The pre-recession good times look to be back again for the real estate industry, CIBC World Market’s real estate investment banking Managing Director Chris Bell told a Toronto audience of investment and real estate executives last week.
“Real estate markets in 2010 came to feel more and more like those conditions we experienced in those halcyon days before the global financial crisis,” observed Bell, who moderated a panel on property markets as part of CIBC’s annual North American Real Estate Equities conference. Core assets in major global markets are once again on the block, “attracting robust bids” and with less hesitancy on the part of buyers, Bell added. The firm bid is back, due diligence periods are getting shorter if not eliminated altogether and auctions are more competitive.
Ed Sonshine, president and CEO of RioCan REIT, said that prices have “snapped back,” on both sides of the border, noting that RioCan dropped out of the bidding for a portfolio when the price tag rose too high. “You knew prices would come back but I don’t think anybody knew they would come back this quickly.” In Canada, RioCan is looking to development and the recognition that there is not enough space to house the new, mainly U.S. retailers, eyeing the market. “There ain’t much vacant space in the retail area in Canada.” As for the U.S., he anticipates corporate opportunities as many rivals there remain capital constrained.
Jon Love, managing partner of KingSett Capital Inc., which operates three funds and made $4-billion worth of transactions last year, said today’s market requires discipline and patience when it comes to investments. “I would say it is a yellow light for buyers and a full-on green for sellers.”
Perhaps the most optimistic of the panelists on the property markets panel was Oxford Properties’ president and CEO Blake Hutchinson, which has property in Canada, the U.S. and Europe. “We are advancing in Canada on every asset class and every front. In the United States, we are trying to buy some core stuff in three main markets” of New York, Boston and Washington. As for Europe, Oxford intends to be patient, “…we know that we can’t buy anything cheap.”
Christopher Chee, managing director of Los Angeles-based Blackstone Group, described himself as “the most aggressive” of the quartet of panelists, noting that his firm invested $4.5 billion in 2010 and was on a pace to exceed that this year. “We have been investing in bankruptcies, recapitalizations, debt restructurings,” he said. “We’re still seeing lots of opportunities. There is literally hundreds of billions (worth) of properties in the U.S. and Europe – not so much here in Canada – that are overleveraged and will need to be recapitalized.”
A later panel tackled the topic titled “back the future,” featuring four senior real estate executives who were asked to look back at what worked well – and didn’t – during the downturn.
Ric Clark, CEO of Brookfield Properties Corp., said his company fared well through the recession “without many major issues,” based in large part on its investment strategy. “We deliberately targeted the majority of our investment dollars in markets that we think are the most dynamic and resilient.” In the office sector, that was markets with strong representation from clients in the financial services, energy, natural resource or government. “Even though they are not immune to the real estate cyclicality, they seem to experience the impact of the cycles less and they come out quickest,” he said. Accustomed to using more leverage than many peers, Brookfield also finances mainly at the asset level in an effort to isolate any problems to a single property.
CPP Investment Board’s senior vice-president of real estate investment Graham Eadie noted that quality shines through in a period such as the 2008 crisis. “It is really a function of getting good, quality product. The weak product got weaker,” he said. “Good product, good markets, good partners and modest leverage and you’ll probably be fine.”
David Henry, president, vice chairman and CEO of Kimco Realty Corp., said his company had two “What were we thinking?” experiences during the recession: the reliance on non-recurring income (as much as 30%) such as merchant building profits that vanished in an instant when the economy went sour. “We probably should have taken more of that non-recurring income and invested it into recurring income rather than distributing that income as dividends to our shareholders,” he said. Kimco was also comforted by its debt-to-equity market cap at 15% to 20% while ignoring its net debt to ebitda as it rose to eight times and fixed charge coverage fell to two. “We got lulled to sleep because at a $50 share price, all looked well as to our leverage.” Going forward, dividends will be based much more on recurring income and its debt-to-ebitda leverage will be a less aggressive six times, he said.
Simon Nyilassy, president and CEO of Calloway REIT, was able to look back on the past for years with some statisfaction. “there was really no recession” for the Canadian retail business,” he observed. Occupancy rates went from 99.2% to 98.4% for a few months before soon rising back to above 99%. “We believe that we built the business from an operational standpoint to be recession-resistant, there is no such thing as recession proof, but I don’t think that we have been tested by the fires yet.”
Property Biz Canada is an RENX publication launching in the May 2011.