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NIC on Financing

June 1, 2006
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U.S. Versus Canadian REITs: A Comparison by Anthony J. Mullen

NIC ON financing

U.S. versus Canadian REITs: A comparison It's no secret that Canadian REITs are quickly discovering the benefits of investing in American-based seniors housing and care communities. Conversely, U.S. companies are becoming interested in forming their own Canadian REITs. Executive Circle members of the National Investment Center for the Seniors Housing & Care Industry (NIC) were recently given an unusual opportunity to hear about the structural advantages enjoyed by Canadian REITs and how they view the U.S. market. The following are highlights from the call, as moderated by yours truly. The guest speakers were Robert Ezer, CEO of Chartwell Seniors Housing REIT, a leading Canadian REIT now investing in the United States; Alex Avery, director of real estate and REITs Institutional Equity Research at CIBC World Markets, the number one underwriter of REITs in Canada; and Stephen Pincus, partner and chair of the Income Funds Group for Goodmans, LLP, a leading law firm representing many of these REITs making cross-border transactions. How big is the Canadian REIT industry, and how does it compare to that in the United States?

Avery: There are more than 25 REITs in Canada with a combined market capitalization of over $23 billion (Canadian), roughly $20 billion (U.S.). By comparison, U.S. REITs have a total market capitalization of $350 billion, making them about 17+ times as large as the Canadian REIT industry.

Within that universe, there are three Canadian seniors housing REITs, with a combined market capitalization of about $2.2 billion (Canadian). That compares to almost $20 billion in the U.S. for healthcare REITs. The Canadian seniors housing REITs yield from 7.1% to 9%, or about 7.8% on average. The largest is Retirement REIT, with a market capitalization of about $860 million. They have a more than 24,000-resident capacity, with about 90% of their properties located in Canada. Second largest is Chartwell, with a market capitalization of about $830 million and a resident capacity of almost 20,000. Again, most of these properties are located in Canada. The third is Sunrise Senior Living REIT, with a market capitalization of about $570 million, and a capacity of about 4,000, with about 80% located in the U.S.

How large is the public market for Canadian REITs? How many companies are represented? Who invests in them? And how are they perceived as an investment class?

Avery: The Canadian seniors housing industry in general is about one-tenth the size of the U.S. industry, in line with the general population comparison. Like the U.S. industry, the Canadian industry is highly fragmented in terms of ownership. As to who invests in Canadian REITs, the Canadian investor base is more retail-oriented. This is due in part to the trust structure, which makes it available to virtually all businesses, including those without any real estate holdings. This wide variety of available investments has made trust investing in Canada popular among retail investors. We're starting to see, however, increased interest from Canadian, U.S., and other international institutional investors in the sector.

In the United States, seniors housing and care has always been viewed as a riskier asset class, compared to apartments, office, industrial, and retail. How does that match up in Canada?

Avery: The seniors housing industry has been viewed as a less risky asset by Canadian investors, largely due to structural differences. That's because our seniors housing industry has been focused on a narrower level of service offering than available in the U.S., that traditionally being retirement homes and long-term care. Retirement homes in Canada are somewhat equivalent to the light-care assisted living sector in the U.S., and the long-term care sector in Canada is similar to the U.S. skilled nursing sector, being largely government funded and, traditionally, less involved with subacute care segments.

What are some of the key differences between Canadian and U.S. REITs?

Pincus: About eight or nine years ago, we came up with this concept of a senior care transaction in which we could have the properties held in the trust and lease those properties to an operating subsidiary that would carry on the business of managing the facilities. That was a fundamental change in the Canadian trust sector. So I would say the primary difference between Canadian REITs and those in the United States is this ability to operate a business and, in the senior care sector, to manage and operate nursing homes, assisted living, and so on.

Another difference is that the REIT itself, which is the public entity, the trust, cannot engage in an operating business. But any subsidiary-a corporation, an LLC, a limited partnership, and so on-can engage in operations, and that obviously gives the Canadian REITs a lot of flexibility.

What are other rules and requirements to qualify as a Canadian REIT? Must you own any property in Canada or can all of your real estate be in the United States?