Analyzing Canadian REITs, Part II: Diversified Office, Retail, And Industrial

by: Monty Spivak

<< Return to Part I

This is the second article of the series, and my first to identify specific securities to attain a high-yield goal. This and the subsequent articles will not focus on the usual high-yield or high-dividend-growth securities. Canadian REITs and real estate companies, which can be purchased on North American exchanges or over-the-counter (OTC) by US and global investors, can help boost your yield and provide currency, geographic, and risk diversification.

The Canadian diversified office/retail/industrial segment is the second largest (by capitalization) of the real estate sector. Names, tickers, and US stock exchange prices follow, to help non-Canadians find these securities on US exchanges when possible (click tables to enlarge):

The following is a table of statistics based on the Canadian stock exchange activities. The US sources do not typically carry this data, which may be important to your investment decision.

The following provides a description and financial results. This will help you identify and understand the company activities and results.


The company invests in office, industrial and retail properties in Canada and the United States. As of December 31, 2010, Artis’ portfolio comprised of 146 properties with approximately 14,398 thousand square feet of gross leasable area (GLA). During the year ended December 31, 2010, it acquired 13 properties.

Acquisition Accretion & 1.9% SP-NOI Growth drive 25% FD FFO Per Unit Growth. Q3/11 fully diluted (FD) funds from operations (FFO) was $0.30/unit compared to $0.24/unit a year ago and above our $0.28/unit estimate. The 25% increase in per unit FFO was driven by the large volume of accretive acquisitions completed in the past four quarters (portfolio GLA up ~67% at Q3/11 from last year).

Canadian REIT, (OTC:CRXIF)

It owns and manages a real estate portfolio consisting of office, industrial and retail properties throughout Canada. The portfolio's 163 properties contain 22.4 million square feet of leasable space, with its ownership interest at 17.9 million square feet. Its retail portfolio is focused primarily on food-store-anchored strip plazas and other un-enclosed shopping centers anchored by retailers on long-term leases. Its industrial portfolio is focused on distribution facilities, warehousing and buildings used for light manufacturing and/or flex-space facilities.

Q3/11 fully diluted funds from operations was $0.60/unit versus $0.57 last year and our $0.58 estimate. The ~5.7% increase in FFO per unit ($0.032/unit) was driven by acquisitions (more than $270 mln of acquisitions and development completions in the last four quarters), internal growth (1.9% rise in accounting SP-NOI) and average lower debt costs (down 28 bps vs. last year). The benefit of acquisitions, interest costs savings, and same-property NOI (+$0.014/unit), offset higher property administrative costs (+$0.009/unit, mainly due to one-time items) and lower interest and fee income (-$0.007/unit).

Canmarc REIT

CANMARC owns a portfolio of Canadian income-producing commercial properties, consisting of retail and office properties with certain industrial properties. In total, CANMARC properties comprise approximately 8.8 million square feet of commercial gross leasable area and 464 multi-family residential units located in Quebec, Atlantic Canada, Western Canada and Ontario.

Canmarc has received an unsolicited written proposal from Cominar REIT to acquire 100% of CMQ's outstanding units for $15.30/unit in cash. The proposal also provides the option to unitholders to exchange CMQ units for Cominar units on a pro-rata basis, up to a maximum of 16 mln units. Author's note: When Canmarc was spun-off from Homburg in 2010, I wrote an article which proposed that the REIT (which was initially named Homburg REIT) would benefit the owners and management, but not the other shareholders.


As of December 31, 2010, the trust owned a real estate portfolio of 268 properties, consisting of 53 office, 55 retail and 160 industrial and mixed-use buildings that cover a total area of 20.9 million square feet in the Greater Quebec City, Montreal and Ottawa-Gatineau areas, as well as in the Atlantic Provinces.

Cominar announced the completion of a private placement acquisition of 3.1 million units of CANMARC REIT, bringing its stake to 8.3 million units, or 15.1% of outstanding CANMARC REIT units. Cominar also announced plans to make a $15.30/unit cash or cash & units bid for all CANMARC units. Acquiring the CANMARC portfolio could increase Cominar’s asset base by approximately 42% to 30 million sq.ft. The acquisition would also significantly alter the composition of Cominar’s portfolio by property type and geographically. Author's note: Please refer to this section for Canmarc REIT.


