Public REIT Property Developer
Mark Kenney, President and CEO, CAPREIT Jason Birnboim, President, Beaux Properties International Inc.
Matthew Organ, President, Skyline Apartment REIT
Multifamily Property Owner
Robin Kelley, Partner, Le Groupe Denux
RHBâ€™s Industry Report for 2020 provides a comprehensive analysis of the status of the rental housing industry in Canada in the midst of the pandemic, with a look toward what will happen when it ends. We interviewed key members of the industry, including one public and one private REIT, an owner of multifamily properties, and a developer, and asked each of them about various topics, including how the rental housing market has changed and what it will look like going forward.
14 | October 2020
Industry 20 Report 20 REITs RHB: REITs have dropped in value, although multifamily has fared better than other sectors with a lot of cash on hand from 2019.Â Indications are that their performance should continue in 2020 and 2021. What are you projecting for your REITâ€™s performance for the balance of 2020 and looking further into 2021? Mark Kenney: We remain positive of strong performance for the balance of 2020 and 2021. Our Net Operating Income margins have remained strong even though bad debts have been higher compared to prior years. Occupancies have remained at near full levels in the residential portfolio, with marginal declines. CAPREIT has a strong balance with low leverage and significant liquidity. We could leverage up to acquire accretive; however, pricing for acquisitions appears to becoming more competitive. Interest rates dropped in 2020 and are at historical low levels, resulting in lower interest expense on refinancings and new financings. Rates have dropped from 2.5 per cent for 10-year money to 1.7 per cent. During the pandemic, we have characterized our business as back to basics: collecting as much rent as possible each month, filling vacancies, and investigating areas where we might find operating efficiencies. We are an affordable proposition for people, which we believe is a highly defensive asset class during the pandemic.
Matthew Organ: Throughout COVID-19, Skyline Apartment REIT maintained its value. As a private REIT, it is valued based on actual value of hard assets, as well as income the assets generate, and is less correlated with the ups and downs of public markets. Distributions have remained unchanged as cash flow has been stable; with nine months behind us, our 2020 Net Operating Income is forecasted to be on budget. From an operations standpoint, suite turnover is low and demand for apartments remains high. As we look to 2021, we anticipate low vacancy rates will continue, and we have significant mark to market rent growth opportunity to be realized, which will help ensure stable financial performance. In spring 2020, we temporarily slowed our acquisition process until we had the certainty of investor support to continue with our growth strategy, which was back on track by midsummer. We are anticipating the REIT to grow by approximately $400 million to $500 million by year-end 2021.
RHB: As REITs have had consistently positive cash flow, are there more opportunities to purchase product?Â Why or why not? Mark Kenney: We continue to see high demand and competitive bid processes in all major markets across Canada, except Alberta given the impact of the struggling oil industry.
rentalhousingbusiness.ca | 15
We are seeing a robust deal flow, as well as demand in the marketplace. All deals shelved during COVID-19 shutdown are now launching to market. Challenges with managing rent collection and COVID-19 protocols are helping to push private owners who were on the brink of retirement to pull the trigger on selling assets. Fear of change in tax legislation as well as the change in CMHC financing equity takeout has pushed some private landlords to sell. Multi-family asset class continues to be a stable, resilient, and defensive asset class when compared to other real estate asset classes such as retail and office. Interest rates are at all-time lows, and financing is available from lenders to solid multi-family players, which is driving demand for product. There is still significant difference between cap rates and interest rates, which is increasing demand for products and pushing cap rates down. Institutions, private buyers, and lenders are viewing COVID-19 as short term, and are comfortable investing and providing financing amounts same as pre-COVID-19.
given their stability and the strong fundamentals of the rental residential business.
Matthew Organ: Multi-residential real estate
RHB: How will government incentives and programs affect you when they end?
has the advantage of providing the basic need of housing, which people will always require. Thus, we believe the rental housing industry is a fundamentally stable sector for investment, perhaps as much as a food retailer. As at midSeptember 2020, the REIT owns 215 properties in 59 communities across eight provinces. The REIT focuses on purchasing in secondary and tertiary markets where demand for housing is high, and the volume of new development is typically lower. In the secondary and tertiary Canadian markets where the REIT is operating and growing, the multi-residential asset class has remained in high demand. This has made purchasing existing properties competitive and made new development feasible. We remain strategic with acquisition opportunities and continue to capitalize on opportunities we believe add longterm value to the REIT.
