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

TD 2

[retiredcf]

Canadian Apartment Properties REIT

(CAR.UN-T) C$54.65

Looking Through Q4 Miss; Outlook for 2022 Remains Bullish

Event

Forecast update. For our initial thoughts on the quarter click here.

Impact: NEUTRAL

Despite the earnings miss, we believe Q4 demonstrated the ongoing recovery in demand fundamentals. We were encouraged by the growth in rent uplifts on renewals, which reached 8.6%, the highest level since the pandemic began, although still well off the mid-teen levels achieved pre-pandemic. The positive momentum has continued into 2022, with rental spreads hitting low-double digits, driven by strength in Halifax, Ontario, and B.C. Management is confident that the return of young professionals/students combined with increased immigration levels will be a key catalyst for pushing rent lifts on turnover above pre- pandemic levels. The REIT reported an uptick in both in-person tours and online visits. We also expect CAPREIT to benefit from the burn off of incentives, although this will occur gradually over 2022 (December was lowest month for incentive granting in 2021). There has also been an uptick in turnover, which is a key component of driving rent growth.

Q4 operating costs were +9.0% on same-property basis. The increase was mostly attributed to the timing of R&M expenses, as lower restrictions for most of Q4 allowed the REIT to "catch-up" on projects that had been delayed during the pandemic. Management expects R&M to normalize in 2022. On a full-year basis, same-property operating costs were +2.1% y/y. Looking ahead, management noted that heavy snowfall during Q1/22 will impact margins. On the utilities front, ~85% of its natural gas exposure is hedged. The only inflationary pressures are expected to be on property-level wages, which should not be overly material for the REIT as a whole. Our 2022F SPNOI forecast of 3.5%, reflects our expectations for improving rental demand and a relatively modest impact from inflation.

Forecast. Our AFFO/unit estimates decline ~2%. We expect 6% average AFFO/unit growth in 2022/23. Our $61.90 NAV/unit estimate is +1%.

TD Investment Conclusion

As the largest, most liquid name in what we see as the most defensive asset class, we view CAPREIT as a core REIT holding. We are maintaining our BUY rating but lowering our target price to $70.00 on the back of our revised AFFO estimates.