Residential real estate investment trusts (REITs) are generally viewed as stable investments because everyone needs a place to live.
However, it’s not necessarily true that all stocks in the asset class are stable. The location of the properties plays an essential role, as we’ll see by comparing Canadian Apartment Properties REIT (TSX: CAR.UN) and Boardwalk REIT (TSX: BEI.UN).
Canadian Apartment Properties REIT
Canadian Apartment Properties, also known as CAPREIT, is among the highest-quality residential REITs. It maintains a +98% occupancy rate with growing average monthly rents (AMR).
Its diversified portfolio consists of 49,073 units, including 42,622 residential suites and 31 manufactured home communities comprised of 6,451 land lease sites.
Comparing Q1 2017 to Q1 2016, Alberta is the only province in which CAPREIT experienced a decline both in occupancy and AMR. Additionally, Alberta only contributed about 5.5% to its net operating income (NOI) in Q1.
CAPREIT’s other locations remained strong. For the quarter, it generated 53.6% of its NOI in Ontario with a 99.4% occupancy and AMR of $1,219 and 17.9% of its NOI in Quebec with a 97.4% occupancy and AMR of $894.
If you combine CAPREIT’s strong portfolio with its sustainable payout ratio of about 75%, its distribution is safe.
Boardwalk REIT
Boardwalk’s 2016 results were disappointing as funds from operations (FFO) per unit declined 20%.
The REIT continues to struggle with a large concentration in Alberta (about 60% of its portfolio).
In fact, in Q1, management revised its 2017 FFO per unit target range downward by 11.6% to $2.30-2.65. As a result, its share price continues to be under pressure.
If its monthly distribution per unit is maintained for the year, the guidance suggests the payout ratio will be 85-98% this year.
Comparing CAPREIT and Boardwalk
At about $33.90 per unit, CAPREIT offers a nearly 3.8% yield and trades at an estimated 2017 multiple of 17.7. So, if you want to own the quality shares, you’ll have to pay up for them.
At about $48.80 per unit, Boardwalk offers a 4.6% yield and trades at a forecast 2017 multiple of 19.9. In other words, it’s more expensive than CAPREIT on a forward basis.
That said, Boardwalk could be a value investment for patient investors if Alberta turns around and the REIT’s FFO per unit rebounds. At the end of Q1, its net asset value (NAV) per unit (including cash) was $62.54, which implies it’s trading at a 22% discount.
Which residential REIT should you buy today?
CAPREIT is the stable and quality pick. The obvious downside is that it trades at a premium. Patient investors can consider building a position on dips for a better value.
Boardwalk is a more cyclical stock due to its big exposure to Alberta. If you believe energy prices will improve and Boardwalk will eventually turn around, you can consider the shares, which are trading at a meaningful discount to its NAV.
