The landlord

Strolling through a nine-room, 6,000-square-foot penthouse apartment in midtown Toronto on a summer afternoon, Morguard Corp. chairman and CEO Rai Sahi certainly doesn't look like a flashy real estate promoter. His face doesn't beam down from any billboards nearby, he doesn't have a reality TV show, and he doesn't tool around town in a Rolls-Royce. At age 71, dressed in a conservative blue suit, Sahi (pronounced Saw-hee) looks like what he is: a prosperous accountant, investor and executive who still enjoys going to work.

At the end of the day, unlike some Canadian business titans worth far less, he won't drive home to an opulent $10-million-plus estate on Toronto's Bridle Path. Instead, he has an easy 15-minute commute from Morguard's 11-storey 1970s headquarters to a well-appointed but run-of-the-mill McMansion at the end of a cul de sac in Mississauga.

Perhaps because of his low-key lifestyle, he's hardly been noticed by Canada's rather thin upper crust. Yet he has an estimated net worth of $2 billion, making him one of the wealthiest people in the country. He's richer than JR Shaw. He's richer than the entire Bombardier family, and the Molson family too.

Since taking over the corporate foundations of Morguard in the late 1990s, Sahi has built it into a $20-billion conglomerate that manages and owns hundreds of office buildings, shopping malls, factories and apartment complexes across North America. And during the last eight years, Morguard's share price has been on a tear, rocketing up faster than almost any other company of its size. In early 2009, it was trading for about $16. Now it's at $175—more than a 1,000% increase—making it one of the best-performing real estate stocks in the country.

As Sahi shows me around the penthouse, the way he talks about the building—one of two 30-storey towers in an elegant but not glitzy two-and-a-half-year-old rental development called The Heathview—tells me a lot about how he's achieved such success.

The apartment is huge, but it hasn't been fluffed—no stylish furniture or baby grand piano (unlike the model suite in a skyscraper downtown that recently ripped Donald Trump's name off its peak). As we walk from room to room, Sahi doesn't dwell on the fine finishes—the stone kitchen countertops or the open fireplace—instead, it's all about the numbers. The building has almost 600 apartments, with an average size of about 850 square feet, he tells me, and the monthly rents average about $3.25 a square foot.

The property was acquired for a song back in 1997, when Morguard swooped in to take a large stake in a struggling apartment developer and landlord called Goldlist Properties Inc. Then Sahi patiently sat on it for years as it increased in value, taking his time while haggling with city and provincial officials to get The Heathview project approved. The buildings didn't open until late in 2014.

The most telling aspect of the project is that it's not another condo development—despite the sizzling market and its tony Forest Hill address. Instead, Sahi built rental buildings that he will continue to own, while collecting his monthly rent cheques, probably until the end of time. And why not a condo? Why not go for the instant windfall, rather than a trickle of income for years to come?

When I ask him this, Sahi peers at me for a moment in the most unnerving way. Then he fires back his answer in a deep and gravelly voice. Condo developers "are a lot of speculators," he says, who borrow heavily to make risky bets. In a soaring market, they can make out like bandits. But when the market downturn hits—and it will—they tend to get wiped out. "We've seen that movie a few times in the past 30 years," he tells me with a cheeky grin.

In many ways, Sahi doesn't fit the billionaire property developer mould. He wasn't born into a wealthy Canadian family. He immigrated here from India when he was 24 years old, still struggling to become fluent in English. With hardly a friend or acquaintance in the country, he started out selling insurance door to door. Given his unlikely path to prosperity, Sahi doesn't seem to care if his approach seems contrarian, old-fashioned or even heretical. He's disciplined, he's patient, and he's tough. How else would he rise from nothing to become one of the most successful real estate investors Canada has ever seen?

Born in what is now Pakistan in 1946, Sahi was just a year old when India was split into two countries by the British, and his parents fled east to India. "We were refugees," he says. "They left everything behind and walked." His father started a dairy farm, and eventually Sahi went to university in the city of Amritsar on a wrestling scholarship. "I had to get up at 4 a.m. every morning, ride my bike to school, train, then go home and have breakfast, and ride back again."

