If you want safe monthly income, add Canadian Apartment Properties REIT (TSX:CAR.UN) to your watch list. You can sleep well at night holding the quality units.
Why is it a high-quality REIT? What’s a good valuation (i.e. price range) to buy its units to prevent overpaying and to boost your starting yield? First, let’s see if it’s the kind of business you want to own.
Canadian Apartment Properties REIT Overview
- Market cap: $4.1 billion
- Price: $29.60 per unit
- Yield: 4.2%
- Payout ratio: 72%
Canadian Apartment Properties REIT started out with 2,900 residential suites in 1997 when it had its IPO. Since then, it has grown to a portfolio of about 48,514 suites.
Source: CAPREIT Q2 2016 Presentation – Slide 7
Canadian Apartment Properties REIT is most notable for its assets from the stable Ontario province, which makes up half of its portfolio. Its assets in Ontario, Quebec and British Columbia all maintain high occupancies.
In total, the three provinces make up 83% of the REIT’s portfolio and adds stability to its financial performance. As a result, the REIT’s portfolio occupancy was 98.2% as of the end of June 2016.
Source: CAPREIT Q2 2016 Presentation – Slide 23
The top three provinces from where the company earns the highest net operating income (NOI) margins are British Columbia (an NOI margin of 68.8%), Ontario (60.4%), and Alberta (60.4%).
Canadian Apartment Properties REIT maintains a well-balanced portfolio. It’s diversified by asset type: 31 manufactured home communities (13% of its portfolio), luxury suites (32%), mid-tier suites (48%), and affordable suites (7%).
The REIT is well managed. While it has been growing its funds from operations (FFO), its payout ratio has been on the decline. This creates a safer distribution.
Source: CAPREIT Q2 2016 Presentation – Slide 8
Strong financial position
As of Q2 2016, Canadian Apartment Properties REIT’s total debt to gross book value was 47%. This was more reasonable than 2010’s 58.9%.
Moreover, the firm has been taking advantage of lower interest rates. In Q2 2016, its weighted average mortgage interest rate was 3.28%. This was 29 basis points lower than it was in Q2 2015 and 1.54% lower than it was in 2010.
In Q2 2016, the weighted average term to maturity for its mortgages were 6.5 years. On top of that, only a small amount (about $200 million) are due from 2016-2018.
The REIT’s interest coverage ratio was 3.01 times at the end of Q2 2016. This indicates it has the ability to meet its interest expenses.
Growth and distribution history
Canadian Apartment Properties REIT has grown its distribution by about 75% since 1997.
From 2007 (right before the financial crisis) to 2015, the REIT compounded its FFO per unit by 4.22% per year. In 2007, the company’s payout ratio was 90%.
So, over the eight years, Canadian Apartment Properties REIT compounded its distribution per unit by only 1.43%. But it brought down its payout ratio to 72% in the process.
So, its distribution is safer than it was in 2007.
Income tax on REIT distributions
REITs pay out distributions that are like dividends but are taxed differently. In non-registered accounts, the return of capital portion of the distribution is tax deferred until unitholders sell or their adjusted cost basis turns negative.
REIT distributions can also contain other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate. And capital gains are taxed at half your marginal tax rate.
When unsure of where best to hold REIT units, contact a tax professional or the REIT in question.
Canadian Apartment Properties REIT pays a monthly distribution — an annual payout of $1.25 per unit. That’s a yield of 4.2% based on the unit price of $29.60.
However, the company is expected to grow its FFO per unit by about 4% per year. Subsequently, if you buy the stable units at a fair valuation, you can expect long-term returns of about 8% (4% yield + 4% growth).
Conservative investors can start buying the stock between $25-26 per unit at a multiple of about 15. If it drops below those levels, consider it the market’s gift for you to buy a sleep well at night stock at a discount.
If you like what you've just read, consider subscribing via the "Subscribe Here" form at the top right so that you will receive an email notification when I publish a new article.Disclosure: At the time of writing, I don’t own any TSX:CAR.UN units.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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