C A N A D A ’ S O N LY N A T I O N A L P U B L I C A T I O N F O R A P A R T M E N T O W N E R S A N D M A N A G E R S
What Your Competition Doesn’t Want You To Know
At Coinamatic, we know you can’t run a superior property with ordinary suppliers. We understand the difficulties of managing multi-family properties including: the time required to keep up with day-to-day operations and the lack of time to focus on developing new revenue opportunities.
Timbercreek Finds Value in Overlooked Properties
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Financial Crisis a Yawn for Some Insurers
Knowledge is Power
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Implements “Alternative Asset Class” Investment Management Structure
Elevator Machinery Guarding and Safety
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C A N A D A ’ S O N LY N A T I O N A L P U B L I C A T I O N F O R A P A R T M E N T O W N E R S A N D M A N A G E R S
V O L U M E 5 / N U M B E R 6 / J A N U A RY / F E B R U A RY 2 0 0 9
22 Cover Story
Timbercreek Finds Value in Overlooked Properties
Timbercreek Finds Value in Overlooked Properties Implements “Alternative Asset Class”
Financial Crisis a Yawn for Some Insurers
Knowledge is Power
Investment Management Structure
Formed in 1999 with one 30-unit apartment building, Timbercreek Asset Management Inc. now has just over $850 million in real estate assets under management. The majority is invested in multi-residential real estate..
Implements “Alternative Asset Class” Investment Management Structure
Elevator Machinery Guarding and Safety
3/6/09 10:21:35 AM
10 Financial Crisis a Yawn for Some Insurers While much of the world’s economy is in difficulty, Canadian property casualty insurers have little exposure to the market meltdown.
14 Restructuring Solutions in a Distressed Real Estate Market Ways to structure your business to survive a downturn in real estate prices
and protect the equity in your portfolio.
18 Elevator Machinery Guarding and Safety The Ontario Ministry of Labour has launched a safety campaign aimed at finding and eliminating unguarded moving equipment in elevator rooms.
36 Knowledge is Power The more knowledge you have about your advertising costs, the more opportunity you have to spend wisely.
38 Need Frequent Reminders? Property managers are turning to automated notification systems to
encourage business integration and operational efficiency.
40 Multi-facts 42 Regulations
6 Canadian Apartment Magazine
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Multi-Residential a Safe Haven for Investors
In times of economic difficulty, investments in multiresidential real estate have often been seen as a safe haven. Timbercreek Asset Management Inc., the subject of this issue’s cover story, has taken the view that multi-residential real estate is both a secure long-term investment and one that will generate a steady return. Formed in 1999, the company’s first investment was a 30-unit apartment building in Oakville, Ontario. Today the company has just over $850-million under management, most of which is invested in the multi-residential sector. Timbercreek owns and manages a portfolio of about 7,500 units. From its earliest days Timbercreek has taken a valueoriented investment position. The company has specialized in finding properties that were undervalued or overlooked by the market. They combined that with an active management style aimed at reducing costs and increasing revenue. Even in today’s rocky financial markets, the company is still adding to its portfolio. In December Timbercreek purchased an additional 700 units. Elsewhere in this issue, Dave Balmer of Quality Allied Elevators, warns Ontario building owners and managers that they are likely, in the near future, to get a visit from a Ministry of Labour safety inspector. The inspector will want to take a look at the building’s elevator machine room to see if the room has any unguarded moving equipment that could injure a worker. The legislation has been on the books for many years but was seldom enforced. Today, an increase in the number of safety inspectors and a mandate to reduce worker accidents and incidents by 20 percent, has made elevator machine room safety a top priority for the ministry. Andy Schwartze, our insurance specialist, tells us that Canadian property and casualty insurance companies are not likely to be affected by the current volatility in the financial markets. Government regulations require most of their reserves to be in highly liquid investments like T-bills. That has protected them from the chaos in the financial markets. He expects a small increase in insurance rates this year as insurers focus on improving results from underwriting. Randy Threndyle Editor email@example.com
Quoteworthy “In our opinion the predictability of multi-family income is much higher than other types of real estate so you’re reducing the risk.”
