The Vancouver Airport Authority shows deicing equipment at the Vancouver Airport in Richmond, B.C. Nov. 17, 2009.John Lehmann/The Globe and Mail
As the federal government looks to unveil its budget next week and seeks ways to close the deficit, there's one juicy asset sitting on the balance sheet that done right, investors would pay a big premium to get a piece of.
Nothing is hotter than commercial real estate and the cash flows that come from it. Real estate investment trusts are soaring, and the returns investors will accept from rents are at all time lows. People will ante up for rent income like never before.
In that environment, Canada's government has the makings of a very interesting real estate play in the form of the airport lands it owns and leases to airport operators in big cities. Right now, that income stream is worth many billions.
The leases, which came into being when the government devolved airport management to not-for-profit local authorities about 10 years ago, run for 60 years. There is an option to extend another 20 years. When the leases are up, unless the authorities and the feds cut a new deal, the airports and all their improvements go back into federal hands with no financial obligation.
The growth in cash flow is steady, if unspectacular. According to Transport Canada, lease revenue was $270-million in the last fiscal year, and is expected to rise to $282.6-million this year. By the year ending 2015, it will be $308.7-million, the government estimates. That's a compound annual growth rate of almost 5 per cent.
What's that cash flow worth over that time? A whole lot.
The concession to operate Toronto's 407 ETR toll highway, which produces about two and a half times the revenue now, is worth well north of $10-billion. The 407 has a longer concession, and its revenue growth rate is about twice as fast, so the multiple an investor would pay for such a stream would arguably higher. Then again, the 407 concession requires operating the highway, and that includes many costs. There's not much in the way of operating costs for the government with the ground leases. It just sits there and collects the cheques. The operating expenses at airports are the airport authorities' problems.
The 407 gets a valuation based on roughly 18 times operating earnings. Use that on the airport rents, and you are looking at a value of roughly $5-billion.
There are cautionary tales against governments selling assets too cheaply. The best example is the 407, which has soared in value since Ontario sold it. If you believe the government could cash out up front some of that income stream from airport rents, you might consider a structure whereby the government keeps a hand in the game to benefit from any upside.
There are also people who hate the idea that the government charges big rents to airports (including the people who run airports). They argue it drives up the cost of flying, by pushing up landing fees and other airport charges. And that, they say, hurts the country's economy. Any sale of an interest in the airport rent income stream would have to balance the commercial interests of the acquirer against the larger good, if that's possible.
But the fact remains that the rents are there. And they will be for many decades to come. No government has shown an appetite for changing the system.
Given that what investors will pay for such income streams is at an all-time high, if ever there was a time to look at this plan, it could be now.
(Boyd Erman is a Globe and Mail Reporter & Streetwise Columnist.)
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