When COVID-19 upended the global property market two years ago, few companies seemed as poorly positioned for the new normal as Artis Real Estate Investment Trust.
Based in the windswept city of Winnipeg on the Canadian prairies, two-thirds of its revenue came from the kinds of office buildings and shopping centers whose long-term futures were suddenly in doubt. But Samir Manji, an activist investor who runs Vancouver-based Sandpiper Group, saw an opportunity.
Employing aggressive tactics for the usually restrained world of Canadian real estate, the 53-year-old Manji launched a campaign that got him installed as Artis’s chief executive officer, then promptly began remaking the sleepy property manager into a corporate raider in his own image. He sold assets the market had viewed as Artis’s crown jewels, used the proceeds to join a group that bought another troubled real estate company, and then took a substantial stake in a third.
The moves have left industry observers scratching their heads. Convention has it that companies like Artis are supposed to sit on their properties and collect rent. But Manji’s approach is a lot more involved -- he wants to buy low and sell high. He believes the stock market is undervaluing the real estate assets held by companies like Artis compared to what they could fetch from private buyers, and is trying to re-engineer it to capture that spread.
It’s a novel experiment that could mean a new way of looking at real estate investment trusts, a type of company structure common around the world that are collectively worth US$2.5 trillion. But it also brings substantially more risk to what has traditionally been one of the safest corners of the stock market.
“We have intentionally chosen to pursue the road less traveled,” Manji said in an interview at the headquarters of Sandpiper, where he remains CEO. It’s an “opportunity to establish, create, and build something in a public environment that has not existed before.”
In a glass-walled conference room with Vancouver Harbor sparkling behind, wearing a sharply-tailored suit and his hair slicked back, Manji looks a little like a West Coast version of Gordon Gekko. But he speaks softly, takes thoughtful pauses, and plays down the confrontational aspects of his business.
Nevertheless, activist investing is still something of a rarity in Canada, and Manji has ruffled some feathers.
One of Manji’s earlier targets, Agellan Real Estate Investment Trust, said he’d first feigned interest in buying one of its assets in an effort to gather information for his campaign. Artis’s previous management accused him of “mudslinging,” a “smear campaign,” and -- perhaps worst of all in the polite world of Corporate Canada -- of operating in an “American-style.”
But Manji points to his track record. He got his way in the 2017 Agellan battle, and won another the same year at Granite Real Estate Investment Trust. Agellan was later taken private at a premium, while Granite’s shares rose to a record. When it comes to Manji’s Artis experiment, the stock market seems curious but skeptical.
Since the new strategy was announced, Artis’s shares have climbed about 10 per cent, more than triple the gain for a Bloomberg index of REITs. But at about $12, the stock is still far below the $17 Manji says its should be worth if the market was valuing its real estate the way he does. Closing that gap is what Manji says he wants to be judged on.
WAIT AND SEE
Of the eight stock analysts who track Artis, only two of them recommend buying its shares, while the rest essentially advise investors to wait and see.
“REIT investors tend to like simple stories with easy-to-follow dynamics,” said Matt Kornack, an analyst with National Bank Financial who has a target of $12.50 on the shares. “Artis is running in the opposite direction.”
Part of the reason for the market’s wariness is that real estate investment trusts, or REITs, aren’t designed for what Manji is trying to do. The trust structure is popular around the world because it provides preferential tax treatment, but only if the company is mainly engaged in drawing income from real estate ownership. Most jurisdictions, including Canada and the U.S., where Artis also has substantial holdings, limit other kinds of investment activity.
Manji says he wants to keep Artis’s REIT status, at least for now, and will work within those limitations. But the new strategy has caused his company to start behaving differently, and nowhere is this better seen than in how Artis has dealt with warehouses.
The pandemic boom in e-commerce plunged Canada into a warehouse shortage and caused rents to skyrocket, prompting some REITs to try to make them a larger part of their portfolios.
But Manji cashed in instead. He sold Artis’s collection of Toronto warehouses to Blackstone for $750 million. Then he took that money and did more or less the same thing at another REIT, joining a consortium of investors in privatizing Cominar, a property owner in Quebec, selling its warehouses and keeping the office and retail buildings.
And, his last major move since taking over at Artis, buying a substantial stake in Toronto-based Dream Office REIT, sees him pushing a similar playbook. Manji says one of the ways Dream can boost its share price is by selling assets, including the stake it owns in a different REIT that specializes in industrial properties.
The reason Manji keeps on selling what other real-estate companies are most determined to keep, while keeping what everyone else is most eager to shed, comes down to a difference of philosophy.
REITs have traditionally sought to own the buildings that bring in the biggest rents. But Manji thinks he’ll get better returns buying undervalued ones, then doing the work needed to turn them around and sell them on.
Right now he says office and retail properties are what’s most undervalued because the changes wrought by the pandemic are causing investors to underestimate how much people want to shop and work with other people. Whether through selling them to more patient private investors, or holding them, Manji says betting on this recovery is where the most money can be made in real estate right now.
“In the public market, you get value X, and in a number of instances, the private market is prepared to value it at something greater than X,” he said. “What we’re trying to do is identify and allocate capital to situations where we believe that delta is significantly higher.”
Manji grounds this view in his own experience. His family has owned and operated a private commercial real estate business since 1981. In the early 1990s, Manji struck out on his own with the purchase of a Vancouver nursing home from bankruptcy, and spent the following two decades building it into a publicly listed chain. But he always believed its shares were trading for less than what the company was worth.
In 2015, he seemed to find validation when he sold the business to a local pension plan for $578 million -- more than double its market capitalization. Manji describes much of his career since as an effort to further mine this arbitrage. At least in the real estate world, other people are starting to see it too.
Last year, Brookfield Asset Management Inc. spent US$6.5 billion buying the shares it didn’t already own of a U.S.-listed subsidiary where most of its office buildings and shopping malls sit. Brookfield said the stock market was missing the assets’ true value, which could be better realized privately.
In Canada, a report from Bank of Nova Scotia this month estimated that the country’s REITs were trading at a six per cent discount to their underlying real estate’s worth. And that’s despite record direct investment into Canadian commercial real estate last year.
While much of that money has been flowing into the industrial and apartment properties that have gained during the pandemic, for Manji it’s only a matter of time before those assets start to look too expensive, and the money will start flowing to the office towers and shopping centers he’s focusing on now.
“I remain bullish and optimistic about the future of real estate,” he said. “With time, executing on this strategy will produce results.”