Responding to a Member of his Inner Circle, Pat McKeough discusses a REIT that’s a relatively new issue, having begun trading on Toronto’s Venture Exchange in 2012. The company’s properties are heavily concentrated in Texas, although a recent Arizona acquisition is a step toward a more diversified portfolio. This REIT’s revenues have increased sharply, the stock is rising and the distribution yields 5.5%. But Pat notes that there are two substantial risks: lack of geographical diversification and rapid growth by acquisition.
Q: Pat: Please could you give me your advice on Pure Multi-Family REIT LP. Thank you.
A: PURE MULTI-FAMILY REIT LP (symbol RUF.UN on the Toronto Venture Exchange; www.puremultifamily.com) is a Canadian based, publicly traded REIT that owns U.S. multi-family real estate assets.
The REIT first sold units to the public and began trading on the Toronto Venture Exchange at $5.00 in July 2012.
Pure Multi focuses on luxury resort-style apartment communities in sunbelt locations such as Dallas, Houston and Phoenix. Those markets rank high for both job and population growth.
Pure Multi’s units are dually listed in U.S. dollars (RUF.U) and Canadian dollars (RUF.UN) on the TSX Venture Exchange, to give investors the flexibility of holding units in either currency.
Mostly due to acquisitions, Pure Multi’s revenues have risen sharply over the last few years. From the company’s first full year of operations in 2013, revenue has risen from $31.5 million to $76.4 million in 2016. (All figures except share price and market cap in U.S. dollars.)
Cash flow has also jumped, from $7.7 million in 2013 to $20.8 million in 2016. However, due to many more units outstanding—the result of the REIT’s acquisitions—cash flow per unit rose just 11.8%, from $0.34 to $0.38.
In the three months ended March 31, 2017, Pure Multi’s revenue increased 22.1%, to $20.8 million from $17.1 million a year earlier. Cash flow rose just 2.6%, to $5.1 million from $5.0 million, mostly due to higher expenses. Cash flow per unit fell 10.0%, to $0.09 from $0.10, on more units outstanding.
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Dividend Stocks: Fast-growing Texas economy could push up rents
Pure Multi continues to grow by acquisition. It has just completed the purchase of the multi-family apartment community Pinnacle at Union Hills. It’s located in North Phoenix, Arizona and has a prime location that borders the future Arizona Biomedical Corridor and the North Scottsdale submarket.
About 77% of Pinnacle’s units have been upgraded with stainless steel appliances, Corian countertops and wood-plank vinyl flooring. Pinnacle features two resort-style swimming pools, a 24-hour fitness centre, a standalone leasing office and a Wi-Fi cafe.
The REIT paid $47.5 million U.S. for the property, which brings its suite count to 196,209. Those apartments are spread across 19 properties.
To fund more acquisitions, Pure Multi has just raised $92 million in a unit issue at $8.95 each.
The company aims for a diversified portfolio, with suites in Texas, Arizona and other sunbelt states. Currently, it is almost entirely concentrated in Texas. That adds a lot of risk.
Offsetting some of that risk is the fact that there are still a lot of Texan properties for sale at depressed prices, but they nonetheless have high occupancy rates. Moreover, Texas has one of the fastest-growing economies in the U.S. That gives rents room to rise.
The REIT currently yields a high 5.5%.
Inner Circle recommendation: Pure Multi-Family REIT is okay to hold, but only for aggressive investors who are willing to accept the risks of a relatively recent stock issue that is growing by acquisition and whose portfolio is geographically concentrated in Texas and Arizona.
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