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2022 is the year of urban renewal. Toronto, where I live, has been a ghost town for two years. Now, with warrants lifted and business down, the city is rapidly regaining ground. I expect that to happen in major cities across Canada for the rest of the year. This should benefit some residential real estate investment trusts (REITs).
Here’s a look at how you can bet on this trend before the rest of the market spreads.
Urban rents
The pandemic has created two forces that have driven down urban apartment rents: cheap oil and people working from home. With almost all white collar workers working from home, living in an urban environment has become less important. Meanwhile, cheaper gas prices have made occasional trips much more bearable.
These two trends reverse in 2022. Crude oil prices are well above $120 a barrel. Higher gas prices are here to stay, at least for the foreseeable future. Meanwhile, companies are asking employees to return to the office, at least a few days a week. COVID-related restrictions have been lifted across much of Canada and could be fully suspended by mid-2022.
As a result, rents for condos and apartments in the city are rising. Canadian Apartment Properties REIT (TSX:CAR.UN) is at the forefront of this trend. The stock is already up 22.7% from the end of 2020. However, the stock could have a lot more upside if apartment rents and valuations continue to rise.
Diversified portfolio
Although the stock has pulled back significantly from its 52-week high, it is still exciting play as it boasts highly defensive and timely action in the Canadian housing market. CAPREIT has a diverse portfolio of over 65,000 sites across Canada, comprised of apartment buildings, townhouses and land lease communities.
In recent years, the company has expanded its portfolio of quality rental accommodation in Canada and the Netherlands. Therefore, the company’s fund flows are well distributed and not dependent on a single market.
Solid results
The REIT has just delivered solid quarterly and annual results. Operating revenue for the year ended December 31, 2021 increased to $933 million from $882 million a year earlier. Net operating income increased to $609 million from $578 million delivered a year earlier. During the year, the portfolio’s occupancy rate was 98.1%, with average monthly rents of $1,149.
Given that the REIT is down about 10% from its 52-week high, now may be the best time to pay close attention. The REIT is trading at a discount with a price-earnings multiple of 6.55. The stock offers a dividend yield of 2.6%, which I think could climb much higher by the end of the year.
At the end of the line
Remote working and cheap gas prices have been temporary factors pushing people out of cities for the past two years. Now that the mandates are up and oil prices are at record highs, demand for urban rentals is expected to spike. This has not yet been incorporated into CAPREIT stock. It still trades at six times earnings and 0.89 times book value.
Conservative investors looking for a safe haven should keep an eye on this.