DEALTALK-REITs raise capital for West Canada property deals

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* Western Canada expected to set growth pace for Canada

* REITs eye acquisitions as demand for space picks up

* Some expect REIT returns of more than 10 pct this year

By Pav Jordan

TORONTO, Jan 20 (Reuters) - Real estate investment trusts, betting on an economic recovery, are lining up to raise capital to acquire commercial properties or even the entire portfolios of smaller rivals.

The dealmaking is focused squarely on Calgary, the capital of Canada's oil and gas industry, as well as other cities in the four Western provinces, where much of Canada's resource wealth is produced.

The four provinces -- British Columbia, Alberta, Saskatchewan and Manitoba -- are expected to show average growth of 3.5 percent in 2010, according to the Conference Board of Canada. That compares with a forecast of less than 3 percent for Canada as a whole.

The Western growth "means stronger demand for office space and industrial space and it means retail tenants do better and pay the rent. It's a trickle-down effect," said Armin Martens, chief executive at Artis Real Estate Investment Trust (AX_u.TO), a REIT focused exclusively on Western Canada.

Artis said earlier this month it planned to raise at least C$50 million ($47.6 million) in an equity financing to help it pay for future acquisitions. Other REITs have done the same as they implement expansion plans in Western Canada or elsewhere.

REITs are happy to raise capital these days because their valuations are rising at a time when they can offer investors higher returns than that on Canada's benchmark 10-year bond CA10YT=RR, currently at about 3.4 percent. Some say REITs may return more than 10 percent.

REITs were a popular investment vehicle in Canada from 2000 through 2005, after the tech bubble burst and investors sought hard assets. The steady payouts also attracted many yield-hungry investors.

For a few years, unit prices soared and IPOs abounded before consolidation in 2006-07 shrank the market again.

GROWING LIST

The list of Canadian REITs coming to market with debt or equity issues has grown since the middle of last year and has picked up steam in the past three weeks.

Earlier this week, Crombie Real Estate Investment Trust (CRR_u.TO) said it would issue C$45 million of convertible unsecured subordinated debentures in a bought deal.

Last week, the Canadian REIT Extendicare (EXE_u.TO) agreed with underwriters led by RBC Capital Markets (RY.TO) to issue C$75 million worth of units, also in a bought deal.

On the same day RBC and Scotia Capital (BNS.TO) reached a deal with First Capital Realty (FCR.TO) to help it raise C$125 million in 5.85 percent senior unsecured debentures.

REITs "have been very active raising capital, primarily equity capital, and also selling convertible debentures to raise both debt and convertible debentures as the capital markets really opened up after being shut for some time," said Mark Rothschild, a real estate analyst at Genuity Capital Markets.

"Now many of the REITs believe that there will be very attractive acquisition opportunities out there for them to use that money to make accretive acquisitions."

ATTRACTIVE BUT NOT CHEAP

To be sure, acquisitions won't come easily in Canada, where commercial real estate did not experience the same slump seen in the United States, in part because prices never jumped as they did south of the border ahead of the credit crisis.

"It's a good time to buy, not because the market is distressed, but because the fundamentals still seem very, very strong," said Dean Orrico, chief investment officer for Toronto-based Middlefield Group, with assets under management of some C$3 billion. The firm just opened a Calgary office.

He said the Calgary office market is drawing strong interest from Chinese oil and gas players.

"If they are going to be buying assets, they are going to want office space and they are going to want to be on the ground," said Orrico, who forecast total returns for Canadian REITs of 12 to 15 percent this year.

"If you own a Canadian REIT you are getting an average yield of 7 or 8 percent, and to have that supplemented by capital appreciation of another 6 or 7 percent would be a pretty good total return for 2010."

($1=$1.05 Canadian) (Editing by Frank McGurty)