According to Neil Downey, a managing director and real estate analyst at RBC Capital markets, the evidence is beyond a reasonable doubt.
What’s less clear is the motives behind the news that one real estate investment trust is the largest shareholder in another real estate investment trust.
In a note to clients this week, Downey said he has been convinced “for some time” that RioCan REIT (REI) has a major stake in Canadian Apartment Properties REIT (CAR.) Now “with Q1/16 disclosures, we now see evidence beyond a reasonable doubt that REI is CAR’s largest unitholder,” wrote Downey, who is a tad perplexed about the strategy behind the investment that was valued by RioCan at $323 million at the end of the first quarter.
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He is perplexed in part because the two REITs operate in different parts of the real estate world: RioCan owns and manages Canada’s largest portfolio of shopping centres with ownership interests in a portfolio of 303 Canadian retail and mixed use properties, while CAPREIT defines itself as owning “multi-unit residential properties, including apartment buildings, townhouses and land lease communities located in or near major urban centres across Canada.”
Downey reached his conclusion about RioCan’s interest in CAPREIT through old-fashioned sleuthing. When RioCan reported this week, its financial statements showed $323 million of available for sale marketable securities (AFSMS.) Those securities were included in RioCan’s receivables and other assets and are determined on a mark to market basis.
Downey’s sleuthing further revealed that RioCan has been accumulating its AFSMS portfolio for several years. At the end of 2013, for instance, there were no holdings. But six months later (the second quarter of 2014) the investments had grown to $125 million. At the end of 2014, the holdings stood at $230 million: by the end of 2015 they had risen to $301 million.
Sleuthing was required because Downey writes, “RioCan has never disclosed the particulars of its AFSMS.” But RioCan does refer to “dividends and/or distributions arising on available for sale investments.”
In reaching his conclusion, Downey compared the unrealized gains or losses in RioCan’s AFSMS versus the change in CAPREIT’s unit price. And since the first quarter of 2015, there has been virtually no variance between the two. In Q3 of 2015, for instance the variance stood at -0.1 per cent; for the last two quarters the variance has been 0.0 per cent.
Downey then used a second piece of analysis to reach his conclusion: he looked at the income yield on RioCan’s AFSMS holdings and compared that with the distribution yield paid by CAPREIT. Comparing those two variables also generated zero variance.
Downey posited a possible reason for RioCan’s investment: it may fit with RioCan’s long term goal of developing about 18,000 multi-residential units which will be a mixture of rent and for sale. “Yet, REI has yet to develop the specific in-house expertise in this business whereas CAR has, in our view, a very strong operating platform,” he wrote, noting that RioCan has nixed the idea of acquiring an apartment manager.
Whatever the motive, Downey feels the investment is “validation of the calibre of CAR’s portfolio and platform.”
Calls to RioCan seeking a comment weren’t returned.