Bull List Report – CAP REIT – CAR.UN.TO

Canadian Apartment REIT – CAR.UN.TO

Canadian Apartment Properties Real Estate Investment Trust is an open-ended mutual fund trust, which engages in the management of interests in multi-unit residential real estate properties, including apartments, townhomes, and manufactured home communities. It operates through the Canada and Europe geographical segments. The company was founded by Thomas H. Schwartz and Michael Leon Stein in 1996 and is headquartered in Toronto, Canada.

Due to the complexity of REIT earnings, our screener does not accurately grade them, so we do not include screener data.

Pros

The valuation gap is large. Even if we believe NAV is overvalued in the mid $50’s, assigning a conservative value ~15% below this, the company is still trading ~20% below its NAV.
Transitioning from older “vintage” properties to newer, energy-efficient builds, which reduce long-term expenses and attract better tenants.
The company is buying back units at an aggressive pace. Buying its own properties back at a discount is seen as a better opportunity than new builds.
The company has the lowest leverage ratio of all residential REITs, with 98% of its debt being CMHC-insured.
Occupancy rates are best-in-class at ~98%.
The company’s payout ratio is conservative, with FFO payout ratios under 60%. This leaves considerable room for error, with the potential for continued distribution increases and buybacks.

Cons

The weighted average mortgage interest rate has crept up to 3.26% (from 2.97% a year ago) as low-rate debt matures and is refinanced.
Continued pressure in Canadian provinces for stricter rent controls to combat housing affordability issues persists.
The Netherlands portfolio has been a drag, with lower occupancy (90.8%) compared to the Canadian side of the business.
Despite exceptional fundamentals, the unit price has remained stagnant. Sentiment needs to shift, and an investment in CAP REIT is not for impatient investors.

The REIT landscape has been a complicated one for investors over the years. REITs were a favorite among Canadian investors post-financial crisis. However, record low interest rates ballooned real estate values, pulling forward many years of growth for REITs, particularly in the residential space.

Once we acknowledge that government policies sent many REITs into the gutter price-wise, we can look at the industry from a more objective lens. Canadian Apartments REIT has done nothing but execute for years. Yet, its price continues to decline. At some point, the sentiment has to shift, and when it does, the REIT looks deeply discounted.

The company is trading at a 33%+ discount to its Net Asset Value, that being the underlying value of the properties it owns. A contrarian might say the bulk of its properties are in Toronto, where asset values are falling. I would agree with this, which is why I take a more conservative approach and say the discount to NAV can be closer to 20% if we want, and we still get an attractive risk/reward prospect.

The company is recycling underperforming and poor assets, both here in Canada and Europe. The company is getting fair value for these assets and then turning around and buying its own units back. This effectively trades lower-quality, high-capex assets for high-quality, low-capex assets while reducing overall unit counts, which is bullish for investors. It also moves CAP REIT back toward a pure-play Canadian apartment REIT, which makes it much easier for investors to evaluate. Personally, I have no idea about the European real estate landscape, and I do believe the Canadian market is large enough that it can grow just fine here.

One of the core theses behind CAP REIT is the fact that the company has plenty of buffer room in regards to rental increases, despite rent falling pretty much across the country. Because CAP REIT’s average rent prices are double-digit discounts to average rents in particular regions, this allows them to navigate a declining rent environment with ease. While residential REITs that are tighter to average rent prices will need to keep pace with those, CAP REIT will still be able to raise rents.

There are plenty of rent caps in place that limit landlords to low single-digit rent increases. However, newer units in Ontario built after 2018 are generally allowed to raise rents to market prices, assuming proper notice is issued. This is precisely why you will see CAP REIT target newer units. It gives them more flexibility.

A primary attraction for REIT investors is the monthly distribution, and CAP REIT remains one of the safest bets in the sector. Because of the drawdown in price, CAP REIT now yields north of 4%, which is a rarity. In addition to this, a 60.4% FFO payout ratio tells a story of a dividend that is well covered and has plenty of room to grow.

Finally, approximately 98% of its Canadian mortgage portfolio is CMHC-insured. This allows CAP REIT to borrow at rates significantly below conventional commercial loans.

