CANADA By Mark Rothschild

For many things in Canada, it is often tough to escape the shadow of its neighbor to the south. Canada's population of approximately 33 million people is approximately 10 percent of the U.S., and many view the Canadian real estate market in that same context—noteworthy, but not on the scale of the U.S. While that is true from a sheer numbers point of view, the Canadian REIT market has undergone its own unheralded run of stellar performance in recent years.

Canadian REITs have out-performed major indices for the past five years, and are poised to outperform again in 2005. For the five-year period ending Dec. 31, 2004, Canadian REITs averaged a total return of approximately 20 percent.

Established in 1993, the Canadian REIT market has grown to contain 26 companies with an equity market capitalization exceeding C$20 billion (U.S. $16.4 billion). There are Canadian REITs focused on almost every property type including retail, office, industrial, residential, hotel and health care.

Canadian REITs differ from U.S. REITs in that they must be trusts rather than a choice in the U.S. of trusts or corporations. Provided they distribute to unit holders their taxable net income, they are not taxable at the entity level. Recent legislation in Ontario extended limited liability to many Canadian REITs, removing what was a significant concern to many investors. This legislation was followed by the recent announcement from Standard & Poor's that it would add income trusts to its Canadian indices. Several Canadian REITs should qualify for inclusion to the main S&P TSX Index, thus creating additional demand for their units/shares.

RioCan is Canada's largest REIT with a market cap of C$4 billion (U.S. $3.3 billion). It owns a 30 million square feet portfolio of retail real estate, and some of its shopping centers are owned in a joint venture with Kimco Realty Corporation (NYSE: KIM). H&R REIT and Calloway REIT are other significant players with market caps exceeding C$2 billion. H&R focuses on single-tenant commercial properties with long term leases, and typically matches its leases with long-term fixed rate debt, creating a bond-like portfolio. Calloway REIT has been one of the most spectacular growth stories in the past few years and currently owns a 20 million square foot portfolio of primarily Wal-Mart anchored new format shopping centers.

The dynamics in the Canadian commercial real estate market are being noticed by U.S. REITs as well. Historically, U.S. REITs have not invested in Canada, Kimco being the most significant exception. Kimco has acquired a number of shopping centers in a joint venture with RioCan. With the increased globalization of REITs, we expect U.S. REITs to enter the Canadian market in a much larger way in the next few years. ProLogis (NYSE: PLD) recently announced the acquisition of land in the Toronto area where it plans to develop 1.75 million square feet of industrial space. Alexandria Real Estate Equities. Inc. (NYSE: ARE), The Mills Corporation (NYSE: MLS), Capital Automotive REIT (Nasdaq: CARS) and Entertainment Property Trust (NYSE: EPR) have also made deals north of the border.

Canadian Apartment REIT provides an opportunity for a large U.S. residential REIT or another institutional buyer to acquire a portfolio of more than 23,000 rental units in a market where the vacancy rates are lower than in most American markets. Summit REIT owns a portfolio of industrial real estate exceeding 29 million square feet. While Summit currently trades at 10 times 2005 FFO per unit/share, the average U.S. industrial REIT trades at 14.4 times 2005 FFO per share.

S N A P S H O T

CAPITAL: Ottawa LAND AREA: 9,093,507 sq km POPULATION: 32.81 million (July 2005) POPULATION GROWTH RATE: 0.9% GROSS DOMESTIC PRODUCT (GDP): $856.5 billion (2003) GDP GROWTH RATE: 2.0% GDP PER CAPITA: $24,470 UNEMPLOYMENT RATE: 7.0% (2004) MAIN INDUSTRIES: Transportation equipment, chemicals, processed and unprocessed minerals, food products; wood and paper products; fish products, petroleum and natural gas. CURRENCY: Canadian dollar LANGUAGES: English and French Source: CIA's “The World Factbook” and the World Bank Group's “World Development Indicators Database.”

Canadian Companies in the FTSE EPRA/NAREIT Global Real Estate Index (Ranked by free float adjusted equity market cap in millions of U.S. dollars)
Company	Ticker Symbol	Equity Market Cap	Free Float Range	Adjusted Market Cap
Brookfield Properties Corporation	BPO	$6,990.8	75	$5,243.1
RioCan REIT	REI	3,349.1	100	3,349.1
H&R REIT	HR	1,719.5	100	1,719.5
Summit REIT	SMU	1,113.5	100	1,113.5
Canadian REIT	REF	918.2	100	918.2
Boardwalk Equities Inc.	BEI	791.0	100	791.0
Retirement Residences REIT	RRR	714.9	100	714.9
O&Y REIT	OYR	713.2	75	534.9
Calloway REIT	CWT	707.7	100	707.7
Canadian Apartment Properties REIT	CAR	614.8	100	614.8
Legacy Hotels REIT	LGY	521.1	100	521.1
Cominar REIT	CUF	504.3	100	504.3
Chartwell Seniors Housing REIT	CSH	485.2	100	485.2
InnVest REIT	INN	474.6	100	474.6
Primaris Retail REIT	PMZ	410.4	100	410.
Dundee Real Estate Investment Trust	D	384.3	100	384.3
Canadian Hotel Income Properties REIT	HOT	369.4	75	277.0
Source: FTSE EPRA/NAREIT Global Real Estate Index. Data as of Aug. 1, 2005.

What's Next For Canadian REITs?

With cap rates at historically low levels, many Canadian REITs are slowing down their pace of acquisitions and expanding their development pipelines. We are seeing an increase in joint ventures as REITs look to grow cash flow through management fees. It is interesting to note that some of these strategies are similar to what U.S. REITs have been doing for several years.

The increase in development is not of great concern, as most REITs remain disciplined. There is almost no significant office development without substantial pre-leasing. This discipline is enforced through high-payout ratios which do not allow for major investments that do not produce cash flow immediately. In fact, historically, Canadian REITs were discouraged from pursuing any development internally. A large portion of the units/shares of Canadian REITs is owned by funds which cater to retail investors. These funds are primarily yield driven and pay a dividend monthly. With yield a significant factor, long-term interest rates are a key variable in the valuation of Canadian REITs.

We believe that going forward Canadian REITs will be evaluated on a more global scale. There has been an increase in global real estate funds which are not constrained to any one market. These funds are evaluating Canadian REITs alongside U.S. REITs and other real estate investments across the globe.