A Member of Pat McKeough’s Inner Circle recently asked for his advice on Canadian Apartment Properties REIT, a REIT that specializes in residential properties located in or near major urban centers in Canada.
Pat likes the track record of solid growth and the attractive yield. Future prospects also look encouraging due to the high demand for Canadian residential properties. However, the trust is growing by acquisition into Europe and that could pose challenges.
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Canadian Apartment Properties REIT (CAR.UN on Toronto; www.capreit.ca) owns multi-unit residential properties, including apartments, townhomes and manufactured home communities (trailer parks). Those rental properties are all located in or near major urban centres in Canada.
Altogether, CAPREIT has ownership or co-ownership interests in 57,565 residential units in Canada: 45,440 residential suites; and trailer parks, which comprise 12,125 land lease sites.
At the same time, the trust also owns 66% of European Residential REIT (symbol ERE.UN on Toronto). European Residential REIT holds a portfolio of 158 multi-residential properties, comprised of 6,896 suites and some retail space located in the Netherlands. It also owns one office property in Germany and another office property in Belgium.
In total, 34.7% of the CAPREIT’s residential suites are in Ontario, followed by 16.2% in Quebec, 9.4% in B.C., 5.2% in Nova Scotia, 3.9% in Alberta, 0.7% in Prince Edward Island, 0.4% in Saskatchewan, and 10.7% in Europe. The trailer parks account for the remaining 18.8%.
The REIT’s overall occupancy rate is 98.9%
Inner Circle: Canadian Apartment Properties REIT’s shareholder-friendly policies continue
CAPREIT continues to buy back shares. In 2022, it repurchased 5.2 million units, at an average of $45.22 each, for a total of $237.8 million. Reducing the number of shares outstanding helps lift earnings per share because profit is then divided among fewer shares. The higher per-share earnings make the stock more attractive to investors. This justifies a higher P/E ratio and helps to drive the stock price even higher.
CAPREIT’s revenue rose steadily in the five years from 2018 to 2022; specifically, it climbed 46.3%, from $688.6 million in 2018 to $1.01 billion in 2022. Cash flow rose 40.1%, from $289.3 million in 2018 to $407.0 million in 2022. Cash flow per unit increased 15.0%, from $2.024 to $2.328 on more units outstanding due to acquisitions.
In the three months ended September 30, 2023, CAPREIT’s revenue rose 6.5%, to $268.4 million from $252.0 million. Cash flow per unit rose 4.6%, to $0.638 from $0.610.
CAPREIT’s overall outlook is positive. The REIT should continue to benefit from the current strong rental demand now lifting rents to all-time highs. Also, it has successfully implemented cost-saving measures around energy use and buying supplies and equipment.
The trust will continue to grow by acquisition, and that adds risk. Its European expansion also adds risk, but the company believes the European multi-residential market will continue to benefit from high occupancy rates, rising rents and strong cash flow growth. The REIT also thinks that demand for professional property management in the European multi-residential segment could grow significantly.
The trust continues to buy back shares. In the first nine months of 2023, CAPREIT repurchased 2.2 million units, at an average of $46.53 each, for a total of $100.9 million. With a monthly distribution of $0.12084 a unit, it currently offers an attractive yield of 3.1%.
Recommendation in Pat’s Inner Circle: Canadian Apartment Properties REIT is a hold.
