Canadian Apartment Properties Real Estate Investment Trust T.CAR.UN

RE:RE:RE:RE:RE:RE:More BNS

[Mephistopheles3]

• Yeah, CAR only locks in fixed rate mortgages so they do not have anything floating which is appealing.  It just means that they're going to be subject to the rate increases on the debt that is coming up to maturity. 

• The mortgages and debt section of the financials are typically pretty boring, so most people skip past that and focus on FFO and occupancy which are a bit sexier, but CAR is great at managing their debt which I don't know if other investors see.  Off memory, InterRent has a ton of debt coming up in 2022 and so they will be hit quite a bit harder than CAR with rising interest rates.  Also CAR was taking the opportunity to reset their mortgages in the last year taking advatnage of the super low rates.  The rates as forcasted are equal to the rates over the last few years, so I'm not too worried about them.  Their debt / book value is actually quite low as well. 

• Where the interest rates will play a part though in the NAV is the capitalization rate which is being used to fair value the properties.  While not an exact science, in general, the capitalization rates do follow the long-term bond yield curves.CAR was not super conservative with their use of cap. rates to fair value their properties which is what created these massive gains last year.  They weren't terribly aggressive either, I would say they were always mid-range.  So they will have to take a hit here which will impact the NAV, but not the FFO from the properties.  Just by point of reference, a 50 bps change in the cap. rate will result in a $2 billion writedown of assets.  

• Your point on inflation is good and I think everyone is being really quiet about it as no one wants to bring up the wrath of the provincial rent control police.  Rent control in Ontario runs from June-May I think in each year, which means that the CPI calculation should run at about 5.5% for the rent of 2023 and even if inflation gets under control towards the end of the year, you are looking at another 4% or so increase in 2024.  This is just bloody massive and will drive margins through the roof if it happens.  I think there's a lot of uncertainty on this one though as the provinces have capped rent during the pandemic.  It's also not unheard of as in the 90's if you look at the history of rent, we do see increases of 5-6%.  So it's not priced in, but it remains a huge opportunity for all residential REIT's operating in rent controlled provinces.