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Saturday, May 2, 2009

Real estate investors: Secrets of my success

Real estate investing pros reveal how they manage their businesses today.

By Alex Mlynek and Calvin Leung

In tumultuous times, it's often prudent to turn to those who know how to make money no matter the situation. That's why we combed the Canadian Business Rich 100 to find some of this country's most successful (and wealthy) real estate players. David Azrieli, Tom (son of Bob) Gaglardi and Peter Gilgan share their strategies, and their thoughts about where the sector is heading and what pitfalls to avoid.

Founder and president, Canpro Investments Ltd.

What is your most recent acquisition?
We bought a parcel of properties from General Electric at the Toronto airport. It's approximately $100 million.

What was the strategy behind going for that acquisition?
I believe it's a quality property. And we have the cash. Some people need the cash, and they want to sell. We have also made an acquisition in Israel. We bought a major shopping centre at the end of March, for about US$200 million.

Is that the Givatayim Mall?
Yeah. And, of course, we have quite a number of projects on the drawing board that we are proceeding with.

What is your strategy in this market?
We have the cash, and we want to take advantage of opportunities. As a matter of fact, in the over 50 years I have been in business, we have always taken advantage of slumps in the market, and we were buying. I can say that we've increased our portfolio nearly every time there was a recession.

So in a way, it's a good thing for you?
No. We are part of the general economy, so it's not very good. But, yeah, we are looking at opportunities, and if we find them we have the ability to proceed.

You have holdings in Canada, the United States and Israel. Which country currently has the best opportunities for the commercial real estate market?
All three. The market in the U.S. will definitely improve, but it might take a bit longer. The prospects in Canada are fantastic, because commodities will be needed in the future, and the banking system in Canada is strong. And I also believe that the ripple effect of the depression touched Israel only slightly.

When do you think the market is going to come back?
Ha ha. I don't know if I ever told you, but that's an unfair question to ask me because I'm the eternal optimist. I think in the second half of the year we will see a very positive change.

Which of the countries that you hold assets in has the best outlook?
We have very nice, very good, very selective properties. And we suffered virtually nothing at all in terms of loss of tenants or rent. Surely there are some places here and there. But I wouldn't say that any of them is different.

You have holdings in various sectors within the commercial real estate market. Office space, malls, hotels. Which of those specific sectors has the best outlook?
Shopping centres. Hotels will undergo a bit of a slowdown this year.

People may not travel as much. People may not spend as much money on vacations. But people are still buying, they're still going to the grocery store, they're still buying shoes.

What advice would you give someone interested in getting into the commercial real estate market now?
The big problem in commercial revenue-producing real estate at this moment is the ability to finance. And if someone's credit is good enough to get 60% to 65% to 70% of a loan, or to identify a project that comes with a loan he would be worthy of assuming, then I would say that a capital return of 7%, 7.5% or 8% would be a very good investment. But that's, of course, limited, because so far the banks are not lending yet sufficiently. Some properties come with existing mortgages, but, even there, there's a question whether the buyer can assume them.

Have you had any difficulties to work through in this downturn?
Some tenants want to downsize; some want to reduce their overhead. So we talk to them. We see how we can accommodate them. If we can, we do. If we cannot, we don't.

What has been the key reason for your success aside from that?
We were never overextended. The leverage which we have was never used to capacity, so we have very few mortgages. We try to do one project at a time, and do it well. And above all, we are very excited about every project we do, and we love it. A.M.

Tom Gaglardi
President of Northland Properties Corp.

What's Northland Properties' business model?
We buy bare land, construct the buildings, put in our brands and operate them. We've occasionally opened restaurants on leased land and bought existing assets, improved them and then rebranded them. We've always kept as much in-house as we possibly can. We have a construction group, purchasing group, our own designers, architects, engineers. Other than the Denny's brand, we own all of our brands. Our approach to business hasn't changed since the '60s.

What are the advantages of the model?
We can typically create assets at a lesser price than our competition, because services you buy outside the company have a profit margin attached to it. On the operating side, by owning our brands rather than paying franchise fees to a third party, we're able to run at higher margins than our competitors.

Have you had to lay off people in this environment?
No, other than normal adjustments, when business begins to soften, like cutting back on hours. The great thing about us is we're private. We don't answer to anybody. We don't answer to the market. These are tough times for guys who need to worry about maintaining their next quarter's earnings.

What factors do you consider before buying a piece of real estate?
Population, airports, highways, density of business and residential areas, parking, visibility.

