Toronto airport authority takes write-downs on commercial real estate; Transport Canada says purchases were for airport's future plans

Commercial real estate was booming in 2017 and office-vacancy rates in downtown Toronto were near historic lows. A strengthening economy supported employment and demand for work space, and property deals were propelled by central-bank assurances that a decade of low, low interest rates might easily extend for 10 years more.

That's when the government-backed agency that runs Toronto's major international airport rolled the dice, betting almost half a billion dollars in 2017 and 2018 on commercial real estate, largely office space, on the perimeter of Canada's busiest airfield. At the time, planning for a new regional transit hub at the airport, dubbed "Union Station West," appeared to be intensifying.

Less than two years later, Covid-19 engulfed China and then spread. Office workers holed up at home during the pandemic found they liked it there, upending a century of work patterns and shrinking companies’ office-space needs, perhaps forever.

Today the Greater Toronto Airports Authority (the "GTAA") faces a bit of a reckoning on its 1.3-million-square-foot investment portfolio near Pearson International Airport, which served 44.8 million passengers in 2023 and ranked among the world's 40 busiest airports. The agency has recorded almost $50 million (US$36.6 million) in write-downs on the properties over the past two years, and the balance-sheet value of the portfolio has fallen almost 16% since 2021. The buildings, including a flight-simulator facility, made up 6% of the GTAA's $6.77 billion of assets at the end of 2023.

A Global Problem

The write-downs reflect a deterioration in the outlook for office properties in Toronto and around the world. Paper losses on the GTAA's untimely investments, which required the approval of Canada's minister of transport, could raise questions for a quasi-public agency that charges passengers and airlines some of the highest fees in the world.

"Government agencies shouldn't be taking risky gambles like this on the taxpayer dime," Jay Goldberg, Ontario director of the Canadian Taxpayers Federation, a politically right-leaning advocacy group, said via email. "It's even more concerning when an agency like the airport authority takes a gamble on something it knows little about, in this case real estate."

Transport Canada said in a statement that the acquisition of 16 properties was approved in 2017 and 2018 by then-Minister of Transport Marc Garneau, who resigned his seat in Parliament last year. Under terms of the lease agreement with the Canadian government, "airport authorities or their subsidiaries may acquire and hold land not required for airport operations provided they obtain the advance consent of the Minister of Transport," the statement said.

"In requesting consent to acquire the properties, the GTAA emphasized the strategic importance of the properties to be acquired to its future development plans and regional transit initiatives," the statement said. "The GTAA intends to retain title to the commercial properties, continuing with their current use until such time as the lands are required for airport operational purposes."

The properties are situated mainly along Airport Road, which forms most of Pearson's eastern boundary. Several of the buildings sit close to the proposed transit hub, and almost all appear to be within three kilometers of the site. The GTAA has identified the airport as hosting the metro area's second-largest concentration of jobs after downtown Toronto and, before the pandemic, had committed tens of millions additional dollars toward developing a rail link to the transit hub.

The GTAA's real estate setback parallels those of other investors. Canada Pension Plan Investment Board, the country's largest manager of retirement funds and holder of $41 billion in real estate, earlier this year offloaded property for effectively nothing, and Caisse de Depot et Placement du Quebec, Canada's No. 2 pension fund, recorded a 6.2% loss on its $46 billion real estate portfolio. Ontario Teachers' Pension Plan hasn't fared much better.

The vacancy rate near Pearson airport rose to 15.7% in the first quarter of 2024 from 13.7% at the beginning of 2019, according to research by Avison Young, a Toronto-based provider of commercial real-estate services. The area around the airport actually fared much better in terms of the size of the increase than the Greater Toronto Area, where the vacancy rate rose to 13.7% from 5.6%.

A sign of the GTAA's investment portfolio

Airport Road

The GTAA says in its financial filings that it acquired the commercial real estate through Airway Centre Inc., which is wholly owned by another GTAA unit, Malton Gateway Inc.

