Canadian Apartment Properties' (CDPYF) CEO Tom Schwartz on Q4 2015 Results - Earnings Call Transcript

| About: Canadian Apt (CDPYF)

Canadian Apartment Properties REIT (OTC:CDPYF) Q4 2015 Earnings Conference Call February 17, 2016 10:00 AM ET

Executives

David Mills - IR

Tom Schwartz - President and CEO

Scott Cryer - CFO

Analysts

Jonathan Kelcher - TD Securities

Frederic Blondeau - Dundee Capital Markets

Heather Kirk - BMO Capital Markets

Mike Markidis - Desjardins Securities

Matt Kornack - National Bank Financial

Jimmy Shan - GMP Securities

Dean Wilkinson - CIBC World Markets

Mario Saric - Scotiabank

Operator

Good morning, ladies and gentlemen. Welcome to the CAPREIT Fourth Quarter and Year-End Results Conference Call. I would like to turn the meeting over to Mr. David Mills. Please go ahead, Mr. Mills.

David Mills

Thank you, Donna and good morning everyone. Before we begin, let me remind everyone that the following discussion may include comments that constitute forward-looking statements about expected future events and the financial and operating results of CAPREIT. Our actual results may differ materially from these forward-looking statements such statements are subject to certain risks and uncertainties. Discussions concerning these risk factors, the forward-looking statements, and the factors and assumptions on which they are based can be found in CAPREIT's regulatory filings including its annual information form and MD&A which can be obtained at SEDAR.com.

I'll now turn things over to Mr. Tom Schwartz, President and CEO.

Tom Schwartz

Thanks, David. 2015 was another year in which we generated record portfolio growth strengthening and further diversifying our asset base for the benefit of our unitholders. We also produced exceptional operating performance as we once again had industry leading increases in same property NOI and benefitted from our proven sales, marketing and property management programs.

As you can see on Slide 4, all of our key performance benchmarks demonstrated solid growth for the year ended December 31, 2015. Acquisitions made a solid contribution but again a key catalyst driving our solid performance is our ability to generate strong organic growth with same property NOI up a solid 3.3% for the year. Importantly, our growth continues to be very accretive as NFFO per unit was up despite reduced leverage and the 8% increase in the weighted average number of units outstanding. Our NFFO payout ratio also remained strong and conservative at 73.1%.

Our strong track record of organic growth, as shown on Slide 5, is the result of our property management programs aimed at keeping our buildings full, with stable and steady increases in average rents, combined with a relentless focus on operating efficiency and reduced costs. As of December 31, 2015, 87.2% of our portfolio consisted of stabilized properties generating a strong 3.3% same-property NOI increase for year. For the fourth quarter of 2015 same property NOI was also solid at 2.3%. Looking ahead, we believe our proven track record of organic growth will continue.

As you can see on Slide 6, average monthly rents for the residential portfolio remained strong at year-end with occupancy remaining very stable at 97.4%. As we said on our last call, rents and occupancies were impacted by acquisitions in the third and fourth quarters in lower rent markets more specifically Montreal. Our MHC portfolio also continues to perform well with near full occupancy and rising monthly rents. Looking ahead demand remains strong in all of our markets despite the challenging economic times in Canada. We see occupancies remaining stable at these nearly full levels and we believe average monthly rates will increase overtime. We are already seeing improving occupancies in the recently acquired properties and expect to report much better results through 2016.

As you can see on Slide 7, occupancies have improved since year-end with average overall occupancy for the portfolio at 97.6% as of February 16, 2016. Our proven sales and marketing programs have kept occupancy strong through the first six weeks of 2016. We expect rates to improve throughout the year. Our MHC portfolio also continues to perform well with near full occupancy and rising monthly rents. Looking ahead, demand remains strong in all of our markets despite the challenging economic times in Canada. We see occupancies remaining strong at these nearly full levels and we believe average monthly rents will continue to increase overtime.

We are also very proud to have generated a strong track record of accretive growth for our unitholders through both, good times and bad a testament to the strength of the apartment business and our proven property management programs. As you can see on Slide 8, CAPREIT has delivered on its main goal to deliver solid, sustainable, growing returns to its unitholders with at the same time conservative payout ratios. We look forward to this growth going forward.

