OT, long and rambling.Kind of off topic, but I figure this is the best place to post it. I want to get away from the cap rates perspective of REIT acquisitions and look at the underlying land and building value. I’ve yet to see a REIT break out the purchase price into components of say, land, building and lease. The odd news release will mention something about step ups in the rent or the cap rate being based on “fully escalated” rents. CAP REIT said their acquisition of ResReit was at under half of replacement cost. That seems incredible given that management put the deal at a cap rate of about 6.7% “with all synergies captured”. Killam Properties has recently acquired apartments at below replacement value according their management (some of these properties are brutal to look at though). A lot of the properties acquired by IPC in 2002 and their recent Dallas purchase are described as well below replacement cost. For the Big Box type structures that are so hot in retail today, what value is in the buildings themselves? In a typical Home Depot big box, the floor is bare concrete, you can see the steel supporting the roof for a ceiling and the walls are just pre-fabricated slabs linked together on site. The fit and finish consists of orange two storey high industrial racking. They have to be cheap to build. The huge parking lots of big box power centres take up a lot of land, and if the value of the land itself goes up the shopping centre owners will benefit even though the value of a big box structure might remain stable or fall. I think it was Sandy McIntyre that said twenty years from now he doesn’t know if big box centres will be the retail format of choice but the land they sit on will sure be worth a lot more. The land under the big boxes must be relatively cheap compared to the downtown areas or those already filled in. That would leave the lease as the main source of value and in the present market of low cap rates, they must be expensive.
I drove on Dundas Street from near Hamilton to close to Toronto and saw a LOT of big boxes, strips and retail hodge podge for kilometer after kilometer after kilometer. A lot of First Pro (they have to be a HUGE outfit), some Riocan, Penrealty, etc along the way. I can’t see the difference between them, just one big retail strip. With lots more room to put up more. Was hundreds of km’s north in the Soo recently and they’ve got a few big retail strips loading up with big boxes too(saw some Riocan there too). Commodity like? It almost seems like Mr. Sonshine had forseen this and started to team up with bigger players like CPP to go after exceptional type properties in high barrier to entry locations. Not to mention the turnaround ventures, development, etc. That is reassuring. I think what this comes down to is the real estate and less the financials/spread . If Mr. Sonshine wanted to, he could probably be buying a lot of properties today and accretively but 1) in the long term today’s prices could come back to haunt him 2) Riocan already has too many generic strip big box properties in small town places like Windsor, Sudbury, Stratford, Sault St. Marie, Saskatchewan, etc where the long term increase in land values will be lower than in GTA, Montreal, Vancouver. Riocan does already hold some exceptional properties, don’t get me wrong. When a REIT starts buying properties like a commodity, well, you get what Summit REIT has offered you. In over seven years, cash distributions have gone from $1.50 to $1.53. If you look at the amount of real estate Lou Maroun bought over that period of time, the results are inexplicable. (I have posted my thoughts on Summit in the appropriate forum)
To continue with the land and building part. Some American REITs are paying huge dollars for well located office towers that are fifty or more years old. It seems land in the central business district of major NA cities will hold/rise in value more than that on Dundas West or Sudbury, Hamilton etc. The cost of putting up an office tower will probably rise as well. I realize that office is more cyclical than retail but, can one of these big boxes actually last 30 years? (you won’t have to buy a whole new office building in 30 years), they don’t look like they are built to. Just thinking out in the open here. I’m glad Mr. Sonshine has gone on the record as being “always worried” and never complacent. Not worried about Riocan, just the wave after wave of boxes blanketing the landscape.
Would be interested to know what other board members think of CAP REIT’s large holding of GTA apartments long term. Boardwalk REIT’s CEO has said that although they are presently not in that market, they think it is one of the best in the world long term. Was looking at an RBC report on ResReit, it had OMERS holding 18% before CAP bought it. CAP certainly holds a good chunk of "institutional calibre" assets now.