What? Canadian Realty Can Go Down in Value?

Chief Executives of Canada’s 2 Biggest REITs Swap War Stories From 25 Years in business

From left, Stephen Johnson, moderator Pat Koval and Ed Sonshine discuss the Canadian realty market during a panel discussion Thursday at the RealREIT conference in Toronto.

Cannot picture real estate going down in worth? The chief executives of Canada’s two largest realty investment trusts can tell you they have actually endured it.

Ed Sonshine, who directs RioCan, and competing Stephen Johnson of Option Properties, which became the largest REIT in Canada this year, shared some war stories from 25 years in the sector at the RealREIT conference held today in Toronto.

Sonshine, whose REIT listed on the Toronto Stock Exchange in 1994, recalled some of the running jokes at the time about an asset class that seemed to have no place to go but down. “You wish to get back at with your kids, leave them your realty,” Sonshine joked to the audience of realty professionals, about the dominating knowledge of the early 90s.

Johnson, who previously headed up Canadian REIT, which combined in May with Option Characteristic to develop a REIT with a market capitalization of about $8.2 billion, was the first out of the REIT gate in 1993. Much to Sonshine’s irritation, he pulled out a pretty ugly-looking chart of the Toronto Stock Exchange realty sub-index that showed the market peak in 1989.

” The structure of the index was comprised of some excellent names,” said Johnson. “Over the subsequent 3 or 4 years, the index came off over 95 percent. It was incredible, the crash. The majority of the business declared correction or were bought out.”

Major business like Ivanhoe Cambridge, Oxford Properties and Cadillac Fairview ended up being taken out, said Sonshine. “All the great companies that were owned by pension funds were among those public companies,” he stated. “The ones who didn’t get bought declared bankruptcy. I remember running into the CEO of Cadillac one day and he stated, ‘Eddie, how are things?’ I stated, ‘How are things? It’s 1992, and it’s horrible, but you’re CEO of Cadillac, so you probably have no idea about that.’ He said, ‘We are all on the same conveyer belt and at the end of it is a fire called personal bankruptcy.'”

Sonshine stated the typical function for all that endured the crisis was the REIT structure that safeguarded new players with guidelines required under their declarations of trust. “Why are they there? Why are we limited to no more than 15 percent of our possessions in advancement? Why are we restricted to not having all of our assets with one income source? Take advantage of? We all have some constraints,” stated Sonshine. “This design was utilized by all REITs and was so we could tell financiers we were not like the people who came before.”

Johnson yielded the REIT market deals with some new obstacles. “The GDP growth is going to be slower than we’ve seen the last 25 years. The speed of change is going to be disruptive. It’s going to be disruptive to a lot of markets, and it’s going to be disruptive to real estate,” stated Option Properties’ chief executive. “Our focus is where do we have an advantage, and it’s our land bank from our merger with Option. We have a great deal of sites where this a chance to add more video footage.”

Option dealt with some major shareholder news this week when grocery-store giant Loblaw Companies, its biggest occupant and investor, stated it prepared to draw out its 61 percent stake in the REIT under a strategy that would see each Loblaw investor, other than George Weston, get common shares in George Weston equivalent to their value in Choice.

George Weston, which manages Loblaw and directly owns 3.8 percent of the REIT, would have a 65.4 percent interest in the REIT after the deal.

” This deal, which leads to our major shareholder ending up being GWL instead of Loblaw, will enhance clarity for all Choice investors as we continue to rearrange and grow our business as a significant homeowner and developer,” said Johnson about the rearrangement, keeping in mind at the conference that it continues to have a tactical relationship with Loblaw.

Garry Marr, Toronto Market Reporter CoStar Group.

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