The close of this week’s Real REIT forum in Toronto was dominated by one question: should REITs expand into the U.S. and other foreign markets or stick with what’s working and stay home?
The high-powered panel that closed out the conference was united in the view most real estate players should stick to their current playground.
“We only invest in Canada,” stated Michael Emory, president and CEO of Allied Properties REIT. “We still feel that there is still a lot of opportunity for what we do in the markets that we operate in in this country and we feel that we have a real competitive advantage and a real positional advantage.”
The enormous U.S. market is tempting for the likes of Allied, with a huge array of properties, but the REIT has remained steadfast in its determination to stay out. Allied’s reasoning: it will get its corporate head handed to it by competitors who know the ins and outs of the markets far better than they do.
“There is a great deal of property in the United States which is exactly what we love to own and operate, but those are markets we don’t understand peopled by men and women who know a hell of a lot more about the local daily real estate goings-on than we can ever know,” Emory said. “We are not going to prance into those markets and try to outsmart the locals; we would get killed.”
What would it take for Allied to go south, or east or west for that matter? An end to growth prospects in its home country.
Today, the Canadian market has an inventory of about 50 million square feet of Class I (repurposed industrial space) and Allied owns about 10 million of that property type. “We see a long runway going forward here and we see the opportunity to see new space here in major urban markets that we understand,” Emory said.
Kimco Realty’s take
David Henry, president & CEO of Kimco Realty Corp., similarly did not see a great need for REITs to invest outside Canada’s borders, although he did note one prominent example of a REIT that did make a successful move.
“I’m a huge fan of investing for the long term in Canada. As you look around the world, Canada has just so much going for it,” he said, ticking off the country’s fiscal position, smart immigration policy and energy resources.
“You have just so much going for you here and in our particular sector, retail, you are under-retailed by any of our measurements. Most of our top 10 tenants have either gone here in Canada or are moving here in a big way.”
Kimco is Target’s largest landlord. The company’s biggest challenge is that high prices have made it difficult to grow in the Canadian market.
Henry singled out Ed Sonshine, CEO of RioCan REIT, for smartly snapping up U.S. retail real estate in the depths of the recession.
“We were all afraid to buy, and cap rates moved up sharply and Ed was able to pick up high-quality properties in the United States at nine cap rates which have since come down into the sixes,” said Henry. “I don’t think he gets much credit for that, but he was bold and he moved when the rest of the world was scared.”
Politics are all relative
Dori Segal, president and CEO of First Capital Realty Inc., noted he is proof foreigners can make it in strange jurisdictions. Segal came to Canada at the end of 1996 “and quickly fell in love with Quebec and Montreal – I’m talking about cap rates, not the geography.”
The real estate establishment warned him about his Quebec focus.
“I was told that there was a political problem in Quebec and that is why people shouldn’t buy there,” Segal said. “Between 1997 and 2002, we were probably one of the only bids in Montreal.
“Remember, I am from the Middle East, we know what political problems are; this is not a political problem, this is a glitch.”
Segal likened his success in Quebec to RioCan’s southern foray.
“When you are not local and you are not bound by the normal local fears, you can make good sound decisions provided that you follow up with a platform and create a business out of this strategy. By the way, I think that is exactly what RioCan is doing.”
What does Mr. Market think?
The closing panel had some Bay Street and Wall Street (by way of California) content in the form of Neil Downey, managing director of Global Equity Research with RBC Capital Markets and Andy McCulloch, managing director of REIT research and investment advisory firm Green Street Advisors of Newport Beach, Calif.
Downey summed up his thoughts through an investor lens: “I’m generally of the view that Canadian REITs should stick to their knitting in Canada because that is actually their competitive advantage, that is, they’re competitive in terms of attracting international capital because institution investors typically buy Canadian REITs for their Canadian exposure.”
There are exceptions to the rule, however, said Downey.
“There are a number of entities who are getting to the point or have gotten to the point where they are dominant domestically. Obviously RioCan is the poster child. It saw at the time a cost of capital advantage in terms of its move to the U.S. in ’09. But for the most part, that is the rare exception.”
McCulloch largely echoed those thoughts.
“Generally, we prefer single-country focus,” he said. “There are just so many risks going across the border: it is tax, legal, political, currency, there is tuition risk and I think generally if you take a step back, a REIT portfolio manager can diversify themselves.
“Generally, they would prefer pure-play, single-asset, single-country. We don’t want the REITs to do it. It is very hard to be very good at a single-country and a single-asset type, we would rather diversify ourselves by picking pure plays.”