Canadian Apartment Properties REIT
(CAR.UN-T) C$44.39
Upgrading CAPREIT to ACTION LIST BUY
Event
We are upgrading CAPREIT to ACTION LIST BUY from Buy.
Impact: NEUTRAL
Long-term Apartment Outlook Remains in Tact. Through the first months of the pandemic, the apartment sector has remained one of the most stable and resilient asset classes, both on the rent collection and occupancy fronts. CAPREIT's rent collections have remained largely in line with historical levels while occupancies have remained elevated in the 99% range. With that said, we believe that the decline in both permanent and temporary (students and migrant workers) immigration, one of the biggest drivers of apartment fundamentals, will result in some short- term pressure on market fundamentals. However, we see this as a temporary phenomenon. For more details, please see our industry bulletin, to be published later today.
Disconnect between Public and Private Market Valuations. Following a temporary halt in investment activity brought about by COVID-19, apartment transaction volumes across the country have begun to rebound at prices in line with, or in some cases even above, pre-pandemic levels, reaffirming our confidence in our NAV estimate. Despite what the private market has dictated, the pricing is not being reflected in the public market valuations of the Canadian apartment REITs, as many, including CAPREIT, continue to trade at double-digit discounts to our NAV estimates.
Valuation. CAPREIT is currently trading at a 21% discount to our NAV estimate, one of the largest historical discounts since we started tracking the statistic in 2005 and 20 percentage points below the long-term average (Exhibit 3). The current AFFO yield spread versus the 10-year GoC is 70bps above the long-term average of 3.33% (Exhibit 4).
Forecasts. We are not making any changes to our forecasts, although we do acknowledge some modest downside risk owing to softening near-term fundamentals.
TD Investment Conclusion
As the largest, most liquid name in what we view as the most defensive asset class, we view CAPREIT as a core REIT holding. In consideration of the current valuation and the 36% total return to our $59.00 target price, we are upgrading CAPREIT to ACTION LIST BUY from Buy.