Pat McKeough responds to many requests from members of his Inner Circle for specific stock market advice as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. We give you Pat’s buy-hold-sell recommendation as well as his analysis of the stock. This is part of the specific buy, hold and sell advice we offer you in our daily posts. Every week you get “A Stock to Sell” on Monday, “Best Canadian Stocks” on Tuesday, and “U.S. Stock Picks” on Thursday.
Recently we had a question from an Inner Circle member about one of Canada’s bigger Real Estate Investment Trusts. Canadian Apartment Properties REIT—also known as CAP REIT—focuses primarily on rental properties like apartment buildings and townhouses but also on land-lease properties, largely in trailer parks. Almost 80% of the company’s revenue comes from Ontario and Quebec. Pat examines the company’s latest financial results and looks at its prospects at a time when low interest rates favour home and condominium buying over renting.
Q: Pat: What is your recommendation on Canadian Apartment Properties REIT? Thanks.
A: Canadian Apartment Properties REIT (symbol CAR.UN on Toronto; www.capreit.net) is a real estate investment trust that owns multi-unit residential properties, including apartment buildings and townhouses.
In all, the trust owns 41,958 units, including 35,674 residential suites and 30 manufactured-home communities, or trailer parks, with a total of 6,284 land-lease sites. Its occupancy rate is 97.9%.
Fifty-eight per cent of CAP REIT’s units are in Ontario, followed by Quebec (21%), B.C. (9%), Alberta (6%), Nova Scotia (4%), Saskatchewan (1%) and Prince Edward Island (1%).
Low interest rates continue to work against rental properties
In the three months ended December 31, 2014, CAP REIT’s revenue rose 3.3%, to $128.1 million from $124.0 million a year earlier. Cash flow per unit jumped 23.5%, to $0.42 from $0.34, thanks in part to higher rents.
The trust yields 4.2%.
Low interest rates have made home ownership more affordable. This has cut into demand for rental properties, since more tenants can now afford to buy condominiums or starter homes.
However, immigration rates remain high, and youth employment will improve with the economy. That will increase demand for rental housing from these key groups.
We view Canadian Apartment Properties REIT as a hold.
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