Only 2 Industrial Property transactions have taken place in Oakville during the past 2-and-a-half months (Sept. 01/08 - Dec. 08/08):
(1) 750 Weller Court sold on October 15th, 2008. This was a 28,750 sq.ft. industrial building on 1.99 acres (so there is some excess land for a further addition). The sale price gives a price point of $66 per square foot. The building was sold vacant. A Vendor-Take-Back mortgage was a critical part to this deal.
(2) 1296 South Service Road West. This was a first-class single-user industrial building fronting the QEW. The building is 80,000 sq.ft. and sits on 6.3 acres so there is excess land on which to build. The sale price gives a value of $91 per square foot. This was a Sale/Leaseback transaction with the purchaser being a pension fund. The price per square foot is skewed a bit as the purchaser was recieving extra land in the deal. If you allow 50% coverage, then there are 2.63 extra acres of land. At $750,000 per acre this would represent $1.97 Million. Subtracting this value from the purchase price gives us a net price of $5.33 Million (or $66 per sq.ft.). I like this deal: cash flow in the near term, great exposure to the QEW, excess land to work with in the future.
Thursday, December 18, 2008
Wednesday, December 17, 2008
A Sign of The Times - Real Estate Funds Halting Redemptions
A Sign of The Times:
I have just been informed that Great-West Lifeco has halted the redemptions at 2 of its segregated funds that invest in high-quality commercial real estate. The 2 funds are the Great-West Life Canadian Real Estate Fund and the London Life Real Estate Fund.
Both Funds hold a diversified portfolio of high-quality Canadian commercial real estate.
These assets typically have a stable cash flow that forms the basis of their value.
As investors suffer in the current downturn they are looking to liquidate assets and generate cash to pay off accumulated debt, the so called "deleveraging" effect that the entire economy is going through.
The problem is that real estate is not a liquid investment and that it takes a great deal of time to complete a transaction, especially when it comes to the larger properties, such as those in these portfolios, where the transactions can be quite complex and require a great deal of due diligence.
So the net effect is that the funds would not have the available cash on hand to fund all of the redemptions being requested.
How long will the moratorium on redemptions last? That's a good question.
The problem surfaces from the fact that these funds are not REITs. This means that they are not publicly traded (if they were then an investor who wants to get out simply sells to another investor and the REIT does not have to sell any assets - the investor cashes out and the REIT continues to own the real estate). Instead here we have the situation where the only way to generate cash to an investor wanting out is to sell assets (the fund had 9.5% of the fund in cash, and 1.9% in bonds, but these, I presume, have been wiped out by recent redemptions).
Obviously, the 2 funds would be reluctant to sell any assets in the current environment as the probability of getting high valuations would be minimal.
It really does boggle the mind that such an illiquid asset has been put into such a liquid vehicle.
What does the future hold for these investors?
Depending on the economy's future, there could be a number of different scenarios. If the economy picks up (which is doubtful) the redemption requests would slow and the need to sell assets would be minimal. If the economy stabilizes, or continues to fall (more likely), and redemptions continue to mount, then the management might see what properties they can sell to recoup maximum value and try to attract a sale. One other option would be to convert into a REIT, but then their agents would lose the fees they get for putting clients into such a liquid investment vehicle in the first place.
I have just been informed that Great-West Lifeco has halted the redemptions at 2 of its segregated funds that invest in high-quality commercial real estate. The 2 funds are the Great-West Life Canadian Real Estate Fund and the London Life Real Estate Fund.
Both Funds hold a diversified portfolio of high-quality Canadian commercial real estate.
These assets typically have a stable cash flow that forms the basis of their value.
As investors suffer in the current downturn they are looking to liquidate assets and generate cash to pay off accumulated debt, the so called "deleveraging" effect that the entire economy is going through.
The problem is that real estate is not a liquid investment and that it takes a great deal of time to complete a transaction, especially when it comes to the larger properties, such as those in these portfolios, where the transactions can be quite complex and require a great deal of due diligence.
