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Real Estate Investment Trusts

Northern Property is Cheap Again

By Roger S. Conrad, on Sep. 19, 2014

The disparity in recent dividend growth explains much of this valuation gap.

In response to worries about a potential increase in borrowing rates and overbuilding in key markets, many Canadian REITs have reined in their dividend growth. Of the 14 names in our table, only six have hiked their payouts over the past 12 months.

Meanwhile, another half dozen have departed from their established schedule of dividend increases:

  • Dream Office REIT;
  • Dundee Industrial Real Estate Investment Trust (TSX: DIR-U, OTC: DREUF);
  • H&R Real Estate Investment Trust (TSX: HR-U, OTC: HRUFF);
  • InterRent Real Estate Investment Trust (TSX: IIP-U, OTC: IIPZF);
  • Morguard Real Estate Investment Trust (TSX: MRT-U, OTC: MGRUF); and
  • RioCan Real Estate Investment Trust (TSX: REI-U, OTC: RIOCF).

In contrast, the Bloomberg North American REIT Index’s 12 largest members have raised their dividends by an average of 15.2 percent over the past month—10 times the growth that the 14 Canadian REITs in our table have delivered.

(Click table to enlarge.)BBREIT Table

This divergence in dividend growth goes a long way toward explaining why the Bloomberg North American REIT Index has generated a total return of 14.5 percent over the past year and the 14 Canadian REITs have averaged an 8.1 percent gain.

But more than half the US REITs in our table slashed their dividends at least once during the 2007-09 real estate bust and financial crisis. In contrast, only two of the Canadian REITs we cover cut their payouts during this trying period:

  • H&R REIT reduced its dividend while scrambling to finances The Bow office building in downtown Calgary. The property owner has subsequently restored its payout to pre-crash levels.
  • InterRent REIT, which went public in February 2007 and embarked on a major expansion effort just before the crisis hit, has yet to match its former payout.

The other Canadian REITs in our table rode out the downturn with aplomb, thanks to their focus on high-quality properties and tenants. From 2010 to 2013, these names used their low cost of capital to fund accretive acquisitions.

Since slowing their dividend growth rates, Canadian REITs have been more judicious in accessing the capital markets and acquiring assets. These names have continued to grow their funds from operations, albeit at a less robust rate and with a greater contribution from cost reductions.

During second-quarter earnings calls, management teams emphasized their self-help efforts to boost margins and protect against weak market conditions. Canadian REITs continue to high-grade their portfolios, divesting noncore assets and using the proceeds to acquire properties that show more promise.

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