RHB: How will the current financial situation change REITs’ short- and long-term plans? Mark Kenney: We remain highly opportunistic in our growth programs, and our balance sheet strength allows us to capitalize on accretive acquisition opportunities should they appear. We are confident that the debt markets and financing will remain highly available for our properties
16 | October 2020
Matthew Organ: As a private REIT, we want to ensure we have enough resources to weather any storm. COVID-19 put us to the test, and thus far we have demonstrated our strength. At the beginning of the pandemic, we paused some capital projects and plans for process and product improvement until things settled. Investors felt uncertainty, and rightfully so; no one knew where the world was headed. As the months unfolded, the REIT maintained stable occupancy, collections, and income. It provided investors the peace of mind they needed during turbulent times. We are continuing down a path of strategic growth and development while taking advantage of excellent financing opportunities. In the current financial environment, historically low interest rates provide a strong opportunity for REITs to buy and build new product, which is desperately needed in most areas of the country as an affordable alternative to home ownership.
Mark Kenney: CAPREIT doesn’t have the data to know the percentage of tenants on government incentives and programs. September is the last month for CERB. We believe we must have benefited from this. However, the affordability of our product should benefit if the employment and economic situations get worse. The REIT has a compassionate call program to contact tenants, and tenants having difficulty making payments are put on a deferred payment plan. To date, under 0.5 per cent of tenants are on the deferred payment plan. In certain jurisdictions, the government has introduced legislation to support tenants by temporarily not allowing rental increases for 2021. This should only exaggerate the mark to market on our rents and reduce rental asset development and supply. The temporary legislation for “no evictions” has now been lifted, and landlords can send eviction notices if rents are not received. Rental tribunals are open for virtual hearings. This should help rent collection for those taking advantage of COVID-19 to not pay rent when economic realities have not changed. The majority of our portfolio is affordable and mid-tier so rents are more affordable compared to the luxury segment. We are primarily located in the residential suburbs of major Canadian cities, which we believe will continue to be in demand.
Matthew Organ: The federal governmentâ€™s expansions regarding Employment Insurance, and the implementation of the Canada Emergency Response Benefit, resulted in financial assistance reaching residents quickly, which had a positive effect on maintaining the REITâ€™s rental income. Our property management staff worked directly with tenants to ensure they were aware of all programs and resources available to help them financially. There is speculation that when government incentives come to an end, many renters will find it more difficult to pay their rent. In addition to our more supportive approach to rent collections, we have an in-house Tenant Support Team specializing in sourcing community resources for tenants, and an in-house tenant assistance program, R.I.S.E. (Reach, Impact, Support, Elevate), which has saved hundreds of tenants from potential eviction since inception in late 2018.
Multifamily Property Owner RHB: Multifamily cap rates are the lowest of any asset class in Canada. What are you seeing or projecting for performance for the balance of 2020 and looking further for 2021? Robin Kelley: This depends on the market and asset. Overall, we see things remaining the same. However, there are signs of downward pressure on the upper tier of the market with newer, more expensive product starting to see increases in vacancy and downward pressure on rents. While vacancy rates may be ticking up, it is not easy in many regions to find apartments as availability rates are low with less people moving around. Ironically, and not surprising when you think about it, suburban and smaller markets appear to be holding out well and in some cases are having upward pressure on rents. We see the central business districts of larger, more traditionally stable markets continuing to be under pressure due to the reduction of people working in downtown offices and in supporting hospitality industries. This likely will continue into the first half of 2021 and until people and tourists return to downtown cores. Surprisingly, some markets considered C and B class are holding out well. In our buildings, there were fewer tenants on COVID-19-related
18 | October 2020
government assistance programs in these markets than in more traditionally stable ones.
