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The thinking goes like this: people need to live somewhere even during a recession, so apartment REITs are therefore recession-proof. It’s a fairly common sense assumption, but does it hold water as an investment rule? Today we’ll take a look at two of the best apartment REITs on the TSX index to see just how suitable they may be for an investor looking to get defensive with their stocks.
Northview Apartment REIT (TSX:NVU.UN)
Representing a spread of affordable properties across Canada, this apartment REIT moves in line with the TSX index with a beta of 0.96. Selling at $27.16 with a fair value of $41.73, this stock has the ability to grow by 35%. It’s also trading at book price with a price to earnings ratio of 6.1, underscoring clear undervaluation. In short, Northview Apartment REIT is defensive, cheap, with room to grow.
However, with a slightly negative estimated outlook in terms of earnings, is this stock worth the outlay? There’s some inherent risk here, with a balance sheet let down by an increasing level of debt that has climbing from 82.6% to 139.9%, and is not well covered by operating cash flow. In terms of performance, its past-year earnings growth of 7.6% was about half the Canadian REIT average.
However, there are three good reasons to buy Northview Apartment REIT (in addition to its defensive nature and attractive share price). First, its five-year average past earnings growth of 34.4% beat the industry average of 24.9% for the same period; second, its past-year return on equity of 16% is also acceptable, if not significantly high; and third, Northview Apartment REIT’s 6% dividend yield is sizeable enough to consider this real estate ticker for a long-term position.
Boardwalk REIT (TSX:BEI.UN)
This particular REIT might be one for strong oil bulls. How so? With much of its asset portfolio physically located in Alberta and Saskatchewan, Boardwalk REIT caters to resource-driven localities, and as such has a certain vulnerability to the oil and gas sector.
However, if that aligns with your investment tastes, Boardwalk REIT’s share price has fallen sufficiently over the years to the point that it is now valued at exactly its fair value with attractively low market fundamentals. That descent has been gradual enough to earn a beta of 0.37 relative to the market, which also indicates a share price well-insulated against the background volatility of the TSX index.
While Boardwalk REIT insiders have only sold shares in the past three months, it does have a few things going for it: its one-year past earnings growth of 6.3% is positive, if not outstanding, while a modest dividend yield of 2.34% is paired with a 21.4% expected increase in earnings that may appeal to a low-risk growth investor.
The bottom line
Should Canadian investors look to stocks like Northview Apartment REIT to add defensiveness to a TSX index portfolio? In theory, yes – however, apartment REITs in resource areas are vulnerable to changes in those industries, while any REIT that carries high debt should probably be avoided. However, while both apartment REITs listed here have similar issues with debt, their dividends may appeal to investors looking for real estate exposure.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned.