Dividends Without Insomnia

03/17/2009 11:13 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, editor of the Canadian Edge, says a Canadian real estate investment trust is making good money and giving its shareholders steady income.

For those in search of a lofty dividend with sleep-easy safety, there are few better options than Northern Property REIT (TSX: NPR-U, OTC: NPRUF). The REIT turned in a 13.3% gain in funds from operations (FFO) per unit-the best measure of REIT profitability-and a 14% jump in distributable income per unit (DIPU) in 2008, a year when the Canadian economy shrank and property values generally fell in most provinces. Cash flow covered debt interest by more than three to one, while the payout ratio was only 71%.

More impressive, growth actually accelerated in the fourth quarter, with FFO surging 18.3% and DIPU soaring 20.2%. That pushed the payout ratio down to just 68.3%, as Northern successfully integrated property acquisitions and expansion, and cut costs

Average weighted interest costs fell to 5.13% from 5.39% a year earlier, demonstrating the REIT's ability to access capital cheaply in a very tough environment. Vacancy rates, including renovations, stood at only 4.7% at end year, while "same door" revenue growth was 6.1%, indicating solidly rising rents. Those are healthy metrics that point to equally strong results in 2009.

About a third of assets are located in Alberta, much in the oil patch region. But over 20% are in the Northwest Territories, 17% are in Nunavut (a large territory in the northern part of Canada centered on Inuit tribal lands-Editor), 15% or so are in British Columbia, and the balance is in Newfoundland and other regions like the Yukon.

These properties have several advantages. First, all of these areas are still growing, based on the latest statistics available (through January 2009). Second, the REIT's properties are in places where the major economic drivers are governments and other extremely creditworthy rent payers and where tenants have very few other options.

In fact, its largest customers are the governments of Canada, the Northwest Territories, and Nunavut

Finally, 82% of assets are residential properties, including retirement housing. Less than 3% are commercial properties in Alberta, the only region with significant energy price exposure. That leaves Northern Property's overall revenue basically immune from a deeper energy patch slowdown. Moreover, residential property values have risen over the past year in most of its markets, providing a firm underpinning for the security of its rents.

Ironically, the greatest risk to Northern's profitability is utility costs, as it essentially buys energy and provides it to tenants. That may become a problem at some point, when energy prices recover. Importantly, however, the impact would likely be more than offset by the higher rents and occupancy the REIT would enjoy during a renewed energy patch boom.

A yield of nearly 10% and a price-to-book value of just 1.24x are plenty of incentive to buy Northern Property REIT up to my longstanding target of US$20. (It closed at $12.24 Monday-Editor.)

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