So the net effect is that the funds would not have the available cash on hand to fund all of the redemptions being requested.
How long will the moratorium on redemptions last? That's a good question.
The problem surfaces from the fact that these funds are not REITs. This means that they are not publicly traded (if they were then an investor who wants to get out simply sells to another investor and the REIT does not have to sell any assets - the investor cashes out and the REIT continues to own the real estate). Instead here we have the situation where the only way to generate cash to an investor wanting out is to sell assets (the fund had 9.5% of the fund in cash, and 1.9% in bonds, but these, I presume, have been wiped out by recent redemptions).
Obviously, the 2 funds would be reluctant to sell any assets in the current environment as the probability of getting high valuations would be minimal.
It really does boggle the mind that such an illiquid asset has been put into such a liquid vehicle.
What does the future hold for these investors?
Depending on the economy's future, there could be a number of different scenarios. If the economy picks up (which is doubtful) the redemption requests would slow and the need to sell assets would be minimal. If the economy stabilizes, or continues to fall (more likely), and redemptions continue to mount, then the management might see what properties they can sell to recoup maximum value and try to attract a sale. One other option would be to convert into a REIT, but then their agents would lose the fees they get for putting clients into such a liquid investment vehicle in the first place.
Friday, December 12, 2008
I'm Looking for Inflation in my Top Right Corner Drawer of my Desk
It seems to me that the U.S. Government is laying the foundation for massive inflation down the road.
Now, a lot can change as we head down the road to the future, but it just makes sense to me that increasing the monetary base by 40% just is asking for inflation to rear it's ugly head.
Let's look at the details:
The U.S. Government has commited roughly $8.5 Trillion to Financial Rescue Incentives.
This is broken down into various government arms. The Federal Reserve has committed $5.5 Trillion to back the ailing Financial System. The FDIC has guaranteed around $1.1 Trillion in loans to banks, Citigroup and G.E. The Treasury has backed about $1.1 Trillion (including the $700 Billion TARP). Congress is crafting a 2nd stimulus package estimated at $500 Billion. The Federal Housing Administration has committed $300 Billion to help borrowers. The Federal Reserve has committed $1.8 Trillion to Commercial Paper Programs, and the Federal Reserve has committed $200 Billion to help unfreeze the Consumer Loan Market.
It is estimated that the Government has already tapped $3.2 Trillion in Bailout Spending.
And all of this comes on top of the Treasury last spring helping finance a stimulus package costing $168 Billion!
America truly is "Bailout Nation!"
If you go back in history to the Great Depression, you will see that the lack of liquidity caused a severe defationary period. It was always thought that this tragedy could be averted by creating massive liquidity if such a crisis occurred again. Well, we have such a crisis now and the U.S. has responded, by indeed, creating massive liquidity. So instead of a severe deflationary period, I predict that we will have a period of massive inflation.
The U.S. will have to send interest rates sky high to attract the money it needs to pay for the current bailout. There will be severe pressure on the U.S. dollar.
And we in Canada will have to increase our interest rates to attract the capital we need for our debt.
So keep an open mind when making investments. Massive inflation could be in the cards down the road.
Now, a lot can change as we head down the road to the future, but it just makes sense to me that increasing the monetary base by 40% just is asking for inflation to rear it's ugly head.
Let's look at the details:
The U.S. Government has commited roughly $8.5 Trillion to Financial Rescue Incentives.
This is broken down into various government arms. The Federal Reserve has committed $5.5 Trillion to back the ailing Financial System. The FDIC has guaranteed around $1.1 Trillion in loans to banks, Citigroup and G.E. The Treasury has backed about $1.1 Trillion (including the $700 Billion TARP). Congress is crafting a 2nd stimulus package estimated at $500 Billion. The Federal Housing Administration has committed $300 Billion to help borrowers. The Federal Reserve has committed $1.8 Trillion to Commercial Paper Programs, and the Federal Reserve has committed $200 Billion to help unfreeze the Consumer Loan Market.
