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What? Canadian Real Estate Can Go Down in Value?

Chief Executives of Canada's Two Largest REITs Swap War Stories From 25 Years in the Business
September 7, 2018
From left, Stephen Johnson, moderator Pat Koval and Ed Sonshine discuss the Canadian real estate market during a panel discussion Thursday at the RealREIT conference in Toronto.

Can't imagine real estate going down in value? The chief executives of Canada's two largest real estate investment trusts can tell you they've lived through it.

Ed Sonshine, who heads up RioCan, and rival Stephen Johnson of Choice Properties, which became the largest REIT in Canada this year, shared some war stories from 25 years in the sector at the RealREIT conference held this week in Toronto.

Sonshine, whose REIT listed on the Toronto Stock Exchange in 1994, recalled some of the running jokes at the time about an asset class that seemed to have nowhere to go but down. "You want to get even with your kids, leave them your real estate," Sonshine joked to the audience of real estate professionals, about the prevailing wisdom of the early 90s.

Johnson, who previously headed up Canadian REIT, which combined in May with Choice Properties to create a REIT with a market capitalization of about $8.2 billion, was the first out of the REIT gate in 1993. Much to Sonshine's chagrin, he pulled out a pretty ugly-looking chart of the Toronto Stock Exchange real estate sub-index that showed the market peak in 1989.

"The composition of the index was made up of some great names," said Johnson. "Over the subsequent three or four years, the index came off over 95 percent. It was staggering, the crash. Most of the companies filed for correction or were bought out."

Major companies like Ivanhoe Cambridge, Oxford Properties and Cadillac Fairview ended up being taken out, said Sonshine. "All the great companies that were owned by pension funds were amongst those public companies," he said. "The ones who didn't get bought went bankrupt. I remember running into the CEO of Cadillac one day and he said, 'Eddie, how are things?' I said, 'How are things? It's 1992, and it's terrible, but you're CEO of Cadillac, so you probably don't know about that.' He said, 'We are all on the same conveyer belt and at the end of it is a fire called bankruptcy.'"

Sonshine said the common feature for all that survived the crisis was the REIT structure that protected new players with rules required under their declarations of trust. "Why are they there? Why are we restricted to no more than 15 percent of our assets in development? Why are we restricted to not having all of our assets with one revenue source? Leverage? We all have some restrictions," said Sonshine. "This model was used by all REITs and was so we could tell investors we were not like the guys who came before."

Johnson conceded the REIT market faces some new challenges. "The GDP growth is going to be slower than we've seen the last 25 years. The pace of change is going to be disruptive. It's going to be disruptive to a lot of industries, and it's going to be disruptive to real estate," said Choice Properties' chief executive. "Our focus is where do we have an advantage, and it's our land bank from our merger with Choice. We have a lot of sites where this an opportunity to add more footage."

Choice faced some major shareholder news this week when grocery-store giant Loblaw Companies, its largest tenant and shareholder, said it planned to spin out its 61 percent stake in the REIT under a plan that would see each Loblaw shareholder, other than George Weston, receive common shares in George Weston equivalent to their value in Choice.

George Weston, which controls Loblaw and directly owns 3.8 percent of the REIT, would have a 65.4 percent interest in the REIT after the transaction.

"This transaction, which results in our major shareholder becoming GWL instead of Loblaw, will improve clarity for all Choice investors as we continue to reposition and grow our business as a major property owner and developer," said Johnson about the rearrangement, noting at the conference that it continues to have a strategic relationship with Loblaw.

Garry Marr, Toronto Market Reporter  CoStar Group   
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