Whiterock Real Estate Investment Trust T.WRK.DB.K

full REPORT

[canadafan]

this says a lot
still $15 "buy" and lots of background
note: still $25 mill to be deployed

July 7, 2011

Action Notes Equity Research

1 of 5

Company Profile

Whiterock is an office-focused REIT with

interests in over 70 office, retail and

industrial properties across 5.3 million net

owned sf (including ground leases). These are

largely in Ontario and Quebec, highlighted

with a strong Toronto office market presence,

specifically within the Highway 427 corridor

and near the international airport.

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WRK.UN-T: Price

Please see the final pages of

this document for important

disclosure information.

Whiterock REIT

(WRK.UN-T) C$13.07

Aggressive Growth Continues With Largest-Ever Equity

Offering

Event

We are resuming coverage of Whiterock REIT following the closing of a $75

million equity offering.

Impact

SLIGHTLY POSITIVE. Whiterock continues to be one of the more active

REITs taking advantage of the attractive spread between property investment

returns and capital cost, and this latest round of acquisitions is being funded

by the REIT’s largest-ever unit equity offering. Our AFFO estimates are up

.03/unit, in contrast to the
.04/unit accretion estimated by management,

as we continue to model a slight reduction in leverage. We view the two

identified property acquisitions as overall having good strategic value to

Whiterock (Sussex more than London), in addition to being accretive to

AFFO/unit. With the basic market cap now over $400 million and likely to

continue to rise if the recent pattern holds, Whiterock is becoming closer to a

size that should start to appeal to more institutional investors. We expect this

to play out, as we anticipate the REIT will take other steps to broaden its

investors appeal, including making refinements to the CEO’s compensation

arrangement. Meantime, we believe Whiterock continues to show strong

near-term AFFO growth potential, and, in our view, this will drive the unit

valuation higher.

Details

Whiterock completed an offering of 5.64 million units priced at $13.30/unit

for gross proceeds of $75 million. Including the over-allotment option, gross

proceeds would reach $86.3 million and the REIT’s unit count would increase

by 24%. This is the largest equity offering in Whiterock’s history.

Given the pricing, our NAV estimate has risen to $11.90/unit from

$11.60/unit previously and our AFFO estimates are up by
.03/unit for each

of 2012 and 2013. We estimate the AFFO yield earned on acquisitions will

approximate 11%, which exceeds the ~8% ‘cost’ implied by the P/AFFO

pricing of the unit offering. This drives the accretion of the transactions and

is the sole driver of our increased estimates.

Real Estate

Recommendation: BUY

Unchanged

Risk: MEDIUM

12-Month Target Price: C$15.00

Unchanged

12-Month Total Return: 23.3%

Market Data (C$)

Current Price $13.07

52-Wk Range $9.16-$14.50

Mkt Cap (f.d.)($mm) $495.4

Mkt Cap (basic)($mm) $437.8

Current Distribution per Unit $1.12

Current Distribution Yield 8.6%

Avg. Daily Trading Vol. (3mths) --

Financial Data (C$)

Fiscal Y-E December

Units O/S (f.d.)(mm) 37.9

Units O/S (basic)(mm) 33.5

Float Units (mm) 32.6

Net Debt/Tot Cap 54.8%

Debt/Gross BV (%) 53.4%

NAVPU $11.90

Estimates (C$)

Year 2010A 2011E 2012E 2013E

EBITDA ($mm) 54.7 70.0 80.7 81.6

DPU 1.12 1.12 1.12 1.12

FFO/Shr 1.14 1.17 1.31 1.36

FFO/Shr (old) -- 1.18 1.28 1.33

AFFO/Shr 0.86 0.98 1.12 1.17

A FFO/Shr (old) -- 0.98 1.09 1.14

FFO/Shr Quarterly Estimates (C$)

Year 2010A 2011E 2012E 2013E

Q1 0.27 0.29 0.32 0.33

Q2 0.27 0.29 0.32 0.34

Q3 0.30 0.29 0.33 0.34

Q4 0.28 0.30 0.33 0.34

Valuations

Year 2010A 2011E 2012E 2013E

P/FFO 11.5x 11.2x 10.0x 9.6x

P/AFFO 15.2x 13.3x 11.7x 11.2x

Notes:Acctg Standards: '10A (GAAP), '11E-'13E (IFRS)

All figures in C$, unless otherwise specified.

Sam Damiani, CFA Maurice Choy, CA, CFA (Associate)

416 983 9640 416 983 4406

[e-mail] [e-mail]

Action Notes July 7, 2011

Equity Research 2 of 5

$295 Million Acquisition Pipeline

The REIT has agreed to acquire two office properties, namely Sussex Centre in Mississauga, ON and London

City Centre in London, ON, both in joint venture with ROI Capital. Whiterock will take a 49.9% interest in

the former and a 40% interest in the latter, and will earn fees for managing ROI Capital’s ownership interest.