It is estimated that the Government has already tapped $3.2 Trillion in Bailout Spending.
And all of this comes on top of the Treasury last spring helping finance a stimulus package costing $168 Billion!
America truly is "Bailout Nation!"
If you go back in history to the Great Depression, you will see that the lack of liquidity caused a severe defationary period. It was always thought that this tragedy could be averted by creating massive liquidity if such a crisis occurred again. Well, we have such a crisis now and the U.S. has responded, by indeed, creating massive liquidity. So instead of a severe deflationary period, I predict that we will have a period of massive inflation.
The U.S. will have to send interest rates sky high to attract the money it needs to pay for the current bailout. There will be severe pressure on the U.S. dollar.
And we in Canada will have to increase our interest rates to attract the capital we need for our debt.
So keep an open mind when making investments. Massive inflation could be in the cards down the road.
Wednesday, December 10, 2008
Apartment Building Sales in Oakville over $1 Million
Let's take a look at recent (over the past 12 months) Apartment Building sales in Oakville.
I have located only 3 transactions:
41 Speers Road - 135 unit Building sold for $15,555,000 ($115,222 per unit) - Dec.14th/07
2300 Marine Drive - 47 unit Building sold for $5,525,000 ($117,553 per unit) - Dec.19th/07
435 Kerr Street - 30 unit Building sold for $2,931,000 ($97,700 per unit) - August 27th/08
Not many transactions, but the ones that did take place were quite substantial. Two of the three were purchased by "large" operating entities, while the Kerr Street property looks like it was purchased by individual through a corporate entity.
The trend continues in that the larger properties are being gobbled up by the well-known REITs and well-financed groups that already have substantiall apartment buildings in their portfolio.
Not any great deals here, but solid deals on properties that are well located and should provide solid and growing cash flows for these new owners for years to come.
I have located only 3 transactions:
41 Speers Road - 135 unit Building sold for $15,555,000 ($115,222 per unit) - Dec.14th/07
2300 Marine Drive - 47 unit Building sold for $5,525,000 ($117,553 per unit) - Dec.19th/07
435 Kerr Street - 30 unit Building sold for $2,931,000 ($97,700 per unit) - August 27th/08
Not many transactions, but the ones that did take place were quite substantial. Two of the three were purchased by "large" operating entities, while the Kerr Street property looks like it was purchased by individual through a corporate entity.
The trend continues in that the larger properties are being gobbled up by the well-known REITs and well-financed groups that already have substantiall apartment buildings in their portfolio.
Not any great deals here, but solid deals on properties that are well located and should provide solid and growing cash flows for these new owners for years to come.
Friday, November 28, 2008
Should H & R REIT's High Yield Set Off Warning Bells for GTA Commercial Real Estate Values?
Traditionally, REITs (like bonds), have provided a nice hedge against declining equity markets. The old adage was that as equity markets decline, REITs tend to perform well. The reason being, that REITs returns are locked in under lease contracts. Therefore when other share prices fall as companies fortunes sag, the rental income still flows for the REITs. The current market, however, doesn’t reflect that old adage. Take for an example H&R REIT, recently trading at $4.85 per unit (versus a 52 week high of $21.46) and giving this REIT an extraordinary high 29.69% Yield!
And H&R is not alone:
Dundee REIT $10.40 per Unit (versus a 52 week high of $36.75)giving it a 21.115% Yield, InnVest REIT $3.00 per Unit (versus a 52 week high of $10.87) giving it a 25.00% Yield, Morguard REIT $7.18 per Unit (versus a 52 week high of $15.75) 12.535% Yield,
Homburg Invest Inc. $1.45 per Share (versus a 52 week high of $4.80) 33.103% Yield, Allied Properties REIT $10.18 per Unit (versus a 52 week high of $22.45) 12.967% Yield.
