Canadian Apartment Properties Real Estate Investment Trust (TSX: CAR.UN) is primarily engaged in the acquisition and leasing of multiunit residential rental properties located near major urban centers across Canada. The company's real estate portfolio is mainly composed of apartments and townhouses situated near public amenities.

Key Highlights

• Amplifying financial matrices: Despite the turmoiled environment, the Company maintained its pace and witnessed spirited performance across its operating revenue, NOI and NFFO in FY 2021. The Company is continuously working closely to carry this winning momentum and has witnessed higher scale on the sequential basis, which is appreciable.

• Started FY 2022 on a strong note: The business started FY 2022 on a high note, with revenue from investment properties increasing 8.4% to CAD 246.6 million in Q1 2022, up from CAD 227.5 million in Q1 2021. Net rental income surged by 4.4% to CAD 153.1 million, while total portfolio net Average Monthly Rents increased to CAD 1,159 from CAD 1,115 in the same reported period, compared to Q1 2021. These remarkable figures reflect the group's well-located and spacious rental suites, townhouses, and prefabricated housing communities, which are in high demand.

• Robust occupancy ratio: The trust mitigates its risk through demographic and geographic diversification by operating properties in the affordable, mid-tier, and luxury sectors. This diversification has aided the trust in boosting its occupancy rate on a sequential basis. Furthermore, its focus on the residential real estate sector is targeted at achieving steady year-over-year revenue increase in a portfolio with stable occupancy.

• Robust rent collection: Despite the hurdles posed by the pandemic's developing events, the trust collected 99% of its invoiced rents on YTD basis, consistent to its prior collection record, which is a key positive. Moreover, it is also keeping a careful eye on its tenant receivables.

• Robust increase in cash flow from operating activities: Cash flow from operations reached CAD 145.2 million in Q1 2022, up from CAD 123.3 million in Q1 2021. The increase in operational cash flows is primarily due to an increase in average monthly rent and an increase in occupancies compared to Q1 2021.

• Investing in affordable housing and value creation: The business recently completed the purchase of a 172-site Manufactured Housing Community ("MHC") in Red Deer, Alberta for CAD 16.5 million, utilizing existing liquidity. This property was fully occupied at the time of closing, which is a significant plus. In the future, the REIT will continue to diversify its residential portfolio, which would give the strength and security of its revenue streams, as well as an appealing return profile.
  

• Consistent dividend distribution: The REIT has a good dividend distribution track record and has grown its payout over the years, demonstrating stability and healthy cash flow creation. Recently it declared a monthly cash distribution of CAD 0.12083 per Unit, which will be paid on July 15, 2022. Furthermore, at the last closing price of CAD 44.36 on June 20, 2022, the company gave a dividend yield of 3.35%, which seemed reasonable given the present macroeconomic and interest rate environment.

Sector Update

The Canadian Real Estate Investment Trusts business is predicted to stay stable. Along with a lack of supply, immigration is an important factor. Canada continues to shine in terms of the excellent quality of immigrants it draws as a result of its educational system and work prospects. Furthermore, robust projected employment and population growth are likely to add to healthy demand.

Financial overview of Q1 2022 (In 000’s of CAD) 

Healthy revenues: The company’s revenue in Q1 2022 increased by 8.4% to CAD 246.6 million, compared with CAD 227.5 million in Q1 2021. An increase is attributable to the increases in monthly rents on turnovers and renewals. Moreover, the contributions from acquisitions further contributed to higher operating revenues for the total portfolio.

• Rise in operating expenses: in the reported period of Q1 2022, its operating expenses increased to CAD 93.4 million, against CAD 80.8 million in pcp, mainly due to rise in realty taxes and higher property operating cost.

• Increased net rental income: Primarily on the back of elevated revenue, the trust’s net rental income increased to CAD 153.1 million, against CAD 146.6 million in pcp.

• Softness net income: Due to above discussed rationales and higher fair value adjustment on investment properties and loss on non-controlling interest, the REIT’s net income fell to CAD 45.3 million in Q1 2022, against CAD 104.0 million in pcp.
  

Top-5 Shareholders 

The company’s top 5 shareholders hold around 16.38% of the total shareholding, where RBC Global Asset Management Inc. is the biggest shareholder, who owns 4.17% of total outstanding shares. Additionally, the company's institutional ownership stood at 38.53%. Higher institutional holding boosts the confidence in the mind of retail investors. 

Company Outlook

The trust will continue to follow its proven asset allocation approach. Its major goal is to increase the portfolio of value-add properties in the mid-tier category located in suburban regions, with a focus on future expansion in the Canadian apartment business. Additionally, the expanding development pipeline will offer future accretive growth. The management estimates that yearly occupancies can be maintained at 97%to 99%, allowing it to generate an annual NOI margin of 62% to 66% of operating revenues over the long run.

 Valuation Methodology (Illustrative): EV to EBITDA based

Risks associated with investment

The revenue and operating results depend significantly on the occupancy levels and rent collection; hence, the group is subject to general business risks. These risks include government regulation and oversight changes, consumer preferences changes, fluctuations in occupancy levels and business volumes, competition from other players, etc.

Stock recommendation

Following a great year in 2021, the REIT's expansion and outstanding operational results continued in Q1 2022. As the pandemic subsides, it is seeing a return to near-full occupancies, rising average monthly rents, and increased demand as Canadians increasingly look to its high-quality, well-located, and spacious rental suites, townhomes, and manufactured housing communities as affordable alternatives to the high cost of home ownership. Looking ahead, the group anticipates continued increase in its key performance benchmarks over the rest of the year, which is a significant positive.

Additionally, its expanding development pipeline will offer future accretive growth. The management estimates that yearly occupancies can be maintained at 97% to 99%, allowing it to generate an annual NOI margin of 62% to 66% of operating revenues over the long run.

Therefore, based on the above rationales and valuation, we recommend a "Buy" rating on the stock at the at the last closing price of CAD 44.36 as on June 20, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on June 20, 2022). Source: REFINITIV, Analysis by Kalkine Group 

*Recommendation is valid on June 21, 2022, price as well. 

Technical Analysis Summary

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