activities and assets, the transferred set is presumed to be a business. CAPREIT applies judgment in determining whether property acquisitions qualify as a business combination in accordance with IFRS 3 or as an asset acquisition. 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 judgment when considering the following: 1. whether the investment property or properties are capable of producing outputs; 2. whether the market participant could produce outputs if missing elements exist; 3. whether employees were assumed in the acquisition; and 4. whether an operating platform has been acquired. As outlined in note 2, CAPREIT has the option to assess whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets under IFRS 3. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. The optional concentration test will be applied on a case-by-case basis. When CAPREIT acquires properties or a portfolio of properties and does not take on or assume employees or does not acquire an operating platform, it classifies the acquisition as an asset acquisition. When CAPREIT determines the acquisition is a business combination, CAPREIT considers the following when determining the acquirer for accounting purposes: 1. whether the former owners of the entity being acquired own the majority of the units, and control the majority of votes, in the combined entity; and 2. whether management of the combined entity is drawn predominantly from the entity whose units are acquired. v) Valuation of Goodwill The acquisition method of accounting is used for acquisitions meeting the definition of a business combination. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred to the acquirer and the liabilities incurred by the acquirer. Goodwill arising on acquisition is recognized as an asset and is initially measured at cost as the excess of the total consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed. Goodwill is initially recognized at cost and is subsequently measured at cost less any accumulated impairment losses. Refer to note 2(w) for details on the goodwill impairment test. In addition to the discussion of these critical accounting estimates and judgments as set out above, the significant global uncertainty resulting from the novel coronavirus (“COVID-19”) pandemic has the following impact: i) Valuation of Investment Properties The availability of reliable market metrics to inform opinions of value is reduced, and therefore a higher degree of judgment must be applied. Consequently, fair values are subject to significant change. Refer to note 6 for further information. ii) Valuation of Financial Instruments The fair value of CAPREIT’s derivatives as reported may differ significantly from the amounts they are ultimately settled for due to volatility between the valuation date and settlement date. In response to the developing COVID-19 pandemic, there is increased volatility in the financial markets. CAPREIT is subject to these market fluctuations, impacting interest rates upon which the fair values of CAPREIT’s interest rate swaps are derived, and expects to continue to experience significant volatility in interest rates as the situation evolves. As a result, there is uncertainty in the future expected interest rates (forward curves) upon which are based the expected variable cash receipts, thereby impacting the fair values of CAPREIT’s interest rate swaps. 98 2021 Annual ReportNotes to Consolidated Financial Statementsiii) Investment in IRES In response to the developing COVID-19 pandemic, there is increased volatility in the financial markets. IRES is subject to these market fluctuations, impacting its share price, which may continue to experience significant volatility as the situation evolves. CAPREIT has determined that the deficiency of the market capitalization of IRES over the carrying amount of the investment as at December 31, 2021 is an indicator of impairment. As such, an impairment assessment was performed. The recoverable amount was determined using a value in use approach using inputs classified as Level 3 in the fair value hierarchy. Based on this analysis, an impairment of $nil was recorded for the year ended December 31, 2021. Refer to note 7 for further information. iv) Valuation of Goodwill CAPREIT recognized goodwill pursuant to the reverse acquisition of European Commercial Real Estate Investment Trust (“ECREIT”) on March 29, 2019. Due to the COVID-19 pandemic, there is an increased risk that goodwill may be impaired as a result of the economic uncertainty and the financial market response. CAPREIT has determined that the decline in the market capitalization of ERES as at December 31, 2021 is an indicator of impairment and as such, an impairment assessment was performed. An impairment of $nil has been recorded for the year ended December 31, 2021. Refer to note 9 for further information. 4. Recent Investment Property Acquisitions CAPREIT completed the following investment property acquisitions since January 1, 2020, which have contributed to the operating results effective from their respective acquisition dates. The below tables do not include $4,457 relating to CAPREIT’s operating lease buyout in the year ended December 31, 2021 (December 31, 2020 – $158,565). Acquisitions Completed During the Year Ended December 31, 2021 Acquisition Date May 5, 2021 May 31, 2021 June 2, 2021 June 9, 2021 June 24, 2021 June 25, 2021 June 30, 2021 June 30, 2021 July 5, 2021 August 31, 2021(4) September 7, 2021 September 22, 2021(5) October 1, 2021 November 30, 2021 November 30, 2021 December 22, 2021 Suite or Site Count 485 154 228 77 30 548 104 33 342 787 193 141 260 63 162 137 Region(s) Oshawa, ON Montréal, QC Victoria, BC Victoria, BC Victoria, BC London, ON The Netherlands The Netherlands Lakeshore, ON Toronto, ON West Kelowna, BC Toronto, ON Québec City, QC The Netherlands The Netherlands The Netherlands Total Acquisition Costs Assumed Mortgage Funding Subsequent Acquisition Financing $ 105,904 $ –(3) $ 54,673(3) 31,727 78,306 20,263 9,906 110,461 45,879 27,202 21,703 165,626 63,385 123,111 74,159 29,966 88,732 57,167 18,037 33,702 –(3) –(3) –(3) – – 8,573 37,225 –(3) 34,077 –(3) – – – – – –(3) –(3) –(3) 21,593(6) 13,995(6) – – –(3) – –(3) 13,949(6) 41,921(6) 24,839(6) Interest Rate (%)(1) 1.88(3) 1.78 Term to Maturity (Years)(2) 3.00(3) 4.58 3.08 –(3) –(3) –(3) 1.16(6) 1.16(6) 4.08 3.16 –(3) 1.93 –(3) 1.16(6) 1.16(6) 1.16(6) 1.67 –(3) –(3) –(3) 6.00(6) 6.00(6) 4.17 7.68 –(3) 0.17 –(3) 5.75(6) 5.75(6) 5.75(6) Total 3,744 $ 1,053,497 $ 131,614 $ 170,970 (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 cash and cash equivalents and CAPREIT’s Acquisition and Operating Facility. (4) (5) (6) CAPREIT purchased the remaining 50% interest in a portfolio of 787 apartment suites and townhouse units. CAPREIT acquired its initial 50% interest on July 31, 2008. Total acquisition cost was increased by $7,985, relating to the difference between the agreed upon issuance price of $56.00 per Exchangeable LP Unit and the fair value of the Exchangeable LP Units on the acquisition date. Refer to note 17 for further information. Subsequent acquisition financing obtained is collateralized by a pool of investment properties. The amount of subsequent acquisition financing shown above has been allocated based on fair value of these properties as determined by the lender. The interest rates shown include the corresponding interest rate swaps. 99 Investing in Our FutureNotes to Consolidated Financial Statements Acquisitions Completed During the Year Ended December 31, 2020 Acquisition Date Suite or Site Count Region(s) Total Acquisition Costs Assumed Mortgage Funding Subsequent Acquisition Financing Interest Rate (%)(1) Term to Maturity (Years)(2) February 10, 2020 1,503 Halifax, NS $ 394,734 $ 108,744 $ 76,174 March 4, 2020 March 16, 2020 August 13, 2020 September 1, 2020 September 21, 2020 October 1, 2020 October 1, 2020 November 26, 2020 November 30, 2020 December 1, 2020 December 2, 2020 December 29, 2020 112 109 88 120 301 169 113 147 380 84 38 98 Montreal, QC Edmonton, AB Halifax, NS The Netherlands London & Sarnia, ON Espanola, Wingham & Midland, ON The Netherlands Maple Ridge, BC Ottawa, ON The Netherlands Halifax, NS The Netherlands 44,331 28,392 23,033 32,233 51,097 9,909 42,353 29,272 97,482 35,667 12,149 19,840 – –(3) –(3) – –(3) 3,911 – –(3) –(3) – –(3) – 33,427 –(3) –(3) 17,526 –(3) – 22,831 –(3) –(3) 19,375 –(3) 10,792 Total 3,262 $ 820,492 $ 112,655 $ 180,125 1.84 2.06 –(3) –(3) 0.97 –(3) 4.77 0.97 –(3) –(3) 0.97 –(3) 0.97 4.66 10.00 –(3) –(3) 4.00 –(3) 7.94 4.00 –(3) –(3) 4.00 –(3) 4.00 (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. 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. 5. Dispositions The table below summarizes the dispositions completed since January 1, 2020. Disposition Completed During the Year Ended December 31, 2021 Disposition Date September 2, 2021(1) September 29, 2021 October 1, 2021(3) Total Suite Count Region(s) Sale Price Cash Proceeds(4) VTB Issued(2) 1 86 506 593 The Netherlands $ Toronto, ON Toronto, ON 461 52,000 90,920 $ 143,381 $ $ 461 5,200 22,730 28,391 $ – 46,800 68,190 $ 114,990 (1) Represents disposition of one individual single family home. (2) Refer to note 8 for further information. (3) CAPREIT disposed of its 33.3% interest in 506 apartment suites. (4) Prior to working capital adjustments. Dispositions Completed During the Year Ended December 31, 2020 Disposition Date January 31, 2020(1) March 30, 2020 July 15, 2020 Total Suite Count – 6 188 194 Region(s) Germany Charlottetown, PEI Calgary, AB Sale Price 25,585 675 30,500 56,760 $ $ Cash Proceeds Mortgage Discharged $ 15,419 $ 10,166 675 19,335 35,429 $ – 11,165 21,331 $ (1) This is a commercial property held by ERES consisting of 58,513 square feet. For the years ended December 31, 2021 and 2020, a loss of $241 and $1,387, respectively, was recognized in connection with property dispositions. The loss represents the difference between the net proceeds after transaction costs from the dispositions and the fair value of the respective properties at the date of disposition. 