Usually, the company that plans to acquire another ends up falling in price. That’s what happened to Northern Property REIT (TSX:NPR.UN). On August 10, it announced its plan to acquire True North Apartment REIT Trust (TSX:TN.UN) as well as $535 million of multi-family portfolio from Starlight Investments Ltd. Northern Property’s unit price reacted by falling more than 8%. Should unitholders of Northern Property be worried?
Result of proposed transactions
The proposed transaction to acquire True North has been approved by the boards of trustees from both True North and Northern Property. However, unitholder voting still awaits. Northern Property’s side requires 50.1% approval, while True North requires two-thirds approval. This transaction is expected to close in late October 2015.
After the transactions with True North and Starlight, Northern Property will become the third-largest publicly traded multi-family REIT in Canada, increasing the stock liquidity for unitholders, with a market cap of over $1.1 billion based on the REIT’s closing price of $21.09 per unit on Monday.
The REIT will own over 24,300 multi-family suites across eight provinces and two territories, creating a more diversified portfolio. Particularly, Northern Property would have residential properties in Ontario, New Brunswick, and Nova Scotia, where it didn’t own any properties before.
Northern Property will also be renamed Northview Apartment REIT and will be listed under the proposed symbol of NVU.UN on the Toronto Stock Exchange.
After the transactions, Northern Property’s expected payout ratio would be about 70% and the current annual payout will remain the same at $1.63 per unit.
At $21 per unit, Northern Property REIT provides an attractive yield of 7.8%. Northern Property has a track record of sustainable and growing distributions as well as a conservative distribution policy.
From 2002 to 2014, over 12 years, the REIT has increased its distributions eight times, and never cut it once. If you had invested in Northern Property in 2002, your income from it would have increased by 41.7%. In that 12-year period, the REIT’s payout ratio typically oscillated between 65% and 80% with the recent payout ratios remaining 70% or lower starting from 2008.
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.
After the 8% drop in unit price, Northern Property is in bargain territory again. The REIT seems pretty confident about both transactions. Even if those transactions don’t come into fruition, the units are 8% cheaper today, falling back to the same price it was before its positive earnings report from last week.
Foolish investors should certainly consider adding this income machine to their diversified dividend portfolios to lock in the sustainable 7.8% yield. It could even surprise you with some occasional income raises.
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Fool contributor Kay Ng owns shares of NORTHERN PROPERTY REIT.