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Stock to Watch: REIT offers ground floor entry to U.S. recovery

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WPT Industrial Real Estate Investment Trust

Wednesday's close: $9.32 (U.S.) a unit

Trading range since April 26 initial public offering: $9.32 to $10.27 a unit

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Annual distribution: 81.1 cents for a yield of 8.7 per cent. This REIT provides a monthly distribution.

Analysts' ratings: none

Recent history

Toronto-based WPT Industrial REIT, which owns mainly U.S. industrial properties, is trading below its IPO price of $10 a unit.

It tumbled to a 52-week low on Wednesday after climbing to an intraday high of $10.27 on May 28.

Like its Canadian-listed REIT peers, it has pulled back recently amid a rise in long-term bond yields. The worry is that investors will flock to bonds for better risk-free returns rather than stick with stocks.

The REIT has acquired 35 industrial sites, and two office properties in 12 U.S. states from Welsh Property Trust LLC. Welsh, a Minnetonka, Minn.-based property company founded in 1977, is the external manager of WPT, and holds an effective 48.7-per-cent interest in the REIT.

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Manager insight

WPT REIT is compelling because it provides exposure to the U.S. industrial sector, where property values are still down 18 per cent from the peak of the real-estate bubble, said Chris Couprie, a portfolio manager at First Asset Investment Management Inc. "They are cheap relative to Canadian industrial property values, which have basically recovered from the big selloff in 2008-09."

The rents from the portfolio's warehouse and distribution centres are 4 to 16 per cent below their highs so there is potential to increase net operating income, said Mr. Couprie, who bought WPT units at the IPO and since the recent pullback.

The U.S. economic recovery and a trend toward online retailing will benefit the industrial sector, but there are also potential gains from owning a U.S.-dollar-denominated REIT, he said. "We believe the U.S. dollar is going to strengthen over time relative to the Canadian dollar."

WPT, which has a payout ratio of about 95 per cent, is a bargain because it is trades well below its estimated net asset value of $10.65 a unit, said Mr. Couprie. His NAV estimate is also his one-year target price.

The average age of properties in the portfolio is 12 years versus 26 for industrial REITs in Canada, and 20 in the United States, he said. WPT, which tends to own buildings with taller ceilings that are close to highways and railways, has a 96-per-cent occupancy rate.

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The higher-than-normal ceilings offers more storage space for stacking so that is "attractive to tenants," he said.

As with other REITs, a risk to WPT continues to be rising interest rates, he acknowledged. "Rates can have an impact if you have debt maturities coming due. You could have upward pressure on interest costs, but it also depends on why rates are rising. If rates are rising because the economy is improving, then the landlord also has the ability to charge higher rents."

Institutional investors will keep on eye on whether the WPT management team can meet the quarterly forecasts in its prospectus, said Mr. Couprie. "We have no reason to believe they won't … There is not much in the way of leases maturing this year so they should know what rent they are going to get. We are pretty comfortable with the operating income outlook."

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