I attended the Canadian Apartment Investment Conference on September 15th 2010. One of the excellent speakers for the morning Executive Panel was Blair Tamblyn; President and CEO of Timbercreek Assset Management Inc. I really appreciated Carrie Morris; MBA, Vice President, Corporate Governance who replied and answered my six questions about REITs. Timbercreek Asset Management Inc. just sold Timbercreek REIT in August for 15% over the appraised value of the buildings to Restier LP. Timbercreek Asset Management Inc. continues to manage the portfolio.
1 – Not every investor can invest in a private REIT; what are the criteria for doing so?
According to the Securities Act, to raise money in Canada, you must either file a Prospectus or, qualify under certain exemptions that would allow you to issue securities without a Prospectus.Â Companies who issue securities privately do not file a prospectus and therefore must rely on the exemptions that are available. The 2 most popular exemptions are the Accredited Investor exemption or the $150,000 investment exemption.Â To qualify as an Accredited Investor, the investor would need to meet at least 1 of the criteria listed in the attached document.Â To rely on the $150,000, the investor must make an investment of at least $150,000. The logic behind this is that for a Private Placements there is no requirement to file documents or seek approval with the security commission, so they want to ensure that whomever is making this investment has the means to sustain any risk associated with an investment product that has not been blessed by the securities commission.Â This is the same regardless of the structure (ie. Corp, investment fund, REIT, etc.).
2 – What is the major operational difference between publicly traded and private REITs; media coverage was one difference mentioned, are there others?
In terms of operating the real estate, I don’t believe it would be much different, but in our experience operating a private fund is slightly more cumbersome than a publicly traded fund (having managed both).Â With a private fund, you often have investors that invest directly without a broker which typically requires more customer service support than would be the case if there was a broker involved to mitigate some of the questions.Â Distribution cheques must also be cut for all of the individual investors rather than issuing one cheque to a brokerage firm representing the aggregate payment for their clients.Â Also, when a company issues securities privately, they are typically printing and issuing a physical certificate representing the value of the investment.Â A third party transfer agent is usually engaged to print, issue and track all of the outstanding certificates.
3 – Should the Real Estate Market crash (as some are predicting) what would the effect be on Publicly Traded REITs? Private REITs?
The effects to the underlying real estate would obviously be the same, but I believe that equity markets are more sensitive to market conditions and therefore the swing in trading prices would likely be greater than the change in the value of the underlying security.Â Private funds track to the underlying value of the security, so the swings would not be as great.
4 – Apartment Syndication was mentioned as the way some of your REITs began; is this still an attractive option for investors? What are the principles behind this method of investment? Can anyone invest this way?
When the executive panel discussed Apartment Syndication, they were basically saying that they build the portfolio one property at a time by raising a little bit of capital each time they want to buy a building.Â Raising capital publicly is quite costly because there are more more legal and regulatory requirements, filing fees, associated with raising capital using this method, so it is not likely that a publicly traded REIT would be able to use this approach.Â I believe the typical approach would be to start out privately until the company gets to a size where they can obtain a line of credit big enough to help them fund a few acquisitions and then go to market and raise capital to pay down this facility.Â Pension funds are not interested in buying one building at a time (syndicating), they would prefer to buy an existing basket of apartments and have someone else manage them.Â Given that the apartment market in Canada is so fragmented (lots of little owners), there are very few large portfolios in this space.Â That is primarily why we were able to sell the portfolio we had aggregated to a pension fund for a premium to NAV.(Net Asset Value)
5 – If you were to invest your own hard earned money in a REIT (Obviously not your own company) what would you be looking for to make your selection? What would be an indicator of trouble with a REIT? What would be an indicator of superior performance?
A few things to look for when analyzing a REIT would be:
- Leverage – REIT should maintain about 50-60% leverage
- Pay-out ratio – are they paying out more than they are making
- Quality of buildings – A Class buildings will pay-out a lower yield
- How much has the company budgeted in terms of deferred capital – are they prepared to reinvest in the buildings to keep them operating properly and maintain occupancy?
- Distributions – Are they sustainable?
6 – Is there any question I missed that you think would be of crucial importance to investors? If so, please add this information as well.
We usually point out that multi-residential real estate is inflation-hedged because operators are able to pass along any increase in costs attributable to inflation to the tenants by increasing rents.Â And that this class of real estate also tends to be counter-cyclical, for example when interest rates are rising, more people are likely to rent rather than buy.
Many thanks to Mrs Carrie Morris for answering my questions!