The latest entry to Canada’s swelling REIT ranks, Agellan Commercial Real Estate Investment Trust, expects to take a decidedly southern approach to growth following its upcoming public offering on the Toronto Stock Exchange.
The Toronto-based REIT is backed by current owners CarVal Investors LLC and Agellan Capital Partners Inc. (ACPI), which bring assets to the new REIT right out of the gate.
ACPI, a privately held real estate investment management company that acquires and manages commercial real estate assets in the U.S. and Canada, currently acts as the asset manager of 22 of the 23 initial properties and will become the asset manager of the REIT following closing of the initial public offering.
Those 23 properties (47 buildings totalling approximately 4.2 million square feet in Ontario, Texas and the mid-western U.S.) will form the foundation for Agellan REIT, which intends to invest in commercial and industrial properties primarily, with a lesser focus on retail.
Exciting States of America
While the REIT will have operations on both sides of the border, it is in the still-recovering U.S. real estate sector that Agellan views as the real prize. “The current market opportunity over the near term, the next 12 to 24 months, is to exploit what we consider to be a value arb in the U.S.,” said Derek Dermott, President of the REIT.
The U.S. is viewed as a lower risk, higher return market with less competition for assets, he said. “Very little building (activity), valuations are still much lower, cap rates much higher and a good entry point to get into the U.S. – not to mention a very strong Canadian dollar currently.”
“We will look at other acquisitions in Canada and they may or may not make sense from an accretive point of view but we will certainly look and we will be open for business on both sides of the border.”
Loves the Lone Star State
One area of concentration for the REIT will be in the great state of Texas. The REIT spells out the appeal of the state in its preliminary prospectus which it filed with regulators this month: The state’s economy, one of the largest in the U.S., has been growing rapidly following the 2008-2009 recession fuelled by rapid population growth and an “unprecedented” energy boom in south-central and west Texas. Much of that growth is in Houston, “which has in many ways become the energy capital of the world.”
Texas had the lowest unemployment rate among the top 10 largest state economies and by December 2011, had regained all of the jobs lost during the recession, compared to just 34% of jobs regained in the U.S. as a whole.
“We have approximately 30% of our NOI coming out of Texas,” with secondary focus in cities such as Chicago and Columbus (Ohio), said Dermott. “Columbus is a secondary city in the U.S. but it has a population that is greater than most major cities in Canada.”
Less is More in Southern Push
Agellan believes it will have little trouble identifying and ultimately acquiring the right mix of office, industrial and retail properties in the States. “It is a combination of just more property available and the fact that the major investors in the U.S. are focused on major port cities, which really leaves a number of major metropolitan areas untapped.”
Agellan is a REIT in a hurry, its president said. “The market opportunity in the U.S., we feel that that window is a good 24 months long before there is some serious competition and serious cap rate compression.”
In its prospectus, the REIT counts four key strengths which it expects to propel its growth:
• Extensive relationships. Agellan Capital Partners (ACPI) “has extensive relationships with brokers, managers, owners and other industry players” in the U.S. and Canada. The REIT expects to leverage these relationships to source accretive, high-quality acquisitions.
• An experienced cross-border acquisition team. ACPI’s extensive knowledge of the REIT’s target markets will enable the REIT to identify and capitalize on attractive acquisition opportunities.
• Access to capital. As a public real estate investment trust, the REIT believes that its access to public capital will provide it with an advantage over competing property purchasers that are entirely dependent on private sources of financing.
Veteran banking team
Dermott, who has worked in both the U.S. and Canada, is a veteran real estate investment banker with the likes of BMO, Brookfield and RBC the past two decades.
The REIT’s board of trustees includes Robert Perry, Senior Managing Director of Minneapolis-based CarVal and Frank Camenzuli, the Chief Executive Chief Executive Officer of ACPI.
“The bulk of the team and the leasing experience, which really drives the value, comes from Agellan and their skill set and Frank Camenzuli leads that and he has been at it 30 years,” said the REIT’s president.