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Interview with Greg Romundt, President and CEO of Centurion Apartment REIT – Part I

This is a column by real estate contributor Rachelle.

I attended the Canadian Apartment Investment Conference a while back. Due to my position in the room and the nature of the event, it was difficult for me to tell who was saying what at all times; therefore, I emailed my article to the speakers prior to publication for checking. I took the opportunity to ask 6 questions on behalf of all investors. I was absolutely delighted to get a response back almost immediately from Greg Romundt of Centurion Apartment REIT (link). Who better to ask than the President and CEO of a REIT? Nobody, that’s what I say! (what is a reit?)

In addition, Mr. Romundt has generously offered to answer any additional questions that you may have. If you have a question about REIT’s just post it in the comments and he’ll check in and answer every once in a while, as his time allows.

1) I understand that not every investor can invest in a private REIT; what are the criteria for doing so?

As a private REIT, we are still bound by the securities regulations that vary by province in Canada as to investor eligibility.

In Ontario, investors must be “accredited investors” which generally means that they have a minimum of any of the following,

  • a) $1 million of financial assets
  • b) $5 million net worth
  • c) Earn $200k per annum singly
  • d) $300k per annum with spouse.

If they don’t meet this qualification they must invest a minimum of $150,000 to qualify. Ontario is the strictest of the provinces.

Outside of Ontario, qualification criteria are easier, if the REIT is structured properly. Broadly speaking this means a minimum of any of the following.

  • a) $75k of annual income singly
  • b) $125k with spouse
  • c) Net worth of $400k.

There are other various exemptions by province that allow smaller investors to participate and we work with investors and their advisors to do so, within the parameters of the securities rules of their province of residence.

For a qualifying investor, Centurion REIT’s minimum investment is $5,000 for an initial investment.

2) What is the major operational difference between publicly traded and private REIT’s; media coverage was one difference mentioned, are there others?

There are not many differences operationally. And by operationally, I assume you are not referring to the pricing of our units but the gears working underneath the hood. I think you mean analyst coverage not media coverage in your question. We have had plenty of media coverage. Refer to the resources section of our website and you’ll find we’ve had a good amount of media coverage. It is financial analysts that work for the brokerage houses that don’t cover us. This is because they will only cover the large public companies that their firms do public security issuances for…thus justifying the cost of the analysts.

The major difference between publicly traded REITs and private REITs has to do with compliance requirements. We are still subject to securities regulation, audit, governance costs (like a board), but our compliance costs are lower. Public companies have a very high reporting requirement, often compiled by expensive lawyers, to comply with the rigid process of reporting. As a private REIT, we must still report, but this reporting is not nearly as onerous and can largely be done by our internal staff at substantially reduced costs. Financial analysts that have been hired to perform due diligence on Centurion Apartment REIT, do report that our reporting detail exceeds that of most public mutual funds/REITs in terms of the information we make available. However, we do this as a matter of policy not legal requirement. Private REITs have far more in common with publicly traded REITs than they have differences.

The primary reason people choose to invest this way is to gain direct real estate exposure without the exposure to stock market volatility.

3) Should the Real Estate Market crash (as some are predicting) what would the effect be on Publicly Traded REITs? Private REITs?

This is an excellent question. We must first distinguish between what you mean by real estate market crash. Most often, in the mind of the investing public when they think of real estate market crash, they assume house prices. Further, they assume that a house price crash is correlated with commercial real estate. This isn’t necessarily the case. I fully believe that the housing market in Canada is in the process of decline. I don’t believe we’ll have a crash but a further 10% would not be unrealistic over the next year in nominal terms. Further, in terms of housing, I believe that they will further deflate in “REAL” terms (inflation adjusted) over the next decade. Canadian house prices are too high, and they always adjust in real terms, part nominal and part from just being stagnant for years. My forecast is for a 10% nominal price decline in houses followed by multiple years of below inflation price appreciation or minimal change in value.

We must draw clear lines between saying there is a housing bubble and a greater real estate bubble as the real estate market also includes commercial classes of real estate like apartment buildings and retail, office, industrial. Apartments tend to be slightly negatively correlated to housing markets and without a large increase in interest rates (which we will not see), commercial classes could continue to see sustained investment while the housing market declines or stagnates.

Why would this be so? Remember, my apartment building (as an example) is a home for my tenants but, is purchased as a home for my investors money. The investment decision is based upon cash flow returns. Housing markets, which are dominated by homeowners and amateur investors don’t have the same constraints. They aren’t buying on the basis of yield. Homeowners buy on the basis of needing a house. They may consider it an investment…but it is not. Since homeowners aren’t focused on cash flow income or pricing metrics, these markets are far more sentiment driven. There is no real financial anchor for pricing.

Commercial properties are firmly grounded in cash flow generation and meeting financial metrics. Remember, when you buy a house, the bank cares about your personal income ( job). They aren’t looking at equivalent rental income to assess whether they will lend on the property. They lend to the buyer, not to the property.

In commercial, the bank lends based on the income of the property, not the buyer. Of course if the buyer has poor credit, this could disqualify the loan but I think you get my point. It is this link to the cash flow of the property that ties investment property values much closer to a disciplined investment approach than for a homebuyer. So, I don’t believe that a substantial move down in housing values, will impact well structured and conservatively financed REITs, either public or private.

