Investors looking at Canadian real estate investment trusts (REITs) and operating companies in Canada have a lot less to worry about than those picking through similar investments in the United States.
"The real estate companies as a sector in Canada, by and large, are in much better shape than the ones in the United States," said Paul Holman, managing director of DBRS, a credit rating agency. "They have not come under the same pressure as their counterparts in the U.S."
When the real estate market was booming, blissfully unaware of the pending credit crisis that began in 2008, big institutional players were chasing opportunities and pouring money into the sector. That source of financing largely dried up with the meltdown in the credit markets, but there are still ways for Canadian real estate companies to find financing.
"The relatively strong and solvent Canadian banking system has filled some of the void left by pension funds, insurance companies and foreign institutional lenders," said Mark Newman, vice-president of real estate for DBRS.
Canadian real estate companies have continued to have good access to conventional mortgages, which are secured by the underlying properties. A "select few" can even tap the unsecured debt markets, according to DBRS.
Mortgages tend to be easier to refinance or roll over, often to the original lenders, as the underlying security rises in value over time. Unsecured financing provides the REITs with more flexibility, although interest costs would be higher, Mr. Holman said.
The real estate companies rated by DBRS are well capitalized, with balanced debt maturity profiles and generally high-quality assets, which are easier to refinance, Mr. Newman said. Two REITs that raised money in the unsecured debenture market during the second quarter of 2009, despite the tight credit markets, were RioCan REIT and Calloway REIT.
While the REITs in Canada had hoped unsecured debt markets would have become more accessible for financing, it has been a slow transition, DBRS said. At the end of the first quarter of 2009, mortgages accounted for about 85 per cent of the industry's financing, compared with 92 per cent in 2002.
It is the unsecured debt that is covered by the DBRS ratings and only three top-rated real estate companies are triple-B (high).
Companies are having difficulty raising money in the unsecured markets because the interest costs remain high, Mr. Holman said. "The credit markets are trying to get back to normal, but the road will be a little longer than earlier indications," he said.
"Despite having a large industrial portfolio, MI Developments Inc. has the smallest amount of debt outstanding of any DBRS-rated [real estate company], which mainly reflects its very conservative balance sheet," the credit rating agency said.
The class A shares of MI Developments yield 7.3 per cent (eligible for a dividend tax credit), while the units of Calloway and RioCan units yield 11.1 per cent and 9.3 per cent, respectively.
The real estate companies with the best coverage of operating earnings to interest costs, which reflects their relatively lower debt levels, other than MI Developments, are Canadian REIT and Allied Properties REIT, according to DBRS.
Only modest amounts of unsecured debt comes due this year and in 2010, although the refinancing requirements pick up the pace in 2011 and 2012.
Brookfield Properties Corp. has a substantial amount of mezzanine debt used to finance the 2006 acquisition of Trizec Corp. It matures in 2011 and could expose Brookfield to refinancing risk, according to DBRS. However, that debt has recourse only to the assets of certain U.S. office properties, it said.
DBRS said it expects real estate companies to continue to rely on secured mortgage financing until credit markets show further signs of recovery and other sources of capital become available.
The highest DBRS-rated real estate companies (triple-B-high) with the best liquidity profile over the next year and a half are RioCan, Brookfield and MI Developments. Other triple-B-rated companies with good liquidity include First Capital Realty Inc., BPO Properties Ltd. and Boardwalk REIT.
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Liquidity profiles of real estate investment trusts
| REIT | Rating | Cash | Total Liquidity | Total Commitments 2009/2010 | Total liquidity as a % of total commitments |
| (millions) | |||||
| RioCan REIT | BBB (high) | $146 | $379 | $779 | 49% |
| Brookfield Properties (U.S.$) | BBB (high) | $221 | $1,045 | $1,971 | 53% |
| *MI Developments (U.S.$) | BBB (high) | $107 | $157 | $0 | 0 |
| * rating is under review with negative implications Source: DBRS |
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