Financial Post: Rebound in REIT Sector

October 15, 2010 - Press Release

Financial Post · Friday, Oct. 15, 2010

The combination of low interest rates, ample liquidity and a reasonable property market have helped make real estate investment trusts the year’s hottest financing sector.

As of yesterday, 26 separate issues, which have raised $2.421 billion, have closed while a further six (for $420 million) have been announced but not closed. In all, $2.84 billion has been raised with three of the issuers being new-to-the-market companies. That amount jumps by $475.3 million when seven convertible issues are added.

Overall, the sector, which has a market cap of about $30 billion, has raised about 14% of the $23.7 billion in equity garnered this year. In the comparable period of 2009, a mere $827.8 million was raised by the REIT sector, or about 3.5% of the total equity (common, trust and royalty units and convertibles) raised. In the comparable period of 2009, there were no convertible issues by REITs.

In other words, 2010 represents a dramatic rebound for financings. And that rebound — and there is debate as to whether 2009 was also an atypical year — is occurring at a time when REITs have outperformed the S&P/TSX composite index by a considerable margin. For instance the XRE–the ETF for real estate–is up by 18.79% so far this year while the S&P/TSX composite is ahead by 7.4%.

Michael Smith, an analyst at Macquarie Capital Markets, said the performance of the REIT sector is due, in part, to interest rates. “Basically we are at an all-time low for commercial mortgage rates,” he said, which represents a huge plus for the capital-intensive real estate industry. “We have tons of liquidity, meaning that the lenders are back. Absolutely, it’s a sweet spot, a time for them to expand,” said Smith, who argues the lenders are being more prudent now compared with recent years. “They are more disciplined,” he said, even though they are still “clamouring to lend to the REITs.”

Accordingly, REITs have access to “cheap and plentiful debt to make acquisitions, and when they make acquisitions they have access to as much equity as they need,” said Smith who adds that lenders are motivated, in part, because of changes made by the REITs. “They have recapitalized, have strong balance sheets, are not looking for high loan to values and are a repeat customer,” said Smith.

The numbers bear this out. For instance, Artis has been to the market six times, Calloway four times, Dundee four times and Pure three. Crombie, Whiterock, Cominar, Crombie, Homburg and Northwest have all done two transactions. And the terms — as judging by the discount to the most recent price prior to the issue — have been attractive. Calloway’s most recent $115.1-million issue was done at a 0.74% discount while Rio-Can priced a $149.4-million deal at a 1.19%discount.

Overall, Smith said the outlook for REITs is “positive because underlying real estate values [net asset values] are increasing. Just because stock prices have gone up doesn’t mean that the sector is overvalued.”

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Skyline Apartment REIT (the “REIT”) is a privately owned and managed portfolio of primarily multi-residential properties, focused on acquiring both established and newly developed properties in secondary and tertiary communities across Canada.

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