In the buttoned-down world of Canadian real estate, few executives can claim to be as colourful as Sikh-Canadian Navjeet "Bob" Singh Dhillon.
It’s hard to figure out where to start when describing the Calgary based multi-millionaire.
There is his 3,000-acre island in Belize that he bought more than a decade ago and is developing into a massive resort property.
The neighbouring island belongs to actor Leonardo DiCaprio.
Then there is his love for yoga, meditation and salsa dancing.
Or perhaps it is his statement made many years ago that he intends to become a billionaire.
Dhillon isn’t quite there yet, but he is already one of the richest men in western Canada. He owns 40 per cent of apartment owner Mainstreet Equities Corp.
Mainstreet owns more than 6,000 units scattered throughout Vancouver, Calgary, Edmonton, Saskatoon and the Greater Toronto Area, a holding which has an appraised value of $810 million. Dhillon says he has a short term target of $1 billion.
The company is coming off a banner second quarter in results announced recently. Rental revenue is up 20 per cent to $15.6 million, and net operating income from operations increased by 20 per cent to $9.1 million. And compared to the second quarter of 2010 when vacancy rates were a lofty 18.8 per cent because of a still-shaky economy, Dhillon has managed to reduce that number to 11.8 per cent.
“It’s been a great year. And yes, I realize that it comes across as completely egocentric, telling people you want to become ... billionaire,” says Dhillon, sipping tea in his suite at the Four Seasons Hotel in Toronto. “But it seemed like a fun thing to say at the time. It wasn’t about keeping a scorecard, but inspiring the next generation of South Asians.”
Dhillon also owns numerous companies, such as a credit card processing facility and other real estate-related businesses. At one point he had a company that owned the rights to Tabasco sauce in India. But he sold that to concentrate on real estate.
It was a good move. His stock, now in the $17 range, has traded as high as $18, with a low of $9.51 during the last 52 weeks. That’s compared with a sub $4 price during the recession, when Dhillon decided to buy back much of his stock.
“They thought I was crazy then, but the price was ridiculously low,” said Dhillon.
Now some analysts think it can hit over $22. But for that to happen, Dhillon has to get his vacancy rates down even further, and to find properties that he can turn around.
That’s why he’s in Toronto on a scouting mission.
In Toronto and Mississagua the company already has four apartment buildings. Rents range from $750 for a one-bedroom to $1,365 for a three-bedroom.
But so far 90 per cent of his holdings are in the western provinces with only 10 per cent in Ontario. He wants to add more to the mix.
One stumbling block, he says, is the provincial Residential Tenancies Act which protects tenants, but doesn’t favour landlords.
For example, the maximum increase allowed by landlords for 2011 in Ontario is 0.7 per cent.
“That’s not even inflation,” says Dhillon. “Toronto is still the centre of the universe, and where most of the immigrants come. But rent controls make it very difficult for people who want to invest in apartments.”
Dhillon goes on to paraphrases a famous quote from Vietnam’s foreign minister in 1989 who said “The Americans couldn’t destroy Hanoi with their bombs, but we did it with rent control.”
One reason for Dhillon’s success out west is that there is no rent protection in provinces such as Alberta, where Dhillion is based and where he most famously raised rents by a eye popping 30 per cent in one year. That did not make him a popular man.
“We would really love to expand more in the Toronto market, but it is a matter of finding the right properties,” he said.
The upside of constrained rental rates is that it discourages new apartment building, so new supply is restricted. The cost of buying existing stock is also cheaper than building new.
“It’s kind of a bullet proof business,” said Dhillon. “You end up with all these decrepit buildings out there that were built 40 years ago that need to be fixed up because it doesn’t make sense to build new ones.”
When the economy is down, more people rent because they can’t afford to buy. And new mortgage regulations introduced in March means that it is harder to qualify for financing for many first time buyers, forcing them to stay put.
According to a report by GMP Securities, the monthly cost of carrying a home verses renting a two bedroom apartment are still high, resulting in a monthly difference of anywhere from $1,000 to $1,600. That means in many cases it is still more attractive to rent.
