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investor clinic

Why are real estate investment trusts such as Canadian Apartment Properties REIT (CAR.UN) down so much? Are rising interest rates the only reason? If so, we are in for a long, rough ride. Could you please comment on this?

It’s important to put CAP REIT’s drop in perspective. Yes, the units have tumbled about 22 per cent after hitting a record high in September. But even after the recent drop, they have still posted a total return – including distributions – of about 10.7 per cent on an annualized basis over the past five years. As a long-term owner of the units myself, I’m certainly not panicking.

Are rising interest rates the prime culprit here? Probably. REITs are typically slow-growing businesses that generate steady, bond-like cash flows. That makes them susceptible, like bonds, to rising rates. Unlike bonds, however, CAP REIT has ways to increase its cash flows and, in turn, raise its monthly distributions to unitholders. It can acquire additional properties, for example, or increase rents in its existing buildings.

Rent controls limit the size of annual increases for existing tenants, but when a new tenant moves in CAP REIT can hike the rent to market rates. With the COVID-19 pandemic easing, CAP REIT saw a 10.2-per-cent increase in rental rates on suite turnovers in the first quarter, up from a 3.4-per-cent lift in the same quarter a year earlier.

But rising interest rates aren’t the only headwind CAP REIT is facing. In its first-quarter results, the REIT said it was hit by higher utilities costs because of the cold winter weather and a significant jump in the cost of natural gas. It also faced rising property taxes and higher costs for weather-related maintenance.

These challenges aside, CAP REIT looks to be in solid shape. As of March 31, overall portfolio occupancy was at 98 per cent, with rent collections at 99 per cent.

What’s more, the REIT continues to grow. In 2021, it acquired 3,744 apartment units, townhomes and manufactured housing (or land-lease) sites in Canada and the Netherlands at a total cost of about $1.05-billion. In the first quarter, CAP REIT added another 1,015 suites and sites for $439-million.

“These new properties will make a strong, accretive and growing contribution in the months and years ahead,” CAP REIT said in its report to unitholders.

CAP REIT cited rising immigration, the return of international students as pandemic restrictions ease, a growing seniors’ population and rising rents as reasons for optimism.

For what it’s worth, Bay Street remains bullish on CAP REIT’s units. Of the 15 analysts who follow the company, there are 14 buy ratings, one hold and no sells.

In light of the above, I wouldn’t lose any sleep over the drop in CAP REIT’s unit price. If anything, it might present an opportunity for long-term investors to add to their positions.

How does one go about trying to identify those “boring, proven businesses” that you recommended in last week’s column? Is there a resource for such advice, aside from reading your articles religiously?

Reading my columns is definitely a good start. I frequently discuss companies I believe are suitable for investors who are seeking income and capital growth, without taking on excessive risk. I’m especially fond of utilities, banks, power producers, real estate investment trusts (REITs) and infrastructure companies that have a track record of increasing their earnings and dividends.

I hold many of these stocks personally and in my model Yield Hog Dividend Growth Portfolio, which Globe Unlimited subscribers can view at tgam.ca/dividendportfolio. The purpose of the model portfolio isn’t to provide a template to be copied exactly; rather, it is intended to be a source of ideas and to serve as a real-time illustration of dividend investing in action.

If you are not comfortable buying individual companies, you can save yourself a lot of time and effort by buying a handful of exchange-traded funds. These could include a low-cost index ETF that holds the stocks of the S&P/TSX Composite Index, another that tracks the S&P 500 and perhaps a dividend ETF to generate additional income, if desired.

Whether you buy individual stocks or ETFs, your behaviour as an investor is critical. After you set up your portfolio, resist the urge to trade. Investing is a long-term commitment that rewards patience, not frequent buying and selling. As the old Wall Street adage goes: “A portfolio is like a bar of soap. The more you handle it, the smaller it gets.”

How can I invest in your model dividend portfolio?

You can’t. It’s a model portfolio that uses virtual dollars, not real money. If you’re looking for a dividend fund to invest in, there are many ETFs to choose from. You’ll need to open a discount brokerage account to get access to them.

Some worthy examples include the BMO Canadian Dividend ETF (ZDV), iShares Canadian Select Dividend Index ETF (XDV) and Invesco Canadian Dividend Index ETF (PDC), among many others. There are also lots of dividend ETFs that cover the U.S. market, including the iShares Core Dividend Growth ETF (DGRO), which I hold in my model portfolio.

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.

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