DBRS Confirms Canadian Apartment Properties Real Estate Investment Trust at BBB (low), Stable Trend

DBRS has today confirmed the Issuer Rating of Canadian Apartment Properties Real Estate Investment Trust (CAP or the Trust) at BBB (low) with a Stable trend. CAP’s credit profile remains stable and reflects the fact that the Trust experienced growth in cash flow levels and improving credit metrics during 2008, supported by strong occupancy levels (98.5%) and higher average rental rates in each segment of the portfolio and geographic region. CAP has also enhanced the quality of its portfolio through non-core property dispositions while focusing on large diverse Canadian markets, particularly the Greater Toronto Area (GTA) (accounts for 49.1% of NOI).

The rating confirmation also reflects that CAP has ample liquidity with undrawn amounts on credit facilities totaling approximately $139 million and that the Trust continues to have good access to favourable financing rates on CMHC-insured financing. As a result, DBRS believes refinancing risk on the reasonable amount of debt maturing in 2009 is relatively low and that this source of financing continues to positively differentiate CAP from other real estate segments in terms of the availability of capital, particularly during the current credit environment.

Despite the modest improvement in operating and financial metrics, the Issuer Rating confirmation continues to factor in the following challenges:

(1) CAP remains weak for diversification and has significant exposure to a substantial amount of condominium construction in the Greater Toronto Area (GTA) market that is scheduled for completion during 2009.

(2) CAP’s payout ratio (DBRS-adjusted for maintenance capital expenditures) of 104.7% for YE Q4 2008 remains at the higher end compared to similarly rated income trusts. However, DBRS believes this level to be manageable at the current per unit distribution of $1.08 and expects the payout ratio to continue to slowly recover throughout 2009 with sound operating metrics, potentially easing operating costs and positive refinancing activity in the near term.

Overall, DBRS believes these concerns are manageable, and the rating continues to be supported by the following factors, which are the basis of the rating confirmation:

(1) CAP has key property locations in Toronto with several properties located along the Toronto Transit Commission (TTC) corridor. DBRS believes these locations will be less affected by new rental supply created by condominium unit completions that are offered for rent.

(2) CAP has a good presence in several of Canada’s strongest residential rental markets (Toronto, Montréal and Vancouver), which generally have more stable economies that are not dependent on a single industry (i.e., the auto sector) and have larger population bases. These markets are also attractive to new immigrants who often choose to rent their first housing.

(3) In light of the current economic downturn, home ownership demand will likely soften until prospects for future employment growth improve and although home-ownership affordability has modestly improved, the spread between owning and renting continues to remain wide. Going forward, DBRS expects that these factors could lead to a slight improvement in CAP’s suite-rental rates and limit any downward pressure on operating metrics in 2009.

Notes:
All figures are in Canadian dollars unless otherwise noted.
This rating is based on public information.

The applicable methodology is Rating Real Estate, which can be found on our website under Methodologies.

This is a Corporate rating.