Interrent REIT 4th Quarter Results 2012


Interrent Real Estate Investment Trust is firing on all cylinders.  It's had a nice run up to these results and is a favourite REIT for those looking for growth.

Fourth quarter results show operating revenue increased 2.1% from Q3 2012 and 28.3% over Q4 2011. Operating revenue for the year increased by $9.1 million, or 23.5%, over 2011.

The average monthly rent for the entire portfolio for December 2012 increased to $888 per suite from $843 in December 2011, an increase of 5.3%.

Net Operating Income (NOI) increased by $2.1 million, or 38.2%, for the quarter compared to Q4 2011. NOI increased by $7.4 million, or 36.3%, for the year compared to 2011.

Funds From Operations (FFO) for the quarter increased by $2.5 million, or 190%, to $3.8 million (or $0.09 per unit). Year over year, FFO increased by $9.2 million, or 214%, to $13.5 million (or $0.31 per unit) compared to $4.3 million (or $0.13 per unit) for 2011.

Adjusted Funds From Operations (AFFO) for the quarter increased by $1.9 million, or 142%, to $3.3 million (or $0.07 per unit). Year over year, AFFO increased by $7.4 million, or 171%, to $11.7 million (or $0.27 per unit) compared to $4.3 million (or $0.13 per unit) for 2011.

Distributable Income (DI) for the quarter increased by $2.5 million, or 443%, to $3.1 million (or $0.07 per unit) compared to $0.6 million (or $0.02 per unit) for Q4 2011. Year over year, DI increased by $7.7 million, or 185%, to $11.9 million (of $0.27 per unit).

Fixed Income - Would you Like a Pony?

Since Royal Bank of Canada purchased Ally Financial Inc., many investors will feel like some corporate 'suit' has swiped their red truck or pony.  I admit I almost moved fixed income holdings to Ally to reward them for the brilliant commercials - the series portrayed the big banks as corporate suits weaselling kids out of toys, ice cream and ponies ... but it really represents them taking your money.

That was just pretend, now for real RBC has reduced Ally's high interest savings rate to 1.2% from 1.8% in the transition.  You will never afford to buy that pony or keep up with inflation with your fixed income savings now.  Of course you will still be better off than owning a big bank money market or short term bond fund.  The bar chart below shows what the Investors Group Canadian Money Market Fund returned over the first half of 2012 and in the previous 10 years.

Click on the chart to enlarge it since you likely cannot see the wee little bars representing meagre returns in the last few years.  Soon they will have to report returns to 2 decimal places!

An ETF without the bloated MER would be better than the mutual fund, but still the 12 month trailing return for the iShares CMR - Premium Money Market Fund is only 0.82%.

Even better, stick with Achieva Financial - they still offer a 2% savings interest rate.  And deposits are insured.  Of course you need to bank by phone, email or the internet - there are no branches (e.g., Ontario).  As an alternative to 'frothy' corporate bond funds, make a GIC ladder from Achieva GICs and earn 2.45% from 1 to 5 years, or take their 2.85% 5 year term if you think rates are staying down a few more years.

2013 REIT Top Pick Tracker

Below are RBC's 2013 REIT stock picks - each has an “outperform” rating.  Click on the price targets to compare how much runway is left for these high-flyers:

Allied Properties REIT (Price target $36)
Calloway REIT (Price target $33)
Canadian Apartment Properties REIT (Price target $27)
Canadian REIT (Price target $47)
Dundee REIT (Price target $43)
Granite REIT (Price target $41)
H&R REIT (Price target $27)
Morguard REIT (Price target $20)

Be Green, Buy Local! So Say Apartment REIT CEOs

Private Apartment REIT CEOs shared their strategies for going green ... making money in Ontario's multi-residential property market that is.  Both see local opportunities going forward according to Property Biz Canada reports.

Greg Romundt, President and CEO of Centurion:


“I’m a big believer in local expertise and there have been enough opportunities for us to stay very busy in our own backyard. It is not to say that we are not interested in other parts of the country, it is just that we can do deals right in our own backyard. I didn’t see a lot of need for us to go elsewhere.”

