Low interest rates, relaxed lenders and robust equity markets are making it easier for real estate companies to finance acquisitions, which is certain a positive trend, but the easy money is driving up prices generally, REIT executives told attendees at CIBC’s 16th annual North American Real Estate Equities conference.
“Our acquisition program was modest in 2010 and we anticipate that it will be very aggressive and ambitious in 2011,” said Michael Emory, president and CEO of Allied Properties REIT. That aggressive stance is fueled “…in part because of the cost of equity that is currently available to us in the equity capital markets and we don’t expect that to change in any material way over the course of the year.” Emory and three other REIT executives comprised a “capital markets update” panel for attendees at the Toronto event.
Emory’s Allied Properties has carved out a market niche for itself by focusing on specialized office assets in major urban centers across Canada through a three-pronged offering: proximity to the downtown core, distinctive internal and external environments and lower overall occupancy costs. The company strove to gain dominance or at least critical mass in its markets with this strategy and, through acquisitions, has grown to an enterprise value of about $1.8 billion.
Kelly Hanczyk, CEO of Transglobe Apartment REIT, noted that conditions are quite different from when the REIT went public last May. “We’re in an industry where there is a lot of money chasing relatively little product,” he said. “Cap rates are compressed, debt is abundant, so it is a little bit different scenario from when we first came out. We came with the IPO and were struggling to get over the line…now everyone wants you to raise equity.”
Transglobe has grown extremely fast in the past year, going from 8,000 apartment suites and a $300 million market cap which today stands at about 12,000 apartment suites in five provinces and a $500 million market cap.
Armin Martens, president of CEO of the western Canada-focused Artis REIT, expects to take it easy this year after a busy 2010 when it completed $900 million in acquisitions. “Things have leveled off a lot and settled down….In our case we do see ourselves curtailing and moderating our acquisition program,” forecasting 2011 acquisitions of between $200 million and $400 million.
Canadian REITS have been superstar performers before, during and after the fiscal crisis and economic downturn, noted Alex Avery, executive director of institutional research with CIBC World Markets and moderator of the day’s money managers’ panel. Since the end of 2008, the S&P/TSX REIT index has delivered a return of 107%, outpacing the main S&P/TSX index by 44%. Perhaps less well known, however, since the end of 2007, well before the market crash, REITs returned a total of 36% to date, again outpacing the main index. Over the last 10 years, the REIT index delivered a compound annual return of 16%, again running ahead of the TSX and Bloomberg U.S. REIT index. “I think we can all agree that the Canadian REIT sector has delivered outstanding returns, has been a great retainer of value and delivered a great experience to investors,” Avery said.
Avery’s panel of four executives comprised “some of the brightest minds in the REIT investing world,” portfolio managers from both sides of the border. They were generally upbeat about the prospects for REITs in Canada and beyond.
Dennis Mitchell, a portfolio manager with Sentry Select Capital, expects a 10% to 20% return for the REIT sector in Canada based upon the expectation that interest rates will not spike but instead slowly rise and “a slow, gradual recovery” continues.
The portfolio managers all forecast a friendly interest rate environment for REITs for the foreseeable future, which runs contrary to the worst fears of many REIT investors. “There is a palpable sense of fear or dread (among investors) about whether rates are going to rise on the back of inflation,” said Mitchell.
Putting the two U.S. managers on the spot, Avery asked them what they thought of the Canadian REIT sector. Dean Frankel, a portfolio manager with URDANG, noted that there are good companies and a high level of disclosure relative to many other countries, but he views the Canadian REIT sector as “a little bit overheated,” with slightly lower growth prospects and slightly higher premiums. “So therefore we have a marginal underweight.” John Murphy, a vice-president and analyst with Cohen and Steers, echoed Frankel, noting “the stocks are absolutely not cheap.”
Property Biz Canada is an RENX publication launching in May 2011.