Aerial photograph of Calgary.The Globe and Mail
Commercial-property owners in Alberta are reeling from the energy crash, a phenomenon that is accelerating as the economic pain from weak oil and gas prices spreads throughout the province.
The problems are spelled out in the latest batch of quarterly earnings from publicly traded real estate investment trusts with heavy exposure to the province. Boardwalk REIT, a major owner of apartment buildings in Alberta, saw its same-property net operating income (SPNOI) – or revenue from properties it owned in 2015 – fall 14.6 per cent from the year prior.
In the skyscraper market, Dream Office REIT, one of the prominent office-tower owners in Calgary and Edmonton, saw the same metric drop 10.9 per cent in Alberta year over year.
The Alberta woes are unravelling as the entire REIT sector sees unit prices swing. Investors have piled into these trusts for the past few years because they paid hefty distributions, with yields often amounting to between 5 and 8 per cent.
But with bond yields roaring back in the past week – the 10-year Government of Canada bond, which is used as a benchmark for REITs, now yields 1.54 per cent, up from 0.95 per cent at the end of September – the sector has sold off.
The S&P/TSX Capped REIT Index has been falling since July, and the drop hasn't been helped by Donald Trump's election as president of the United States last week – which sparked mayhem in the bond markets. The index has dropped 13 per cent since July, not including distributions.
Alberta's woes have hurt owners for multiple quarters, but the pain was particularly severe this earnings season – and it was spread across the office and multifamily, or apartment tower, markets. Industrial properties are also affected.
For Boardwalk, which has 60 per cent of its rental units in Alberta, income from properties it has owned for at least a year dropped 19.5 per cent in Calgary, 19.2 per cent in Edmonton and 39 per cent in Grande Prairie.
The REIT's outlook isn't very promising, either. "The trust reported disappointing results and, while we had been cautious, the outlook provided by management is significantly weaker than we were expecting," Canaccord Genuity analyst Mark Rothschild wrote in a research report.
It isn't total doom and gloom for all real estate owners. Dream and Artis REIT both have diversified portfolios, and Ontario's performance has been much brighter. Dream's downtown Toronto SPNOI jumped 2.6 per cent – and this portfolio amounts to 34 per cent of its net operating income.
Artis has a sizable exposure in Manitoba, which makes up 10 per cent of its cash flow. The province's same-property revenue climbed 7.5 per cent year over year for the REIT.
However, Alberta's woes are not likely to abate any time soon because new developments are still being completed.
Extensive property development is common across many of Dream Office's markets, but "the REIT's Alberta portfolio remains the most challenged as leasing conditions continue to deteriorate, as reflected by the sharp decline in SPNOI and occupancy erosion in [the third quarter]," CIBC World Markets analyst Alex Avery wrote in a note to clients.
In response, the REITs have started repositioning themselves. In February, Dream – formerly known as Dundee REIT – announced plans to sell at least $1.2-billion worth of assets, or 15 per cent of its portfolio, and to slash its monthly distribution by a third.
"I've never been in an environment where it's more difficult to model either [real estate] values or longer-term cash flows," Dream founder Michael Cooper said of the Alberta market on a conference call at the time.
The REIT is currently in the process of negotiating some Alberta asset sales.
Artis is already active. In October, the REIT sold eight industrial properties and a retail property, all in Alberta, for total proceeds of $211-million.
Meanwhile, Boardwalk has been building its own projects, including the Brentwood Village Shopping Centre joint venture in Calgary with RioCan REIT, as well as buying newer development properties.
Tim Kiladze