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When Is the Best Time to Buy This Quality REIT?

Real estate investment trusts (REITs) are viewed as a source of stable income. At the same time, they offer diversification in the real estate market. If you pick REITs, which have a quality portfolio of properties, you can pretty much sit back and enjoy monthly rental income without having to lift a finger.

However, buying REITs is like buying stocks. You will get better returns and reduce your investment risk if you don’t overpay for shares.

First, I will discuss why Canadian Apartment Properties REIT (TSX:CAR.UN), also known as CAPREIT, is of high quality. Second, I will talk about the best time to buy it and what a reasonable price to pay for it is in the near term.

Why is CAPREIT a quality REIT?

Not only is CAPREIT in a recession-resilient class of residential real estate, but it also has its properties in quality locations. It maintains high occupancies and growing margins in its three largest net operating income (NOI) contributing geographies: Ontario, Quebec, and British Columbia. They contribute almost 72% of its NOI. Additionally, the REIT has little exposure to resource-based markets.

Specifically, the REIT earns about 52% of its NOI from Ontario, about 20% from Quebec, 12% from British Columbia, and only 6% from Alberta.

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At the end of 2016, CAPREIT’s Ontario portfolio had a high occupancy rate of 99.5% with an average monthly rent of $1,214, which was about 3.6% higher than at the end of 2015.

Similarly, its Quebec portfolio had an occupancy rate of 97.4% with an average monthly rent of $892, which was about 3.8% higher. Its British Columbia portfolio had an impressive occupancy rate of 99.8% with an average monthly rent of $1,124, which was about 5% higher.

CAPREIT saw NOI-margin increases in those three provinces. Although CAPREIT increased the occupancy of its Alberta portfolio by 5.5% to 95.7%, it was at the expense of lowering its average monthly rents by nearly 5.8%. Thankfully, Alberta only makes up a small part of its portfolio.

When is it the best time to buy the REIT?

Because of CAPREIT’s quality and stability, the REIT trades at a premium compared to its peer group.

At about $33.60 per unit, CAPREIT trades at a multiple of 19, which is quite expensive for its growth expectation of roughly keeping pace with inflation.

CAPREIT would be reasonably valued if it fell to the $27-29 level, at which time the company would be trading at a multiple of about 15-16.

The best time to buy CAPREIT will probably be during a market crash. In the last crash in 2009, CAPREIT was priced at an attractive multiple of 10. Since then, the REIT has returned annualized returns of 17%.

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

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