A real estate panel composed primarily of REIT executives responded with a unanimous “yes” to the opening question posed to them: Do current market fundamentals support acquisitions today?
“In a word, I would say yes,” said Ron Perlmutter, Vice President of Investments with Primaris Retail REIT. Cost of capital has been favorable and is anticipated to continue to be while availability of potential acquisitions with the necessary return fundamentals of operations, occupancy and leasing are there as well.
The end price of the asset up for sale is the ultimate concern for the Sobey-linked Crombie REIT, said its President and Chief Executive, Don Clow. “For us the real estate fundamentals are fine, we are seeing reasonable accretion on day one because the spreads are so wide and we have availability of product. The concern we have is just the ultimate pricing of the asset.”
Armin Martens, President and CEO of Artis REIT, playfully answered like an economist with a lengthy “on the other hand” description of the market before concluding: “The numbers still make sense, it is a good time to be in the space. It is a good time to be investing in real estate directly or investing in REITs,” he said. “I like the fundamentals the way they are.”
Michael Zakuta, President and CEO of New Brunswick-based Plazacorp Retail Properties Ltd., which focuses on added-value or development plays, was the lone dissenter on the pro-acquisition panel. “The fundamentals for our group are not good for acquisitions, that is not our business model,” he said. “We are fortunate to be able to make higher development yields…and generally we want to do 10-year financing or longer.”
The panel’s moderator, Altus Group’s President of Research, Valuation & Advisory Services Colin Johnston, asked Primaris REIT’s Perlmutter why his trust was successful in its $572 million bid for five Ivanhoe Cambridge shopping centres earlier this year. The Primaris executive said that the REIT won by anticipating an eventual sale and doing its homework.
“The price that we paid really wasn’t the highest price that Ivanhoe could achieve – if they had chosen to sell it on a breakdown individual basis they would have likely done better,” he said. “The reason we were successful was we chose to underwrite this at a very early stage, we were tracking these assets before they were even listed and by the time the bidding process had taken place we had invested a lot of money so that our bid was very unconditional. We bid on all the assets and had a very quick closing period. Quite frankly our goal was to make it as easy as possible for Ivanhoe to sell them to us and that is how we were successful.”
On the subject of primary versus secondary markets, the Crombie president said that his REIT’s current 72% concentration in the steady, if unspectacular, Atlantic Canada market served it well in the market downturn. “We call it a ‘no boom, no bust economy,’” said Clow. As Altantic Canada’s biggest landlord, Crombie is also aware that there are significant pockets of growth with the continued urbanization in the region’s top five markets – St. John, Moncton, Fredericton, Halifax and St. John’s.
Still, Crombie has a stated goal to become a national player and move its weighting to 50-50 Atlantic Canada-rest of Canada within the next five to seven years by the strategic disposition of its “bottom 10%” of assets and by growing faster in non-Atlantic Canada markets, in part as it follows the Sobey supermarket chain’s expansion across Central and Western Canada.
Primaris REIT’s Perlmutter dealt with the urban versus secondary question by stating that his trust rarely considers potential assets based on whether they are part of a big city or a smaller centre. “We always look at the location of the assets in more of a primary or secondary trading context, the city name itself doesn’t really matter,” he said. “As long as it meets our basic market underwriting concerns, whether it is the population density, other economic data and minimum population then we are okay.”
Perlmutter held up the recent Ivanhoe transaction as an example. In addition to malls in Montreal, Oakville, Burlington and Windsor, the smallest mall in the portfolio was in St. Albert, Alberta. The REIT’s research team had no trouble discovering that St. Albert’s median family income is 50% higher than the Canadian average.
“It is a very wealthy suburb of Edmonton and the property we bought is the only enclosed shopping centre,” he said. “So although it has a name St. Albert that may not come across as a major city in Canada which it is certainly isn’t, it is a very properly well-defined, well-supported primary market and that is why it was of interest.”