It is perhaps the lessons learned in the 2008 crash that have resulted in Pure Industrial Real Estate Trust (PIRET) (TSX:AAR.UN) being ranked among the top 10 fastest-growing companies in British Columbia this year.
When Vancouverites Stephen Evans and the late Darren Latoski, who died of cancer last year, took PIRET public on the Toronto Stock Exchange in 2007, the company had a $20 million market capitalization, considered small fry among real estate investment trusts (REITs).
“When we started, we structured the company so there was no general and administrative costs, aside from public-company filing costs and accounting costs,” said Evans, company co-CEO. “We didn’t want a big overhead to be a drag on the young company.”
Neither Evans nor Latoski drew a salary for nearly four years, until PIRET had reached a market capitalization of $200 million. They paid staff from their own pockets, ran the operation from a modest Vancouver office and poured profits back into the company.
Today, PIRET has a cap approaching $900 million – up from $500 million in January 2013 – holds 15.5 million square feet of industrial property across North America and is ranked fifth on BIV’s list of B.C.’s fastest-growing companies for 2013.
Today, the company’s total general and administrative costs still represent just 3.6% of revenues.
The conservative approach to personal remuneration is not reflective of the aggressive acquisitions that have characterized the company’s trajectory. In 2013, PIRET acquired $603.9 million worth of property, after snapping up $300.3 million in assets a year earlier.
This year, while concentrating on expanding across Canada, buying portfolios and individual buildings from New Brunswick to B.C., PIRET roared into the U.S. market, buying 11 distribution centres for $131 million. The entire 1.9-million-square-foot U.S. portfolio is leased to FedEx Corp., one of the largest courier companies in the world.
Like all REITs, PIRET has benefited from the historically low interest rates that have been in place since 2008, Evans confirmed, pointing to a deal they did in Montreal as an example of how low borrowing costs come into play.
Interest on that portfolio’s financing was 4%, locked in for 20 years, while the assets are producing a 7.75% capitalization rate that will increase over the 20-year lease agreement signed with the tenant.
“Higher interest rates are the largest cost and the largest risk factor [for REITs],” Evans said. “But with long-term debt, you can be largely insulated from that risk.”
Across its entire portfolio, PIRET is paying 3.5% in mortgage interest rates but posting an average yield (capitalization rate) of 6.9%.
PIRET will continue to pursue U.S. opportunities, Evans said, but will likely restrict its U.S. exposure to one-fifth of total holdings. “We are and remain a Canadian REIT,” he said.
PIRET is now the largest REIT owner of industrial real estate in Metro Vancouver, holding more than 2.3 million square feet of space in 14 properties, including the largest industrial building in the region, the 630,000-square-foot ContainerWorld distribution complex in Richmond.
“We have concentrated on the top four industrial markets in Canada, which we believe are Vancouver, Calgary, Edmonton and Toronto,” Evans said.
He said the rapid growth of e-commerce – an Ipsos Reid poll this month showed 82% of Canadians are now shopping online – means that distribution and logistics space will remain PIRET’s primary focus.
