Whiterock REIT back in the hunt for properties

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When many real estate executives waited anxiously for the market to normalize, Jason Underwood was signing an $82-million deal for two Toronto office towers conveniently nestled between major highways.

The chief executive officer of Whiterock Real Estate Investment Trust helped the company raise about $30-million this year in stock offerings, and decided to put some money to work before his competitors made the first move. "There are good properties out there and the economic mood has been feeling a little better," he said. "So we're going back into the market and finding good properties that fit our profile. We're certainly optimistic, but we're also very cautious."

Mr. Underwood bought 40 per cent of the Toronto towers, which are 99-per-cent leased, with an option to buy the rest. He said Whiterock will be a buyer as more properties start to appear on what was once a frozen market.

What does Whiterock do?

Whiterock owns and manages office, industrial and retail properties. With the most recent deal, it now has a portfolio totalling 3.4 million square feet across 44 properties, with an average lease term of seven years. About 58 per cent of its space is leased to government or investment-grade firms.

How have its units done?

Like the broader market, REITs have performed well since scraping against recessionary lows in March as investors got a better feel for how the downturn would affect different sectors. And while the S&P/TSX REIT index has gained 29 per cent on the year, Whiterock units have gained 106 per cent.

"After finding a bottom, REITs have continued to rally over the past few months," said Genuity Capital Markets analyst Mark Rothschild. "REITs are, for the most part, trading slightly above the long-term average on a net-asset-value basis, and essentially in line with historical multiples."

The units, which currently yield 12.5 per cent, closed just shy of their 52-week high yesterday at $26.72. They were as low as $11.85 in December.

What do the analysts think?

The company's investment plans aren't going unnoticed - CIBC World Markets analyst Alex Avery raised his 12-month price target 81 per cent last week to $30 from $16.50, based on "a moderately lower-than-average valuation as well as very strong accretive growth prospects." He also changed his rating from "sector performer" to "sector out-performer."

"Our rating change is based on several factors including: its new joint venture acquisition strategy and expectations for continued and significantly accretive growth; strong leasing results achieved in 2009; the demonstrated ability of the REIT to access capital markets; and its attractive valuation compared to its peers," he said.

He's by far the most bullish with the only "buy" rating. Four other analysts follow the units, with three "hold" ratings and one "sell." Their average 12-month price target is $19.20.

What are the dangers?

Mr. Avery felt compelled to add a "speculative" qualifier on his recommendation, saying the REIT's market cap of just over $100-million and relatively light trading activity could pose liquidity challenges for investors looking for a rapid move, and also making it more difficult for large institutional investors to build positions.

"This increased volatility and leverage is a significant factor in our speculative rating," he said. "However, leverage works both ways, and we believe that with the improving credit and equity markets and an active approach to accretive growth, this leverage could serve to amplify the positive effects of internal and external growth, leading to unit price outperformance."

Whiterock (WRK.UN)

Close: $26.72, unchanged

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