U.S. versus Canadian REITs: a comparison.
It's no secret that Canadian REITs are quickly discovering the benefits of investing in American-based seniors housing and care communities. Conversely con·verse 1
intr.v. con·versed, con·vers·ing, con·vers·es
1. To engage in a spoken exchange of thoughts, ideas, or feelings; talk. See Synonyms at speak.
2. , U.S. companies are becoming interested in forming their own Canadian REITs. Executive Circle members of the National Investment Center for the Seniors Housing & Care Industry (NIC (1) (Network Interface Card) See network adapter. See also InterNIC.
(2) (New Internet Computer) An earlier Linux-based computer from The New Internet Computer Company (NICC), Palo Alto, CA. ) were recently given an unusual opportunity to hear about the structural advantages enjoyed by Canadian REITs and how they view the U.S. market. The following are highlights from the call, as moderated by yours truly. The guest speakers were Robert Ezer, CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. of Chartwell Seniors Housing Chartwell Seniors Housing REIT (TSX: CSH.un) is a real estate investment trust in Canada that was founded in 1999. It operates seniors housing properties in six of Canada's provinces and four in The United States. REIT REIT
See: Real Estate Investment Trust
See real estate investment trust (REIT). , a leading Canadian REIT now investing in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. ; Alex Avery, director of real estate and REITs Institutional Equity Research at CIBC World Markets CIBC World Markets is the investment banking division of the Canadian Imperial Bank of Commerce. It helps governments, large companies, and other large institutions obtain capital and credit and is a primary dealer in U.S. Treasury securities. , the number one underwriter of REITs in Canada; and Stephen Pincus, partner and chair of the Income Funds Group for Goodmans, LLP LLP - Lower Layer Protocol , a leading law firm representing many of these REITs making cross-border transactions.
How big is the Canadian REIT industry, and how does it compare to that in the United States?
Avery: There are more than 25 REITs in Canada with a combined market capitalization Market Capitalization
A measure of a public company's size. Market capitalization is the total dollar value of all outstanding shares. It's calculated by multiplying the number of shares times the current market price. This term is often referred to as market cap. of over $23 billion (Canadian), roughly $20 billion (U.S.). By comparison, U.S. REITs have a total market capitalization Total Market Capitalization
The total market value of all of a firm's outstanding securities. of $350 billion, making them about 17 1/2 times as large as the Canadian REIT industry.
Within that universe, there are three Canadian seniors housing REITs, with a combined market capitalization of about $2.2 billion (Canadian). That compares to almost $20 billion in the U.S. for healthcare REITs. The Canadian seniors housing REITsyield from 7.1% to 9%, or about 7.8% on average. The largest is Retirement REIT, with a market capitalization of about $860 million. They have a more than 24,000-resident capacity, with about 90% of their properties located in Canada. Second largest is Chartwell, with a market capitalization of about $830 million and a resident capacity of almost 20,000. Again, most of these properties are located in Canada. The third is Sunrise Senior Living This article or section needs copy editing for grammar, style, cohesion, tone and/or spelling.
You can assist by [ editing it] now. REIT, with a market capitalization of about $570 million, and a capacity of about 4,000, with about 80% located in the U.S.
How large is the public market for Canadian REITs? How many companies are represented? Who invests in them? And how are they perceived as an investment class?
Avery: The Canadian seniors housing industry in general is about one-tenth the size of the U.S. industry, in line with the general population comparison. Like the U.S. industry, the Canadian industry is highly fragmented in terms of ownership. As to who invests in Canadian REITs, the Canadian investor base is more retail-oriented. This is due in part to the trust structure, which makes it available to virtually all businesses, including those without any real estate holdings. This wide variety of available investments has made trust investing in Canada popular among retail investors Retail Investor
Individual investors who buy and sell securities for their personal account, and not for another company or organization.
Retail investors buy in much smaller quantities than larger institutional investors. . We're starting to see, however, increased interest from Canadian, U.S., and other international institutional investors Institutional Investor
A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. in the sector.
In the United States, seniors housing and care has always been viewed as a riskier asset class, compared to apartments, office, industrial, and retail. How does that match up in Canada?
Avery: The seniors housing industry has been viewed as a less risky asset Risky asset
An asset whose future return is uncertain. by Canadian investors, largely due to structural differences. That's because our seniors housing industry has been focused on a narrower level of service offering than available in the U.S., that traditionally being retirement homes and long-term care long-term care (LTC),
n the provision of medical, social, and personal care services on a recurring or continuing basis to persons with chronic physical or mental disorders. . Retirement homes in Canada are somewhat equivalent to the light-care assisted living as·sist·ed living
A living arrangement in which people with special needs, especially older people with disabilities, reside in a facility that provides help with everyday tasks such as bathing, dressing, and taking medication. sector in the U.S., and the long-term care sector in Canada is similar to the U.S. skilled nursing sector, being largely government funded and, traditionally, less involved with subacute subacute /sub·acute/ (-ah-kut´) somewhat acute; between acute and chronic.
Between acute and chronic. care segments.
What are some of the key differences between Canadian and U.S. REITs?
Pincus: About eight or nine years ago, we came up with this concept of a senior care transaction in which we could have the properties held in the trust and lease those properties to an operating subsidiary An operating subsidiary is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity and rolling stock. that would carry on the business of managing the facilities. That was a fundamental change in the Canadian trust sector. So I would say the primary difference between Canadian REITs and those in the United States is this ability to operate a business and, in the senior care sector, to manage and operate nursing homes, assisted living, and so on.
Another difference is that the REIT itself, which is the public entity, the trust, cannot engage in an operating business. But any subsidiary--a corporation, an LLC (Logical Link Control) See "LANs" under data link protocol.
