DBRS Confirms Canadian Apartment Properties Real Estate Investment Trust at STA-3 (high)

DBRS has today confirmed the stability rating of Canadian Apartment Properties Real Estate Investment Trust (CAP or the Trust) at STA-3 (high). CAP continues to maintain a sound stability profile underpinned by reasonable credit metrics, good access to low cost Canada Mortgage and Housing Corporation (CMHC)-insured mortgages and a stable portfolio of multi-family residential properties that are well located in several of Canada’s strongest residential rental markets (the Greater Toronto Area (GTA) accounts for 49% of the total portfolio, Montréal (8.8%) and Vancouver (4.5%)), which generally have stable economies and large population bases.

The rating confirmation reflects the fact that CAP’s multi-family residential portfolio continues to perform reasonably well supported by strong occupancy levels (98.3% as at Q3 2009) and higher average rental rates in each segment of the portfolio and geographic region with the exception of its Calgary market. Going forward, DBRS however expects CAP’s same portfolio net operating income (NOI) growth to decline modestly in 2010, driven mainly by higher utility costs and limited opportunity to achieve higher rental rates in the Trust’s core markets. DBRS notes that a significant amount of new condominium supply in the Toronto market could put pressure on rental rates across all of the Trust’s rental segments.

In addition, falling occupancy and modestly lower market rental rates in CAP’s Alberta markets could limit any growth in the Trust’s western Canadian portfolio. Despite potential softness in the near term, CAP is expected to resume property acquisitions in 2010, which should increase overall cash flow levels. The Trust’s management has indicated that they intend to acquire a target of 1,500-2,000 rental suites in 2010. DBRS notes that the Trust’s significant five-year capital spending on building improvements and cost-saving initiatives, such as boiler replacements and energy-efficient lighting systems should also lower operating costs going forward.

In terms of financial profile, CAP’s financial flexibility is limited by the Trust’s negative free cash flow position and high DBRS-adjusted payout ratio of 105.6%. While CAP’s payout ratio is expected to remain above 100% in 2010, DBRS takes comfort in the fact that the Trust has an active dividend reinvestment program (DRIP) and good access to CMHC-insured mortgages to fund its distribution shortfall. DBRS also believes that this source of financing significantly reduces the Trust’s exposure to refinancing risk when compared with other real estate segments that primarily use conventional mortgages. In the absence of an equity issuance, DBRS expects that the Trust’s capital spending program will likely be financed with debt proceeds and that debt will increase in the near term; however CAP’s debt-to-gross book value ratio will likely be below our expectation of 65%, which is reflected in the current rating category. DBRS also expects coverage ratios to remain near current levels as any improvement in EBITDA and/or positive refinancing activity will likely be limited by additional debt in 2010.

Overall, DBRS expects CAP’s stability profile to remain stable and believes the following strengths will limit and any potential for downward pressure on operating and financial metrics in 2010. These include: (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 condo 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) Despite the current challenging economic climate and low interest rate environment, DBRS expects that an increasing interest rate environment and improving employment conditions could help to improve apartment fundamentals over the medium term.

Note:
All figures are in Canadian dollars unless otherwise noted.

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

This is a Corporate rating.

This rating is based on public information.