As of December 31, 2010, the trust's portfolio consisted of approximately 12.3 million square feet of gross leasable area across Canada. Through its subsidiary, Dundee Management Limited Partnership, the trust provides management services to its tenants and other businesses. Its rental properties have been segmented into office and industrial components. As of December 31, 2010, its ownership interests included 68 office properties consisting approximately nine million square feet. As of December 31, 2010, its industrial portfolio consisted of 43 prime suburban industrial properties consisting approximately 3.2 square feet in Calgary, Edmonton, London, Toronto, Ottawa, Montreal and Halifax. On February 8, 2011, it acquired Realex Properties Corp. On January 4, 2011, it purchased Saskatoon Square in Saskatoon. On January 17, 2011, it purchased 400 Cumberland Street in Ottawa, Ontario.

Q3/11 fully diluted (FD) funds from operations (FFO) was $0.68/unit compared to $0.60/unit last year and our $0.64 estimate. The ~13% rise in FFO was the largest year-over-year increase in quarterly FFO in the REIT’s history and was due to the REIT’s substantial completed acquisitions, which more than offset a modest 1.3% decline in same-property cash-NOI. Overall occupancy, including occupied and committed space, was 95.8% at Q3/11 vs. 96.5% at Q2/11 and 97.1% last year. Office occupancy was 95.7% at Q3/11, down 90 bps from last year. Industrial occupancy was 96.1% at Q3/11, down 240 bps from last year. At Q3/11, the REIT’s weighted average remaining lease term was 5.4 years (4.8 years in office, 7.8 years in industrial).


It invests in office, industrial and retail properties. As of December 31, 2010, the REIT held interests in 35 office properties, 118 single-tenant industrial properties, 129 retail properties and three development projects. As of December 31, 2010, the REIT was focused on the construction of the Bow in Calgary. The Bow is a two-million square foot head office complex pre-leased to EnCana Corporation. In January 2010, the REIT sold a 179,000 square foot industrial building located in Mississauga, Ontario.

Q3/11 IFRS FD FFO was $0.38/unit in Q3/11, unchanged from $0.38/unit in Q3/10, and slightly above our $0.37 estimate, all excluding gains on debt extinguishments. Q3 FFO included recoveries relating to capital improvements capitalized to the balance sheet of $1.6 million or $0.008/unit compared to $2.0 million or $0.01/unit in Q3/10, and lease termination payments of $1.0 million or $0.005/unit compared to none a year earlier. Q3/11 same-property cash-NOI increased +1.3% (-0.8% on an IFRS basis), as a +1.9% increase in Canadian same-property cash-NOI was partly offset by a 1.3% decline in U.S. same-property NOI when translated into Canadian dollar terms. On a local currency basis, U.S. same-property NOI rose +6.8% year over-year, but was impacted in Canadian dollar terms due to a lower US$/C$ exchange rate. On a local currency basis, overall same property cash NOI rose +2.8% in Q3/11.

Homburg Invest Inc. (OTC:HIIAF)

Owns 77 office, seven retail and 28 industrial properties in the United States, Germany, the Netherlands and Eastern Europe, and holds land for residential development in Canada. Affiliate Homburg Canada Real Estate Investment Trust owns 119 retail, office, industrial and residential properties across Canada.

On September 9, 2011 (the "Petition Date") the company and certain of its subsidiaries (collectively, the "Applicants") applied to the Superior Court of Québec (the "Court") for protection under CCAA (the "CCAA proceedings", or "Creditor Protection Proceedings"). On September 13, 2011 the company sold 3 million Units (as hereinafter defined) of CANMARC Real Estate Investment Trust (formerly Homburg Canada Real Estate Investment Trust) ("CANMARC") on a bought deal basis, which resulted in a loss of approximately $13 million. As a result, HII's voting ownership in CANMARC decreased from 23.1% to 16.1%. Thus, the company no longer has significant influence in CANMARC and has reclassified it's investment from an equity investment to a portfolio investment. Funds from operations (FFO) from continuing operations, net of the sale of properties developed for resale, was $(2.9) million for the three month period ended September 30, 2011, compared to $(2.5) million recorded in the same period in 2010.

Melcor Developments (OTC:MODVF)

Melcor Developments Ltd. is engaged in the development of urban communities and the subsequent marketing of residential, commercial and industrial lands in Western Canada. The company operates in four divisions: Community Development, which is engaged in purchasing and developing land to be sold as residential, industrial and commercial lots; Property Development, which is engaged in developing investment properties which, when constructed and at least 75% leased, are transferred to the Investment Property Division, which will hold and manage the asset; Investment Property, which owns 54 leasable commercial and retail buildings and other rental assets, such as residential property and land leases, and Recreation Property, which owns and manages three 18-hole golf course operations. On June 1, 2010, the Investment Property Division acquired a 240-unit residential apartment complex in Sugarland, Houston. During the year ended December 31, 2010, it sold its Crowfoot Circle land lease.

