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A RioCan centre in Kingston, Ont.

Canadian real estate investment trusts are expensive for a reason.

When the market took a nose dive in August, REITs slumped for a few days and then bounced right back up. And with the TSX down 7.5 per cent for the year, the S&P/TSX Capped Real Estate Index is up around 11 per cent.

There have been worries these unit prices are propped up by retail investors who will pay pretty much anyting for the yield that REITS offer. No doubt that's at least partially true. But the latest round of quarterly reporting proves that the REITs are holding their own and deserve to be in demand.

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Some of the bigger names have already reported, with RioCan the latest to release on Monday, and the earnings have been very solid. Calloway REIT churned out funds from operations of 43 cents per unit and CREIT posted FFO of 60 cents per unit – both of which were in line with analyst estimates.

Their occupancy numbers have also been very strong. Calloway posted a 99-per-cent occupancy rate for the sixth consecutive quarter, and CREIT's is now up to 95 per cent.

Earlier this year REITs went on a buying spreed, and there was some concern that some of them were buying for the sake of buying, rather than acquiring based on fundamentals. If RioCan is any indication, however, the REITs remain on good footing even after all these deals.

RioCan has completed north of $600-million in acquisitions in 2011 at an average capitalization rate of 6.7 per cent. These deals have bumped FFO per unit to 36 cents, and even with the added properties, the REITs occupancy is 96 per cent.

Because it's so stable, RioCan was able to sell $126-million of new units a few weeks ago in a deal that was upsized by 26 per cent. The offering also had substantial institutional demand, which proves that big portfolio managers see the strength of this sector (rather than it being supported solely by retail players.)

Still, everyone must keep in mind that the economy isn't in calm waters just yet, so those occupancy rates may not stay high forever. Plus, many of the REITs are trading around their 2007 highs, and growth rates today are much lower than they were projected back then.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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