“Average rent growth in Canada, owing in large part to Ontario rent control, has not kept up with the growth in housing prices since early 2000s,” said GMP.
Immigration also remains a positive driver, and the cost of debt is still low, making the apartment sector attractive, said GMP.
Those conditions have been good for Mainstreet. But higher interest rates on the horizon could hurt growth. And finding bargains is getting harder to do as competitors chase the same properties.
But Dhillon likes his chances. A true global citizen, he was born in Japan, but his father was born in Hong Kong. His mother was born in India.
His journeys have taken him to places such as Belize, where he is the honorary consul general in Alberta. In June he is releasing a book that he’s written on the Central American nation: A Business And Retirement Guide to Belize.
But despite his travels, he says he owes much of his success to being a Canadian and a westerner.
In the wake of the recent Slave Lake fires, he recently offered 50 of his apartments in North Edmonton to the Red Cross and the Alberta government for evacuees to use for a minimum of three months.”
“The outlook out there is very entrepreneurial, very down to earth,” says Dhillon. “In Toronto, people want to be financial engineers. Out west you want to run your own company.”
His eureka moment arrived when he was only 19, using the trunk of his car as an office and a cell phone. This was where he understood the value of a coat of paint and upgraded plumbing.
In his first year he made $18,000 buying and renovating two properties in Calgary.
“That was everything. I remember just looking at the check, and I’ve never looked back.”
And he hasn’t forgotten to sniff the roses along the way. Although he doesn’t get to salsa as much as he used to. He spends more of his time today doing yoga and meditation, two things that likely came in handy during the recession which softened property values for Canadian real estate moguls.
So far prices seem to be stabilizing, and Dhillon is in full growth mode.
“We think prices have fallen as much as they will go, and interest rates are about the lowest they will ever get, so we have an opportunity to accelerate the growth process,” said Dhillon.
His biggest challenge will be keeping his vacancy rates down.
He specializes in mid-sized apartment buildings, 100 units or under, that need serious TLC. Most of those apartments are mom and pop operations that don’t have economies of scale or a back of house system to make them more efficient. He then guts the building and raises rents.
So when he acquires a property, it normally takes up to 18 months to fully renovate, resulting in a loss of revenue and empty apartments.
“Mainstreet’s greatest challenge in 2011 will be the cycle time of stabilizing new acquisitions,” said the company in a forecast. “The corporation only buys properties that require extensive renovations.”
The larger buildings are targets for big pension funds and international investors, so Dhillon stays away.
“You don’t want to get into a bidding war with a pension fund. Plus most people live in mid sized apartments,” said Dhillon.
So far the plan has worked, and analysts see upside in the company.
“We continue to believe the company is well positioned to reward investors who are willing to sacrifice current yield for potential capital appreciation,” said Dundee Capital Markets analyst Brad Cutsey in a report. “If history is any indication, Mainstreet Equity’s turnaround strategy should continue to serve its shareholders well as management capitalizes on the repositioning of undervalued real estate.”
However, because the company specializes in fixer-uppers, expect some bumps along the way for investors, says TD Newcrest analyst Jonathan Kelcher.
“Mainstreet’s acquisition program is likely to continue to cause lumpiness in the quarter to quarter results as it brings more non stabilized assets into the portfolio.”
Another issue is until the economy shifts into high gear, Mainstreet may have to keep rents low in order to attract tenants even as higher financing costs through rising interest rates will invariably impact the bottom line.
“Until the economy shows meaningful recovery and rents and vacancy rates stabilize at more normal levels, Mainstreet will likely need to continue providing rental concessions to attract and retain tenants and keep vacancy rates low,” said the company this week.
Finding a rhythm through the rough patches ahead will be a challenge for salsa dancing Dhillon, especially if he eventually plans to take a more aggressive run at the ultra-competitive Toronto market. But he’s been there before.
“It’s always a challenge. But people need to live somewhere and when they’re ready to make a move we plan to be there.”
[Courtesy: Toronto Star]