What is your opinion of Canadian Apartment Properties Real Estate Investment Trust (CAR.UN)? The units have gone south since I bought them several years ago, and I am wondering if I should cut my losses and move on.
I feel your pain. CAP REIT CAR-UN-T has been the worst performer in my model Yield Hog Dividend Growth Portfolio over the past year, posting a decline of about 23 per cent.
Higher interest rates, cuts to immigration targets (including international students and foreign workers) and an influx of new rental supply have all turned investor sentiment against the residential REIT sector, which until a few years ago was seen as one of the most attractive real estate classes.
While I don’t see the units rebounding in the short term, I believe selling after such a precipitous decline would be a mistake given CAP REIT’s solid fundamentals. The REIT yields about 4 per cent, its balance sheet is strong and some of the changes it is making to its portfolio should contribute to long-term growth.
Many analysts say the selloff in CAP REIT’s units has been overdone. Of the 13 analysts who follow the company, nine have buy ratings, with three holds and one sell, according to LSEG Data & Analytics. The average price target is about $50, which implies a gain of about 28 per cent from CAP REIT’s price of about $39 as of Friday morning. Analysts’ targets are often over-optimistic, but the consensus seems to be that the units are undervalued.
One reason analysts aren’t throwing in the towel is that CAP REIT, Canada’s largest publicly traded residential landlord, is in a strong financial position to weather the current slump.
In a note following the release of CAP REIT’s second-quarter results in August, Accountability Research analyst Jim Marrone said the REIT’s total debt-to-gross book value fell to 38.5 per cent from 41.5 per cent a year earlier. The weighted average interest rate on its mortgages was 3.2 per cent, with an average debt maturity of five years.
These encouraging metrics are bolstered by CAP REIT’s operational strategy to upgrade its property portfolio and boost its profitability. The REIT has been selling older, less profitable buildings and recycling the proceeds into newer rental properties that require lower maintenance capital expenditures and generate higher free cash flows.
“The company is setting up to have a more focused strategy, with reduced leverage and greater ability to continue improving its portfolio,” Mr. Marrone wrote.
These REITs could benefit from a falling interest rate environment
In the first half of 2025, CAP REIT sold $274-million of non-core Canadian properties and completed or agreed to $743-million of asset dispositions in Europe. In addition to recycling proceeds into newer buildings, the REIT repurchased $187-million of its units, which are trading at a steep discount to the estimated net asset value (NAV) of its property portfolio.
“We view unit buybacks as the best use of incremental capital investment by CAP REIT given its sizable NAV/unit trading discount” of about 27 per cent, Brad Sturges, an analyst with Raymond James, said in a September note to clients.
CAP REIT’s distribution appears quite secure. According to Raymond James, the estimated payout ratio for 2025 is 72 per cent of adjusted funds from operations (AFFO), a real estate measure of cash flow. Raymond James expects the payout ratio to fall to 69 per cent in 2026 and 65 per in 2027. The trend is your friend here.
Underlining CAP REIT’s confidence in its cash flow outlook, the REIT raised its distribution by 3.3 per cent in February following a similar increase in August, 2024.
Even as CAP REIT is in a solid financial position, many challenges remain. Falling immigration levels, higher interest rates and new rental supply have turned apartments from a seller’s market into a buyer’s market, prompting many landlords to offer discounts and other inducements to attract tenants. That has clipped the growth in rental revenue that CAP REIT typically sees when a suite turns over.
But for investors who can be patient, the substantial drop in CAP REIT’s unit price offers an attractive entry point, with a solid yield that looks very safe while you wait for the eventual rebound.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.