An investment panel at the Toronto RealREIT conference gave a generally gloomy assessment of the prospects for the world economy – with one notable exception.
Calloway REIT President and Chief Executive Al Mawani, sandwiched on the stage between investment analysts and fund managers, sounded a sunny dreambeat amongst the gloom of European debt crisis and a U.S. economy poised to step back into recession.
“This year we retained or renewed over 90% of our tenants,” he told the RealREIT attendees. “We just don’t see on a tenant base anyone that has come back for a rent concession. We have had one small I guess, tenant failure, Blockbuster.
“If you look at the facts on the ground they certainly don’t support the comments here,” he said. “Debt levels are reasonable, (most hold debt in) staggered maturities, a lot of REITs who use unsecured debt have pools of unencumbered assets. Even in the last downturn, secured debt was readily available.”
Fellow panel member Ira Gluskin, Vice Chair and Co-Founder of Gluskin Sheff + Associates, said he understands the optimism gap between the REIT president and the professional investors sitting beside him.
“I’m not sure Al’s answer would be any different if we were predicting an economic boom,” said Gluskin. “The greatest recovery, fantastic GNP, wouldn’t affect Calloway, it would be the same business anyway, they are already at whatever 98% leased, it is hard to go to 102%. That is the nature of the business. It is a very predictable business.”
Gluskin added that the REIT/REOC business is rock solid and has gotten more stable and predictable over time. “The people who run these businesses today are, I would say much more solid than the people who used to run them before,” he said. “In the old days, I was a real estate analyst about 100 years ago and most of the activity was by developers and they were all cowboys. They didn’t know how to issue equity, they didn’t believe in issuing equity and they didn’t and most of them went bankrupt.”
The cowboys have been weeded out from the early days. “The audience wants solid, conservative great Canadian values and that is what the industry has given them.”
U.S. REITs, which were ill-prepared for the 2008 downturn, have learned their respective lessons and today are in much better shape to weather another storm, said Steve Carroll, Managing Director and Global Portfolio Manager of U.S.-based CBRE Clarion Securities. “The management teams who were responsible for delivering on the whole premise on enhancing shareholder value this last cycle forgot what the REIT vehicle was about and they decided to chase growth. They did that by pursuing ancillary activities which were not necessarily their core competency.”
Instead of sticking to their knitting (ownership of property, enhancing property values and delivering the income stream to shareholders in the form of dividends), U.S. REITs got into development activities, joint ventures, investments outside their home markets. The issues for those REITs was not so much high leverage but rather near-term debt maturities and when capital markets dried up, investors turned extremely negative on U.S. REITs, forcing them to undergo a “massive” and highly dilutive recapitalization.
“The management teams have essentially been taken behind the wood shed by a lot of analysts and investors and given a good beating,” Carroll said. “That is a good thing because now they are focused more on the back to basics of the REIT vehicle and they have brought leverage down and fixed a lot of their debt long term.”
That means most U.S. REITs today have significant investment capacity or, looked at another way, have the financial wherewithal to survive and lengthy economic downturn. “I think just the defensive nature of the REIT vehicle will attract investors as they see that dividend being much more transparent and with potentially some decent growth in the coming years,” Carroll said.