Sussex Centre:

• Located in Mississauga’s city centre node, adjacent to Square One Shopping Centre and City Hall. The

City wants to boost density in this node. Sussex Centre is located just a 15-minute drive west from

Whiterock’s cluster of office properties along Highway-427.

• Two-tower property built in 1987 and 1989, connected by a long podium that has been converted into

office space (from retail originally).

• Key tenants include Edward Jones, BMO Nesbitt Burns, Kimberly-Clark Inc., and Benefit Plan

Administrators Limited. (Of note, Sino-Forest Corp’s small Canadian head office is in the building.)

• Our initial assessment is that Sussex Centre is a solid and affordable office property in an

attractive location. However, we like Whiterock’s Highway 427 node cluster slightly better.

London City Centre:

• Located in the central core of downtown London, adjacent to the convention centre and on the same

block as downtown’s two main full-service hotels.

• Two-tower property built in 1973-1975; connected to the Hilton hotel which is third-party owned. The

seller invested in significant upgrades during its four years of ownership.

• Main tenant is TD Bank, which occupies 64% of the total area.

• Our initial assessment is that London City Centre is a solid office property, but in a secondary

market with uncertain macro growth prospects. At only $113/SF, however, we believe Whiterock’s

purchase price fully reflects the market characteristics.

Exhibit 1: Summary of Identified Properties to be Acquired

Property Name WRK Rentable Occu- Wt. Avg Acq. Price* Debt (mm) WRK Acq. Cap Cap

(Location) Own'p* Area (SF) ancy Lease 100%-basis (Term) Equity Price/SF Rate Rate

Expiry (mm) (Rate) (mm)* excl. HL*

Sussex Centre 49.9% 657,503 93% 6 years $157 $95 $31 $239 7.3% 6.9%

Mississauga, Ontario 6-year

4.2%

(new debt)

London City Centre 40.0% 539,472 94% 6 years $61 $40 $8 $113 8.2% 7.4%

London, Ontario 7-year

5.7%

(assumed debt)

Total 1,196,975 $218 $135 $39 $182 7.6% 7.0%

* Notes:

Acq. Price and WRK equity req'd are before closing costs and CEO's transaction-based compensation.

WRK's partner is ROI Capital.

HL = Headlease rent provided by vendor on spaces that either are already forward-leased, or mgmt has high confidence in leasing.

- London City Centre headlease is 2-years starting at 4% of gross revenue, then 2% in year 2 after an executed lease commences.

- Sussex headlease is 1 year and is 3% of gross revenue (space being vacated by the vendor and in excellent condition and configuration).

Source: Company reports, TD Securities.

On a 100%-basis and before-closing costs, these two properties will be acquired for $218 million (Whiterock’s

share is $103 million) across 1.2 million SF of Class A office space.

The aggregate price represents $182/SF and a weighted average cap rate of 7.6%. The cap rates would average

7.0% if the benefit of headlease rent on both properties was excluded. However, based on the leasing status

Action Notes July 7, 2011

Equity Research 3 of 5

and condition of the specific spaces under headlease in these buildings, we are confident that at least the

majority of this income can be counted on into the future.

After new and assumed debt on these two properties, Whiterock’s cash equity requirement will total close to

$40 million. Both acquisitions are scheduled to close during Q3/11. Details are shown in Exhibit 1.

In addition, Whiterock has entered into conditional agreements for ~$77 million (before closing costs) of

acquisitions currently subject to due diligence. Whiterock intends to acquire these properties on a 100% basis

(i.e., without ROI Capital), and the equity portions of these would consume the majority of the remaining

equity offering proceeds.

Valuation

Whiterock currently trades at 13.3x 2011E AFFO versus 15.3x on average for its office-focused REIT peers.

The REIT’s 7.0% implied cap rate is in line with the peer group average. Whiterock also trades at a 10%

premium to our estimated $11.90 NAV/unit, versus the peer group’s 7% average premium.

[gwplant]

Sounds great Canadafan and thanks for taking the time to post...what isn't there to like about WRK??? Stable income gotta love it....but I will wait to add until the downtrend is broken, no hurry and lots of time to add as the stock drifts and searches for a solid support area, my guess is it may test the mid $12's once again before the summer is out...like I have always said I don't

[1condor]

I already own a lot of WRK.un and AX.un and would really like to add to WRK at anything below 13 bucks.  Good ole AX is reluctant to come down..but I will be there if it does. You just gotta love the dividends on these ones. I also picked up some aar.un recently.

[Baer1]

Hey condor, we seem to be thinking along similar lines. I own a big chunk of WRK and AX as well as D, that I got cheap a while back. I'm also into CFX. I'll have a look at aar. Sounds very piratey. ;)

[gwplant]

AAR.un looks interesting...my problem is I am already invested in WRK.un, BTB.un INN.un EXE.un and even LW so it will stay on my radar considering I am a tad bit overweight the sector ATM even though it is a good place to be.