While investors have been buying into REITs for the past few years, Alberta trusts are suffering massive blows from multiple fronts, according to a Globe and Mail
As economic pain from weak oil and gas prices continues to hurt commercial property owners in Alberta, publicly traded REITs with heavy exposure to the province are feeling the heat. A major owner of apartment buildings, Boardwalk REIT’s same-property net operating income (SPNOI) – a measure of revenue from properties it owned in 2015 – fell 14.6% from the year prior.
Office property owner Dream Office REIT, which has properties in Calgary and Edmonton, experienced a 10.9% drop in the same metric.
Making matters worse is the recent rally in bond yields, which resulted from a chaotic selloff following Donald Trump’s victory in the US presidential election. As the 10-year GoC bond’s yield has increased from 0.95% at the end of September to 1.54%, yields from REITs have become comparatively less attractive. This is seen to exert additional gravity on the S&P/TSX Capped REIT Index, which since July has dropped 13%, not inclusive of distributions.
Some areas of the REIT sector are less gloomy because of diversified exposure. Dream REIT’s downtown Toronto portfolio, which represents 34% of its net operating income, has seen a jump in SPNOI of 2.6%. Artis REIT’s exposure to Manitoba, making up 10% of its cash flow, saw SPNOI climb 7.5%.
However, Alberta’s REITs still face a problem from ongoing developments. Dream REIT’s portfolio is an example, described by CIBC World Markets analyst Alex Avery as “the most challenged as leasing conditions continue to deteriorate” in a note to clients.
In a bid for survival, the REITs have mounted various responses. In February, Dream, formerly known as Dundee REIT, announced a planned to sell at least $1.2 billion worth of assets and cut its monthly distributions by a third. “I’ve never been in an environment where it’s more difficult to model either [real estate] values or longer-term cash flows,” Dream founder Michael Cooper said of the Alberta market at the time.
Artis sold eight industrial properties and a retail property for $211 million in October, while Boardwalk has been building its own projects, including a joint venture with RioCan REIT, and acquiring newer development properties.
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