A Canadian REIT Back on Track

04/20/2012 9:45 am EST

Focus: REITS

It might not have been terrible for real estate investment trusts in Canada, but it hasn’t been easy either. This one is getting back to form in the new normal, writes the staff of Investor’s Digest of Canada.

Northern Property REIT (Toronto: NPR.UN) didn’t head south in the fourth quarter, Brad Cutsey will tell you. At 59 cents a unit, its funds from operations were not only 5 cents above his own estimate, as well as 4 cents above the consensus call, but 20% higher year over year.

Northern did well elsewhere, cutting vacancy losses by 90 basis points to 3.7%—the result in part of stronger rentals in both British Columbia and Alberta, says Cutsey, a market maven with Dundee Capital Markets in Toronto.

Indeed, vacancy losses in Alberta fell 320 basis points year over year, to 6.1%, with losses in BC sliding 50 points to 5.1%.

Meanwhile, the company is in a better position to pay down its credit facilities, having recently closed a $65.7 million issue of two million trust units at $32.85 apiece. Northern is also less leveraged, having seen its ratio of debt to gross book value decline to 42 from 43%—a level well below its peer group average, 52%.

In the interim, the company is now likely leaner and meaner, given that it has reached a deal on the sale of the bulk of its senior properties in Newfoundland. The REIT is also likely a little richer, now that it has closed the sale of its Callingwood Downs property for $6.8 million. In the meantime, the company remains an “item” in the marketplace, having received inquiries about the sale of its properties in Western Canada.

Cutsey, for his part, sees Northern becoming both bigger and stronger in 2012, thanks to its acquisitions, as well as the properties it’s now putting up. Such new developments, he notes, are particularly important given that their going-in yield—8% to 8.5%—tops that for existing rental apartments by at least 200 basis points.

And Northern has been hefting its tool kit, having recently finished a 32-unit upscale apartment building in Iqaluit, while continuing work on another 87 units in the Nunavut capital. The company is also busy with developments in both Yellowknife and Lloydminster.

Cutsey thinks Northern will be well served by its experience in putting up buildings in Canada’s far north. In fact, he sees this giving the REIT the chance to earn higher returns than if it only made third-party acquisitions.

In the interim, he’s tweaking his estimates. Not only is he cutting 2012 FFO to $2.35 from $2.39 a unit, but he’s reducing Northern’s adjusted FFO to $2.09 from $2.12, the result of near-term dilution from Northern’s recent financing.

For 2013, Cutsey is pegging FFO at $2.27 and not $2.41, while cutting his AFFO estimate to $2.04 from $2.15 a unit. The big cuts not only reflect Northern’s sale of its seniors living portfolio in its entirety, but also the timing lags associated with the deployment of those funds.

Still, despite the lower estimates, he thinks the REIT should have no trouble covering its distributions. For Cutsey, Northern not only deserves a “buy” recommendation, but a berth once again on his coverage list. His 12-month price target is $33.75 a unit.

For the three months ended December 30, Northern posted net operating income of $23.8 million—just $2.4 million shy of Cutsey’s forecast, although $2.4 million, or 10.1% higher, year over year.

The company also finished up strongly in the revenue column, notching sales of $42.6 million—an increase of $6.6 million, or 18.3%, YOY. But net income was lower, sliding to $33.2 million, or $1.13 a unit, from $58.9 million, or $2.15 a unit, for the similar period in 2010.

For the 12 months ended December 30, Northern swung to net earnings of $86.2 million, or $3.01 a unit, from a net loss of $23.9 million, or 93 cents a unit, for the similar period in 2010. Total revenue, not surprisingly, also presented a brighter picture, climbing 13.4% to $158.7 million, while net operating income increased 12.1% to $103.1 million.

Elsewhere, the company saw funds from operations grow to $67.4 million, or $2.35 a unit, from $55.5 million, or $2.16 a unit, for the similar period in 2010. The payout ratio, however, was lower, sliding to 65.3% from 70%.

Headquartered in Calgary, Northern Property REIT invests primarily in residential properties. Indeed, the company is the biggest residential landlord in Nunavut, the Northwest Territories, and Newfoundland. The REIT also boasts a strong presence in the northern parts of Alberta and British Columbia.

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