Second update on Bentall Kennedy Canadian Real Estate Plus Segregated Fund

January 5, 2015

Plan sponsors may wish to consider whether this investment news has any implications for the investment options available within their plans. Sun Life Assurance Company of Canada purchases units of the fund listed below, which is established as a segregated fund in accordance with the Insurance Companies Act (Canada).

In late September, we wrote to inform you that given the significant asset flows into the Bentall Kennedy Canadian Real Estate Plus Segregated Fund (BK Plus) since its inception, and particularly in the summer of 2014, the allocation to real estate through units of the Bentall Kennedy Prime Canadian Property Fund (Prime) of approximately 30% as of July 31, 2014, was below the target allocation of 70-80%.

As a reminder, BK Plus invests in three underlying components, namely units of Prime, Real Estate Investment (Trust) Exchange Traded Funds (REITs) and Cash.

While BK Plus accepts new investment on a daily basis, Prime accepts inflows at quarterly subscription windows (July, October, January and April); this is not uncommon for institutional real estate funds which invest directly in physical properties. At each quarterly window, Bentall Kennedy decides how much new investment they will allow into Prime based on the opportunities they have to purchase real estate assets.

Since we last wrote the BK Plus' allocation to real estate has increased closer to its target through a subscription for units of Prime at the end of October 2014. In addition, Bentall Kennedy reimbursed the equivalent of all of the investment management fees that they received in the three months when the BK Plus Fund, on average, invested less that 50% of its net assets in Prime (i.e. August, September and October 2014. This was done through a payment to the fund.

Update on BK Plus' allocation to real estate
Since BK Plus's inception in November 2013, its assets have grown to over $40 million, due mostly to transfers in, but also through daily net contributions. As of September 30, 2014, Prime had a gross property value of $3.9 billion; 59 properties; 136 investors (BK Plus being one investor). As of October 31, 2014, BK Plus is invested as follows (target allocations are included in brackets):

(1)   62% Prime (Target allocation is 70-80%)   
(2)   9% Real Estate Investment Trusts Exchange Traded Funds (REITs) (Target allocation is 10%)
(3)   29% cash (Target allocation is 10-20%)

Prime has faced challenges placing new capital given commercial real estate markets are in a period which is characterized as highly competitive, with limited new offerings and strong pricing. As a reminder, BK Plus accepts new investment on a daily basis, Prime accepts inflows at quarterly subscription windows (July, October, January and April); this is not uncommon for institutional real estate funds which invest directly in physical properties. At each quarterly window, Bentall Kennedy decides how much new investment they will allow into Prime based on the opportunities they have to purchase real estate assets.

Prime continues to seek new investments, which will permit BK Plus to acquire more Prime units as outstanding commitments are drawn down. Prime is taking a particularly cautious approach to acquiring new real estate in the current market conditions. As such, Bentall Kennedy expects BK Plus to be slightly under its targeted allocation to Prime and over its targeted allocation to cash over the short term. They are exploring all options to keep the fund as close as possible to its target allocations, including purchasing Prime units from other investors. Due to high volatility, Bentall Kennedy plans to keep BK Plus's allocation to REITs under 10%. BK Plus remains focused on generating stable returns supported primarily by the income from its underlying real estate investments.

Fund management fees when real estate allocation is low
In December 2014, Bentall Kennedy reimbursed BK Plus with the equivalent of the investment management fees for the months of August, September and October 2014, when the BK Plus' allocation to Prime was below 50%. Bentall Kennedy will continue to monitor BK Plus' investments in Prime and will evaluate, on a case-by-case basis, the possibility of making a similar payment should BK Plus' allocation to Prime decrease below 50% in similar circumstances.

Sun Life Financial comments
Bentall Kennedy has an established track record of managing real estate through different market environments. Historically, Bentall Kennedy has been successful in deploying new capital through multiple cycles. Due to the large transaction sizes typical in commercial real estate, Prime's total of committed and undeployed capital has ebbed and flowed over Prime's history dating back to 1983. When evaluating real estate it is important to maintain a long term focus as the asset class provides many benefits to those who invest for the long term. These benefits include stable cash flows and income yield, a hedge against inflation and low correlation with traditional asset classes.

As one of the largest managers of institutional real estate, Bentall Kennedy is well-positioned to participate in large real estate transactions when they are available in the market. The Firm continues to maintain a disciplined focus, carefully evaluating each property to ensure it meets the necessary criteria for investment. BK Plus's main investments include office buildings, retail shopping centres, warehouses, multi-family residential buildings and land.

We believe that Bentall Kennedy's willingness to reimburse investment management fees when the real estate allocation was less than 50% illustrates their commitment to managing this asset class. As BK Plus grows in assets, the issue of low allocation to real estate is not expected to persist.

We continue to believe that BK Plus provides group plan members with the opportunity to invest in high-quality commercial real estate that is otherwise only available to large institutions such as defined benefit plans, endowments and foundations. 

Questions?
Please contact your Sun Life Group Retirement Services representative.