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Why big investors are eyeing real estate investment trusts

A Killam Properties trailer park in Eastern Passage, N.S.

PAUL DARROW/paul darrow The Globe and Mail

Canadian REITs are no longer just reliable income plays. They're becoming takeover targets – with juicy premiums being paid in several recent cases.

The latest acquisition among real estate investment trusts came last week when Northwest Value Partners Inc. paid a 61 per cent premium to acquire GT Canadian Medical Properties REIT.

Earlier this year, Cominar REIT acquired Canmarc REIT at a 24 per cent premium to the price before the takeover bid was launched, while Dundee REIT snapped up Whiterock REIT at a 20 per cent premium.

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Observers say more deals are likely as institutions pursue any investment that can reliably generate attractive yields in today's low interest rate economy. REITs invest mainly in shopping malls, office buildings and warehouses. The larger ones typically yield between 3 and 10 per cent.

While most REIT takeovers to date have been done by other REITs, some real estate experts predict that pension funds will soon jump into the fray.

"Everything could potentially be in play," says Lee Goldman, a portfolio manager with First Asset Investment Management Inc. "If a big pension plan really wants to get into real estate, RioCan [Canada's largest REIT]could be bought at the right price."

British Columbia Investment Management Corp., whose clients include public sector pension plans, waded into the real estate arena last year with its $489-million purchase of Parkbridge Lifestyle Communities Inc., an operator of land leased for prefabricated or mobile homes.

Primaris Retail REIT, which owns indoor malls and has no large controlling shareholder, could be an interesting acquisition for a pension fund, or even a major U.S. real estate firm that might want to expand into Canada, Mr. Goldman said.

Canadian Apartment Properties Real Estate Investment Trust (CAP REIT) might be interested in taking a run at Killam Properties Inc ., an apartment operator in Atlantic Canada, he added. "It has been long rumoured that CAP REIT owns a stake in Killam, but it has not been confirmed by the company. We believe it to be true by tracking its investment account from quarter to quarter."

Dennis Mitchell, chief investment officer at Sentry Investments, expects pension funds to show more interest in REITs as low interest rates make it tougher for the funds to generate the returns needed to pay out benefits.

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"[Pension funds]can go and buy 10-year government bonds that yield 2 per cent, or they can take a little bit more risk and buy a portfolio of commercial real estate," said Mr. Mitchell, who runs a REIT-focused mutual fund.

Pension funds that are looking for likely takeover targets will probably want to avoid REITs with large controlling shareholders, or ones that are too small to have a material impact on an institutional investor's results. More likely candidates for pension funds are RioCan, H&R , Primaris , Artis , CAP REIT and Canadian Real Estate Investment Trust (CREIT), Mr. Mitchell said.

Apartment REITs are particularly attractive to pension funds because of their ability to produce stable cash flow even in a down market, suggested Charles Dillingham, a portfolio manager with Morguard Financial Corp. "[Apartments] are not as tricky to manage [as]the office market where you have problems of big tenants leaving, and renovating whole big buildings."

When the Caisse de dépôt et placement du Québec last summer acquired the Rockhill Apartments, a six-building complex in a prime Montreal location, the Quebec pension fund said the purchase was a first step in its strategy to become a bigger player in the multiresidential property sector.

Apartment companies that could be attractive takeover targets include CAP REIT, Killam Properties and Boardwalk REIT, Mr. Dillingham said.

Artis REIT, which has more than 160 office, retail and industrial properties in western Canada, could also be a target. "Dundee REIT might go after Artis," he said. "Artis is a similar type of company with a very diversified bunch of properties. Dundee is looking to do more in the west."

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Tying the knot this year

Cominar REIT/Canmarc REIT

Quebec City Cominar Real Estate Investment Trust acquired Canmarc REIT of Montreal after raising its offer to $905-million, or $16.50 per unit. This was a 24-per-cent premium over the closing price of Canmarc units in November when Cominar first attempted a hostile bid.

Dundee REIT/Whiterock REIT

Toronto-based Dundee REIT bought Whiterock REIT in a $582-million deal, or $16.25 a unit. The transaction solidifies Dundee's position in the office sector. The offer was a 20-per-cent premium over the last closing price of Toronto-based Whiterock before the deal was announced.

NorthWest Value Partners Inc./GT Canadian Medical Properties REIT

NorthWest Value Partners Inc. has agreed to buy GT Canadian Medical Properties REIT for over $30-million, or $2.05 per unit. The price could be adjusted for dilution of additional units. The offer, which needs the unitholder approval, is at a 61-per-cent premium to GT's unit price on April 13. Both are based in Toronto. NorthWest plans to sell GT's properties to minority-owned NorthWest Healthcare Properties REIT, and transfer its international real-estate portfolio into the GT REIT structure.

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