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Wednesday, September 14, 2011

Battening Down the Hatches

By Amy Erixon, Toronto

There was fruitful discussion about bracing for global headwinds at the annual REIT conference yesterday in Canada. The overall sentiment was cautious, a marked change from last year. Not surprisingly, the most pessimistic was the sole European participant followed closely by the American portfolio managers, who noted they are triple overweight Canadian real estate securities as compared to other regions, on the assumption it will hold up better in the event of another downturn.

Most Canadian panelists concurred, asserting that fundamentals in Canada are healthy and CEO’s are spending their strategic planning efforts on strengthening and diversifying their capital structure. There was robust debate about effectiveness of various capitalization tools including unsecured vs convertible debentures, timing of equity follow-on offerings, managing bank lines, and other widely employed strategies. There was also a discussion of some of the more innovative approaches tested during the last downturn including rights offerings, warrant sweeteners, and companies who paid dividends in shares vs suspending distributions in 2009. These debates underscored how much more sophisticated and defensive the public real estate companies worldwide been forced to become in recent years.

The moderators dug deeply into what participants learned in late 2008 and 2009 and how that has altered their capitalization strategies going forward. In general, companies with a strong value-add and development orientation indicated a preference for utilizing convertible debt (as best aligned with asset performance characteristics) whereas core oriented companies expressed a preference for unsecured debt when and where available, and all underscored the importance of maintaining a pool of unleveraged assets (for a rainy day). Universally participants indicated a need to have cash, or access to cash as a business climate imperative.

Lastly, there was debate about correlations of REITs with the stock market and their merits vis-a-vis open and closed end funds. This was followed by a discussion whether pension funds should/can/will become major players in the REIT (and REOC) markets globally. Conclusions were mixed, but generally it was felt in the US yes, Canada no, rest of the world maybe. The primary reason for the US is that US REITs have more flexibility to employ operating strategies (development, JV’s etc) to make the real estate perform like real estate, acknowledging it is strongly correlated to stocks during strong downturns. Many non-North American REIT markets are newly emerging and/or facing regulatory shifts which may make the sector more or less attractive to institutional investors over time. The emerging markets are comprised 80% of publicly traded development companies, particularly housing developers, possibly providing powerful future growth prospects. Some questioned whether the risk/return trade-off has been appropriately priced for these types of companies when compared to their US and Canadian counterparts. All in all, a healthy debate highlighting the pivotal role this sector is currently playing in recovery and recapitalization of property markets throughout the world.

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