REIT Cuts: Canadian Real Estate Trusts Are Slashing Payouts
Two major real estate investment trusts (REITs) have recently announced distribution cuts in just the last few weeks, making a case for the struggles faced by the real estate industry amid rising interest rates and vacancies.
Slate Office REIT (TSX: SOT.un) slashed its distribution to 1 cent per unit monthly from 3.3 cents, or almost 70%, after a strategic review.
“The REIT is also announcing the conclusion of the comprehensive review of strategic alternatives undertaken by the REIT and its external advisors and a corresponding unitholder value preservation plan, under which the REIT will amend its monthly cash distribution from $0.0333 per trust unit of the REIT to $0.0100 per trust unit of the REIT,” the firm said in its statement.
The aforementioned distribution policy adjustment is expected to generate an additional $23.9 million in cash per year, which the firm said will be used to strengthen the REIT’s balance sheet and liquidity.
“We completed a thorough strategic review in partnership with our advisors and determined that a revision to our distribution policy is prudent to preserve capital in a challenging environment and ensure the REIT will be in a stronger position when we emerge from this economic cycle,” said Monty Baker, Interim Chair of the Board of Trustees.
This follows after True North Commercial REIT (TSX: TNT.un) slashed its own distribution by 50% in March, also due to higher inflation and rising interest rates.
The Canadian REIT stated that it has had issues as a result of altering office needs as a result of the epidemic. The annual cash dividend was reduced to $0.297 per unit, and the board stated that it would examine its distribution strategy on a regular basis.
“This decision underlines the board’s and management’s view that the unitholders are best served by a well-capitalized REIT, which bolsters the REIT’s ability to enhance its portfolio and pursue value-creating opportunities,” the firm said in a statement.
Furthermore, the True North announced that it has agreed to sell two office premises in Toronto and Ottawa for $24.8 million, with an additional $5 million in sale profits.
What’s causing the REIT cuts?
Slate and True North aren’t the only REITs that have reduced their payouts since the pandemic began. Because the economic prognosis was so bleak during the first and second lockdowns, a spate of REITs, including RioCan and First Capital, reduced their own.
Yet, some of the REITs who reduced their dividends early have already begun raising them, making Slate’s and True North’s recent decisions stand out.
The recent onslaught of rising interest rates have hurt most real estate investment trusts, which have mortgages that are often equal to 50% to 60% of their property prices.
According to Canaccord Genuity analysts, the weighted average interest rate on existing debt in Canada’s REIT industry is 3.5%. A five-year commercial mortgage at the current market rate is anticipated to cost 5.5%.
Rising interest rates also have an impact on REIT unitholders, many of whom are retail investors. When interest rates were extremely low, a REIT distribution yield of roughly 5% appeared fairly appealing. Nevertheless, now that the Bank of Canada’s benchmark rate has been hiked to 4.5%, ultrasafe guaranteed investment certificates pay nearly the same.
At the same time, office property owners are having difficulty retaining renters as working from home has become increasingly widespread. When Slate last reported earnings in February, occupancy was at 81%.



The latest layoffs also came from the office sector, which is trying to re-enter the market. Allied Properties REIT, a prominent office landlord, was one of Canada’s best-performing real estate businesses prior to the pandemic, but its units are now down 62% from their record high reached in February 2020.
Romspen, one of Canada’s largest private mortgage lenders with $3.2-billion in assets under management, suspended investor redemptions in November, citing difficulties with loan repayments. Romspen’s loan portfolio is primarily made up of construction and predevelopment loans, and it lends to borrowers in the United States and Canada.
A month later, Blackstone REIT, one of the world’s largest private investment real estate investment trusts, announced that it had to limit redemptions on the fund due to a huge number of clients requesting refunds.
H&R REIT challenged
Meanwhile, another Canadian REIT is facing a different kind of challenge. K2 & Associates Investment Management intends to nominate four directors to the board of H&R REIT (TSX: HR.un) at its annual meeting in June, sparking an activist battle at another of Canada’s largest publicly traded real estate corporations.
The Toronto-based hedge fund is attempting to repeat the playbook used to fight for board renewal at First Capital REIT earlier this year, which resulted in a board refresh.
K2 intends to nominate four members to H&R’s board of directors: Moti Jungreis, the recently retired head of global markets at TD Securities; Josef Vejvoda, K2’s former CEO; Michael Siskind, the former president of Self Storage Plus; and Daniel Farb, a financial professional.
H&R is vulnerable to activism because its units have struggled since the epidemic began, with revenues down 24% since the beginning of 2020. The units are also trading at about a 35% discount to the REIT’s net asset value.

H&R plans to focus 75% of its real estate portfolio on multifamily assets in the United States, primarily in the Sun Belt, and the other 25% on industrial sites in Canada around Toronto, Montreal, and Vancouver.
K2 said in a public statement that it approached H&R on March 1 and told the REIT that it supports the present plan but would like to see faster progress. According to RBC Dominion Securities, H&R has sold around $1.1 billion in assets since the new plan was announced, with an additional $3.7 billion to sell.
A few weeks after K2′s approach, H&R announced the appointment of Donald Clow, the recently retired CEO of Crombie REIT, as its new lead independent director. According to K2, it was not told ahead of time.
“While K2 views Donald Clow’s appointment as a positive change, it still maintains that more change is necessary, and that time is of the essence,” the fund said in its statement.
H&R stated in a statement on Tuesday that it will “continue to engage with K2 in good faith, as it does with all unitholders,” but that “it will not put K2′s shorter-term interests ahead of the longer-term interests of other unitholders.”
Information for this briefing was found via The Glob And Mail, Yahoo Finance, Market Watch, Seeking Alpha, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.