100 2021 Annual ReportNotes to Consolidated Financial Statements 6. Investment Properties Reconciliation of Carrying Amounts of Investment Properties by Type For the Year Ended December 31, 2021 Balance of investment properties, beginning of the year Additions: Acquisitions Property capital investments Capitalized leasing costs(1) Right-of-use asset(2) Operating lease buyout(3) Dispositions Transfer between investment property types(3) Fair value adjustments Loss on foreign currency translation Fee Simple and MHC Land Lease Sites Operating Leasehold Interests Land Leasehold Interests Total $ 14,624,762 $ 114,775 $ 261,054 $ 15,000,591 1,053,497 303,850 1,386 – – (143,381) 23,810 1,043,649 (187,752) – 2,580 2 – 4,457 – (23,810) 16,146 – – 7,955 (75) 10,067 – – – (11,053) – 1,053,497 314,385 1,313 10,067 4,457 (143,381) – 1,048,742 (187,752) Balance of investment properties, end of the year $ 16,719,821 $ 114,150 $ 267,948 $ 17,101,919 (1) Comprises tenant inducements, straight-line rent and direct leasing costs. (2) On April 1, 2021, the basic annual rent of an existing land lease was increased in accordance with the lease agreement, which stipulates that the basic annual rent be renegotiated every 20 years to reflect the land market value. During the year ended December 31, 2021, CAPREIT purchased the freehold interest on one of its operating leasehold properties and converted the ownership into fee simple. (3) For the Year Ended December 31, 2020 Balance of investment properties, beginning of the year Additions: Acquisitions Property capital investments Capitalized leasing costs(1) Operating lease buyout(2) Dispositions Transfer between investment property types(2) Fair value adjustments Gain on foreign currency translation Fee Simple and MHC Land Lease Sites Operating Leasehold Interests Land Leasehold Interests Total $ 11,934,504 $ 965,869 $ 196,053 $ 13,096,426 825,681 231,822 1,248 – (56,760) 945,507 604,662 138,098 – 5,304 (4) 158,565 – (1,023,879) 8,920 – – 4,937 (585) – – 78,372 (17,723) – 825,681 242,063 659 158,565 (56,760) – 595,859 138,098 Balance of investment properties, end of the year $ 14,624,762 $ 114,775 $ 261,054 $ 15,000,591 (1) Comprises tenant inducements, straight-line rent and direct leasing costs. (2) During the year ended December 31, 2020, CAPREIT purchased the freehold interest on 10 of its operating leasehold properties and converted the ownership into nine fee simple and one land leasehold interest. Valuation Basis Beginning in the year ended December 31, 2021, CAPREIT appraises some of its Canadian investment properties using valuations prepared by its internal valuation team. This team consists of individuals who are knowledgeable and have specialized industry experience in real estate valuations and report directly to a senior member of CAPREIT’s management. The internal valuation team’s processes and results are reviewed and approved by senior management of CAPREIT, including the President and Chief Executive Officer and Chief Financial Officer. As at December 31, 2021, CAPREIT had approximately 94% by value or 68% by number of properties of its Canadian investment properties appraised by a qualified external appraiser (December 31, 2020 – 100% and 100%, respectively). External valuations for the Canadian portfolio, where obtained, are performed at year-end with quarterly updates provided on capitalization rates. CAPREIT obtains external valuations for a cross-section of investment properties that represent different geographical locations across the Canadian portfolio. For internal valuations, the appraisal methodologies used are consistent with the practices employed by the external appraiser. The fair values of all of CAPREIT’s European residential portfolio are determined by qualified external appraisers quarterly. The qualified external appraisers hold recognized relevant professional qualifications and have recent experience in the location and category of the respective property. 101 Investing in Our FutureNotes to Consolidated Financial Statements Due to the COVID-19 pandemic and its ongoing impact on the economy, and specifically its unknown future impact on the real estate market, there is heightened uncertainty surrounding the valuation of the investment properties. Consequently, there is a need to apply a higher degree of judgment as it pertains to the forward-looking assumptions that underlie CAPREIT’s valuation methodologies. Fair values for investment properties are classified as Level 3 in the fair value hierarchy, as disclosed in note 20. 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. 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 either the DC or the DCF methods to arrive at the fair value of the investment properties. Capitalization rates and discount rates used are based on recently closed transactions for similar properties and other current market indicators for similar properties. Investment properties have been valued using the following methods and key assumptions: a) Fee Simple and MHC Land Lease Sites For its Canadian portfolio, 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 market-based assumptions such as long-term vacancy rates, management fees, repairs and maintenance costs, and general and administration costs). The most significant assumption is the capitalization rate for each specific property. The capitalization rate is based on the actual location, size and quality of the property, taking into account any available market data at the 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 fair value than would a higher capitalization rate. For its European portfolio, CAPREIT utilizes the DC method, described above, and the DCF method. Under the DCF method, discount rates are applied to the forecasted cash flows reflecting market-based NOI assumptions as described above. The most significant assumptions are the stabilized cash flows, the discount rate applied over the term of the cash flows and the capitalization rate used to determine the terminal value of the investment properties. Generally, an increase in forecasted cash flows will result in an increase to the fair value of an investment property. The discount rate is generally the weighted average cost of capital that is appropriate to the cash flow risk for the investment property. An increase in the discount rate will result in a decrease to the fair value of an investment property. The terminal capitalization rate is generally determined with reference to recent transactions for similar investment properties. An increase in the terminal capitalization rate will result in a decrease to the fair value of an investment property. b) Operating Leasehold Interests CAPREIT utilizes the DCF method. Under this method, discount rates are applied to the forecasted cash flows reflecting market-based leasing assumptions for a 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. 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 (earlier of option exercise date and early buyout date) to estimate the future value, which is then discounted to a present value. Under this method, the stabilized income is adjusted to a projected NOI as at the end of the operating lease term and the capitalization rate is adjusted to a “reversionary capitalization rate” reflecting the incremental risk associated with future uncertainty. The value of the option is then determined based on the difference between the estimated fair value of the property at such date and the option buyout price, discounted back to its present value using a risk-adjusted discount rate (the “option discount rate”). 102 2021 Annual ReportNotes to Consolidated Financial Statementsd) Land Leasehold Interests CAPREIT’s land leasehold interests consist of four investment properties with ground leases and one investment property with an air rights lease with various expiry dates (subject to revisions at periodic intervals) between 2045 and 2072. One lease matures in 2045, two mature in 2068, one matures in 2070 and another matures in 2072. Generally, each lease provides for annual rent and additional rent calculated from the results of property operations. CAPREIT utilizes the DCF method for properties that are subject to land or air rights leases. Under this method, discount rates are applied to the forecasted cash flows reflecting market-based leasing assumptions for that specific property as well as assumptions about renewal and new leasing activity. The most significant assumption is the discount rate applied over the term of the lease. Forecasted cash flows are reduced for contractual land lease payments and the discount rates reflect 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, is presented below as at December 31, 2021 and December 31, 2020: As at December 31, 2021 Type of Interest Fee simple interests(1) MHC sites Operating leasehold interests(2),(3) Land leasehold interests(4) Total Investment Properties excluding right-of-use assets Add: Right-of-use assets, net of fair value change Total Investment Properties As at December 31, 2020 Type of Interest Fee simple interests(1) MHC sites Operating leasehold interests(2),(3) Land leasehold interests(4) Total Investment Properties excluding right-of-use assets Add: Right-of-use assets, net of fair value change Total Investment Properties Fair Value $ 16,011,231 $ 708,590 114,150 221,842 $ 17,055,813 46,106 $ 17,101,919 Fair Value $ 13,986,832 $ 637,930 114,775 224,440 $ 14,963,977 36,614 $ 15,000,591 WA NOI / Cash Flow(5) 3,591 1,913 2,854 3,316 Rate Type Capitalization rate Capitalization rate Discount rate(6) Discount rate(6) Max 9.53% 8.14% 5.25% 7.50% Min 2.05% 4.85% 5.00% 5.50% Weighted Average 3.57% 5.67% 5.08% 6.43% WA NOI / Cash Flow(5) 3,768 1,881 2,487 3,122 Rate Type Capitalization rate Capitalization rate Discount rate(6) Discount rate(6) Max 8.61% 8.14% 5.50% 7.50% Min 2.25% 4.68% 5.25% 5.50% Weighted Average 3.82% 5.96% 5.32% 6.47% (1) (2) (3) (4) (5) (6) The fee simple interests include $2,676,150 (December 31, 2020 – $2,299,435) of CAPREIT’s European portfolio with an implied capitalization rate of 3.55% (December 31, 2020 – 3.87%), which were valued using the DCF method at a weighted average discount rate of 5.64% and a terminal capitalization rate of 4.46% (December 31, 2020 – 5.75% and 4.92%, respectively). The fair values of operating leasehold interests include the fair values of the options to purchase the related freehold interests of $50,010 as at December 31, 2021 (December 31, 2020 – $42,235). For the two operating leasehold interests remaining as at December 31, 2021 (December 31, 2020 – three), the contractual weighted average remaining lease term on operating leasehold interests is 14.4 years (December 31, 2020 – 14.9 years) based on the assumption that the early purchase option is not exercised. If the purchase option is exercised at the earliest allowable date, the weighted average remaining lease term on the two operating leasehold interests is 4.4 years as at December 31, 2021 (December 31, 2020 – 4.9 years). The fair values of leasehold interests subject to land leases reflect the estimated air rights or land lease payments over the term of the leases. Weighted average (“WA”) net operating income (“NOI”) or cash flow by property fair value. Represents the discount rate used to determine the fair value of operating leasehold and land leasehold interests using the DCF method. A weighted average stabilized net operating income growth for operating leasehold interests of 3.0% has been assumed as at December 31, 2021 and December 31, 2020, respectively. 