The Absolute World Towers in Mississauga.FRED LUM/The Globe and Mail
In a tower in downtown Toronto, a pair of fortysomething brothers is amassing an office-building empire. There's an irony in that: They are big believers that the real value right now is not where they sit in the city core.
Blair and Brady Welch run Slate Properties, which has acquired $2.5-billion of properties in the past nine years, partnering with pension funds and other investors. Their vision is to create something similar to Brookfield Asset Management Inc., the real estate behemoth based a few blocks to the east. They envisage a management company with affiliates specializing in various types of property.
They already have Slate Retail Real Estate Investment Trust. And now they are involved in a complicated little takeover that they believe will be the foundation for a big office REIT – and one that will invest in properties in places such as Mississauga. That is, big cities full of nice buildings, but not the downtown cores of Toronto and Calgary that get so much of the focus in office real estate.
But first, they have to get the takeover done. They need to convince investors in Huntingdon Capital to sell their company to Slate. That will give Slate a 30-per-cent stake in another REIT known as FAM REIT, and the contract to manage that REIT. Then they need to convince FAM unitholders to accept a transaction in which Slate will hand over seven office buildings to FAM, and take back FAM stock in return. The plan is to make FAM into a REIT that focuses on office buildings in non-core areas, with the Welches running it.
The FAM board is on side. But the analysts who cover FAM don't like the transaction much. They don't like the terms, and they don't like the shift in strategy for FAM, which is at the moment a diversified REIT with holdings in office, retail and industrial buildings. Mark Rothschild, an analyst who covers FAM at Canaccord Genuity, said in a report that "FAM unitholders should have gotten more."
So the brothers behind Slate want people to know who they are, and why they are suited to run FAM. And they want them to know why they are keen on the non-core strategy as the future of FAM.
The Welches grew up the sons of a developer, and went into the property business. When they graduated from business school, commercial property was a tough business, having hit a bust. While other graduates went into more prosperous lines of work, they started working on real estate in private equity. They worked out loans. Slowly, they worked up the ladder. They eventually became the point men in Canada for the real estate behemoth Blackstone, and parlayed that into a big business that now runs $1.5-billion of assets.
They call themselves value investors, and argue the value is not in the core.
In downtown Toronto or other major centres, any top property that comes up for sale draws huge interest. There are only two major office-focused REITs in Canada and they focus on downtown buildings. Pension funds love downtown towers, and they have the cheapest capital. The prices soar, reflecting that.
Head to Mississauga or another suburb and the competition is less intense, but the assets are no less attractive, the Welches argue. These are huge head office centres and large cities in their own right, but out of vogue.
"Core strategies do make sense, but that doesn't mean that other areas don't grow as well," Blair Welch said in an interview at the company's offices Friday. While being close to downtown is attractive, there are reasons to like the suburbs.
"Union Station, subways – those matter. But the airport, major highways, those are pretty important pieces of infrastructure."
He notes that 67 per cent of office properties in Canada do not fit into the definition of core. And demographically, much of Canada's growth is in suburban areas. What's more, buildings are so much cheaper that there is more protection should the real estate market go soft and rents underperform.
It's not that they don't like the core. They own assets there. They just don't like the pricing.
"Be patient," Brady says. "You might buy core later."