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First Capital Real Estate Investment Trust FRC-UN-T, one of Canada’s largest retail landlords, is restoring its monthly payout to prepandemic levels, making good on a promise to do so within two years after management slashed the distribution at the start of 2021.

First Capital, which owns shopping centres largely anchored by supermarket and drugstore tenants in major urban areas across Canada, is doubling its monthly distribution to 7.2 cents a unit, or 86 cents annually. The REIT is the first to fully restore its distribution after a wave of payout cuts fuelled by uncertainty over the economic fallout from COVID-19.

While management has always said it intended to fully reverse the cut, a move that provided financial flexibility amid another round of lockdowns, there was no guarantee it would do so. The fact management held true to its word gave investors some confidence on Thursday, with First Capital’s units climbing 2 per cent while the broader S&P/TSX Composite Index fell 0.8 per cent.

However, many REITs, including First Capital, have a long way to go before their unit prices are back to prepandemic levels – and winning investors back will likely take time now that interest rates are rising rapidly.

First Capital REIT slashes monthly payout in half amid pandemic shutdowns

Because REITs are property owners, higher interest rates directly affect their businesses by raising mortgage costs. Commercial mortgages tend to be priced off five-year and 10-year Canada government bonds, and the yields on both have more than doubled since January.

Rising rates also hurt REITs’ investor appeal – particularly for retail buyers who were desperate for yield in an era of incredibly low interest rates. While many government bonds had annual yields of less than 2 per cent, REITs often paid 5 per cent to 6 per cent each year.

That has all changed in a flash. After restoring the distribution to its prepandemic level, First Capital’s yield is now at an annualized 5.6 per cent, according to National Bank Financial, a figure that is roughly in line with retail REIT peers in Canada. Investors, meanwhile, can now get a risk-free, one-year GIC from Tangerine Bank that pays 4.4 per cent annually.

While investing in REITs offers some upside if unit prices rise, investors have been quite concerned about their prospects, which has led to a sectorwide sell-off this year. Since January, First Capital’s units have dropped 17 per cent, and the broader iShares S&P/TSX Capped REIT Index ETF has lost 19 per cent.

Investors have grown so skittish that Canada’s retail REITs now trade on average at around a 20-per-cent discount to their net asset values.

First Capital, however, reported comforting earnings last quarter, with net operating income on properties it owned in the same quarter last year climbing 3.8 per cent. Occupancy rates on these properties were also stable.

“The REIT continues to display robust performance despite the mounting narrative of a potential economic slowdown,” CIBC World Markets analyst Dean Wilkinson wrote in a note to clients at the time. However, First Capital also reported a roughly $110-million loss on the fair value of its investment properties.

Despite the woes, one sector of Canadian commercial real estate continues to win investors over: industrial properties. Storage and distribution warehouses are seeing unrelenting demand from potential tenants, and the market for warehouse space is so strong that the national vacancy rate has fallen to a record low of 1.6 per cent, according to commercial real estate services and investment firm CBRE Group Inc.