While they never invoked the name of the Oracle of Omaha, the four REIT chief executives that lined the podium for the close of the RealREIT conference in Toronto were all following Warren Buffett’s rule book. Or at least his two most famous ones: “The first rule of investing is don’t lose money. The second rule is don’t forget Rule No. 1.”
The high-powered heads of Allied Properties, CAP REIT, Dundee and RioCan all agreed with the premise that the world is a scary place these days with uncertainty in Europe, China and the U.S., although Canada remains remarkably stable. If the audience of real estate professionals were expecting enthusiasm, they were disappointed because the best they got was cautious optimism and variations on the Rule 1/Rule 2 theme.
Tom Schwartz, President and CEO of CAP REIT, kicked off the CEO HumbleFest.
“We’ve all learned that if we have good real estate, even if we pay a little too much for it, we are going to do very well. If we have troubled real estate and difficult times it is more difficult, so I think the quality of the portfolio is really important,” Schwartz told the RealREIT audience. “Certainly in our business everything comes down to people. We want to offer our tenants the best quality and service so we can collect the highest rent and make the most money for our shareholders.”
Schwartz added a further heaping of caution to his “view from the CEO’s office” commentary when he added that CAP REIT’s approach to the public markets is “to build a strong balance sheet that is a bit more conservative than the real estate guys used to be” and to make sure we have adequate liquidity.
Cash flow king at Allied Properties REIT
If anything keeps Allied’s CEO Michael Emory up at night it’s cash.
“It really is (about) cash flow per unit growth. At the end of the day that is the ultimate litmus test… and the basis on which we ground distributions to our unit holders,” Emory explained. “The single most important focus for me, and frankly for my colleagues in the senior management team, is generating and hopefully sustaining significant FFO and AFFO per unit growth,” he stressed. “You can talk about all kinds of interesting and compelling sounding things but if they don’t reasonably, rapidly translate to growth on an AFFO and FFO per unit basis, it doesn’t do any good except to the guys who are talking about it.”
Dundee’s $300-million retirement payout
Michael Cooper, Vice-Chairman and CEO of Dundee REIT, was fresh from a three-day management retreat where they came up with 41 commitments to improve the REIT’s operations. Not exactly sexy but a reality considering real estate’s lengthy bull run (outside of 2008-2009).
“More and more with the slow-growth environment property is expensive,” Cooper said. “It is going to be how you take care of your properties and get more value for your tenants.”
Cooper also highlighted the fact that Dundee – and the other REITs at the table in fact – carry sobering widow and orphan characteristics.
“We pay out $300 million a year in retirement income. That money is extremely valuable to our shareholders. And although I am not disagreeing with the AFFO growth, we want everybody in our business to get that people are counting on us for their retirement,” Cooper explained. “We must make considerations that are consistent with being able to continually pay their distribution safely and with predictability.”
Growth with safety preoccupies RioCan REIT's chief
Yes, operations are important, said RioCan’s CEO Edward Sonshine, but his focus from the corner office centers on growth of FFO and AFFO with an eye to the company’s balance sheet. RioCan grew its assets by nearly $3 billion in the last three years and raised almost $2 billion in that span.
“That balance between equity and debt, what kind of debt and the terms of the debt, is what preoccupies me,” said Sonshine. “But all from a point of view of…the security and safety of our existing distributions.”
It’s a uniquely Canadian outlet, added Schwartz. In the U.S. “they only care about growth” because the investor base is largely composed of institutions hungry for growth and capital gains, while in Canada, REITs are primarily composed of investors seeking safety, stability and a steady flow of distributions.
U.S. expansion pays off for RioCan
Cautiously Canadian as RioCan may be, the REIT did not emerge from the dark days of 2008-2009 afraid to act. “We stuck our heads up around springtime of 2009 and saw that somehow the world had not ended,” said Sonshine. “We felt that this was going to be one of the prime times to start buying quality assets.”
RioCan had cash to spend, but needed to look beyond the crowded Canadian market. It naturally went south, a market it had tried and failed to crack just a few years ago when it found itself the “14th guy that the agent called” with no advantages. “In 2009 we realized we had an advantage. We had money and we had a lower cost of capital.” Its former competitors for U.S. properties were struggling to survive and were not thinking about acquisitions.
RioCan went in “pretty whole hog” with a portfolio worth about $1.5 billion today. “Interesting enough over the last three quarters, albeit from a much lower base, our 51 or 52 shopping centers in the United States have actually performed better than our 280 shopping centers in Canada.”
Rental and occupancy growth at RioCan’s U.S. shopping centers have also been aided by the fact that virtually no rival real estate has been built in its markets since 2009, Sonshine said. “I think that is one of the reasons you are seeing so much expansion activity from American retailers in Canada. Yes it is a great market here in Canada that they all want to be a part of, but there is almost no expansion opportunities for them in the United States due to lack of new development.”
REITs or funds?
Finally, the REIT chiefs were asked about the tension and competition between pension funds and REITs, with both sides coming at the market with quite different strengths, portfolios and time horizons. Both Dundee’s Cooper and Allied Properties’ Emory suggested that in 2013 the advantage will continue to lie with REITs.
“I think next year we are going to see the REITs continue to increase their relative importance in the Canadian real estate sector, probably at the expense of pension funds,” Emory concluded.