2010-12 (last year): For the fiscal year ended 31 December 2010, Melcor Developments Ltd's revenues increased 41% to C$193M. Net income increased 94% to C$45M. Revenues reflect increased sales from community development and Investment property segment.

Morguard Corporation (OTC:MRCBF)

Acquires, owns, develops, manages and leases office, industrial, retail and multi-unit residential roperties located in major centres across eight Canadian provinces and three states in the South-eastern U.S. Also constructs and sells residential condominiums, and provides rental services and real estate management services to Canadian institutional investors and private individuals. The company’s real estate properties, including the investment in Morguard REIT, represent more than 92% of Morguard’s total assets.

2011-09: The company’s net income attributable to common shareholders for the three months ended September 30, 2011, was $44,634 ($3.44 per share) compared to $71,532 ($5.39 per share) for the same period in 2010. The decrease in net income of $26,898 for the three months ended September 30, 2011, was primarily due to a decrease in fair value gains on real estate properties of $28,392 and a decrease in the equity income from Morguard REIT of $7,359; these items were partially offset by an increase in net operating income of $1,586, an increase in management and advisory fee revenue of $2,322, an increase in interest and other income of $1,649, a decrease in property management and corporate expenses of $719 and a decrease in income taxes of $1,366. In general terms, average occupancy rates for the three months ended September 30, 2011, are similar those experienced during the same period in 2010 for the following segments: Canadian multi-unit residential, U.S. multi-unit residential and U.S.

Retail. The average occupancy rate for Canada Retail increased predominantly due to the completion of the redevelopment 13 and lease up at Bramalea City Centre. The office and industrial average occupancy rate has decreased predominantly due to the increase in vacancy at two office properties and one industrial property. Net operating income increased $1,586, or 4.1%, during the three months ended September 30, 2011, to $39,984, compared to $38,397 in 2010.


The trust owns a real estate portfolio of 51 retail, office and mixed-use properties consisting of approximately 8.3 million square feet of gross leasable area located in the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Quebec. The trust's operations cover three types of real estate properties located in seven regions. In June 2010, the trust acquired a 50% co-ownership interest in Prairie Mall. On June 1, 2010, the trust acquired a 50% interest from Revenue Properties Company Limited, a subsidiary of Morguard Corporation (Morguard). In July 2010, the trust, together with Morguard , acquired Place Innovation. The REIT's main property types are retail and office (>95% of NOI). In its retail portfolio, the REIT owns both large regional shopping centres, as well as neighbourhood and community retail centres. Morguard REIT's office portfolio includes both single tenant buildings, typically leased to government tenants, and multi-tenant properties with spread out lease expirations. MRT stands to benefit from Target anchoring ~50% of the REIT’s total retail GLA, with those stores re-opening under the Target brand in 2013. Target stores are expected to drive much more foot traffic than existing Zellers stores, which should benefit other tenants and result in higher sales and ultimately higher rents as leases roll-over.

Q3/11 fully diluted FFO was $0.33/unit, up from $0.30/unit last year, and in-line with our $0.33/unit estimate. FFO was boosted by continued strong internal growth as Q3/11 same-portfolio cash-NOI rose 2.9%, mainly due to strong occupancy in the REIT’s retail and industrial portfolio, and acquisitions ($82.5 million acquisition in July 2010). Same-property NOI rose +3.6% in the retail portfolio, +0.3% in office portfolio, and +17.0% in the “other” segment (includes industrial properties). This was the REIT’s fifth straight quarter of same-property NOI growth (range of +2.9% to +5.9%). Overall occupancy was ~95% at Q3/11, unchanged from Q2/11, but up from ~94% a year ago.

Wall Financial

Wall Financial Corporation is a real estate investment and development company. The company operates in three segments of the real estate industry: ownership and management of residential revenue-producing properties, the development and sale of residential housing (development properties), and the ownership and management of hotel properties. The company owns and manages three hotel properties in Metro Vancouver: the Vancouver Airport Comfort Inn, the Sheraton Vancouver Wall Centre Hotel and the Westin Wall Centre Vancouver Airport Hotel. At January 31, 2011, the total number of hotel units was 1,050, and the total number of residential and commercial rental units was 1,057. As at January 31, 2011, the company's three projects under active development were Capitol Residences, Eagle Mountain and Wall Centre False Creek. On September 1, 2010, the company acquired a property on 1300 Richards Street in Vancouver.

