Giuseppe H. Robalino

In all the commotion with the U.S. economy and the Fed’s bond-buying uncertainties, it is very easy to want to extend the search for yield overseas—to risky emerging markets or deeply indebted nations—and risk default or erosion of one’s principal. However, the investor need not look as far as an entirely new continent. The answer is quite literally in our own backyard. Lately, some Canadian REITs have been yielding over 20% and demonstrating aggressive underlying growth. Some are even potentially undervalued; trading near or at their 52-week lows.

 

A good one to consider is CDPYF, the Canadian Apartment Properties REIT (also CAR.UN). Its 52-week range is at $19.71-28.29 and was trading at its 52-week low. As of August 2nd, it is trading at $20.10, having seen changes of no more than $1 per share in the past month. Despite having a 5-year P/E average of 29, its P/E ttm is calculated to be at 4.18, and forward P/E projected at 9.6. This potentially indicates good expected growth prospects in the near future. Its EPS ttm is at 4.81.

 

Taking a look at CDPYF’s financials we find that it not only incredibly outperforms its competition on net income growth, operating margin (ttm), ROA (ttm) and ROE (ttm); it also beats the S&P 500 and TSX industry averages, according to Morningstar. The fact that its price has remained relatively stable in light of this performance seems to indicate that this equity has not been brashly speculated upon and should steer clear of any market bubbles going forward, with a beta of 0.19. Furthermore, the past five quarters have seen the gap between CDPYF’s total assets and total liabilities increase, with approximately a 30% increase in total assets (from 3,184 million to 5,023 million). Total liabilities have increased at a much slower rate, remaining in the 2,000 millions.

 

If we delve into specifically looking at the ratios mentioned above, its net income growth for the past 3 years is at 107.1 versus the 75.9 industry average; its operating margin at 119.7 versus 99.0; ROA 10.1 versus 2.3; and ROE 21.1 versus 11.2 industry average. Its earnings yield is at 21.4 compared to 6.8 for the S&P 500 and TSX averages.

 

The only concerns that may arise for this REIT are about the sustainability of such high multiples and the effect that can have on shareholders should these numbers decline. If that is of a significant concern, then the investor can check out PennyMac Mortgage Investment Trust (PMT) or Two Harbors Investment Corp (TWO). PMT, while similar to CDPYF, is a small-cap U.S.-based REIT yielding about 10% and trading approximately $3 above its 52-week low, $7 below its high. It has an opportunity to boost its revenue growth with somewhat lesser pressure to continue to deliver on the higher ROA and ROE that CDPYF’s management does. PMT’s ROA (ttm) is at 8.0 and ROE (ttm) is at 19.0 and has strong working capital. TWO is in a similar position, but its 3-yr revenue growth seems greatly inflated at 405.0 compared to the 14.3 industry average.

 

Beginning in Q2 2012, the CDPYF announced a $455M acquisition of 3,562 apartment suites in 14 properties, ranging from affordable to luxury housing. It is difficult to find other information since such press announcements are primarily available to Canadian investors.

 

As a rental apartment REIT including retirement communities, CDPYF is a generally conservative investment. It has a debt/equity ratio of 0.05 for the latest quarter, down from 0.06. Its long-term liabilities have decreased dramatically—by 92%—in the past five quarters. However, the balance sheet reports its “other liabilities” have been increasing steadily over the past five quarters. Taking in the bigger picture of liabilities in general, they have remained stable—thereby balancing this out. Free cash flow rebounded significantly in 2012 from the past year, when it saw negative FCF. Overall, according to Morningstar’s equity index, this is a mid cap, moderate risk value stock.

 

The investor should consider buying and prepare to hold it for the long term as Canadian real estate continues to grow, keeping in mind that Canadian Apartment Properties REIT is one of the largest owners and operators of multi-family residential properties in Canada. Invesco, Vanguard, and JP Morgan—among others—hold this equity. Ten Wall Street analysts cited by Morningstar recommend either buying or holding CDPYF.