Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Supply-demand imbalance in Canadian REITs

By Jonathan Ratner

View the original article online   |   Read the article in PDF format

Manager: Russil Lea, Nicola Wealth Management
Fund: NWM Real Estate Fund
Description: Seeks to provide stable and growing cash distributions, as well as long-term capital growth, primarily by investing in Canadian REITs, other securities and hard real estate assets
Firm’s mandates: $1.7-billion
Performance: 1-year: 19.3%; 3-year 40.8%
MER: 1.25% (F Class); 0.5% (O Class)

Canadian bond yields are at such low levels that investors are increasingly turning elsewhere for income, notably high-quality, income-producing real estate, according to Russil Lea, portfolio manager at Nicola Wealth Management.

“Extremely low benchmark bond yields are effectively motivating retail and institutional investors, such as pension funds and insurance companies, to pursue higher returns elsewhere,” Lea said. “We see investors directing more capital towards investments like real estate, which have the benefit of offering stable, high-yielding and inflation-protected returns.”

But the demand for real estate assets is also spurring M&A activity in the sector. Lea highlights two recent takeouts of smaller Canadian REITs (Canmarc and Whiterock) as an indication that M&A activity could continue to gather steam. The deals remind him of the 2006-2007 period when several REITs, including O&Y REIT and Summit REIT, were bought out. Any increase in M&A deals will reduce the number of quality options in the REIT sector.

“There seems to be an imbalance between supply and demand,” he said. “A lot of money is chasing after high-quality real estate, but not a whole lot of people are selling. The sector is quite small, so when you take one or two names out of the top 10, it really drives down supply.”

Lea still believes the sector’s fundamentals look attractive across the board, with the office and diversified REITs likely offering a little more value right now. He notes that residential REITs are typically considered the most defensive group, while office-focused names are more aggressive.

“Demand is going to remain pretty strong for real estate, so that is going to drive the price of the remaining REITs up,” Lea said.


Dundee REIT (D.UN/TSX)

The position: 9% of fund

Why do you like it? Lea likes Dundee’s recent acquisitions and its shift from a strictly Western Canada portfolio to a more diversified national REIT. He notes that many of its acquisitions have been downtown office buildings, particularly in the greater Toronto area. “After their recent acquisition of Whiterock REIT, Dundee has crystallized its status as Canada’s largest office-focused REIT with a 27 million square foot portfolio,” Lea said. Dundee already has an attractive yield, but Lea expects Dundee will raise its distributions over the next 12 to 18 months.

Biggest risk: Higher interest rates

Brookfield Office Properties Inc. (BPO/TSX)

The position: 5% of fund

Why do you like it? Investors worried that Brookfield’s World Financial Center property would need a new key tenant in 2013 because of Bank of America’s ongoing woes, but Lea took a different approach. “While the market focuses on the risks, we focus on the opportunity and the reality is that Brookfield’s World Financial Center is ideally situated on the Hudson River waterfront and is one of New York’s premier business addresses,” the manager said. “It also gives us confidence that Brookfield recently upped their stake in World Financial Center recently.”

Biggest risk: Lower demand for office leasing

TransGlobe Apartment REIT (TGA.UN/TSX)

The position: 5% of fund

Why do you like it? Residential REITs have performed very well recently, making it difficult to find value in this area, but this is one name Lea still likes. He notes that TransGlobe appears to be priced 25% cheaper on an adjusted funds from operations (AFFO) basis than its larger-cap peers.

Biggest risk: Higher interest rates


Boardwalk REIT (BEI.UN/TSX)

The position: Recently exited position

Why don’t you like it? Lea likes Boardwalk’s management team, portfolio and balance sheet, but sold his position because of the stock’s valuation. “I believe it is the most expensive REIT in Canada,” he said. “There is better value elsewhere.”

Potential positive: If expensive stocks continue to rise