- Canadian REITs underperformed the S&P TSX Composite in 2020 (-10% vs +6%)
- Canadian capital gains tax is assessed on a settlement date basis so December 29 was the last day to realize losses in 2020
- REITs with poor YTD returns and notable recent insider buying include Cominar, Riocan, First Capital, Allied Properties, Brookfield, and Artis
Real estate sectors dependent on gathering large numbers of people indoors have been significantly affected by government imposed restrictions and voluntary behavior changes in 2020. Everybody knows this so units/shares of commercial property owners exposed to retail, entertainment, hotels, and offices have declined. Canadians can capture a tax benefit by selling those loser stocks by 12/29. Some of that selling pressure has been offset by investors anticipating a post-COVID recovery, however there is uncertainty about the extent to which COVID-induced changes persist. Significant insider purchases provide a useful assessment of which real estate companies are well positioned for a rebound.
Brief comments about individual REITs:
Cominar REIT has a portfolio of retail, office, and industrial property concentrated in Montreal, Quebec City, and Ottawa. The significant mall exposure led to same property NOI -10% in 9M20 and pushed Debt/EBITDA up to 11.4. The distribution rate was cut 50% with 2Q20 results. In August Cominar announced that it would begin a Strategic Review of opportunities to enhance unitholder value. Insider ownership is quite low (<1%) except for 8.4% controlled by independent Director Zachary George through FrontFour Capital. Frontfour worked together with Sandpiper Group on a successful 2017 activist campaign to replace the Trustees and management of Granite REIT which has subsequently provided an outstanding investor return. The insider buying in recent months has been from George Armoyan (through his G2S2 holding company) who crossed the 10% ownership threshold requiring public disclosure and continued purchases that have raised his stake to 11.2%. Canadianvaluestocks wrote an excellent profile last year of Armoyan’s record at Clarke Inc. Cominar is facing short-term pressures on its cash flow and balance sheet, however it has good assets and two strong independent shareholders that will push the asset sales necessary to deleverage and provide capital for profitable redevelopment opportunities (i.e. adding residential to existing retail locations, like every other REIT is doing).
Riocan is a leading retail REIT with a national portfolio of 221 properties. 51% of revenue is from the Greater Toronto Area. Property performance has been relatively good with 93% rent collection in 3Q20 and 96% committed occupancy. The company has a 42mm sqf pipeline of development projects that will build NAV over time. The company has raised capital through sale of some non-core assets and partial stakes in its properties – an October sale achieved a 3.5% cap rate on its residential component and 4.5% on retail. Riocan cut its distribution rate in December. Recent insider buys have been from CEO Ed Sonshine who will be retiring in April.
First Capital develops mixed-use properties with a retail core and residential space sold as condos or retained as rental apartments. The company’s development pipeline of 25mm sqf is larger than its current portfolio of 23mm sqf. Over 90% of current revenue is from retail tenants, but over 90% of the development GLA is residential. Recent insider buys have been from company Founder and former Chairman/CEO Dori Segal.
Allied Properties is a leading office REIT with top quality buildings in Toronto (41% of NOI) and Montreal (31% of NOI). The company also derives 16% of its NOI from urban data centres, a unique exposure among Canadian REITs. The company maintains a conservative balance sheet with debt/assets well below most peers at just 29%. In September Allied surprised investors with a secondary offering at C$37 to raise funding required for its development pipeline. The fundraising was not absolutely necessary, but was in keeping with management’s conservative approach. Four different insiders have bought units in recent months. Despite COVID, management maintained guidance for 2020 full year growth in AFFO and NAV per unit and same property NOI. At the current level the units provide investors with exposure to a top quality office assets, including the data centres, at an uncommonly discounted valuation.
SmartCentres operates open air shopping centres across Canada with a majority anchored by Walmart. Similar to peers, the company has a large portfolio of redevelopment/intensification projects which it estimates could boost equity by C$1.4Bn ($9/unit) over time. Recent insider buying has been from Executive Chairman Mitch Goldhar.
Brookfield Property claims to own “the world’s largest, highest quality real estate portfolio” and who wouldn’t want that? The unit price has traded below NAV for several years due to the complex scope of the business, above average leverage, above average risk from private equity investments, high retail exposure, and high fees payable to Brookfield Asset Management (BAM). COVID exacerbated concerns about the retail malls and added worries about coastal offices. In July BAM provided an “equity commitment” to fund up to $1Bn of share purchases made by BPY that would be held for the account of BAM. The recent purchases fall under this agreement.
Artis has been described in many prior Koneko articles. The recent settlement agreement with Sandpiper Group clears the path to realize fair value for unitholders through sale of the REIT in whole or parts, but the Canadian brokerage analysts have not yet been willing to ascribe value to further corporate actions. They maintain modest price targets based on an assumption that Artis will continue to own a diversified portfolio which is out of favor with investors. Aggressive unit purchases in recent weeks by Sandpiper and two of the independent Trustees it nominated demonstrate confidence in bolder action and a better outcome.
Savvy insiders are demonstrating impressive conviction in the value of these individual REITs and in aggregate they also show confidence in a sector recovery. Some retail tenants will fail and some office vacancies will rise, but the risks are priced in.
Total returns in the pre-pandemic period of 2014-2019 are a simple way to measure the quality of these companies. Allied and Smartcentres insiders are betting on a resumption of their success while Artis and Cominar buyers are betting on new strategic initiatives to unlock value.
DISCLOSURES & NOTES
At the time of publication the author was a unitholder of Artis, Allied, and Cominar. The author does not make any recommendation regarding any investment in any company mentioned in this article. Investors are encouraged to check all of the key facts cited here from SEDAR filings and other sources prior to making any investment decisions.