8 Canadian Apartment Magazine
– page 28
PUBLISHER Kevin Brown
ASSOCIATE PUBLISHER Marc L. Côté
EDITOR Randy Threndyle
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DESIGNER Ian Clarke
PRODUCTION COORDINATOR Rachel Selbie
CONTRIBUTING WRITERS Gary Abrahamson Dave Balmer Carissa Drohan Catherine Malear Andy Schwartze Michael Stoyan
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Tel: (416) 512-8186 Fax: (416) 512-8344 President Kevin Brown Copyright 2009 Canada Post Canadian Publications Mail Sales Product Agreement No. 40063056 ISSN 1712-140x Circulation ext. 232 Subscription Rates: (GST Included) Canada: 1 year, $46.30 2 years, $82.60 Single Copy Sales: Canada: $8.00 Reprints: Requests for permission to reprint any portion of this magazine should be sent to Marc Côté Authors: Canadian Apartment Magazine accepts unsolicited query letters and article suggestions. Manufacturers: Those wishing to have their products reviewed should contact the publisher or send information to the attention of the editor. Sworn Statement of Circulation: Available from the publisher upon written request. Although Canadian Apartment Magazine makes every effort to ensure the accuracy of the information published, we cannot be held liable for any errors or omissions, however caused. Printed in Canada
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Financial Crisis a Yawn for Some Insurers Insurance Industry Tightly Regulated
By Andy Schwartze
While much of the world’s economy marches firmly into the arms of insolvency (however you may wish to define it) for Canadian property casualty insurers the whole thing seems to be a big bore. For their managers it’s just another day at the office. Their life insurance colleagues across the hall, however, aren’t sleeping as soundly. Why is one arm of the insurance industry sleeping well while the other side is having a few nightmares? The difference lies in what investments insurance companies are allowed to carry on their balance sheets. Insurance companies are typically licensed by the Office of the Superintendent of Financial Institutions Canada. Few insurers are licensed only provincially, the exception being mostly a number of “mutual” (policy holder owned) farm insurers in southern Ontario. In addition, each province has its own insurance department, for the purpose of providing a number of licensing controls and related oversight of the distribution of insurance products. Both industries are very tightly regulated. Their ability to invest premiums is restricted by their exposure to claims. Life insurance companies are able to reliably predict their downstream needs for claims payments. Life expectancies and illness probabilities are actuarially determined with amazing precision. For that reason, life carriers are allowed to make longer-term investments, as long as their shortterm cash needs are held in instruments that are readily available. This has allowed this sector of the insurance 10 Canadian Apartment Magazine
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Andy’s Tip Remember that insurance companies are like lemmings. They all go in the same direction at generally the same time. Watch your claims record and make sure it is updated for you regularly. In hard insurance markets a bad claims record can create a lot of very unpleasant trouble.
industry to take on the appearances of the banking and investment businesses. Real estate mortgages and mutual fund-like products are commonplace offerings, the latter even featuring investment products with capital guarantees (ouch). Anyone who has been paying attention will know that some redemptions have been halted and a couple of the big names are in the process of raising new capital. The squeeze is on and with insurers all having had December 31 fiscal year ends I can’t wait to see what the true “mark to market” damage has been. Stay tuned……any day now. We all know that ’09 will bring lots more trouble to the surface. Move over Bernie Madoff. The property casualty insurers, on the other hand, have it easy in this so called crisis. They have very limited windows of investment to work within. It is assumed that, at any one moment, they can be subjected to a very significant cash call. We don’t need to remind anyone of what types of events trigger one. Therefore, these guys can only invest in highly liquid instruments and are very much in things like T-bills. Right now, of course, those investments are paying next to nothing so we can expect the property casualty managers to be focusing on underwriting results this year. Rates will probably go up, but for the owner of a 200-suite building a premium increase from $10,000 to $11,000 is hardly worth discussing. What may well happen, in the mid-term future, is that interest rates will rise significantly. As governments borrow heavily and foreign sources for that borrowed 12 Canadian Apartment Magazine
money dry up, the competition between the private and public sectors for domestic sources of credit may well drive interest rates to high levels. Remember 1980/81. At that point, the limited investment opportunities for property casualty insurers will again generate strong returns and that tends to allow competition back in to the marketplace. Rates will then ease. Such is the pricing cycle of the property casualty sector. What we do not know, at this point, is the impact that declining business activity will have on premiums. A closed business pays no premium but may well have unreported claims yet to show up on the books (like a liability claim that generally takes three years to make its appearance). In addition, claims tend to go up in hard economic times. People look to their insurance policies as potential sources of cash. Fraudulent claims do go up. So while I think I have it all figured out, I would be less than honest if I didn’t admit to the possibility of some unexpected bumps and grinds along the way. Fortunately, for building owners, insurance costs are only a very small component of operating costs. A bit of fluctuation is not at all painful. CA M Andy Schwartze, BSc, MBA, CIP, is an insurance broker specializing in property management and real estate. He is a former President of the Insurance Institute, has taught in the community college system and provides continuing education to other brokers. He can be reached at email@example.com.
