Tips for Assessing a Private REIT

Tips for Assessing a Private REIT

Table of Contents

  • Real estate is a type of alternative investment and is classified as a hard asset. [Jump to this section]
  • In a REIT structure, an investor gains access to pooled ownership of a group, or portfolio, of properties. They can vary across real estate classes, and can be open-ended or closed-ended. [Jump to this section]
  • REITs can be publicly or privately traded (bought and sold), and there are significant differences between the two in terms of valuation methodology, fees, liquidity, and eligibility. [Jump to this section]
  • When considering a private REIT, investors should do their due diligence and consider its operations, management, performance, transparency, fees, liquidity, and eligibility. [Jump to this section]

Real estate is a type of alternative investment, a term defined on WealthProfessional.ca as “assets that do not belong to conventional investment types, such as stocks, bonds, and cash.”[1] Real estate investing may help investors enhance and/or diversify their portfolios. Some investors find the tangible “brick and mortar” aspect of real estate investment an attractive feature that denotes the potential for performance stability.

There are multiple methods of real estate investing. While some investors may prefer hands-on property ownership, others may find more convenience and potential income stability in a Real Estate Investment Trust (REIT) structure without having to worry about the potential stressors that property management can bring.

What is a REIT?

In a REIT structure, a group of properties is offered to investors as a single product, packaged as a portfolio. In other words, when someone invests in a REIT, they have pooled ownership of that entire group of properties.

REITs have been established in Canada since 1993—before then, they were structured as close-end mutual funds (it should be noted that REITs as we know them today are no longer considered mutual funds). From 2009-2019, the collective value of publicly-traded REITs in Canada grew 215% to just over $74 billion.[2]

REITs also saw a significant increase in number in 2008, when income tax rules changed to lower barriers to market entry.[3]

REITs span a multitude of real estate asset classes. These include, but are not limited to:

  • Multi-residential housing (apartment buildings)
  • Commercial properties (industrial facilities, offices, etc.)
  • Retail properties (malls, open-air plazas, etc.)
  • Medical buildings
  • Resorts

Some REITs may focus on only one of these asset classes, while others may purchase properties within multiple real estate asset classes. Additionally, while some REITs invest directly in the properties themselves, there are also mortgage REITs, which invest in mortgages or mortgage-backed securities, with the mortgage interest payments providing investor income.

REITs are often owned by businesses or institutions, with the properties professionally managed. Due to this fact,  REITs can often offer the “everyday investor” an opportunity to invest in the types of institutional-quality real estate properties (such as commercial facilities) that they may not otherwise be able to singularly invest in—and without the headaches of managing those properties. Additionally, the commercial real estate market has also seen increasing purchasing activity and pricing, with multi-family and industrial classes surpassing their 3 year trailing average in quarter one of 2021 alone.4 [second graph on page 5]

Private vs. public REITs

REITs can be classified as public or private investments, depending on where they are/aren’t listed, and how their units or shares are traded.

  • Private REITs, which are classified in Canada as Exempt Market Products (EMPs), are not listed on any stock exchange and are offered under prospectus exemptions. Because they are generally
  •  Public REITs are listed on the stock market. Their shares may be purchased without the investor needing to meet certain criteria (or “exemptions”), and are sold through a standard document called a Prospectus, which is governed under securities law.

There are many additional differentiating factors between private and public REITs:

    1. Valuation. Because a public REIT share is traded on the public market, it is subject to the typical pricing fluctuations, or buyer/seller/media “emotion,” that may accompany daily market activity. By contrast, private REIT units are valued based on the underlying properties themselves, and their associated cash flows. Because of this difference in valuation, private REITs can potentially offer a more stable rate of return than public REITs.
      RENX.ca illustrates the difference between public and private REIT performance amid the 2008 financial crisis: “During this time . . . the public REIT index fell approximately 38 percent. That year, the private apartment index and the broad-based private commercial real estate index experienced positive returns of 6.5 per cent and 3.8 per cent, respectively.”[5]
    2. Discerning acquisitions strategy. Public REITs can face pressure to continue acquiring properties even when conditions aren’t optimal because of available capital. By contrast, private REITs usually only buy properties that fit their investment mandate, meaning management can ensure they’re buying at competitive prices and cash flow yields – which in turn may benefit the investor.
    3. Liquidity. Public REIT units can be traded at any time, whereas private REITs may have their own unique liquidity structures. This may include initial hold periods for purchased units (such as four months), as well as a notice period for redemption of units (such as 30 to 60 days) and redemption limits
    4. Fees. Public REITs must pay ongoing registration fees to list on public market exchanges, and investors are usually subject to purchase and/or redemption fees, as well as management fees paid to their advisor or broker. Private REITs are not required to pay listing fees, however their fee structures may differ, some offering lower management fees than others and commission paid to the distributor of the private REIT.
    5. Qualification to invest. Public REIT investors are not subject to any eligibility requirements, whereas private REITs may require certain eligibility requirements, such as income or wealth thresholds, for investors to qualify. For example, they may need to qualify as an Accredited Investor.

