Aren’t Apartment REITs Supposed to Be Safe?

Should you buy Canadian Apartment Properties REIT (TSX:CAR.UN), Boardwalk REIT (TSX:BEI.UN), or none at all?

| More on:
apartment

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You’ll often hear that as an industry, residential REITs are safe. Heck, I’ll admit that I’ve said so myself. However, I’d mentioned back in September that Boardwalk REIT’s (TSX:BEI.UN) distribution is risky.

I didn’t go to the extent to say that the company will cut its distribution, because there are ways for companies to maintain their distributions in the short run, despite not having enough earnings or cash flow to do so.

My close call with Boardwalk

Here’s my story with the stock. Thinking that residential REITs were a defensive asset class, I dabbled in Boardwalk in March 2015 and bought a bigger position in November of the same year to average down. I even managed to reinvest the special distribution in January 2016 at a low point to further average down.

However, as I saw deterioration in its cash flow generation, I realized its distribution may be in danger down the road. So, I strategically sold out of my position in May 2016, when the market gave me an opportunity to do so — with an 8.2% total return after trading fees. Since I’d held the position in my RRSP, there was no tax event.

The stock is 25% lower than when I sold. Now that Boardwalk has cut its distribution (in January, by more than a half), investors might consider it a turnaround story.

apartment

The problem with Boardwalk

Boardwalk has large exposure to resource regions. From the last reported quarter, the REIT had about 60% and 16%, respectively, of its portfolio in Alberta and Saskatchewan. So, Boardwalk will be directly impacted by the business cycle in the energy sector.

On a positive note, job vacancies in Alberta have risen in 2017, which may indicate that the economy there is turning around. If so, there will be higher demand for housing, and Boardwalk’s occupancy and rental income should improve over time.

Is this apartment REIT a safer buy?

Canadian Apartment Properties REIT (TSX:CAR.UN), or CAPREIT, is well known for its quality portfolio. It generates about half of its net operating income in Ontario.

In the most recent reported quarter, the apartment REIT continued to experience steady growth with average monthly rents up 3% and a portfolio occupancy of 98.7%. It pays out about 70% of its cash flow, so its distribution is sustainable.

CAPREIT has quality management and excellent assets. However, I can’t wrap my head around investors paying a multiple of about 18.8 right now for a company that’s going to grow about 3-4% a year.

Investor takeaway

Investors should be careful when they hear others say that a sector or stock is safe or stable. Apartment REITs are generally defensive. However, in the case of Boardwalk, its business and performance will be cyclical. So, investors need to be careful about when they buy the stock.

Ideally, they should buy as the Albertan economy recovers after a decline. Boardwalk’s distribution looks safe now, but it’s probably unattractive to most income investors with a ~2.5% yield. Currently, it’s really a turnaround play.

In the case of CAPREIT, it’s expensive most of the time. So, there’s risk that investors will overpay for its units and get below-average returns.

Higher interest rates will also weigh on these REITs.

Should you invest $1,000 in Ishares S&p/tsx Capped Financials Index Etf right now?

Before you buy stock in Ishares S&p/tsx Capped Financials Index Etf, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Ishares S&p/tsx Capped Financials Index Etf wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Canadian dollars are printed
Dividend Stocks

Beat the TSX With These Cash-Gushing Dividend Stocks

Learn how recent macro events have affected stocks on the TSX, and find out which stocks are thriving despite challenges.

Read more »

dividends grow over time
Dividend Stocks

How I’d Build a $15,000 Portfolio Around These 3 Blue-Chip Dividend Stocks

Dividend stocks are one thing, but blue-chip dividend stocks are some of the top options out there.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

TFSA Investors: 2 TSX Stocks to Buy for Dividend Income

These stocks have increased their dividends every year for decades.

Read more »

exchange traded funds
Dividend Stocks

2 Rock-Solid Canadian ETFs to Safeguard Your Portfolio During Trump’s 90-Day Tariff Pause

BMO Low Volatility Canadian Equity ETF (TSX:ZLB) and another ETF were built for tougher market sledding.

Read more »

people relax on mountain ledge
Dividend Stocks

3 TSX Dividend Stocks to Buy for TFSA Passive Income

These stocks trade at reasonable prices and offer high dividend yields.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

The Smartest Canadian Stock to Buy With $250 Right Now

Analysts are super excited about this Canadian stock, so let's get into why.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

1 Top TSX Stock Down 18% to Buy and Hold For Decades

TD picked up a nice tailwind to start 2025. Are more gains on the way?

Read more »

Forklift in a warehouse
Dividend Stocks

9.5% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Looking for a dividend stock that's ready to stand the test of time? Then consider this top notch option.

Read more »