One key reason we have been able to deliver such a strong and accretive growth is our track record of increasing the size and scale of our property portfolio over the last 18 years. As you know can see Slide 10, we have grown our property portfolio from only 2,900 apartment suites to where we now own 47,460 apartment townhouse in MHC suites and sites across Canada. Since our IPO, we have successfully expanded into new geographic regions diversifying our portfolio to reduce risk and strengthen our presence in all of Canada's strong rental markets. We have repositioned the portfolio with increased emphasis on the higher margin luxury and mid-tier demographics segments of the business while also maintaining a strong presence in the profitable affordable sector.

We have also expanded into new asset classes in the rental residential real estate business building a growing portfolio of manufactured housing, land-leased communities that deliver strong and growing cash flows with a reduced risk profile. All of these growth initiatives have transformed CAPREIT into Canada's largest publicly traded residential landlord with a high quality in growing property portfolio and a management team located in key centers from coast to coast. We will continue to build on this dominant market presence in the years ahead.

Our goal to further strengthen and diversify our portfolio continued in 2015 as you can see on Slide 11. Our acquisitions were primarily targeted in the vibrant Vancouver and Victorian market. And we also enhanced our presence with a large acquisition in Montreal at the end of September. We also purchased high quality properties in the Greater Toronto area and Edmonton. Overall, we purchased 5,362 apartment suites in 2015 as shown on Slide 12, the total acquisition costs of $824 million financed by our credit lines, mortgage financing and two successful bought deal equity offerings. With these new properties, our annualized revenue run rate is now $544.7 million, a 12% increase over last year.

Additionally, as a majority of these newly acquired properties have average monthly rents below market and as we integrate them into our proven property management programs, we are confident they will make an increasing contribution to our cash flows overtime as we bring rents up to market, improve our occupancies and reduce our operating cost.

With our growth this year in markets outside Ontario, we have also significantly strengthened our overall geographic diversification. As you can see Slide 13, Quebec now represents 24% of our total portfolio with British Columbia now at 10%. We believe our well located properties and CAPREIT's proven property management programs should help mitigate any downturns in any of our markets. Alberta represents approximately 8% of CAPREIT's total NOI in 2015 therefore CAPREIT doesn't overly expose to any unanticipated downturn in the Alberta multifamily residential rental business.

Slide 14 details how our demographic diversification has also been enhanced with our recent acquisitions as the higher margin, luxury and mid-tier properties now represent the majority of the portfolio at approximately 80% of the total. Our MHC portfolio now standing at 13% of the total also continues to perform well and provides additional stability to our results. Our diversification by property type and geography contributes to the stability and sustainability of our monthly cash distributions and protects unitholders from any potential downturn in one region or demographic segment.

I am now going to turn things over to Scott to review our financial results in more detail.

Scott Cryer

Thanks, Tom. Turning to our Q4 results on Slide 16, you can see we benefitted once again from the increase in size and scale of our property portfolio as well as our continuing strong organic growth. Revenues were up 11.4% compared to last year's fourth quarter and as a result for our proven operating programs, NOI increased 12.5% driven by lower R&M cost and realty taxes as a percentage of our operating revenues. NFFO rose over 13% primarily due to contributions from acquisitions and a strong operating performance. And NFFO per unit was impacted by the almost 15% increase in the weighted average number of units outstanding in the quarter. Additionally, one-time stock compensation in connection with the equity offering and temporary higher interest costs and fees associated with a bridge facility used to close our two major portfolio acquisitions in September.

Slide 17 details our results for the year ended December 31, 2015. And again our operating performance was very strong with a 5.4% increase in revenues, NOI up 6.8% and NFFO rising 9.1%. You can see that our growth is accretive for the year as NFFO per unit was up 1% despite the reduced leverage and the increase in weighted average number of units outstanding. And as I mentioned we expect this accretive growth to accelerate as we see a full year's contribution from our acquisitions completed late in 2015.

Slide 18 details how we're generating solid growth in average monthly rents, on suite renewals and turnovers due primarily to our strong property management programs. This growth should accelerate in 2016 as rent increase guidelines in Ontario will rise from 1.6% to 2.0% in 2016. Similarly British Columbia guideline will increase from 2.5% in 2015 to 2.9% in 2016. Another factor in our rental rate growth is our ongoing successful application for above guideline increases in Ontario. We've been very successful with these applications and we're confident we'll be able to generate further above guideline increases going forward.