Centurion Apartment REIT Markets

Most Centurion properties are in Ontario, centred around the GTA and the 400-series of highways surrounding the metropolitan area.


Jason Castellan, Co-founder and CCEO of Skyline Apartment REIT:

“There is still lots of real estate in Ontario, it is the highest concentration of multi-residential real estate (in the country), so we will continue. Why go beyond your own backyard when you don’t have to?”

Both private apartment REITs have recently achieved unit price gains and have steady distributions above 7%.  Those distributions were above 8 and 9% before the unit appreciation.  Centurion even offers a discount on units purchased through their DRIP plan, enhancing long term value.  Nice!

Buy Local!!!
Both REITs are RRSP eligible and  are great alternatives to low yield GICs, frothy corporate bonds, and certainly any fixed income mutual fund someone could push your way this RRSP season.  For registered accounts, both REITs can be held in a self-directed account such as from Olympia Trust.

Rain Tax to Soak Ontario REITs?

Many of us have read of the infrastructure funding deficits that plague municipalities.  Their services are often  underground, out of sight and out of mind .. until there is a problem.  A recent tragedy related to unsafe water supply (Walkerton, Ontario) prompted legislation to require sustainable funding over the lifecycle of municipal services.  In the case of water supply, these costs are covered in rising water bills.  For bridge maintenance, these costs are often collected through property taxes.

Some services, like stormwater management, are the "poor cousin" of other well-funded municipal services.  In Ontario,  the Water Opportunities Act point to provincial targets to sustainable funding of stormwater management which can include flood control, runoff quality treatment, and watercourse erosion restoration/habitat restoration.  Several Ontario municipalities have already embarked on stormwater utility fees for property owners.  These fees are often related to the runoff characteristics of the property, such as size and amount of impermeable, hardened surface coverage (i.e., parking, driveways and rooftops).

A rain tax, as it was called in Hamilton media, could impact the bottom line of  retail and commercial REITs more than residential REITs, by virtue of the wide "runoff footprint" of properties with extensive parking areas.

On the positive side, municipalities can offer incentives to reduce stormwater fees when the property owner incorporates sustainable, low-impact development features on-site.  This puts stormwater control measures in the same stead as other green initiatives a REIT could invest in to receive some type of pay-back (think energy efficiency, or water conservation measures that reduce utility bills).

Progressive real estate companies have adopted green strategies for their properties.  First Capital Realty builds new projects to LEED (Leadership in Energy and Environmental Design) certification standards, which include credits for stormwater quantity and quality management.  Skyline Apartment REIT adopts many environmental measures in their 40-year old plus portfolio of buildings.  One highlight in their award-winning program is the installation of  71 rooftop solar systems by the end of 2012 - generating 12,500 kWh per year, and contributing to the profitability of the REIT over many years to come.

First Capital Realty ... goes green ... goes up !

Cap Rate Yield for Multi-Family Residential

Capitalization rates are measurement of real estate "yield", calculated by dividing net operating income by asset price.  Cap rate compression means that the bottom of the ratio (the price of the investment) goes up relative to the top of the ratio (the net income).


Given the low bond yield environment, investors are tuning to REITs to provide yields that outpace inflation - and then some.


Colliers summarizes cap rates for Canadian cities for different real estate classes.  As you would expect. cities with the highest property values show the lowest cap rates .. after all if you pay more for your building but you don't get proportionately higher rents, your yield, or cap rate, is less.  Multi-family cap rates are shown in this table.

Considering lower property values outside major centres, investors could expect higher cap rates.  The Skyline Apartment REIT operates in 42  "B and C" market communities in Ontario.  The Skyline REIT's distribution of 99 cents on a unit value of $13.25 reflects yield of 7.5%, certainly higher than cap rates shown in the table above.

Click to Enlarge
This tables shows rental rates in Ontario communities (click to enlarge)  Certainly, the cost of a multi-res unit in Guelph, Oshawa, or Kingston is less than one in Toronto - but is it more than enough to offset the 15% lower rent. 

As for property prices, late last year Skyline acquired a 80+ unit apartment in Hamilton for $85,000 per unit.  Compare that to comparable apartments in Toronto such as this one to the right.  It has a cost per unit of $183,000 per unit.

