In October 2015 Northview Apartment REIT (TSX:NVU.UN) acquired True North REIT, which helped Northview reduce its exposure to western Canada from 50% to 22% based on net operating income (NOI). This improved the stability of Northview’s portfolio.
In the second quarter Northview’s western Canada occupancy rate was 81.3%, which was 3.4% lower than the same period last year. (This occupancy rate was already adjusted for the impact of the mandatory evacuation of Fort McMurray, Alberta, due to the wildfires.)
Through the True North transaction, Northview entered the Ontario market, from which it generated 27% of its NOI for the first half of the year. This province had the highest occupancy rate of 95.9% in the second quarter, while the overall portfolio occupancy was 90.8%.
As of the end of June Northview’s cap rate was 6.81%. The higher the cap rate, the better. For example, if a property was listed for $400,000 and generated an NOI of $24,000, the cap rate would be $24,000/$400,000, or 6%.
Distribution safety
Northview has a diversified portfolio comprised of over 24,000 multi-family suites in 60 markets across eight provinces and two territories.
Additionally, the REIT has maintained or increased its cash distribution since 2002 while reducing its funds from operations (FFO) payout ratio from about 90% to roughly 70%. Northview’s diluted FFO payout ratio was 79.6% in the second quarter, but excluding non-recurring items, it would have been 72.9%.
So, Northview’s yield of 7.8% remains safe.
Growth sources
Northview has been executing a number of value-adding activities, including renovating some suites; once the renovations are complete, it can increase the rent of those assets by $200-300 per month and raise below-market-rent suites to market levels on turnover.
Northview’s development activities allow it to obtain higher profitability. The REIT focuses its development activities in areas with high asking prices for existing properties and long-term potential for low vacancy and rent increases.
Northview has in-house development expertise that can develop new properties, which capture higher rental rates and have lower initial ongoing maintenance costs than existing properties. These new properties allow Northview to get additional returns of 1-2% than it would buying existing apartments.
For example, in March Northview completed a 140-unit development in Airdrie, Alberta, which was 95% leased. The expected cap rate for these properties is 7-7.5%.
Northview also has another development of 419 units in Calgary, Alberta. The first phase, comprised of 261 units, is expected to complete in the fourth quarter. The expected cap rate for these properties is also 7-7.5%.
Additionally, Northview started a development of 36 units in Cambridge Bay, Nunavut, with occupancy expected in Q2 2017. The expected cap rate for these properties is 10-10.5%.
Taking the low end of the expected cap rate for the above three developments, they can generate a NOI of at least $6 million per year. This also assumes that the combined listing price for these units is at least the price of the development costs.
On top of these development activities, Northview has 48 acres of land on which it can construct about 1,700 units. Furthermore, management identified about 500 new units, which can be developed on existing property sites in Ontario.
Conclusion
Northview has increased its distribution eight times since 2002. It also has a sustainable payout ratio of about 70%. So, the REIT maintains a safe distribution for unitholders.
Northview’s acquisition of True North improved the stability of its business performance by reducing its western Canadian exposure from 50% to 22% based on its NOI generation, and it now generates about a quarter of its NOI from Ontario.
Northview’s value-adding and development activities should lead to higher FFO generation, which further improves the safety of its distribution and perhaps will lead to a distribution hike.