We continue to maintain a strong and flexible financial position as shown on Slide 19, with improved leverage and coverage ratio compared to the end of 2014. It's also important to note that we have approximately 290 million of our properties non-encumbered by mortgages as at December 31, 2015. Our goal is to maintain our unencumbered assets in the range of 150 million to 180 million over the long-term. Our weighted average interest rate declined further at the end of the quarter and we maintain a conservative term to maturity of 6.3 years.

Looking ahead you can see that our March portfolio remained well balanced as shown on Slide 20. As we continue to focus on extending on the debt maturities in this low rate environment. With maturities between 2015 and 2021 representing a smaller portion of the portfolio in the next ten years, we believe we have a good balance between top-up liquidity and reduced sensitivity to rising interest rates. While we have seen some margin expansion by some lenders as the GOC has hit all time lows, rates continue to be extremely attractive. In addition with 96.5% of our current mortgages being insured, we've had a large and diverse group of lenders willing to work with us at rate below conventional financing.

On the liquidity front we remain well positioned to continue our growth program as shown on Slide 21. Our liquidity position now stands at approximately 70 million providing the resources for future acquisitions of approximately 230 million all while maintaining a conservative debt ratio. Strong top up potential estimated at 150 million for 2015 will continue to provide sufficient liquidity and allow us to fund our future CapEx programs. And as I mentioned earlier we plan to finance a portion of encumbered properties while maintaining the unencumbered pool in the range of 150 million to 180 million available for future growth.

I'll now turn things back to Tom to wrap up.

Tom Schwartz

Thanks Scott. We believe the future is extremely bright for CAPREIT, we've proven our ability to capitalize on continuing strong fundamentals in the Canadian apartment business through all economic cycles. We've one of the strongest balance sheets in the business and fiscal prudence will remain a key priority at CAPREIT. We are very proud of our team. We have the right people in the right positions to manage our growth for years to come. And finally we've demonstrated that our business strategy is succeeding and prospering and we will continue to build on the solid performance generated over the last 18 years.

A key driver of our success over the last 18 years has been our experienced and dedicated team of people and we were very proud to be recognized in 2015 as a Platinum Level Best Employer in Canada the highest recognition in the Aon Hewitt survey. As you can see on Slide 24, this is the third consecutive year CAPREIT has been awarded this prestigious honor recognizing our high levels of employee engagement, leadership, performance culture and brand. We are very proud of our people and look for their contributions to continue building value in the years ahead.

Turning to our growth prospects Slide 25 details a new and innovative element of our growth program, the development of new apartment assets. We own a number of properties where there is sufficient excess land on which we can develop new apartment buildings and we are investigating zoning potential to determine the feasibility of all of these projects.

We are looking at opportunities to partner with other real estate companies to capitalize on our proven track record of residential rental property operations and we are very pleased to have announced our first joint venture deal with First Capital Realty and its partner to acquire a one third interest in the residential component of the King High Line project in Toronto. This was an exciting and very accretive opportunity for CAPREIT and will set the stage with further similar partnerships in the future.

The CAPREIT IRES transaction is another example of our innovative approach to growth as you can see on Slide 26. The sale of our Dublin assets in an IPO in April 2014 generated 770,000 gains. We are now receiving a stabling growth stream of recurring asset and property management fees amounting to $1.2 million of the last eight months of 2014 and another $3.3 million in 2015. We also received approximately 1 million as an underwriters fee on assets we bought on IRES to have and then transferred to them. And finally we believe our ongoing retained interest in IRES currently at 50.7% will generate strong long-term capital depreciation for our unitholders over the long-term.

As you can see on Slide 27, our growth and superior performance have resulted in remarkable returns for our unitholders. Unitholders who invest in our IPO in November 1997 have received a total return of 1025% through February 12, 2016 compared to only 512% for the cap real estate index and 201% for the overall Toronto Stock Exchange Index. We are very proud of everything we have accomplished for our unitholders and truly believe this growth and success will continue going forward. The main takeaway today is that we are all very excited and confident about our future and we look forward to sharing our results with you in the coming quarters.

