Calgary-based real estate company Strategic Group has come out of a two-year restructuring process by selling 110 office and retail properties, reducing its exposure to the struggling Alberta office market by 92 per cent and reducing its debt by $1.02 billion.
Riaz Mamdani, the company’s president and CEO, told RENX the move had to be made for the survival of the business, but that Strategic is now ready to grow again.
Before the restructuring which began in February 2020, the company had an operating cash shortfall of $3 million per month. Today, it is in a positive cash flow situation.
Mamdani said the company had not had positive cash flow since 2014.
“Without having embarked on the restructuring, we wouldn’t have been cash-flow positive today. We wouldn’t have existed today,” he said.
Assets now focus on multiresidential
Prior to the court-supervised restructuring, Strategic’s portfolio consisted of 48 per cent residential, 42 per cent office and 10 per cent retail. After the restructuring, it is 86 per cent residential (all rental), nine per cent office and five per cent retail.
“Every month we were eating away at $3 million and it came to a point where we couldn’t have a viable business if we were going to continue that,” said Mamdani. “We didn’t have any idea of a recovery, mainly of office space. I felt at the time our equity in our portfolio was deteriorating at a rate of $3 million a month, that’s assuming the values weren’t dropping . . . our lender exposure was growing.”
The company first attempted a restructuring program under the Companies’ Creditors Arrangement Act (CCAA), but that was rejected by the courts.
“Our CCAA was not successful, so we went down a much quicker path,” Mamdani said. “At the end of the day, we were pretty darn lucky that we went down a much quicker path. We would have not survived had our CCAA been approved.”
Mamdani said a number of Strategic’s properties had negative equity – the debt was greater than the value of the property. Negative equity in properties was $206 million for the 110 properties it sold. It also had $266 million in positive equity.
The court process allowed Strategic to realign equity within the various sectors of its portfolio.
Strategic Group’s move away from office sector
Today, the company has 50 properties, with about 70 per cent located in Alberta and 30 per cent in Atlantic Canada.
Mamdani said the company had started to pivot away from office properties about seven years ago.
“We needed the restructuring to rebalance that portfolio. . . . In 2014, we recognized that residential was a real opportunity and we were the first developer to start low-rise, wood-frame multiresidential,” he said.
“We stopped buying office buildings because our vacancy from 2014 onwards kept increasing. Our cash requirements to fill our buildings 2014 onwards kept increasing.
He said despite the efforts to make that “pivot”, cash flow from the residential portfolio was not sufficient to support the struggling office portfolio.
“By the time we got to late-2019, it was unsustainable. The losses in our office portfolio were such an enormous number from our balance sheet and even our profitable residential . . . couldn’t keep up with the burden,” he explained.
“We were burning equity so we went down the restructuring to accelerate that mix that we wanted. We didn’t know in 2014 that the office market was going to deteriorate to a 30 per cent vacancy . . . But, by 2019 we knew there wasn’t an end in near sight.
“There wasn’t a mathematical model that we could envision that got us to a stable vacancy rate in office space.”
Strategic’s plan for future growth
Mamdani said moving forward Strategic will grow in an organized manner. The company will continue residential development “aggressively” and will selectively look for opportunities in other areas.
“We’re not ruling out office space forever, but office space at the right price, office space with the right metrics, may make sense. So we’re actively underwriting a number of office projects. They don’t fit my level of pessimism for that market today,” said Mamdani.
“But there’s going to be a tipping point and when we reach that tipping point I think we’ll be . . . in a position we can pay for those things without risking the company and not be in the position we were in two years ago, where we actually put the company at risk with the proportion of vacant office space we had.”