Propmodo Daily

By Franco Faraudo · Feb. 27, 2024

Greetings!

Late Friday, S&P Global issued an alert regarding Canadian commercial real estate brokerage Avison Young. The rating agency downgraded the company to a "selective default" rating after Avison Young failed to meet a debt obligation. Yesterday, Avison Young announced that it is finalizing a restructuring of the debt in question. Today, we'll delve into the factors that led to this situation and assess the company's performance compared to other large brokerages.

This week, Propmodo Technology is delving into the essential subject of Building Operations & Controls, with the support of Building Engines. We highly recommend their latest publication, "The State of Commercial Real Estate Property Management for 2024.” Our discussions cover a range of topics, such as the automation of HVAC systems, strategies property managers are employing to achieve more with fewer resources, and the evolving role of robots in office environments.

Now, let's dig in!

Avison Young’s Path Out of “Selective Default” Downgrade

Last Friday, the rating agency S&P Global published a memo explaining that they were downgrading Avison Young’s credit rating to “selective default” after they had learned that the company had failed to make its third and fourth-quarter principal and interest payments on its senior secured term loan. This selective default is different from being in default since the company was still able to pay on some of its other loans but did raise rightful concerns about the health of the company.

To dispel some of the speculations about the company’s solvency, Avison Young announced yesterday that it was nearing a deal to restructure its debts and reduce its debt obligations by one-half. “We started this journey over two years ago with a vision, and we expect this deal to be finalized within a week,” said a spokesperson for the company.

While the S&P’s announcement was a surprise, it was in line with the direction of their debt rating. In 2019, Avison Young borrowed $325 million, a deal that was rated as B by S&P at the time. In 2022, they borrowed another $50 million on a loan with a B- rating. In March of last year, the company was given a CCC+ rating due to the deteriorating situation in commercial real estate and was downgraded again to CCC in September.

Avison Young is one of the few large brokerages to remain private; it is majority-owned by its principal brokers, so these types of credit facilities were its main avenue for expansion. The money from this debt was used to acquire books of business from other property companies, as it did with Madison Marquette’s retail property management and leasing services earlier this year. But as rates on these variable rate loans spiked and income took a hit from the weakening property market, those loans ended up being too much for the company to service.

The market has hurt other large commercial property companies as well, but none of them have a debt ratio like Avison Young. Marcus and Millichap announced that they are debt-free in their last earnings call. JLL is having their earnings call today, and we will see if they were able to achieve the goal they stated in their last earnings. “We are focused on realigning our debt mix, derisking existing maturities, and diversifying our sources of capital in the near term,” CFO Karen Brennan said.

Cushman and Wakefield restructured some of its debt last year, leaving it with $193 million loan that is due in 2025 (which they plan to pay off in cash). They have said that 93 percent of their debt is currently at a fixed rate, which gave investors hope that they would be able to last through this high-interest rate period. CBRE has $2.8 billion of debt, which, even though it sounds like a lot, is pretty manageable for a company with $1.3 billion in cash and $2.2 billion in earnings annually.

Avison Young’s leadership remains confident about the future, saying that this restructuring would help them grow as the market returns. What will be more difficult after this restructuring is bringing in more debt, as creditors will be cautious of another restructuring. One of the repercussions of this restructuring is shrinking the board of advisors from 11 to 5. The company has said that one of the goals of this is to make it look more like a public company, so who knows, a public offering might be on the table if they need to fund another aggressive expansion without the use of possibly costly debt.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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