Thanks again and Scott and I will now be pleased to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you. We will now take questions from the telephone lines. [Operator Instructions] And the first question is from Jonathan Kelcher from TD Securities. Please go ahead.

Jonathan Kelcher

First, just on the Calgary portfolio and I know it is not very big for you guys but there is pretty good occupancy rate slippage in Q4 versus Q3. And I'm just curious as to whether that was one or two buildings? Or was it more general? And what are you seeing so far in 2016 there?

Scott Cryer

So Alberta and Saskatchewan are obviously our most challenged markets today we saw that obviously coming and we put a focus on occupancy and what I can tell you today in the Calgary portfolio the occupancy is actually 92% up from 89.9% again in December so again we have active programs to make sure that are building stay full and we think we are going to bring out occupancy if not we are going to get back to 97 or 98 but we’re certainly soothing I think by next quarter you will see in excess of 95. It's harder to rent units there it's harder to retain tenants we are giving some incentives but in spite of that we still think we can keep those buildings relatively full.

Jonathan Kelcher

Secondly, just on your development program, you have the one announced, sounds like you're working on others, both on your own buck and with partners. How big would you ultimately want your development pipeline to get to?

Scott Cryer

So this is really exciting we have a team at CAPREIT right now full time dedicated to looking at our existing land inventories and determining of what points and how long the development process will take. I'm hoping by the next quarter to be able to make an announcement that's very solid about what we can do in the next three years and what perhaps we can do in three to five years what I can tell you is the numbers are significant and that's really where our focus will be as developing our own properties our sales for the benefit of all of our shareholders. We will continue to do some joint ventures we have a couple we have negotiating for a while and not the easiest deals to make but we work on that but I think the real future is the land that we’re sitting on I think very significant land resources and the ability to create our own new rental properties in house.

Jonathan Kelcher

How big a market do you think there is for high-end purpose build rentals?

Scott Cryer

I think it's weird location specific and in certain markets are already going to get overbuilt with what's on the horizon but I think there is still good opportunities and again it's a matter of building the right product in the right market, but I do think we have to be careful I mean it's possible that those markets can get overbuilt. We will always have a significant advantage with our older buildings I mean we are looking right now in certain areas where there are new buildings coming on stream and in spite of that we’re doing condo quality renovations in our buildings and we’re -- with forward waiting list all right if you look at Ontario where our occupancies is incredible and our rents continue to go up for that reason, so that new market is up actually helping us so there will always be a gap between the new and old in favor of the old and we are in the best position to benefit from that.

Operator

Thank you. The next question is from Frederic Blondeau from Dundee Capital Markets. Please go ahead.

Frederic Blondeau

Quick question for Scott in terms of other operating expenses costs as a percentage of revenues, they were down for the year at 17.9%. What would be a good run rate for this year and next? What is the trend in R&M cost at this point?

Scott Cryer

I think the trend on R&M specifically would be fairly flat, I think we saw our declines over the last couple of years as we brought it from 1100 down closer to the 8 to 850, so we think that those are probably I mean more stable than anything. Utility costs are kind of a mixed bag, we do see some pressure on Ontario based hydro cost but we're also seeing the offset of that in natural gas, so we think really it will become somewhat degree of the fact that we've had a fairly one year that will play into it, but fairly flat on utilities and reality tax as well continue on kind of an inflationary basis. So we think we are going to be able to maintain that 50 plus percent margin obviously the top line is going to drive some of that, but we feel pretty confident.

Frederic Blondeau

And maybe for Tom it's been only a quarter now but I was wondering how the FDL portfolio performing so far?

Tom Schwartz

Better than expected, we've been able to raise rents, we certainly spent some capital there because they are very-very well located buildings and that's going to be a home run and we're very pleased with it the quality of locations is just first first-class and again our occupancy is a little better than we expected and our rents a little bit higher than expected. So I think that will be a big contributor to 2016.

Operator

Thank you. The next question is from Heather Kirk from BMO Capital Markets. Please go ahead.

Heather Kirk

I wanted to dig into the occupancy decline on a same-property basis. Part of that was clearly Alberta, but Quebec also seemed to be coming down. I would just like to get your thoughts on what's happening in the Quebec market? And also it seemed to be more concentrated in the mid-tier and luxury versus affordable. I was just looking for some color on that as well?

