H&R REIT doesn't see Canadian Tire and Loblaw real estate trusts as competition

TORONTO – The head of one of the country’s largest real estate investment trusts said he’s not worried about big-name Canadian companies preparing to enter the REIT market.

Instead, he welcomes them.

H&R Real Estate Investment Trust chief executive Tom Hofstedter said investors will continue to see the value in the REIT even as the number of players in the area increase with Canadian Tire (TSX:CTC.A) and Loblaw Cos. Ltd. (TSX:L) both in the process of establishing their own trusts.

“I think they’re not going to enter our world and be aggressive real estate players as they have inherently their own inventories that they can build off,” he said Thursday following H&R’s annual general meeting.

“I don’t think it’s competition. In fact, I think it’s a welcome addition to our world.”

Hofstedter said the risk of oversaturation of the REIT market comes from smaller companies, not the big names.

H&R REIT (TSX:HR.UN) holds a portfolio of 40 office, 112 industrial and 163 retail properties across North America.

Earlier this month, the Toronto-based trust signed a deal to buy a Fort McMurray, Alta., mall for $168.5 million in a deal expected to close July 3. It also recently secured $300-million in financing for the Bow office tower in Calgary.

Hofstedter said H&R’s focus on shopping centres, for instance, including its recent $2.7-billion acquisition of Primaris REIT which owns several properties occupied by discount retailer Target, has helped it carve out a specialty.

“That’s where we have a leg up right now, and where I think the opportunities lie,” he said.

In recent months, Canadian Tire (TSX:CTC.a) announced that it was creating a $3.5-billion REIT to unlock the value of its property holdings, and will open its initial public offering later this year. The trust would encompass 250 properties, totalling 18 million square feet with an approximate market value of $3.5 billion.

Grocer Loblaw (TSX:L) also announced it was starting a $7-billion REIT, expected to be one of the largest commercial real estate trusts in Canada. Choice Properties Real Estate Investment Trust will hold 415 retail properties, nine warehouses, and one office complex.

Investors have been flocking to real estate trusts over the past few years as stable options for their investments in a low-interest environment. Returns of five per cent or more have helped boost the popularity of the stocks. H&R said that its investors saw a return of nine per cent in 2012.

But as uncertainty persists over how long interest rates will continue to stay low, some have been questioning whether REITs can hold onto their value.

Kevin Chu, a REIT analyst with independent equity firm Accountability Research Corp., said rising interest rates will put the value of REITs at risk, as investors weigh other options like bonds.

“For any investor, they should focus in on higher quality REITs, high quality assets, and ones that give better risk-adjusted returns,” he said.

“In general, they have to think about their investments, whether they give them a favourable yield. If they have a REIT giving you five to six per cent — that will be a better investment than a bond or a GIC.”