Multifamily rentals in the United States have been one of the most compelling investment thesis topics in U.S. real estate. It certainly is not news that the great recession led many hard working Americans to live a renter’s lifestyle. The fact that large portions of homeowners were quote unquote under water made some people challenge the sense of stability in the housing market. In addition, many saw the risks that are associated with owning a property. Many millennials, who were faced with large college loan debt and stringent borrowing requirements could not take on any additional debt that is required to purchase homes. Instead, they chose to either rent or stay home with their parents. These situations result in the fact that, after homeownership peaked at seventy percent in 2005, it has greatly declined without any signs of stabilization in the near future. We can only guess if homeownership levels will revert back to where they were, or if we will see an entirely new normal moving forward.
Another consequence is that multifamily REITs have become expensive on an AFFO multiple basis. It was just a few weeks ago that I indicated that small caps might have the best entry point for stocks that dwell in this REIT sector. Thanks to a reader’s comment, I also did research on Canadian REITs that invest in U.S. multifamily properties.
Pure Multi-Family REIT
Pure Multi-Family REIT is a small cap business that is listed on the TSX-Venture, a Canadian electronic exchange for emerging companies. The company’s market capitalization is approximately US$230 million. They own fifteen properties that are located within three metropolitan areas of Texas including Dallas, Houston, and San Antonio, along with Phoenix, AZ. Pure Multi-Family stocks are traded under the symbol RUF.U in US dollars, and RUF.UN in Canadian dollars.
Much like many real estate investment companies Pure Multi incorporates a complex investment structure. Raising equity in Canada and owning properties in the United States certainly adds an additional layer of entities. The Canadian entity was formed as a limited partnership; however, they own a Maryland based U.S. REIT under which the properties operate.
Pure Multi has issued two types of units, including Class A and Class B. The Class A units are available to investors and have rights over 95 percent of all distributions and all net assets. The company’s financials are reported in U.S. dollars, however they can be viewed in the SEDAR website which is the Canadian version of EDGAR. Their financials are reported under International Financial Reporting Standards (IFRS), so it is certainly possible to gain a better aspect of the stock’s net asset value. IFRS requires an estimate of the fair market value of a REIT’s investment properties. Pure Multi-Family’s management reported that, for the nine-month period ended September 30, 2015, they took into consideration independent appraisals on ten of their investment properties, which represented 67% of the properties that the company owns.
From a valuation standpoint, Pure Multi is trading on par with small cap multifamily REITs in the United States (Bluerock Residential, Independence Realty Trust, NexPoint Residential, Preferred Apartment Communities). The company’s dividend yield is at 8.2 percent, and the price-to-AFFO is at 12x. On average, its U.S. peers’ dividend yield is at 8.8 percent, and the price-to-AFFO is at 12x.
Source: Preferred Apartment Communities (NYSE:APTS), Bluerock Residential Growth RE(AMEX:BRG), Independence Realty Trust, Inc (AMEX:IRT), NexPoint Residential Trust, Inc (NYSE:NXRT), Pure Multi-Family REIT LP (TSXV:RUF.U), census.gov, Fast Graphs.
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Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.