In 2018, Reza Satchu and his close partner at Alignvest, Sanjil Shah, launched a bold plan to consolidate the purpose-built student housing sector in Canada. From a standing start, the team built what is today the largest student housing platform in the country (~10,500 beds). Reza's initial vehicle, a private REIT under the Alignvest brand, found an exit in 2024. While Reza will emphasize this as a $1.69B score, it was a paper deal. Meaning that only time will tell the ultimate fate of the investors. I have analyzed the deal terms, have had some exchanges with the parties and ultimately keep an open mind. Here's a bit of the story behind the deal.
Reza’s "first startup" raised money from Onex, KKR and über prestigious Silicon Valley VC Sequoia. But in 2003, when Reza Satchu returned to Canada and launched his first real estate venture, he had to take on the somewhat less prestigious Kevin O’Leary as a minority investor, in addition to his dad and brother. He sold that venture for $110m, a 6.5x return on investment. By the time he launched his Alignvest platform, he had made some impressive connections in Canada. He had co-founded tech accelerator Next Canada with the niece of Galen Weston (Claudia Hepburn). He had former Goldman Sachs Canada CEO Tim Hodgson as a partner (Tim is now a Minister in the Carney cabinet). And Reza had many other potentates as friends. But in 2018, when he launched the Alignvest Student Housing REIT, he went heavy on retail investors via financial advisors. (You might say that Reza had disappointed too many in his immediate network or alternatively, that Reza was simply a pioneer. After all, these days, Blackstone is raising money from mass affluents.)
In any event, the heavy lifting of courting financial advisors in some of Canada’s smaller financial centers was left to Reza's partner Sanjil Shah. One early convert was Mark Teal, a financial advisor from Meckelborg Financial Group in Saskatoon. Mark Teal has been quoted as saying:
When you're from a market like Saskatoon, you must always ask yourself: "Why is this group out of Toronto approaching us? If it's such a good idea, why isn't someone from there jumping on this?"
Mark started with $20m, but eventually put $150m of client money with Alignvest. He also joined the fund’s investment committee. I think Mark’s reflection on the concept of “adverse selection” remains valid. What are these city slickers up to? As always with Reza, there’s more than meets the eye. On paper, the Alignvest Student Housing REIT has done well. In 2024, the private REIT merged with another fund, the Forum Real Estate Income and Impact Fund. The exchange of units valued the Alignvest fund at $1.69B (that's about $700m in equity plus the assumption of debt). Per Reza’s own figures, this represents a 16.4% annualized return since inception in 2018 (or a 2.68x multiple (or 3x in Reza-speak)). The clearest beneficiary of this is, of course, Reza & Co (ie the fund’s manager), who got to crystallize $140m in performance fees (aka carried interest) upon the merger of the fund with the Forum REIT.
What did the fund’s unit-holders get? They mostly got to rollover into another fund. Only about $135m was paid in cash and anyone who elected for cash took a 10% haircut in comparison to the in-kind value. Conversely, those who rolled over faced a 10% haircut if they redeemed before 1 year. More than 99% of the unitholders casting votes were in favour of the transaction and, in practice, anyone who elected to get cashed out, was cashed out. The unitholder vote was apparently not required under securities law, just a goodwill gesture.
Alignvest presents the fact that the rollover is on a tax-free basis as an advantage, which it certainly is. Why doesn’t the taxman take his cut on a rollover? Because it would be bad form to settle accounts while the game is still being played. One twist about the Alignvest REIT is that Reza & Co deferred the triggering of the performance fees (aka carried interest) from inception until this exit event. So the Forum transaction was the first time Alignvest was paid a performance fee by their REIT. But paid they were - $140m!
That piece of paper his investors got, as I mentioned, is a private REIT run by Forum Asset Management. Forum has longstanding experience in real estate, starting in brokerage and morphing into an institutional builder and lately an asset manager. Forum has a much more sophisticated DNA than most of the private market fund peddlers I have profiled. They have a genuine real-world track record (vs just milking fees). You can think of them as a mini-Brookfield, in scope. They were the main developer on the pedestrian tunnel that leads to the Billy Bishop airport. I don't know enough about them to evaluate them, but I keep an open mind. It helps to know that Forum has $100m+ of its own money invested in their REIT.
