Canadian REITs Tap Banks, Sending Bond Issuance to Four-Year Low

  • `To me it was a no-brainer,' Allied Properties REIT CFO says
  • Search for value+search for yield=match made in credit heaven

When Allied Properties REIT decided to borrow money this year, Chief Financial Officer Cecilia Williams had two options: tap the public market favored by the industry for the last three years, or borrow directly from the lenders. It was an easy choice.

“It was 117 basis points more to access the public market,” Williams said by phone Thursday, after the company announced that it had received a C$150 million ($115 million) unsecured credit facility at 170 basis points over CDOR, Canadian inter-bank lending rates. “To me it was a no-brainer.”

Canadian real estate investment trusts are getting better pricing from banks as concerns over global growth make investors wary of all but the safest assets, widening credit spreads in the bond market. Meanwhile, banks hungry for yield are approaching REITs from Allied to Dream Office with deals they can’t refuse. That’s sending first-quarter REIT issuance plunging to a four-year low.

Since the beginning of the year, the premium investors demand to hold bonds of Canadian REITs over ultra-safe government debt has increased 0.07 percentage points to 1.94 percent on average, according to Bank of America Merrill Lynch data.

No Sense

Tapping the private market is a shift from the last few years, when real-estate owners preferred the public market, issuing a record C$3.2 billion in bonds in 2013, data compiled by Bloomberg show. This year, their issuance has dropped 68 percent to C$350 million from the same period a year ago, the slowest start to the year since 2012 and the largest drop since 2005, according to the data.

"It is very different from a year ago. A year ago we were ready to go to the unsecured debenture market," Williams said. "We’d love to come back to the unsecured market but it just doesn’t make sense right now with pricing."

Allied, which manages C$4.5 billion in assets across the country and specializes in the brick-and-beam offices so in-demand across major cities, was joined by H&R REIT last week in tapping Bank of Montreal. H&R, which owns 44 million square feet of offices, plazas and warehouses across the country, borrowed C$200 million at 120 basis points above CDOR. Allied and H&R are using the proceeds to do everything from finance the construction or purchase of new buildings, pay down prior debt, and reduce shareholder payouts.

Chasing Yield

"The REITs find it more compelling to go to a bank than to tap the unsecured market," said Paul Chin, executive vice president of real estate lending for Otera Capital, the C$10 billion real estate lending arm of one of Canada’s largest pension funds Caisse de Depot et placement du Quebec. "The public markets are treating them as riskier, but they’re not necessarily riskier."

Low interest rates create challenges for lenders, he said. “It’s good relative value compared to everything else out there. Everyone’s chasing yield -- that’s what it’s all about.”

Landlords with a higher reliance on Alberta office space should expect to pay banks more to borrow, as the fall in oil prices shrinks demand for space among energy firms leading to lower rents and higher vacancy. Many have already announced they’re taking out loans to help salve the effects of low oil. Dream Office, the country’s largest office REIT, announced Feb. 18 it was more than doubling its credit facility to C$800 million. Artis REIT, which is selling properties in Alberta, increased its credit facility to C$300 million in 2015.

"As markets bounce around, the Canadian banks remain resilient," said Ashi Mathur, head of investment and corporate banking at Bank of Montreal’s real-estate unit. "Bond yields have widened relative to where the bank market is. It’s better to finance in the bank market at this moment in time. REITs will continue to tap into the market."

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