Canada's smaller real estate investment trusts have been thrust into the spotlight in recent weeks and Whiterock REIT's solid third-quarter earnings offer yet another reason for them to stay there.
The year to date has been an outstanding period for Canadian REITs because investors are searching for yield to supplant rock-bottom interest rates on bonds. Yet small-capitalization names have been overshadowed by their larger peers. But now that some of the biggest players, such as RioCan REIT , are approaching their previous stock price highs, analysts say the smaller names deserve more attention.
The smaller names pay big yields, with Whiterock's coming in around 8.6 per cent. The REIT also continues to grow. Third-quarter earnings beat both the previous quarter and the same period in 2009, with diluted funds from operations totalling 45 cents a unit, just a penny shy of consensus expectations. Those figures represented around a 20-per-cent rise over the third quarter of 2009.
Although Whiterock's shares rose just 1.4 per cent on Tuesday, their recent capital gains have been impressive. Investors who bought in three months ago have realized a 35-per-cent return.
Analyst Jimmy Shan at National Bank Financial said the rise is well deserved because it has come on the back of solid growth. But he does worry about the source of expansion. "It's all driven by acquisitions … whereas the actual [organic]growth was basically flat," he said. "You need a combination of both."
But this REIT isn't the only small-cap name grabbing investor attention. On Monday BTB REIT easily raised $10-million of new equity, and the firm is getting praise from portfolio manager Paul Gardner at Avenue Investment Management.
Although Mr. Gardner still likes the large caps, he said they are in the "seventh or eighth inning" of the buying cycle and it is therefore time to look at the smaller players. He particularly likes BTB because it pays a yield around 11 per cent and its distribution payout ratio is below 100 per cent of adjusted funds from operations, meaning it can afford its payments to shareholders.
Despite all the buying in REITs, Mr. Gardner doesn't think the sector is overbought. "The wave of buying is correct. Income trusts are closing; REITs are still strong," he said, noting that occupancy rates are near all-time highs in Canada, unlike in the U.S.
He did admit that BTB's minuscule $25-million market cap would normally raise caution flags, but he makes exceptions for this sector. "I don't like the idea of being in a small-cap space, but in real estate it's probably okay because you have a real asset behind you," he said.
Tim Kiladze