Overall, I’d normally view REITs as a conservative investment, good for the fund’s yield plus maybe a percent or two in terms of capital appreciation. However, I do feel there is a large valuation gap here, and the market is overreacting to headlines about rental prices falling. Even though these headlines are true, CAP REIT is in a position where they can still benefit despite falling rents.

Beta	1.3
Best monthly return	21.1%
Worst monthly return	-12.3%
Max drawdown	42.6%

There is zero question that a lot of residential REITs benefit significantly from immigration. This makes the federal government’s 2025–2027 Immigration Levels Plan the most significant macro risk for CAP REIT. Some pundits have estimated that the immigration cuts could cause Canada’s population to decline for the first time since the 1950s. However, CAP REIT’s “mid-market” positioning (with 75% of suites under $2,000/month) acts as a safety net, as demand remains highest in the affordable segment even during population corrections.

Although CAP REIT has a lot of buffer in regards to raising rental prices because of their overall low profile, as the rental market becomes more competitive, CAP REIT will ultimately see vacancy mitigation costs, because they will need to deploy more advertising and offer more incentives.

CAP REIT remains heavily exposed to provincial rent caps. Ontario (2.1%) and British Columbia (2.3%) have set caps that trail the actual inflationary growth of property taxes, insurance, and labor. Provincial regulators are always going to side with tenants, as tenants are ultimately those who vote for the regulators in place.

The company is no doubt trading at a discount to its Net Asset Value. However, NAV is relatively hard to calculate with any sort of accuracy. A lot of CAP REIT’s large apartment complexes wouldn’t exactly be the most liquid investments, so the “value” of them is up for interpretation. That said, it will not have as drastic swings in NAV, as say, an office REIT like Allied Properties would. I tend to take the more conservative side of NAV calculations and assume they’re lower than the company states. This allows plenty of room for error.

We could see NAV continue to decline if housing in Toronto and Vancouver continues to dip. If the market assigns the same discount to NAV in terms of unit pricing, we could see a slide in unit value. We need a shift of sentiment, which I do believe we will get. However, investors will have to be patient.

	TTM	Historical average	Forward numbers
P/FFO	14.5	19	–
Cap Rate	5%~	–	–
Discount to NAV	-33%	–	–

In my opinion, with CAP REIT trading at only 14.5x Funds From Operations, the market is giving you a high-quality, high-moat real estate play at a clearance rack price. If CAP REIT reverted back to even a 17x multiple, which would still be below its historical average, this would result in a 17% increase in share price, before the distribution is accounted for.

The market is currently pricing CAP REIT as if it were a high-risk entity, likely due to concerns over Canadian immigration caps, interest rates, and valuations of real estate prices in hotbeds like Toronto and Vancouver. However, this is a large disconnect from the fundamentals, and I do believe the market is pricing in worst-case situations for CAP REIT. It’s not solely this REIT either. The market sentiment towards residential REITs in general is in the gutter and has been for 3+ years. At some point, we need to see a turnaround, and I think we are close.

Pre-COVID, it was not unusual to see CAP REIT trade at a premium to its Net Asset Value. In this day and age, where many REITs trade at massive discounts to NAV, this seems like an absurd situation, but it really wasn’t. The discount only began to extend significantly after interest rates started rising in 2022. The market shifted from valuing CAP REIT based on its underlying real estate (NAV) to valuing it based on its sensitivity to interest rates.

Even if we make the assumption that CAP REIT’s NAV is overstated by, let’s say, 10-15%, even if the market starts to value the company’s real estate more, there is double-digit upside here from a pricing perspective, which is rare for a REIT.

CAP REIT’s positioning is best understood through a comparison with Boardwalk REIT, Killam Apartment REIT, and InterRent REIT. Boardwalk REIT represents the primary growth alternative, being heavily concentrated in the non-rent-controlled markets of Alberta and Saskatchewan.

While this area of the market allowed Boardwalk to achieve best-in-class same-property NOI growth of 8.6% in late 2025, it comes with a higher debt-to-assets ratio of 41.4% and significant exposure to the cyclical energy economy.

In contrast, Killam Apartment REIT offers a more defensive, Atlantic-based portfolio that has been successfully expanding into Ontario. Killam’s strategy leans heavily on new developments and a high percentage of CMHC-insured debt. But, because its portfolio is relatively modern, it lacks the massive “mark-to-market” rental upside that CAP REIT has with its older, undervalued suites.

