June 9, 2015

REITs Disappoint, Investors Seek Real Estate Private

Equity Alternatives
Canadian REITs have been under fire for underperformance, negative stock yield, low
payout ratios and low dividends. Increasingly, investors have been leaving REITs for
Alternative Investment products in droves. The last two and a half years has seen
dreadful performance from the big name Canadian REITs like Calloway, RIOCAN &
Dream. Investors in turn have been calling for increased scrutiny on these self-regulated
(REALpac) structures calling for decreases in transaction costs and eliminating potential
conflicts of interest that have been known to routinely occur because of the tax exempt
structure.
Last 2.5 years of total returns (no brokerage fees included) and Current Dividend Yields:
Company
Total Return Current Dividend
Caloway REIT
+0.66%
5.2%
Canadian REIT
+1.9%
3.72%
Boardwalk REIT
-9.34%
3.24%
Allied properties REIT +1.9%
3.72%
Morguard REIT
-4.26%
3.72%
RioCan REIT
+3.59%
4.92%
Dream Office REIT -31.06%
8.4%
TSX Index over period+21.91%

Flight from Risk into Safer Investment Structures

The sell bell rang very hard in 2008 where stock prices plunged throughout, the real
estate sector down over 50% in that short period, but taking, stock prices years to
recover. That bell has been ringing again since January 2013, for the majority
performance has been flat to negative or slightly above 0% over the last two and a half
years. Essentially, Investors are paying REITs to take their money. But being the stock
market, that plunge was divorced from fundamentals and many REITs had considerable

cash yet their stocks were plunging along with the overall market. For some REITs with
multifamily assets, the overall fundamentals actually improved showing decreased
vacancy rates across the country. Investors are know that these underlying
fundamentals are still strong, and the REIT is not yielding that risk to reward tradeoff.
Causing many investors to sell REIT shares, trading the dividend and negative yields for
the safety of a predictable yield in government bonds or other forms of high yield
corporate bonds, which have performed considerably better in the near term with far less
volatility. Being that the real estate market fundamentals are still intact, investors are
diving into alternative portfolio construction and there real estate alternatives. Growing in
popularity is private real estate asset managers or Real Estate Private Equity firms the
difference being the flexibility in Private Equity funds. These funds exchange the stock
market volatility for a set distribution or dividend rate generated by purchasing
commercial property. Some well-known and unique private funds in Canada include Fiera
Properties, Trebuchet Capital Partners, Kingsett Capital, and Partner One Capita.
These funds can differ widely and the potential investors are urged to get detailed
information prior to any investment. One of the perceived pitfalls is a so called lack of
liquidity, but some funds allow investors to redeem all or part of their capital similar to a
mutual fund. This is the easiest way to invest outside the stock market, fees tend to be
well heeled in, and fund lives are fixed and set. The best funds have around a 5 year
lifespan. Another well-known way to gain exposure to real estate is to buy property
directly. This is day-to-day management and is not for the faint of heart or part, part time
investor. But those willing to put up personal guarantees in case of bankruptcy with
substantial down payment (+25%) cash can roll up their sleeves, and buy a small
apartment building.
Sweat Equity & Just Plain Equity
For those not willing to collect rent, paint, schedule midnight plumbers & evict tenants,
there is an option to employ a property manager. Fees range but generally managers are
paid on a percentage of rent collected with bonuses for new rentals, renewals. Additional
costs include added surcharges for contracting out regular maintenance work. Owners
should expect to pay between 15% to 24% of the revenue of the building including
maintenance costs per year- property tax not included. One bonus over commercial
property is the exclusion of GST on the sale of multifamily property. In Canada, new
small buildings with less maintenance issues and repair have not been widely built in the
last 30 years here. These aging 5-50 suite apartments make getting return over a GIC
difficult for the most part. The overlooked issue is real rate of return, where the property
is frequently cash flow negative, (rents - mortgage - costs= less than zero) make lenders

routinely require more than 40% down. What buyers of this kind of property hope for is
blind speculation in a rise above inflation to make a return when they divest. Gamblers,
are advised to pay an accountant for economic analysis and hiring of building inspector
prior to purchasing. Alternative multifamily funds promising high single distributions
should be avoided, most distributions are routinely deferred to the end of the fund,
causing most of the yield from the speculative sale of the property, 5 or more years down
the line
Investors Seek Real Estate Rewards without Excess Risk
MICs or Mortgage Investment Companies are also a way to gain alternative exposure to
property. MICs do this by underwriting mortgages, if the mortgage holder defaults, then
the MIC gains possession of the asset. Check closely as not all investors get their
investment directly secured in the investment structure, the same as buying a common
share. MIC investors can expect to return of medium to low single digit returns with
carefully screening of management fees and asset classes. For the investor willing to do
a bit of homework, Real Estate Private Equity and MICs can offer diversity without the
volatility of listed real estate investment trusts