Tom Schwartz

Look Quebec is a temporary phenomenon that we created ourselves. As Frederic just asked, we took over that FDL portfolio, it's a very large portfolio, we're doing capital work, we're upgrading suites, training over tenants and raising rents. So I think you'll see that firming up certainly in the next couple of quarters. Other than that there is one building in Quebec City that's a bit challenged that we've been working on that's probably our weakest part of the Province of Quebec. And again, we are putting our forces in place and I think we'll see improvements there.

Heather Kirk

And so that Quebec City issue -- is that more of a condo construction issue? Or?

Tom Schwartz

No, I think it's one building that we've had for awhile that's developed some vacancies. A lot of tenant turnover. We've got it repopulated when we bought it had a lot of seniors in it. Seniors have moved on to other sorts of accommodations. We are currently repopulating the building.

Heather Kirk

In terms of acquisition opportunities, it was clearly a very active year for you last year. Could you just comment on whether, with where cap rates have gone, that you would be considering dispositions? And also, are you seeing any opportunities in that Calgary and Alberta market as a result of some of the weakness there?

Tom Schwartz

Okay so a lot of questions in there the first one in terms of dispositions, we're certainly a little bit overweight in Montreal and we hope to make some dispositions in Montreal this year, so that is the certainty. In terms of general acquisitions what I'll start up by saying is we made a great certainly a great volume one in Montreal we've announced this year other than that we've lost the last three auctions we bid on and we've lost significantly. So there again, people paying a lot more money than we are prepared to pay for assets, in terms of Alberta we have not seen one good opportunity there yet. So we keep waiting, I don't believe there is any desperation out there and the cap rates in cross Canada continue to the lower. We're seeing cap rates in Ontario on let's call it C class assets that now have barely a four in front of them. We're not a buyer of those kind of assets unless they have tremendous upside and the ones we bid on does not have had enough upside to justify that kind of a cap rate to us.

Heather Kirk

Have you considered other markets, given the success you have had in Ireland?

Tom Schwartz

We are always looking other markets we're kind of in that traffic so absolutely we're looking at all opportunities, but so far we haven't seen anything as compelling as Ireland as yet.

Operator

Thank you. Your next question is from Mike Markidis from Desjardins. Please go ahead.

Mike Markidis

Just more housekeeping-related issues for me, actually or questions. On the trust expenses, Scott, annually you have been growing at 8% to 8.5% over the last couple of years. I'm just wondering if you see that actually, the growth in G&A moderating this year, on the trust expense line?

Scott Cryer

I mean I think not specifically going into 2016, we probably see it beyond that, we have gone through some restructuring where we've been investing more significantly in our technology platform and our operating platform moving away from a lot of accounting resources. So we have repositioned it and we're kind of stabilizing through 2016 and I think we'll start to see you know better economies going forward beyond that.

Mike Markidis

Okay, and again just a house relating issue here but the Unibase comp the amortization component of your Unibase comp, it seems like sequentially it increased quite substantially it was running about 1.1 to 1.3 million the last several quarters and jumped to 2.2, is that the catch up entry or how should we think about that line going forward?

Scott Cryer

It's actually largely related to options we had issued in connection with equity and offerings, so because we had two offerings we did 400 million of equity this year, that does have a significant impact probably close to $1 million so that's really just something to model in when you look at doing equity as opposed to on a run rate basis.

Mike Markidis

Okay. So would the 4Q amount remain relatively stable throughout 2016? Or does it drop off pretty quickly?

Scott Cryer

No, it will drop off due to the stock options a little bit but the rest of it will continue at that run rate.

Operator

Thank you, the next question is from Matt Kornack from National Bank Financial, please go ahead.

Matt Kornack

In terms of your growth profile, historically you've stated about 1,500 to 2,000 of suites in terms of acquisitions going forward. As you look at the development pipeline, should that be an additive number? Is it going to be included in the 1,500 to 2,000? Or is it additional to that number that we should expect going forward?