103 Investing in Our FutureNotes to Consolidated Financial Statements The table below summarizes the impact of changes in both the capitalization rate and stabilized NOI on the fair value of CAPREIT’s investment properties: As at December 31, 2021 Change in Capitalization Rate(1) Change in NOI (2.00)% (1.00)% –% +1.00% +2.00% (0.50)% $ 2,387,826 $ 2,585,721 $ 2,783,615 $ 2,981,509 $ 3,179,403 (0.25)% –% +0.25% +0.50% 917,510 (340,046) (1,428,749) (2,381,028) 1,100,401 (169,987) (1,269,799) (2,231,795) 1,283,292 – (1,110,849) (2,082,563) 1,466,183 170,131 (951,900) (1,933,330) 1,649,074 340,190 (792,950) (1,784,098) (1) For operating leasehold interests, land leasehold interests and European properties, 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, land leasehold interests and European properties to determine the impact on fair value of the total portfolio. 7. Investment in Associate As at December 31, 2021, CAPREIT has an 18.7% (December 31, 2020 – 18.8%) share ownership in IRES, an Irish residential REIT listed on the Euronext Dublin exchange. CAPREIT’s subsidiary, IRES Fund Management Limited, entered into an external investment management agreement to perform property and asset management services for 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 judgment when considering the extent of its ownership interest in IRES, the level of its involvement, responsibilities and remuneration as IRES’s investment manager, and the control and influence exerted over IRES by its independent board of directors and CEO. As at December 31, 2021, CAPREIT concluded that it continues to exert significant influence 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 29 for further details. The table below discloses further details about CAPREIT’s investment in IRES: As at Carrying value of investment in associate Share ownership (%) Number of IRES shares IRES share price (€) Fair value of investment in associate based on quoted market price(1) December 31, 2021 December 31, 2020 $ 246,505 $ 257,210 18.7% 18.8% 98,910,000 98,910,000 1.68 1.50 $ 238,564 $ 231,568 (1) CAPREIT has determined that the deficiency of the market capitalization of IRES over the carrying amount of the investment as at December 31, 2021 is an indicator of impairment. An impairment analysis was performed and no impairment was identified for the year ended December 31, 2021 (year ended December 31, 2020 – no impairment). 8. Mortgages Receivable As disclosed in note 5, CAPREIT issued VTBs in connection with the disposal of two investment properties. Interest is payable monthly or quarterly, with the principal due at maturity. The borrowers can prepay the principal, in whole or in part, at any time or times during the term of the mortgage without notice or penalty. The table below presents the mortgages receivable: Issuance date September 29, 2021(1) October 1, 2021 Total Maturity year Interest rate December 31, 2021 December 31, 2020 2023 2024 2.33% 3.00% $ $ 46,800 68,190 114,990 $ $ – – – (1) The borrower has the option to extend the VTB for an additional year at an interest rate of 4.00% per annum. 104 2021 Annual ReportNotes to Consolidated Financial Statements 9. 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 Right-of-use asset, net of amortization(2) Deferred loan costs, net(3) Fair value through profit or loss investment Deferred tax asset Goodwill(4) Total Other current assets Prepaid expenses Other receivables Restricted cash Deposits MHC home inventory Total Note December 31, 2021 December 31, 2020 $ 47,430 $ 23 $ $ (33,606) 13,824 3,365 1,339 51,286 5,010 15,133 89,957 10,732 17,866 10,986 7,543 8,138 $ $ 59,850 (43,330) 16,520 1,141 451 37,198 2,032 16,468 73,810 9,969 15,411 9,355 10,230 – $ 55,265 $ 44,965 (1) Consists of head office and regional offices’ leasehold improvements, corporate assets and information technology systems. (2) On October 25, 2021, CAPREIT issued a lease extension notice to extend one of its existing leases by five years. As a result, CAPREIT reassessed the lease term and increased the right-of-use asset and the lease liability by $2,833. Amortization during the year ended December 31, 2021 is $609 (year ended December 31, 2020 – $636). (3) Represents deferred loan costs related to the revolving credit facilities net of accumulated amortization of $1,673 (December 31, 2020 – $12,994). (4) CAPREIT has determined that the decline in the market capitalization of ERES as at December 31, 2021 is an indicator of impairment and as such, an impairment assessment was performed. No impairment has been recorded for the year ended December 31, 2021 (December 31, 2020 – $nil). 10. Other Current Liabilities As at Current tax liability Mortgage interest payable Current lease liabilities Total 11. Accounts Payable and Accrued Liabilities As at Accounts payable Accrued liabilities Deferred revenue Distributions payable to ERES non-controlling unitholders Other Total Note 23 December 31, 2021 December 31, 2020 $ $ 2,808 11,565 1,119 15,492 $ $ 2,362 10,446 1,177 13,985 December 31, 2021 December 31, 2020 $ 56,835 63,659 15,708 745 4,552 $ 58,378 51,843 14,399 920 6,348 $ 141,499 $ 131,888 105 Investing in Our FutureNotes to Consolidated Financial Statements 12. ERES Units Held by Non-Controlling Unitholders The ERES units held by non-controlling unitholders are classified as equity on ERES’s balance sheets but are classified as a liability on CAPREIT’s consolidated balance sheets. ERES units are redeemable at any time, in whole or in part, by the unitholder. As at December 31, 2021, CAPREIT valued the ERES units held by non-controlling unitholders at $356,695 (December 31, 2020 – $328,535) based on the closing price on the TSX and classified the units as a liability on the consolidated balance sheets. The mark-to-market loss (gain) arises from the (increase) decrease in ERES’s unit price. For the Year Ended December 31, Mark-to-market loss (gain) on ERES units Distributions to ERES non-controlling unitholders Loss (gain) on non-controlling interest 2021 25,895 12,756 38,651 $ $ 2020 (37,020) 12,542 (24,478) $ $ 13. Mortgages Payable As at December 31, 2021, mortgages payable bear interest at a weighted average effective rate of 2.52% (December 31, 2020 – 2.61%) and mature between 2022 and 2036. The effective interest rate as at December 31, 2021 includes 0.05% (December 31, 2020 – 0.05%) for the amortization of the realized component of the loss on settlement of derivative financial instruments of $32,494 included in accumulated other comprehensive (loss) income (December 31, 2020 – $32,494). As at December 31, 2021, 99.1% of CAPREIT’s mortgages payable are financed at fixed interest rates (December 31, 2020 – 99.3%). Investment properties at fair value of $15,919,474 have been pledged as security as at December 31, 2021 (December 31, 2020 – $14,023,910). CAPREIT has investment properties with a fair value of $1,182,445 as at December 31, 2021 that are not encumbered by mortgages (December 31, 2020 – $976,681). Of these, $893,320 of the investment properties are located in Canada (December 31, 2020 – $974,480) and secure only CAPREIT’s acquisition and operating facility (“Acquisition and Operating Facility”). $274,240 of these Canadian investment properties also carry a negative pledge relating to the ERES revolving credit facility (“ERES Credit Facility”). Refer to note 14 for further information. As at December 31, 2021, unamortized deferred financing costs of $17,989, unamortized fair value loss of $1,992 and unamortized prepaid CMHC premiums of $109,660 are netted against mortgages payable (December 31, 2020 – $15,453, $1,330 and $96,255, respectively). Future principal repayments as at December 31, 2021 for the years indicated are as follows: As at December 31, 2021 2022 2023 2024 2025 2026 2027 – 2036 Deferred financing costs, fair value adjustments and prepaid CMHC premiums Total portfolio As at Represented by: Mortgages payable – non-current(1) Mortgages payable – current(1) (1) Included in mortgages payable as at December 31, 2021 are non-amortizing mortgages from ERES. $ Principal Amount 643,460(1) 547,374(1) 606,244(1) 922,025(1) 874,195(1) 2,632,424(1) 6,225,722 (125,657) $ 6,100,065 % of Total Principal 10.3 8.8 9.7 14.8 14.0 42.4 100.0 December 31, 2021 December 31, 2020 $ 5,456,605 $ 4,811,131 643,460 590,071 $ 6,100,065 $ 5,401,202 106 2021 Annual ReportNotes to Consolidated Financial Statements 14. Bank Indebtedness Effective June 18, 2021, CAPREIT entered into a new credit facility agreement upon expiry of the previous one. CAPREIT made the following changes to its credit facility agreement, among other things: (i) decreased its Acquisition and Operating Facility from $740,000 to $600,000, (ii) lower margin and fees, (iii) replaced the conversion feature with a three-year term from June 18, 2021 including the possibility to request a renewal or extension at any time, subject to the lenders’ consent, and (iv) changed certain financial covenants, which are further discussed in note 22. Effective June 30, 2020, CAPREIT amended its credit facility agreement to change the “conversion date” from June 30, 2020 to June 30, 2021 for when the revolving Acquisition and Operating Facility converts to a one-year non-revolving term facility. Prior to the conversion date, CAPREIT can request a one-year extension. The lenders have discretion on whether to grant the extension. The bridge facility on the Acquisition and Operating Facility expired on March 15, 2020. CAPREIT’s credit facilities include the $600,000 Acquisition and Operating Facility, which can be borrowed in US dollars (“USD”), euros or Canadian dollars (collectively, the “Credit Facilities”). The $65,000 five-year non-revolving term credit facility (included in mortgages payable) that was included in the previous Credit Facilities was repaid on January 15, 2021. It bore interest at the bankers’ acceptance rate plus 1.4% per annum. The Acquisition and Operating Facility matures on June 18, 2024. The interest rate on the Acquisition and Operating Facility is determined by interest rates on prime advances, bankers’ acceptances, and USD and euro LIBOR utilized during the year. The Credit Facilities are subject to compliance with the various provisions of the Credit Facilities. The Credit Facilities are used to fund operations, acquisitions, capital improvements, letters of credit and working capital deficiencies. The ERES revolving credit facility (“ERES Credit Facility”) and the ERES one-year revolving bridge credit facility (“ERES Bridge Facility”), each originally maturing on July 8, 2021, were extended to October 29, 2021, under the same terms and conditions. On October 29, 2021, ERES amended and renewed its existing ERES Credit Facility with the same two Canadian chartered banks, providing up to €100,000 for a three-year period ending on October 29, 2024, which resulted in (i) combining the ERES Credit Facility and the ERES Bridge Facility; (ii) lower interest rates and fees, (iii) certain modifications to CAPREIT’s financial covenants; and (iv) a negative pledge of an unencumbered property pool provided by CAPREIT, such that it represents 1.50x the facility amount of €100,000. As at December 31, 2021 Facility Less: USD LIBOR borrowings Canadian borrowings Letters of