Managers of the new Harlo Diversified Canadian Real Estate Trust fund plan to incorporate a range of strategies into the open-ended vehicle, with an eye to raising up to $100 million in equity in their initial call for investors.
The fund targets a five per cent annual yield and 12 to 15 per cent annualized returns. The strategy encompasses acquiring value-add income-producing assets and development through Harlo Capital; and private mortgages through Harlo Financial.
“The goals of the fund are to produce returns for investors while providing an opportunity to invest in a traditionally closed-ended asset class in an open-ended environment,” Harlo Capital chief operating officer Geoffrey Nelles told RENX.
Toronto-based Harlo Capital is the real estate co-development and private equity arm of Harlo Group, which was established in 2018 by Jeffrey and Michael Kimel. It has completed five multifamily projects and is developing 16 others through limited partnerships.
Harlo Financial is a private commercial mortgage lender that specializes in multifamily residential development sites, industrial land, stabilized industrial facilities, retail plazas, office buildings and mixed-use commercial properties. Its portfolio is comprised of 25 completed and in-progress mortgages totalling $185.07 million.
Family offices are being targeted
The goal is to raise between $50 million and $100 million in the initial offering and build the open-ended fund from there. Leverage won’t exceed 60 per cent of total asset value.
“We’re not trying to create a retail fund that you’ll be buying with your RSP,” Harlo chief financial officer Andrew Lepper said. “We’re trying to appeal to family offices to have alignment with long-term investors who are looking to grow generational wealth.”
Jeffrey Kimel has committed to investing $10 million in the fund.
“We recognize that it’s going to take time to build up the assets and the performance within this trust to show institutional investors that we’re a good match for them, but that’s certainly our intention over time,” Lepper said, noting it hasn’t yet approached institutions about the fund.
Asset classes of interest
While Lepper said there are no asset classes the fund couldn’t potentially invest in at some point, the focus is on long-term holds. The purpose-built rental apartment and industrial sectors are currently favoured sectors.
Lepper also sees a return in interest to the retail and food-service sectors. Harlo Capital has been involved in mixed-use development and that’s another area where the fund could invest.
There are too many uncertainties in developing condominiums under current market conditions so Lepper doesn’t anticipate being involved with that in the near term.
“Mortgage rates are still relatively high for commercial properties and the banks aren’t fully back into the market yet,” Lepper said of the fund’s mortgage component. “So I think in the short term, at least, we’re still able to earn 10 to 12 per cent returns on first mortgages, which is a really good return — particularly because our office is so accustomed to underwriting deals as an owner as well as a lender.
“That gives us a little extra insight into commercial property mortgage lending.”
Properties in due diligence
While it’s too early to provide details, Lepper said the fund has tied up and is doing due diligence to acquire a student housing property.
“It’s in a good market and we think that there’s some upside in the rents. It’s the kind of thing where we’d like to add some value and hold it long term.”
Nelles said the fund is also in diligence on several multifamily and industrial properties and is very close to committing to a commercial mortgage on a property in Calgary.
“One of our tenets at Harlo has always been to be selective, disciplined and patient,” Nelles said. “Just because we’re trying to start something doesn’t mean that we should rush into acquiring assets for the sake of acquiring assets.
“They have to still meet our standards and our criteria and we’re going through our due diligence and being very selective in the process, especially if we’re going to hold them long term.”
Geographical preferences and projects
Most of the projects Harlo Capital has partnered on to this point have been in Ontario, though it recently developed The Stainsbury, a five-storey 80-unit rental apartment in Vancouver.
The 20-person company likes most of Canada’s major markets and also cities just outside of them, including Hamilton and Kitchener-Waterloo in Ontario.
“It’s easy to overlook those markets, but we think, for the most part, they provide great opportunities to earn some risk-adjusted returns — particularly with existing income-producing properties,” Lepper observed.
Harlo Capital is partnering on three multiresidential developments in Toronto to be completed in the next 12 to 18 months:
Other projects are earlier in the development cycle.
Revised proposal for Lake Shore Blvd. development
Harlo Capital is part of a joint venture with Toronto Standard and Major Street Group that owns a development site at 3807 Lake Shore Blvd. W.
An 11-storey multiresidential building was originally proposed for the site. That has been revised to 43 storeys after adjacent properties were acquired to create an assembly currently occupied by four, two-storey mixed-use buildings.
Approval is being sought for a Studio JCI-designed building with 549 residential units and retail space at grade.
“We’re all about working with up-and-coming co-development partners and we love the idea of putting residential properties on transit nodes,” Lepper said.
