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. Most of CAPREIT's holdings are aimed towards the mid-tier and luxury markets in terms of demographic segments. The company derives nearly all its income in the form of rental revenue from leasing its properties to tenants. 

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.

Source: Company Filing, Analysis by Kalkine Group 

• Escalating 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.

Source: REFINITIV, Analysis by Kalkine Group 

• Robust rent collection: Despite the hurdles posed by the pandemic's developing events, the trust collected 99% of its FY 2021 invoiced rents, exceeding its prior collection record. It is also keeping a careful eye on its tenant receivables.
  

• Portfolio growth via acquisitions: For a total acquisition price of CAD 1,053.5 million in 2021, the trust bought 3,744 residential suites and manufactured housing community (MHC) sites in its target regions. At the conclusion of the year, the company's portfolio has 66,165 suites and sites, with a book value of CAD 17.1 billion, retaining its position as Canada's biggest multi-family residential REIT.

• Industry beating margins: The Company kept up the pace and had strong results throughout its operating margin matrix. Furthermore, the fair value adjustment of investment properties enabled them to outperform the industry median operating margin and net margin in FY 2021, demonstrating the company's competitive edge within the sector.

Source: REFINITIV, Analysis by Kalkine Group 

• Expands presence in strong British Columbia market: The organization recently finalized the acquisition of a six-story, 59-suite apartment and townhouse property in downtown Kelowna, British Columbia. The property, completed in the spring of 2021, was acquired for CAD 29.5 million. Occupancy was 94.9% at closing, with three townhomes previously used as short-term rentals vacant on closing. Given the property's outstanding quality and location, management anticipates that these units will be rented fast.

• 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 April 18, 2022. Furthermore, at the last closing price of CAD 53.20 on April 4, 2022, the company gave a dividend yield of 2.69%, which seemed reasonable given the present macroeconomic and interest rate environment.

Source: REFINITIV, Analysis by Kalkine Group

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 FY 2021 in 000 of CAD

Source: Company Reports

• Healthy revenues: The company’s revenue for Fiscal 2021 increased by 6% to CAD 933.1 million, compared with CAD 882.6 million in Fiscal 2020. 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 FY 2021, its operating expenses increased to CAD 323.1 million, against CAD 304.4 million in pcp, mainly due to rise in realty taxes and higher property operating cost.

• Increased net rental income: Primarily in the back of elevated revenue, the trust’s net rental income increased to CAD 609.9 million, against CAD 578.1 million in pcp.

• Elevated net income: Due to above discussed rationales and higher fair value adjustment on investment properties, the REIT’s net income swelled to CAD 1,392.7 million in FY 2021, against CAD 925.9 million in pcp.
  

Top-5 Shareholders 

The company’s top 5 shareholders hold around 15.74% of the total shareholding, where RBC Global Asset Management Inc. is the biggest shareholder, who owns 3.57% of total outstanding shares. Additionally, the company's institutional ownership stood at 36.0%. Higher institutional holding boosts the confidence in the mind of retail investors.

Source: REFINITIV, Analysis by Kalkine Group 

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 Sales based Valuation Metrics 

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

Despite the pandemic, the REIT had another strong year, maintaining its pace and seeing spirited performance across its operational revenue, NOI, and NFFO in FY 2021. It is always working carefully to maintain this winning momentum and has seen larger scale on a sequential basis, which is commendable. The proactive and close resident interactions derived 99% of rent collection, which is a significant plus.

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 53.20 as on April 04, 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 April 04, 2022). Source: REFINITIV, Analysis by Kalkine Group

 Technical Analysis Summary

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