Canadian real estate investment trusts are capitalizing on a growing hunger for yield-driven stocks, tapping investors for fresh cash in an unexpected flurry of financings.
REITs have raised $1.3-billion through share sales since the start of September, outpacing any other sector in Canada and extending a string of deals over the past year that now totals $6.2-billion.
RioCan Real Estate Investment Trust is the latest to announce a share sale, launching a $200-million offering late Thursday. The market is so hot for real estate that Bay Street has seen six REIT financings this month and apartment-focused Continuum Residential Real Estate Investment Trust is attempting a $300-million initial public offering.
With so many deals, the real estate sector this year has raised roughly triple the amount brought in by the once-soaring cannabis industry in 2019.
Falling interest rates have largely fuelled the REIT rally. Bond yields have tumbled around the world and US$13-trillion worth of debt now trades with negative yields. In this environment, the S&P/TSX Capped REIT Index’s average yield of 4.4 per cent looks rather compelling.
This index has delivered a total return of 24 per cent since January, while the S&P/TSX Composite Index has delivered a return of 18 per cent on the same basis.
Canadian REITs have also lured investors with their strong fundamentals, dispelling worries that slower economic growth would hurt their bottom lines. “REITs have very attractive cash flow per share growth driven by pipelines of internally generated projects," said Sante Corona, head of equity capital markets at TD Securities.
Apartment-focused REITs have been one of the hottest corners of the real estate market, buoyed by high occupancy rates and strong rent increases whenever one tenant vacates and another moves in. There is also strong demand for these types of property owners because population growth has been outstripping the new supply of rental units in many large Canadian cities.
Canadian Apartment Properties Real Estate Investment Trust, the largest publicly traded apartment owner, had an average occupancy of 98.3 per cent across its entire portfolio at the end of its last quarter, and some apartment REITs have shown that their rents can jump 25 per cent on tenant turnover.
Since going public in the first half of 2018, Minto Apartment REIT has watched its unit price jump 55 per cent. The REIT recently raised $225-million on the same day that its units set a new high, and the offering was priced to yield 1.9 per cent, an uncommonly low level for a Canadian REIT.
Continuum is attempting its IPO at a 2-per-cent yield on the back of Minto’s success.
Because pricing has been so advantageous, many REITs are rushing to finance while they can. “Our real estate clients have been taking advantage of the positive backdrop to raise equity to finance accretive acquisitions and property development,” said Tyler Swan, managing director of equity capital markets at CIBC World Markets.
Even retail REITs are winning investors back. Despite fears that digital giants such as Amazon.com Inc. will steal business at an alarming rate, retail landlords secured tenant renewal rate increases of roughly 4 per cent on average in 2018, according to a team of analysts at CIBC.
“We believe that the headwinds facing the retail sector are indeed real; however, the operating performance of the underlying real estate appears to be at odds with the significant unit price underperformance relative to other REIT sub-sectors," the analysts wrote in a note in early October.
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