So, what gives with these extraordinary returns? When REIT returns yield more than 8% you know that something has to give. Either the Commercial Property Sector will see many tenant defaults with a lower revenue stream and thus justify the low price of H&R units, or that the market is wrong and there will be no large tenant failures and the unit price will rebound to previous levels. The market in its infinite wisdom is always looking to the future. So when you have a yield on a REIT like H&R with a return yielding 29.69% the market is forecasting a severe decline in its future revenue. But will this happen? H&R has a great property portfolio. It owns 34 Office properties, 124 Single Tenant Industrial Properties, 122 Retail properties and 4 Development properties that the company says has a Book value of $4.931 Billion. The current share price gives H&R a market value of only $708 Million. Add in Debt of $3.1 Billion and you have a total of debt and share value of $3.8 Billion which is $1.2 Billion less than Book Value (a discepancy of around $8 per share). Is the company really worth this little? Looking in the rear view mirror everything looks great. Third quarter distributions were just announced at $0.11 per month (implying an annual distribution of $1.23). The market however is saying that the share price of HR is unsustainable in the forthcoming recession. Thus the abnormally high looking return on units. This means that the market is forecasting a rough ride ahead for real estate assets that HR owns. What does H&R own? Large office, industrial, and retail properties in great locations. It has about 31% of it's total square footage in the U.S. so this might be impacting the unit price as well. The LTV ratio is only 63% based on H&R's book value (but is 81% based on the current market value of the REIT). So, the market is forecasting that there will be many defaults looming as companies restructure/go out of business. If this happens look for lease rates to decrease as companies default on leases and excess product comes on the market. Lower lease rates and excess product can only mean lower prices. Will that be the scenario that pans out, or is the market totally out to lunch? Only time will tell. For every seller of this REIT ther are buyers who think that none of this doom & gloom talk will have a material effect on H&R's distributable income.
If massive layoffs, plant closures, and companies going bankrupt come to pass, then Toronto Commercial real estate values will certainly plunge. The Toronto market is not concerned with the overleveraged concerns that the U.S. is experiencing. The GTA concerns would be how severe a recession/depression will we be seeing?
As for me, I have no idea. I won’t pretend to be smarter than the market. I’ve seen too many people burnt doing that. Something has to give. Either the unit price rises dramatically to reflect that the distributions have remained stable or the Unit price remains where it is as distributable unit income dramatically falls off to reflect the new reality of the commercial real estate market. Let’s hope it’s the former scenario.
And H&R is not alone:
Dundee REIT $10.40 per Unit (versus a 52 week high of $36.75)giving it a 21.115% Yield, InnVest REIT $3.00 per Unit (versus a 52 week high of $10.87) giving it a 25.00% Yield, Morguard REIT $7.18 per Unit (versus a 52 week high of $15.75) 12.535% Yield,
Homburg Invest Inc. $1.45 per Share (versus a 52 week high of $4.80) 33.103% Yield, Allied Properties REIT $10.18 per Unit (versus a 52 week high of $22.45) 12.967% Yield.
So, what gives with these extraordinary returns? When REIT returns yield more than 8% you know that something has to give. Either the Commercial Property Sector will see many tenant defaults with a lower revenue stream and thus justify the low price of H&R units, or that the market is wrong and there will be no large tenant failures and the unit price will rebound to previous levels. The market in its infinite wisdom is always looking to the future. So when you have a yield on a REIT like H&R with a return yielding 29.69% the market is forecasting a severe decline in its future revenue. But will this happen? H&R has a great property portfolio. It owns 34 Office properties, 124 Single Tenant Industrial Properties, 122 Retail properties and 4 Development properties that the company says has a Book value of $4.931 Billion. The current share price gives H&R a market value of only $708 Million. Add in Debt of $3.1 Billion and you have a total of debt and share value of $3.8 Billion which is $1.2 Billion less than Book Value (a discepancy of around $8 per share). Is the company really worth this little? Looking in the rear view mirror everything looks great. Third quarter distributions were just announced at $0.11 per month (implying an annual distribution of $1.23). The market however is saying that the share price of HR is unsustainable in the forthcoming recession. Thus the abnormally high looking return on units. This means that the market is forecasting a rough ride ahead for real estate assets that HR owns. What does H&R own? Large office, industrial, and retail properties in great locations. It has about 31% of it's total square footage in the U.S. so this might be impacting the unit price as well. The LTV ratio is only 63% based on H&R's book value (but is 81% based on the current market value of the REIT). So, the market is forecasting that there will be many defaults looming as companies restructure/go out of business. If this happens look for lease rates to decrease as companies default on leases and excess product comes on the market. Lower lease rates and excess product can only mean lower prices. Will that be the scenario that pans out, or is the market totally out to lunch? Only time will tell. For every seller of this REIT ther are buyers who think that none of this doom & gloom talk will have a material effect on H&R's distributable income.