RHB: Are there more opportunities to buy during COVID-19 than usual, or fewer? What about post-COVID-19, or earlier next year â€“ will there be greater opportunities to buy? Will you be exploring potential developing opportunities? Robin Kelley: We have active construction projects under way that started pre-COVID-19. For new projects, we are focusing on obtaining approvals and entitlements and taking a wait and see approach. We are hesitant to start projects with supply chains being disrupted and uncertainty over COVID-19 case trends. We are focusing on being ready to react quickly when the situation stabilizes and construction costs normalize. For purchases, we are starting to see more product for sale but prices have not changed. There seems to be a gap between buyer and seller as per usual. With low interest rates, we do not see much movement in cap rates; however, more attention will be paid to downside and upside risks to rents and vacancy. Today is a great opportunity to purchase a building where rents are below market, as downside risk is limited and interest rates are very low. However, we would be hesitant to purchase a building with market rents just because interest rates are low, without adjusting values for future increase in vacancy or stagnant rents. The one thing unknown going forward is how recent changes made by CMHC regarding refinancing and equity takeouts will impact the market. Long term, this may be more significant than people think, and could increase cap rates at the low end where investors were relying on equity takeouts in the future. These changes happened post-COVID-19 lockdowns so the market has not had time to digest the impacts. We see the central business districts of larger, more traditionally stable markets continuing to be under pressure due to the reduction of people working in downtown offices and in supporting hospitality industries.
RHB: How will the current financial situation change short- and long-term plans? Robin Kelley: We always are focused on retaining tenants, but this has heightened our focus. We are not looking at acquisitions that assume future increases in rents to rationalize continued on page 22
a current low cap rate. From the construction side, we have been taking advantage of some programs CMHC has to offer regarding new rental construction.
RHB: How will government incentives and programs affect you when they end? Robin Kelley: The larger the market, the higher percentage of residents receiving some sort of COVID-19 relief. A lot is unknown and will depend on what happens with recent increases in COVID-19 cases and the continuing opening of the economy. We anticipate some tenants having more difficulty to pay but the fundamentals of rental housing were good going into this and remain relatively strong. We have relatively few buildings located in the core areas of large cities. This appears to be playing to our advantage as these buildings appear to be absorbing more negative impacts of the changes in the labour market.
Property Developer The low cap rates reflect the low risk and the long-term stable outlook for the best asset class to own when it comes to incomeproducing real estate.
RHB: COVID-19 has compelled lot of people to look to the suburbs. With more people working from home, do developers expect more developments to move to the suburbs, or is the city core still the place to be? Jason Birnboim: In my opinion, COVID-19 is extremely serious and disruptive to our way of life in Canada and has touched everyone’s personal and business lives dramatically. However, I view it as a temporary global health emergency that will be brought under control in six to nine months through widespread vaccinations and hopefully bring a return to pre-COVID-19 routines and lifestyles within two years. While developers need to be mindful of all factors and forces affecting their business models, if the development of apartment living of one kind or another is your preference, then the urban environment will be
22 | October 2020
more desirable overall. Suburban land is less expensive the farther out you venture, amenities are less appealing and generally speaking single family housing is the goal of a suburban resident. You can’t match the energy, excitement or dynamism of the city in the suburban landscape, digitally or otherwise. While some people are seeking to escape the virus by escaping to the suburbs, I believe an equal or greater amount will return to the city as soon as it is deemed safe and secure. The current American urban landscape looks different to me at the moment, and more disturbing from a civil unrest perspective than the more moderate and stable Canadian one.
RHB: What does the development market look like for the second half of the year and going into 2021? How will developers change their strategies going forward? Jason Birnboim: You would be reckless if you weren’t extra cautious in your assumptions and projections. The critical factor of course is a return to pre-COVID-19 immigration numbers.
RHB: Multifamily cap rates are the lowest of any asset class in Canada. What does this mean to developers going forward? Jason Birnboim: The low cap rates reflect the low risk and the long-term stable outlook for the best asset class to own when it comes to incomeproducing real estate. A developer must be extra disciplined in his or her proforma budgeting because the margin for error is very small.
RHB: How will government incentives and programs affect you when they end? Jason Birnboim: The government has a responsibility to ensure sufficient support to all renters who have been affected by COVID19 until the pandemic is brought under control. That should be one of its primary goals. As far as government incentives for new rental multifamily development, the margins on new developments are so slim that if the government wants to see new buildings get built at all and new rental stock in the market, incentives are the only way it’s going to happen.
RHB: Thank you for your input and participation.
RHB, RHB Magazine, Rental Housing, Industry Report, Mark Kenney, CAPREIT, Jason Birnboim, Beaux Properties, Matthew Organ, Skyline Apartment...
Published on Oct 28, 2020
RHB, RHB Magazine, Rental Housing, Industry Report, Mark Kenney, CAPREIT, Jason Birnboim, Beaux Properties, Matthew Organ, Skyline Apartment...