Four months ago, REITs were being written off by investors as losers in the Donald Trump world of economic stimulus and higher inflation.
The S&P/TSX Capped REIT Index had plunged from over 170 in the summer of 2016 to the 145 range shortly after Mr. Trump's election. REITs are interest-sensitive securities and investors were betting they'd be hit hard in the new economic order the President was envisioning.
As it turned out, Mr. Trump has run into some major roadblocks in the implementation of his policies. This has prompted investors to revisit their assumptions about REITs and other interest-sensitive securities. The REIT Index has rebounded strongly, closing last week at 164.
There are several good choices in this category but one I especially like is Canadian Apartment Properties REIT, or CAPREIT for short. It trades under the symbol CAR.UN. Here are the details.
Background: CAPREIT owns interests in multi-unit residential rental properties. These include apartments, town homes and manufactured home communities. Its properties are primarily located in and near major urban centres across Canada. As of the start of this year, the REIT owned interests in 48,767 residential units, comprised of 42,316 residential suites and 31 manufactured home communities, comprising 6,451 land lease sites.
Share performance: CAPREIT was first recommended in my Internet Wealth Builder newsletter in July 2014 at $22.90. It was last updated in February 2015 as a Buy at $28.31. The units traded above $33 in the summer of 2016 when REITs were riding high but then dipped below $29 last fall before resuming an upward climb. Last week they hit a new 52-week high, finishing at $34.05 on April 13.
Recent developments: The REIT turned in an excellent performance in 2016 as all the numbers reflected big improvements over 2015 results. Operating revenue came in at $596.8 million, up 11.8 per cent from $533.8 the year before. Net rental income was just under $367 million, for a margin of 61.5 per cent. That compares to $324.7 million (margin of 60.8 per cent) in 2015.
Normalized funds from operations, a key factor in determining a REIT's financial strength, was $231.8 million ($1.77 per unit) compared to $200 million ($1.69 per unit) the year before. The payout ratio was 70.9 per cent, down from 73.1 per cent in 2015.
CAPREIT continued to grow during the year, acquiring 2,552 residential suites and sites for total costs of $412.9 million.
Distributions: Investors benefitted from the good financial results when the directors approved a 2.4 per cent increase in the monthly cash distribution to $0.1067 per unit ($1.28 on an annualized basis). The yield at the current price is 3.8 per cent.
Conclusion: CAPREIT is recommended for investors seeking a combination of income and long-term growth, with moderate risk. Ask your financial adviser if it is suitable for your account.
Disclosure: I own units in this REIT.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney
Gordon Pape