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Low-cost debt, demand for income, demonstrated capitalization rate compression and REIT distribution increases have allayed some investory skepticism. In this photo, H&amp;R REIT is planning to Acquire Two Gotham Center, a State-of-the-Art Office Tower in New York.<br />

For years, Bay Street's equity desks reaped the rewards of underwriting offerings for real estate investment trusts. Now the debt desks are getting their chance to shine.

In 2012, Canadian REITs issued $2.1-billion of unsecured debt, more than double the average annual issuance from 2009 to 2011, according to analyst Neil Downey at RBC Dominion Securities. Better yet, last year's issuance topped the historical record of $1.5-billion set in 1997.

For most sectors, more debt deals would mean fewer equity offerings, but retail investors are so hungry for REITs that last year was one of the rare instances when the size of the pie increased for both types of capital. In total, almost $7-billion in equity and equity-related capital was raised by Canadian REITs – also setting a new record. (Though it was broken the year before, too.)

The only loser, so to speak, were convertible debentures. Typically their issuance amounts to between 15 and 20 per cent of total REIT fundraising, according to RBC. Last year they amounted to just six per cent.

REITs issued more debt for a few key reasons: three more of them earned investment grade status last year, making them more attractive to institutional buyers; credit spreads tightened dramatically early in the year, relative to the second half of 2011; and REITs scooped up many properties last year, generating the need to borrow to fund the purchases.

On that last point, it's much too early to tell whether acquisitions will continue to drive more borrowing this year. Although some analysts expect the buying to cool, there are whispers in the real estate world that a number of portfolios could hit the market in 2013.

As for the performance of Canadian REITs, yet again, their total returns beat the S&P/TSX Composite Index last year – 16.4 per cent versus 7.2 per cent, respectively. But broaden your scope and the returns don't look as stunning.

Mr. Downey pointed out that the FTSE/EPRA Asia Index posted a 2012 total return of 45.5 per cent and U.S. REITs churned out a total return of 17.8 per cent, beating their Canadian counterparts.

(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)