Northview Apartment REIT’s (TSX:NVU.UN) share price more or less correlates with the movement of the WTI oil price. Since mid-2014 the WTI oil price has fallen from over US$100 to under US$40, while Northview has fallen about 34% from roughly $28.50 to $18.80 per unit.
About Northview Apartment
It owns total assets of about $3.1 billion including more than 24,000 residential units and 1.1 million square feet of commercial properties, which consist of office, warehouse, retail, and mixed-use buildings that are largely leased to federal or territorial governments and other quality commercial tenants under long-term leases.
Navigating the negative environment
Through acquisitions, Northview has reduced its resource-region exposure from 30% of net operating income (NOI) to 22%, of which 17% is from Alberta and 5% is from northeastern British Columbia.
The rest of Northview’s portfolio is performing as expected. The portfolios acquired in 2015 in Ontario and Atlantic Canada have added stability to Northview’s portfolio with high occupancy and rising rental rates.
2015 results
Northview’s 2015 diluted funds from operations (FFO) per unit was $2.34, declining only 1.3% from 2014’s FFO per unit. Its payout ratio was 69%, leaving some margin of safety for its distribution. In 2015 it maintained a portfolio occupancy of 90.3%, 1.3% lower than in 2014.
From 2014 to 2015, Northview’s interest-coverage ratio decreased 0.39 times from 3.7 times to 3.31 times, and its debt-service coverage ratio decreased 0.24 times from 2.1 times to 1.86 times.
The interest-coverage ratio indicates how easily a company can pay interest on its outstanding debt. The debt-service-coverage ratio measures how well the company’s cash flow covers current debt obligations. The higher the ratios, the better.
Another metric to watch for is Northview’s weighted-average-capitalization rate, which decreased about 1.1% from 2014’s 8% to 2015’s 6.8%. The capitalization rate is a metric of profitability; generally, we want a higher rate.
The changes in the interest-coverage ratio, debt-service-coverage ratio, and capitalization rate are due to the 2015 acquisitions. Unitholders should follow these metrics going forward to see if they’re improving or deteriorating.
A positive is that Northview’s weighted-average-mortgage interest rate was 34 basis points lower in 2015 than it was in 2014, which means the REIT pays less interest.
In 2015 Northview generated 80% of its NOI from its residential portfolio, 16% from its commercial portfolio, and 4% from its execusuites. In 2015 the REIT’s residential same-door NOI decreased 3.3%, the commercial portfolio increased 4.6%, and the execusuites and hotel portfolio increased 6.5%.
Conclusion
Northview’s acquisitions in 2015 helped the REIT diversify by expanding its portfolio to Ontario and Atlantic Canada. Further, the REIT’s commercial portfolio continues to give a solid performance. Specifically, the Northview’s diluted FFO per unit only declined 1.3% compared with 2014.
Northview’s 8.7% yield is attractive. Northview has increased its distribution eight times in 13 years and has never cut it. In addition to that track record, its FFO payout ratio of about 70% adds a margin of safety to its distribution.
Furthermore, the shares are discounted by about 30% from its normal multiple. Still, cautious investors should observe how its 2015 acquisitions of the True North portfolio and Starlight properties contribute over a few quarters before deciding to buy or sell. Value and/or income investors might consider a position here for their diversified portfolios.
