BAY STREET-REITs zoom on boomer demand, but clouds may loom

* REIT equity issuance hits pre-crisis levels

* Demand driven by low rates, yield-hungry retirees

* Some fret economic slowdown could hit sector

By Pav Jordan

TORONTO, Nov 7 (BestGrowthStock) – Soaring demand for Canadian real
estate investment trusts has driven sales of new equity to
pre-crisis levels, boosting bankers’ paychecks but stirring
fears the popular products may be vulnerable to a downturn.

A combination of ultra-low interest rates and yield-hungry
baby boomers seeking a haven for retirement savings has fueled
the surge, with REITs raising more than C$2 billion ($2
billion) year-to-date in secondary offerings.

“What’s driving them?” said Karine MacIndoe, a real estate
analyst with Bank of Montreal. “An unbelievable hunger for
yield … what they can get on comparable Canada bonds,
corporate bonds, other yield options, has made REITs look
pretty attractive.”

Bonds yields tumbled after the financial crisis as the
central bank slashed rates to a record low in a bid to revive
the economy. The Bank of Canada has since nudged its key rate
up to 1 percent, but is expected to keep it there well into
2011. [CA/POLL]

As result, Canada’s benchmark 10-year bond (CA10YT=RR: ) now
yields just 2.85 percent. By comparison Calloway Real Estate
Investment Trust (CWT_u.TO: ), which specializes in renting out
retail and mall space, yields 6.3 percent.

REITs are taking advantage of investor appetite to raise
capital for acquisitions that can be easily financed in a low
interest rate environment, another factor in the near perfect
storm for trusts.

In October alone six secondary offerings by REITs, ranging
in size from C$23 million to C$130 million, raised some C$500
million.

REITs have also raised more than C$800 million in initial
public offerings this year, and still more in debentures,
according to Bank of Montreal.

“Investor appetite for REIT secondary offerings has been
very robust,” said Roman Dubczak, head of equity capital
markets at CIBC World Markets. The unit of Canadian Imperial
Bank of Commerce (CM.TO: ) was the third most active bookrunner
in Canadian secondary offerings to Sept. 30.

He said investor appetite for REITs should remain strong as
long as low interest rates prevail.

PROBABLY AT PEAK?

Recent issuers include Chartwell Seniors Housing Real
Estate Investment Trust (CSH_u.TO: ), one of the largest
participants in the North American seniors housing business,
which said it raised C$130 million in an offering on Oct. 29.

Earlier in the month Calloway closed a C$115 million
financing in which underwriters fully took up a 15 percent
over-allotment option.

Proceeds from the offerings go mostly to fund further
property acquisitions and to repay indebtedness.

“With interest rates this low and credit spreads that have
tightened, the cost of debt is so low that it’s pretty
accretive to acquire property,” said Mark Rothschild, who
covers real estate at Canaccord Genuity in Toronto.

“If you can grow your cashflow per unit you can grow your
distributions and that’s really what they’re trying to do, grow
distributions.”

But Rothschild said with interest rates as low as they are,
demand for REITs is probably at a peak.

PRICED TO PERFECTION

REITs are popular because they offer investors a way to
participate in real estate, including the potential rise in
property values, with the added benefit of liquidity from the
equity market and without the headaches of being a landlord
yourself.

The resurgence this year has also been fueled by the
Canadian government’s decision to gradually remove the favored
tax-status of competing business trusts.

Analysts dare not say the word “bubble,” but they will
whisper it as they compare the REIT market today with 2007, the
last year of robust secondary offerings. That year trusts
raised C$1.9 billion. Secondary offerings were C$480 million in
2008.

In particular, market observers worry the trusts would be
highly susceptible to a fresh economic downturn that would hurt
revenue from the rental properties they own.

Some worry that less savvy investors may think that owning
REITs means they own the real estate.

“They may not realize that the banks own them first,
through the mortgages, then unsecured debenture holders hold
them, and then convertible debenture holders own them,” said
Tim Logan, a portfolio manager with Cockfield Porretti
Cunningham in Toronto.

($1=$1.00 Canadian)
(Editing by Jeffrey Hodgson and Rob Wilson)

BAY STREET-REITs zoom on boomer demand, but clouds may loom