We recently read up on a company called Wilmington Capital Management, which was formerly known as Unicorp. To anyone familiar with Brookfield (or as it was formerly known as, Brascan), there were a lot of familiar names; Unicorp was run by folks such as Ian Cockwell and Brian Lawson.
The Company made two particularly interesting real estate investments during the 1990s – 2000s, and here are their stories.
SPY Properties
On September 30, 1997, Unicorp purchased a 50% stake in SPY Properties. SPY owned 12 residential rental-only buildings with 3,364 units in Ontario, with virtually nil vacancy.
Unicorp’s 50% stake was purchased for $116 million, which was financed by (1) $110 million of non-recourse debt, (2) $5 million in cash, and (3) $1 million in Unicorp warrants with a $5/share strike (just under book value and around where the stock was trading at the time) and expiration of Dec 31, 1998.
In case you missed that, let’s just repeat the $116 million purchase was financed by $110 million (95%) of non-recourse debt. The Company was still relatively conservatively financed; excluding all the non-recourse assets and debt, book value was $52 million which was mostly made of net unencumbered cash.
Now, what was the general thesis for these rental-only residential buildings? As background, in 1997 the then-premier ended rent controls with the passing of Bill 96, to try encouraging new residential rental development. Also, in their words from the next two years’ annual reports:
“Apartment properties, as an investment class, have proven in recent years to be a very stable component of the real estate sector, a fact that appears to have been neglected by Canadian institutional investors for many years. Apartment properties continue to sell at prices significantly below replacement cost, although an increasing number of non–private purchasers, including institutional investors and a selected number of well-capitalized public companies and REITS, have recently caused selling prices to move higher.”
“During past economic slowdowns, increased vacancies were a consequence of a higher supply of new construction, rather than by a lower demand of occupancy. With the relative absence of any new residential rental construction, the cyclical risks in the apartment sector are currently low.”
Got it. So there is (1) likely upside in rental rates, (2) super tight rental market as evidenced by essentially nil vacancy rates, (3) there isn’t much supply coming onto the market, and (4) did we forget to mention 95% non-recourse debt-financed acquisition? Let’s see what happened after that.
In April 1998, SPY sold 4 of the 12 buildings for net proceeds of $44 million (Unicorp’s share), which was used to repay debt. SPY was now left with 3,358 units at around 2.1 million sqft. All throughout this time, the properties were also producing some positive free cash flows, so there was no additional net equity investment required.
Fast-forward to 2000, SPY sold the remaining buildings for $115 million (Unicorp’s share). Using rough math over the 3-year period: for basically $6 million of equity investment, Unicorp made $49 million ($159 million total sales proceeds less $110 million in non-recourse debt repayment). It was actually a bit more than this, since the properties were positive free cash flowing during this time, but hey let’s just call it an 8x which works out to around 100% CAGR. Not bad, considering it was all with non-recourse debt.
They generally used the money to invest in Parkbridge (land leasing business for mobile and recreational homes), and Brascan/Brookfield stock. In the case of Parkbridge, which they initially started investing in in 1998, we estimate they spent no more than $30 million developing it and by 2004 their stake was worth $100 million when it was publicly floated. Not quite the out-of-this-world percentage returns from SPY, but certainly enough to warrant a few cartwheels around the office.
181 University Avenue Land Purchase
Let’s look at another investment they made in 2002 – by then, Unicorp was now known as Wilmington. In either case, the company bought, through a sale-leaseback transaction, the land at 181 University Avenue in Toronto. You only have to look at the location of this on Google Maps and you’ll immediately see it is in a prime area of downtown Toronto.
The 181 University Avenue land was purchased for $19 million. Based on the disclosures we estimate it was financed with probably ~$18.4 million of (again) non-recourse debt. Since they only owned the land, they effectively had no capex. The owners of the actual building, who were paying Unicorp the land lease payments, were the ones that had the pleasure of spending money to make sure the building was in tip-top shape. And since it was in a prime downtown location, it was likely the building owners would continue paying those land lease payments.
Anyway, even though this land purchase was 95%+ (we estimate) non-recourse debt-financed, this investment was also positive free cash flowing every year. No net equity investment again. We think we’re starting to see a trend here.
In 2006, this land was sold for $24.3 million. By then, ~$1 million of debt had been repaid from the land lease payments, meaning only $17.4 million of debt was outstanding. So the company netted $6.9 million from the sale, from ~$600k of equity.
Yeah, but…
Now some people might say the SPY and 181 University purchases were just good timing. In a sense, it is true that returns (especially for the 181 sale in 2006) were juiced by a healthy economy. But at the same time, let’s look at the downside should either of these investments not have turned out due to bad timing or other shenanigans.
If on January 1, 1998 Toronto was no longer the center of Canada (saving endless eye rolling out west), instead becoming a destitute dirt patch causing Unicorp’s SPY investment became worthless, the company would have taken a whopping $6 million hit to shareholders’ equity, which was $58 million at the time (ie, $52 million shareholders’ equity pro-forma for Armageddon). Almost all of this would have been in net cash. And because the debt was non-recourse, the downside was capped at this amount (assuming they didn’t pour any more money into it, of course). It is a similar scenario if you assumed the same on the 181 purchase.
Now all we’re looking for are (1) real estate properties in prime areas which would have positive free cash flows even after levering up 95%, and (2) banks that would actually lend us 95% on a non-recourse basis…and we’re set!
Want to read more? Just check out their old annual filings on SEDAR - https://www.sedar.com/DisplayProfile.do?lang=EN&issuerType=03&issuerNo=00002414
(On March 8, 2002, the name of the Corporation waschanged from Unicorp Inc. to Wilmington Capital Management Inc.)