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Oak Street finds $2B niche in Canadian office real estate

Private equity firm Oak Street Capital Real Estate looks for very specific types of real estate i...

IMAGE: Western Canadian Place in Calgary. (Courtesy CBRE)

Western Canadian Place in Calgary, one of three major office properties in Canada acquired by Oak Street during 2021. (Courtesy CBRE)

Private equity firm Oak Street Capital Real Estate looks for very specific types of real estate in which to invest. It found three such opportunities in Canada during 2021, acquiring major office properties valued at about $2 billion.

The Chicago-based company has been an active investor in Canada market since 2018. The acquisitions of the Bow Tower and Western Canadian Place in Calgary, as well as the Bell Canada Campus in Mississauga for $1.5B (at Oak Street’s share), pushed its total investments in Canada to about $3.5 billion and 110 properties.

“We started investing in Canada a number of years ago in 2018, when we really started to get traction. The first sizeable transaction we did as a tenant was Magna International. That was closed in 2018,” said Sean Sullivan, a managing director with Oak Street. “Following that we did two transactions where the tenant was Sobeys.

“Then we did a transaction shortly after that where the tenant was Loblaws . . . a big deal across all 10 provinces of Canada.

“We didn’t do much in Canada in 2020 just because of the disruption in the market with COVID. And then in 2021 (we did) the two transactions in Calgary for The Bow, Western Canadian Place and the Bell Canada Campus in Mississauga.”

The three Canadian acquisitions in 2021

The iconic Bow Tower in the heart of downtown Calgary was purchased, along with partner Deutsche Bank, from H&R Real Estate Investment Trust for $1.216 billion. The main tenant in the building is energy giant Ovintiv.

Western Canadian Place, a major downtown Calgary office complex comprising two towers, was purchased for $475 million from British Columbia Investment Management Corp. and its real estate arm QuadReal. The anchor tenant is another energy giant, Cenovus, which inherited the space when it acquired Husky energy.

The sale of the 1.1-million-square-foot Bell Canada office campus was for $439 million and was also acquired from vendor H&R REIT. It occurred at the same time as The Bow acquisition.

IMAGE: Gary Rozier, left, and Sean Sullivan are managing directors with Oak Street Real Estate Capital. (Courtesy Oak Street)

Gary Rozier, left, and Sean Sullivan are managing directors with Oak Street Capital Real Estate. (Courtesy Oak Street)

Gary Rozier, also an Oak Street managing director, said the 12-year-old firm manages real estate portfolios for primarily institutional investors – U.S. public and private pension plans, foundations and endowments. It has about $15.7 billion in assets.

“We manage both open- and closed-end structures. The strategy is really designed to buy single-tenant assets, cross-sector,” Rozier explained. “So we will own assets in industrial, office and retail. All of our lease types is what’s called triple-net.

“We work only with investment-grade-related tenants, so every tenant in our buildings (is) investment grade. We try to do that in a long-duration lease structure.”

Oak Street currently invests only in Canada and the United States.

Strategy behind Oak Street’s investments

Rozier said the company wants to make sure it has the right partner before investing in real estate assets. The vast majority of the transactions involve sale-leasebacks – Oak Street buys an asset from a tenant and then leases the building right back.

“You sort of start with the tenant, then the transaction, then you’re going to look at the real estate,” he said. “So for us, I wouldn’t say geography comes last, but we certainly want to get the right partner first, structure the transaction in the appropriate way and then you’re going to sort of fill in the blanks with the real estate.

“I think in Canada there’s been a more openness to doing sales-leaseback transactions. In the U.S. what you find is a lot of companies look at real estate, even if they’re not a real estate business, as having these trophy assets, where oftentimes companies in the Canadian market understand sometimes there’s a better use for capital and they’re quicker to monetize real estate in a sales leaseback.”

Sullivan said there are not as many single-tenant investors in Canada as in the U.S. – at least, not at the large scale Oak Street prefers.

“So we’re not chasing multi-tenant industrial properties and multifamily properties, which are two very hot asset classes, and we’re not chasing multi-tenant office buildings, which in core markets the pensions like to go after,” he explained.

“Where we’re deploying capital to, in various Canadian markets, the big capital flows from the Canadian pensions aren’t going to the same place. I think that’s led to us being successful in the number of the deals that we’ve closed.”

Two core Calgary properties

Sullivan said the two investments in The Bow and Western Canadian Place presented Oak Street with an opportunity to invest in its core specialty – single-tenant properties, with long-term leases in place, with investment-grade credit exposure.

“These properties and what we always underwrite, (the goal) is that we want to deliver long-term, stable income for our investors. So really, the two transactions that we closed on Western Canadian Place and The Bow, they check all those boxes for us.”

Sullivan said Oak Street has a significant amount of capital raised through its institutional investor base. The capital is discretionary and committed to the company – so it is ready to make more acquisitions if the right properties come to market.

“If we can find opportunities in Calgary, Alberta generally speaking, or other markets across Canada that meet our parameters, we’re actively looking to deploy capital in those opportunities,” he explained. “We’d be pleased if we find more opportunities that meet our criteria and fit our platform.

“We’ve had a great experience working with various tenants and counterparties all over Canada and we look forward to hopefully doing more in 2022 and beyond.”

EDITOR’S NOTE:This article was updated after publishing to update Oak Street’s total assets under management, and to clarify that Oak Street’s interest in the office acquisitions totals about $1.5B Cdn. 

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