Competition and growth force REITs/REOCs to evolve

Fierce competition for transactions has forced the country’s real estate companies to evolve and adapt, a reality evidenced by a panel of industry executives at CIBC's Real Estate Conference in Toronto.
Perhaps no better example of just how quickly a company can change gears has been shown by KingSett Capital, which got its start focusing on the office market, before focusing on industrial properties.
“At the onset, KingSett’s strategy was very specific, relatively brilliant – and as it turned out, unexecuteable,” joked Jon Love, KingSett’s managing partner.
“So we quickly evolved to focus not on real estate types, asset class, geography, but on investment dynamics and our focus has always been on trying to create premium, risk weighted returns.”
That strategy has taken KingSett out of just offices into “a wide range of investments, that while being different asset types, geographies and structures ranging from industrial, cold storage, retail, etcetra it has all come back to the same core thesis, which is trying to generate a premium risk weighted return.”
Risk-return equation dominates decisions
The risk-return equation continues to dominate KingSett’s decisions today, he said.
KingSett has been extremely busy of late, in partnership with H&R REIT, acquiring Primaris REIT in a $1.28-billion deal in February and a month earlier, selling 17 industrial properties comprising more than 1.5 million square feet.
Love added that today’s current “slow growth, low interest rate, low inflation environment … for us nirvana.”
It is an especially good time to buy long-life assets, he said. As well, the “dramatically limited new supply,” particularly in secondary markets, is good news for outfits like KingSett, which are potential sellers of more industrial property and “A malls in B markets.”
He expects investment demand to continue on the back of improving operating fundamentals and continued cap rate compression.
“The fact is if you have more buyers than sellers, you have more investment capital looking to find a real estate home, you are going to continue to see pressure on cap rates and I think you will see that right across the asset class.”
Artis grows out of the West
The story of Winnipeg-based Artis REIT is an impressive one. Starting out as a micro-cap eight years ago, the company spent the first four years of its existence focusing on western Canada only, with a strong weighting in the booming Alberta market.
After the 2008 financial crisis, Artis dramatically changed its strategy, diversifying first into the greater Toronto Area and then, in 2010, into the U.S.
“It started with the fact that our dollar was trading in the parity range and we were basically able to buy newer generation real estate in the United States at higher unlevered yields, lower price per square foot, financing readily available and good tenant profiles,” said Armin Martens, President and Chief Executive Officer of Artis.
Today Artis is diversified across all asset classes, with a geographic weighting that is about 20% U.S., 15% in the GTA, 65% in the West and a few buildings in Ottawa.
REIT shopping in the U.S.
Given the greater value proposition he sees in the U.S., Martens sees the REIT growing its U.S. holdings to 25% to 30% of its portfolio and bringing its GTA holdings up to about 20%. That would bring Artis REIT’s western Canada exposure down to a more comfortable 50% of assets, he said.
Despite the strong demand, Martens expects to see plenty of deals occurring in 2013. “When we first started eight years ago as a REIT, people would ask me, ‘Where are you going to get your deal flow from, how are you going to buy any properties?’ I never understand that question, I always thought there would be buildings somewhere.”
That proved to be a correct operating perspective and except for the great recession, the market has been characterized by more buyers than sellers, yet Artis REIT has had captured its share of deals and grown to $4 billion worth of properties, he observed.
“The sellers will show up, in my conversation with the brokerage community I think the pipeline will be pretty healthy, it is just that there is a lot of money out there will chase deals, in my case as a REIT of course they have got to be accretive from day one.”
KingSett’s Jon Love similarly has heard “there is nothing around” but experience, as well as his company’s plans, means it will be busily buying and selling properties.
“We will be sellers of two or three billion dollars worth of assets over the next two or three years and hopefully we will be buyers of two or three billion dollars of assets over the next two or three years,” he said.
“The beauty of this industry is people have different views, different time horizons, different cost of capital, different skills, and there is lots of real estate that has moved from what I would call one sophisticated set of hands to another set of sophisticated set of hands and people have executed well on both sides and made money.”


Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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Paul is a writer, editor and media trainer based in Toronto with over 25 years of experience as a business reporter. He has written for Canada’s major news services on…

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