1 Canadian Stock Down 23% to Buy Now for Lifelong Income

A 23% pullback has put Canada’s biggest apartment REIT on sale, letting investors collect monthly rent-like income without owning a single unit.

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Key Points
  • CAPREIT owns about 45,600 suites, and occupancy plus modest rent growth are still supporting cash flow.
  • Its monthly distribution looks well covered, using about 65% of funds from operations.
  • The unit price trades well below reported net asset value, but debt and softer rental markets mean buy gradually.

A $1,726 monthly rent payment feels very different when it lands in an investor’s portfolio instead of leaving a tenant’s bank account. Owning thousands of rental suites through one investment can turn Canada’s housing costs into recurring retirement income, and one major landlord now trades about 23% below its 52-week high.

The decline reflects a rental market that no longer looks quite so frantic. Canada Mortgage and Housing Corporation (CMHC) reports that new supply, rising vacancies, and softer asking rents are bringing many major cities closer to balanced conditions.

Those changes create pressure for landlords, particularly owners of expensive new buildings competing for tenants. Older stabilized properties remain tighter, however, while rents paid by existing tenants continue rising. This creates a more promising backdrop for established operators.

A woman stands on an apartment balcony in a city

Source: Getty Images

Income, without the property

A real estate investment trust (REIT) collects rent, pays operating expenses, and distributes part of the remaining cash to shareholders. Investors gain property exposure without handling repairs, tenant calls, or the mysterious plumbing emergency that always waits until midnight.

Still, falling units don’t automatically make a Canadian REIT attractive. The properties must remain occupied, cash flow needs to cover the distribution, and management must protect the balance sheet while the market adjusts.

Those qualities bring Canadian Apartment Properties Real Estate Investment Trust (TSX: CAR.UN) into focus. CAPREIT owns roughly 45,600 residential suites across Canada, giving investors one of the country’s largest publicly traded rental-housing portfolios.

An income machine

To understand its strength, let’s look at earnings. CAPREIT’s Canadian residential occupancy stood at 97.1% at the end of the first quarter, while average monthly rent across its same-property portfolio rose 2.9% to $1,726. That combination kept rental income moving higher even as newly completed buildings faced greater competition.

The operating growth flowed through to investors. Diluted funds from operations (FFO) per unit increased 1.7%, while the distribution consumed only 65.1% of FFO. That leaves a meaningful cushion behind CAPREIT’s $1.55 annualized distribution.

At writing, CAPREIT’s monthly payout yield is about 4.4%. That won’t win the biggest-yield contest on the TSX, but a well-covered payment offers a stronger foundation for lifelong income than a double-digit yield wobbling toward a cut.

A large discount

The falling price also created a striking valuation gap. CAPREIT reported a net asset value of $54.79 per unit at the end of March, placing the market price roughly 36% below the estimated value of its properties and other assets. Meanwhile, its current share price is down 23% since hitting 52-week highs.

A discount alone won’t force the units higher, but management can use it to create value by repurchasing shares below net asset value. CAPREIT’s buybacks helped increase FFO per unit during the first quarter, allowing remaining investors to own a slightly larger portion of the business.

Rental supply could keep rising faster than demand, weakening rent growth and occupancy. CAPREIT also carries substantial mortgage debt, leaving earnings sensitive to refinancing costs, while property valuations could fall further if interest rates rise. Those pressures make gradual buying sensible, even for investors building a collection of monthly dividend stocks. A discounted REIT can become more discounted before the market decides it has suffered enough.

Bottom line

Yet all in all, CAPREIT offers highly occupied apartments, a conservatively covered monthly distribution, and units trading far below reported net asset value. Rental conditions may remain soft in the near term, but patient investors can collect income while Canada’s largest apartment REIT positions its portfolio for the next housing cycle.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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