“We were able to lock in costs in early 2022, and because of that our development spread is looking very favourable, with leasing rates at 20 percent above initial forecasts”

Kevan Gorrie, Granite Real Estate Investment Trust

“We’re not exposed to the debt market; we’re exposed to the cost of debt. We are extremely low leverage for the asset class”

Mark Kenney, CAPREIT

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How leading REIT CEOs navigate markets

Middlefield REIT CEO round table: Real estate thought leaders explain why their companies are built to succeed in the current market environment

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Dean Orrico

Middlefield

Kevan Gorrie

Granite Real Estate Investment Trust

Mark Kenney

CAPREIT

Industry experts

AS NEWS about Canadian and international markets continues to oscillate between doom and gloom, one investment vehicle is outperforming the status quo. With increasing inflation, rising interest rates, and a global economy on the cusp of recession, real estate investment trusts (REITs) can still be relied upon to add diversification and higher yield with comparatively low overall risk. At a round table hosted by Middlefield president and CEO Dean Orrico, industry experts Mark Kenney, president and CEO of CAPREIT (Canadian Apartment Properties REIT), and Kevin Gorrie, president and CEO of Granite Real Estate Investment Trust (Granite REIT), shared their insights about current trends and discussed strategies for leveraging macro- and microenvironments across the residential and industrial sectors. CAPREIT and Granite REIT have been long-time core holdings of Middlefield’s award-winning real estate funds (ETF | Mutual Fund). Canadian-based Granite REIT, specialists in the acquisition, development, ownership, and management of logistics, warehouse, and industrial properties throughout North America and Europe, combines a proactive management approach with strategic capital allocation to maximize total returns for unitholders. With 139 investment properties in their portfolio representing over 57 million square feet of leasable area, Gorrie says he’s bullish about industrial REITs in today’s climate. “From a sector fundamental perspective and considering what Granite REIT focuses on, logistics and e-commerce still remain very strong,” says Gorrie. “The overall vacancy rate in Europe is three percent, the US vacancy rate is just under three percent as of the second quarter, and for the first time in history, Canada vacancy rates are averaging around one percent.”

Both Gorrie and Kenney agree undersupply raises questions around regulations and stymied zoning which they attribute to challenges across various levels of government. Real estate – the great hedge against inflation While real estate is often viewed as the great hedge against inflation, today’s market is seeing a pullback in REIT trading prices by close to 20 percent. Orrico puts this conundrum to fellow panelists, asking if investors will see a recovery. “I firmly believe investors will be vindicated,” says Gorrie. “There’s a valid concern about the rise in the cost of borrowing, but we are not a highly leveraged buyer. While a lot of private equity firms leverage at 75 percent, we finished the second quarter at just under 28 percent.”

Gorrie explains that a pivot in the strength of the company’s liquidity and a focus on buying back units in lieu of pursuing acquisitions is making their current share price very attractive. With interests in over 67,000 suites, townhomes, and land-leased community sites, and a total asset value exceeding $17 billion, growth at CAPREIT is equally robust. “CAPREIT focuses on the mid-tier, mass market, under-three-dollar-per-foot monthly rent properties,” explains Kenney. “Fundamentals are rock-solid, and the underlying story is incredibly strong – but it’s not a story about demand; it’s a story around undersupply.”

This part of the equation is something Gorrie says is often ignored, noting that the best assessment approach amid inflationary markets is a focus on the fundamentals – a strong balance sheet that drives dividend growth and cash flow. Kenney puts a finer point on this issue with a reminder that where residential buildings are concerned, the focus has been on yield growth. He advises investors to do their due diligence around NAV methodologies, noting that calculations are conducted differently among different management companies. CAPREIT uses three different appraisers and conducts a management review every quarter, which Kenney says carries more weight than a discretionary NAV. “We’re moving in on $700

million to $1 billion in dispositions this year, and we’re selling assets at above IFRS value,” he says. Undersupply, development charges, and the high cost of construction Despite expansion into growth markets throughout Canada and internationally, Gorrie says the bulk of Granite industrial development right now will be in the US. “Of the five and a half million feet we’re developing this year, approximately four and a half million is in the US. We were able to lock-in costs in early 2022, and because of that our development spread is looking very favourable, with leasing rates at 20 percent above initial forecasts.” At this, Kenney reiterates that CAPREIT are buyers and not builders. In other words, they’re in the business of raising equity and matching it to acquisitions that allow for value-added capital investment and unit price accretion. “That’s why we issued over $1.4 billion in equity in an 18-month period. It’s because we don’t develop,” says Kenney. “We do, however, sit on Canada’s largest residential landbank, which is not fully factored into our IFRS valuation and doesn’t take into account development potential.” Kenney adds that CAPREIT has been buying new assets in Kelowna and Victoria, BC as well as Ottawa and Quebec City, and always at the three-dollar-per-foot monthly threshold.