How to assess a private REIT

Private REITs, and private investments in general, may present different risks than their public counterparts. For this reason, some investors tend to prematurely dismiss private REITs as a viable investment option.

It is true that investors should do their own research, and ask the right questions, to ensure a private REIT (or any investment, for that matter) is the right fit for them. If investors do the work to properly evaluate their private REIT investment options, they may be pleasantly surprised to find a hidden opportunity to potentially receive stable returns. Below is a checklist of factors for investors to consider when evaluating a private REIT:

  1. Operations
    • What is the REIT’s business model?
    • What real estate class(es) comprise the property portfolio, and what is the strategy behind asset acquisitions and dispositions? Does it employ a long-term buy-and-hold strategy?
    • How many clients are currently invested?
    • How is the corporation behind the REIT structured?
    • Do the REIT’s operations and corporate management policies align with your values?
    • Does the corporation behind the REIT actively invest in the communities in which it does business?
  2. Management Team & Accessibility
    • What is management’s experience and industry reputation?
    • Is the investment team and other levels of management available to answer your questions about the , general taxation and other areas of importance to you as an investor?
  3. Performance history
    • What is the REIT’s historical performance and track record, both in distributions and redemptions?
    • Does the REIT have a Funds From Operations (FFO) payout ratio of under 100%? Why or why not?
  4. Transparency & Reporting
    • Are the REIT’s audited financial documents and Annual Reports readily available?
    • Does the REIT have an Offering Memorandum (OM) document and is it readily available?
    • Is there an online repository of all reporting documentation for the REIT?
  5. Fees
    • What are the transaction fees, if any?
    • What are the management fees, if any?
    • What are the redemption fees, if any?
    • Are all fees proactively disclosed by the advisor?
  6. Liquidity Constraints
    • Is there a mandatory hold period upon initial investment before you are eligible to redeem your units?
    • Is there a penalty for early redemption?
    • Is there a notice period for redemption before you receive your funds?
  7. Eligibility & Suitability
    • Are the eligibility thresholds to invest proactively disclosed?
    • What is the eligibility of registered plans?
    • Does your advisor evaluate your suitability for the investment based on your previous investment experience, your risk tolerance, and your financial objectives?
    • What is the minimum initial investment?

For investors seeking a long-term real estate investment option that may offer stable returns—without the hassle of property management—private REITs may be a great choice to consider. According to a November 2020 survey of 122 Canadian DB (Defined Benefit) plans, 73% of Canadian DB plans overall currently hold alternative investments or expect to add them, and 96% of plans with more than $5 billion in assets hold them or expect to do so.

However, not all private REITs are one and the same, and investors must do their due diligence to understand the REIT’s strategy, its management team’s expertise, and its historical performance—just as they would before investing in a public REIT.

When carefully evaluated to ensure they align with, among other things, an investor’s ideal portfolio allocation, their risk tolerance, and their financial goals, private REITs may be a smart choice for long-term investment.

Ray Punn
Vice President, Wealth Solutions
Skyline Wealth Management

Ray Punn is an experienced leader in management across the public and private sectors, including the Financial, Automotive, and Private Equity industries. As Vice President of Skyline Wealth Management, he leads a comprehensive team of Advisors, and oversees business operations, marketing, investment management, and investor relations. With a deep understanding of how each component of wealth management contributes to an exceptional investor experience, Ray and his teams focus on building long-term partnerships with Skyline Wealth Management’s valued investors.

References:

[1] Grones, Geraldine. “What exactly are alternative investments?” WealthProfessional.ca, https://www.wealthprofessional.ca/your-practice/practice-management/what-exactly-are-alternative-investments/252467. Accessed 20 July 2021.

[2] Kubes, Danielle. “What you need to know about REITs.” MoneySense, https://www.moneysense.ca/spend/real-estate/what-you-need-to-know-about-reits/. Accessed 9 June 2021.

[3] “REITs as a force for good.” Grant Thornton, https://www.grantthornton.ca/globalassets/1.-member-firms/canada/insights/pdfs/grant-thornton-reits-report.pdf. Accessed 9 June 2021.

[4] “Canada Investment MarketView Q1 2021 ” CBRE,  Accessed 9 June 2021.

[5] Placidi, Greg. “Private REITs: a solid capital growth investment.” RENX.ca, https://renx.ca/private-reits-solid-capital-growth-investment/. Accessed 09 June 2021.

[6] Kozlowski, Rob. “Canadian pension plans boost allocations to alts – survey.” PIOnline.com, https://www.pionline.com/pension-funds/canadian-pension-plans-boost-allocations-alts-survey. Accessed 20 July 2021.

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