Canadian Finance Minister Jim Flaherty said he’s not worried by the recent wave of businesses spinning off real estate assets into tax-preferred trusts.
Canadian Tire, the country’s largest sporting goods retailer, said May 9 it will create a C$3.5 billion ($3.47 billion) real estate investment trust in an initial public offering this fall, becoming the eighth company to either sell or propose such an IPO this year.
“We have seen an uptick in commercial real estate certainly in recent times, so in that sense, it doesn’t surprise me,” Flaherty said in an interview in Aylesbury, near London, where he was attending a meeting of Group of Seven finance officials. “As long as people play within the rules, we won’t need to intervene.”
Flaherty moved in 2006 to stop a trend of companies converting to high-yield income-trust securities in order to take advantage of favorable tax rules at the time. So-called real estate investment trusts, or REITs, were exempted in that decision, and Flaherty said in the interview that they deserve to be treated differently.
“We did not eliminate REITs back in 2006 because they were not considered to be passive investment vehicles,” Flaherty said. “They actually invest and reinvest in shopping malls and office buildings and various other things, so it’s not just a money flow-through to passive investors.”
Canadian Tire is joining Loblaw Cos., the country’s biggest grocery chain by market value, which said it plans to file regulatory documents for a C$7 billion REIT this month. Retailers are using REITs to raise capital from yield-hungry investors amid increasing competition from U.S. companies such as Target Corp.
Hudson’s Bay Co., the Canadian retailer established in 1670, is looking at creating a REIT “sometime in the future,” Chief Executive Officer Richard Baker said last month.
REITs, which receive preferential tax treatment from the government, are companies that invest in income-producing real estate and pay out most of their income to investors through unit distributions. They have raised $760 million from six Canadian IPOs this year, including Milestone Apartments REIT and Agellan Commercial REIT, to account for 74 percent of $1.03 billion raised from initial offerings this year in the country, data compiled by Bloomberg show.
Canadian REITs raised almost $500 million in seven IPOs last year, more than any other industry in Canada, the data show. The Standard & Poor’s/TSX Capped REIT Index soared 165 percent from a five-year low on March 9, 2009 through May 10. The benchmark S&P/TSX Composite index rose 66 percent over the same period. The REIT index rose 0.13 percent today to 174.84 at 9:37 a.m. in Toronto trading.
Flaherty also said in the interview his government will probably appoint a new chief executive at Canada Mortgage & Housing Corp. with experience in finance, because the nation’s housing agency has become an important financial institution. CMHC CEO Karen Kinsley said last week she is stepping down, while the government this month also named Robert Kelly, former chief executive officer at Bank of New York Mellon Corp., as the agency’s new chairman.
“It’s morphed into one of Canada’s largest financial institutions,” Flaherty said, adding the Kelly is a “fabulous” appointment. “To be frank, its board did not reflect that fact.”
Flaherty gave new powers last year to the nation’s banking regulator to oversee CMHC’s finances and added two government deputy ministers to the agency’s board of directors. Most mortgage insurance in Canada is provided by CMHC, which is backed by the federal government’s top credit rating. The value of mortgages insured by the government’s housing agency was C$566 billion at the end of 2012, according to its annual report, almost double from C$291 billion in 2006.
The changes to CMHC’s oversight made last year require the Office of the Superintendent of Financial Institutions to check the housing agency’s finances at least once a year. Asked if the government planned any changes at the housing agency, Flaherty said he’ll wait for the results of the first review by OSFI. He didn’t say when that would be.