Canada's Favorite Landlord

03/24/2010 11:13 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

CREIT has stood the test of time and the recession, writes Gavin Graham in The Income Investor.

Canadian Real Estate Investment Trust (Toronto: REF.UN, OTC: CRXIF), or CREIT as it is popularly known, is the oldest and one of the best managed of the real estate investment trusts. 

CREIT owns 160 properties in three different asset classes across Canada, with more than 22 million square feet gross (18 million net) of leasable space. CREIT properties are usually situated in prime locations near major metropolitan centers, attract solid tenants, and maintain above-average occupancy rates. In fact, CREIT''s vacancy rate has been at least one point lower than the national average for its office and industrial properties and over 1.5 points lower for its retail assets since 1993.

Most analysts feel that REITs are fairly valued after their strong performance in 2009. During the year, they beat the S&P/TSX Composite Index by 11 percentage points and US REITs by 21 points on price alone (including distributions would have added to the outperformance). As Mario Saric at Scotia Capital points out, momentum can be an investment's best friend. By this, he means that the search for higher-yielding investments after the introduction of the [income tax for Canadian trusts following their mandated 2011 conversion to corporations] will lead, as it already has done to some extent, to income trust investors switching into REITs [which will remain trusts] as a safe haven.

The spread above the ten-year Government of Canada bond is 300 basis points (bp). That's the second highest spread globally (after Japan—Editor). Every other major REIT market, such as the UK, Australia, and the US, provides a spread of [only] 150 bp or less against risk-free government issues. The high Canadian yield and a strong loonie could result in more foreign interest in Canadian REITs.

There are a lot of things to like about this REIT: good cash flow, a low payout ratio, a solid history of growth, and broad diversification. CREIT is one of the few REITs to have a diversified portfolio both by asset type and geographically.

CREIT [has 52%] of its assets in retail properties, usually food-anchored unenclosed strip malls [that] provides tenant stability and good income flow. In fact, while its retail portfolio grew from 400,000 square feet in 1994 to 6.9 million square feet in 2009, the occupancy rate has only varied by two percentage points, between 97% and 99%. 

Over the last ten years, owing to its higher occupancies and faster growth, CREIT has seen its AFFO per unit (cash flow after accounting for maintenance capital expenditures) grow at almost double the rate of its large capitalization REIT competitors (6.7% vs. 3.7%). 

CREIT pays monthly distributions of 11.5 Canadian cents per unit (C$1.38 annualized). The relatively low 5% yield is a reflection of the market's confidence in CREIT's ability to sustain its distribution while maintaining asset value. 

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