Brookfield Properties Corp. and its partners have an unexpected problem: They have $5-billion to spend on commercial real estate, but markets have recovered so strongly that they can't find the juicy deals they hoped would lead to 20-per-cent returns.
The stock market's resurgence from March lows has allowed many of the world's most challenged real estate companies to issue stock or sell bonds to solve financial issues brought on by lower rents and higher vacancies. Meanwhile, the sector is showing signs of recovery in Canada, further encouraging landlords to hang on to buildings that had caused concern through the recession.
"There really hasn't been that much out there," said chief executive officer Ric Clark. "When we first started thinking about this, we had many companies on the list as potential targets - the public markets have been so efficient that many have been able to solve their problems."
There hasn't been that much distress [in the Canadian market]. — Kirk Kuester, managing director of Colliers
Brookfield BPO-Tset up a $5-billion real estate investment fund in September with Brookfield Asset Management Inc. and dozens of major institutional investors. The plan was to buy malls and office towers from owners that were struggling to keep tenants and pay mortgages.
While the U.S. market is still going through a historic upheaval (7.9 per cent of lease holders are behind on their payments and one in 10 shopping mall stores sit empty), things have stabilized enough that the consortium is rethinking its ability to score its targeted 20-per-cent return on any investment.
"There hasn't been that much distress [in the Canadian market]," said Kirk Kuester, managing director of Colliers. "And if companies do find themselves in a bit of a pinch, it's not that difficult to raise equity on the market."
Mr. Clark made the comments as Brookfield Properties posted a third-quarter profit of $38-million or 8 cents a share, compared with $174-million or 44 cents a year earlier. While revenue fell 7.1 per cent from a year ago and profit from continuing operations took a 24-per-cent fall, Mr. Clark said there were encouraging signs of recovery in the quarter.
There is an opportunistic edge to the marketplace as investors start to take a more positive look at things. — Mark Renzoni, managing director at CB Richard Ellis
"There have been improvements in some areas of the business and we are witnessing what appears to be a signal that the worst is behind us," he said. "There isn't enough data to see if we've turned the corner or make the call that we've bottomed, but I will say there's been a noticeable improvement in business confidence building."
Commercial real estate tends to lag the broader economy by as much as a year and a half, and U.S. economists are predicting that the market may begin to gain ground in the second half of 2010. In Canada, however, the signals have been stronger.
Last week, RealNet Canada Inc. data showed that after almost two years of declining activity, the volume of deals in the Greater Toronto Area increased 46 per cent in the third quarter from the second quarter, to $1.31-billion, while the number of transactions rose 20 per cent.
Western Canada data, released yesterday, also indicated that the market was bouncing back from recessionary lows. Calgary posted its second consecutive quarter of increased activity, while Vancouver saw the value of deals increase 10 per cent from the previous last quarter, while the number of deals rose 21 per cent.
"The mood is positive," said Mark Renzoni, a managing director at CB Richard Ellis. "There is an opportunistic edge to the marketplace as investors start to take a more positive look at things."
Brookfield Properties (BPO)
Close: $11.13, up 26¢
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Brookfield Properties
Q3 / 2009 / 2008
Profit / $38-million / $174-million
EPS / 8 cents / 44 cents
Revenue / $657-million / $707-million
All figures in U.S. dollars
Source: Company reports
Report on Business Company Snapshot is available for:BROOKFIELD PROPERTIES CORPORATION
