Northern Property REIT (TSX:NPR.UN) reported funds-from-operations (FFO) per-share growth of 4.9% for the second quarter compared with the second quarter of 2014, and it increased 5.5% for the first half of the year compared with the first half of 2014.
The total revenue and net operating income also grew 7.3% and 9.5% for the first half of the year. The market took the growth as a positive sign and the shares rose 7% to $23 per unit as a result. Is this real estate investment trust (REIT) still a good investment after the jump?
The business
Northern Property REIT owns multi-family residential properties with a focus on northern and secondary areas of Canada where growth rates are typically higher. Its properties are diversified across Alberta, the Northwest Territories, Nunavut, Newfoundland and Labrador, and is expanding into British Columbia, Saskatchewan, and Quebec.
Due to weak economic conditions in various areas, Northern Properties has experienced a higher than normal tenant move out this year. However, the REIT has made efforts to counter that and most regions are showing signs of decreased vacancy.
Dividend safety and growth
The recent oil-price decline made Northern Properties’s share price retreat 21% from its high of $29 in 2014. Even after the price jump of 7% on Friday, the REIT still yields 7.1%.
From 2004 to 2014 Northern Properties’s distribution increased by a compound annual growth rate of 3%. Additionally, the REIT has a growing FFO and the payout ratio is sustainable around 70%. So, it’s likely the REIT will continue paying that 7.1% yield, and may even surprise you with a hike occasionally.
Is it still a good investment today?
Todd Cook, the president and chief executive officer of Northern Property REIT, also stated that they are “in the process of renewing [their] normal course issuer bid as the current trading price of our trust units remains well below the net asset value…We believe that the repurchase of Northern Property REIT’s units will deliver strong returns for unit holders and represents an effective use of capital.”
I agree with the CEO. Historically, the company has traded at a price-to-funds-from-operations ratio of over 11, indicating a price of $28-29 or an upside of 22-26%. At $23 a share, it’s trading at a price-to-book of 0.87, further indicating its shares are cheap compared to the value of the underlying assets.
Tax on the income
REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income, and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
So, to avoid any headaches when reporting taxes, buy and hold REIT units in a TFSA or an RRSP. However, the return of capital portion of the distribution is tax deferred. So, it may be worth the hassle to hold REITs with a high return of capital in a non-registered account.
Of course, each investor will need to look at their own situation. For instance, if you have room in your TFSA, it doesn’t make sense to hold investments in a non-registered account to be exposed to taxation.
Conclusion
With Northern Property REIT showing strong growth in the face of low oil-price headwinds, one can imagine what happens when the operating environment becomes more favourable. Northern Property pays a juicy, safe yield of 7.1% and has potential of capital gains of 22-26%. It is a good investment priced at a discount today.