After earning a bachelor's degree in economics, Sahi went to work for the Central Bank of India, one of the country's largest commercial banks. After four years, he wrote to his brother, an electrical engineer who had emigrated to Montreal to work for Northern Telecom. "He said I should come here," says Sahi.

Arriving in Montreal in February, 1971, Sahi took any job he could find, including unloading boxcars for $1.50 an hour. After a few months, he joined the Canadian division of Prudential Insurance Co. of America, moved to Kingston, Ontario, and began selling life insurance door to door. Sahi says that job improved his English and taught him a lot about Canadian culture—at all levels of society. "You were meeting different families every week," he says. "Kingston was known for penitentiaries and hospitals. And Queen's University." Yet Sahi adds that he never experienced even a hint of discrimination then or since. "I've never come across any situation where somebody wouldn't do business with me because I come from a different part of the world," he says.

Two years later, he got married to Sudershan (Sue) Thakur, who was working in Eaton's computing department in Toronto. Sahi earned his Certified General Accountant designation, and he and Sue moved to Toronto, where, in 1976, Sahi landed a job at the Bank of Montreal as a business loans officer. Over the next four years, he worked his way up to a position in commercial real estate loans at an office downtown. He loved it. "I probably could have just stayed there—by now I'd be retired," he says wistfully.

But Sahi was ambitious, and the bank jobs gave him skills in determining the value of businesses and assessing risk. "You need to understand a business before you lend it money," he says. He dealt with "all kinds of companies, from small manufacturers to consulting firms to trucking companies." He established contacts too. And after granting loans to entrepreneurs, he figured he could become one himself.

In 1981, Sahi spotted an opportunity: Advanced Extrusions Ltd., a small manufacturer of aerosol cans and toothpaste tubes based in Penetanguishene, Ontario. Along with several partners, he bought the business for $7 million. Quickly, Sahi and his partners kicked Advanced into high gear by installing a high-speed assembly line and taking advantage of the low Canadian dollar to boost exports to the United States. Revenues doubled, and CCL Industries Inc. bought the company in 1985 for a reported $22 million. He then used the proceeds from the Advanced sale as a launchpad to buy control of two transport companies, combined them, and sold them to Winnipeg-based Federal Industries for $70 million, much of it in shares. Sahi was on a roll, but he was also about to face his first major nasty boardroom battle.

At the time, Federal Industries was run by John (Jack) Fraser, a pillar of the Canadian establishment. The company had a long and storied history, but it lacked focus—it had dabbled in many businesses over the years and soon rebranded itself as a metal distributor called Russel Metals. In 1996, it posted heavy losses, and by early 1997 its share price had declined by more than 70% over the previous decade.

Sahi was frustrated. He raised his stake in Russel to 8%, then mailed a proxy to shareholders, urging them to kick out Fraser, who was then vice-chairman, as well as chairman and CEO John Pelton. A Fairfax Financial Holdings subsidiary was the company's biggest shareholder, and Fairfax chairman Prem Watsa agreed to side with Sahi. On the eve of Russel's annual meeting in April, Fraser and Pelton stepped down. Sahi dropped his proxy fight, and he and two allied directors received seats on Russel's 11-member board.

Bud Siegel, who had been Russel's executive vice-president, was promoted to CEO as a result of the shakeup, and he says Sahi tried to push him around too. "He would say things like, 'Maybe you shouldn't get any compensation for the first year, until we see if you're any good or not,'" Siegel recalls. Sahi was sharp with finances, and he leaned on the board heavily, but, says Siegel "he didn't understand where the numbers came from at first." Fortunately, "once Rai figured out that we understood what we were doing, he was a non-event." Siegel was left to run the company in peace, but even now he shakes his head at Sahi's nerve. "He was a bully," Siegel says. ("I was," Sahi says with a smile, when reminded of the event.)

By the late 1990s, Sahi was tired of investing in operating companies. He stayed on Russel's board for a couple more years, then, in 1999, he sold out and stepped down so he could focus on real estate instead. As he had in other businesses, Sahi searched for bargains among overlooked or beaten-up companies. "I got into real estate on April 30, 1997," he says. "I remember the date, because that's my birthday." That day, he bought 40% of Goldlist's IPO for $9 a share, after the company reduced the size of the issue. Over the next year, he bought control of several more firms, including Revenue Properties Co. Ltd. and Devan Properties Ltd.