Meanwhile, InterRent REIT pursues a more aggressive model, focusing on the acquisition and repositioning of mid-market assets. While this can lead to high returns during economic expansions, it is a capital-intensive strategy that has not paid off all that well in a higher-rate environment and a higher-labor-costs environment. CAP REIT effectively gives you the best of all these peers, with the strongest balance sheet and more promising outlooks. I will admit, I was tempted to add Boardwalk to the Bull List as well, but I always tend to get nervous about Alberta real estate, and for good reason. I’ve lived through the booms and busts of Alberta for decades.

Ultimately, while Boardwalk offers higher immediate growth and InterRent provides a speculative turnaround play, CAP REIT’s deep discount to NAV and high-quality profile make it the most attractive REIT from a risk/reward perspective in my opinion.

Yield	4.3%
Payout ratio (FFO)	60%
5-year dividend growth %	1.4%
Money Spent/Received on Buybacks and Share Issuances	504M

REITs are structured to return the bulk of their profits (90% minimum) back to investors. So, distribution and buyback strategies are extremely important and should be at the forefront in terms of focus. Fortunately, CAP REIT has one of the best policies among the REITs in Canada.

The trust maintains an FFO payout ratio of roughly 59% to 61%, one of the most conservative in the Canadian residential sector. This payout ratio ensures the distribution is well-covered by cash flows and provides a significant buffer, allowing it to fund its capital recycling program internally, without unitholders having to worry about the distribution.

A unique component of the 2025 fiscal year was the issuance of a $0.90 per unit special non-cash (unit) distribution in December. This move was designed to efficiently give back the substantial capital gains realized from the trust’s massive $783 million European asset sale and other Canadian asset sales.

By paying this in additional units and immediately consolidating them, CAP REIT provided unitholders with a tax benefit, increasing their adjusted cost base (ACB) to reduce future capital gains taxes, while strategically retaining the actual cash for reinvestment into its own portfolio.

This retained cash has been aggressively deployed into buybacks, which may be the most compelling arbitrage opportunity in the current market. Throughout 2025, management bought back $294M units at an average price of $43.00. When compared to the fund’s NAV of ~$56, effectively, they’re buying back their own properties at deep discounts. Yes, NAV can be overstated, but I do not believe it is anywhere near the fund’s current unit price.

This buyback strategy creates a permanent and immediate lift in FFO per unit and NAV per unit.

CAP REIT had a solid quarter, mostly because they are moving fast to sell off old, operationally expensive buildings and buying new ones that don’t need much work. They sold over a billion dollars in property this year, including a big chunk of their European business.

Rent is up 5.7% overall, but the growth they get when people move out has slowed down to around 3% or 4%. This is happening because about 20% of their tenants are paying more than the current market rate right now, so it’s going to take about a year or two to cycle those people out and get the numbers back on track. But, I’m not all that concerned with this.

They did a great job cutting costs this quarter. If you ignore taxes and utilities, their operating expenses went down by 2.5%. They used new software and better bidding to save over $2 million on repairs and maintenance alone. Occupancy is still high at 97.8%, but they are using some small rent discounts to keep occupancy steady during the slower winter months.

The company is also buying back a lot of its own stock, as I’ve mentioned. They spent $200 million on buybacks at about $43 per share on the quarter, which is an outstanding opportunity considering they value their own assets at $56 a share. Their debt is low at 37.7%, so the balance sheet is in great shape.

The main goal right now is to stop needing outside cash and become totally self-sustaining by owning newer buildings that generate more free cash flow. It’s a boring but safe strategy that is clearly working.

One of the key things about the REIT that I like is that it isn’t growing just to grow anymore. You could arguably get away with simply adding as many units as you could pre-pandemic. But now, the focus is on quality units. Even with some temporary vacancy in the European portfolio as they prep those units for sale, the Canadian business is holding the line.

They have nearly $300 million in cash and credit ready to go. Management is being picky with acquisitions right now because the gap between what sellers want and what the market is worth is still pretty wide. But a REIT with this amount of cash and credit on hand is exactly what you want in areas where developers might get desperate to move assets (think of Toronto, Vancouver, etc.)

Overall, it was a great quarter from the company, and I view it as one of the more attractive REITs in the country right now.

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