credit Available borrowing capacity Weighted average interest rate including interest rate swaps As at December 31, 2020 Facility Less: USD LIBOR borrowings Letters of credit Available borrowing capacity Acquisition and Operating Facility $ 600,000 (104,329)(1) (104,488)(2) (6,673) ERES Credit Facility $ 143,910 (102,049)(4) – – Consolidated Total $ 743,910 (206,378) (104,488) (6,673) $ 384,510 $ 1.44%(3) 41,861 0.57%(5) $ 426,371 1.15% Acquisition and Operating Facility $ 740,000 (104,810)(1) (7,193) ERES Credit Facility $ 156,080 (13,743)(4) – Consolidated Total $ 896,080 (118,553) (7,193) $ 627,997 $ 142,337 $ 770,334 Weighted average interest rate including interest rate swaps 1.10%(3) 0.65%(5) 1.05% (1) CAPREIT has net USD LIBOR borrowings of USD $82,292 (December 31, 2020 – USD $82,320) that bear interest at the USD LIBOR rate plus a margin of 1.35% per annum as at December 31, 2021 (December 31, 2020 – 1.65%). (2) Canadian borrowings bear interest at the bankers’ acceptance rate plus a margin of 1.35% per annum as at December 31, 2021 (December 31, 2020 – 1.65%). (3) (4) (5) Excluding the impact of cross-currency interest rate swaps, the weighted average interest rate on the Acquisition and Operating Facility is 1.76% (December 31, 2020 – 1.78%). For details of the swaps, refer to note 21. ERES has USD LIBOR borrowings of USD $80,300 (December 2020 – USD $10,800) that bear interest at the USD LIBOR rate plus a margin of 1.35% per annum as at December 31, 2021 (December 31, 2020 – 1.65%). Excluding the impact of cross-currency interest rate swaps, the weighted average interest rate on the ERES Credit Facility is 1.45% (December 31, 2020 – 1.79% on the ERES Credit Facility and ERES Bridge Facility). For details of the swaps, refer to note 21. 107 Investing in Our FutureNotes to Consolidated Financial Statements 15. Unit-based Compensation Financial Liabilities Units are issuable pursuant to CAPREIT’s unit-based compensation plans, namely the Employee Unit Purchase Plan (“EUPP”), the Deferred Unit Plan (“DUP”) and the Restricted Unit Rights Plan (“RUR Plan”). As at December 31, 2021, the maximum number of units issuable under CAPREIT’s unit-based incentive plans (excluding ERES) is 9,500,000 units (December 31, 2020 – 9,500,000 units). The maximum number of units available for future issuance under these unit-based incentive plan agreements as at December 31, 2021 is 355,228 units (December 31, 2020 – 550,279 units). ERES units are issuable pursuant to ERES’s unit options plan (“ERES UOP”). The maximum number of unit options that may be reserved under the ERES UOP is 10% of the outstanding ERES units (including ERES Class B LP Units). As at December 31, 2021, the maximum number of unit options issuable under the ERES UOP is 18,419,405 unit options (December 31, 2020 – 18,861,857 unit options). The unit rights and unit options issued or outstanding under CAPREIT’s incentive plans and the ERES UOP as at December 31, 2021 and 2020 are as follows: Year Ended December 31, 2021 (Number of units) Unit rights and unit options outstanding as at January 1, 2021 Issued, cancelled or granted during the year Issued or granted Exercised or settled in Trust Units Cancelled or forfeited Distributions reinvested Unit rights and unit options outstanding as at December 31, 2021 Year Ended December 31, 2020 (Number of units) Unit rights and unit options outstanding as at January 1, 2020 Issued, cancelled or granted during the year Issued or granted Exercised or settled in Trust Units Cancelled or forfeited Distributions reinvested Unit rights and unit options outstanding as at December 31, 2020 (1) Total CAPREIT excluding ERES UOP. ERES UOP DUP RUR Total CAPREIT(1) 4,199,694 174,805 563,387 738,192 530,000 – (30,000) – 17,103 – – 4,515 113,511 (204,683) (5,831) 13,316 130,614 (204,683) (5,831) 17,831 4,699,694 196,423 479,700 676,123 ERES UOP DUP RUR Total CAPREIT(1) 4,256,014 150,996 542,087 693,083 – – (56,320) – 19,263 – – 4,546 87,985 (80,408) (2,393) 16,116 107,248 (80,408) (2,393) 20,662 4,199,694 174,805 563,387 738,192 The table below summarizes the change in the total unit-based compensation financial liabilities for the years ended December 31, 2021 and 2020, including the settlement of such liabilities through the issuance of Trust Units and ERES units. For the Year Ended December 31, 2021 December 31, 2020 Total unit-based compensation financial liabilities, beginning of the year $ Unit-based compensation expense Settlement of unit-based compensation awards for Trust Units and ERES units (Gain) loss on foreign currency translation 33,747 14,615 (11,306) (161) $ 33,049 4,705 (4,043) 36 Total unit-based compensation financial liabilities, end of the year $ 36,895 $ 33,747 108 2021 Annual ReportNotes to Consolidated Financial Statements Unit-based compensation financial liabilities are as follows: As at Non-current RUR ERES UOP Current DUP RUR ERES UOP Total unit-based compensation financial liabilities December 31, 2021 December 31, 2020 $ $ $ $ $ 14,179 93 14,272 11,777 8,038 2,808 22,623 36,895 $ $ $ $ $ 13,887 236 14,123 8,738 9,345 1,541 19,624 33,747 Units or Unit-based Compensation Financial Liabilities Held by Trustees, Officers and Other Senior Management As at December 31, 2021, 0.7% (December 31, 2020 – 0.7%) of all Trust Units outstanding and unit-based compensation financial liabilities were held by trustees, officers and other senior management of CAPREIT. 16. Unit-based Compensation Expense These costs represent unit-based compensation expense, which include fair value remeasurements at each reporting date recognized over the respective vesting periods for each plan for the years ended December 31, 2021 and 2020, as follows: For the Year Ended December 31, DUP RUR Plan EUPP ERES UOP Unit-based compensation expense a) DUP $ 2021 3,048 10,453 496 1,114 $ $ 15,111 $ 2020 733 3,331 455 641 5,160 The DUP gives the non-executive trustees the right to receive a percentage of their annual retainer in the form of deferred units (“Deferred Units”). Each trustee who elects to participate may be paid 25%, 50%, 75% or 100% (the “Elected Percentage”) of their annual retainer payable in respect of a calendar year (the “Elected Amount”), subject to an annual maximum Elected Percentage established by the Human Resources and Compensation Committee, in the form of Deferred Units, in lieu of cash. CAPREIT will match the Elected Amount in the form of Deferred Units having a value equal to the volume-weighted average price of all Trust 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 2021 is 100.0% (2020 – 100.0%) of a trustee’s annual Board compensation of $85 for 2021 and 2020. The Deferred Units earn notional distributions based on the same distributions paid on the Trust Units, and such notional distributions are used to acquire additional Deferred Units (“Distribution Units”). The Deferred Units and additional Distribution Units are credited to each trustee’s Deferred Unit account and are not issued to the trustee until the trustee elects to withdraw such units. Each trustee may elect to withdraw up to 20% of the Deferred Units credited to their Deferred Unit account only once in a five-year period. Distribution Units are issued based on the five-business-day weighted average closing price of the Trust Units on the TSX prior to the distribution date. 109 Investing in Our FutureNotes to Consolidated Financial Statements The details of the units issued under the DUP are shown below: For the Year Ended December 31, 2021 December 31, 2020 Weighted Average Issue Price Fair Value per Unit Number of Units Weighted Average Issue Price Fair Value per Unit Number of Units Outstanding, beginning of the year Granted during the year Additional unit distributions $ 32.42 $ 49.99 174,805 $ 30.09 $ 53.01 57.83 57.13 – – 17,103 4,515 46.69 49.38 – – Outstanding, end of the year $ 35.20 $ 59.96 196,423 $ 32.42 $ 49.99 150,996 19,263 4,546 174,805 The fair value of DUPs represents the closing price of the Trust Units on the TSX on the last trading day on which the Trust Units traded as of the reporting date. b) RUR Plan 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 Trust 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. Distribution RURs are issued based on the five-business-day weighted average closing price of the Trust Units on the TSX prior to the distribution date. The details of the RURs granted under the RUR Plan (including the Distribution RURs) are as follows: For the Year Ended December 31, 2021 December 31, 2020 Weighted Average Issue Price Fair Value per Unit Number of Units Weighted Average Issue Price Fair Value per Unit Number of Units Outstanding, beginning of the year Granted during the year Additional unit distributions Settled or cancelled during the year $ 38.71 $ 49.99 563,387 $ 32.69 $ 53.01 50.29 56.59 32.96 – – – 113,511 13,316 (210,514) 59.00 48.96 24.73 – – – Outstanding, end of the year $ 44.47 $ 59.96 479,700 $ 38.71 $ 49.99 542,087 87,985 16,116 (82,801) 563,387 The fair value of RURs represents the closing price of the Trust Units on the TSX on the last trading day on which the Trust Units traded as of the reporting date. c) EUPP The EUPP grants all employees the right to receive an additional amount equal to 20% of the Trust Units they acquire, paid in the form of additional Trust Units. This additional amount is expensed as compensation on issuance of the Trust Units. 110 2021 Annual ReportNotes to Consolidated Financial Statements 17. Exchangeable LP Units On September 22, 2021, Exchangeable LP units were issued in connection with the acquisition of an investment property as described in notes 4 and 27. On June 30, 2020, Exchangeable LP Units were issued in connection with the operating lease buyouts as described in notes 6 and 27. Exchangeable LP Units are entitled to distributions equivalent to distributions on Trust Units, must be exchanged solely for Trust Units on a one-for-one basis, and are exchangeable at any time at the option of the holder. Exchangeable LP Units are not eligible for the Distribution Reinvestment Plan (“DRIP”). An equivalent number of special voting units (“Special Voting Units”) were issued at the same time as the Exchangeable LP Units. The holders of these Special Voting 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 LP 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 LP Units held. The carrying value of the Exchangeable LP Units is measured at their fair value of $100,684 as at December 31, 2021 (December 31, 2020 – $16,632), which is based on the closing price of the Trust Units on the TSX. The number of issued and outstanding Exchangeable LP Units is as follows: For the Year Ended December 31, Exchangeable LP Units outstanding, beginning of the year Issued or granted Exchanged for Trust Units Exchangeable LP Units outstanding, end of the year 2021 332,703 1,346,487 – 1,679,190 2020 – 632,761 (300,058) 332,703 18. 