The investments, totaling $467 million over the two-year period, included the May 2017 purchase, for $120.2 million, of 5915 Airport Road and 5935 Airport Road, according to property records provided to HBB. Other significant deals were the $69.5 million buys in May 2018 of 6655, 6695, 6715 and 6725 Airport Road and, the same month, the $54.5 million acquisition of 6299 Airport Road and 6303 Airport Road, based on the records. Leasing is handled by the GTAA, which employs an external manager for the properties.

A building in the GTAA's investment portfolio

"The GTAA’s diverse business model includes acres of various sized buildings and lands for multi-purpose usage such as commercial and industrial development," the agency says on its website. "These properties are available for lease and are situated in close proximity to the 400-series highways and to the Malton rail station, offering convenience and unlimited opportunities for businesses looking to be in the heart of the airport zone. "

The GTAA did not respond to a list of questions emailed on April 23.

The non-profit GTAA was formed in 1996 when the federal government transferred operating responsibility for Pearson to the airport authority, which runs the facility under a lease that paid Ottawa $212.5 million in 2023.

The agency's chief executive is Deborah Flint, who arrived in Toronto in April 2020 following a stint in Los Angeles as CEO of that city's airport authority. Flint's predecessor, Howard Eng, was in charge of the GTAA during the period when the property investments took place. The GTAA and Air Canada, the country's largest airline, came under fire in 2022 after Pearson ranked dead last in on-time performance globally as the travel industry emerged from the pandemic.

Value Reductions

The GTAA began recognizing the reduction in the value of the property portfolio after applying more stringent valuation measures in 2022, as it became clear that post-pandemic work patterns and higher interest rates had lowered the portfolio's potential long-term returns. Lower prices were reflected in higher capitalization and discount rates, which are key measures determining what income real estate should cost.

The estimate of the portfolio's fair value - what the commercial properties could reasonably be expected to sell for on the open market - decreased 12.9% to $502.5 million at the end of 2023 from as high as $577.0 million at the end of 2021, according to the GTAA's financial reports.

But the authority also noted that the value of certain buildings in the portfolio was "determined to be impaired," leading to a write-down of $23.0 million in 2022 and another of $26.3 million in 2023. Due significantly to the write-downs, the book value of the portfolio - the cost of property minus amortization and write-downs - dropped 15.7% to $406.9 million at the end of 2023 from $482.6 million in December 2020.

A view down Airport Road

Last year, the commercial properties produced $34.6 million in rental revenue, up from $34.1 million in 2022. Operating expenses associated with the properties rose to $27.7 million from $27.4 million. HBB wasn't able to find any disclosure on how the GTAA financed the investment properties.

The GTAA's net income in 2023 more than tripled from a year earlier to $265 million on revenue of $1.89 billion, due mostly to the resurgence in travel, but also helped by an additional $33 million in interest income and slightly lower debt expense.

Could Work Out

The GTAA's wager on its environs may well work out over the long run. The Toronto Star reported in 2017 that the federal government might be open to changing the ownership structure of the airport to accommodate private investments, although a plan released by the airport early that year doesn't appear to have gone anywhere. Office demand is rebounding as employers start forcing workers back to their cubicles, and the GTAA has since 2017 added three directors with varied real estate expertise to its 15-member board.

Even assuming an eventual rebound in property prices, the write-downs could be somewhat dismaying news for long-suffering travelers shelling out to use Pearson. The write-downs equate to 8% of the revenue that the airport generated in 2023 from airport-improvement fees charged on tickets of departing passengers. Airport-improvement fees made up one-third of Pearson's revenue last year, and the property losses came on capital that might have instead been used to provide a tad of fare relief.

--HBB

Halifax soccer club makes playoffs. In England.

The Halifax soccer club made the playoffs.

In England.

FC Halifax Town, the fifth-tier West Yorkshire club, subsequently lost an elimination match on April 24 after replacing Gateshead on the ticket against Solihull Moors near Birmingham. Gateshead was disqualified over concerns about its stadium lease.

Haligonians in Nova Scotia may be feeling slightly envious of FC Halifax's success given that the Canadian team, the Halifax Wanderers, have had a disappointing start to 2024. The Wanderers, led by second-year coach Patrice Gheisar and owner Derek Martin, lost their first two games and have yet to score after finishing third last year in the eight-team Canadian Premier League. Some analysts are picking the Wanderers to win their league this year.

