FAM REIT ups GTA exposure with Promontory office complex purchase

Toronto-based FAM Real Estate Investment Trust this month made its second major acquisition since going public in late 2012, adding a 159,752-square-foot Class A office complex in Mississauga.
The seller of the “The Promontory,” situated at 2655 and 2695 North Sheridan Way, was Bentall Property Fund.
Like FAM’s first big buy, the purchase of a 170,000-square-foot building on Yonge Street in Toronto, the Promontory pickup increases exposure to primary markets, a major strategic focus for the REIT.
At the time of the Yonge Street purchase in March, FAM also sold its 50 per cent interest in a Winnipeg property to Artis REIT for approximately $20.5 million, subject to certain adjustments.
“We’ve been pretty busy,” said Shant Poladian, chief executive officer of FAM.
FAM got its start in December after Vancouver-based Huntingdon Capital Corp. decided it needed a more efficient capital vehicle for many of its properties. After the REIT went public, FAM acquired a portfolio of 27 income-producing properties from Huntingdon Capital Corp., made up of 1.7 million square feet of industrial, office and retail properties.
Poladian explained that being the new guy on the REIT block means FAM has to be selective and patient when it comes to adding properties to its portfolio.
“As a small REIT, you generally have a more expensive cost of equity than more seasoned, large REITs so ideally we would like to acquire in primary markets in every transaction that we do, but the reality is that will be difficult until we have a more attractive valuation,” said Poladian.
“But the first (acquisition) ended up being primary market and we are pretty happy about that.”

The Promotory office building located at 2695 North Sheridan Way in Mississauga
Times a-changin’
Poladian, a former Bay Street analyst, knows as well as any real estate veteran about market cycles and how changing interest rates will affect prices and profitability over the long term.
“Clearly with the changes in interest rates, you have seen a decent correction in the REIT world. You have seen higher borrowing costs and you have seen lower equity valuations.”
The young REIT has bobbed through the troubled waters.
“We have held our own and I think over time if we continue to buy decent property and it is accretive overall without driving leverage higher, we will get some good traction with the investment community,” he said.
Getting attention and broader ownership from institutional investors requires any REIT to diversify its holdings so that it is not dependent on just one or two markets, tenant or geography and offers decent liquidity, the FAM CEO explained.
“The trick is how you do that accretively so that you are not putting your distribution payout at risk. You just can’t grow for growth’s sake and buy everything that shows up on your doorstep.”
He added that FAM compares favourably to a number of other small REITs which have higher distribution yields and leverage.
“In this environment where equity capital is more scarce we think our strategy should help deliver some competitive advantage as people sort of become more aware of how the game has changed at this point of cycle.”
For example, a highly leveraged REIT two years ago enjoyed declining interest rates and cap rates and equity valuations rose as a consequence.
“Now it is working the other way. If you have higher leverage, you have more downside risk to your valuation than somebody with lower debt.”
Debt kills
FAM’s allergy to high debt can be seen in the REIT’s decision to raise $20 million in a bought deal in connection with the Promontory acquisition.
The REIT needs only $17 million to close the deal, but is raising $20 million from the public, $4 million from minority owner Huntingdon Capital Corp. in a private placement and possibly another $3 million with an over-allotment option.
“So we are over-funding the option to get more liquidity,” said Poladian.
FAM has only $1.7 million of debt coming due before November 2015, which puts the REIT in a strong position to ride out any further shifts in the market. “If we do get more volatility and market dislocation, we are in great shape.”
Poladian, a former equity research analyst and managing director at Canaccord Genuity Corp., (and at BMO Nesbitt Burns prior to that), has a pretty good idea of what investors are looking for.
His Bay St. background has given him some added industry cred.
“Definitely,” he said. “There was a little bit of a transition coming out of the securities industry to the direct property side, but it has been a very good, smooth transition. We have put up over $80 million of acquisitions and $40 million of dispositions.
“For a REIT that had only $200 million in real estate six months ago, it is a fair bit of activity. But we are definitely building street credibility.”



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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