Tom Schwartz

It's certainly additional to that number Matt, what I'm trying to do is I don’t want to throw a number that the market is pulling out of the air we are really working very hard to do it in bands what we can develop within the next three years within three to five, and once we make an announcement we want to be able to deliver on that, so that will certainly be a thought but what I can tell you is we will have an active development program across Canada once we get this going.

Matt Kornack

But you'll continue to acquire properties?

Tom Schwartz

Oh yes, we always start out with 1,500 to 2,000 sometimes if I'm not confident that 1,000-1,500, look last year we bought over 5,000 a year before we barely bought 500, so it's, the acquisitions are lumpy but we're always in the market. We're never going to stop acquiring if the right opportunities are available to us and they're accretive and they have -- where we can have a good value and opportunities.

Matt Kornack

And Scott, just quickly on the other income line, I know that includes some IRES noise and other stuff. In terms of a run rate, what is a good number for just Q1 and onward in 2016?

Scott Cryer

Yes, I mean if you look in our disclosures we have broken out the other income in our MD&A between recurring and non-recurring so I think the recurring component is solid, we actually probably see an increase in it. We’ve budgeted an increase related to IRES specifically where we'll have we've had more capital out and we will have strong acquisitions through the year so we could see that going up and at least another $1 million into 2016 if not more. So we use the recurring aspects in the MD&A and then you can adjust for kind of some growth in the IRES component.

Operator

Thank you, the next question is from Jimmy Shan from GMP Securities, please go ahead.

Jimmy Chan

Turning to the CapEx, the 2016, I think you're expecting between 170 million to 180 million. I know part of the increase is due to the acquisitions. But have we hit a level where we peaked and you would expect that the overall CapEx, to trend down from here on out? How do you see that playing out?

Scott Cryer

Yes, I mean definitely the balance of where the capital has been spent has changed over the last couple of years. Obviously with these large portfolio acquisitions a high percentage of that being we're seeing 80 million plus of the total budget is focused on acquisitions we've completed over the last quarter four years or so. We see the structural component coming down but we'll continue to invest in the suites and capital other more value enhancing components of it, so definitely the structural coming down but overall we think that number assuming no more acquisitions will continue to trend downward from here.

Jimmy Chan

Okay. And then in terms of your comment on the new rental supply, particularly in the GTA, I know it is a different market. But I would just wonder how you would -- are the new supply worrisome enough that you think that it may have an impact down the road in terms of the ability to push rents? How would you -- I know it is hard to speak in generality -- but how would you characterize these new supply coming as a potential impact on the portfolio?

Scott Cryer

Okay, the first thing that Jim it's actually creating opportunities for us because the new supply is coming in at a rent level way above our existing rent so we're finding is where we have buildings that are in the same neighborhoods as the new buildings we're able to do a condo quality renovation to our suite which is generally larger and virtually always larger and raise the rent significantly for us to still stay below that new level specifically we've done that in the Yonge-Eglinton market. We are doing it now in the Davisville and Yonge market. We found that on Jarvis Street so were actually benefitting from that I think what were all a little bit concerned about as that lot of that new supply is coming into the same neighborhoods and as I think there may be a slight over supply but I think the gap was wide enough between the new supply and ourselves that we won't be directly impacted I think some of the providers of new supply maybe a little bit surprised to at where the rent levels are and they may not quite meet the performance they are expecting.

Jimmy Shan

Okay. In terms of the rent that you're getting, for instance at Yonge and Eglinton, versus these new supplies, what would be that rental gap?

Scott Cryer

It's still a good couple of $100 a month.

Operator

Thank you. The next question is from Frederic Blondeau from Dundee Capital Markets. Please go ahead.

Frederic Blondeau

I was just wondering, what kind of cap rates would you expect to get on your developments?

Scott Cryer

Well we wouldn't look at anything that didn’t have a very solid five in front of it and the more important question is do we have a good enough contingency because when you do development from the ground up things happen, so I think we have to have good pro forma I think we have to end up with a very solid five something and I think we have to be very careful how we pro forma our rents because everybody is making some very aggressive rent assumptions a lot of these rent assumptions haven’t been tested in the market yet and again as we look at our development going forward we want to make sure we are being realistic as for the rates we can achieve.

Operator

Thank you. The next question is from Dean Wilkinson from CIBC World Markets. Please go ahead.

