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

TD Report

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Canadian Apartment Properties REIT

(CAR.UN-T) C$57.05

Fundamentals Remain on Track for H2/21 Recovery Event

Forecast update following Q1/21 results. For our initial thoughts on the quarter click here.

Impact: NEUTRAL

Management was bullish on this morning's conference call and believes that it has a clear view of the recovery trajectory, noting that during the pandemic, population continued to grow, while supply was largely unchanged. The drop off in fundamentals since the pandemic is being attributed to household consolidation (i.e. students/ young professionals temporarily moving home), which management believes should reverse swiftly as the pandemic subsides. Further, housing affordability has continued to decrease. Management anticipates these two factors will drive a near- term rebound in occupancy, as well as pre-pandemic levels of rent growth. A resumption in immigration should also benefit fundamentals. Current vacancy is largely concentrated in just 10 buildings, half of which are student focused. The remainder are in downtown cores. We expect these types of assets to see the most pronounced rebounds in occupancy. With the vaccine program progressing well, our conviction for an H2/21 recovery has increased.

Acquisitions. The REIT did not complete any Q1 acquisitions, however, it acquired a four-building portfolio in Oshawa subsequent to the quarter in an off-market deal. Market expectations remain that there are several larger portfolios that will likely transact in H2/21. Given the amount of both public and private capital chasing the asset class, we believe the transaction prices will likely drive additional cap rate compression and IFRS gains over the balance of the year.

Valuation Gap Versus U.S. Peers Persists. The U.S. apartment peers have seen valuations recover to 4% above their February 20, 2020 valuations, while CAPREIT is still 8% below. Given the increasing visibility we have towards a recovery in Canadian fundamentals, we view this gap as unjustified and expect it to narrow (Exhibit 7).

Forecast. Our AFFO/unit estimates declined ~3% largely on higher G&A assumptions. Our $57.30 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 ACTION LIST BUY recommendation and increasing our target price to $67.00.