Is This Top-Performing REIT Worth its High Multiple?

Canadian Apartment Properties REIT (TSX:CAR.UN) has been a fabulous investment as of late, but how much are you willing to pay for the stock?

| More on:

Canadian Apartment Properties REIT (TSX:CAR.UN), or CAPREIT, has been a wonderful investment. Since 2014, the stock has delivered an annualized rate of return of about 20%. However, the run-up may be overdone, as it trades at its highest multiple in 16 years!

The business

CAPREIT is one of the best Canadian residential REITs to own. Its portfolio of apartments, townhomes, and manufactured home communities are predominantly located in and near major urban centres.

At the end of the first quarter, the REIT’s diversified portfolio consisted of 50,630 units, including 44,174 residential suites and 31 manufactured home communities comprised of 6,456 land-lease sites.

CAPREIT continues to perform

CAPREIT’s first-quarter results compared to the same period last year are as follows. The REIT increased its operating revenues by 8%, its net operating income by 11.8%, its same-property net operating income by 7%, its normalized funds from operations by 10.6%, and its net funds from operations per unit by 7.9%.

The REIT had an occupancy rate of 98.8% with growing average monthly rents, and its net funds from operations payout ratio was 70.4%, which implies that its distribution is safe.

Distribution

At about $43 per unit, CAPREIT offers a 3.08% yield. The REIT’s quality portfolio and steady growth in a stable industry have allowed it to increase its distribution every year since 2012. In the past five years, CAPREIT increased its distribution per unit by 3.1% per year on average.

A stock price graph showing declines
Image source: Getty Images.

Valuation

CAPREIT tends to trade at a premium multiple because of its quality. Most of the time, CAPREIT is expensive. And it’s more so today. At the recent quotation, it’s trading at a multiple of about 23, while the REIT increased its funds from operations per unit by about 3.3% per year on average in the past three years.

The stock was pretty fully valued a year ago when it traded at roughly $33.50 per unit at a multiple of about 18.8. Now, the stock is even more expensive. At this point, it’s pretty much a matter of how much the next investor is willing to pay for the stock.

The Bank of Nova Scotia analyst agrees that there’s essentially no upside and no margin of safety for the stock right now, as the REIT’s 12-month target implies a decline of about 7%.

Investor takeaway

Given CAPREIT’s quality management, excellent assets, and stable performance, the stock is worth a premium multiple. However, the stock has run up past that point and is now in overvalued territory.

It’s better for investors to avoid this stock now and wait for an event that will bring down its valuation before considering a position. If you’re willing to pay a premium multiple of 16-18 for CAPREIT, start nibbling the stock in the low $30s.

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 owns shares of Bank of Nova Scotia.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »