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

TD comments

[incomedreamer11]

Impact: SLIGHTLY NEGATIVE

Our lower estimates reflect the higher current interest rate environment as we believe improving demand fundamentals will allow revenue to more or less keep pace with inflationary cost pressures.

Q1 rental uplifts on turnover increased to 10.2%, representing the highest level since the pandemic began and a fourth consecutive quarterly improvement. Accelerating immigration, a full resumption of in person classes at universities, and a more fulsome return to the office should all be positive catalysts for apartment demand. We expect turnover uplifts to increase to the mid-teens over the course of 2022. Assuming 20% turnover, that would represent revenue growth of 4%+ on an annualized basis and allow the REIT to absorb cost increases of ~10% while maintaining positive SPNOI growth (Q1 SP expenses were +11%).

Our forecast has 2.5% SPNOI growth for 2022 and 5.0% for 2023. Capital allocation. Management noted that it expects to become active on its NCIB program, which we view as a good use of capital at the current trading price. We believe that the REIT will use net equity proceeds from dispositions to buy back stock (the REIT recently closed on a $56mm sale in Toronto). Management also noted that it has an active acquisition pipeline - largely newly built properties that it believes it can acquire accretively (likely with the assumption of low in place financing).

Compelling Valuation. CAP REIT is trading at a 22% discount to our revised $62.10 NAV estimate. The REIT has only traded at 20% discounts to NAV for brief periods during the GFC and the beginning of the pandemic. Over the last 20 years, it has traded at 20%+ discounts to NAV only 2% of the time. Forecast. Our 2022/23 AFFO/unit estimates decline ~5%/7%. We expect 2% average AFFO/unit growth in 2022/23.

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 ACTION LIST BUY rating but lowering our target price to $66.00 on the back of our revised AFFO estimates.