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 Trust Units, an unlimited number of Special Voting Units and 25,840,600 preferred units (“Preferred Units”). As at December 31, 2021, no Preferred Units were issued and outstanding. Trust Units represent a Unitholder’s proportionate undivided beneficial interest in CAPREIT. No Trust Unit has any preference or priority over another. No Unitholder has or is deemed to have any right of ownership in any of the assets of CAPREIT. Each Trust Unit confers the right to one vote at any meeting of Unitholders and to participate pro rata in any distributions by CAPREIT and, in the event of termination of CAPREIT, in the net assets of CAPREIT remaining after satisfaction of all liabilities. Units will be issued in registered form and are transferable. Issued and outstanding units may be subdivided or consolidated from time to time by the trustees without Unitholder approval. No certificates for fractional units will be issued and fractional units will not entitle the holders thereof to vote. By virtue of CAPREIT being an open-ended mutual fund trust, Unitholders of Trust Units are entitled to redeem their units at any time at prices determined and payable in accordance with the conditions specified in the DOT. As a result, under IFRS, Trust Units are defined as financial liabilities; however, for the purposes of financial statement classification and presentation, the Trust Units may be presented as equity instruments, as they meet the puttable instrument exemption under IAS 32. For the purposes of presenting earnings on a per unit basis as well as for unit-based compensation plans, CAPREIT’s Trust Units are not treated as equity instruments, and accordingly earnings per unit has not been presented. The number of issued and outstanding Trust Units (excluding unit rights issued or outstanding under CAPREIT’s incentive plans) is as follows: For the Year Ended December 31, Trust Units outstanding, beginning of the year Issued or granted during the year in connection with the following: Exchangeable LP Units DRIP EUPP RUR Plan Trust Units outstanding, end of the year 2021 2020 171,751,839 169,869,197 – 1,397,445 52,439 204,683 300,058 1,448,190 53,986 80,408 173,406,406 171,751,839 111 Investing in Our FutureNotes to Consolidated Financial Statements a) New Trust Units Issued Year Ended December 31, 2021 There were no new Trust Units issued during the years ended December 31, 2021 and 2020. b) Exchangeable LP Units During the year ended December 31, 2021, no Exchangeable LP Units were exchanged for Trust Units. During the year ended December 31, 2020, pursuant to the terms of the Exchangeable LP Units agreement, 300,058 Exchangeable LP Units were exchanged for 300,058 Trust Units. The same number of Special Voting Units was cancelled. c) Distribution Reinvestment Plan 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 The EUPP grants all employees the right to receive an additional amount equal to 20% of the Trust Units they acquire, paid in the form of additional Trust Units. e) Deferred Unit Plan During the years ended December 31, 2021 and 2020, no DUP units were settled. f) Restricted Unit Rights Plan During the year ended December 31, 2021, 210,514 RUR units were settled or cancelled, out of which 204,683 RUR units were settled for an equivalent number of Trust Units and the remaining RUR units were forfeited. During the year ended December 31, 2020, 82,801 RUR units were settled or cancelled, out of which 80,408 RUR units were settled for an equivalent number of Trust Units and the remaining RUR units were forfeited. 19. 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 August 2021, monthly cash distributions declared to Unitholders increased to $0.1208 ($1.45 annually) from $0.1150 ($1.38 annually). For the Year Ended December 31, Distributions declared on Trust Units Distributions per unit 2021 243,348 1.409 $ $ 2020 235,649 1.380 $ $ 20. Financial Instruments, Investment Properties and Risk Management a) Fair Value of Financial Instruments The fair value of CAPREIT’s financial assets and liabilities, except as noted below and elsewhere in the consolidated annual financial statements, approximates their carrying amount due to the short-term and variable rate nature of these instruments. As at December 31, 2021, the fair value of CAPREIT’s mortgages payable is estimated to be $6,294,000 (December 31, 2020 – $5,854,000) due to changes in interest rates and foreign exchange 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). 112 2021 Annual ReportNotes to Consolidated Financial Statements 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, Fair Value Measurement (“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 judgment 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, 2021, 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. Recurring Measurements Assets Investment properties Fee simple and MHC land lease sites $ Operating leasehold interests Land leasehold interests Investments Derivative financial assets Liabilities Derivative financial liabilities ERES units held by non-controlling unitholders Unit-based compensation financial liabilities Exchangeable LP Units Total Level 1 Quoted prices in active markets for identical assets and liabilities Level 2 Level 3 Significant other observable inputs Significant unobservable inputs $ – – – 51,286(2) – – (356,695) – – – – – – $ 16,719,821(1) 114,150(1) 267,948(1) – 30,926(3) (3,973)(3) – (36,895) (100,684) – – – – – Total $ 16,719,821 114,150 267,948 51,286 30,926 (3,973) (356,695) (36,895) (100,684) $ (305,409) $ (110,626) $ 17,101,919 $ 16,685,884 (1) (2) (3) Fair values for investment properties are calculated using either the DC or the DCF methods, which result 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. 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. The valuation of the interest rate swap and cross-currency 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 mark-to-market value is positive, CAPREIT will consider a credit value adjustment to reflect the credit risk of the counterparty, and if the total mark-to-market value is negative, CAPREIT will consider a credit value adjustment to reflect CAPREIT’s own credit risk in the fair value measurement of the interest rate swap agreements. 113 Investing in Our FutureNotes 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, 2021, 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. For assets and liabilities measured at fair value as at December 31, 2021, there were no transfers between Level 1, Level 2 and Level 3 during the period. 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 at least 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 cause volatility in earnings. For the years ended December 31, 2021 and 2020, a 100 basis point change in interest rates would have the following effect: Floating rate debt Floating rate debt Cross-currency and/or interest rate swaps(1) Cross-currency and/or interest rate swaps(1) Increase (decrease) in net income Change in interest rates (basis points) December 31, 2021 December 31, 2020 +100 -100 +100 -100 $ $ $ $ 1,204 (1,204) 13,881 (13,884) $ $ $ $ 1 (1) 3,977 (4,058) (1) Represents the parallel interest rate shift of both the USD LIBOR and EURIBOR forward rates. CAPREIT’s objective in managing interest rate risk is to minimize the volatility of interest expenses due to fluctuations in market interest rates. As at December 31, 2021, interest rate risk has been minimized, as 99.1% (December 31, 2020 – 99.3%) of the mortgages payable are financed at fixed interest rates, with maturities staggered over a number of years. Taking into consideration interest rate swaps where hedge accounting has not been applied, 100.0% of the mortgages payable are financed at fixed interest rates (December 31, 2020 – 100.0%). 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 98.5% of CAPREIT’s mortgages are CMHC-insured (excluding $1,205,252 of mortgages on the MHC sites and the ERES properties), which reduces the risk in refinancing mortgages. CAPREIT’s overall risk for mortgage refinancings is further reduced as the unamortized mortgage insurance premiums are transferable between approved lenders and are effective for the full amortization period of the underlying mortgages, ranging between 25 and 40 years. To mitigate the risk associated with the refinancing of maturing debt, CAPREIT staggers the maturity dates of its mortgage portfolio over a number of years. In addition, CAPREIT manages its overall liquidity risk by maintaining sufficient available credit facilities and unencumbered assets to fund its ongoing operational and capital commitments, distributions to Unitholders and to provide future growth in its business. As at December 31, 2021, CAPREIT had undrawn lines of credit in the amount of $384,510 (December 31, 2020 – $627,997), excluding borrowing capacity under the ERES Credit Facility and the ERES Bridge Facility, while available. 114 2021 Annual ReportNotes to Consolidated Financial Statements CAPREIT has available borrowing capacity in its Credit Facilities, as described in note 14, in addition to cash on hand. As a result, management has determined that CAPREIT is in a strong financial position despite the changes in the market and the heightened risk environment resulting from the COVID-19 pandemic. The contractual maturities and repayment obligations of CAPREIT’s financial liabilities as at December 31, 2021 are as follows: Mortgages payable Bank indebtedness Mortgage interest Bank indebtedness interest(1) Other liabilities(3) Derivative financial liabilities ERES units held by non-controlling unitholders Lease liabilities Security deposits Distributions payable 2022(2) 2023 – 2024 2025 – 2026 2027 onward $ 643,460 $ 1,153,618 $ 1,796,220 $ 2,632,424 – 134,458 1,890 155,872 2,816 – 1,119 43,675 20,953 310,866 219,539 2,770 – – – 2,451 – – – 159,462 – – 1,157 – 2,639 – – – 198,496 – – – 356,695 43,226 – – $ 1,004,243 $ 1,689,244 $ 1,959,478 $ 3,230,841 (1) Based on current in-place interest rates for the remaining term to maturity. (2) Estimates of the amounts as at December 31, 2021. (3) Related to accounts payable and accrued liabilities, current tax liability and mortgage interest payable. 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. The maximum exposure to credit risk at the reporting date is the carrying value of the tenant receivables. CAPREIT mitigates the risk of credit loss with respect to the borrower of VTBs by ensuring that adequate collateral has been obtained for the VTBs. The VTBs are secured by the property that was purchased by the borrower. 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 Canadian dollars while the functional currency of CAPREIT’s fund management subsidiary in Ireland, investment in IRES and CAPREIT’s subsidiaries in the Netherlands, including ERES, 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 USD LIBOR borrowings, cross-currency swap and euro LIBOR borrowings. The (loss) gain on foreign currency translation relating to CAPREIT’s subsidiaries in Ireland, the Netherlands and IRES investment is recognized in other comprehensive (loss) income. The mark-to-market on the cross-currency swap and foreign exchange translation on the USD LIBOR borrowings are recognized in the consolidated statements of income and comprehensive income. 