A Bird in Hand

01/26/2010 9:18 am EST

Focus: GLOBAL

Roger Conrad

Founder and Chief Editor, Capitalist Times

Two of last year's big winners are poised for further gains as they home in on new opportunities, writes Roger S. Conrad in Canadian Edge.

Artis REIT (TSX: AX-U, OTC: ARESF) trounced expectations [in 2009] by continuing to post high occupancy rates and rising rents, even while several rivals in Western Canada real estate were going belly up.

This month, the REIT further demonstrated its strength by reaching agreements to buy 50% of a Vancouver office building, an industrial property in Saskatchewan, retail property in British Columbia, and a flexible industrial property in Edmonton, Alberta.

The total cost of the four acquisitions was C$72 million, mainly financed by C$50.6 million in proceeds from a successful unit offering. The Kincaid building in Vancouver is 100% occupied by Eastman Kodak (NYSE: EK) under a ten-year lease slated to expire in 2019, with a rent step up in 2014. The other properties are also 100% occupied by creditworthy tenants under long-term leases.

These deals will all immediately add to distributable cash flow. They also include rents 15% below market, one of Artis’s trademarks and a key to its success in Alberta’s rough property market. The deals also reduce the overall share of Alberta in the REIT portfolio to 45.7%. The result is further protection for a yield that’s still near 10% percent. Buy Artis REIT up to US$11. [Shares closed at US$10.79 in New York Monday—Editor.]

Bird Construction Income Fund’s (TSX: BDT-U, OTC: BIRDF) 113.6% total return for 2009 was part of a dramatic comeback from the 2008 sell off that took shares from a high in the low US$40s at mid-year to a low of less than US$11 in early December.

Sellers badly underestimated the company’s ability to tack from a hefty reliance on the floundering energy patch to more secure revenue sources, such as government contracts. As a result, many were shocked when Bird inked enough new contracts and held enough old business to keep its backlog rising last year. And still more were astounded when it boosted its distribution more than 24% in May.

The cancellation of a delayed contract in the oil sands region demonstrates the tough conditions still facing construction in the energy patch, and will shave C$107 million from backlog in the fourth quarter of 2009.

A pair of new contracts in Ontario announced in early January, however, will add back some C$70 million,  while a third in British Columbia will add C$41 million. Moreover, all three contracts are with quasi-government entities, ensuring costs will be paid even if the economy should unexpectedly weaken again. Together, they more than offset the lost revenue from the oil sands projects and again demonstrate the company’s flexibility.

Bird has yet to reveal plans for dealing with 2011 taxation. But with a very low payout ratio of just 45%, a steady business backed by a near-record backlog and no debt, it definitely has the means for a cut-less conversion. Meanwhile, Bird Construction Income Fund is a buy up to US$33 for those who don’t already own it. [Shares closed at US$31.29 in New York Monday—Editor.]

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