Throughout our history, we have been able to earn attractive income-based returns for our clients ranging from the conventional (i.e. corporate bonds) to the hard to access (i.e. mezzanine debt on a privately-owned self-storage business).
We are not alone in the pursuit of income. Investors throughout the world have been seeking yield in an era of low economic growth and mediocre equity returns. As a result, money has flooded into every popular idea and driven up the prices and, regretfully, driven down yields.
Specifically, a lot of money has flowed into Canada’s real estate market – a sector that has been a reliable source of income for us and other investors. Much of the interest has come from overseas. Foreign investors have liked our real estate, our economy, our currency and our stable political environment. This inflow of capital has pushed up prices to the point that we now think there are more significant risk/reward opportunities elsewhere.
We have been eyeing the U.S. real estate market for some time. It’s widely known that values have fallen in most US markets 30% or more since 2007. Like everyone else, we’ve been asking the question to which there is no foolproof answer: “has the market bottomed?” We know that real estate is driven by job growth so we have closely monitored employment as an indicator of a possible turnaround. We also know that the U.S. market is not our home turf. And we know that it is made up of many sub-markets – Tucson is very different than Brooklyn. Therefore it was vital to find reputable and experienced local asset category specialists through whom we could invest.
We spent the past four years getting to know Venterra Realty, a real estate investment company specializing in the southern US market. John Foresi and Andrew Stewart started Venterra over 10 years ago and have now built a portfolio of over 14,500 garden-style apartment units in Texas, Florida and Georgia that the company owns and manages. The multi-family residential sector did not suffer materially in the aftermath of the 2008 financial crisis. In fact, during the period of 2009-2011, it has been the best performing major real estate asset category. The demand for rental accommodation is strong – particularly in the ‘right to work’ states of the southern US where the manufacturing sector is growing. Since 2010 apartments have enjoyed rental increases of 4.0% annually, well above the existing inflation rate. We made an initial investment in late 2011 and have been participating in the properties Venterra has acquired since that time. We are expecting annual cash flows of 8% from this portfolio and are targeting a total return of 12% when the properties are ultimately sold.
On the commercial real estate front, we have committed to an investment with Alex Brown Realty (ABR) of Baltimore. We will participate in a diversified portfolio of 30-35 U.S. commercial properties. ABR is an experienced group of real estate investors having started in 1972 and bought and sold over 280 properties since then. They specialize in the mid-market commercial sector which represents over 80% of all U.S. transactions. According to ABR’s President, John Prugh, “today’s market offers the best opportunities for investors in over two decades.” There are already 11 properties in the portfolio and we are expecting annualized returns of 9-10% annually with a meaningful capital gain on the sale. ABR expects to hold each property for five years or more. However, they have already sold two of the 11 properties after having received compelling offers.
In keeping with our approach to go where the opportunities are, our ongoing pursuit of reliable income has now taken us to Jacksonville, FL, Nashville, TN, Livermore, CA and even Brooklyn, NY! In our view, the potential returns are very attractive. We plan to share more details about the potential of the U.S. market as well as the individual projects in a future blog.