115 Investing in Our FutureNotes to Consolidated Financial Statements 21. Derivative Financial Instruments a) Contracts for Which Hedge Accounting is Being Applied In June 2011, CAPREIT entered into a hedging program, which effectively hedged interest rates on approximately $312,000 of mortgages refinanced between September 2011 and June 2013. These mortgages have been refinanced for 10-year terms maturing between 2021 and 2023, 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 other comprehensive (loss) income (see note 24). 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 mark-to-market have been recognized in net income. All contracts have been settled. The forward interest rate derivative liability has been summarized as follows: As at Derivative liability in (AOCL) AOCI, beginning of the year Amortization from (AOCL) AOCI to interest and other financing costs Derivative liability in (AOCL) AOCI, end of the year December 31, 2021 December 31, 2020 $ $ (3,762) 2,170 (1,592) $ $ (6,005) 2,243 (3,762) b) Contracts for Which Hedge Accounting is No Longer Effective 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, 2021, $270 (December 31, 2020 – $271) was amortized from (AOCL) AOCI to mortgage interest expense. c) Contracts for Which Hedge Accounting is Not Being Applied CAPREIT has certain derivative financial instruments in place, namely interest rate swaps and cross-currency interest rate (“CCIR”) swaps. These derivative contracts, for which hedge accounting is not being applied, consist of the following: As at December 31, 2021 Type of instrument CCIR Swap(1) CCIR Swaps(2) ERES Interest Rate Swap(3) ERES Interest Rate Swaps ERES CCIR Swaps(4) Consolidated Total As at December 31, 2020 Type of instrument CCIR Swap(5) CCIR Swap(1) CCIR Swaps(2) ERES Interest Rate Swap(3) ERES CCIR Swaps(4) Consolidated Total (1) Euro equivalent of €74,000. Notional amount Maturity year Weighted average receiving leg rate Weighted average paying leg rate Derivative asset (liability) US$ 82,525 2022 US LIBOR +1.65% 1.05% $ $ € € 570,694 25,500 156,550 US$ 80,300 2022 – 2025 1.07% EURIBOR + 1.38% EURIBOR 0.08% 0.49% (0.06)% US LIBOR + 1.35% EURIBOR + 1.15% Notional amount Maturity year Weighted average receiving leg rate Weighted average paying leg rate Derivative asset (liability) $ 26,952 $ US$ $ € US$ 65,000 82,525 500,986 25,500 10,800 BA + 1.40% 0.97% $ USD LIBOR + 1.65% 2022 – 2025 1.11% EURIBOR + 1.38% 1.05% 0.10% 0.49% USD LIBOR + 1.65% EURIBOR + 1.20% (2,115) 29,550 (769) 987 (701) (5,048) (10,318) (5,844) (1,401) 55 2025 2027 2022 2021 2021 2025 2021 $ (22,556) (2) Euro equivalent of €368,358 (December 31, 2020 – €323,540). This CCIR swap consists of a current derivative asset of $8,506 (December 31, 2020 – $nil) and a non-current derivative asset of $21,044 (December 31, 2020 – $(5,844)). (3) As at December 31, 2021, the interest rate swap consists of a non-current derivative asset of $389 (December 31, 2020 – $778) and a non-current derivative liability of $1,157 (December 31, 2020 – $2,179). (4) Euro equivalent of €71,050 (December 31, 2020 – €8,800). (5) Euro equivalent of €44,818. The CCIR swap was terminated in January 2021 prior to its maturity date of June 2021. The gain on settlement was $966. 116 2021 Annual ReportNotes to Consolidated Financial Statements 22. Capital Management CAPREIT defines capital as the aggregate of Unitholders’ equity, mortgages payable, bank indebtedness and Exchangeable LP 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 14) require compliance with certain financial covenants. In addition, borrowings must not exceed the borrowing base, calculated at a predefined percentage of the market value of the properties. In the short term, CAPREIT utilizes the Credit Facilities to finance its capital investments, which may include acquisitions. In the long term, equity issuances, mortgage financings and refinancings, including “top-ups”, are put in place to finance the cumulative investment in the property portfolio and ensure that the sources of financing better reflect the long-term useful lives of the underlying investments. During 2021, CAPREIT’s Large Borrower Agreement (“LBA”) with CMHC expired. The expiry of the LBA has not affected the manner in which CAPREIT conducts its business or its approach to mortgage financing, including the use of CMHC financing. CAPREIT continues to obtain CMHC financing under substantively similar provisions. The total capital managed by CAPREIT is as follows: As at Mortgages payable Bank indebtedness Unitholders’ equity Exchangeable LP Units Total capital December 31, 2021 December 31, 2020 $ 6,100,065 $ 5,401,202 310,866 10,399,886 100,684 118,553 9,273,702 16,632 $ 16,911,501 $ 14,810,089 As described in note 14, CAPREIT entered into a new credit facility agreement on June 18, 2021. The new Credit Facilities introduced the following covenants: (i) total debt to gross book value of CAPREIT’s total assets shall be less than 62.50%, and (ii) the funds from operations (“FFO”) payout ratio shall not exceed 100% based on the trailing four quarters. FFO shall be calculated in accordance with the recommendations of the Real Property Association of Canada (“REALpac”) and will be subject to the adjustments disclosed in the most recent annual report and such other adjustments as may be agreed with the lender. Furthermore, the following changes were made to the financial covenants under the new Credit Facilities: (i) the minimum tangible net worth increased from $2,400,000 to the sum of $5,000,000 and 75% of the net cash proceeds received in connection with any issuance or sale of equity by CAPREIT after the closing date of the new Credit Facilities, (ii) the minimum debt service coverage ratio increased from 1.20 to 1.40, and (iii) the minimum interest coverage ratio increased from 1.50 to 1.65. 117 Investing in Our FutureNotes to Consolidated Financial Statements The results of CAPREIT’s compliance with the key covenants are summarized below(1): Total debt to gross book value(2) Threshold December 31, 2021 December 31, 2020 Maximum 62.50% 36.12% 35.54% Tangible net worth(3) Minimum of $5,000,000 $ 10,522,332 $ 9,307,613 Debt service coverage ratio (times)(4),(5) Interest coverage ratio (times)(4),(6) Minimum 1.40 Minimum 1.65 1.97 4.02 2.01 3.95 (1) CAPREIT’s FFO payout ratio did not exceed 100% for the trailing four quarters ended December 31, 2021. As at December 31, 2021, CAPREIT is in compliance with its debt covenant on the FFO payout ratio. (2) CAPREIT’s new Credit Facilities limit the maximum amount of total debt to 62.5% 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 consolidated 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. (3) As per the Credit Facilities agreement, the tangible net worth is generally represented by Unitholders’ equity and unit-based rights and compensation liabilities or assets, including Exchangeable LP Units added back, and excluding goodwill. Per the Credit Facilities that CAPREIT entered into on June 18, 2021, tangible net worth should be at a minimum of $5,000,000 plus 75% of proceeds of future equity raises subsequent to June 18, 2021. There have been no equity raises subsequent to June 18, 2021 to date. (4) Based on the trailing four quarters. (5) As per the Credit Facilities agreement, the debt service coverage ratio is defined as earnings before interest, income taxes, depreciation and amortization and other adjustments, including non-cash costs (“EBITDA”), less income taxes paid divided by the sum of principal repayments and interest expense. (6) As per the Credit Facilities agreement, the interest coverage ratio is defined as EBITDA less income taxes paid divided by interest expense. CAPREIT’s subsidiary, ERES, is subject to various debt covenants contained in ERES’s credit facilities. ERES must have a maximum debt to gross book value of 65%, a maximum debt to market value of portfolio of 60%, a minimum tangible net worth of €375,000, a minimum debt service coverage ratio of 1.35 and a minimum interest coverage ratio of 1.50. As at December 31, 2021, ERES is in compliance with its debt covenants. Due to the emergence of the COVID-19 pandemic, CAPREIT has been closely monitoring its investment and debt restrictions along with the financial covenants contained in CAPREIT’s Credit Facilities and DOT. Management has performed stress-testing on CAPREIT’s covenants prescribed above to ensure that CAPREIT continues to meet its covenant obligations in the long term. 23. Income Taxes CAPREIT is taxed as a “mutual fund trust” as defined under the Income Tax Act (Canada) and continues to meet the prescribed conditions relating to the nature of its assets and revenues in order to qualify as a real estate investment trust (“REIT”) eligible for the REIT exception to the specified investment flow-through (“SIFT”) rules. CAPREIT expects to distribute all of its taxable income to its Unitholders; accordingly, no provision for Canadian income tax has been made. Income tax obligations relating to the distributions from CAPREIT are with the individual Unitholders, with the exception of Canadian withholding taxes for distributions to non-resident Unitholders. CAPREIT has foreign operating subsidiaries in a number of countries with varying statutory rates of taxation. Judgment 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 where activities relating to the foreign subsidiaries are considered to be taxable in those countries. 118 2021 Annual ReportNotes to Consolidated Financial Statements For the Year Ended December 31, Income before income taxes Income not subject to taxation(1) Income before income taxes in foreign subsidiary entities Tax calculated at the Dutch corporate tax rate of 25% Increase (decrease) resulting from: Expenses not deductible for tax Effect of different tax rates in countries in which CAPREIT operates Adjustments to deferred taxes for the change in tax rates Adjustment for income taxed at a lower rate Unrecognized deferred tax assets Other adjustments Current and deferred income tax expense 2021 2020 $ 1,473,976 $ 954,491 (1,162,021) 311,955 77,989 – 252 4,036 (1,098) 709 (707) (863,181) 91,310 22,828 1,209 (95) 4,547 (1,893) 592 1,375 $ 81,181 $ 28,563 (1) Consists primarily of Canadian income including fair value adjustment of Canadian investment properties, interest on and fair value adjustments of Exchangeable LP Units, and other adjustments. A breakdown of current and deferred income tax expense is as follows: For the Year Ended December 31, Current income tax expense Deferred income tax expense Current and deferred income tax expense 2021 4,539 76,642 81,181 $ $ 2020 3,350 25,213 28,563 $ $ The deferred income tax liability of $133,974 (December 31, 2020 – $59,964) is primarily related to the difference in tax and book basis of investment properties. The deferred income tax asset of $5,010 (December 31, 2020 – $2,032) also relates to the difference in the tax and book basis of investment properties, as well as loss carry-forwards. As at December 31, 2021, CAPREIT has total non-capital loss carry-forwards of $18,040 (December 31, 2020 – $16,501). Of these losses, $13,449 (December 31, 2020 – $11,948) are in respect of the Dutch subsidiaries which, starting on January 1, 2022, will have no expiry period but the utilization will be subject to annual limits. The remaining losses of $4,591 (December 31, 2020 – $4,553) are in respect of German subsidiaries and have no expiry period. CAPREIT has not recognized a deferred tax asset for a deductible temporary difference of $4,824 as it does not expect this difference to reverse in the foreseeable future. 