Apartment REITs are the least at risk because we have access to CMHC guaranteed loans. No matter what happens to the banks willingness to lend, even in a market downturn, the banks will lend to apartments because they can either buy our mortgages and keep them as Government of Canada equivalents on their books or syndicate them immediately to the Canada Housing Trust. Other classes of real estate don’t have this opportunity and it provides great stability for the apartment class.

If you have questions for Greg Romundt (CEO of Centurion private REIT) please leave them in the comments.  Stay tuned for the next part of the interview which will include apartment syndication and how to evaluate a REIT.

About the Author: Rachelle specializes in renting property on behalf of landlords and is the blogger behind Landlord Rescue. She also works with investors to find good investments in Toronto and surrounding areas. Her passion is bringing multi res properties back from the brink and maximizing profitability. Check out some of her other real estate posts on MDJ.

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About the author: This is a guest post. You can read more about the author in the biography above.

{ 12 comments… add one }
  • Rachelle September 29, 2010, 10:54 am

    I did another interview with Timbercreek Asset Managers on my site for those who want to check it out or if you just want a preview to the rest of the questions :)

    I have another question.

    One of the criticisms about private REITs is the lack of liquidity (getting your money out) what are the terms for getting one’s funds out of Centurion REIT?

  • FT FrugalTrader September 29, 2010, 11:00 am

    Great question Rachelle, to add to that question, when an investor wants to liquidate their position, how is their postion valuated?

  • Elvis September 29, 2010, 11:40 am

    My question is based on what type of compenstion does somebody get if they invest in your Reit compared to a Public Reit. I found a public Reit that pays 1.70 annual dividend, what kind of yield would somebody look to make if they invest 5000 grand with Centurion Reit?

  • Rachelle September 29, 2010, 11:50 am

    Distributions for Centurion REIT are 8% so $5000 would net you $400/per year plus any increase in net asset value (measured when the buildings are appraised)

  • tom September 29, 2010, 2:29 pm

    Timely article, I just purchased some of this REIT for my personal portfolio at the end of August. Those of us who work in the industry and have the appropriate securities licenses are also considered “accredited”.

  • Greg Romundt September 29, 2010, 4:20 pm

    Re Liquidity:
    For private REIT’s in general the liquidity provisions do vary from fund to fund. In Centurion’s case, we have a 30 day redemption notice period. Redemptions are on the 15th of each month. That said, it is important for investors to keep in mind that real estate, like most investments is long term in nature. Our fund holds real assets, the apartment buildings that underpin the cash flow. They can’t be turned to cash on a moments notice. Neither real estate (in general) or our fund specifically is designed to be a money market fund alternative so investors, whether looking at us or real estate in general should always keep their real estate in the long term portion of their portfolio. We’ve designed the liquidity features for investors that want to move on or have an unplanned need for cash but we would have a hard time running a fund if all the investors were short term oriented and wanted to trade real estate like the stock market.

    Liquidity is a two edged sword. The stock market gives you decent relative liquidity (although not absolute liquidity…take the recent flash crashes as a good case in point) but the trade off is massive volatility. Real estate is less liquid but tends to be significantly less volatile. Personally I believe that the biggest reason investors fail as investors is due to volatility and its effect on behaviour. An investor could develop a well thought out asset allocation strategy and pick the right fund managers but fail to follow through because the volatility often interferes in the process of making investment decisions. They may get scared out of the market at the wrong time when the market has dropped significantly. If you have an asset allocation strategy that keeps volatility under control, you may be more able emotionally to stay invested for the long term. Apartment buildings have a long track record of providing stable returns with low volatility and that’s why they are a great store of wealth for the long term.

  • FT FrugalTrader September 29, 2010, 6:23 pm

    Thanks for the response Greg. How about the valuation of the shares once the investor wants to redeem? Say an investor has held for 10 years, how is investment value determined?

  • Greg Romundt September 29, 2010, 7:10 pm

    The value of the fund is calculated and posted monthly based on the valuations of the properties in the REIT. This is the price at which incoming investors subscribe and exiting investors redeem at. There is no bid/offer spread. So in your example, let’s say an investor bought 10,000 units at $10.00 per unit, and redeemed in 10 years at $20.00 per unit. The proceeds would be $200,000 (10,000 units x $20.00/unit).

    The valuation is current and moves with the values of the properties and not minute by minute (like a stock) meaning that gains tend to accrue slowly over time rather than overnight (and I think that is a good thing). What we’ve tried to create in this fund is an experience that the closest thing to owning a portfolio of buildings yourself but without having to do the work. One of the things about investing in a public real estate company, is that the stock market value of the properties may have little relation to the value of the underlying properties, particularly when the stock market is volatile. A private REIT, while it doesn’t insulate one from economic reality (no investment or investment manager can do that), it does provide some insulation from the volatility of the stock market, particularly if what you were aiming to get at was the real estate exposure rather than the stock market exposure.

  • tom September 29, 2010, 10:28 pm

    Which is why I’ve added this REIT and a MIC to even out the volatility in my portfolio.

  • David September 30, 2010, 1:47 pm

    This is interesting stuff. As an investor in REIT’s, it’s good to hear about the industry from someone who is actually working in it instead of an analyst who is just researching it.

  • Rachelle September 30, 2010, 2:38 pm

    I like part 2 better myself, so make sure you don’t miss it. At one point I ask Greg what to look for when investing in a REIT.

  • FT FrugalTrader September 30, 2010, 2:54 pm

    Part 2 coming up tomorrow!

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