Our Action List Picks
Canadian Apartment Properties REIT CAR.UN-T: C$53.86; ACTION LIST BUY 12-Month Target: C$63.00
The apartment sector continues to be one of the most stable and resilient asset classes through the pandemic. With that said, we believe the decline in both permanent and temporary (students and migrant workers) immigration, one of the biggest drivers of apartment demand, is causing some short-term pressure on market fundamentals, which we anticipate will continue in H1/21. However, we expect higher immigration levels (Canada revised its annual immigration targets upwards by 14% in late-2020), the resumption of in-class learning at post-secondary institutions, and younger workers returning to the downtown cores as offices reopen, to drive an improvement in fundamentals in H2/21 and into 2022. With the majority of its assets located across Canada's major urban hubs (33% of its NOI in the GTA (Ontario: 44%), 11% in Montreal (Quebec: 15%) and 8% in the Greater Vancouver Area (B.C: 11%)), we expect these trends to result in increased demand for CAPREIT's product. This should allow the REIT to improve occupancies, and begin to generate more substantial rental rate growth in H2/21.
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.
With liquidity returning to the transaction market, we expect CAPREIT to remain active on the acquisition front in 2021. Although competition for multi-family properties has increased as the asset class proves its resilience through the pandemic, we expect several other large portfolios to come to market over this year, which should provide ample opportunities for CAPREIT to continue to execute on its acquisition program. Management is targeting $400-$800 million of 2021 acquisitions. We have included $250 million of unannounced acquisitions in our 2021 forecast, which may prove to be conservative.
We also note that we do not expect a material earnings impact from the 2021 Ontario rent freeze, the temporary rent freeze in B.C. (until July 10, 2021), or rental cap implemented in Nova Scotia (2.0%). In all three provinces, landlords may still bring rents to market on turnover.
CAPREIT's balance sheet remains one of the strongest in the Canadian REIT space in our view. As at Q4/20, leverage (D/GBV) was 35.4%. The REIT ended the quarter with $749.7 million of liquidity ($121.7 million of cash; $628.0 million available on credit lines) and unencumbered assets valued at $976.7 million.
CAPREIT is currently trading at a 5% discount to our NAV estimate, two percentage points below the long-term average, but well below the ~10% premium pre- pandemic.