If massive layoffs, plant closures, and companies going bankrupt come to pass, then Toronto Commercial real estate values will certainly plunge. The Toronto market is not concerned with the overleveraged concerns that the U.S. is experiencing. The GTA concerns would be how severe a recession/depression will we be seeing?
As for me, I have no idea. I won’t pretend to be smarter than the market. I’ve seen too many people burnt doing that. Something has to give. Either the unit price rises dramatically to reflect that the distributions have remained stable or the Unit price remains where it is as distributable unit income dramatically falls off to reflect the new reality of the commercial real estate market. Let’s hope it’s the former scenario.
Wednesday, November 26, 2008
Shock and Awe in ProLogis Share Price Plunge
Oh, how the mighty have fallen.
Less than one year ago shares in ProLogis Inc., the world’s largest developer and owner of distribution/logistics centres, were trading at over (US)$71. Today, as of this posting they trade at (US)$3.35 (hopefully not too many employees took their compensation in the form of share options!)
The current share price gives the company a market cap of (US)$880 Million (versus a Market Cap of well over $18 BILLION at it’s high point).
According to various reports the company has nearly 550 million square feet of space in North America, Europe, and Asia. Those properties are said to be worth upwards of $41 Billion. Chairman and CEO, Jeffrey Schwartz, resigned 2 weeks ago in a stunning move. The company has said that it does not plan any new development activity going forward and the company has cut it’s previously announced dividend of $2.28 per share down to $1. The company has total debt of $14.6 billion versus total equity of $11.3 billion (as of the end of the Third Quarter). The company’s development pipeline stood at a whopping $8 Billion.
My lowly opinion is that ProLogis will start to sell off certain assets in order to generate funds to pay down outstanding debt. The credit markets are currently too tight and expensive to be of much help in securing funds. And the company would be loathe to even consider selling shares at this level even if they could find investors willing to buy! However, having said that, look at the “SIDE NOTE” below.
SIDE NOTE: Just to see how other companies are struggling with raising capital look at A-B InBev’s recent takeover of US beer giant Anheuser-Busch. InBev took on $54.8 Billion in debt to fund this mega-acquisition. Part of the financing was an Equity Bridge Financing component of $9.8 Billion. Yesterday, in a stunning move, it unveiled an $8.2 Billion rights offering at a whopping 69% discount to Friday’s closing share price. Such a huge discount to the existing share price virtually ensures that the rights will be purchased by the existing shareholders making this issue a slam dunk. But what a price to pay! Even with this capital being raised the company is still looking at selling assets to pay off the $1.6 Billion balance. What a market!!
Less than one year ago shares in ProLogis Inc., the world’s largest developer and owner of distribution/logistics centres, were trading at over (US)$71. Today, as of this posting they trade at (US)$3.35 (hopefully not too many employees took their compensation in the form of share options!)
The current share price gives the company a market cap of (US)$880 Million (versus a Market Cap of well over $18 BILLION at it’s high point).
According to various reports the company has nearly 550 million square feet of space in North America, Europe, and Asia. Those properties are said to be worth upwards of $41 Billion. Chairman and CEO, Jeffrey Schwartz, resigned 2 weeks ago in a stunning move. The company has said that it does not plan any new development activity going forward and the company has cut it’s previously announced dividend of $2.28 per share down to $1. The company has total debt of $14.6 billion versus total equity of $11.3 billion (as of the end of the Third Quarter). The company’s development pipeline stood at a whopping $8 Billion.