24. Accumulated Other Comprehensive (Loss) Income For the Year Ended December 31, (AOCL) AOCI balance, beginning of the year Other comprehensive (loss) income: Amortization from (AOCL) AOCI to interest and other financing costs(1) (Loss) gain on foreign currency translation Other comprehensive (loss) income (AOCL) AOCI balance, end of the year As at (AOCL) AOCI comprises: Net cumulative loss on derivative financial instruments Net cumulative loss on forward interest rate hedge(1) Cumulative (loss) gain on foreign currency translation Reversal of cumulative foreign currency translation relating to IRES ownership dilution (AOCL) AOCI balance, end of the year 2021 2020 $ 70,047 $ (19,510) 2,440 (115,884) (113,444) $ (43,397) $ 2,570 86,987 89,557 70,047 December 31, 2021 December 31, 2020 $ $ (110) (1,592) (44,822) 3,127 $ (43,397) $ (380) (3,762) 71,062 3,127 70,047 (1) The estimated amount of the amortization expected to be reclassified to net income from (AOCL) AOCI in the next 12 months is $1,278. 119 Investing in Our FutureNotes to Consolidated Financial Statements 25. Interest and Other Financing Costs For the Year Ended December 31, Interest on mortgages payable(1) Amortization of CMHC premiums and fees(2) Interest on bank indebtedness and other deferred costs(3) Interest on Exchangeable LP Units Interest on land and air rights lease liability Total 2021 2020 $ 138,293 $ 133,217 10,041 6,110 1,119 4,900 18,505 7,955 441 4,507 $ 160,463 $ 164,625 (1) (2) (3) Includes amortization of deferred financing costs, fair value adjustments and OCI hedge interest for the year ended December 31, 2021 of $6,263 (December 31, 2020 – $6,471). During the year ended December 31, 2020, CAPREIT expensed $14,348 of prepaid CMHC premiums related to mortgages which were refinanced in 2020 and previous years as these premiums no longer had future economic benefits. Includes amortization of deferred loan costs of $710 (December 31, 2020 – $1,304). 26. Joint Arrangements CAPREIT’s share of the assets, liabilities, revenues, expenses and cash flows from joint arrangement activities is summarized as follows: For the Year Ended December 31, Assets Liabilities Revenues Expenses and other adjustments Net income Cash provided by (used in): Operating activities Investing activities Financing activities 2021 2020 $ 242,624 $ 338,317 50,035 18,321 (14,134) 32,455 86,394 21,397 8,388 13,009 $ 9,046 $ 12,754 (19,788) 13,801 (4,116) (9,498) On August 31, 2021, CAPREIT purchased the remaining 50% interest in a joint arrangement located in Toronto, ON. Refer to note 4 for further information. On October 1, 2021, CAPREIT disposed of its 33.3% interest in a joint arrangement located in Toronto, ON. Refer to note 5 for further information. The results of the above two joint arrangements for the period during which they were in place are included in the table above. 27. Supplemental Cash Flow Information a) Net Income Items Related to Investing and Financing Activities For the Year Ended December 31, Dividend and interest income Distributions to holders of Exchangeable LP Units Distributions to ERES non-controlling unitholders Interest expense on mortgages Interest expense on bank indebtedness Interest expense on leases Net disbursements $ 2021 (1,672) 1,119 12,756 129,345 5,400 4,900 $ 2020 (3,200) 441 12,542 122,138 6,650 4,507 $ 151,848 $ 143,078 120 2021 Annual ReportNotes to Consolidated Financial Statements b) Changes in Non-cash Operating Assets and Liabilities For the Year Ended December 31, Prepaid expenses Tenant inducements, direct leasing costs and other adjustments Other receivables Deposits MHC home inventory Accounts payable and other liabilities Derivative liability Security deposits Current tax liability $ $ 2021 (1,279) (1,125) (864) (4,219) (8,138) 5,961 (979) 2,995 (3,698) Net decrease in non-cash operating assets and liabilities $ (11,346) $ 2020 (1,748) (479) (614) (4,677) – 2,237 (34,426) 1,369 (16,702) (55,040) Derivative liability, previously included in accounts payable and other liabilities, is now presented separately. The comparative period has been reclassified to conform with current year presentation. c) Net Cash Distributions For the Year Ended December 31, Distributions declared to Unitholders, ERES non-controlling unitholders and holders of Exchangeable LP Units Add: Distributions payable to Unitholders at beginning of the year Less: Distributions payable to Unitholders at end of the year Less: Distributions to participants in the CAPREIT DRIP Add: Distributions payable to ERES non-controlling unitholders at beginning of the year Less: Distributions payable to ERES non-controlling unitholders at end of the year Less: Distributions to non-controlling participants in the ERES DRIP Add: Distributions payable to holders of Exchangeable LP Units at beginning of the year Less: Distributions payable to holders of Exchangeable LP Units at end of the year Gain on foreign currency translation Net disbursements d) Capital Investments For the Year Ended December 31, Capital investments Change in capital investments included in accounts payable and other liabilities Net disbursements e) Acquisition of Investment Properties For the Year Ended December 31, Acquired properties Fair value adjustment of assumed debt Assumed debt Deposit on purchases Issuance of Exchangeable LP Units Change in investment properties included in accounts payable and other liabilities Net disbursements f) Operating Lease Buyout For the Year Ended December 31, Operating lease buyout Issuance of Exchangeable LP Units Net disbursements 2021 2020 $ (257,223) $ (248,632) (19,751) 20,953 75,739 (920) 745 2,265 (38) 406 50 (19,533) 19,751 68,108 (832) 920 – – 38 109 $ (177,774) $ (180,071) 2021 $ (309,744) 10,325 $ (299,419) 2020 (250,607) 5,750 (244,857) $ $ 2021 2020 $ (1,053,497) $ (825,681) 1,246 131,614 (2,723) 83,385 – 187 112,655 22,252 – 5,189 $ (839,975) $ (685,398) 2021 (4,457) – (4,457) 2020 (158,565) 30,746 (127,819) $ $ $ $ 121 Investing in Our FutureNotes to Consolidated Financial Statements g) Disposition of Investment Properties For the Year Ended December 31, Proceeds Closing costs Working capital adjustments Issuance of VTB Mortgages discharged Net proceeds h) Issuance of Trust Units For the Year Ended December 31, Issuance of Trust Units Conversion of Exchangeable LP Units to Trust Units Settlement of unit-based compensation awards for Trust Units Net proceeds i) Mortgage Portfolio For the Year Ended December 31, Balance, beginning of the year Add: New borrowings on acquisitions Refinanced Less: Mortgage principal amortization Mortgages matured Mortgages repaid on dispositions of investment properties Non-cash Adjustments: Mortgages assumed (Gain) loss on foreign currency translation Net change in deferred financings costs, fair value adjustment and prepaid CMHC premiums Balance, end of the year j) Bank Indebtedness For the Year Ended December 31, Balance, beginning of the year Net borrowings (repayments) before foreign currency translation Loss (gain) on foreign currency translation Balance, end of the year 2021 $ 143,381 $ (241) 1,044 (114,990) – $ 29,194 $ 2021 $ 14,444 – (11,306) $ 3,138 $ $ 2020 56,760 (1,387) (730) – (21,331) 33,312 2020 21,863 (15,344) (4,043) 2,476 2021 2020 $ 5,401,202 $ 4,228,805 317,614 1,023,351 381,412 1,148,552 (149,996) (521,375) – 131,614 (87,069) (15,276) (136,087) (353,966) (21,331) 112,654 60,176 (19,013) $ 6,100,065 $ 5,401,202 2021 2020 $ 118,553 $ 623,893 189,305 3,008 (498,783) (6,557) $ 310,866 $ 118,553 122 2021 Annual ReportNotes to Consolidated Financial Statements 28. Revenue and Other Income Other income For the Year Ended December 31, Investment income Net profit from investment in associate(1) Asset and property management fees(2) Interest income from mortgages receivable Profit from sale of MHC home inventory(3) Other Total $ $ 2021 1,493 18,455 9,863 778 945 179 $ 31,713 $ 2020 1,226 17,173 9,592 – – 1,999 29,990 (1) CAPREIT’s share of IRES’s investment property fair value change, earnings and foreign exchange effects thereon. For the years ended December 31, 2021 and 2020, CAPREIT’s share of IRES’s investment property fair value gain is $9,271 and $6,141, respectively. (2) Based on investment management agreement with IRES, which owns properties in Ireland. (3) Consists of income from sale of MHC home inventory of $3,459 offset by cost of sales of $2,514. In accordance with IFRS 15, management has evaluated the lease and non-lease components of its revenue and income. Revenues under IFRS 15 consist of asset and property management fees listed above and miscellaneous revenues. For the year ended December 31, 2021, miscellaneous revenues of $25,873 were included in revenue from investment properties (year ended December 31, 2020 – $18,794). Miscellaneous revenues consist of cable income, certain common area maintenance recoveries, service charges, premium service components and sale of MHC home inventory. 29. Related Party Transactions a) IRES Transactions As at December 31, 2021, CAPREIT has an 18.7% share ownership in IRES and has determined that it has significant influence over IRES. Pursuant to the exercise of options assigned to CAPREIT in November 2020, CAPREIT purchased 3,400,000 shares of IRES for $8,020, increasing CAPREIT’s share ownership from 18.3% to 18.8%. The share ownership is held through a 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, 2021 are asset management and property management fees of $9,863 (year ended December 31, 2020 – $9,592). Expenses related to the asset and property management services are included in trust expenses. The amount receivable from IRES as at December 31, 2021 is $3,237 (December 31, 2020 – $1,831). On March 31, 2021, CAPREIT provided 12 months’ notice of termination of its IMA with IRES, which will become effective March 31, 2022. The services agreement will terminate automatically upon termination of the IMA. The initial five-year term IMA between CAPREIT and IRES expired on November 1, 2020. The IMA subsequently rolled into a second five-year term under the original terms. Under the second five-year term, both parties have termination rights under the IMA. IRES has the right to terminate the IMA if it determines that internalization of the management of IRES, subject to relevant regulatory approval, is in IRES’s best interests. On August 6, 2021, IRES served a notice of termination of the IMA and exercised its obligation to acquire IRES Fund Management Limited for €1, effective January 31, 2022 and subject to approval from the Central Bank of Ireland. In the interim, CAPREIT will continue to provide all the services pursuant to the current IMA and services agreement on their existing terms. 