Northview Apartment REIT: Where Did The Growth Go?

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About: Northview Apartment Real Estate Investment Trust (NPRUF)
by: Trapping Value
Summary

Northview Apartment REIT has delivered on many metrics.

FFO growth per share was not one of them.

We like the stock but it is no longer our top pick.

Northview Apartment REIT (OTC:NPRUF) has been our top pick among REITs for two consecutive years. When we last covered Northview, we concluded:

Northview is the only apartment REIT we own, and we have no desire to let go of it. The stock has underperformed its peers, although a 10.5% total return puts it in the top quartile of all Canadian REITs. 2019 should shape up to be a banner year, and Northview should get its long-awaited rightful multiple.

We also gave it a target price of $35 CAD. Since we first mentioned this REIT in August 2017, it has been an excellent performer and done better than both the US and Canadian REIT indices.

Chart Data by YCharts

With the stock now approaching our long held $35 CAD target, we decided to see if the current results merited holding on to this one.

Q4-2018 results

At first glance, Northview has delivered some rather exceptional numbers with revenues, net operating income (NOI), and funds from operations all powering ahead double digits.

Source: Northview Presentation

However, FFO per units and adjusted FFO (AFFO) were much weaker and barely increased over the previous year. The reason for this has been the rather extensive equity offerings and the accompanying unit issuances in 2018.

Source: Northview Q4-2018 financials

With unit counts up about 10%, we can see where the growth per unit has gone. This chronic equity issuance though has not been for nothing as Northview has derisked a significant portion of its challenges by reducing debt to gross book value much closer to 50%.

Source: Northview Presentation

At the same time, it has used the proceeds of its offerings to expand the portfolio and complete developments.

Source: Northview Presentation

What to look forward in 2019

In Q4-2018, Northview's same door NOI (SDNOI) stayed strong in Ontario.

Western Canada while weaker than last year, was still positive.

Source: Northview Presentation

While they are smaller parts of the portfolio, we were surprised to see notable weaknesses in Quebec and Atlantic Canada.

Source: Northview Presentation

That drag is the reason our estimates were off for this quarter. Northview did mention that it had taken units off the market in Quebec.

In Atlantic Canada, improved economic conditions combined with higher lease incentives resulted in increased occupancy. Quebec occupancy decreased due to units taken out of inventory for renovations.

Source: Northview Q4-2018 press release

That helped explain it as Quebec is one of the hottest economies in North America right now and an SDNOI decline there would make little sense under normal conditions.

Northview does have a healthy dose of refinancings to do for 2019.

Source: Northview Presentation

Recent CMHC refinance rates are in the 3.25% range, so mortgage refinancings should be positive in 2019 and neutral in 2020 for Northview. But it no longer has the strong rolloff delta it had in the past.

Northview has also substantially renovated units coming into the market and that should make for better NOI comparisons. Overall, NOI should grow 2-3% and FFO should grow about 4-6% in 2019. However, we have been a bit optimistic, and wrong, on this in the past as Northview has eschewed FFO growth and preferred instead to focus on reducing leverage. Whether Northview delivers on our targets will depend heavily on whether it allows portfolio growth to flow through or continues with more equity offerings.

Conclusion

At about 13x our FFO estimates alongside a 15% discount to our estimated NAV, Northview is certainly not expensive. Boardwalk REIT (OTCPK:BOWFF) trades at far higher multiples and yields so little that you might confuse it with a Treasury bond. We hence wholeheartedly endorse that Northview should trade three multiples higher. We are still disappointed that the overall numbers have come in lower than we anticipated. We hence sold some of our position at $29.19 CAD as we believe that there are some better opportunities elsewhere. The stock is still a good long-term holding for someone who wants a lower risk apartment play with a management that has proven ability to grow the business. We may buyback our sold units should the price retreat or Northview follows through with a secondary offering.

Disclosure: I am/we are long NPRUFF, BOWFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints. Tipranks: No Rating