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

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Also included a second report on the conference call. GLTA

Canadian Apartment Properties REIT

(CAR.UN-T) C$47.28

Results Ahead; Forecasting ~9% AFFO/unit Growth through 2021

Event

Q1/20 results.

Impact: SLIGHTLY POSITIVE

Q1/20 FFO/unit (f.d.) was $0.55, +11% versus Q1/19 and ahead of our estimate of $0.52 and consensus of $0.53. AFFO/unit (our calculation) of $0.47 was also ahead of our estimate. The positive variance versus our estimate was on NOI and lower interest.

COVID-19. As of April 30, CAPREIT had collected 98% of April rents, largely in line with March 2020 collections. Currently, less than 0.5% of its tenants have entered rent deferral programs. We do not anticipate materially different rental collection rates for May/June. The REIT is deferring its acquisition and development programs for the duration of the pandemic and has limited its capex spend to emergency repairs only. The REIT's leasing activities continue, albeit at a reduced pace, given the current physical distancing protocols. CAPREIT is utilizing incentives as well as on-line tours to help drive traffic. As of April 30, occupancy in its apartment portfolio was 98.2% (Q1/20: 98.7%), while MHC occupancy was 95.8% (Q1/20: 95.8%).

Liquidity. As of April 30, CAPREIT had $255 million of liquidity, including $145 million of cash and $110 million of capacity on its credit lines. Unencumbered properties are valued at ~$968 million, which we estimate could generate ~$532 million of proceeds at 55% LTV. We note that the REIT's leverage (D/GBV) of 36.1% (+140bps q/q) remains among the lowest in our coverage universe. Management expects to raise $580 million to $630 million in total mortgage renewals/refinancings. We expect CAPREIT's liquidity position to improve, at least over the short term, as the REIT has limited its capex to emergency repairs only.

Forecasts. We have increased our AFFO/unit estimates by ~4%. We expect ~9% earnings growth in 2020/2021. Our NAV/unit estimate is +2% to $55.50.

Q1/20 Conference Call. Management will host a conference call at 10:00 a.m. EST today (1-800-273-9672).

TD Investment Conclusion

We believe that as the largest, most liquid name in what we view as the most defensive asset class, CAPREIT remains a core REIT holding. We are maintaining our BUY rating and increasing our target price to $59.00 from $57.00.

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Canadian Apartment Properties REIT

(CAR.UN-T) C$47.28

Q1/20 Conference Call Highlights Event

Management held a conference call to discuss Q1/20 results. For details on the quarter and to see our forecast revisions, click here.

Impact: NEUTRAL

On the call, management noted that May rent collections are running in line with April, although it is too early to be definitive. It does expect government income support programs, which are now fully in effect, to provide additional stability to its tenants. Across its portfolio, it believes that the mark-to-market is only down marginally from what was reported in Q1 (~13%). Management is seeing market rents for value-add properties hold in better than rents at newer properties and believes its portfolio average rent levels (~$1,275/month) will help insulate the REIT from any significant MTM erosion as this crisis continues to play out. That said, there could be an impact on supply as some Airbnb rentals in the larger markets across the country convert to long-term rentals. Management also saw a slight uptick in turnover in April/May as some of its population of younger service workers have elected to move home, and noted that increased turnover is typical of any economic downturn. For 2020, it expects turnover to be slightly ahead of 2019 (19.0%). June and July (typically busier rental months) should provide a better indication as to how near-term fundamentals will play out.

On the cost side, CAPREIT has been seeing net cost savings during the pandemic as increased cleaning/PPE costs are being more than offset by lower repairs and maintenance as amenities are closed and R&M has been limited to emergency repairs only. Management does expect a catch up on some R&M expenses as the pandemic subsides and previously deferred work is completed.

On developments, management is seeing downward pressure on higher-end rents, which could impact development yields. That said, the REIT will continue to work towards getting entitlements for its projects to prepare them for permitting. At its two most advanced development projects, 100 Wellesley and 141 Davisville (both in Toronto), hearings have been delayed about a month