Dean Wilkinson

Most of my questions have been answered but one more of a technical. Could you just clarify for us what exactly happened on that reclassification under the dilution loss on the FX?

Scott Cryer

So I think the reclassification of?

Dean Wilkinson

Yes the 3.1 million of the accumulated foreign-currency loss. It looks like it was moved from other comprehensive loss to equity accounted investments. What happened there?

Scott Cryer

I can walk you through in a little more detail offline basically what we have is we have unfortunately we don’t have a perfect hedge from accounting point of view on our investment in IRES. I can tell you that economically we have put in a euro based loan which protects us against the cost that we've invested in shares in IRES. So we are economically hedged other than any fair value increase in that investment we are exposed to any fair value increased but basically both as the asset and the debt we aren’t hedging those as offsetting so it's creating some funny accounting to be completely honest just isn’t representative of the economic so we’re just trying to normalize for any of those gains and losses. But again it is economically hedged.

Dean Wilkinson

So it's just a square-up of how the currency moved relative to the underlying instruments?

Scott Cryer

Yes and the fact and it's the fact that we run them through our P&L differently the asset and the debt side they don’t they are not hedged perfectly where you have that natural offset, they are running separately through one through the P&L one through the other comprehensive income so that creates a difference in the net income. We are just adding that back.

Dean Wilkinson

And that doesn't impact the add-back on the FFO? In terms of the adjustment for equity accounted investments?

Scott Cryer

So the adjustment is very specific the equity accounted investment so we can pick up the entire equity like we account for the IRES investment on an equity basis which includes a fair value gain on the investment portfolio so similar to how we add back our fair value gain to our FFO for purposes of the Canadian assets we’re just adding that back for our -- shifting out the fair value gain for the equity pick up.

Dean Wilkinson

For the equity pick up independent of the FX move, right? Okay, got it. That's clear. Clear as can be. That's all I had. Thanks, guys.

Operator

Thank you. The next question is from Mario Saric from Scotiabank. Please go ahead.

Mario Saric

Just one question, focused on the relationship between FFO per unit growth and same property NOI growth, in 2015, the same property NOI was up north of 3% and the FFO per unit growth was up 1%. I think, Scott, you highlighted some of the reconciling items on the call. So unit count was up a little bit and there were some onetime costs in Q4 as well. But, that relationship going forward, 2016 and beyond how should we think about that? In terms of, if you are getting 1% to 3% same property NOI growth, should we be thinking of better FFO per unit growth, in part because some of these acquisitions you've recently done are starting to materialize in terms of accretion and what not? So just maybe some color on the relationship between the two going forward?

Scott Cryer

Yes I mean I think definitely part of the impact would be doing big deals in one quarter and the impact of transaction cost and what not as well, as well as the fact that we bought really high quality properties that the cap rate reflected that and obviously from an FFO point of view, it's not going to be as accretive as buying in other markets, so those buying very the strong markets have had an impact on that. But I would start at that I mean definitely the onetime items we wouldn't see again, so it's hard to predict specifically. We think there is some upside obviously in some of the acquisitions that should start to show us through right to the FFO line.

Mario Saric

Okay. And then, when we look at your debt-to-gross book value, it's come off pretty substantially at these levels. Is this level today a stabilized number going forward? Or is it a temporary decline and you feel comfortable increasing leverage by 200 to 300 basis points?

Scott Cryer

I think considering the stability of the portfolio, Mario, this is pretty low. I have said in the past we're certainly not going to go back to the 60s or the 70s where we were years ago, but 50 is a little above that if the right opportunities came I think is very comfortable.

Operator

[Operator Instructions] And the next question is from Mike Markidis from Desjardins. Please go ahead.

Mike Markidis

Just one more for me, Tom, when you mentioned the development returns having a strong five in front of it, I was just curious if you included a proportion value for land or if you look at that return excluding some sort of attributed value to the land component?

Tom Schwartz

No, that number would have something in there to the land.

Operator

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Schwartz.

Tom Schwartz

Okay. I want to thank everybody for joining us today. As you can see, we remain very excited about CAPREIT's future and look forward to keeping all of your apprised of our progress going forward. If anybody has any additional questions, please give Scott or I a call at anytime and thank you very much.

Operator

Thank you. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.

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