Our view: With a business model designed to perform well in good times and bad, CAPREIT continues to deliver steady growth amid challenging operating conditions. While a return to better times is dependent on a substantial vaccine rollout, we think the resurgent U.S. rental market provides an indication of what could be coming in late 2021 and 2022. We increase our price target by $1 to $65 on the back of rising private market apartment values and reiterate our high-conviction Outperform rating.
Key points:
Delivering steady growth amid challenging operating conditions. As detailed herein, CAPREIT delivered an in-line print with NFFOPU of $0.55, up 2% YoY, compared with our $0.55E. Same-property revenue growth remained steady at 1.8% (vs. 1.7% in Q4), while SP-NOI decelerated 80 bps sequentially to 2.4% owing to good cost control in Q4/20 (-0.9%). Looking ahead, we see SP-NOI growth of 2–3% in 2021, improving to ~3% in 2022.
What could be waiting over the horizon? With the U.S. first dose/fully vaccinated rates of 47%/37% leading the Canadian equivalent of 39%/3%, a resurgent U.S. apartment market provides a glimpse of what could come as Canada's vaccine rollout advances. U.S. rent growth on new move-ins hit a 10 year high of 8% in April, compared with growth of 1–2% in Q1/21, -1% in 2020, and 3% in 2019, according to RealPage. So, while CAPREIT's equivalent 3% print in Q1/21 was down from 8% in 2020 and 14% in 2019, we're not concerned and think Q1 (possibly Q2) could be the bottom.
Surging deal flow is good for CAPREIT. With Q1/21 transaction volumes up 14% YoY in the GTA (32% of NOI), this supported cap rate compression of 12 bps QoQ and 30 bps YoY to 3.2%, according to Colliers. While CAPREIT moved its overall cap rate just 1bp QoQ lower in Q1, Management expects to see further cap rate compression going forward. With ample acquisition opportunities, we see CAPREIT as well-positioned with $762MM of liquidity, $1.3B of unencumbered assets, and D/GBV of just 35%.
What it would take to achieve our $76 bull case. Our upside scenario is predicated on: 1) SP-NOI growth exceeding our forecast by 2% (i.e., ~5% vs. 5% in 2019); 2) cap rates compressing 25 bps to 3.7%; and, 3) units trading at a 10–15% premium to NAV (vs. ~12% in 2019 with a range of 7–17%). With units trading at a reasonable 3% premium to NAV, we see a good entry point for a best-in-class name with a long history of value creation.
Raising our NAVPU estimate by 2% and trimming FFOPU by 1–3%. Post Q1, our NAVPU estimate increases by $1 to $56, with our 1Y forward NAVPU reflecting 5% growth to $59 (+$1). Our 2021–22E FFOPU decrease by 1%/3% to $2.32/$2.40, due to: 1) planned CMHC premium write-offs as CAPREIT aggressively works its balance sheet (~1%/~2%); and, 2) the termination of the IRES management agreement (nil-%/~1%). Our target remains based on a 10% premium to our 1Y forward NAVPU. This compares to an average premium of 5%/5% over the past 3Y/5Y and 11% in 2018–19.