The Globe and Mail: Five Reasons REITs are Sitting Pretty for a Breakout Year

Published in the Globe and Mail, Friday, Jan. 22, 2010

They represent only a fraction of Canada’s publicly traded companies, but 2010 is shaping up as the Year of the Real Estate Investment Trust for investors seeking higher yields.

These funds buy income-generating assets such as shopping centres, office towers and hotels and then pay their unitholders distributions from the cash the properties spin out. After a year of holding the line on payouts and acquisitions, analysts believe 2010 will be a breakout year for the sector.

“REITs are in a desirable position because capital is both cheap and plentiful,” said Michael Smith, an analyst at Macquarie Securities. “They are buying more properties, and that means they will be able to pay higher distributions. The sector will gain prominence this year.”

Here are five reasons you’ll hear more about REITs in 2010.

They’ve got money

Analysts estimate REITs have raised about $1.5-billion in the last year, money that is sitting on balance sheets waiting to be used. Property values, meanwhile, have decreased across Canada and opened the door for the funds to make investments that would have been out of reach only two years ago.

“We raised about $200-million through equity and convertible debentures last year,” said Cominar REIT chief executive officer Michel Dallaire, whose company just paid $71-million for Halifax-based Overland Realty Ltd. “We’d been looking at this company for a year-and-a-half, and were finally able to make a fair deal.”

The acquisition of income-generating properties helps REITs finance operations, raise new capital and increase unitholder payouts. It also helps smaller funds raise their profile and attract investors. “This provides some smaller players with the ability to benefit from strategic acquisitions by transitioning from a ‘B’ player to an ‘A’ player,” Mr. Smith said.

They have little competition

Not only do they have money, they aren’t competing against traditional rivals when they do find properties they’d like to own. Pension funds have been focusing their efforts on foreign infrastructure acquisitions and divesting themselves of smaller holdings, and many private equity companies are finding it hard to raise the large pools of capital needed to finance deals.

“We’ve been able to look at deals that weren’t available to us before the credit crisis,” said Michael Emory, CEO of Allied Properties REIT. “This builds longer-term value for our unitholders.”

They’ll pay you more

REITs will have more money to pay their investors with in the coming year, according to analysts. Canadian REIT was one of the few Canadian companies to increase its payout in 2009 and if the market continues to stabilize a handful of REITs are expected to do the same. “People are tired of not earning anything on their money,” said Ed Sonshine, CEO of shopping mall owner RioCan REIT. “As a sector, we grow our income to ultimately distribute to our unitholders.”

And distribute they have – yields have continued to hover near 7 per cent even as share prices rise. Higher yields usually mean more risk, but analysts suggest REITs are considered fairly valued (and in some cases slightly undervalued).

“In short, we believe the sector has transitioned from ‘value investment’ to ‘yield play,’ ” said Neil Downey, the managing director of global equity for RBC Dominion Securities, in a report on the sector.

Mr. Smith said Boardwalk and Canadian REIT are the most likely to raise distributions in 2010. Crombie, Northern, Allied, Cominar and First Capital may also boost theirs.

There’s room to grow

Canada has been slow to embrace the REIT concept, lagging behind countries such as Australia that have been more keen to invest in publicly traded real estate companies.

“Established REITs have been able to raise so much equity,” Mr. Smith said. “But in Canada most of real estate is owned privately. With so much room to grow, you could easily see four or five initial public offerings in the coming months.”

They’re not income trusts

In 2011, income trusts as we now know them will be gone, forced to convert to other structures after the government decided to eliminate the model that saw profits paid out as shareholder distributions.

Investors have about $20-billion tied up in income trusts, and analysts expect to see at least some of that money flow to REITs and their steady distributions. “If you only take 10 per cent of that money and move it into REITs that is $2-billion looking for a home,” Mr. Sonshine said. “That’ll move everybody’s needle.”