“We are battling the storm,” said Riaz Mamdani, CEO of Strategic Group, in a statement issued Wednesday afternoon. He blames the ongoing downturn in the Alberta economy for Strategic’s decision to seek a reorganization of elements of its commercial real estate holdings.
“It’s the prolonged downturn: five years dropping occupancy, five years increasing defaults,” he later told RENX in an interview. “Our property taxes have increased 55 per cent over the last four years. The number of defaults that we had in November exceeded that which I’ve ever seen in my career and December got even worse.
“We’re at a stage where we have to make some really tough decisions on what our next step needed to be. In order to ensure our longer-term viability, this is a step we . . . had to take in order to ensure that our over-350 people have a place to work a few years from now.”
Mamdani explained the defaults resulted from tenants moving out of their space, or from those who stopped paying rent. The affected properties are primarily office, but include some retail. The hardest-hit properties are in Calgary, but Edmonton assets have also been affected.
Protection affects Alberta portfolio
Across Canada, Strategic owns or has interests in 171 properties, but “it’s only our Alberta portfolio that we’re seeking protection for,” Mamdani said.
He also confirmed Strategic Group has laid off 19 employees.
“Our struggling properties in this market are our office properties, in a market with 24.6 per cent vacancy where the vacancy rate continues to increase, not decrease,” he said. “One in four buildings in downtown Calgary are vacant. It’s a struggle. That’s the problem.”
Sandip Lalli, president and CEO of the Calgary Chamber of Commerce, said the Strategic news is a continuation of the headwinds Calgary businesses have been dealing with for five years.
“This is just another proof point around the same stuff we’ve been feeling,” Lalli told RENX. “We have to figure out a way to move forward together on this and increase the investor confidence and the competitiveness of our businesses here.”
While the move might be a shock, Lalli said there is an important underlying message.
“Strategic Group is taking steps to future-proof their business and that’s a good sign,” she said. “I don’t think that should be lost in this. They’re working to future-proof their business. They’re not looking to exit.”
In a court affidavit, Mamdani said the mid-2014 crash in the Canadian energy market (and in particular, the exploration and production of oil and natural gas), which still endures, has had a profound negative effect on economic activity in Alberta.
Strategic Group hit by vacancies
“The Calgary economy has been deeply affected by the drop in worldwide commodity prices, particularly the differential between global oil prices and the price paid for Alberta oil,” he stated.
“The drop in the price paid for Alberta oil and the steep decline in the AECO price for Alberta’s natural gas (which, admittedly, has abated as of late but the damage has been done), have drastically reduced the revenues for Calgary-based exploration and production companies which are among the city’s largest businesses, employers, and tenants.”
The portfolio involved in this restructuring has been hit hard.
“Between mid-2014 to 2019, the CCAA Parties in aggregate had 78 tenants occupying 573,333 square feet that did not survive as going concerns or otherwise did not remain in their leased premises, despite being committed to a lease agreement,” the affidavit says. “During this time, the Calgary office market experienced dramatic increases in vacancy with class-B office space exceeding 40 per cent vacancy, class-A office space 25 per cent vacancy, and class-C approaching 40 per cent vacancy. The overall market stands at 32 per cent vacant or available for sublease.”
The portfolio has also been negatively impacted by the amount of new office space added to the Calgary market since 2017. Brookfield Place (2017) and Telus Sky combined add over 1.8 million square feet of class-A downtown office space.
This has further decreased rental rates, and enticed tenants out of what Mamdani refers to as Strategic’s “Rental Portfolio Entities” in the West and Beltline.
“Unfortunately, due to: (i) the current commercial rental market; (ii) the decrease in value and capital impairment of commercial rental properties in Alberta and, specifically, Calgary; and, (iii) the fact that there is no macro-economic turnaround on the horizon (at present, in Calgary alone, the Rental Portfolio Entities have approximately 586,812 square feet of vacant property and it is projected that this number will continue to rise throughout 2020, potentially peaking at over 700,000 square feet) the Rental Portfolio Entities are no longer able to function and carry on their current operations, as they presently exist,” stated Mamdani in his affidavit.
“Seminal event” for Calgary business
In Alberta, Strategic owns or has interests in 61 office and retail locations with a total aggregate square footage of approximately 3,601,852 square feet, and 22 residential apartment properties (completed or under construction) comprised of 2,448 residential apartments.
The balance of Strategic Group’s real estate projects are located in British Columbia, Nova Scotia, and New Brunswick. Those projects are primarily comprised of a retail complex in Duncan, B.C., and 84 residential apartment buildings in Nova Scotia and in New Brunswick.
“As Strategic Group navigates the troubled economic waters in the Alberta marketplace, the court protection of (56) of their properties will go down as one of the seminal events that defines the current economic downturn,” said Michael Kehoe, owner of Fairfield Commercial Real Estate in Calgary.
“Strategic Group is a gorilla-size player on the Calgary commercial real estate scene. The firm is a high-profile, innovative and entrepreneurial force with commercial and residential lease relationships with hundreds of companies and individuals across the city and the region.
“Strategic Group will likely emerge from their current troubles over time, but other property firms could follow down this bumpy road in the new normal that’s the Calgary economy these days.”
Under the terms of the court order, the companies under Strategic Group that have sought protection remain in possession and control of their assets, subject to the oversight of the court and a court-appointed monitor, Hardie & Kelly Inc. Neil Narfason has been retained as Chief Restructuring Officer.
Hope for the future
So, is there no end in sight?
“This is the most prolonged that I’ve seen a downturn,” said Mamdani in the interview. “I’m an optimist, so that’s really tough for me to believe.
“I’m an optimist and I know tomorrow is a better day. I just don’t know how far away tomorrow is.”
The protection grants Strategic Group time to deal with the debt it is carrying on the 56 properties.
It also plans to sell some assets “so that we have a viable company at the end of it,” Mamdani said. “Not all 56 (properties), but we will need a partial monetization of that to stabilize the overall portfolio.”
Strategic Group said its property management, service companies, and development and construction business will not be affected. Projects currently under construction are also not impacted, the company said.