It’s time for some early spring cleaning in my model dividend portfolio.
First, I’ll discuss how I’m reinvesting a chunk of the cash that’s accumulated over the past few months. Then I’ll announce a few changes to the portfolio to simplify its structure.
Buying good companies whose shares are out of favour is a time-honoured investing strategy. With that in mind, I’ve decided to increase my position in one of the portfolio’s worst-performing stocks: Canadian Apartment Properties Real Estate Investment Trust (CAR-UN-T).
Cuts to immigration targets and an influx of new rental supply have delivered a double blow to Canada’s largest publicly traded apartment landlord. Higher interest rates have also hurt the unit price by driving up CAP REIT’s borrowing costs and compressing REIT valuations. From its July high to December low, CAP REIT’s unit price slumped about 24 per cent.
Yet the REIT’s fundamentals remain solid: The balance sheet is strong; the distribution – which yields about 4 per cent – is well-covered by CAP REIT’s cash flow; and the REIT is aiming to boost its bottom line by selling older, less profitable buildings and investing in newer properties that require less maintenance spending.
In another positive signal, CAP REIT has resumed distribution hikes after leaving its payout unchanged for several years. The REIT raised its distribution by more than 3 per cent in each of 2024 and 2025, and I’m betting there are more increases to come.
Evidently, apartment REIT valuations have fallen to levels that some large investors find attractive. This week, Minto Apartment REIT (MI-UN-T) agreed to be taken private for $18 per unit, or $2.3-billion, including debt, representing a 32-per-cent premium to the market price before the deal was announced. Crestpoint Real Estate Investments LP will own 50.1 per cent of the REIT, while Minto Group, which is controlled by the founding Greenberg family, will own 49.9 per cent.
This followed a deal announced last May that will see fellow apartment owner InterRent REIT (IIP-UN-T) taken private by its executive chair, Mike McGahan, with the financial backing of Singapore’s sovereign wealth fund.
“We would hope that this being the second [Canadian] apartment privatization should provide further evidence of the fairly large disconnect in valuation observed between public and private markets,” said Jimmy Shan, an analyst with RBC Dominion Securities, in a note following the Minto privatization announcement.
CAP REIT still faces challenges. For years, renting was a seller’s market in which landlords could jack up rents to whatever the market would bear when suites turned over. Now, renters are in the driver’s seat, and rent escalations – if any – are much more modest. But the rental market is cyclical, and the current softness will eventually give way to more favourable supply-and-demand dynamics.
For these reasons, I’ve decided to purchase 80 units of CAP REIT, bringing the total in the model portfolio to an even 200 units. (The purchase was executed at Tuesday’s closing price of $38.40 and consumed $3,072 of cash.)
Simplifying the portfolio
Now, I’d like to announce a couple of housekeeping moves, starting with the sale of the portfolio’s South Bow Corp. (SOBO-T) shares.
Back in October, 2024, TC Energy Corp. (TRP-T) completed the spinoff of South Bow, its liquids pipeline business, resulting in 23 shares being added to the portfolio. I’ve decided to sell these shares for proceeds of $838.58 (again at Tuesday’s closing price). The decision does not in any way reflect my outlook for the company; it’s simply a decluttering exercise. Such a tiny position is not going to have a material impact on the portfolio’s performance.
Second, I’ve decided to swap out the iShares Core Dividend Growth ETF (DGRO-A), which trades in U.S. dollars on a U.S. exchange, for the BMO S&P 500 Index ETF (ZSP-T). In addition to trading in Canadian dollars on the Toronto Stock Exchange, which is more convenient for Canadian investors, ZSP also provides exposure to a broader cross-section of U.S. companies. Holding an S&P 500 ETF is also consistent with the diversification strategy I use in my personal portfolio. This will result in 144 units of ZSP being added to the portfolio, plus a small amount of cash.
All of the above changes will be reflected in the next model portfolio update, to be published in early February.
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.