Are you staying away from Alberta now?
We're more cautious. Having said that, we have two big hotels under construction that will be completed by the end of the year. But both of them — one is in Calgary and the other is in Edmonton — are in super strong markets that are going to perform fine. My view is that oil is not going to stay where it is for a long time. Alberta is still a strong place; it's just not as strong as what it was. Depending on who you talk to, Ontario is the worst place to go now. But we're performing great there. For example, Moxie's in Ontario, even in this market, is performing fantastically. A lot of guys might say you shouldn't be doing well. But these are strong locations and they have strong fundamentals.

Northland Properties went from being a minority to the majority owner of Revelstoke Mountain Resort earlier this year. How did that come about?
In 2007, we became a lender and were given a minority interest as a sweetener. It was a way for us to invest some surplus cash and participate in an exciting project. In British Columbia, as you build ski capacity and add ski lifts, the government permits you to build bed units tied to that capacity. Potentially the project will have over 5,000 homes, and that's potentially very profitable. The big thing for us was we could participate in a deal like that but not have to run it.

What made you change your mind?
The world changed in October '08. Don Simpson, who was the majority shareowner, saw his working capital disappear. But he loves the resort so much, he didn't want to see it stop. He basically came and said, "I'll do anything." We seriously considered acting like a lender, which would have meant a foreclosure action. As corny as it sounds, I think there is a moral feeling. Our name was attached to it. Once we better understood the opportunity and knew itwouldn't disrupt our core businesses, we stepped in to carry this thing through a difficult time.

Isn't the ski business quite a different business than hotels and restaurants?
It is, but there are similarities. You have guests and you sell them services. But as for the ski business itself, it is an absolutely new industry for us. There's a learning curve, and we're learning every day.

What advice would you give to someone looking to invest in the hospitality business?
It might be a fantastic time to get positioned. There are some unbelievable buying opportunities right now, whether it's raw land or existing assets that are in some cases selling at half their value of 18 to 24 months ago. But you'll need access to cash. The credit markets are in clear disarray. C.L.

Peter Gilgan
Founder and CEO of Mattamy Homes Ltd.

What's your real estate strategy?
We're known for building whole communities in a very organized fashion. We're in and out very quickly so you're not battling delivery trucks for six or seven years. We win, because it's obviously an efficient method, and our customers win, because they get a more efficient pricing structure and get to enjoy their places more quickly. We tailor our offer to people within five miles of our communities, because that's where most of the buyers come from.

How are you enticing customers to buy in this tough economic environment?
Our prices are less today than they were two years ago. You price to the new market reality. We're also aware of the change in consumers' importance rankings. I read in the newspaper this morning that guys are not buying the Belvedere vodka anymore; they're buying Absolut. We're no different. We recently ran an ad. The message was house prices go up and down. Enjoy where you live and love where you live, and in the long-term you'll win big.

Mattamy recently began selling houses in Airdrie, a community just north of Calgary where demand for new homes has significantly dropped over the past few months. Why there and now?
Real estate is a long-term business. I don't play a six-month game. I play a 20-year game. Westarted investing in Calgary four years ago.

How have sales been?
We're not setting the world on fire by Mattamy standards. We sold 20 houses on the opening weekend, whereas in the past, we might have expected to sell twice that many. But we've reset our expectations according to the times. Like somebody once said to me: you can't go broke making a little bit of money. You find better ways to make money. You reset your cost structures, because free market inputs as opposed to regular costs are more flexible. In other words, a carpenter will work for a hell of a lot less this year than last year, to put it in simple English.

What's your biggest challenge?
In Ontario, the approvals regime over the last 20 years has become so difficult I have postponed or aborted further acquisitions in the province for a number of years now. Approval times have lengthened and become unpredictable. Approvals in north Oakville have been two years away for the last five years — if you get my math on that. Conditions for approvals have made it not affordable for the middle-class home buyer.

What's causing that?
A small faction of people, for reasons that are inexplicable to me, are either misinformed or choose to misinform approval authorities asto the merits of development. The authorities have a lack of deep comprehension on how integrated the building industry is into the financial and social health of the community. A community where no houses are being built is consistent with a community that's dying a slow death. The evidence of that is all over the place. The communities need that renewal, corollary employment and tax base.

How have you dealt with that particular challenge?
We'd rather convince than fight. That's our mantra. That's how we've run our land development division for over 20 years, since I really got into the business: Have a convincing and compelling reason why a community should approve a project in a manner that we can approve. But we're struggling, even though we have the best relationships possible with most of the municipalities.

When do you think the housing market will improve in Canada?
Your opinion is as good as mine — maybe even better. The turnaround will be significantly about consumer confidence and affordability.

Any advice for people in the residential real estate business?
Going into these kinds of periods you want to de-leverage. But it's important when you start the process. If it's when the bogeyman is at the door, it's a little late. We started de-leveraging two years ago.

What made you think the economy was heading for a downturn?
My bones. C.L.


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