LLC - Logical Link Control , a limited partnership, and so on--can engage in operations, and that obviously gives the Canadian REITs a lot of flexibility.
What are other rules and requirements to qualify as a Canadian REIT? Must you own any property in Canada or can all of your real estate be in the United States?
Pincus: There's no requirement to own anything in Canada. You could structure a Canadian REIT with operations and properties only in the United States. However, you need to at least have a head office in Canada. You also need to have a board here, because the REIT is in the form of a trust, and you have to have at least a majority of the trustees in Canada. But you can have some non-Canadians, some U.S. resident trustees, as well. Another requirement is that a REIT's senior management would have to go to Canada for board meetings about four to six times a year.
Let's say a company wanted to raise $500 million of equity in the Canadian market and that the value of the equity in those properties was approximately $500 million. How much of that could be sold to the public and how much would have to be retained by the sponsors?
Pincus: The ideal size for an IPO (Initial Public Offering) The first time a company offers shares of stock to the public. While not a computer term per se, many founders, employees and insiders of computer companies have found this acronym more exciting than any tech term they ever heard. these days is somewhere between $150 million and $250 or $300 million (Canadian). Certainly, one of the interesting things about the Canadian market is the ability to absorb smaller size deals than in the U.S. You've got some IPOs that are quite a bit smaller than that, and you've got others that are a lot bigger--for example, there have been trust IPOs that have been in the billion-dollar range. But there are no hard-and-fast rules about what the sponsor needs to retain. I think a typical structure in the example you've given would be for the IPO to be about 50%. So you'd do an IPO at about $250 million, with the balance to be retained.
One technical rule is that a majority of the ownership of the REIT has to be based in Canada. So typically you'll look for at least 50% plus one to be held by Canadian residents. There are structures for U.S. private equity sponsors to have more than 50%, but that's typically held down at the U.S. subsidiary level, and then ultimately they cash out through a liquidity mechanism through the Canadian markets over time as the enterprise grows. But on the basis of the 50% limit for nonresidents below 50%, you need to consider that in structuring the capital.
The Canadian regulatory environment tends to be more balanced than the United States. It's a lot less litigious litigious adj. referring to a person who constantly brings or prolongs legal actions, particularly when the legal maneuvers are unnecessary or unfounded. Such persons often enjoy legal battles, controversy, the courtroom, the spotlight, use the courts to punish . The regulatory system is not quite as complex, but we do have governance rules and requirements that are similar to those in the United States, such as the Sarbanes-Oxley rules.
What's the difference in valuation between Canadian and U.S. REITs? Can I get a higher valuation in Canada?
Avery: If you look on a general basis at the valuation of Canadian REITs and U.S. REITs that focus on seniors housing, they are relatively comparable, with both trading at about 13 times 2006 FFO FFO
See: Funds from operations . On the surface, it doesn't appear that there is a strong valuation motive for choosing a Canadian REIT structure.
That being said, I think the motives for choosing a Canadian REIT structure have more to do with the structural differences between them, notably the ability to own and operate the business of the seniors housing. But, again, there are also drawbacks to the Canadian REIT structure, including currency risk management and having to deal with the cross-border tax structure. And for Canadian REITs looking to buy in the U.S., they have the challenge of achieving economies of scale for management of these properties, given the magnitude of the U.S. market.
Let's talk about Chartwell's specific U.S. strategy. How much do you expect to invest over the next two years here in the United States? What types of properties are you going to target?
Ezer: We have aligned ourselves with a capital partner, ING Real Estate Group out of Australia. They're our joint venture partner exclusively on assets in the United States. Together we acquired just under $300 million in eight properties last year. It's our goal to do at least in the $300 to $400 million range in 2006 and in 2007. Our target is independent living and private-pay assisted living. We prefer not to be exposed to any kind of funding fluctuation. Everything that we've bought today that has a component of care has been private pay with no Medicaid or Medicare.
On the development front, we are looking to develop in the U.S., but are going to start with internal growth projects in our Meridian portfolio, with about 6,800 units under development in Canada.
What about your relationship with Horizon Bay Senior Communities? Does that give you any advantage?
Ezer: I think it certainly does in terms of the speed at which we would like to operate in the U.S., considering a lot of Canadian companies This is a list of companies from Canada.
Directory: A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Current Companies came down to the United States and got clobbered. We always felt that we needed to operate with someone who understands the business, the industry; has the contacts; and knows the legislation and licensing requirements, so we weren't operating in a vacuum from a distance.
So we set up a management company called Horizon Bay Chartwell, owned 50% by Horizon Bay and 50% by Chartwell, to manage the properties in the United States. And that gives both companies the ability to even look at cross-border synergies as we continue to grow our businesses. We felt much more comfortable with a management partner in the United States, as opposed to going it alone. Over time, as we learn the business and get a better comfort from operating, that may change.
Anthony J. Mullen is Research Director, National Investment Center for the Seniors Housing & Care Industry. To hear a recorded version of this call, which featured more discussion on the differences between American and Canadian REITs, the timing and costs for a U.S. operating company operating company
A business that engages in transactions with outsiders. to go through an IPO to become a publicly traded Canadian REIT, and liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts.
A type of proceeding pursuant to federal Bankruptcy mechanisms, visit "Executive Circle" at www.NIC.org or call (410) 267-0504. Founded in 1991, NIC is a nonprofit organization Nonprofit Organization
An association that is given tax-free status. Donations to a non-profit organization are often tax deductible as well.
Examples of non-profit organizations are charities, hospitals and schools. that uses proceeds from its annual conference (next scheduled for Sept. 27-29, 2006, in Chicago) to provide data and research to facilitate informed investment decision making for the seniors housing and care industry. To send your comments to the author and editors, e-mail email@example.com.