1. With regard to your comment about Class-A commercial real estate having a bleaker short-term future -this statement is mostly correct, or it may not be…A commercial REIT will likely have long-term leases coupled by long-term debt maturities so, while we are in a global recession, there are many land-lords whose cash-flows are well protected meaning they will skate through this unscathed. That goes out the window, however, if you have large lease maturities in the ‘down years’ and/or if you suffer tenant bankruptcies -the unknown which the market is discounting. However, if you have large, multi-national tenants that aren’t going anywhere, you may be fine. Moreover, commercial REITs in Canada are mostly reporting that debt is still available and with the risk-free rate as low as it is, they are frequently re-financing well below the rate on expiring mortgages, generating significant interest savings. The reason why they say real estate is a lagging indicator is that the aformentioned commercial real estate REIT will eventually have to deal with lease maturities in the ensueing years and the bruised-and-battered markets will likely hurt their pricing power for years to come.

2. With regard to payout ratios and such, there is one additional layer of analysis that is prudent -the AFFO payout ratio alone is not enough to tell the story. RioCan is the perfect example: with a payout of $1.31 and AFFO of $1.36, they are ‘over-distributing’ by $0.05/unit or $11 million (222 million units outstanding). For a entity with an enterprise value of over $6 billion, this represents a rounding error. The thing to remember is that REITs pay down the principals of their mortgages like homeowners but unlike homeowners, there goal is not to pay it off entirely -they need to maintain a target capital structure which includes debt, thus they often ‘top-up’ mortgages when they come due or ‘up-finance’ (borrow more if the value has increased), which provides a steady-stream of cash. The bottom line is that over-distributing by an estimated $11 million puts absolutely no stress on RioCan or its balance sheet whereas it may sink someone else.

Thanks,
S.

Canadian REIT is also very good (TSX: REF.UN): a diverse holding of residential, office and industrial. No one tenant accounts for more than 5% of revenue. Long track record of steady management.

But I am generally not a huge fan of REITs. Real estate is a tough play on the public level- lots of valuation and financing issues. I always tend to like private real estate plays better.