New Stock Pick Poised for Growth

As I look for value plays in keeping with the ten lessons from the bees, Northview Residential REIT (NRR.UN) begins to stand out.

It owns some 14,400 apartments, 1.2 million square feet of commercial property, and 200 Executive Rentals for 30 days or more short-term stays. The apartments and properties are distributed across the country in northern, western, central, and Atlantic provinces.

With a market cap of 667 million dollars and real estate valued at 887 million after deducting mortgages and other liabilities, the current price to book is some 75%. That’s a 25% discount to net asset value.

The company pays a 6.4% dividend and a payout ratio of 66% of cash flow.

So why am I starting to nibble on this stock, buying a few here and there?

1. Let’s start with the inverse. What could go wrong with this company? Currently, 80% of their mortgages are in fixed terms, with an average date to maturity of 4.9 years. That means that, for almost five years, their debt payments will be fixed. However, 20% are in floating mortgages, open to significantly increased payments should rates rise again. It’s a risk that isn’t necessary, and the company should immediately fix that debt. Most of their debt is CMHC-insured, giving the portfolio more stability. I’m finding it hard to find much wrong with this company. 

2. What is the probability of losing all my investment in this company? I give it a 5% chance of going to 0. Mismanagement, fraud and theft are the only real risks right now. Not paying for insurance policies on buildings that could be destroyed in a fire or natural disaster is also a risk. Severe climate events could adversely impact the Northern Canada Portfolio more than any other area.

3. What are the chances of the company continuing to pay its dividend? (Little bits become significant bits.) I give the probability of the dividend continuing for the next five years to be in the 95% range.

4. Habitat or location? The company owns property throughout the country within three different classes: apartments, 30-day Executive rentals, and commercial space. While not spectacular, the other locations add to the location safety of the investment.

5. Value Play? At $18.48 Canadian today, this is a good value. It is an owner of apartments within markets that investors and experts often overlook. Secondary markets, while frequently not exposed to significant market upside benefits, are also usually more valuable than the price offered. This is the case, in my opinion, for NRR.UN.

Depending on what happens with European Residential REIT, I believe that NRR.UN could become a core holding of the portfolio. It should be a long-term hold and not susceptible to liquidation or takeover, as experienced at European Residential REIT. The ten rules of the hive tell me this. What say you?