As online sales blur lines between retail and industrial real estate, and demands for multifamily developments increase, more real estate investment trusts are moving to diversify their portfolios.
RBC Capital Markets real estate and REITs analyst Pammi Bir moderated a panel of four executives dealing with this diversification at the Sept. 5 RealREIT conference at the Metro Toronto Convention Centre.
Bir noted Canada’s six largest retail REITs combined have active and future development pipelines of about 75 million square feet, which is just over one-third the size of their existing portfolios. The vast majority of those pipelines are for mixed-use assets.
Crombie REIT executive vice-president and chief operating officer Glenn Hynes explained its evolution from a starting point 13 years ago, as a buy-and-hold, grocery-based REIT. Crombie plans to intensify 33 of its 284 properties to achieve three to five per cent annual growth in both adjusted funds from operations (AFFO) and net asset value (NAV).
“We have a development opportunity of $4 billion to $5.8 billion over the next 10 to 15 years with these properties, at a starting point base of $4.6 billion, so it’s a pretty big opportunity,” said Hynes. “So, we have revamped our strategy and approach.
“Our capital allocations changed. Human capital demands of this new direction are being put in place and we’re off to the races. We’re six projects in, with $300 million currently in the ground on the way to a $500-million ongoing investment.”
Thirteen of Crombie’s properties slated for mixed-use redevelopment are in the hot market of Vancouver and form a five- to seven-year development pipeline. A Davie Street project will cost $105 million to build and is projected to have a NAV of $175 million to $200 million upon completion in 2020.
Crombie is partnering on mixed-use developments to learn from companies with good local and asset-class knowledge, while going it alone on retail developments. The goal is to do everything on its own in the next two to three years.
Hynes said things are going well so far. He’s confident Crombie can deliver on its AFFO and NAV growth goals and add it to an annual six per cent distribution to achieve “an annual nine to 11 per cent return on a business that’s extremely stable, resilient and non-cyclical.”
Crombie will have sold $800 million in assets, 15 per cent of its business, by the end of 2019. The proceeds will help fund its developments because Hynes said it’s difficult to raise equity when the trust trades at 25 per cent below NAV, as it was a year ago.
Crombie also owns 50 per cent of Sobeys distribution centres in Toronto, Montreal and Calgary, and may acquire the balance of those over time. It also invested $100 million in an online customer fulfillment centre for Sobeys in Montreal earlier this year.
Hynes believes the mixed-use and industrial sectors will comprise 15 to 25 per cent of Crombie’s income over time. He said that ratio could be higher if all of the mixed-use developments included residential rental buildings, but some will include a condominium component, which will be sold.
“We want to optimize the value opportunity, but without changing the investor’s view that we’re still really a retail play,” said Hynes. “We’re doing it in a prudent manner and a risk-adjusted manner that’s consistent with our values and strategies.”
SmartCentres president and chief executive officer Peter Forde said his retail real estate-based REIT’s diversification strategy is based on making more and better use of the land it already owns. This includes:
* 50 acres of undeveloped land in Vaughan(at the north end of the Greater Toronto Area’s Yonge-University subway line) which it owns 50-50 with SmartCentres founder Mitchell Goldhar;
* its Revival 629 Film Studios on Toronto’s Eastern Avenue, which includes development land next door;
* and a 42-acre property at Major Mackenzie Drive and Weston Road in Vaughan originally purchased for retail development, which now encompasses about half the site. Updated plans include townhomes, self-storage with SmartStop, two seniors homes with Revera, plus three or four apartment and/or condo buildings.
Forde said SmartCentres will develop the buildings and its partners will take over from there. It’s about to build a 35-storey apartment building in Vaughan and, when it’s ready in two years, will manage it internally. The REIT recently hired a VP of residential and has staff in house with experience managing apartments.
Farther into the future, SmartCentres could intensify sites with shrinking retail by knocking it down, or moving it around and building on top of it.
SmartCentres owns 157 shopping centres and has identified 94 properties with intensification potential. It plans to work on 256 different intensification initiatives on those 94 properties in the next 10 years.
Even if all of these projects move forward – and there are about 150 people on the payroll focused on development – Forde said its retail properties will still account for about 80 per cent of net operating income.
“We know the properties and have always done things with a very hands-on approach from a development point of view,” said Forde. “We supplement that with consultants as appropriate.”
Artis REIT has owned office, industrial and retail properties since its inception in Western Canada. It expanded into the United States and Toronto starting in 2010.
“Our U.S. strategy has been focused on central corridors,” said executive VP of investments and developments Kim Riley. “We’re in capital cities and university cities, and we only own office and industrial in the U.S.”
Artis has multiple offices and people on the ground to help manage all of its assets. While Artis isn’t currently considering any new markets, Riley doesn’t believe such expansion is more complicated as long as the groundwork has been done beforehand.
She said the biggest challenge is “communicating the strategy of why we moved into those markets.”
CI Investments portfolio manager Joshua Varghese oversees a $4-billion listed real estate portfolio.
The firm prefers to do most diversification itself through stand-alone vehicles, unless it can integrate and create a platform of assets with different types of properties.
“Existing real estate companies have to think defensively about their portfolio, but the other step is for them to look at the canvas of assets they have, and try to see what other types of value there is within them,” said Varghese.
While there are opportunities for consolidation of REITs, Varghese advised them to be careful and ensure a very methodical approach is followed.