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Real Estate May Do an Encore


Date: Friday, January 27, 2012
Author: Barry Critchley, Financial Post

With real estate being one of the top performing sectors in 2011 - the S&P/TSX Capped REIT index was up by 15%, or 24 percentage points above the return for the S&P/TSX composite - some have argued real estate won't generate a repeat performance this year.

But Jeffrey Olin, a former real estate executive turned investment banker turned portfolio manager at Vision Capital Corp. isn't in that camp. Mr. Olin, who co-oversees the three property funds that are home to about $100-million in assets, believes the fundamentals continue to be attractive.

"The prospect of low-long-term Japanese-style interest rates for the foreseeable future bodes extremely well," said Mr. Olin, citing a 2.85% 10 year mortgage recently given to one of the country's largest apartment rental companies.

In addition, Mr. Olin argues the supply-demand balance for commercial real estate is positive. "Across the country, we have single-digit vacancy rates for virtually every property type in virtually every region versus double-digit in the U.S. You will start to see rent increases this year," said Mr. Olin, who at a recent conference heard that cap rates will soon start with a four and not a five.

As well, real estate companies will be helped by a move to new global accounting standards that should mean an increase in net asset value.

Analysts are also bullish. "The publicly traded commercial REITs in Canada have all reported healthy and stable operating metrics in the most recent quarter. For instance, operating income from the same properties was up by about 1.5% on a year-over year basis,"

said Jimmy Shan, from GMP Securities. "Investors desire for yield plus cap rate compression were a big part of 2011's performance."

As for Vision's modus operandi, Mr. Olin puts it in these terms.

"Look for value. You have got upside and you have got a cushion on the downside if and when the world falls apart," said Mr. Olin, who comanages the funds with Frank Mayer, a veteran real estate analyst.

As for downside protection, Mr. Olin says it comes provided stocks can be bought at 50 on the dollar in "terms of value." These the real estate assets "are bricks and sticks for which there are lots of buyers," he said.

But some companies aren't bargains, which allows Mr. Olin the opportunity to short them.

Vision has three funds: the Opportunity Fund Trust (formed in July 2008 and is RRSP eligible); the Opportunity Fund LP (formed in July 2008); and Opportunity Fund LP 11 (formed in September 2009.) Two of the funds are allowed to use 25% leverage, though Mr. Olin said it has never been used. The funds are geared for investors who aren't looking for liquidity within five years, the term of the hedge funds. Instead, investors are required to hold their investment for five years before getting redeemed, though swaps - where a new investor buys out a departing investor - are allowed.

Mr. Olin believes in concentrated portfolios, namely owning a few stocks. His current holdings include:

- Mainstreet Equity Corp., a Calgary based company that buys apartments on the cheap, fixes them up and then re-tenants them, allowing higher rents to be charged.

- Morguard Corp.: The company, has a major stake in Morguard REIT, and is trading at a large discount to its net asset value.

- Edleun Group: Based in Western Canada, Edleun aims to be one of the consolidators of child care centres. Vision has helped Edleun raise capital and Olin is a director.