While office, industrial, retail and multiresidential dominate the Canadian real estate investment trust market, a panel at the recent RealREIT conference at the Metro Toronto Convention Centre focused on “niche” REITs and what they have to offer.
Another way in which these real estate investment trusts differ from many of their competitors is that they are not aggressively following the trend toward asset diversification. Having developed expertise in a particular area, they leverage that experience to drive returns.
Panel members at the Sept. 5 event came from REITs with very different types of portfolios; automotive properties, health-care properties, European multiresidential assets, and U.S. hotel properties. All might be a bit outside of the mainstream for some investors.
Here’s an overview of the four Canadian REITs:
American Hotel Income Properties REIT
Vancouver-based American Hotel Income Properties REIT (AHIP) (HOT-UN-T), had its initial public offering (IPO) on the Toronto Stock Exchange (TSX) in February 2013. It now owns 112 hotels in 32 states and 89 cities.
AHIP REIT initially focused on economy hotels for which railway companies signed long-term contractual occupancy guarantees. Under these contracts, the rail firms paid for 60 to 100 per cent of the rooms for their freight-train crews, whether or not those rooms were actually occupied.
Canadian tax laws don’t permit hotel REITs, which is why all of AHIP REIT’s properties are in the United States and its distributions are in U.S. dollars. It also sources and reports its debt in U.S. dollars.
“U.S. lenders have insatiable appetites and there’s a lot of demand for hotel assets,” said AHIP REIT chief financial officer Azim Lalani. “We tend to find if one lender can’t do it on its own, it will partner up with two or three or four other lenders to provide very competitive terms.”
There are 3.5 million select service hotel rooms in the U.S., compared to 350,000 in Canada, according to Lalani.
He said the hotel industry in the U.S. has experienced strong growth over the past 10 years and he believes the increasing demand for rooms will continue.
AHIP REIT looks for assets with good capitalization rates that can be purchased at below replacement cost. It’s currently focused on completing a major renovation program at its existing properties.
Automotive Properties REIT
The portfolio was initially dominated by the Dilawri Group of Companies, Canada’s largest car dealership group, but Automotive Properties REIT has since acquired dealership properties from other companies.
The three largest dealership groups in Canada are among its tenants.
Automotive Properties REIT had more than $200 million in acquisitions last year. Over 90 per cent of those properties were non-Dilawri dealership sites, according to president and chief executive officer Milton Lamb.
The groups own the operations of the dealerships, while Automotive Properties REIT owns the real estate.
More than 80 per cent of the REIT’s dealerships are in Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal. Lamb said the value of its portfolio has grown from about $350 million to more than $800 million.
“The real driver is demographics and service,” said Lamb. “It’s an essential service for all the cars on the road and we want to be there to take advantage of it.”
Automotive Properties REIT owns prime properties in major cities with long-term leases averaging more than 13 years. There are built-in annual rent escalators of either 1.5 per cent, or based on the consumer price index.
“There are zoning restrictions, which means it’s very hard for our tenants to move,” said Lamb.
While automotive property REITs in the U.S. are trading at 25 per cent above net asset value (NAV), Lamb said his REIT is trading at a five per cent discount to NAV because people view it as a retail REIT.
That hasn’t prevented Automotive Properties REIT from successfully raising equity from capital markets.
While Automotive Properties REIT has some conventional mortgages on its books, it primarily deals with three lending syndicates familiar and comfortable with auto dealerships and willing to lend at very low spreads.
Lamb said Automotive Properties REIT has no current plans to develop properties.
European Residential REIT
European Residential REIT (ERES REIT) (ERE-UN-X) is Canada’s first European-focused multiresidential REIT. Toronto-based CAPREIT, which owns interests in about 51,000 residential units, is the biggest shareholder.
The REIT trades on the TSX Venture Exchange and is initially focused on the Netherlands. CEO Phillip Burns said it can get locked-in yield spreads of about 300 basis points from Day One in its acquisitions.
“You can have European exposure and amazing going-in yield spreads and the growth is much more defensive, because we don’t need turnover to drive our high-level growth,” said Burns, who is based in Europe but frequently returns to Toronto.
ERES REIT only does development or redevelopment if it wants to “turbo-charge” its growth rates, according to Burns.
While Canadian investors are familiar with the multiresidential sector, Burns often has to explain some of the nuances and differences between the Canadian and the very regulated Dutch markets.
That country has had a complex rent control system for about 60 years. He said the lending market in Europe is “deeper than ever.”
ERES REIT has been growing quickly and Burns believes that will continue.
The housing market is comprised of 55 per cent owner/occupiers and 45 per cent renters.
Burns said 70 per cent of the rental market is held by “housing associations that are pseudo non-profit organizations” which often rotate product. This practice allows his REIT to step in and do things the associations can’t.
There’s a relatively mature institutional ownership market, primarily owned by insurance companies and pension funds, in the Netherlands. These owners often rotate assets and sell them in order to buy new ones.
They’re willing to accept lower yields, so ERES REIT is a natural buyer for those older properties.
“We see multiple pools of people that are providing us the opportunity to continue to buy product at very attractive yields,” said Burns. “We don’t see that dissipating any time in the immediate term.”
NorthWest Healthcare Properties REIT
It has a portfolio of 149 income-producing medical office buildings, health-care facilities, clinics and hospitals and 10.1 million square feet of gross leasable area in major markets in Canada, Brazil, Germany, Australia and New Zealand.
It just entered the Netherlands.
The Toronto-based REIT employs more than 180 in nine offices in five countries. Chairman and CEO Paul Dalla Lana said it has an asset pool worth $7 billion, with about three-quarters of its business outside of Canada.
“Our investment strategy is to earn a positive spread on all of the investments that we do, using local currencies,” said Dalla Lana. “We’re making long-term decisions and ultimately we feel comfortable in good markets with good assets and a conservative financial structure.”
Dalla Lana said three of the 10 largest REITs in the U.S. are involved with health care. NorthWest Healthcare Properties REIT doesn’t want to compete head-on with them, which is why it has focused on becoming a leader in Australia, Germany and Brazil.
“We see consolidation and see a phenomenal demand for capital from the operating side of the health-care industry,” said Dalla Lana. “That gives us a great opportunity to provide capital to health-care operators.
“There’s a huge demand and it’s probably about to enter its peak moment, particularly when you think about people in the northern and more developed parts of the world where people are entering their prime years of health-care need.”
Dalla Lana said 10 per cent of NorthWest Healthcare Properties REIT’s portfolio is in a state of expansion on a low-risk basis and that it will have constant value-add opportunities.