Milestone goes the distance

WITH BENEFIT OF HINDSIGHT, IT’S PROBABLY NO GREAT SURPRISE.

More than three-anda-half years back, Canadian investors were introduced to a new and different class of real estate investment, one based on a portfolio of assets all based in the U.S.

In that year, three issuers completed initial public offerings: American Hotel Income Properties REIT LP raised $100.1 million; Milestone Apartments REIT, snared $228.5 million; and WPT Industrial REIT raised US$111.43 million via the sale of US$10 units.

Prior to those, there were two outliers: Slate U.S. Opportunity Realty Trust which went public in 2012 and morphed into Slate Retail REIT; and Pure Multi-Family REIT LP which went public in mid-2012. All the assets for both are in the U.S.

The five share at least one characteristic: all have been active by buying additional properties and raising additional equity. That trend continued this week when Dallas-based Milestone announced the acquisition of 1,460 units in the U.S. sunbelt and plans to finance the US$242.2-million acquisition with a $175-million boughtdeal transaction. But despite a 10-per-cent hike in monthly distribution announced at the time of the offering, the units closed lower — but still above the $18.45 issue price.

But that drop is just a small dent in what has been a sustained rise in the price of the units. According to Bloomberg, of the three, Milestone has been the best performer. For instance in the time it’s been public and remembering that it reports in Canadian dollars, investors have received a total return of 123.49 per cent. In contrast, American Hotel, which again reports in Canadian dollars, has posted a total return of 46.67 per cent, while WPT Industrial has posted a total return in US dollars of 48.97 per cent. All three have beaten the S&P/TSX Composite return over the same period.

The movement in the Canadian dollar relative to the U.S. dollar over the period is one reason for the performance difference. In a report issued Thursday, Alex Avery, a real estate analyst at CIBC, said benefits have flowed for those REITS that “own exclusively U.S. properties and operate and report in US$.”

Over the past two years, Avery wrote, “these REITs have benefitted from the dual tailwind of stronger domestic (U.S.) growth and an appreciating currency, with arguably the currency being the predominant driver of Canadian dollar-denominated returns.”

Pure-Family illustrates that conclusion perfectly: in the two-plus years that it has had a Canadian-dollar listing, the total return has been 86.32 per cent. (For the four years that it’s been U.S. listed, total return has been 65.15 per cent.

The other factor behind the strong performance, particularly for Milestone, has been the ability to generate growth in rentals on a year-over-year basis. That growth is a reflection of higher occupancy and higher rents. At Milestone, for example, the same property net operating income growth to Q2 was 11.1 per cent. The comparable numbers for American Hotel REIT and WPT were 3.5 per cent and 2.2 per cent respectively.

With the benefit of hindsight, there’s probably no great surprise Milestone has been the star performer. The reason, noted one observer, is because of fundamentals in the aftermath of the U.S. credit crisis. From a situation of over-supply before the crisis, “they basically stopped building houses in the U.S. in 2009 and didn’t return to 2014. In other words there was five years of missed supply. There is now a shortage of housing in the U.S.”