A condo complex is seen in downtown Calgary. Condo sales in the city rose by 21 per cent.Jeff McIntosh/The Globe and Mail
Some investors are still shying away from REITs, apparently spooked by what happened to the sector in the spring of 2013 when the so-called "taper tantrum" sparked a sell-off in a broad range of income securities.
(The term refers to the fact the sell-off was triggered by comments by former Federal Reserve Board Chairman Ben Bernanke about winding down, or tapering, the quantitative easing program.)
The concern now seems to be that interest rates will likely start rising next year as the U.S. economic recovery strengthens, hitting REITs and similar securities again.
Such concerns are understandable but I think they're overblown. The result has been to create some opportunities in the REIT sector for investors who are willing to take on some risk.
One security I especially like is Canadian Apartment Properties REIT (CAR.UN), known more familiarly as CAP REIT. Here are the details.
The company:
This REIT is one of Canada's largest residential landlords, with interests in over 41,500 residential units including apartments, townhouses, and manufactured homes. Its main focus is in the Toronto area; however it has properties in major urban centres from coast-to-coast as well as in Dublin, Ireland.
The security:
CAP REIT units trade mainly on the Toronto Stock Exchange. They are also listed on the over-the-counter Pink Sheets in the U.S. although volume there is very light (less than 8,000 units a day on average).
Why I like it:
Residential properties tend to be more stable than office or retail holdings in difficult economic times. In the case of this REIT, net operating income (NOI) – a key measure of a real estate trust's financial health – has increased every year since 2006, including during the recession of 2008-09. The NOI in 2013 was 76 per cent higher than in 2006.
Distributions, which were flat for many years, have been raised four times since the middle of 2012, the latest being a 2.6 per cent hike in June. This is another positive financial sign.
Financial highlights:
Second-quarter results were released on Aug. 8. Operating revenue was $125.4-million, up 6.6 per cent from $117.7-million in the same period of 2013. For the first half of the fiscal year, operating revenue totalled $251.9-million compared to $233-million the year before, an improvement of 8.1 per cent.
Normalized funds from operations (FFO) came in at $47.1-million for the quarter, an excellent improvement of 10.6 per cent over last year's $42.6-million. However, on a per unit basis the gain was only 1.4 per cent to $0.431 because the REIT issued approximately nine-million new units in the intervening period. For the first half, normalized FFO was just over $90-million ($0.826 per unit) compared to $78.8-million ($0.787) in 2013.
NOI for the quarter was $78.1-million compared to $71.5-million last year, an improvement of 9.2 per cent. For the half, it was $149.5-million, up from just under $135-million a year ago.
"We generated yet another quarter of strong growth as same property NOI rose a significant 5.4 per cent while our track record of making accretive acquisitions contributed to increased cash flows," commented CEO Thomas Schwartz.
Management announced that the TSX has approved a normal course issuer bid that would allow the REIT to repurchase up to 10.66-million shares on the open market over the next year. That represents about 10 per cent of the public float. However, there is no guarantee the company will actually buy back that many units, or even any at all.
Risks:
As mentioned, REITs are interest-rate sensitive. A sudden, sharp rise in rates (which is not likely) would have an immediate downward effect on the share price. A gradual increase in rates (more likely) may have some negative impact but that could be offset if the REIT continues its recent policy of distribution increases.
Distributions:
CAP REIT currently pays $0.0983 per unit monthly ($1.18 per year). At Friday's closing price of $24.20 the units yield 4.9 per cent.
Who it's for:
This REIT is suitable for conservative investors who are looking for above-average yield. This does not mean it is without risk but CAP should fare better than most other REITs if the market turns sour.
Summing up:
This is a quality REIT with a good track record in a stable business.
Gordon Pape