Buy CAP REIT for stability and income

Among the Canadian real estate investment trusts monitored by the Money Reporter, CAP REIT’s defensive qualities should appeal to risk averse investors. Its properties are mainly located in or near major urban centres across Canada. Its 4.2 per cent yield reflects its high price which in return reflects the economic stability of the areas in which it operates.

Canadian real estate investment trusts (REITs), which were widely expected to underperform the market in 2015 due to rising interest rates, have performed relatively well lately. In 2015, the S&P/TSX Capped REIT Index’s total return was negative five per cent, versus a nine per cent decline for the S&P/TSX Composite Index. And so far this year, REITs continue to outperform the market.

Among the risks that REITs will face in 2016, however, is the fallout from tumbling oil prices. This will be particularly true of those REITs that have considerable exposure to Alberta, or those that operate in more economically sensitive areas of the economy such as the retail space. By comparison, REITs that do business in more stable areas, such as apartment rentals, may weather economic difficulties better than their cyclically-oriented counterparts.

CAP REIT owns multi-unit residential properties

Canadian Apartment Properties Real Estate Investment Trust (CAP REIT) (TSX─CAR.UN) is one such REIT. It’s one of Canada’s largest residential landlords, serving over 46,000 families across the country. It owns and operates a portfolio of multi-unit residential rental properties, including apartments, townhomes and manufactured home communities principally located in and near major urban centres across Canada.

CAP REIT has enjoyed solid growth lately. For the nine months ended Sept. 30, 2015, CAP REIT’s normalized funds from operations (NFFO) rose 7.7 per cent to $147.2 million from $136.7 million in the same period of 2014. NFFO per share rose 1.8 per cent to $1.26 from $1.24, on more shares outstanding.

The results primarily reflected the contribution from acquisitions, stable occupancies and strong average monthly rents. Occupancies for properties owned for more than a year remained stable at 98.2 per cent, while same-property average monthly rents increased by 1.7 per cent.

The NFFO payout ratio, or the distribution as a percentage of NFFO, was 72.5 per cent, up slightly from 71.5 per cent a year earlier. This is at the lower end of the 70 to 80 per cent range that management has targeted for the long term.

Despite global economic uncertainty, CAP REIT believes the multi-unit residential rental business will continue to improve in most of the markets in which it operates. It foresees modest increases in rents and stable occupancy rates.

The REIT trades at about 16.6 times the $1.75 a unit that CAP REIT will likely earn in 2016. That’s well above the average multiple of 11.8 for similar REITs. But we believe the premium valuation is worth it in view of the stable, low-risk nature of CAP REIT’s business.

The REIT currently pays an annual distribution of $1.22 a unit, which yields 4.2 per cent. Buy.

 

Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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