The company recorded net earnings and comprehensive income attributable to owners of the company for the nine months of fiscal 2012 of $26,800,238 or $0.81 per share (October 31, 2010 - $31,770,871 or $0.96 per share). As at October 31, 2011, earnings before interest, income tax, and depreciation and amortization (EBITDA), and net earnings attributable to non-controlling interest were $79,905,133 (October 31, 2010 - $56,039,634). Revenue from real estate operations increased from $127,334,225 for the nine months of the prior year to $207,047,646 for the nine months of fiscal 2012, predominantly due to the closing of 368 units at the Capitol Residences development in the nine months of fiscal 2012. Revenue from hotel operations was $42,240,019 for the nine months ended October 31, 2011 compared to $48,026,681 in the same period of the prior year. This decrease was primarily due to the sale of the Comfort Inn hotel on May 31, 2011 and the stimulus received in the prior year from the Vancouver Winter Olympics, which resulted in higher occupancy and average daily room rates in the first half of the prior year. Rental property operating revenues decreased from $13,277,538 as at October 31, 2010 to $12,027,800 for the nine months ended October 31, 2011 primarily due to the sale of two rental properties in May and June 2010.

Whiterock REIT (OTC:WRKUF)

The trust engages in the acquisition, ownership and management of income-producing office, industrial and retail properties in select markets across Canada. As at December 31, 2009, Whiterock's property portfolio consisted of 47 properties totalling approximately 3.4 million square feet (Whiterock's interest) of office, industrial and retail properties located in seven provinces. During the year ended December 31, 2009, the trust acquired properties consisting of two industrial properties in Regina and Montreal, and three office properties in Toronto and Fredericton. In March 2011, the company acquired Winston Park Drive.

Whiterock REIT’s (WRK.UN–SP) fully diluted recurring funds from operations was $0.30/unit (excluding $1.6 million of mortgage prepayment penalties, which represents $0.04/unit) in Q3/11 compared to $0.28/unit a year ago and our $0.31/unit estimate. FFO was positively impacted by acquisitions and a 1.8% rise in same-property NOI (1.9% on a cash-basis), which offset transaction timing between raising and investing capital. The rise in same-property NOI was due to positive leasing spreads on tenant renewals and higher occupancy. Overall occupancy was 96.9% at Q3/11 compared to 97.3% at Q2/11 and 96.3% a year ago. Whiterock had completed leasing on ~82% of 2011 lease expiries, achieving an average rental rate increase of ~15% over expiring lease rates. The REIT has completed approximately 25% of its 2012 lease maturities (~8% positive leasing spreads). More than 50% of the remaining 2012 exposure is in properties located in the Greater Toronto Area, with some Calgary and Regina exposure. The REIT’s average remaining lease term was 6.3 years at Q3/11. The REIT’s total debt/GBV assets, including WRK's share of joint venture debt, was 61.6% at Q3/11. WRK's interest coverage, including JV debt, was 2.2x in Q3/11. Whiterock has been making progress to reduce leverage to levels closer to peers and targets a 55%-60% D/GBV in the next few years, however, the REIT remains more highly levered than its peer group.

Wilmington Capital Management

Wilmington Capital Management Inc. (Wilmington) is a Canada-based investment company. The company's principal objective is to provide its shareholders with capital appreciation. As of December 31, 2009, the company owned 8% interest in Parkbridge Lifestyle Communities Inc. (Parkbridge), which acquires, operates and develops land sites that are leased to homeowners in manufactured home communities and to owners of recreational properties in seasonal recreational resorts. It also owns land at 370 Third Street in San Francisco, California, which is leased to commercial property owners. In August 2011, the company acquired a 50% interest in NCI Management Ltd.

March 24, 2011 – Wilmington Capital Management Inc. today announced net income of $252,000 for the year ended December 31, 2010 compared to a net loss of $135,000 for the year ended December 31, 2009. Net income per Class A and Class B share for the year ended December 31, 2010 was $0.03, compared to a net loss of $0.02 per share for the year ended December 31, 2009. Net income for the three months ended December 31, 2010 was $68,000 or $0.01 per Class A and Class B share, compared with net income of $86,000 or $0.01 per share for the same period in 2009.

Disclosure: I am long ARESF.PK, DRETF.PK, HRUFF.PK, WRKUF.PK.

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