Canadian REIT is giving more back to its investors, raising its distribution at a time when many still wonder worry about the health of the commercial real estate sector.
"While it was modest, being the first to increase since the credit crisis nonetheless speaks volumes to CREIT's strength, stability and conservative accounting policy," Macquarie Securities analyst Michael Smith said.
The Toronto-based company reported third-quarter earnings on Monday, vowing to spend up to a half-billion dollars on new properties even as the industry works through a recession that has seen vacancy rates climb and returns diminished. It's a sign that many worst-case scenarios aren't likely to occur, Mr. Smith said.
"We are just not seeing the distress everyone feared at the beginning of the year," he said. "The capital markets are wide open, which is critical for a capital-intensive industry like real estate. Equally important, the underlying fundamentals are a lot better than everyone feared. To be sure, landlords have less pricing power and are a lot more accommodating to tenants, but they are still getting rental increases and holding on to occupancy."
What does CREIT do?
The firm owns 162 retail, industrial and office buildings across Canada. Retail holdings consist mainly of strip malls anchored by grocery stores, while industrial holdings focus on distribution facilities, warehouses and buildings used for manufacturing.
In its earnings report Monday, funds from operations were down year-over-year to 56 cents a unit compared with 59 cents. The trust raised its distribution 1.5 per cent to $1.36 a unit annually. Its occupancy rate fell slightly to 96 per cent. "We are satisfied with our operating performance for the third quarter," CEO Stephen Johnson said. "We have a strong balance sheet with significant liquidity and we have continued to generate and retain meaningful cash flow from operations."
What have its shares done
Investors also appear to be satisfied: Units are up 17 per cent on the year. The units are lagging behind the S&P/TSX Capped REIT index (which tracks the unit performance of the sector's largest companies) which has gained 34 per cent this year.
"CREIT has increased distributions in 13 of the last 14 years, something we believe is not reflected in the trading price of its units," said Mr. Smith, who raised his price target to $28.50 from $26.75. "We believe it will continue with an annual increase each year for the next few years, in stark contrast to many REITs which are expected to hold distributions flat."
Eleven analysts follow the shares, with five "buys," five "holds" and one "sell."
What are the hurdles?
The company faces the same hurdles as its peers in commercial real estate - shrinking profits, tenants leaving, or negotiating lower rates when they renew.
"Similar to most commercial REITs, we anticipate little internal growth through 2010 owing to the lagging nature of the sector," Mr. Smith said. "In addition, new development activities have slowed given the current economic environment and the decline in tenant demand for new facilities."
StarMine, a service that tracks analyst expectations, shows analysts expect funds from operations to remain flat for at least the next year.
The company, which raised $100-million earlier this year in an equity offering, said this week that it has much as $500-million to spend on the market if it can find properties for sale that fit in its portfolio.
"We now have sufficient capacity to acquire approximately $500-million of new income property, and we are actively looking to acquire, at appropriate pricing, high-quality real estate assets to add to our portfolio," CEO Mr. Johnson said.
Neil Downey, a managing director at RBC Dominion Securities said any moves are likely to take time. "CREIT sees commercial real estate as a lagging economic indicator, and despite near-term dilution, it will probably remain patient on timing, and picky on quality," said Mr. Downey, who raised his price target to $28 from $26.