Restructuring Solutions in a
Distressed Real Estate Market What are your options? By Michael Stoyan and Gary Abrahamson
As business advisors and accountants, we often deal with clients who are in financial difficulty. In these uncertain times, it is more likely than not that your business has been affected by the downturn in the economy. Analyzing your real estate and portfolio structure is always a prudent activity. This exercise can represent a healthy strategy to reduce exposure given changing conditions and the current economic climate; even if your business currently holds a solid financial position. We all know too well that hindsight has taught us it is never too early to take chips off the table. Restructuring your portfolio is a vital practice designed to protect your real estate portfolio and to potentially create liquidity and enhance profitability. Below are some restructuring elements to consider: Review Your Asset Mix Real estate investors or developers will often have a mix of properties. You may have some mature income producing properties in your portfolio, some projects that are just commencing the 14 Canadian Apartment Magazine
development stage, and others that are actively under construction. You may even have vacant land that is held for future development and providing no free cash flow. The danger in this sort of asset mix is that real estate companies often use the money being generated by income producing properties to finance new developments. If you have multiple projects at different stages of development you are really depending on the income producing properties to carry the projects that are under development. Furthermore, many companies have pledged these income properties as collateral to shore up security for lenders. This cross collateralization of your portfolio is, in a sense, â€œrobbing Peter to pay Paul.â€? If one project or development is in difficulty it could potentially drag down the rest of your portfolio. If you are in this situation it can be difficult to unwind but there are ways to restructure your business to avoid the scenario where one project drags downs a whole company. One method is to devise stand-alone financing for
each project. However, if your projects are already cross collateralized it is unlikely your lender will agree to unwind the loans and give you stand alone financing. However, for future projects and when market conditions improve, it is something that you should revisit. With limited recourse financing you might jeopardize a particular project, but you are positioned more safely so that one project cannot expose the entire portfolio. If your projects are interdependent you need to take a close look at your overall corporate financing and your cash flow so that you know where each project stands. That information proves to your lender that you have sufficient cash to carry on your business. Upon review of your asset mix and, depending on your situation, you may choose to liquidate non-performing assets to obtain enhanced cash flow and forego profit to protect the remaining viable assets.
Analyze Your Cash Flow Knowing your cash flow is essential to assessing your restructuring needs. Even
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accounting if your portfolio seems fine it is a critical objective to examine your corporate model because, if difficulties arise, you will have identified options should you need to restructure your loans. There are two primary levels of cash flow to assess:
Corporate Cash Flow Requirements Knowing the total cash flow across an entire portfolio is a business practice that merits attention. Most portfolio managers know the cash flow for each individual property or project, but often are not keeping track of the cash flow across the entire portfolio. You may find that one project is a far bigger drag on your bottom line than you had assumed. For the exercise to be effective, you need to have continuous updates on your corporate cash flow. That way, if something changes, say an increase or decrease in interest rates or a change in vacancy rates, you have instant access to how it is affecting your cash position. Knowing your corporate cash flow often determines whether you can go forward with planned projects. Cost cutting measures should also be considered including the reduction of overhead and general administrative costs. Staying close to your suppliers and vendors is also essential in today’s economic environment. In addition, with income producing properties you need to keep a close eye on your lease renewals and try to stagger lease maturities to minimize vacancies. Often the covenant behind leases is part of the collateral that you pledge to a lender. If all your leases come due at the same time and you are in a difficult economic situation, you could go from a low to high vacancy rate very quickly and jeopardize existing financing and, without a doubt, limit the potential of refinancing.
