Expect to see more real estate IPO filings in the next little while, as the TSX quickly finds itself becoming home to a growing number of industry players whose properties are outside of Canada.
Just last week Inovalis REIT, which will focus on office properties in France and Germany, filed its prospectus, and Milestone Apartments REIT, which owns multi-family properties in the southern U.S., priced its IPO. They add to the lengthening list of TSX-listed REITs with foreign assets – a new phenomenon – and industry sources say there are more on the way.
It's a trend that's generally welcomed by the sector as well as yield-hungry investors. But, given the demand among investors for yield, and all things real-estate related, right now, there are also fears that some bad apples could hit the market as real estate players seek to cash in on the trend. Industry players refer to "build-a-REITs" that are looking to get in on the action.
There are a variety of reasons why a property company in the U.S. or oversees might look to list on the TSX. For one it's easier to get investors' attention in Canada. Another is that Canadian investors are more willing to accept structures such as external management arrangements, which in some instances can see the REIT pay a large amount of fees (often to a company that's related to the REIT's founder or CEO) for property management and other services. It's a set up that's common in Canada where families and private operators play a large role in the industry. Another potential draw to Canada is that a portfolio of U.S. assets faces less competition here from rival U.S.-listed REITs that might have a higher quality portfolio, or a better located portfolio, in the U.S.
"There is currently a significant amount of potential IPO activity and a lot of this activity involves U.S. real estate assets," said Andrew Phillips, managing director and team head of the real estate group at TD Securities. "Some of these are well conceived, strong businesses with good operating platforms that have been around for a while and which are using the Canadian capital markets to further and grow their business. We are also seeing a lot of stories where people are putting together pools of assets and trying to come here to arbitrage the Canadian capital markets, and a number of these are not so well conceived and do not have a lot of appeal."
"Some of these concerns are fair and real," said Ashi Mathur, head of Canadian real estate investment and corporate banking at BMO. "There is concern that if the wrong deals go forward, that could have an impact on the industry."
He said that bankers must ensure they have a very high bar for the quality of companies that are coming in, but added that "at the end of the day the market will keep us in check … In fact, we have seen three companies come forward wanting to go public, where they have spent a lot of money preparing prospectuses and so forth, but they haven't been able to proceed."
Mark Decker, head of U.S. real estate investment and corporate banking at BMO, said Canada is more flexible about external managers, more willing to accept U.S. property portfolios that aren't located in the premier markets, and more focused on yield than on total return.
But those aren't necessarily bad things.
"For the right companies, the Canadian market is absolutely the right home to go public in," Mr. Mathur said.
BMO was the sole bookrunner on the $200-million Milestone IPO and in that instance part of the reason the company sought a Canadian listing was that it can be a bigger fish in a smaller pond.
"They're a midcap player in Canada, they would be a microcap in the U.S.," Mr. Mathur said. "In Canada, they're going to be the largest U.S. multi-family pure play on the TSX. In the U.S., if they went public as a multifamily, they would be a small cap and they would be the thirteenth largest.
"Coming to Canada, you've got the depth of capital, you've got a size consideration, and you've got an intelligent investor base that really understands the REIT universe."
It was not so long ago that a scandal ensnared a number of Chinese-based, North American-listed companies – such as Sino-Forest Corp. – after investors here were hot to trot for all things Chinese. No one is suggesting any resemblance in this instance – when they talk about bad real estate apples, they're referring to lower standards and poorer quality investments, not companies at risk of total collapse. The concerns among some in the sector have institutional investors on alert.
"When foreign entities look to do IPOs here our first question is going to be why do you want to IPO here, and then we move to, do you have a real business, is your growth profile attractive, and does the valuation make sense?" said Michael Missaghie, portfolio manager at Sentry. "What we wouldn't invest in are small REITs made up of a few assets with no real business behind them."