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Canadian real estate players go shopping in U.S.

Some of the country's biggest real estate players, turned off by high prices in Canada, are ramping up their exposure to U.S. commercial properties.

Brookfield Asset made the latest move Tuesday, announcing a $1.7-billion deal with a U.S. fund to increase its stake in mall owner General Growth Properties. The transaction bumped Brookfield's ownership of General Growth to 38 per cent from 27 per cent, a stake it bought during the latter's bankruptcy restructuring.

Canadian companies can afford to play in the United States right now because they have access to capital - and they want to make deals because many of the assets are top-quality properties. It's simply that their current owners are in financial trouble, with some being so distressed that projects are being abandoned, even if they are 90 per cent complete.

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The Canadian players are also betting on a U.S. economic turnaround. "Over time, we're expecting the strong U.S. economy to translate into lower [capitalization]rates and a more robust real estate market," said Andrew Willis, Brookfield's communications director.

A capitalization rate is calculated by dividing the annual income generated from a property by its value. (A property that produces $1-million in income and is worth $10-million would have a cap rate of 10 per cent.) Falling capitalization rates means property values are going up, in the same way that falling bond yields means their prices are going up.

RioCan is also making waves in the U.S. market, buying up hundreds of millions of dollars worth of U.S. properties in the second half of 2010. The company raised more money earlier this week, quickly selling $100-million in preferred shares and $225-million of debt, in an illustration of how easy it is for some Canadian property owners to get funding.

Like Brookfield, RioCan has been buying shopping centres, which means both companies' investments are tied to U.S. consumers, who have been reluctant to spend coming out of the recession. Mr. Willis acknowledged this, but pointed to the latest Christmas stats that show the consumer is finally coming back.

The big names aren't the only players getting in on the action. Private equity players like Second City Capital Partners, which is in the midst of raising money for its second fund, are also finding U.S. deals. The Vancouver-based firm recently closed its $17-million acquisition of an office tower in St. Petersburg, Fla. Managing director Jamie Farrar said there will be more opportunities as banks auction off reclaimed properties and private equity funds sell off assets they no longer want.

In Brookfield's case, the company isn't simply making a play on the U.S. commercial market. It also likes General Growth's fundamentals. Mr. Willis said few companies have assembled as extensive a collection of malls. General Growth recently installed a new CEO, Sandeep Mathrani, who was last with New York real estate giant Vornado Realty Trust.

General Growth can also take advantage of a U.S. restructuring rule that allows it to refinance all of its mortgages at current rates. The company is now going through its portfolio and doing that one-by-one. "GGP has the ability now to redo its balance sheet, redo its mortgages, property by property, at very attractive rates, and those savings fall right to the bottom line," Mr. Willis said.

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The fund that sold its stake in General Growth to Brookfield, Fairholme Fund, will hold $907-million of Brookfield shares, amounting to 4.5 per cent of the company. The rest of the deal's value will be paid in cash.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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