Though he emphasized the operating outlook for its first quarter of fiscal 2021 is being “challenged” by the latest round of COVID-19-related restrictions, Raymond James analyst Brad Sturges upgraded Canadian Apartment Properties REIT to “strong buy” from “outperform” on Friday in the wake of recent U.S. investor meetings with its senior management team. “As the 2nd wave proliferates through many Canadian jurisdictions, understandably, leasing activity could be slower than usual in what is a typically slow leasing season in 1Q21, particularly in the urban city core locations in CAPREIT’s larger markets,” he said. “As a result, the potential exists for modest increases in the REIT’s average rental apartment vacancy rates (still below 3 per cent), and rising bad debt expense (still below 1 per cent). CAPREIT’s mark-to-market (MTM) opportunities in 1Q21 could look fairly muted due to the fairly low level of leasing demand expected in the very short term. That said, we expect that CAPREIT’s 1Q21 earnings results could mark the trough of the REIT’s organic growth degradation year-over-year.”
However, Mr. Sturges thinks a recovery in Canadian multifamily leasing demand following the first quarter “looks promising” as vaccine distribution ramps up.
“The dissemination of COVID-19 vaccines could drive a return to population mobility, a key multifamily demand driver at some point in 2021,” he said. “While the pandemic has momentarily hit the pause button on foreign immigration in 2020, it is possible that a growing backlog of future foreign immigration in Canada could exceed the Canadian Government’s recently increased targets of 400k annually between 2021 and 2023 to potentially over 600k people, according to CAPREIT. Also, the return of foreign students (totaling 640k in 2019) in Canada may be a further boost to multifamily demand.”
He raised his target for CAPREIT units to $61 from $58.75. The average is $57.23.
“We are upgrading CAPREIT to Strong Buy, from Outperform, to reflect its balance sheet strength, the REIT’s above-average 2021E AFFO/unit growth profile relative to its Canadian apartment REIT peers, and the attractive risk-reward profile for its Canadian portfolio that is weighted towards value-add, suburban multifamily properties in the mid to high mid-tier rental segment, which has demonstrated exceptional resiliency during COVID-19,” he said. “As the largest and most liquid Canadian multifamily REIT, it is also possible that CAPREIT’s units could recover relatively faster than its peers by capturing incrementally greater fund flows into Canadian REITs.”