Choice Properties REIT Lifting IPOs Above TSX: Corporate Canada
Real estate investment trusts led by Choice Properties REIT (CHP-U) are helping initial public offerings outpace Canada’s benchmark index for the first time in four years on speculation dividend payers will hold up better than commodity shares as global economic growth slows.
Eight stocks that began trading in Canada in 2013 have advanced 3.5 percent as of July 12, according to data compiled by Bloomberg on companies with a market value of at least C$100 million ($96.1 million). That compared with a 0.2 percent gain in the Standard & Poor’s/TSX Composite Index (SPTSX), the first time since 2009 IPO stocks have outperformed the commodity-heavy benchmark over a comparable period.
More than half of the initial offerings this year have been REITs. The largest, Choice Properties, which holds the real estate properties of grocer Loblaw Cos. (L), had risen 1.5 percent this year after its C$400 million initial offering on July 5. Choice gained 1 percent to C$10.15 at 4 p.m. in Toronto trading today.
“Anything yield-oriented is still doing well, outside of that it’s hard to get anyone excited about putting money into resource exploration companies or energy companies,” said Anil Tahiliani, fund manager with McLean & Partners in Calgary, who helps manage about C$1 billion.
The S&P/TSX’s slight gain this year compares with a 12 percent advance in the MSCI World Index, which tracks equity markets from developed nations. Raw-materials and energy stocks make up 58 percent of equities in the S&P/TSX.
Gross domestic product in China, the world’s biggest consumer of commodities, is expected to grow 7.6 percent this year and next, according to the median estimate of economists surveyed by Bloomberg, down from a five-year average of 9.3 percent from 2008 to 2012.
The International Monetary Fund cut its projection for global growth in 2013 for a fifth time on July 9, to 3.1 percent from 3.3 percent in April. China’s growth was lowered to 7.8 percent from 8 percent.
Chinese Finance Minister Lou Jiwei signaled July 11 the world’s second-biggest economy may expand less than the government’s 7.5 percent target this year and that growth as low as 6.5 percent may be tolerable in the future.
Canada’s economy is expected to grow 1.7 percent this year and accelerate to 2.4 percent growth in 2014. The U.S. economy will advance 1.8 percent and 2.7 percent this year and next.
“Companies that come to market are coming from sectors that work,” said Brian Huen, managing partner at Red Sky Capital Management Ltd. in Toronto. He helps manage C$220 million with the firm, and participated in the offerings for Choice Properties, Information Services Corp., and Ski-Doo maker BRP Inc. (DOO) “People certainly aren’t bringing any gold IPOs to market. So investors are focusing on buying deals in the right markets, as opposed to the wider market which has exposure to resources.”
The underwriters have also done a good job of properly pricing IPOs, including underpricing in some cases, to create after-market demand that will send the stocks higher, Huen said.
“This is a one-time opportunity that you don’t have in the public market,” he said. “As long as the banks are pricing them properly and there’s investor appetite, they will do well.”
The weak returns of several REIT IPOs this year through July 12, including a 5 percent drop for WPT Industrial REIT and a 5.3 percent decline for Agellan Commercial REIT, has been a matter of timing, said Matthew Merkley, a lawyer who specializes in advising on REIT initial offerings with the firm Blake, Cassels & Graydon LLP in Toronto.
“The trading down, it’s about the wider market and not about their individual performance,” Merkley said.
Craig MacPhail, a spokesman with WPT Industrial, said Scott Frederiksen, chief executive officer at the company, could not immediately be reached for comment.
A voicemail message left with Frank Camenzuli, chief executive officer at Agellan Commercial, on July 12 wasn’t immediately returned.
Dividend-yielding stocks, including REITs, utilities, telephone companies and industrials, slumped in June after the U.S. Federal Reserve said it may begin tapering its bond purchasing program as early as this year.
“The whole interest-sensitive sector has been greatly oversold,” said David Baskin, president of Baskin Financial Services in Toronto. His firm manages about C$500 million. “People who got carried away selling will at some point recognize that the distributions of REITs are still much higher than you’ll get from a bond.”
REITs, which are taxed differently by the government, invest in income-producing real estate and pay out most of their income to investors through unit distributions.
Since tumbling to an 18-month low on June 24, the S&P/TSX Capped REIT Index rallied 4.8 percent through July 12. The index, which tracks 15 of Canada’s largest real estate trusts, has slipped 7.7 percent this year, compared with a 30 percent plunge in materials stocks.
“Choice went to market recently and it’s sort of clogged the pipeline of new REITs a bit, cast a bit of a shadow,” Merkley said. “I expect we’ll see a lot of pent-up supply and demand come the fall.”
BRP, a former division of Bombardier Inc. (BBD/B) that manufactures jet skis and other recreational vehicles, is the best-performing IPO stock in Canada this year, soaring 24 percent to C$26.61 from its initial offering of C$21.50 on May 22. It doesn’t pay a dividend. Information Services, which provides registry services to the province of Saskatchewan, has risen 3.1 percent since trading began on July 9.
“We believe BRP should trade at a premium to its competitors given its strong brand equity, leading market share and top-ranked position in several power sports categories,” said Anthony Zicha, analyst with Scotia Capital Inc., in a note to clients July 9.
Zicha initiated coverage of BRP with a sector outperform rating, the equivalent of a buy, and a one-year price target of C$29. He expects the company will increase its sales at a rate of 8.5 percent a year through 2015. The stock has six buys and one hold recommendation, according to data compiled by Bloomberg.
IPO stock performance in Canada remains mediocre when compared with global performance. Year-to-date, global IPOs of $100 million or more have advanced 12 percent in trading, compared with the 3.5 percent growth of Canadian IPOs. Canadian IPOs through the same period have underperformed world IPOs since 2005, data compiled by Bloomberg show.
“This is going to continue,” said Paul Taylor, chief investment officer with BMO Harris Private Banking in Toronto. His firm manages about C$16.5 billion. “The factors that caused the Canadian equity market to falter are still in place and that is weak commodity prices and a housing market stalling. These are two things that the Canadian economy, equity market and by association the IPO market will struggle with. The opportunities are better elsewhere.”
With 12 REIT IPOs in Canada since the beginning of 2012 and at least another coming from retailer Canadian Tire Corp. (CTC) in the near future, Taylor said the market has become saturated.
“Throughout the year the windows of opportunity for IPOs will open or close,” Bill Demers, the Canadian IPO leader for Ernst & Young LLP, said in a phone interview from Toronto.
The current window for REIT IPOs is “kind of closed for the next couple of months until people see REIT prices come back, which may not happen until this fall when people are less concerned about rates going up,” said Tahiliani with McLean & Partners. “The rising tide lifts all boats, whether it’s an IPO REIT or a regular REIT it will do well.”
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