I love the idea of owning rental property. Looking after rental property? Not so much.
Between deadbeat tenants and hefty maintenance bills, there are too many headaches that come with being a landlord. But for people who want the benefits of owning income property without all the hassles, there's a solution: residential real estate investment trusts (REITs).
The beauty of residential REITs is that they provide exposure to a diversified portfolio of rental apartments that are managed professionally. You put up the cash and collect monthly distributions, while the REIT looks after all the messy details: leasing, repairs and dealing with drunk tenants who blast Guns N' Roses at four in the morning.
With sky-high housing prices causing more would-be homeowners to turn to renting, now may be an opportune time to own rental real estate. Even REITs with little or no previous exposure to the apartment sector are seizing the opportunity by building or acquiring residential properties to complement their office and retail portfolios.
Apartment REITs aren't risk free. Regional economic weakness can wreak havoc on REITs that lack adequate geographic diversification, as the plunging share price of Boardwalk REIT – with 60 per cent of its units in Alberta – has demonstrated. Rising interest rates are another potential threat. That's why it's important to focus on REITs that offer a combination of diversification, prudent financial management and growth potential.
The best apartment REITs generate cash flows and distributions that grow over time thanks to a combination of rent increases, cost controls, acquisitions and new property developments. If a REIT's distribution is rising, there's a good chance its unit price will also move higher over the long run. Here are three apartment REITs that check off a lot of those boxes. As always, be sure to do your own due diligence before investing in any security.
Canadian Apartment Properties REIT (CAR.UN)
Yield: 3.8 per cent
One of Canada's largest residential landlords, CAP REIT owns more than 49,000 rental apartments, townhomes and leased-land sites for manufactured homes. Although Ontario accounts for 45 per cent of its rental units, CAP REIT has a growing presence in six other provinces, plus nearly 1,500 suites in the Netherlands and a minority stake in Ireland's IRES REIT. Further enhancing diversification, its portfolio includes "affordable," "mid-tier" and "luxury" units.
CAP REIT's occupancy is excellent at 98.6 per cent, and the payout ratio was a conservative 71.8 per cent of normalized funds from operations, or NFFO – a measure of cash flow – through the first six months of 2017. The yield may appear modest, but CAP REIT has hiked its monthly distribution for six consecutive years and, as a unitholder myself, I'm betting there are more increases ahead.
Second-quarter results released on Tuesday showed continued strength, as total operating revenues rose 7 per cent through the first half of 2017, reflecting acquisitions, rising rents and higher revenues from parking, laundry and other ancillary sources. CAP REIT's consistent results have made it a favourite of Bay Street, where eight of the 12 analysts who follow the stock rate it a "buy," with four "holds," according to Thomson Reuters. The average 12-month price target is $35.48. (On a sad note, CAP REIT announced the passing of long-time chief executive and co-founder Thomas Schwartz, 68, after a battle with prostate cancer. Chair Michael Stein will continue to head up CAP REIT's management team until a new CEO is named.)
InterRent REIT (IIP.UN)
Yield: 3.1 per cent
With about 8,300 units in Ontario and Quebec, InterRent is a growth-oriented REIT with a proven money-making formula: It acquires dated properties with below-market rents and invests in suite improvements, energy-efficiency upgrades and common-area enhancements that allow it to charge incoming tenants higher rents (or apply for increases above rent-control guidelines for existing tenants).
Thanks to this steady revenue tailwind, InterRent's same-property net operating income – essentially rental revenue minus operating costs – has risen by more than 4 per cent for 11 consecutive quarters, according to BMO Nesbitt Burns analyst Troy MacLean. In a recent note, he cited InterRent's pricing power, densification opportunities and potential growth in occupancy (currently at 95.7 per cent) among its key strengths.
InterRent's locations are another plus: "With strong presence in high-growth regions (GTA, Ottawa and Montreal), and no footprint in Western Canada, the REIT's geographic exposure is ideal," CIBC World Markets analyst Dean Wilkinson said in a recent report. Even as InterRent has been raising its distribution annually in recent years, the payout ratio is a comfortable 71 per cent of adjusted funds from operations (AFFO). Analysts are generally bullish, with 10 "buy" recommendations and three "holds," and an average price target of $8.80.
Killam Apartment REIT (KMP.UN)
Yield: 4.8 per cent
Another growth-oriented REIT, Killam owns about 20,000 apartment suites and leased-land sites for manufactured homes in Atlantic Canada, Ontario and Alberta. In addition to a busy acquisition schedule – it has announced $180-million of deals so far this year, blowing past its full-year target of $75-million – Killam has a strong development pipeline of more than 1,700 units, which typically generate higher yields compared with properties it purchases.
"In the Canadian public apartment REIT universe, in our view Killam is far ahead of the pack as far as development experience. Layering on accretive acquisitions should help generate better than expected growth, as well," Raymond James analyst Ken Avalos said in a note. Killam also gets a lot of love from analysts, who have 10 "buy" recommendations, one "hold" and an average price target of $13.77. The REIT – which has a payout ratio of about 89 per cent of AFFO – hiked its distribution by 3.3 per cent in February and has indicated that it "expects to continue to sustain and grow distributions."
Disclosure: The author personally owns units of CAR.UN and IIP.UN