CAP REIT offers the best of both worlds with its defensiveness and solid growth potential.
After a year in which real estate stocks have been battered by the COVID-19 pandemic, there’s reason for optimism about the year ahead. That’s because a number of tailwinds are likely to develop that will be favourable for real estate equity prices.
For one thing, the Canadian economy should recover as the coronavirus is brought to bay. This, in turn, should be positive for property fundamentals and real estate companies’ earnings.
Then too, though there’s concern about rising interest rates these days, central banks seem committed to accommodative policies that should keep rates relatively low. This bodes well for the balance sheets of real estate companies. And, as it stands, many such companies have solid liquidity positions that have let them weather the economic downturn and have placed them in a good position to exploit an economic recovery.
A good blend of growth and defence
One real estate business that’s particularly well placed to exploit an economic recovery is Canadian Apartment Properties Real Estate Investment Trust (TSX—CAR.UN), or CAP REIT for short. CAP REIT is Canada’s largest publicly-traded provider of rental housing. It currently owns or has interests in, and manages, about 67,500 residential apartment suites, townhomes and manufactured housing communities in Canada, the Netherlands and Ireland.
CAP REIT has a good blend of growth potential and defensive characteristics. After all, individuals place a high priority on keeping a roof over their head. And most renters, with the help of government aid, managed to pay their rent during the pandemic. The Canadian Housing and Mortgage Corp. has found that 6.1 per cent of the country’s apartment units were in arrears in its 2020 Rental Market Report.
Despite the fallout from COVID-19, then, CAP REIT actually performed well overall last year. Normalized funds from operations, or NFFO, rose 14.7 per cent in the year ended Dec. 31, 2020, to $389.0 million from $339.1 million a year earlier. NFFO per unit rose 6.1 per cent, to $2.27 from $2.14, on more units outstanding. The increase in NFFO was primarily due to the contribution from acquisitions and higher net operating income for properties owned prior to Dec. 31, 2018.
Immigration boosts demand for rental housing
Meanwhile, CAP REIT is particularly well placed to benefit from the tailwinds of economic recovery. One of these tailwinds will be an increase in immigrants looking to rent as the federal government moves to make up for the 2020 immigration shortfall. Also, as owning a home becomes less affordable in a hotter economy, renting becomes a more attractive option. And younger people who moved in with their parents during the pandemic may soon be looking for apartments to rent again.
The units trade at a high multiple of CAP REIT’s projected NFFO of $2.37 a unit. This high multiple reflects the REIT’s lower risk and stable cash flow. The annual distribution of $1.38 a unit yields 2.6 per cent. CAP REIT is a buy for growth and some income.
This is an edited version of an article that was originally published for subscribers in the April 2, 2021, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.
Money Reporter, MPL Communications Inc.
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