The Canadian REIT market has proven to be a safe haven for investors, propelling it to gold-like levels of performance in recent years, a Bay Street executive told attendees at the RealREIT conference in Toronto held September 13th.
“Aside from the large amount of capital that is seeking a home in Canadian real estate as a shelter from storms in other markets, which I believe is the main driver behind real estate’s strong relative outperformance, the next biggest contributors to performance are likely the abundant availability and low cost of debt,” said Carolyn Blair, Managing Director of RBC Capital Markets Real Estate Group.
An environment of ultra-low mortgage rates has boosted the leveraged returns on real estate, she noted. REITs have benefited from lower financing costs and increased property values and, with the U.S. Federal Reserve statement that rates will remain ultra-low for the next two years, these favourable conditions will continue for some time.
“So while things are still quite fragile, it is good to know that real estate returns, volatility, and liquity, are all in fine shape,” she said.
The RBC Capital Markets executive was reluctant to make economic forecasts, but she did predict further interest in the sector. “I would expect that many pension funds and other investors would be seeking to increase their real estate weightings which will benefit REIT and property values for the foreseeable future. The recent stock market volatility has actually been good for REITs as it has demonstrated the defensive nature of real estate.”
The past dozen months have been busy, if not as hectic as the prior one-year period that Blair charted at last year’s edition of the RealREIT conference, she observed.
This year saw the creation of one new REIT (Dundee International), no new REOCs, the completion of two M&A transactions, raised $5.9 billion of new equity and achieved a total return of 17.9%.
By comparison, in the year earlier, the industry produced six IPOs, four M&As, raised $4.6 billion in equity and a 37.5% total return.
In the last 12 months, 18 of Canada’s 29 TSX REITs raised equity. The busiest REITs in terms of equity raising were Dundee, RioCan, TransGlobe and Artis. The vast majority of the new equity raised went to commercial REITs.
The Canadian REIT market cap reached an all-time high of $37.6 billion in July (it has pulled back slightly since that time).
Blair showed attendees at RealREIT that the REIT index has been a strong performer since the rare down years of 2007 and 2008. REITs roared back with 55% returns in 2009, 22.6% in 2010 and 11% year to date. The REIT index is now also 13% ahead of the previous all-time high set in 2007.
In terms of performance of individual REITs over the past year, the best performing Canadian REITs were Temple REIT followed by InterRent REIT.
Based on total returns going all the way back to their IPOs, the RBC executive singled out Canadian REIT (CREIT) and RioCan, which each posted total returns in excess of 16% over a 17 to 18 year time period. Younger star REITs around since the last Nineties that have churned out total annualized returns over 15% are Canadian Apartment Properties (CAP) REIT and Cominar REIT. Top total REIT returners from the early 2000s include Boardwalk, Northern Property, Calloway, Allied Properties, Dundee and Primaris.
The RBC executive also graded REITs/REOCs based on another measure of successful performance, net asset value per unit growth (NAV) and adjusted funds from operations (AFFO) per unit of growth relative to the amount of equity that they have raised over a five-year period.
Based on AFFO per unit growth, standouts producing compound annual growth rates of 5% or more over the past half decade included Boardwalk, Canadian REIT (CREIT), Northern Property and Canadian Apartment Properties (CAP) REIT.
Blair noted that Canadian REITs are trading at a weighted average of AFFO multiples of 15.5 times, ranging from 8 times all the way up to 20 times. The REITs most valued by investors for each dollar that they are expected to generate are Brookfield Office, Boardwalk, First Capital, RioCan, CAP REIT and CREIT.
Blair identified three REITs/REOCs that managed to perform in all the various categories that investors should take note of: a track record of at least five years; never cutting distribution, five-year AFFO and NAV growth per unit of at least 5%, having a low payout ratio and having a comfortable debt ratio. The three REITs? Boardwalk, CREIT and Northern Property.
Blair concluded her presentation with a simple question with a somewhat more complicated answer: are REITs a good investment now?
Based on REIT distribution yield spreads, AFFO yields and NAV compared to government debt shows that REITs are in pretty average territory, meaning that they are not over-priced or under-priced.