Real estate investment trusts yielding as much as 5.5 percent, led by American Hotel Income Properties REIT (HOT-U), are forecast to continue outperforming Canadian initial public offerings such as Hudson’s Bay Co. (HBC) and Ivanplats Ltd. (IVP)
American Hotel is Canada’s best performing IPO above C$80 million ($78 million) in the 12 months through yesterday, gaining 8.4 percent since its Toronto Stock Exchange debut last month, according to data compiled by Bloomberg. HealthLease Properties REIT (HLP-U), which began trading June 20, is second best, rising 8.1 percent, while Dundee Industrial REIT (DIR-U), the third-best performer, has gained 7.6 percent since its Oct. 4 trading debut.
“In an environment of low economic growth and low interest rates, investments like REITs continue to look attractive because of the yield, the moderate visible growth that you get out of these vehicles, and the valuations,” said Michael Missaghie, a portfolio manager at Sentry Investments Inc. in Toronto, which manages about C$9 billion. “Across those three things, REITs will continue to look attractive.”
Initial offerings of Canadian REITs are outperforming IPOs in other industries as demand surges from retail investors for high-yield securities. REITs are companies that invest in income-producing real estate and pay out most of their income to investors through unit distributions.
Hudson’s Bay, the 342-year-old retailer, is Canada’s worst performing IPO in the past year, losing 13 percent since selling C$365 million in new shares in November. The sale was led by Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce and Bank of America Merrill Lynch. Tiffany Bourre, a spokeswoman, declined to comment on the performance.
Crius Energy Trust (KWH-U), which owns a stake in U.S. energy retailer Crius Energy LLC, is the second-worst, falling 9.4 percent since it started trading on Nov. 13. Michael Fallquist, Crius Energy Trust CEO, didn’t immediately return a call seeking comment. Bank of Nova Scotia (BNS), Royal Bank and UBS AG led the sale.
Ivanplats, a mining company founded by billionaire Robert Friedland, ranks third worst, dropping 8.8 percent since raising C$300.8 million in October. The Vancouver-based firm, which is developing copper projects in Africa, has fallen since its Oct. 17 trading debut as the price of copper futures in New York dropped 9.4 percent. Bob Williamson, a spokesman for the firm, declined to comment. Bank of Montreal led a group of banks managing the sale including Morgan Stanley, Macquarie Group Ltd. and Royal Bank.
The S&P/TSX Capped REIT Index (SPRTRE) has risen 7.2 percent in the past 12 months, outpacing the 2.4 percent return of Canada’s benchmark Standard & Poor’s/TSX Composite Index.
Dundee Industrial, based in Toronto, has a 12-month dividend yield of 2.6 percent. HealthLease has a 5.5 percent yield, the highest among the REIT IPOs and almost double the 3 percent yield of Canada’s benchmark index. Hudson’s Bay has a yield of 0.63 percent while Ivanplats does not pay dividends.
Dundee Industrial’s IPO was led by Toronto-Dominion Bank (TD), while HealthLease’s sale was led by Canaccord Financial Inc. and National Bank of Canada. (NA) Michael Cooper, chairman of Dundee Industrial, and Adlai Chester, HealthLease’s chief financial officer, didn’t return telephone calls seeking comment.
“There has been more success for the REITs in the last eight to 12 months,” said Dean Braunsteiner, IPO services leader in Toronto for PwC Canada, a member of PricewaterhouseCoopers International Ltd. “Part of the reason is investors are really looking for yield, a return, and that’s the attraction.”
Canadian REITs raised almost $500 million in seven IPOs last year, more than any other industry in Canada, Bloomberg data show. Canadian companies have raised $482 million in 13 IPOs in the past 12 months, with 92 percent of that from three REIT sales.
One such sale was American Hotel, which boosted its IPO size by 16 percent to C$87 million on investor demand. Chief Executive Officer Robert O’Neill said he he met 55 institutional investors during a two-week roadshow, including eight meetings in Toronto on the last day, during a Feb. 8 blizzard.
“We had about C$270 million of orders,” O’Neill said in a telephone interview. “The support that we have bodes well for future financings, as long as I can bring deals of equal or better quality to the market.”
American Hotel, which bought 32 hotels that offer lodging for railroad workers, was led by Canaccord and National Bank. Milestone Apartments REIT, based in Toronto, sold C$200 million in units in February, a month after Agellan Commercial REIT raised C$134.6 million in its IPO. Bank of Montreal and CIBC led both sales.
Other IPOs are in the works, including a C$105 million sale of Inovalis REIT, which will invest in European office properties, and WPT Industrial REIT, which seeks to raise money to buy industrial sites and office properties in the U.S. from Welsh Property Trust LLC.
Loblaw Cos. (L), Canada’s largest grocery chain, also plans to create a REIT in the second quarter. The Brampton, Ontario-based company said in a Dec. 6 statement that it will contribute about 35 million square feet of real estate with a current value of more than C$7 billion into the sale, and it intends to retain a “significant” majority interest.
PwC’s Braunsteiner said he doesn’t anticipate waning interest in REIT IPOs any time soon, though investors will eventually have their limits.
“There’s only so many retail dollars out there, so you want to be early out of the gate in terms of getting some interest,” Braunsteiner said. “At some point there probably is a crest and it starts to come down again, but I don’t think we’re near that yet.”
To contact the reporter on this story: Doug Alexander in Toronto at firstname.lastname@example.org