A cancelled golf game with a banker in the summer of 2007 set off alarm bells for Edward Sonshine, chief executive officer of RioCan Real Estate Investment Trust. His partner couldn't make their tee off because of an emergency meeting called after the market for buying and selling loans between banks unexpectedly seized. And Mr. Sonshine was left with his first hint of the unfolding credit crisis.
A veteran of past downturns, Mr. Sonshine says he actually started to get nervous a few years ago, as real estate asset prices escalated. Shopping mall owner and developer RioCan, Canada's largest REIT, began shoring up its balance sheet to brace for a downturn.
Still, Mr. Sonshine said he had little inkling of how bad things would become, as the credit market and consumer confidence shrivelled and real estate deals came to a standstill.
However, while times will be tough next year, a cautious approach and strong tenants mean RioCan is in fairly good shape, Mr. Sonshine says. In 2009, he adds, buying opportunities could emerge for the industry's strongest players as others succumb to the economic downturn. You appear to have been preparing for a downturn for a while at RioCan. When did you start to become more conservative?Around 2004 and 2005, I said, 'You know what, the prices are just getting too high,' so let's go into producing our own real estate. We built up our own in-house development team. When we did buy, it was opportunistic.You've talked about RioCan being born out of the last real estate crisis. Has that helped shape a company that can withstand a downturn?The late '80s, early '90s, was horrific. RioCan itself really came out of the early '90s devastation, and was, quite frankly, structured to withstand something like that again, with our low leverage levels and that kind of stuff.
A cancelled golf game with a senior real estate banker set off your nerves in 2007 ...
As a survivor of the early '90s, I get anxious very easy. ... That sort of scared me, because I've always felt that our world, the real estate world, is very capital-intensive. Money's got to keep moving around, and when you're hearing banks aren't buying loans from each other, that has a backup effect through the whole system. But I still had no idea where this was all going. I wish I could say that I did.
So how did you react ?
At that point, I got the guys together and said, 'Let's look at all our development exposure and all of our capital commitments over the next two to three years, and let's see if we can start cutting them back.'
We cut down on buying, we really revved up our refinancing program, and we were trying to do them early. The major deal we did was probably the transaction with CPPIB [Canada Pension Plan Investment Board], where we sold them a 50-per-cent interest in our three largest development programs. What that did [was] really put us in a position to wait out any storm.
What are you watching for in 2009?
Quite frankly, I'm not quite sure what to expect in 2009. I think most of our peers are having capital issues today. In retail, what everybody's holding their breath on ... is [whether] there are going to be a significant amount of retail defaults in 2009.
What's your outlook?
I think there's obviously going to be some retailers that are going to have difficulty next year - we'll certainly see some of the smaller, more independent retailers go down. But as we look down our top 25 - we've actually extended it to our top 50 over the last three months - we really watch every tenant from a receivable perspective. And so far, I'm not saying they're having great sales because clearly they're not, but I haven't seen the slightest indication of any distress.
Are we in better shape than in past downturns?
Our current retail system is sort of an outgrowth of what happened in the early '90s, when a lot of retailers did go broke, and you had this tremendous consolidation take place, and it's continued.
In Canada, at times like this, it's actually a wonderful setup. Over the years of real growth, this was a bit of a negative, because you didn't have great competitive demand. In the U.S., they had faster rent growth, which is now hurting them, because you had several players who all wanted the same place.
In Canada, you didn't really have that luxury.
Could the current lack of liquidity lead to buying opportunities this year?
It's going to be a quiet year. It's going to be a year in which everybody looks around and says, 'Okay, am I still alive financially?' I hate to put it this way, but that's when companies [that] have a strong balance sheet, like I think RioCan has, may have some opportunities.
What opportunities could emerge and what will it take to entice you to buy something?
Well, I'm probably going to not do anything until February. I told the guys, 'Catch up on all of your work over December and January.' Because in February, two things will happen. One, everybody's year-end statements, including ours, start to come out. So you get to see a real good picture of what shape everybody's in, and who's really going to be having problems as the year unfolds. Two, we'll get a chance to talk to all the retailers and find out really how Christmas '08 was. So far, the indications are that it's not good, but it's not terrible.
I think as we roll through February, we'll get pretty good visibility on both the market and retailers in general, and, to the extent that there are available opportunities, that's when I would start pursuing them.
That will give me an idea on pricing. Right now, quite frankly, you don't know what anything's worth.
© The Globe and Mail
