Most investors dread the prospect of a recession. Morguard Corp. chief executive Rai Sahi, on the other hand, is setting up his company to take advantage of an inevitable downturn in real estate markets.
Mr. Sahi, a classic value investor, built a $21-billion property portfolio and a $2-billion personal fortune by patiently buying up stakes in office buildings, condo developments and golf-course owner ClubLink when these properties were out of fashion or when their owners needed to cash out quickly. Mr. Sahi’s favourite buildings aren’t the ones that win architectural prizes or dot downtown skylines. They’re properties you see along a highway that cut through the suburbs. These are buildings Mr. Sahi buys for less than their book value, renovates, then milks for the cash that comes from long-term leases.
Last month, Morguard’s 73-year-old boss signalled that he now sees value in strip malls, a segment of the real estate market that’s decidedly out of step with a world that’s consumed with online shopping. Morguard and Mr. Sahi’s personal holding company announced it boosted its stake to 14.7-per-cent ownership of Plaza Retail REIT, a Fredericton-based company with a $455-million market capitalization. In investment banking circles, this is what’s known as a toehold investment, a sign the buyer has plans to come back for more.
“We do not believe a transaction for Plaza Retail REIT is imminent,” said Pammi Bir, real estate analyst at RBC Dominion Securities Inc. “However, given the patient, value bias of Morguard’s CEO, we would not rule out the possibility of a more substantive future investment or transaction in the longer term.”
Plaza owns 277 properties, most of which are open-air malls or large single-store developments in Quebec, Ontario and the Atlantic provinces. If you pull into a Dollarama, Shoppers Drug Mart or Tim Hortons in small-town Eastern Canada, you’re probably parking at a Plaza property.
Late last year, Plaza’s board told anyone who was listening that their business was undervalued. The company decided not to raise its dividend, which Mr. Bir said “was no small change in thinking given Plaza’s previously unmatched 15-year streak of distribution increases.” Instead, Plaza said it would devote cash to buying back its own units and buying properties. Plaza CEO Michael Zakuta, one of the company’s largest shareholders, said: “Our unit price does not reflect the underlying value of our business, nor our very strong pipeline of development and redevelopment projects.”
Mr. Sahi agrees. In an e-mail, Morguard’s CEO said the Plaza units “were acquired for investment purposes, at a price we believe to be below their fair value.” Morguard disclosed it most recently snapped up Plaza units for $4.20 each. By RBC Dominion’s calculation, the company’s book value is $4.64 a unit. Plaza units closed on Friday at $4.44 on the Toronto Stock Exchange.
Mr. Sahi went on to say that there was a strategic rationale behind the purchase. Morguard’s CEO pointed out that Plaza’s holdings in Eastern Canada dovetail neatly with his company’s existing portfolio, which is concentrated on Ontario, Alberta and the United States, and is weighted more to residential and office buildings than retail properties.
As with many of his investments, Mr. Sahi’s initial approach is to remain a supportive passive investor, even though Morguard is now Plaza’s largest single-unit holder. He said, “The Plaza management team is successfully executing on a business plan to strengthen its portfolio every year, as it continues to pursue opportunistic acquisitions, as well as strategic leasing and redevelopment opportunities.”
However, Mr. Sahi has shown in the past that he’s more than willing to buy properties when everyone else is selling. The current economic cycle is fuelled in large part by consumer spending and is long in the tooth. A downturn, when it comes, will likely see consumers slash spending, which would knock the stuffing out of retailers, and also be hard on their landlords. It’s easy to imagine a recession turning investor sentiment against a real estate play such as Plaza and opening the door to a takeover from a contrarian such as Mr. Sahi.
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