My top, top holding

I received an interesting question today from one of my patron. He asked me what my “top, top holding” was, i.e. the stock I have the most money in.

Well, to be honest, the answer tends to vary quite a bit from one day to another, depending on the trades I’m doing and what I’m trying to achieve in terms of risk and potential rewards. But there is one stock that almost perpetually sits at the top; right now, it is indeed my top, top holding with over $200,000 in it.

This stock is: Northview Apartment REIT (TSE:NVU.UN).

There’s little not to like about this company. Now, I’ve written about this company before, but the more I study it, the more I realize just how ridiculously undervalued it is. Northview isn’t exactly the next Tesla, but it’s a very reliable stock that pays me month after month with minimal risk.

Before I explain exactly what I like about this stock, let me set a disclaimer: this is the perfect stock for me. Depending on your risk preferences, you might not even want to invest in this. But for my needs, my risk tolerance and so on, Northview Apartment REIT is indeed my top, top holding.

Northview was created during a fusion of two independant REIT, one of which had a strong presence in Northern Canada, another which had a strong presence in Alberta/Ontario. The result is a very diversified, solid, economical, well-managed company with plenty of advantages and few disadvantages.

To kick this off, let us start with the BAD points about this company. There aren’t many:

Bad Points

1. No distribution growth.

By now, I would have expected at least two dividend hikes, yet I got none:

This stock still pays the $0.1358 distribution it paid back in 2014. I like companies with dividend increases and I like companies with annual dividend increase even more. Why? Because dividend increases indicate two things: that the company is doing well (else, why would the directors vote to increase the distribution? If things were going badly, they’d look at cutting, not increasing!) and that more raises are on the horizon. But when a dividend stagnates, it can stagnates for a while. Just take a look at Artis for example:

Artis (TSE:AX.UN) still pays the same dividend it did back in 2017)

Artis still pays the same distribution it did back in 2007. Ten years without any growth and there certainly isn’t any hike on the horizon. Now, maintaining a dividend is certainly better than cutting it, but if a company was doing that well, you’d expect profits to grow and the distribution along with it – or at least the stock price.

To go back to NVU.UN: these guys have plenty of room to increase their distribution should they choose to and it’s not quite clear why they haven’t. When you pursue a growth strategy, you expect results at some points and with REIT being so tax-efficient, you’d really expect managers to be interested in pursuing that kind of strategy. Compare them to BEI.UN, for instance, a company that hikes their distribution every year, and you might start to wonder what Northview’s strategy is. With a payout ratio at 74.6%, there is no reason not to target at the very least a 2% increase per year.

Two years after the merging of NPR.UN and TN.UN, Northview seems nowhere close to increasing its distribution and one might wonder if it will ever be increased at all. This one might very well be another Artis, aka a company offering a strong yield, but not really going anywhere.

2. Higher Risk Perception

For some reason, Northview is viewed (no pun!) as a very risky company. There is no other reason the company would be trading at so a low valuation. Even with the most pessimistic scenarios, there is no reason Northview should be trading below $25 per share. Although you might not see this as a problem, a higher risk perception creates several problems: harder and most costly to borrow money, stock price more vulnerable to short selling attack, etc.

The Good

1.The Yield

Let’s start with the obvious: Northview offers an amazing 7% yield that is well covered by earnings. If you’ve been trading for a while, you know a safe 7% per year is extremely hard to achieve. Canadian banks are safe, but they pay 3-5% per year. Northview’s distribution, in my opinion, is among the safest distributions of all REITs, and REITs, once again in my opinion, offer some of the safest yields in all sectors. Why? Because rent is pretty much the last thing you’ll stop paying.

Northview is an apartment REIT, which eliminates some, if not many of the problems of other kind of REIT. Unlike commercial REITs, for instance, its buildings will never fall out of favor. And unlike industrial REITs, it will never be stuck with building that can be used for one kind of industry only. Apartments are ALWAYS in demand and if you can’t rent one, well, just drop the price 5% and there it goes.

So the yield alone, in my opinion, justifies holding it, distribution increase or not.

2. Amazing tax treatment

I won’t expand too much on that, but Northview sends me over a thousand dollar per month and I’ve never paid a single penny in taxes on that amount. In fact, until I sell my stocks, if I sell my stocks, I won’t pay a damn cent in taxes and when I do, only 50% is going to be taxed. Fantastic!

3. Northview Apartment REIT is far safer than it looks

I’ve tried to see what was considered so risky in Northview – so risky that it justified a price far below book value – but I’ve utterly failed. Even Alberta, which is “supposedly melting,” is doing just OK.

Overall, Northview is very diversified, with apartments all over Canada, has no major debt problem, is profitable, is growing and has several projects on the way. Its occupancy is fine for an apartment REIT, with over 90% of its apartment rented, and its financial position is fine. Plus, it has over 60,000 units in several major markets in Canada. So why do everyone assume that it’s about to go bankrupt?

Looking at similar apartment REITs: Milestone offers a 3.64% distribution, Interrent offers a 3.12% and Boardwalk offers a 4.93% distribution, far below Northview. Sure, the distribution isn’t all, but Northview is trading well below net asset value.

Now, looking at it in details, I can see some slight hints of risk: yes, the debt is a little higher than it should, at 60% instead of 50-55%. Yes, the occupancy of their Western portfolio is kind of low. Yes, it is indeed vulnerable to interest increases due to its large amount of mortgages. But those are all very minor point in what is a critically undevalued company. It seems to me that Northview is being regarded as a high-risk play, especially with all the idiots betting the housing market is about to crash (a position they had since 2009). But even if that happens, apartments are not going to be affected that much. Apartments are some of the easiest and quickest forms of property to rent and, once again, are one of the last thing people will stop paying.

With that being said, the housing market is still doing great in Canada and there is no reason it should stop doing great in the near future, no matter what the “pundits” say.

4. Critically undervalued

At $22 per share, Northview is not trading at a discount, it is trading at firesale price. Northview is building new apartments all the time (401 units planned in 2016) and rents for its current units are going up. To me, it seems there is a lot of growth happening and although this hasn’t materialized in revenue or distribution increases, I’m confident this will happen fairly soon. Northview had to deal with tough conditions in Western Canada, with the McMurray fire and crashing oil prices, and I feel any small uptick will help me tremendously.

I fully expect this kind of company to grow at 5-10% per year over the long term, if only with the new buildings they are completing and rent increases. Right now, Northview is trading at a price that assumes it will never grow again.

5. The safest category of REIT there is

I’ve always felt REIT were one of the safest sectors to invest in. After all, buildings are not going to go away and people will always need buildings.

Of all REIT categories, I have to say residential REITs are certainly the safest. If you rent a building to a large company and the company stops paying, it might be quite a while until you can rent it to someone else – years, sometimes. But with a residential building, if the tenant doesn’t pay, you can kick him out and rent the apartment to someone else a month later, if not a week. Plus, people will always need apartments.

There is too much to like about Northview Apartment REIT and too little to hate. I feel that people give too much value to the slightly too high debt ratios. But to be fair, I also feel Northview’s results have disappointed in the past year or so. While I invested most of my money at under $20, I definitely expected them to perform a bit better than they did. After all, from a purely analytical ratio, their Funds from operations did go down and their debt did creep up.

But I still believe that sooner or later, Northview Apartment REIT will improve its position and get back to amazing growth. Until then, I am all too happy to collect the distribution and wait.

So there you go, that’s my top, top holding. This company really has everything I’m looking for in a stock: undervalued stock price, amazing distribution, great growth opportunity, lower-than-perceived risk, etc.

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