Canada’s real estate investment trust (REIT) arena is the scene of mixing portfolios and potential mergers in 2017 as managers seek yields and safety in a more volatile real estate market.
For commercial REITs the strategy appears to involve multi-family residential as a hedge.
“Residential REITs are considered to have lower operating risk than commercial REITs, which are impacted to a great extent by general economic conditions,” noted Keystone Financial in a Canadian REIT report in late 2016.
While stating that REIT fundamentals are “reasonably strong,” Keystone added a geographical qualifier. “Canadian REITs with high exposure to Alberta and Western Canada have felt pressure from the energy patch downturn,” it noted.
But some big REITs are hedging against that warning.
In November, RioCan Real Estate Investment Trust of Toronto announced a joint venture with Calgary-based landlord giant Boardwalk Real Estate Investment Trust to develop a mixed-use, 11-storey residential rental tower on part of RioCan’s Brentwood Village Shopping Centre in Calgary, and said it is looking much further along the same path.
RioCan, traditionally focused on retail real estate and one of the largest REITs in Canada, has 50 other commercial sites it “considers to be strong possible intensification opportunities,” according to RicoCan CEO Edward Sonshine in an announcement of the joint venture.
RioCan has already obtained planning approvals for nine mixed-use projects with a total of more than 10 million square feet of rental housing and condominiums.
Another REIT on a similar two-lane track is Allied Real Estate Investment Trust, which is involved in three Toronto joint ventures to blend housing with commercial properties. But there are also mergers within the REIT sector as companies consider that swallowing a competitor could be an easier route to yields than individual acquisitions.
An example is Northview Apartment REIT that merged last year with True North Apartment REIT to become one of Canada’s largest apartment REITs.
REITS to watch
The following is a look at residential-weighted REITs in Canada that Western Investor believes have a potential for mixed-use plays or mergers with larger commercial REITs in 2017.
Boardwalk REIT: Share price: $44.15. Yield: 5.10 per cent. Market capitalization: $2.04 billion. As noted above, Calgary-based Boardwalk has taken aggressive steps to expand into joint venture developments mixing residential with commercial development. Boardwalk remains vulnerable as a merger or acquisition target because its valuation has become cheaper: about 60 per cent of its 33,000 apartments are in Alberta.
Milestone Apartments REIT: Price: $19.21. Yield:3.77 per cent. Market cap: $1.4 billion. Toronto-based Milestone is the largest Canadian REIT that is focused solely on the U.S. multi-family sector. Rated a “buy” by Keystone Financial, Milestone zeroes in on mid-market rentals in fast-growing U.S. cities. It holds 22,000 U.S. apartments in 70 projects and could be on the radar of U.S. acquisition hunters. Early last year, Milestone itself was involved with Starwood Capital Corp. in the purchase of Landmark Apartment Trust, a U.S. residential REIT.
Killam Apartment REIT: Price: $12.20; Yield: 4.92 per cent. Market cap: $895 million. Killam owns 13,882 rental apartments and 5,100 manufactured home sites, 60 per cent in Atlantic Canada, the rest in Ontario and Alberta (22 per cent). It has been spending a minimum of $50 million a year on acquisitions. Killam concentrates on newer apartments. Killam has been rumoured as a takeover target for at least two years.
Morguard North American Residential REIT: Price:$12.59. Yield: 5.96 per cent; Market cap: $634 million. Morguard is active in Canada, but owns 30 U.S. rental buildings totaling 13,470 units, which generated 62 per cent of its net operating income in 2016. It owns 15 rental buildings in Ontario and Alberta, and in seven states, including Texas and Florida.
Pure Multi-Family REIT: Price: $6.10; Yield: 6.15 per cent; Market cap: $325 million. A small REIT that concentrates on high-quality U.S. rentals, it is holding 4,440 units in Texas and Arizona. Vancouver-based Pure should see stronger performance into 2017 as the U.S. economy improves and rental demand increases. This could attract bidders for this low-cost, low-cap residential REIT.