REIT and real estate financings show signs of comeback

Theglobeandmail.com
April 19, 2016
By Tim Kiladze

It’s been one of the strangest dichotomies of these difficult markets. Despite persistently low interest rates and demand for securities with big yields, Canadian real estate investment trusts have been stuck in the dumps.

Until now. For the first time in a year, REITS and real estate corporations are showing signs of a comeback. Many of their unit prices have popped, leading to new financings and raising the prospect of more acquisitions.

In calendar 2015, the S&P/TSX REIT Total Return Index, which accounts for monthy distributions in its calculations, fell 14 per cent from its January peak - even as benchmark interest rates dropped by 0.5 percentage points in the same year. Canadian investors used to love REITs for their extra yield. To date in 2016, the same index is up 13 per cent.

It is far too early to get overly excited, but there is reason to be hopeful. In the past month, three real estate companies collectively raised $355-million - and two of the offerings, for Northwest Healthcare Property REIT and Milestone Apartments REIT, were upsized because of heavy demand. This is progress, considering there was only one real estate financing in the entire first quarter.

The latest deal, announced late Monday, raised $120-million for Sienna Senior Living Inc. - formerly Leisureworld Senior Care Corp. - to help fund the $255-million purchase of senior housing properties in British Columbia.

The resurgent demand dovetails with heavy investor appetite for yield-driven securities, particularly preferred shares. The Big Six banks continue to issue them and the offerings are often oversubscribed. The same phenomenon started spreading to other sectors. When TransCanada Corp. recently set out to raise $300-million to help fund its acquisition of Columbia Pipeline Group, the demand was so heavy the company boosted the total deal size to $500-million.

Still, no one was sure if this trend would extend to real estate. Although the REIT Index pays an average yield just shy of 6 per cent, investors have been spooked by Canadian economic fundamentals - particularly in Alberta. Landlords in energy-rich provinces are suffering the first prolonged shock in decades, and buyers are scared to see how it shakes out.

Lately these broad fears have subsided - in fact, REITs with exposure to these hard hit areas have popped the most this year with Dream Office up 21 per cent and Boardwalk up 16 per cent.

Canadian stalwarts, like RioCan and Canadian REIT, haven’t climbed as much since January, but that’s largely because they didn’t fall as fast in 2015. And it doesn’t mean they aren’t doing well, either. RioCan, for one, is creeping back toward its record high, set last May.

If they need to tap the market - for acquisition cash or to fund capital expenditures - it’s starting to look like a pretty fine time to do so.