A look at private and public REITs in today’s market

Equiton's Geoff Lang discusses the attributes of different REITs, and why private REITs continue to offer advantages for the year ahead

A look at private and public REITs in today’s market

It was a difficult year for public REITs in 2022. Dragged down by concerns elsewhere in the markets and economy, some public REITs fell nearly 40%.

But it was a different story for private REITs. Largely sheltered from the fears rippling through the public markets, some used 2022 to snap up new properties and emerge from the year stronger than ever.

“It was our biggest year from a buying perspective,” says Geoff Lang, the SVP for Business Development at Equiton. “We spent about $270 million and bought seven properties.”

As a private REIT, Equiton was able to avoid much of the market turmoil that was spilling over into public REITs.

“When the public REITs NAVs (net asset values) declined, there were fewer players in the market,” Lang explains. “Instead of 15 to 20 buyers, there were only 2 or 3, so Equiton was able to get some buildings below market value.”

During a recent interview with Wealth Professional, Lang delved into the differences between REITs, and why he thinks private REITs like Equiton offer some key advantages.

Founded in 2015, Equiton has expanded to manage 35 properties in 17 communities across Canada. Buoyed by favourable trends including strong population growth and a shortage of housing, the company’s flagship Apartment Fund has successfully targeted an annual net return of 8-12% while delivering 87 consecutive months of positive returns.

With almost $1 billion of assets under management today, Equiton presents an interesting alternative to public REITs in Canada.

The pros and cons of private REITs

Lang acknowledges that some investors may have concerns about private REITs. It’s believed, for example, that private REITs can require a high-income threshold that leaves many investors in the cold. Others may worry about their ability to withdraw funds from a REIT that isn’t traded on the markets.

Further concerns voiced by investors include the absence of an independent board, the presence of a single dominant investor, and regulatory oversight.

Lang says Equiton has been careful to address these issues.

“Our goal when we started Equiton back in 2015 was to democratize private equity real estate for all Canadians,” he says. “So for example, we have one of the lowest minimum investment thresholds at $10,000 per purchase, with subsequent purchases set at $1,000.”

Equiton also provides monthly liquidity in their Apartment Fund so investors aren’t locked up for an extended period of time. There’s always the option to exit on a monthly basis. In some cases, Equiton’s liquidity compares favourably to some well-known public REITs.

Lang also notes that Equiton has more than 10,000 investors with no single dominant investor. The largest unit holder in the Apartment Fund is Equiton’s management team at about 6.5%i (as of June 30, 2023) of the total mandate.

As for transparency and oversight, Lang points to several measures that Equiton employs to ensure investor confidence, such as, the company has a majority independent board, the properties are appraised quarterly by a third-party accredited appraiser, and its financial statements are audited by a reputable third-party CPA firm.

“We do everything in our power to operate like a public company, even though we're private,” he says. “We want to give investors the confidence that they can look under the hood and see all of our numbers. Our Fund Fact Sheets and Fund reports are prominently listed on the website highlighting Fund performance statistics”.

Stability amid volatility

The economic climate has been challenging for some REITs. Rising interest rates have increased the cost of borrowing while inflation has resulted in much higher expenses for utilities, renovations and other bills that come with managing properties.

While Equiton has been affected by the rising cost of goods and services like everyone else, they have avoided difficulties with debt, in part due to having fixed mortgages with an average rate of 3% with a 7.5 year duration.

“We have no mortgages maturing prior to 2025” Lang says. We are sustainable for years to come in this rate environment.”

Lang also notes that Equiton is focused on the Canadian market, where they have the knowledge and experience to identify value in a number of communities across the country.

‘We're not looking into the US market, where some states are seeing rental fluctuation. We're very confident in the Canadian marketplace, and we're able to find pockets of opportunity”.

Equiton’s experience in the Canadian market has contributed to a consistent track record of returns for investors.

“We target a return of 8% to 12% a year,” Lang says, adding that “Last year Apartment Fund achieved a net trailing return of 15.16% (Class F DRIP) in a volatile market, and we're up 5.28% halfway through the year.”

Looking ahead, Lang says they remain focused on delivering steady returns in an uncertain market.

“We see ourselves as a long-term, stable hold for clients that are looking for yield with capital appreciation. And I think that's what makes us so attractive to Canadian investors today."


iNote: this only includes Equiton Partners ownership interest and does not include Executive or employee ownership interests