Canadian Apartment Properties REIT Is Great, but There’s 1 Big Problem

Canadian Apartment Properties REIT (TSX:CAR.UN) is a rare gem in the Canadian REIT world. But there’s one big problem with it today.

| More on:
The Motley Fool

There’s no denying Canadian Apartment Properties REIT’s (TSX:CAR.UN) high quality. It is a residential real estate investment trust (REIT) that owns apartments, townhouses, and land-lease communities in or near major urban centres in Canada.

The REIT is growth oriented. It has grown its suite count from 2,900 in 1997 to 47,559 today.

It has 50% of its properties in Ontario, and many see this as a positive. It also has 23% of its properties in Quebec, 10% in British Columbia, 6% in Alberta, and 5% in New Brunswick.

First-quarter results

Quarterly results only affect short-term prices. So, long-term investors can choose to ignore them. However, the results indicate the REIT’s health, so let’s take a look at it.

In the first quarter, Canadian Apartment’s operating revenues and net operating income (NOI) were up by almost 13%, and normalized funds from operations (FFO) rose almost 20%.

Additionally, Canadian Apartment’s NOI margin improved by 30 basis points to 58.1%, and its same property average monthly rent improved by 1.7%. Although its occupancy rate decreased slightly by 40 basis points, it still maintains a high occupancy rate of 98.2%.

On a per-unit basis, the REIT’s FFO only rose about 4%. As well, its same property NOI rose 2.6%.

Strong financial profile

Canadian Apartment maintains a strong financial profile with strong coverage ratios and debt levels that are in alignment with its peers.

At the end of the first quarter, Canadian Apartment reported the following:

  • Its debt-to-gross book value was 45.8%, 1.5% higher than in the same period in 2015
  • Its weighted average mortgage interest rate was 3.36%, 24 basis points lower than in the same period in 2015
  • Its weighted average term to maturity was 6.1 years
  • Its debt-service coverage ratio was 1.64 times, which was stronger than 2015’s 1.59 times
  • Its interest coverage ratio was three times, which was also stronger than 2015’s 2.82 times

Distribution

Over time, Canadian Apartment’s FFO per unit has been trending up, while its payout ratio has been declining.

So, at $31.80 per unit, the REIT’s 3.8% yield is rock solid, especially since its first-quarter payout ratio was only 76%.

The big problem: Too pricey

As noted before, Canadian Apartment’s FFO per unit only rose 4.1%. Don’t get me wrong. It’s still strong growth.

However, Canadian Apartment now trades at a multiple of 19.6. The REIT has never traded at this high a multiple before–even when it had higher FFO per-unit growth in previous years.

Simply put, Canadian Apartment is just too expensive as an investment today.

Conclusion

Canadian Apartment is one of the highest-quality residential REITs you can invest in. However, you should not buy shares today because they’re simply too pricey. If the shares fell to $26.80 or lower, the REIT would be a buy at a yield of 4.5% or higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned.

More on Dividend Stocks

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »

grow money, wealth build
Dividend Stocks

1 Growth Stock Down 24% to Buy Right Now

With this impressive growth stock trading more than 20% off its high, it's the perfect stock to buy right now…

Read more »

Dividend Stocks

What Should Investors Watch in Aecon Stock’s Earnings Report?

Aecon (TSX:ARE) stock has earnings coming out this week, and after disappointing fourth-quarter results, this is what investors should watch.

Read more »

Freight Train
Dividend Stocks

CNR Stock: Can the Top Stock Keep it Up?

CNR (TSX:CNR) stock has had a pretty crazy last few years, but after a strong fourth quarter, can the top…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

3 Stocks Ready for Dividend Hikes in 2024

These top TSX dividend stocks should boost their distributions this year.

Read more »

pipe metal texture inside
Dividend Stocks

TC Energy Stock: An Undervalued 7.8% Dividend Stock

TC Energy stock appears to be trading at a discount of about 20%.

Read more »

Man data analyze
Dividend Stocks

1 Dividend Stock Down 13% to Buy Right Now

Parkland (TSX:PKI) stock may be down by 13%, but shares are still way up in the last year. So, this…

Read more »

Senior Couple Walking With Pet Bulldog In Countryside
Dividend Stocks

TFSA 101: How Pensioners Can Earn $4,987.50 Per Year in Tax-Free Passive Income

Retirees can use this TFSA strategy to boost portfolio yield while reducing risk.

Read more »