Our approach to financial management is based upon a disciplined framework with three components:
- Aligned financial reporting practices
- A prudent level of cash distributions
- Staggered debt maturities
Aligned Financial Reporting Practices
At CREIT, we strive to match our financial reporting practices with the operational aspects of our real estate business. This is a long-term approach that is conservative and reliable.
To illustrate, we report Adjusted Funds from Operations (AFFO), a non-IFRS defined financial measure, in a manner that is consistent with our philosophy. We consider major maintenance expenditures, such as the cost of replacing a roof that may involve significant spending, as operating activities. Such costs are required to maintain our productive capacity; therefore we deduct them in calculating our AFFO. If we were to classify these as investment expenditures instead, our AFFO would be higher than what we are reporting.
As a result, CREIT’s approach could have a negative impact on certain reported financial results over the short term (lower AFFO as shown above). However, in our view, it is an appropriate representation of our business.
Prudent Level of Cash Distributions
While we like to pay out as much cash as is practical to our Unitholders through monthly distributions, we also avoid paying out so much that it impairs the operating fundamentals of the business. Striking a reasonable balance requires a prudent distribution policy.
We have a track record of consistently increasing the monthly distributions to our Unitholders since 2002. Even so, we are still able to increase the amount that we retain in the business, thus preserving cash that can be redeployed for new acquisitions to fuel our growth and generate additional earnings.
Staggered Debt Maturities
We have incorporated the efficient use of leverage in our capital structure, and maintained our indebtedness ratio (total debt to total adjusted assets) below the 60% level permitted by our Declaration of Trust. We generally use two forms of debt:
- Floating rate debt with a term of less than one year
- Fixed rate debt with terms of up to 10 years
For flexibility and to help manage interest rate risk, we generally keep 10% to 20% of our total debt in floating rate bank facilities. The remaining 80% to 90% is fixed-rate debt comprised of primarily mortgages and unsecured debentures. We strive to spread the maturities for our long-term debt evenly over 10 years so that in any one year only 10% of our fixed rate debt is subject to interest rate risks.
The following chart illustrates our staggered debt maturities as at December 31, 2015.