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

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Canadian Apartment Properties REIT

(CAR.UN-T) C$47.31

Delivering Growth and Stability in Times of Uncertainty Event

Impact: NEUTRAL

CAPREIT delivered very solid operating results in the second full quarter since the onset of the pandemic, including +6% y/y FFO/unit growth, +3.5% SPNOI growth in its Canadian residential portfolio and 7% gains on Q3 turns. October occupancy is only down 80bps from March 31 to 97.9%, which we believe is as much a function of the difficulty of leasing during the pandemic than it is any deterioration in demand fundamentals. The REITs bad debts also declined to 0.3% of revenues in Q3, following an uptick to 1.1% in Q2 (0.6% YTD). This underscores our view that while there is some pressure on Canadian multi-residential fundamentals, particularly on newer/downtown properties, CAPREIT is well-insulated owing to the large proportion of suburban assets in its portfolio, as well as its affordable average rents of $1.60/sf. We remain very confident that once key demand drivers such as immigration and in-person post-secondary classes, fundamentals will quickly approach pre-pandemic levels. We are also encouraged by the ongoing cap rate compression we are seeing and believe that should drive continued fair value gains. Acquisitions. Management noted there continues to be an uptick in deal flow in recent months, however, it expects volumes to revert to normalized levels in 2021. We have included $150 million of unannounced acquisitions in Q4/20 and $250/$200 million in 2021/22. Valuation. Even with the 6% gain yesterday, the stock still stands out as very attractive at a 16% discount to our revised NAV versus its long- term average of trading at NAV. We think it should trade close to the long-term average given the stability in the fundamentals, continued expected NAV growth, accretive acquisition opportunities, and low leverage/payout ratios at 36%/70%. Forecast. Our AFFO/unit estimates are largely unchanged. We expect ~6% average annual AFFO/unit growth through 2022. Our NAV/unit estimate is +1% to $56.20.

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. We are maintaining our ACTION LIST BUY recommendation and increasing our target price to $60.00.