The English Haligonians, known as the Shaymen, are controlled by Chairman David Bosomworth and play at a 10,400-seat stadium known as the Shay. An average of just 1,900 fans showed up this year at the Shay, while the Nova Scotian team usually comes close to selling out the 6,500-seat Wanderers Grounds.

(Note: the story has been corrected to eliminate the implication that FC Halifax did not originally make the playoffs, and it now reflects the result of the match.)

--HBB

Nova Scotia-Bermuda ties going back two centuries are key to BermudAir's new Halifax route

Why Halifax?

That was the question at HBB after BermudAir, a privately owned start-up airline, said this week it will begin operating a weekly flight between Halifax and Bermuda. Halifax will be by far the smallest of the seven metro areas served by the carrier when the flights commence in May.

The new route should not surprise anyone, said Pat Phillip-Fairn, BermudAir’s head of public relations and corporate affairs. Halifax and Bermuda, a self-governing British territory 1,400 kilometers south of Nova Scotia's capital, have had business ties for two centuries, and there is a tradition of Bermudian parents sending children to the province for their education.

“There are longstanding links between Bermuda and Halifax from the perspective of schools and colleges,” Phillip-Fairn said via email. "Many Bermudian students attend university in Nova Scotia in particular, as well as boarding school. BermudAir re-establishing direct service has been very well-received by local (Bermuda) families in this regard."

Bermuda, a 54-square-kilometer island with just 64,000 residents, ranked 17th of 130 countries that sent students to Dalhousie University in the 2019-2020 academic year. The 42 students with Bermudian citizenship were more than the 37 U.K.-passported students who attended the Halifax school that year. King's-Edgehill School of Windsor, Nova Scotia, whose founding in 1788 makes it Canada's oldest boarding school, has sent recruiters to Bermuda.

Butterfield in Halifax

Among financial companies with back offices in Halifax is Bank of N.T. Butterfield & Son Ltd., Bermuda's biggest local bank. Butterfield, based in the capital, Hamilton, set up shop in Halifax in 2006, at which time the Globe and Mail newspaper reported the bank would hire 400 people over seven years. As of last year, the number of Butterfield employees in Halifax did not exceed 364, which was the total number of the bank's employees listed as working outside Bermuda, the U.K. and the Cayman Islands. The 2023 annual report said Butterfield, which has downtown offices on Hollis Street, continues to expand its presence in the city.

Other historical Halifax-Bermuda connections include the first communications cable to Bermuda, which was laid in 1890 and originated in Halifax, and shipping services established by the Canadian government between Halifax and Bermuda in the 1920s. A pilgrimage for some Canadian visitors is the gravesite of a Halifax surgeon who died at the age of 32 on a ship off Bermuda's northern coast in 1846, and, as recently as four years ago, Haligonians anxious to satisfy a donair craving apparently could get the classic Halifax meat sandwich in Bermuda.

BermudAir's service from Halifax Stanfield International Airport will begin May 25 and be flown Saturdays on Embraer 175 aircraft with 14 business seats and 52 economy seats. BermudAir, based at L.F. Wade International Airport, already serves Boston; Baltimore; Fort Lauderdale; Westchester County, New York; and Orlando. Bermudair will also offer flights to Toronto beginning in May.

The ownership group behind BermudAir includes "many of Bermuda’s leading business people and U.S.-based investors with significant ties to Bermuda," Phillip-Fairn said, declining to be more specific. The company is led by Chief Executive Adam Scott, a Toronto native and former Goldman Sachs banker. A previous Scott venture, the London-based premium-class carrier called Odyssey Airlines, was founded about a decade ago but never got off the ground. BermudAir was also conceived as an all business-class airline, but the idea was shelved six weeks after starting operations.

Air Canada flew between Halifax and Bermuda but discontinued the route in 2013, Phillip-Fairn said.

Halifax earned a mention after millions of documents released in 2017 linked the city to worldwide efforts to help wealthy people evade billions of dollars in taxes.

--HBB