123 Investing in Our FutureNotes to Consolidated Financial Statements b) Transactions with Key Management Personnel Key management personnel are eligible to participate in the EUPP. In addition, certain key management personnel also participate in the RUR Plan and trustees currently participate in the DUP. Pursuant to employee contracts, key management personnel are entitled to termination benefits that 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, Short-term benefits Unit-based compensation – grant date amortization Unit-based compensation – fair value remeasurement Total c) ERES Transactions $ $ 2021 3,546 2,982 6,528 4,393 $ 10,921 $ 2020 3,862 2,618 6,480 (778) 5,702 Asset Management Agreement CAPREIT entered into a management agreement with ERES pursuant to which CAPREIT acts as the asset manager to ERES, except for the commercial properties (the “Asset Management Agreement”). CAPREIT provides, among other things, strategic, advisory, asset management, project management, construction management and administrative services necessary for ERES. The Asset Management Agreement provides for a broad range of asset management services for the following fees: a) An annual asset management fee in the amount of 0.35% of the historical purchase price of ERES’s properties excluding the commercial properties plus HST/VAT; b) An acquisition fee in the amount of (i) 1.0% of the purchase price paid by ERES or one or more of its subsidiaries for the purchase of a residential or commercial real property of ERES located in Europe, on the first €100,000 of such properties acquired in each fiscal year, (ii) 0.75% of the purchase price paid by ERES or one or more of its subsidiaries for the purchase of such a property, on the next €100,000 of such properties acquired in each fiscal year, and (iii) 0.50% of the purchase price paid by ERES or one or more of its subsidiaries for the purchase of such a property, on properties in excess of €200,000 acquired in each fiscal year, plus VAT; A capital expenditure fee equal to 5.0% of all hard construction costs incurred on each capital project (other than in respect of the commercial properties) with costs in excess of €1,000, excluding work done on behalf of tenants or any maintenance expenditures, plus VAT; and c) d) A financing fee equal to 0.25% of the debt and equity of all financing or refinancing transactions completed for ERES or any of its subsidiaries, which is intended to cover the actual expenses incurred by CAPREIT in supplying services to ERES relating to financing transactions. To the extent that the financing fees paid by ERES exceed the actual amount of such expenses, CAPREIT will reimburse ERES for the difference. To the extent that the financing fees charged by CAPREIT are less than the actual amount of such expenses, ERES will pay the difference as an additional financing fee amount. Property Management Agreement CAPREIT entered into a property management agreement with ERES pursuant to which CAPREIT acts as the property manager to ERES for residential properties and receives 3.5% of EGI for its services. 124 2021 Annual ReportNotes to Consolidated Financial Statements Services Agreement CAPREIT has entered into a services agreement with ERES pursuant to which CAPREIT provides ERES with certain administrative services, including financial, information technology, internal audit and other support services as may be reasonably required from time to time. CAPREIT provides these services to ERES on a cost recovery basis. Pipeline Agreement CAPREIT entered into a pipeline agreement with ERES (the “Pipeline Agreement”) pursuant to which CAPREIT, for a period ending on March 29, 2021, makes up to $237 million (€165 million) (the “Total Commitment”) available to acquire properties that comply with ERES’s investment policy and do not contravene the investment policy of CAPREIT for which ERES wishes to purchase but is unable to do so (a “Suitable Property Investment”). On March 20, 2021, the Pipeline Agreement was extended under the same terms and conditions for a subsequent two-year period, ending on March 29, 2023. Once any part of the Total Commitment has been repaid by cash or units, that part of the Total Commitment will be available for reuse under the terms of the Pipeline Agreement. CAPREIT will receive an underwriting fee in the amount of 1.0% of the purchase price on any acquisitions under the Pipeline Agreement. There were no acquisitions made pursuant to the Pipeline Agreement during the years ended December 31, 2021 and 2020. Promissory Note On December 20, 2021, ERES issued a $57,409 (€39,300) promissory note to CAPREIT, with a maturity date of June 20, 2022 and an interest rate of 1.30% per annum. ERES repaid the promissory note in full on December 30, 2021, without penalty. ERES’s promissory note to CAPREIT represented contingency financing for ERES’s December 22, 2021 acquisition portfolio, that was ultimately funded directly with long-term mortgage financing. The table below summarizes fees charged to ERES: For the Year Ended December 31, Asset management fees Acquisition fees Property management fees Service fees Interest from promissory note Total $ $ 2021 7,405 2,140 4,033 798 21 2020 6,896 1,266 3,722 592 – $ 14,397 $ 12,476 Any fees charged by CAPREIT to ERES are eliminated upon consolidation in these consolidated annual financial statements. 125 Investing in Our FutureNotes to Consolidated Financial Statements 30. Commitments Natural Gas Through the combination of fixed and variable price contracts, CAPREIT is committed as at December 31, 2021 in the aggregate amount of $14,048 for its natural gas and transport requirements. These commitments, which range from one to four 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 2022 2023 2024 $ 2.28 $ 2.31 $ 2.31 $ 82.2% 68.1% 54.6% $ 1.11 $ 0.81 $ 0.75 $ 69.7% 68.1% 54.6% 2025 2.26 32.0% 0.79 32.0% (1) Fixed weighted average cost per gigajoule (“GJ”) excludes other administrative costs. Property capital investments Commitments primarily related to capital investments in investment properties of $37,153 were outstanding as at December 31, 2021 (December 31, 2020 – $21,618). 31. Contingencies CAPREIT is contingently liable under guarantees provided to certain of CAPREIT’s and CAPREIT’s subsidiaries’ 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 where appropriate. 126 2021 Annual ReportNotes to Consolidated Financial Statements 32. Segmented Information CAPREIT owns and operates investment properties located in Canada, the Netherlands, Germany and Belgium. In measuring performance, CAPREIT distinguishes its operations on a geographic basis and, accordingly, has identified two reportable segments for disclosure purposes after aggregation. Segments include (i) Canada and (ii) the Netherlands and other European markets. CAPREIT’s chief operating decision-maker reviews operating results of the Canadian and European properties to make decisions about resources to be allocated to the segments and assess their performance. Selected income statement items Revenue from investment properties Operating expenses Net rental income Fair value adjustments of investment properties Selected income statement items Revenue from investment properties Operating expenses Net rental income Fair value adjustments of investment properties Selected balance sheet items Investment properties Mortgages payable Selected balance sheet items Investment properties Mortgages payable Canada 819,219 (297,433) 521,786 760,988 Canada 775,675 (278,975) 496,700 523,144 $ $ $ $ $ $ For the Year Ended December 31, 2021 Europe 113,918 (25,711) 88,207 287,754 Consolidated financial statements $ $ $ 933,137 (323,144) 609,993 1,048,742 For the Year Ended December 31, 2020 Europe 106,968 (25,497) 81,471 72,715 Consolidated financial statements $ $ $ 882,643 (304,472) 578,171 595,859 $ $ $ $ $ $ Canada Europe As at December 31, 2021 Consolidated financial statements $ 14,425,769 $ 2,676,150 $ 17,101,919 4,928,030 1,172,035 6,100,065 Canada Europe As at December 31, 2020 Consolidated financial statements $ 12,701,156 $ 2,299,435 $ 15,000,591 4,306,405 1,094,797 5,401,202 33. Subsequent Events On January 25, 2022, CAPREIT completed the acquisition of a six-storey 59-suite apartment and townhouse property located in downtown Kelowna, British Columbia. CAPREIT paid $29,500, funded by the Acquisition and Operating Facility and the assumption of a $17,135 mortgage maturing on December 1, 2026. On January 31, 2022, CAPREIT’s IMA with IRES was terminated. As a result, CAPREIT ceased to have significant influence over IRES, and its investment in IRES will now be recognized as an investment measured at FVTPL. CAPREIT will continue to provide transition services for a period of three months for total fees of approximately $1,500. On January 31, 2022, ERES acquired a multi-residential property comprised of 45 suites located in Rijswijk, the Netherlands, for a purchase price of $27,807 (€19,500). On January 26, 2022, ERES issued a $27,014 (€19,000) promissory note to CAPREIT, with a maturity date of July 26, 2022 and an interest rate of 1.30% per annum. The proceeds of the promissory note were used to fund the acquisition. 127 Investing in Our FutureNotes to Consolidated Financial Statements Unitholder Information Head Office 11 Church Street, Suite 401 Toronto, Ontario M5E 1W1 Tel: 416.861.9404 Fax: 416.861.9209 website: www.capreit.ca Officers Michael Stein Chairman Mark Kenney President and Chief Executive Officer Scott Cryer Chief Financial Officer Jodi Lieberman Chief People, Culture and Brand Officer Corinne Pruzanski General Counsel and Corporate Secretary Investor Information Analysts, Unitholders and others seeking financial data should visit CAPREIT’s website at www.capreit.ca or contact: Mark Kenney President and Chief Executive Officer Tel: 416.861.9404 E-mail: ir@capreit.net Registrar and Transfer Agent Computershare Trust Company of Canada 100 University Avenue, 9th Floor Toronto, Ontario M5J 2Y1 Tel: 1.800.663.9097 E-mail: caregistry@computershare.com Auditor PricewaterhouseCoopers LLP Legal Counsel Stikeman Elliott LLP Stock Exchange Listing Units of CAPREIT are listed on the Toronto Stock Exchange under the trading symbol “CAR.UN.” 

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