DBRS Confirms CAP REIT at STA-3 (high)

DBRS has today confirmed the Stability Rating of Canadian Apartment Properties REIT (CAP or the Trust) at STA-3 (high). The rating confirmation reflects increasing operating income driven by improving multi-family residential fundamentals in the Trust’s markets over the course of the past year. Operating performance has also benefited from CAP’s focus on upgrading the quality of its multi-family residential portfolio through building improvements and by acquiring properties in high barrier to entry markets (Greater Toronto Area (GTA) and Greater Vancouver Regional District) while disposing of non-core assets located in markets with lower rental rates (Québec and southwestern Ontario).

CAP maintained strong occupancy levels and achieved healthy rental rate growth across each of its asset segments and most of its markets in 2011. Higher cash flow also resulted in modestly improved financial flexibility. Increased capital investment (acquisitions and growth capital expenditures) was mainly funded by debt during the nine-month period ended September 30, 2011. An equity issuance subsequent to Q3 2011 of approximately $151.7 million has lowered the Trust’s debt-to-gross book value of assets ratio to a level more appropriate for the current rating category (51.3% from 55.4% as at Q3 2011). CAP’s EBITDA interest coverage also improved, due to higher operating income and lower interest rates on refinanced debt.

Although CAP continues to achieve improving operating and financial metrics, its metrics remain commensurate with the STA-3 (high) rating category and the rating continues to be limited by: (1) above-average concentration in the GTA; (2) exposure to substantial condominium development in core markets; and (3) a debt structure that consists entirely of secured debt. The following factors continue to underpin CAP’s STA-3 (high) rating: (1) focus on the relatively more stable multi-residential segment; (2) attractive property locations in Toronto with several properties located along the Toronto Transit Commission corridor; and (3) good presence in Canada’s largest residential rental markets, which generally have more stable economies.

Going forward, DBRS expects that CAP will continue to achieve reasonable same portfolio net operating income (NOI) growth in 2012, driven by higher average rental rates from government guideline increases above 2011 levels, recent building investments and cost saving initiatives. While DBRS expects rental rates to improve, a significant amount of new condominium supply in the GTA market (49.5% of CAP’s portfolio) will likely moderate the pace of growth over the next several years. Over the medium term, CAP will likely continue to grow its portfolio by acquiring properties in underrepresented markets and new markets across Canada, which should provide greater stability to the Trust’s earnings profile over time.

In terms of financial profile, DBRS expects cash flow from operations and cash available for distribution to continue to improve, along with comparable operating income. For the 2012 to 2014 period, CAP’s building improvement budget is $81 million to $91 million ($38 million of which is expected in 2012, declining to $13.5 million by 2014), and management has also indicated that it intends to continue growing through acquisitions. DBRS expects these investments to be financed with incremental debt while CAP maintains its debt-to-gross book value in the 50% to 55% range (under IFRS), which is an appropriate level for the current rating category. DBRS expects coverage ratios to continue to improve with cash flow growth and positive refinancing activity in 2012.

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

The applicable methodologies are Rating Real Estate Entities and Rating Income Funds, which can be found on our website under Methodologies.

This rating did not include issuer participation and is based solely on publicly available information.