Interest rates and cap rates Interest rates can cut both ways. When a portion of the balance sheet is borrowed, it is a drag on cashflow, but it also has an impact on valuations. “We are in a very fortunate position in the apartment space to have guaranteed renewal of CMHC debt financing,” says Kenney. “We’re not exposed to the debt market; we’re exposed to the cost of debt. We are extremely low leverage for the asset class.” Kenney says CAPREIT looks for quality non-institutional assets that are in potential development locations. “We are one of the

only REITS in the last quarter writing down our assets in the apartment space because there were no trades to compare to. We expected the suburban assets to get hurt, but so far there’s no evidence of that. They’re holding up remarkably well.” Gorrie says the industrial space saw a difficult second quarter for the same reasons Kenney points out. “We were relatively confident the discount rates would move, so we adjusted our discount rate across the entire portfolio,” he says, noting the expectation for the third quarter is much the same.

What’s ahead Panel members agree that judicious geographic diversification that includes a significant footprint in Germany, western Europe, and the US has buoyed REIT fundamentals. For Canada to measure up amid market volatility and zoning constraints, panelists say a lot must be done to improve municipal regulations and by educating government. “All industries have an obligation to educate government on the issues their businesses face,” says Gorrie. “Politicians can’t be expected to be masters of all industry knowledge. We have an obligation to open discussions across all levels of government – federal, provincial, and municipal – because different aspects of real estate are within the purview of each.”

Building resilience into the supply chain is a worthy goal that panelists say depends on regulatory bodies taking a page from their international counterparts to help direct investment into domestic interests. Meanwhile, diversified portfolios at both CAPREIT and Granite REIT are what’s placed the companies in enviable positions, and a key reason why they make up the largest weightings within the real estate strategies at Middlefield.

Logistics and e-commerce, Granite REIT

The overall vacancy rate in Europe is 3%, the US vacancy rate is just under 3% as of the second quarter, and for the first time in history, Canada vacancy rates are averaging around 1%

Middlefield is an asset management company founded in 1979 with the goal of creating innovative investment solutions. We are independently owned, answering only to our clients. The team is not burdened by the distractions faced by public companies, allowing them to focus on what matters most – the satisfaction of financial advisors and investors. With over 40 employees and over $2.5 billion in assets under management, Middlefield has a proven track record of providing investors with access to ever-evolving equity income investing trends.

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With over 30 years of experience in the multi-family sector and as president and chief executive officer, Mark Kenney is actively involved in creating and implementing the strategic vision for the organization through the direction of company policy and oversight of the crucial divisions within CAPREIT, including property management operations, marketing, procurement, development, and acquisitions.

president & CEO, CAPREIT

Mark Kenney

Kevan Gorrie joined Granite REIT as president and chief executive officer on August 1, 2018. With over 20 years of corporate real estate experience in Canada, the United States, and Germany, Mr. Gorrie most recently served as the president and chief executive officer of Pure Industrial Real Estate Trust (TSX: AAR.UN), where he successfully grew and led the business until its strategic sale to Blackstone Property Partners and Ivanhoé Cambridge for approximately $3.8 billion in May 2018.

president & CEO, Granite Real Estate Investment Trust

Kevan Gorrie

Dean Orrico brings over 35 years of investment experience to his role as president and chief executive officer of Middlefield Capital Corporation (MCC), and has been employed by MCC since 1996. Dean is a respected member of the investment management community, having spent many years educating financial advisors on the trends and developments in the capital markets in Canada and abroad. He is committed to excellence and integrity in funds management and is responsible for overseeing the business development and expansion of Middlefield's asset management business, as well as being lead manager of Middlefield's real estate strategies.

president & CEO, Middlefield

Dean Orrico

Canada’s leading REIT by market cap

CAPREIT issued over $1.4 billion in equity in an 18-month period

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