Property Biz Canada
Bay Street veteran Shant Poladian makes big shift as REIT CEO
Property Biz Canada
Thu Jan 10 2013
As an analyst, Shant Poladian has had a front row seat for the seemingly unstoppable growth of the Canadian REIT sector since 2001, the stunning plunge in 2008-2009 and the roaring comeback since then.
Now he gets to take an active role as the Chief Executive Officer of the newly minted FAM Real Estate Investment Trust.
“I saw the whole thing play out, the good, the bad and the ugly and the boring times too,” said Poladian.
Long term relationship with Huntingdon
The former Equity Research Analyst and Managing Director at Canaccord Genuity Corp. (and BMO Nesbitt Burns prior to that), can trace his current role to a lengthy relationship with B.C.-based Huntingdon Capital Corp. head Zachary George when few people were paying attention to him.
“He would come to me every few months to give me an update on what he was doing – he wasn’t looking to have me pick it up as an analyst at that time. We ended up building up a pretty good dialogue together.”
By 2011, the two men decided it was time for Huntingdon to raise public capital and the Canaccord analyst helped the REIT raise $46-million in debenture financing. “The stock basically went from around $6-ish at the time to around $13. So it was a pretty successful offering,” said the former analyst.
REIT adventure began last summer
It was a decision this past summer to pull the stabilized assets out of Huntingdon and put them in a REIT that ultimately created a new career for Poladian.
The Vancouver-based company decided to create FAM REIT because it is at a disadvantage when it comes to cheaply raising capital to make acquisitions because it trades at a “significant” discount to its net asset value. Putting the best properties in a separate REIT controlled by Huntingdon neatly solves that problem.
“The ideal structure is a REIT structure and that is when Zach approached me to see if I would be interested,” he said. “I thought, age 39, going on 40, you only get a few opportunities in your career to make a significant move.”
With its initial public offering at the end of December, FAM REIT raised $58.8-million. Huntingdon will remain very involved in its operations.
Mixture of Industrial, Office and Retail
Following the IPO, FAM acquired a portfolio of 27 income-producing properties from Huntingdon Capital Corp. made up of 1.7 million square feet of industrial, office and retail properties.
Huntingdon will act as manager of the REIT and the initial properties and provide strategic, asset management, administrative, property management, leasing, construction management and administrative services necessary to manage the day-to-day operations of the REIT and its assets. Through Huntingdon, the REIT will benefit from a broad network of relationships and property management and financing expertise within the commercial real estate industry.
FAM’s initial stake has a decidedly Central Canada character, something that the REIT’s CEO hopes to change over time. Nearly two-thirds, 18, are in Manitoba, with the rest in Alberta (four), Saskatchewan (two), Ontario (two) and the Northwest Territories (one).
The REIT’s portfolio is currently split approximately 45% in each office and industrial with the remainder in retail. Given that retail has not yet had much of a shakeout with bankruptcies and vacancies, the CEO is not expecting much activity there initially. “In office and industrial you probably have more balance of opportunities as long as you are not chasing after trophy assets.”
He believes the pure play approach that comes from concentrating on just one asset class is too limiting for a small REIT and could make it captive to the market cycles that are unique to the office, industrial and retail sectors.
Different approach to growth
Given that the Canadian commercial real estate market is in the later stages of a long-term bull market, FAM REIT hopes to distinguish itself and prosper through a conservative approach. “The right strategy going forward to be successful is a low leverage model, low payout” said Poladian. “So if we do acquisitions we will be quite aggressive with raising equity, we are not going to be doing heavily leveraged acquisitions.”
The former chartered accountant believes that FAM REIT can achieve “blue chip” status and more quickly attain an “investment grade credit rating” than other REITs have done by using that lower leverage strategy from the start.
Leverage is everything for the FAM CEO. “Our initial target operating leverage range is 50-55% but we plan to move drive this to less than 50% as we grow and our cost of capital improves,” he said. That is expected to be maintained as the REIT issues more equity than it does debt to make future acquisitions. By comparison, many companies of similar size or even double FAM’s size, many are running at leverage ratios between 60 and 75%.
“What would a 20% correction in commercial real estate prices do to your leverage? Well if you are at 75% your goose is cooked. If you are at 50 to 55% you go somewhere into the 60s where you can still can get a reasonable amount of lenders to refinance at a decent rate.”
There is another noteworthy part of the IPO that makes them different from the competition. Specifically, the IPO forecast occupancy rate calls for a weighted average 93% for 2013, even though it is successfully operating the portfolio above 96%, Poladian said.
"Based on my experience as a REIT analyst, many IPOs have stumbled to achieve their forecast and disappointed investors because the prospectus was overly optimistic on growth assumptions," he said.
"We decided to do the exact opposite and felt that our unitholders would be much better served if we took a more conservative route on day one, and 'earned' our way to a higher valuation."
FUN times in bad times
While he has only been in the job a few months, Poladian is upbeat about FAM’s prospects. “The exciting returns in this asset class don’t come from buying properties in a competitive market, they come from having the liquidity and the balance sheet to be able to pursue opportunities when markets stumble.
“Just in terms of that, we have our largest unitholder, Huntingdon, with post closing of our IPO well north of $50-million in cash on their balance sheet so we are really well positioned with respect to a strong, liquid sponsor who has a track record of turning around two public companies in the last three years and now has all of its stabilized assets in a lower cost of capital than it does,” he said.
“Over the course of the next 10 years, we’re looking to have a lot of fun, and that’s our ticker F-U-N (TSX F.UN-T).”