REAL ESTATE
Reichmann knows property meltdowns: ‘It's time to sell'
30 June 2005The Globe and Mail
Philip Reichmann is fighting a major battle to save the $2-billion deal to sell his real estate empire.
For several weeks, rumblings have been building from a group of major institutional shareholders who are unhappy with the $15.50 per unit offer made for O&Y Real Estate Investment Trust by a group led by Brookfield Properties Corp.
Now, just a week before shareholders are to vote on the transaction, Mr. Reichmann has taken out newspaper ads and hired a firm to call thousands of small investors and urge them to vote.
Mr. Reichmann's message is simple. It's time to sell.
“I think the euphoria out there and the expectations that it drives is just asking for trouble.” said Mr. Reichmann, who at least for the time being heads one of the country's best-known publicly traded real estate companies.
“I think it is the time for O&Y REIT holders to get out. It is time to sell this company,” he said yesterday in an interview with The Globe and Mail.
If all goes as planned, that is exactly what will happen later this summer. Next week, investors of O&Y Properties Corp. and its related REIT will be asked to give their blessing to the sale of O&Y's massive office portfolio. The bid is for the holdings of both companies, which together own 25 office towers across the country.
But after months of drumming up interest from potential buyers and three weeks of intense negotiations with the winning group of bidders, Mr. Reichmann is now facing the most serious threat yet to his plan to sell it all before the overheated commercial real estate market runs out of steam.
Response to the bidding group's $13-a -share offer for parent O&Y Properties Corp. has been favourable. But sources say a group of six institutional investors with sizable holdings in the underlying REIT have indicated that they don't like the $15.50 offer on the table for the income trust units. They don't like the tax fallout that will come from the sale of the trust. In fact, some have indicated they don't like the idea of selling the real estate holdings at all.
Depending on how many unitholders vote, this group of six could have enough clout to kill the deal.
Such an outcome, Mr. Reichmann warned yesterday, would be “a terrible mistake.”
It would be a shame, Mr. Reichmann said, if a small group of investors with specific interests made the decision for everyone. Besides, Mr. Reichmann said, he believes that his decision to sell is in the best interests of all shareholders — at O&Y Properties and at the REIT.
Office towers are trading at sky-high prices, pumped up by a flood of money looking to invest in real estate and the belief that valuations will continue to rise.
It's a belief that Mr. Reichmann, who had a ring-side seat at the last real estate meltdown, described as “dangerous.”
“There is too much enthusiasm. You know in the real estate game if you wait a little too long you get killed. I've been there, done that. I don't want to do it again. I want to get out at the right time.”
Trouble is, the group of institutional investors don't see things the same way. They like the returns O&Y REIT has brought to their funds. The proposed sale also creates a huge headache for them because it will require them to find a new place to reinvest the money they had in O&Y.
Mr. Reichmann said he understands their situation, but argued that it is impossible for things to continue as they are. O&Y's parent firm will be sold, he said, either to the Brookfield group or to another bidder if the current offer fails. And he said prices for office properties mean that the REIT could not continue to grow by acquiring new holdings as it had in the past. Under the present conditions, it was bound to disappoint investors, he said.
He said this turn of events has put him in a strange situation — arguing for the sale of a company that he did not want to sell, but felt he should due to market conditions.
“This is very awkward for me because here I am, at 47, standing up and saying ‘I want to sell this company because I think it is the right thing.' The truth of the matter is I don't want to sell this company. At 47 years old I do not want to start another career and I am too young to retire. And that golf thing — it's just a line.”
Still, he said, investors who put their money in the REIT because they trusted his judgment must now also trust his decision that it is time to head for the exits, even if he is going against the crowd.
“It requires faith that I know what I am doing. But I'm not afraid to be out there on my own. I have training that other people don't have — from my experience. I know what happens when you hold on for too long.”
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