As Canadian REITs surge in the GTA…are they here to stay?

As Canadian REITs surge in the GTA…are they here to stay?
August 28, 2012 GTA Suburban
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In the first blog post we took a brief look at REITs and their success to date.  Now, we would like to understand what REITs are active in the Greater Toronto Area (GTA) and what impact this may have on the GTA.

Let’s first look at a sample list of REITs present in the GTA…..

Dundee REIT Crombie REIT Artis REIT (AX) Chartwell REIT
RioCan REIT H&R REIT PIRET (AAR) Cap REIT

Of this list, let’s focus on Artis REIT and Dundee REIT given the activity in the GTA as of late.  A brief description of each REIT can be found below.

Dundee REIT (D-U)

–          Although it is classified as a “diversified” REIT, it is really only diversified in terms of geography.

–          They provide unit holders with income from Canada’s many different regions, but the properties they own are definitely focused in the area of urban and suburban, office & industrial buildings, & are disproportionately balanced towards Toronto.

–          The Trust owns over 16 mill SF of leasable CRE across Canada.

–          Like most Canadian REITs, they seek to acquire commercial properties that will pay long-term income streams.

–          Their goal is then to pass these profits on to unit holders, while taking advantage of Canada’s special tax status for real estate investment trusts.

–          Dundee REIT is now the largest landlord of office space in the suburban west GTA market.

In July it was announced they closed on Scotia Plaza, a 68-storey landmark tower in downtown Toronto with the majority leased to Scotia Bank for $1.2-billion, setting a new record price for a single building sale in Canada.

Artis REIT (AX)

–          Artis is a diversified Canadian real estate investment trust investing in office, industrial and retail properties.

–          Since ’04, Artis has executed an aggressive but disciplined growth strategy, building a portfolio of commercial properties in Canada and the United States, with a major focus on Western Canada.

–          Has recently been fairly active in the GTA with office and flex office/industrial acquisitions. They do not have their own internal property management team but have paired up with industry leaders on the asset and property management side.

When considering buying a REIT and researching the value, a common checklist to consider on the stock side is the following; asset base in portfolio, location of assets (concentrations), distributable income and level of depreciation.

Of that list, 2 stand out as it relates to the leasing market, each helping companies understand the risks (if any) associated with REITs as landlords:

  1. Location of assets (concentrations)
  2. Asset base in portfolio

Another important item to consider, that is not stated above, is the size of the REIT and if they have internal or external property management resources.

What does this mean for Tenants?

If, for example, you are a Tenant in the marketplace looking for advice from a CRE broker to better understand the ownership structures and pros and cons of leasing space in a REIT-owned building, we would recommend inquiring about:

  • Location of assets (GTA only, across Canada, downtown/suburban)
  • Asset base in portfolio (industrial, office, retail, mixed)
  • The REIT’s motivation for acquiring the asset – was it part of a portfolio sale?
  • The price the REIT paid to acquire the building.

If the building was not a core acquisition but rather part of a portfolio of buildings sold to the REIT, it’s possible the building could be flipped or sold, so a tenant evaluating a newly acquired REIT asset may expect a change of landlord over its tenancy.

How much above or below market a REIT pays for its assets can give an indication of its rent expectations going forward.  In today’s market, REITs are paying top dollar to acquire buildings, and in turn, often have lofty expectations in rent to justify the purchase price.

 Our Market View on Dundee REIT:

  • Tremendous growth and a near monopoly position in some sub-markets with the recent acquisitions of WhiteRock REIT and other assets
  • Growth expected to continue as long as interest rates remain low
  • Leasing challenges ahead as it will take time for its leasing teams to understand the recent acquired assets and how best to position them in the market;
  • Dundee is making fast changes to acquire talent on the leasing side and organize its teams across geographies and product lines – this will delay decisions and some assets will be less of a priority for upkeep and attention.
  • Paying top dollar for new acquisitions – tenants of newly acquired Dundee REIT buildings need to prepare for rent increases come renewals, which in certain circumstances could be significant.

Our Market View on Artis REIT:

  • Strong performer with modest pace of growth
  • Expanding its positions through acquisitions in eastern Canada
  • Building its Team with the addition of Asset Managers across the GTA
  • Making efforts to understand leasing market trends and relaying on industry experts both external brokers for third party leasing and in the property management side to support leasing efforts

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