Farewell to a top-performing REIT: RBC’s Neil Downey reflects on Canadian Real Estate Investment Trust
Neil Downey, managing director of global research at RBC Capital Markets, said goodbye to an old friend this week, when Choice Properties REIT and Canadian Real Estate Investment Trust (CREIT) completed the plan of arrangement that will see the merged entity become what he calls “Canada’s premier diversified REIT.”
That merger marks “the end of an era for CREIT as a standalone entity,” after it was taken public almost 25 years back, Downey said.
At the operations level, the REIT was a very strong performer: over the 24-plus years that the fund was public, it posted a compound annual growth rate in funds from operations per unit, in distributions per unit and a 20 year internal rate of return of 8 per cent, 5 per cent and 14 per cent respectively.
And for CREIT unit holders, the ride was a good one: $10,000 invested in September, 1993 was worth $229,000 at the end of last year and $261,000 when the plan of arrangement was completed last week. Those numbers show the magic of compound interest, which has been described by many, including a certain Albert Einstein, as the “eighth wonder of the world.”
For most of the more than 21 years that Downey followed CREIT, the stock was rated as an outperformer or a buy, but for a short period around the 2008/2009 financial crisis.
In a report, Downey reflected on four lessons that were learned from investing in this REIT as well as investing in general:
- Good governance cannot be regulated or legislated. Instead, he argues, that it must be part of an entity’s “DNA.”
- The power of compounding over time is the “most important force in the accumulation of wealth.” And that compounding is made easier through leverage, which can occur when the issuer offers a dividend reinvestment plan (DRIP.)
- It takes a “lot of time, patience and operational execution” to build a good quality REIT capable of delivering “industry leading returns.”
- A REIT is usually a good investment if it is trading below NAV.
While CREIT is gone as a public company, some of its unit holders can still enjoy the benefits of the assets held by the new merged entity. In the merger, they had the choice or receiving $53.75 in cash or 4.28365 Choice Properties units for each CREIT unit held — or some combination.
It seems that most of the CREIT holders opted to receive units in Choice Properties. By Downey’s calculations, about 43 million units were exchanged for units in Choice Properties.
So who is the next CREIT? In other words who are the other issuers, which are good at creating long-term value. Downey mentioned four: CAPREIT; Allied Properties REIT; First Capital and Brookfield Asset Management.
Financial Post