RealREIT 2012

September 21, 2012

By James Speakman

As lead counsel to two publicly-traded REITS and several other private real estate investment trusts, mortgage trusts and limited partnerships, I try to attend the RealREIT conference held each September in Toronto. The conference presentations on the state of Canadian capital markets for real estate are relevant to our clients who are actively raising capital for their real estate ventures. As well, there is usually quite a bit of discussion about the commercial property markets.

The ninth annual RealREIT conference held on September 19, 2012 included several individual presentations and panel discussions. As a few sessions were held concurrently, and because I was called out to help a client negotiate an agreement during part of the day, I was only able to attend about half the sessions. This report is therefore shorter than it could have been. However, having spoken with a few colleagues who attended sessions I did not, I understand that overall the messages were generally the same.

As in many previous years, the conference was opened with a presentation by Carolyn Blair, Managing Director, RBC Capital Markets Real Estate Group, on the state of the Canadian REIT market. Ms. Blair reported that the REIT market remains very strong, having out performed every other public market sector in terms of overall return, liquidity and volatility since 2008. Highlights of Ms. Blair's presentation included:

In summary, Ms. Blair stated that in an environment where GDP growth is modest, interest rates are low and expected to remain low, commodity prices are below their recent peaks and the U.S. economy is showing signs of recovery, it is a good time to invest in real estate through an investment in REITs.

William Wong, also a Managing Director of RBC Capital Markets Real Estate Group, moderated a panel discussion on whether the "good times" for real estate can continue. Panelists included Steve Carroll, Managing Director and Senior Global Portfolio Manager, CBRE Clarion Securities; Tom Dicker, Portfolio Manager, Dynamic Funds; Dennis Mitchell, Chief Investment Officer and Senior Portfolio Manager, Sentry Investments; and Michael Smith, Managing Director, Real Estate Equity Research, Macquarie Securities Group. Generally, the panel agreed that, indeed, the good times will continue, but with overall returns tempered from those in the previous three to four years. Overall, the panel predicted total returns on the TSX-listed REITs of 8% to 12% in 2012. Other highlights of this panel discussion were:

Andre Kuzmicki, Executive Director, Program in Real Estate and Infrastructure, Schulich School of Business then moderated a panel discussion on "What Role Can REITs Play in Pension Fund Portfolios: The Canadian versus the United States Experiences". The panel was comprised of senior pension fund trustees and advisors, William Briscoe, Managing Director and Chief Operating Officer, Triovest Realty Advisors; Michael Latimer, Executive Vice President & Chief Investment Officer, OMERS; John Parsons, Managing Director, MacGregor Associates; and Sharon Sallows, Director, Ontario Teachers Pension Plan; Trustee, RioCan REIT; Trustee, Chartwell Seniors Housing REIT.

The panel quickly stated that, in fact, REITs generally have no role to play in pension fund portfolios, that pension funds prefer direct investment in real estate properties and have sophisticated internal management teams in place to identify and manage real estate. As such, they do not need to rely on REITs to identify or manage real estate for them. This is contrasted with the United States, where pension funds regularly invest in REITs and enter into joint ventures and partnerships with REITs for investment and development properties.

At the same time, the panellists suggested that as the Canadian REIT marketplace continues to gain scale and market share, REITs may become attractive investment for pension funds (particularly smaller funds) seeking investment in a particular market sector or seeking access to real estate generally (as the supply of quality Canadian properties continues to dwindle).

I then attended a panel discussion moderated by Sandy McNair, President, Altus InSite, on challenges in operating a REIT in today’s market environment. The panel was comprised of Tom Burns, Executive Vice President & Chief Operating Officer of Allied Properties REIT; Steve Evans, Co-Chief Executive Officer, Pure Industrial REIT; and Louis Forbes, Executive Vice President & Chief Financial Officer of Primaris Retail REIT.

When asked what challenges they have to balance in operating their businesses, answers included balancing the temptation to quickly re-lease vacant retail space to the first available tenant versus the need to evaluate the overall needs of the property. Another balancing challenge for a growth-oriented REIT such as Pure Industrial is to match property acquisitions with the availability of cash-flow. In terms of what issues worry them in the operation of their business, the panellists all mentioned interest rates and the consequences of interest rates rising, particularly if those increases were not matched by economic growth.

I was not able to attend any of the afternoon sessions. However, in speaking with colleagues who did, it seems that the messages were the same as in the morning: