This undervalued TSX Apartment REIT pays monthly dividends

The apartment market is slumping, and I’m baffled that more investors aren’t considering the much simpler alternative. Instead of taking on a mortgage, condo fees, property taxes, repairs, and the fun of managing tenants, you can own a condo real estate investment trust (REIT) in a tax-free savings account (TFSA).

You avoid taxes on growth and income, you avoid the headaches of being a landlord, and you still receive monthly cash flow. One option that stands out at the moment is Canadian Apartment Properties REIT (TSX:CAR.UN), better known as CAPREIT. Here’s what you need to know about it before you start investing.

How to understand CAPREIT

CAPREIT is one of the country’s largest residential rental companies, with a portfolio of apartments in Canada’s major cities and select European holdings. Residential real estate is generally more stable than commercial real estate, because people always need a place to live, and this is reflected in CAPREIT’s figures.

The trust continues to report strong occupancy at 97.6%. This helps support steady growth in funds from operations (FFO), the REIT’s version of earnings. CAPREIT’s FFO per unit reached $2.54 over the last twelve months, a growth rate of 2.4% year-over-year despite higher interest rates and rising operating costs. Residential rental prices have also risen steadily, giving CAPREIT a built-in inflation hedge that many other REITs lack.

Financially, CAPREIT remains solid. The trust has a healthy balance sheet compared to its peers, with lower debt-to-equity ratios, and because residential leases are shorter in duration, CAPREIT can reprice rents more frequently. This flexibility is valuable when inflation is high or when interest rates change.

CAPREIT’s monthly distribution

CAPREIT pays a monthly distribution of $0.1292 per unit. Based on the current unit price, the yield is around 4.05%. This is above the long-term historical average, which generally indicates undervaluation. FFO has grown, but unit price has lagged, creating a more attractive entry point for income-oriented investors.

Importantly, the payout ratio is approximately 61% of recent FFO. For a residential REIT, that is very safe. CAPREIT has also increased its benefit at an annual rate of 5.4% over the past five years, meaning your income will grow over time instead of staying flat.

Because distributions are usually taxed as ordinary income with some capital return, a TFSA is the best home for CAPREIT. Within a TFSA, you keep every dollar of monthly cash flow. You can reinvest to multiply it or withdraw it without any tax consequences.