The Skyline Apartment REIT strategy of operating in B and C markets certainly makes sense to investors.

Actively Managed REIT Fund vs REIT ETF

The Sentry REIT Fund is an actively managed mutual fund that holds Canadian and US REITs.  It could be an alternative to holding private REITs or putting your own basket of individual stocks together.  One question you may ask is whether its active management, with a fee of 2.25%, is worth it - does the cost of management pay for itself and enhance returns?  Some numbers to consider...

Sentry charts the following returns assuming reinvestment of all distributions.  The Sentry REIT Fund's 2 year return of 13.2% is less than the 16.14% return of the ZRE, BMO's Equal Weight REITs Index ETF.  Similarly, the Sentry 1 year return of 16.4% is less than BMO's 18.46% return.

So while Sentry's fund is actively managed, is it so large ($1.4B assets under management) and diversified, it pretty well follows the index.

BMO's ZRE 's is designed to follow an index (Dow Jones Canada Select Equal Weight REIT Index) with little tracking error.  ZRE annual maximum management fee is only 0.55% compared to the Sentry fee of 2.25% - so the high mutual fund fees really just erode returns, and the active management you are paying for does not add value in terms of performance (in this case).  Previous posts have reinforced this for Investors Group funds.  You are better off buying the index ETF.

ETFs offer liquidity and low trading costs (now free trades at Questrade).  The Sentry Fund has the downside of high deferred sales charges if you sell within the next six (ouch!) years.  This table shows that the charges are more punitive than even some Investors Group DSCs.  So you are locked into those lower returns unless you want to pay more to get out.

I read that there was a reason that some mutual funded exit fees are so high - its worth it to get out!




REIT Top Picks 2013

Canaccord has posted top picks for public REITs in 2013 as well as projected returns for the sector.  They cite strong fundamentals across all major asset classes, exceptionally low interest rates, and free flowing debt and equity capital - the result is predicted to be a total return of 11% in 2013 for stocks they cover. This follows a S&P/TSX Capped REIT Index total return of 17% in 2012.

This chart (click to enlarge), shows returns since December 2008, and compared the Canadian and US REIT indices to the S&P 500 and TSX Composite.  REITs have outperformed the broader indices.


Canaccord top picks for 2013 along with target prices and current yield are:
Amica Mature Lifestyles ($11.25; 4.52% ..others have targets up to $10)
InterRent REIT ($6.50; 2.64% ...already run up to $6)
Killam Properties ($15.25; 4.44 ... more room to run)
Artis REIT ($18.25; 6.7% .. was $17.22 last summer)
H&R REIT ($28.00; 5.71% ..more room to recover from last summer)
Crombie REIT ($17.00, 6.04% ... more room to run since last fall)

On average, you get paid 5.01% to wait.  This compares with a yield of 4.06% for iShares XRE - S&P/TSX Capped REIT Index Fund (3 of Canaccord's top picks are in the index), or 5.36% for ZRE BMO Equal Weight REITs Index ETF.


Free ETF Trading Questrade

Questrade has announced free trades for ETFs.  Combined with no account fees, the overall cost for couch potato investors with simple portfolios is now even better.  Note this is just for buy orders, not sell orders.

Many investors have used DRIP features for cost effective trading in the past - this is to prevent minimum trading fees from eating into small investment trades.  Now investors at Questrade can make their own small ETF trades without fees eroding account values.  Free ETF trading (buying) begins on February 1, 2013 at Questrade.  No details on what ETFs qualify for no fees at Questrade -could it be all ETFs?

For comparison, Scotia iTrade offers 50 ETFs with no commissions: 39 iShares1 Funds, 7 Horizons Funds, 2 Vanguard Funds, 2 Powershares Funds.  This appears to be for 'trading', including selling.

Qtrade offers 60 commission-free ETFs covering  a variety of geographic regions, sectors, capitalization sizes, currencies and issuers.  These include mostly iShares ETF plus Horizons commodity and broad US Canada and global index ETFs.  Virtual Brokers offers 100, including a few more Horizons funds and 12 BMO ETF funds.