My lowly opinion is that ProLogis will start to sell off certain assets in order to generate funds to pay down outstanding debt. The credit markets are currently too tight and expensive to be of much help in securing funds. And the company would be loathe to even consider selling shares at this level even if they could find investors willing to buy! However, having said that, look at the “SIDE NOTE” below.
SIDE NOTE: Just to see how other companies are struggling with raising capital look at A-B InBev’s recent takeover of US beer giant Anheuser-Busch. InBev took on $54.8 Billion in debt to fund this mega-acquisition. Part of the financing was an Equity Bridge Financing component of $9.8 Billion. Yesterday, in a stunning move, it unveiled an $8.2 Billion rights offering at a whopping 69% discount to Friday’s closing share price. Such a huge discount to the existing share price virtually ensures that the rights will be purchased by the existing shareholders making this issue a slam dunk. But what a price to pay! Even with this capital being raised the company is still looking at selling assets to pay off the $1.6 Billion balance. What a market!!
Friday, November 21, 2008
Companies Raising Cash Through Sale/LeaseBacks
With the Stock Market crashing to lows not seen for years, and with slowdowns forecast for virtually every sector in the economy, what options are available for companies strapped for cash?
Well one would normally access the credit markets but these have been severely tightened and the money, if any, to be gotten is expensive and usually inadequate in the amounts available.
Thus the rising poularity of Sale/LeaseBack transactions.
What's a Sale/Leaseback?
A Sale/LeaseBack is simply a transaction whereby a company sells off the real estate it owns to either a pension fund, a wealthy investor, or a syndicate of investors for all cash, and then turns around and enters into a Lease with that Buyer on a long-term basis (usually a 10-year time frame).
What does this accomplish for the Company?
Well, it frees up badly need cash for the company to survive the coming economic slowdown. The cash can be, and usually is, a substantial amount as real estate values have climbed dramatically over the last decade and, even though there has been a slowing of price appreciation, the amount of equity in these properties can be quite substantial.
But you say that the company now has to pay a lease!
True, but the investors out there look to get a 8 - 10% return on their capital (depending on what city the the property is located in, as well as the location within that city) so it is not an onerous term. The other benefit is that the Lease is now a cost of doing business and can be written off as part of the overall expenses.
Although not for everyone, Sale/Leaseback transactions can be a great financial tool for those who need to access cash to survive the downturn and then position themselves to prosper during the ensuing economic recovery.
Make sure to get expert legal, accounting, and real estate advice from your professionals before embarking on any proposed transaction.
Well one would normally access the credit markets but these have been severely tightened and the money, if any, to be gotten is expensive and usually inadequate in the amounts available.
Thus the rising poularity of Sale/LeaseBack transactions.
What's a Sale/Leaseback?
A Sale/LeaseBack is simply a transaction whereby a company sells off the real estate it owns to either a pension fund, a wealthy investor, or a syndicate of investors for all cash, and then turns around and enters into a Lease with that Buyer on a long-term basis (usually a 10-year time frame).
What does this accomplish for the Company?
Well, it frees up badly need cash for the company to survive the coming economic slowdown. The cash can be, and usually is, a substantial amount as real estate values have climbed dramatically over the last decade and, even though there has been a slowing of price appreciation, the amount of equity in these properties can be quite substantial.
But you say that the company now has to pay a lease!
True, but the investors out there look to get a 8 - 10% return on their capital (depending on what city the the property is located in, as well as the location within that city) so it is not an onerous term. The other benefit is that the Lease is now a cost of doing business and can be written off as part of the overall expenses.
Although not for everyone, Sale/Leaseback transactions can be a great financial tool for those who need to access cash to survive the downturn and then position themselves to prosper during the ensuing economic recovery.
Make sure to get expert legal, accounting, and real estate advice from your professionals before embarking on any proposed transaction.
Subscribe to:
Posts (Atom)
