Investors looking to benefit from a growing rental market are eyeing Northview Apartment Real Estate Investment Trust – a REIT analysts say is cheap relative to its peers and well poised to benefit from a recovery in the energy market.
Units of Calgary-based Northview, one of Canada's largest and most diversified publicly traded multifamily REITs, have risen by about 33 per cent over the past year.
While the stock, which closed on Wednesday at $25.12, is trading just a bit below its Bloomberg consensus target price of $25.33, the REIT's rich distribution – yielding 6.5 per cent – is a lure for some investors. That's higher than its peers and above the 4.4-per-cent yield on the iShares S&P/TSX Capped REIT Index ETF.
"We believe NVU is an attractive investment vehicle for investors who prioritize current cash yield," analysts at Desjardins Securities said in a recent note, referring to the REIT's ticker symbol. Desjardins picked up coverage of Northview earlier this month with a "buy" rating and $25.50 target price, which it has since increased to $26.50 after the REIT's third-quarter results came in ahead of forecasts.
"We also like the torque to a potential recovery in resource-dependent markets, especially since it appears that investors are ascribing very little, if any, value to this optionality," the analysts said, adding that Northview has the "most geographically diverse platform in the Canadian multifamily space."
Northview – formed in 2015 after Northern Property REIT bought True North Apartment REIT and suites from Starlight Investments Ltd. – has about 24,000 residential suites in more than 60 markets across eight provinces and two territories. About 31 per cent of the portfolio is in Northern Canada, 27 per cent in Ontario, 24 per cent in Western Canada, 13 per cent in Atlantic Canada and 5 per cent in Quebec.
Of the nine analysts that cover the stock, four have a buy recommendation and five have a hold. A few analysts recently initiated coverage of the REIT and upgraded their targets after Northview reported that "same door" net operating income (NOI) grew 6.8 per cent in the third quarter compared with the same period last year. Total NOI grew 6.5 per cent year-over-year.
"They're executing well on their plan and there's more to come," Echelon Wealth Partners analyst Frederic Blondeau said in an interview. He recently upgraded the stock to buy from hold and increased his target price to $26 from $23.
Mr. Blondeau said Northview has an "attractive valuation," trading at around 11.4 times 2018 price to funds from operations (P/FFO) per unit – a ratio used for REITs – compared with between 12 and 19 times for its apartment REIT peers.
He's also optimistic on the apartment sector, which is benefiting from the higher prices of buying a home in many markets across Canada as well as growth in immigration, especially in Eastern Canada.
Rising interest rates, which are supposed to deter investors from REITs because they mean higher borrowing costs, are also seen as an advantage for apartment owners because they prevent some consumers from purchasing a home.
Still, rising interest rates remain a risk in general for Northview and the REIT sector. "We feel the REIT space could become more at risk if we continue to see interest-rate volatility or higher interest rates. That's why we have a more prudent approach," Mr. Blondeau said. "We aren't telling investors to exit the space, we're telling them to pick their spots."
Canaccord Genuity analyst Jenny Ma recently upgraded Northview to "hold" from "sell" and increased her target to $24 from $20. "With very healthy rental market fundamentals, we expect the REIT's Ontario and Quebec portfolios to drive continued internal growth," Ms. Ma said in a recent note.
She has been cautious on Northview for its exposure to the weaker resource-focused markets, but pointed to "operating improvements" in recent quarters. "We now have greater confidence that rental apartment fundamentals in the resource-focused markets in Western Canada are stabilizing," she said.
CEO Todd Cook said analysts appear to be getting over their "initial skepticism" on the 2015 transaction that created Northview and the growth the REIT predicted would come. "To me, we've done that," Mr. Cook said.
The company has also been buying assets in what it sees as strong markets with high occupancy levels in diverse locales. The REIT's latest acquisition was a portfolio comprising 1,250 units in cities across the country, for about $196.8-million.
To maintain growth and keep investors interested, Mr. Cook said the REIT is looking to expand both through acquisitions and through new developments, in particular in growing markets in Ontario, Quebec and Western Canada.
Derek Warren, assistant vice-president and portfolio manager at Lincluden Investment Management, said his firm started buying the stock in September, 2016. Mr. Warren said he was attracted by its portfolio and likes the yield. While they trimmed their position when the units were trading at $23.40 in early November, they still own it.
"I think it's fully valued, but I like the cash flow," Mr. Warren said.