Residential real estate investment trusts (REITs) are generally viewed as stable investments because everyone needs a place to live.
That said, take care to avoid overpaying for your REITs because the lower the multiple you pay, given all else equal, the more the income you’ll get.
Let’s see if Northview Apartment REIT (TSX:NVU.UN) is a stable value investment today after it has dipped about 7% from its April high.
Portfolio
After acquiring True North in 2015, Northview reduced its exposure to resource-based markets, and, as a result, its portfolio has become more diversified.
Northview’s portfolio is comprised of more than 24,000 residential units (which contribute about 86% of its revenue) and commercial properties. It generates about 32% of its net operating income from northern Canada, 26% from Ontario, 24% from western Canada, 13% from Atlantic Canada, and 5% from Quebec.
Recent results
In Q1 2017, Northview’s residential portfolio occupancy held up well in most geographies. It had an occupancy rate of +92% in all regions with minor changes (up or down) in the average monthly rents (AMR), except in western Canada. The occupancy there remained below 82%, and the AMR was 4.6% lower compared to Q1 2016.
Its northern Canada portfolio remains a bright spot with an occupancy of 94.1% and maintaining the highest AMR in its portfolio. The overall occupancy in Northview’s residential portfolio was 90.6% in Q1.
Northview’s payout ratio expanded 10% to 92.6% in Q1 2017 compared to Q1 2016 due to non-core asset sales, a lower operating performance in resource-based markets (namely western Canada), and dilution from the equity offering in October.
Northview has sold $72 million non-core assets since 2016. It has another $16.4 million under contract. These sales have been primarily directed to reducing the company’s debt levels.
Having increased its distribution per unit eight times without cutting it since 2002, Northview shows its commitment to maintaining its distribution. Its distribution remains sustainable for now, and its payout ratio should improve if we see an improvement in the Albertan economy.
Is the stock a value buy today?
At $20.90 per unit, Northview trades at a multiple of about 10. Bank of Nova Scotia gives the stock a one-year price target of $22.50, which represents upside potential of +7%, or a total return of +14% after adding in its 7.8% yield.
Investor takeaway
If you’re looking for income, you may opt to take a small bite in Northview today. However, since the performance of the company is subject somewhat to the cyclical nature of the Albertan economy, patient investors can look for an entry point of, at most, about $20.