Around the time Forum REIT made its offer, it had $400m in net asset value, so about a third smaller than the target. And the price was at a material premium. Chiefly as a result of the takeover premium, Reza’s REIT went up about 41% in 2024 (or up 31% vs the NAV prevailing before the deal was announced). Prior to the takeover, the Alignvest REIT had pretty ordinary returns you might expect from a REIT.
| Year | Returns |
|---|---|
| 2018 | 3.7% |
| 2019 | 15.3% |
| 2020 | 8.0% |
| 2021 | 12.1% |
| 2022 | 8.2% |
| 2023 | 21.4% |
| 2024 | 41.4% |
And then in May 2023, a mere 18 months after the Forum REIT had been founded, Forum bid $1.05B for the Alignvest REIT.
I don't know if this first bid was announced to unitholders, but on May 26th, 2023, Alignvest decided to suspend subscriptions into the fund, essentially saying they had enough money for their projected acquisitions:
ASH REIT has over $50 million of liquid assets on its balance sheet, which Management believes is sufficient to complete upcoming acquisitions and manage the day-to-day liquidity requirements of ASH REIT.
In that press release they also mention:
Management advises Unitholders to consider that the Fair Market Value of ASH REIT’s Units may appreciate materially in the coming months as a result of the core fundamentals and continued development of ASH REIT’s investments.
That's a pretty curious statement to make! Alignvest says this was a reflection that an exit event was coming into view. Shouldn't they have disclosed more explicitly they had an offer at a premium from Forum? In any event, that first offer was turned down. After being rebuffed, Forum came back in July 2024 with the winning $1.69B bid. In between those two offers, Alignvest was an active acquirer, acquiring more than $400M worth of assets. So the price went up by some $240m, net of those acquisitions. Forum tells me that the cap rate remained consistent between those two bids. (If you don't know, the cap rate is sort of like the inverse of the EV-to-EBITDA ratio, it's the multiple a buyer is prepared to pay).
A takeover premium is normal in the case of a publicly-listed REIT, since they often trade at a discount to NAV. But in the case of a private REIT, the manager causes the NAV to be calculated monthly or quarterly (within some governance framework). Why did Forum decide to pay 31% over Alignvest's Fair Market Value? This, in a year when the broader REIT market delivered negligible returns. Managers generally have an incentive to strike robust NAVs (what with performance attracting investors). So someone coming in and telling Reza that he's being a shrinking violet raises eyebrows.
Forum justifies the premium on this basis:
- The portfolio’s embedded rent growth and below market rents.
- The opportunity to unlock CMHC insured financing and long term accretive debt placement.
- The absence of any portfolio premium in the pre transaction NAV.
I think these are entirely plausible points. In particular, Alignvest's original valuation rested on just adding up the individual properties. But there are synergies to operating several buildings in a cluster, as it does for example, in Waterloo.
Still, it might be worthwhile to keep some incentives in mind. As a result of the REITs merging, Forum gets $600m in incremental assets and relationships with the financial advisors. That's got to be worth something. Forum gets to earn millions from the assets contributed by Alignvest. Yet, it did not have to pay anything to acquire the rights to be a manager. Could that have played into the calculus? Between that and the crystallization of fees for Reza & Co. based on paper gains, the clearest immediate winners are the managers. Just something to be mindful of.
Forum got one more benefit from having a bigger fund and investor base. Forum also happens to be a builder of student housing properties (through a separate division). And so the Forum REIT gets a Right of First Offer on any building that comes out of Forum's development pipeline. This is presented as a benefit for investors, but it's also a potential conflict of interest. All kinds of governance measures are in place both for the merger and the ongoing activities of the REIT, to an "institutional standard." I don't think those are foolproof, though.
I might provide a bit more analysis about the Forum REIT later on. If you have any insights into this situation, please get in touch. I haven't even covered the extra, expensive short-term debt the Forum REIT incurred to pay for some of the cash components of this deal. Ultimately, not having found any smoking gun, I have to keep an open mind. After all, a bold acquisition at a premium financed with a bit of debt could just as well describe the first chapter of countless success stories.
As for Mark Teal of Saskatoon, he has retired from Meckelborg Financial Group. Earlier this year, at Reza's invitation, Mark had the chance to roam the hallowed halls of the Harvard Business School, if only for a day. A beautiful illustration, for now, of how our lives can be enriched when we rise above our prejudices.
