Last year Northern Property REIT, which traded with the symbol, TSX:NPR.UN, acquired True North and transformed into Northview Apartment REIT (TSX:NVU.UN). Northview Apartment is now the third-largest multi-family real estate investment trust (REIT) with an enterprise value of $2.7 billion as of January 8. Yet at the January 27 closing, it had a market cap of under $761 million.
Trading at deep discount
Thanks to Northview Apartment’s resource markets exposure, the REIT is trading at a significant discount to its peers. As of the January 8 closing, it traded at 8.7 times its adjusted funds from operations (AFFO), while its peers Boardwalk REIT and Canadian Apartment Properties REIT traded at 14.8 times and 17 times their AFFO, respectively.
Northview Apartment has already made an effort to diversify away from resource-oriented markets to reduce risk. The Truth North acquisition was Northview’s path to enter the markets of Ontario, Quebec, New Brunswick, and Nova Scotia.
Originally, Northern Property earned 30% of net operating income (NOI) from resource-based regions. After the acquisition, that exposure has been reduced to 22% of its NOI.
Is its 9.7% yield safe?
Northview’s portfolio consists of over 24,000 multi-family suites in 60 markets across eight provinces and two territories. Its residential portfolio contributes 85% of its NOI. Surprisingly, its occupancy rate in that area is over 93%. Its commercial properties contribute 12% of NOI and its execsuite and hotel properties contribute 3%.
Northview’s payout ratio is only 67%, which is in the middle of the spectrum compared with four other peers. A strong occupancy rate and a conservative payout ratio make Northview’s distribution pretty safe. But wait! Northview also has a long history of paying and increasing its distribution.
In the last 13 years Northview has increased its distribution eight times. Further, since 2002 its payout ratio has been in a declining trend. Its payout ratio was 91% in 2002 and is only 67% now. So, it’s evident that management runs the Northview business conservatively and leaves a margin of safety for its distribution.
To sum it up, Northview’s occupancy rate remains strong, the REIT maintains a conservative payout ratio of below 70%, and it has over a decade’s history of paying sustainable distributions. All of these factors make its 9.7% yield solid.
Comparing Northview’s debt metrics with its four peers, it was the second-strongest. Northview’s trailing-12-month-interest-coverage ratio is 2.9 times and the debt-service-coverage ratio is 1.7 times.
The first ratio indicates how easily Northview can pay interest on its outstanding debt. The second ratio measures its cash flow availability to pay current debt obligations. The higher the ratios, the stronger the REIT.
Low commodity prices in the energy and mining sectors have brought down Northview’s share price and valuation. Northview’s share price is not likely to recover while commodity prices stay low.
However, at under $17 per unit, Northview is a compelling long-term investment. If commodity prices recover, Northview’s share price will shoot up as well. If Northview’s share price returns to its normal multiple, it can get back to $28, which will be a 65% gain. While you wait for that to happen, you’ll get a handsome 9.7% yield.