Sahi's key investments, though, were a 100% stake in Morguard Investments Ltd. for $35 million and a 20% stake in its publicly traded real estate investment trust, Morguard REIT. Morguard Investments was later folded into Morguard Corp., along with stakes in three publicly traded subsidiaries. "That gave us a platform on which we were able to grow."

Unlike a lot of property magnates, Sahi doesn't have an edifice complex. No desire to own the biggest or glitziest buildings in town, hire celebrity architects or plaster his name on his properties. From the beginning, his interest in real estate was mainly financial. "The idea was to buy $400 million or $500 million in assets, and make maybe $30 million or $40 million a year in EBITDA," he says. "I never expected that we would end up owning and managing $20-billion worth of real estate."

As a vehicle for real estate investors, Morguard Corp. evolved into a very odd duck. It was soon managing billions of dollars worth of properties, but there wasn't a landmark downtown Toronto or Vancouver skyscraper among them. Think, instead, of dozens of apartment complexes, offices and factories in suburbs and smaller cities, and malls such as St. Laurent shopping centre in Ottawa and the Scotia Place office complex in Edmonton.

Morguard was also one of the very few real estate companies to focus on growth rather than dividends. Unlike REITs, which paid out almost all of their income to investors, Sahi was determined to reinvest cash flow back in the business. The result was that Morguard became not an income play, but a long-term value growth proposition, says Neil Downey, a managing director with RBC Capital Markets, who has covered the company since the late 1990s. Today, the company's yield is a negligible 0.3%. If you invest in Morguard, you're not looking for retirement income; you're counting on Sahi to compound the share price over time.

Thankfully, that's exactly what he's done over the past two decades, and he is now in firmer control of the company than ever. Over the years, Morguard has bought back millions of its shares, and Sahi has acquired more himself—he's never sold any. He now has an outright majority holding of 56%, worth about $1.2 billion.

Sahi has stuck doggedly to core principles. He's restricted Morguard's investments to Canada and the United States, and believes in buying and building to own and rent, not to flip. To limit risk, he has diversified extensively by region and by type. In total, Morguard Corp. and its subsidiaries now own about $9.4-billion worth of properties and manage another $12.5-billion worth of buildings, real estate and other investments for clients.

Like most value investors, Sahi loves a bargain. He's unemotional about his purchases, and he doesn't mind squeezing sellers, even when they're desperate. His most controversial deal to date—his takeover of ClubLink, which owns the world famous Glen Abbey golf course in Oakville, Ontario—was a prime example.

Sahi recalls that it all went down on the Saturday before Labour Day in 2001. Bruce Simmonds, CEO of the King City, Ontario-based ClubLink Corp. chain of 29 golf courses, and James Hinckley, then president of Dallas-based ClubCorp. Inc., ClubLink's biggest shareholder, had arranged to meet Sahi that evening at his house in Mississauga. When no one answered the front door, Simmonds and Hinckley walked around back and looked through a window. "I was asleep in front of the TV," Sahi says. The two banged loudly on the door, and he woke up.

ClubLink was facing a deadline with a lender in just three days, and it desperately needed cash. Hinckley and Simmonds wanted Sahi to buy ClubCorp.'s 25.1% stake at $7 a share, for a total of $35 million. Sahi heard them out, nodded, then offered them not $7, but $5 a share, for a total of $25 million. They said they needed to think about it. On Monday, the day before the deadline, they caved—they had no choice. In 2007, after a standstill agreement expired, Sahi bought out the remaining shareholders and folded ClubLink into a precursor to TWC Enterprises Ltd., a TSX-listed firm he controls and runs as chairman and CEO.

ClubLink still gets a lot of publicity, largely because of Sahi's plan to bulldoze the prestigious 230-acre Glen Abbey golf course and build a massive new subdivision in what is now the middle of Oakville. When his plans were announced, more than 1,000 irate local residents signed a petition, but Sahi says he's not losing any sleep. The Ontario Municipal Board has deemed his application complete, and the project is now up for review by city council. Besides, ClubLink has evolved into a bit of a side project for him since the early 2000s. "I didn't have a lot of time to think about it, actually, because that first deal was done over a weekend," he says. "The only thing I knew was that I was in the real estate business, and these guys have got 10,000 acres of land, which may be worth something."

