Canadian Apartment Properties REIT (TSX:CAR.UN), which is more fondly known as CAPREIT, is the largest multi-residential REIT on the TSX. The stock has corrected more than 20% from its high in August 2021. It goes to show that when it comes to the grand scheme of things, the small dividends paid out by stocks are not as important as the stock valuation paid by investors, which is highly connected to the potential price appreciation you could get from a stock investment.
In 2005, CAPREIT traded at about 12.2 times funds from operations (“FFO”). The Canadian REIT trades at a much higher valuation today — about 21 times funds from operations (“FFO”) — than about 17.5x a decade ago. And this was after it corrected +20% from last year’s high around 27x!
Surely, the ~73% higher FFOPU in the decade of 2011 to 2021 versus the period of 2005 to 2010 wasn’t enough to push the stock’s soaring valuation to 27x in 2021. There must have been other underlying drivers. We suspect the catalysts were low interest rates and higher real estate prices.
Now, in a rising interest rate environment, the monthly dividend stock has quickly contracted to ~21 times FFO, as investors worry rising interest rates will somewhat cool off the hot real estate market in Canada, which CAPREIT is primarily invested in.
From a P/FFO perspective, CAPREIT trading at ~21x appears to be expensive. However, if you incorporate the unrealized gains of its investment properties, the dividend stock is cheap. This is why, across 15 analysts, the consensus 12-month price target is $63.42 per unit. So, the stock trades at a ~23% discount at $48.87 at writing. Its FFO payout ratio is estimated to be about 61% this year. So, its yield of close to 3% is safe.
This post was primarily an excerpt from my article published on Seeking Alpha. For the full article, please visit: Canadian Apartment Properties REIT: Is It A Cheap Dividend Stock?
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Disclosure: As of writing, we’re long TSX:CAR.UN.
Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.
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