Apartment REITs are some of the most popular investments out there, especially for investors looking for income.
People need a place to live, of course, but the logic goes far deeper. While every REIT is subject to ebbs and flows of the business cycle, residential real estate tends to be much more stable than retail or office space.
It’s also a very easy to understand business. We all know somebody who owns rental property. We can all wrap our heads around that kind of operation. Sure, it’s not difficult to understand renting out other types of real estate, but I know many investors who don’t want anything to do with real estate that isn’t residential.
The only question left for many Canadian investors is which residential REIT they’re going to put in their portfolio. Let’s take a closer look at two of Canada’s largest: Northview Apartment REIT (TSX:NVU.UN) and Boardwalk REIT (TSX:BEI.UN).
Operations
Northview Apartment REIT was created in 2015 as a result of a merger between True North Apartment REIT and Northern Property REIT. Although both companies had emphasis on northern markets, together they form a diversified powerhouse. Northview has more than 24,000 apartment units across 60 markets in eight different provinces. It has an enterprise value of approximately $3 billion.
Boardwalk REIT is larger with an enterprise value of $4.7 billion. Approximately 60% of the portfolio of more than 34,000 suites is located in Alberta. This exposure to the energy market has hit investors hard with shares falling some 30% versus 2014 highs.
Boardwalk’s management is taking advantage of low prices and cheaper labour to further expand in Alberta. It has already acquired approximately 800 suites thus far and has plans to add about 1,700 additional units. Expansion plans are also in place for Regina.
Valuation
We’ll use funds from operations (FFO), which is a key metric for REIT profitability, as the basis of our valuation metrics.
According to company projections, Boardwalk plans to earn between $3.05 and $3.20 per share in FFO. At the top end of that range, shares currently trade at 15.6 times FFO. On a price-to-book value basis, Boardwalk trades at a discount of approximately 20% compared to its book value of $62.95 per share.
Northview is much cheaper than Boardwalk on a price-to-FFO basis. It is projected to earn $2.16 per share in FFO–a slight decrease compared to last year because of the Fort McMurray fires. Even based on these temporarily depressed earnings, Northview shares trade at just 9.7 times FFO.
Northview isn’t quite as cheap as Boardwalk on a price-to-book value basis, but it still trades at a discount to book value of approximately 7%.
One thing to keep in mind when comparing these two REITs is debt levels. Northview has a debt-to-assets ratio of 60%, while Boardwalk’s balance sheet is about as good as you’ll find in the real estate sector. It has a debt-to-assets ratio of closer to 40%.
Dividend
There isn’t really much competition. From a dividend perspective, Northview is a far better choice for dividend investors than Boardwalk.
Northview pays investors a monthly dividend of 13.58 cents per share–a payout that works out to a 7.8% yield. Unlike many other dividends approaching 8%, Northview’s payout is quite sustainable. That’s good enough for a 75% payout ratio.
Boardwalk has delivered terrific dividend growth over the years. In 2005 it had a regular dividend of $1.26 per share. In 2016 that payout is projected to hit $2.25 per share. That’s spectacular dividend growth for a REIT.
A $2.25 annual dividend gives Boardwalk shareholders a yield of 4.5% with a payout ratio of approximately 70%. There’s certainly nothing wrong with a dividend like that, but it certainly pales in comparison to Northview’s attractive payout.
Overall
For me, the choice is clear. Yes, Boardwalk does appear to be attractively valued today, but even after shares have declined 30% off their 2014 peak, Northview still looks to be the better choice. Northview has a lower price-to-FFO ratio, a much higher dividend with an equivalent payout ratio, and a plan to pay down its excessive debt.
I think investors who buy Northview today will be happier five years from now than those who buy Boardwalk. It’s that simple.
