Contents
Executive Summary 3
The Canadian Office Industry: Clouds Gathering; Umbrellas Already Out 3
Summary of Recommendations 5
Allied Properties REIT (AP.un) 5
Artis REIT (AX.un) 6
Dundee REIT (D.un) 7
H&R REIT (HR.un) 8
Summary of Key Macro Findings 9
Today and Tomorrow vs. the Early 1990s 9
Demand Trends 9
Supply Trends 9
Financing Trends 10
Investment Trends 10
Canadian Office Market – Today & Tomorrow vs. the 1990s 11
The Early 1990s Should Be Confined to the History Books 11
Balance Sheets Appear Healthier; In More Conservative Hands Today 12
Demand Trends: “For Lease” Signs Are Coming 14
Vacancy vs. GDP – Relationship Cloudy; Peak Vacancy in 2010/2011 14
Absorption vs. GDP – Economic Activity Drives Office Demand 15
A Job Lost Is Space Gained; Rising Unemployment Negative for Demand 16
Office Use Dominated by Finance & Professional Services 17
Sublet Space on the Rise; Indication of Slowing Demand 18
Rent Growth Has Beat Inflation by 33% Since 2005; Time for a Breather 19
Supply Demand Growth Has Failed to Match Economic Growth Since 2000 20
Supply Trends: Focused on Toronto and Calgary 21
Levels Pale in Comparison to Early 1990s; Calgary Is a Big Exception 21
We Forecast 2011 National Central Vacancy in the 8%-10% Range 22
Property Economics 25
Financing Trends: Debt Available for Good Real Estate 26
Investment Trends: Cap Rates on the Rise 29
Office REITs – Side-by-Side Comparison 31
Appendix 1 – Major Market Overview 32
Allied Properties REIT – Brick and Beam Held in High Esteem 41
Summary & Investment Recommendation 42
Capital Markets Profile – Allied Properties REIT 45
Allied – First Capital Combination 47
Developments – Cautious Near-Term Approach; Significant Long-Term Value 48
Corporate Profile – Allied Properties REIT 50
Debt Profile – Significant Financial Flexibility 51
Allied Properties Portfolio – A Big Fish in a Growing Pond 52
Cité Multimédia – Elevated Leasing Risk Through 2010 55
What We Like About Allied Properties REIT 56
Financial Forecast – Allied Properties REIT 57
Valuation – Good Upside with Equally as Important Downside Protection 59
Risks and Issues 62
Appendix 2 – Allied Properties REIT 63
Class I Office Overview 68
Artis REIT – Rating Reduced; Limited Near-Term Catalysts 73
Summary & Investment Recommendation 74
Valuation – Attractively Valued; Limited Near-Term Catalysts 75
Debt Profile – Artis REIT 77
Portfolio Overview – Artis REIT 78
What We Like About Artis REIT 81
Financial Forecast – Artis REIT 82
Risks and Issues 83
Dundee REIT – Waiting for a Chinook to Warm Sentiment 85
Summary & Investment Recommendation 86
Capital Markets Profile – Dundee REIT 89
Corporate Profile – Dundee REIT 91
Debt Profile – Dundee REIT 92
Portfolio Overview – Dundee REIT 93
Dundee vs. Artis 96
What We Like About Dundee REIT 99
Financial Forecast – Dundee REIT 100
Valuation – Relatively Fairly Valued; Multiple Expansion Could Prove Challenging 102
Risks and Issues 104
Appendix 3 – Dundee REIT 105
H&R REIT – Dough for The Bow; Gradual Road to Recovery 111
Summary & Investment Recommendation 112
The Bow 115
Capital Markets Profile – H&R REIT 118
Corporate Profile – H&R REIT 120
Debt Profile – H&R REIT 121
Portfolio Overview – H&R REIT 122
What We Like About H&R REIT 127
Financial Forecast – H&R REIT 128
Valuation – Worst Is Over; Gradual Road to Recovery 129
Risks and Issues 132
Appendix 4 – H&R REIT 133
Toronto Industrial Statistics 138