The Real Estate Investment Trust (REIT) has had a marvelous decade as property values just kept rising.  It inspired large institutional investors (pension funds for e.g.) to get directly involved.  The Canada Pension Plan has 12.1% invested in real estate.  Ontario Teachers Pension has a bit more than this, and Cadillac Fairview is its wholly owned subsidiary.  Insurance companies have always been heavily invested in real estate assets.

Since the advent of the REIT, many retail investors have had access to the sector.  The good news has been low interest rates which have certainly provided fuel for the industry.  The bad news is coronavirus threatens the highly leveraged business model.

For fun I had a quick look (knew this already but always good to snoop at financials) at a couple of REIT’s that were mentioned in the newspaper today.  Not all REIT’s are created equal.  Canadian Apartment REIT invests in well, apartments; DREAM Industrial REIT is sort of obvious, and the BSR REIT invests in apartments in the U.S. sunbelt, although it’s listed on the TSX Exchange.

The most solid financially (total equities to total liabilities ratio) with distributions absorbing the lowest (of the three) proportion of cash from operations is CAP REIT.  Not surprisingly it pays the lowest yield (price has held up better).  The point of the exercise is to highlight that although they are different, they all have one thing in common.  Some tenants will be unable to pay rent.  Rent revenues are needed to meet unitholder distributions.  Some, such as the BSR example, are terribly vulnerable both from a cash flow perspective, but their balance sheet is frightening.

• Apartments – unemployment & layoffs mean risks to revenues, but mortgages and bank loans by the REIT will likely not be relaxed; banks have obligations as well.
• Commercial & Industrial – will depend on the financial wherewithal of the tenant.  Some have more bargaining power than others – and they tend to be the biggest source of cash.

Is it wise to continue to own them?  I’d worry because the potential fallout isn’t being discussed yet…but will be soon enough.  A warning sign will be when some REIT’s begin issuing more units so they can use those funds to continue paying distributions.  It’s unlikely lenders will issue more loans to do this.

In the event (seems probable) that distributions for some will have to be reduced, the yields will rise to where they were – this can only happen because the price of the unit falls precipitously.  Whether the yield for the next few months is sufficient to compensate for the capital loss remains to be seen, but I’ve seen the movie before and it doesn’t end well.

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