Long-time real-estate specialist and hedge-fund manager Jeffrey Olin believes that the landscape is changing, as some parts of the Canadian condo and office market are vulnerable to a correction, while the residential rental market in Alberta is strengthening. As a result, he's taken a selective approach, going long on some real-estate stocks, but shorting others that have fundamental weaknesses.
"We do not think there will be a crash in the Toronto condo market, because we haven't had any material apartment construction for many years due to rent controls," says Olin, president and CEO of Toronto-based Vision Capital Corp., and co-manager of Vision Opportunity Fund LP. "There is still a big demand to rent these condos. Rents are still increasing, which is providing some resilience. But prices will correct. And the Vancouver condo market has been in a bubble since Expo 86. For now, it's been supported by mainland China money."
Conversely, Olin is bullish on residential rental accommodation in Alberta, since there are single-digit vacancy rates in cities such as Calgary and Edmonton. "Ninety percent of the employment growth last year was in Alberta. We've had limited supply and big population migration. Rents are increasing 3% to 7%," says Olin, a bottom-up, value-oriented investor who works alongside Frank Mayer, co-founder and chairman of Vision Capital.
One of the larger holdings that reflect this view is Mainstreet Equity Corp. MEQ. The Calgary-based firm operates primarily in Western Canada, where it has grown through acquisition of older properties that it has renovated and then capitalized on higher rents. In 2010, Olin recognized that Mainstreet was trading significantly below its net asset value and took a position.
"That's what we like: buying real estate at 50 cents on the dollar," says Olin. "So we bought 10% of the company." Since taking that position, the shares have generated a 250% return, exclusively capital appreciation.
"The core of what we do is focus on certain inefficiencies in the market for Canadian publicly traded securities," says Olin. "We can buy real estate more cheaply in the stock market than in the property market."
A Toronto native, Olin has spent more than 30 years in the real-estate sector, ranging from operations to investment banking to asset management. Upon graduating in 1983 with a bachelor of commerce degree from the University of Toronto, he worked for one year at Olympia & York Developments Ltd. He was responsible for negotiating leases and helped to computerize the firm's operations.
After Olin completed an MBA in 1985 at Northwestern University's Kellogg School of Management, he was hired by Bramalea Ltd., in Dallas. He was a development and acquisitions analyst, rising later to director of development and vice-president, commercial properties group, where his tasks included leasing and planning and design. He stayed at Bramalea for seven years.
Olin returned to Toronto and spent a couple of years at the city's Parking Authority, where he was responsible for joint-venture developments. For the next 15 years, he was in investment banking, first as a vice-president with Canaccord Capital, and then as managing director at HSBC Securities. It was there that he resumed his involvement with real estate and met his business partner, Frank Mayer.
In 2002, Olin and Mayer established Vision Capital, and raised equity capital for firms such as Halifax-based Killam Properties Inc. Between 2003 and 2007, both Olin and Mayer worked for Desjardins Securities. Olin was head of investment banking and managing partner outside of Quebec, while Mayer came on as vice-chairman and senior real-estate analyst. In 2008, they left to run Vision Capital and launched two of their three funds. Today, an eight-person investment team manages about $190 million in assets. Vision Opportunity Fund LP accounts for $150 million.
Eligible investors, who are regarded as sophisticated by securities regulators, must invest a minimum $150,000. Last year, the fund was recognized at the Morningstar Awards as one of Canada's top three opportunistic hedge funds or multi-strategy funds.
For the five years ended July 31, the fund returned an annualized 20.8%, higher than the 18.9% return of the S&P/TSX Capped Real Estate Index. For the 12 months ended in July, it returned 11.6%, lagging the index's 19.7 %.
While Olin generally goes long, he will also exploit opportunities through short positions. The short weighting, which ranges between 5% and 25%, was 13% as of June 30. Turnover tends to be high; it was 147.2% in 2013.
Given his bearish view on the Canadian office sub-sector, Olin has been shorting DREAM Office REIT (formerly known as Dundee REIT D.UN. DREAM Office, Olin notes, derives 48% of its net operating income from Class B office space in Toronto, and 18% in Calgary. "These cities will see significant incremental supply since there is seven million square feet in development in Toronto, and five million square feet under construction in Calgary. We see the vacancy rate in Toronto and Calgary going from mid-single digits to mid-teens by 2016. Rental rates will come down."
Moreover, Olin believes the firm is saddled with an external management contract that is "unfriendly" to DREAM Office's unitholders. "The cost of the contract is largely ignored in determining the firm's true net asset value," he says. "And there is no firm on Bay Street saying, 'Short DREAM Office.'"