Today, it seems like Sahi has the magic touch when it comes to real estate, but his journey to success was not without a few bumps. When the market crashed in 2008, Morguard could easily have collapsed too.

For the first decade under Sahi, Morguard generated cash, Sahi reinvested it, and the company's share price climbed steadily, hitting almost $50 in 2007. But when the crash hit, that impeccable record didn't count for anything. Sahi says he still remembers a gut-churning Monday morning in mid-September, 2008, just after Lehman Brothers collapsed. He'd heard that even in Canada, the banks were freezing their lending operations, and a real estate investor without access to credit could die a swift and merciless death.

As soon as he got into the office, he jumped on the phone and started calling banks, life insurers and other lenders. His heart sank: They had all stopped rolling over mortgages for even their favourite real estate clients, effective immediately. "One investment bank went under, and the whole world collapsed," Sahi recalls. "I was worried the real estate business was going to come to an end."

Over the next several weeks, Morguard's share price got pounded. By November, it had plummeted from $30 to less than $16. It stayed down until the bottom of the financial crisis the following March. But Morguard survived—thanks to a bit of luck. The company had a history of staggering the maturity of its mortgages, so it only has to roll over about 10% of them each year. In late 2008 and early 2009, it only had one significant loan come due: $10-million worth of mortgage-backed securities, an amount it could cover from its own cash flow.

The crash was rough, but the period since then has been the best Morguard has seen. As the market recovered, the company's share price went on a tear, and it kept going for the next five years, cracking $100 in 2012 and $150 in mid-2014. In part, the surge was due to strong operating earnings and the soundness of Sahi's basic model. It's also an illuminating example of compounding at work.

Because Sahi reinvests almost all the cash spun off by his properties, Morguard acts a bit like the retirement fund of a disciplined long-term investor. Like any fund where compounding is at work, you don't see a huge amount of growth in the early years, but once the fund reaches a certain size, the compounding takes over and growth is not linear, but exponential.

Sahi modestly credits the company's success to a bit of luck, too, when it comes to mortgage rates. "Commercial real estate value is strictly tied to the long-term market rate of interest. The interest rate goes down, the values go up," he says. "The rate goes up, the values go down. It's that simple," he says. Interest rates have declined since 1997; ergo, Morguard's share price has gone up.

The next few years will reveal just how savvy Sahi is. Several headwinds have blown up that will test Morguard's ability to weather tougher times.

For starters, there's the so-called death of retail and the rise of online shopping. Morguard has a lot of money tied up in the kind of mid-tier shopping malls that analysts predict will be hit hardest by the rise of Amazon. The company has a stake in 28 such malls and plazas across Canada, and 14 in the United States. In 2015, when Target Corp. shut its department stores, Morguard held leases on 15 of them. Now it has to contend with the troubles of Sears Canada—Morguard holds leases on 12 of its stores.

The biggest challenge Sahi faces, however, is the threat of rising interest rates. He admits that he has never invested in real estate in a rising rate environment, and already, cracks are beginning to appear in Toronto's overheated market. To date, they have only swallowed headstrong investors—such as metals magnate Alex Shnaider, who made a disastrous investment in the Trump International Hotel & Tower, and veteran condo developer Alan Saskin, whose Urbancorp filed for court protection from creditors in early 2016—but as rates keep rising, others may follow.

Long-time admirers of Morguard aren't worried. After all, value investors often do well when their more greedy counterparts are coming apart at the seams. Sahi has never overextended himself. He's always bought cheap and built in a margin of error. His investments are diversified geographically and by sector. It's a bit of a stretch, perhaps, but you could call him the Warren Buffett of Canadian real estate.

In the coming years, Sahi's even temperament and discipline will be tested. But in many ways, he has always been preparing for the day when the market turns. The tide is going out, and as Buffett famously observed, when it does, investors will find that some of the real estate speculators were swimming naked all along. But not Sahi. He's definitely wearing at least one bathing suit. Maybe two.