Project Based Cash Flow Requirements You might have multi-residential buildings that are undergoing major renovations or capital expenditure 16 Canadian Apartment Magazine
programs. Their cash inflow is likely to be less while the renovations are underway. If you have a project that is undergoing renovation, you may choose to forgo some improvements until conditions in the credit markets improve. In the case of projects under construction, it can be difficult to stop or even delay a project once it is underway. You might want to consider analyzing the posted rental rates to ensure they are in line with today’s market. If it is not, you will have to look into whether the project is viable at a different price point. If you have flexibly in the pricing of your units, you can restructure the project and, while you may make less or even no profit, you may avoid placing the project or your company in receivership. For construction and property management contracts, it is a good idea to make sure that contractors who work on your projects are being paid. Is your general contractor paying the subcontractors? Is your property manager paying the contractors that maintain your buildings? If any contractor or subcontractor isn’t being paid, they can place a lien on your building making future financing efforts difficult.
Renegotiate Lending and Equity Arrangements Being familiar with the terms of your loans is paramount. By determining the amortization, interest rates, covenants, etc., you can equip yourself with knowledge and prepare for exploring alternate options available. For example, extending an amortization period can represent a short term solution to cash flow. If you have a good working relationship with your lender, you will be in a better position to renegotiate. It is also recommended that property managers research the types of government assistance and other incentive based programs available. These programs have been designed to help Canadian businesses grow. As an example, there are some programs
offering marketing loans on an unsecured basis and they provide flexibility in terms of the use of the funds. In the past, lenders were often willing to underwrite loans with only a snapshot view of an individual project. Today, lenders are demanding extensive corporate reporting. If your company can generate that information via enhanced reporting, it has a better chance of survival in tough economic times.
Closing Assessing the structure of your business should be an ongoing practice, regardless of the economic climate. We all know too well that as the tides turn, options can become limited. Getting into the habit of reviewing your structure frequently, even in good times is critical to ensure your family and business goals will be achieved. Depending on the severity of your situation, you may choose to engage experts to execute a formal restructuring under the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act. The goal of this process is to create a more viable and profitable entity, improve capital structure, preserve value for stakeholders and does not necessarily mean that your company will become bankrupt. In fact, it may help you to determine and assess the causes of financial stress and offer possible alternatives to alleviate financial and operational difficulties. As business advisors, we can’t predict how long the current economic difficulties will last, no one can. With proper planning, you can restructure your portfolio in a way to protect your assets and ensure your business operations are well positioned for the future. CAM Gary Abrahamson is the Restructuring and Insolvency Partner of Fuller Landau LLP, Chartered Accountants and Business Advisors and Michael Stoyan is a Partner leading the firm’s Real Estate specialty group. To contact Gary call 416-645-6524 or email firstname.lastname@example.org. Michael can be reached at 416-645-6545 or email email@example.com.
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Elevator Machinery Guarding and Safety Ontario Launches Enforcement Campaign By David Balmer
The title of this issue’s article concerning your elevators may not be a “grabber”, however, it is a subject with which every owner of a building with an elevator should become familiar. At some time an Ontario Ministry of Labour (MOL) safety inspector will arrive at your building and request access to your elevator machine room. Why now? Over the past couple of years the Ministry of Labour has been tasked with ensuring that any unguarded “moving equipment” in the Province of Ontario where there is the potential for injury or electrical shock to a worker, must be guarded. This is all with a view towards safety and protection of the worker. These rules have actually been in the Occupational Health and Safety Act and Regulations for Construction Projects, often referred to as the “Green Book” for over 17 years. Due to the unique nature of elevator equipment, which is located in secure machine rooms, and the shortage of safety inspectors within the MOL, it has not been the focus of enforcement within our industry—up to now! You may 18 Canadian Apartment Magazine
wonder: Why is the MOL involved when it is the Technical Standards and Safety Authority (TSSA) who have the responsibility for elevator safety in the Province of Ontario? It should be noted that: The MOL has complete and total jurisdiction over the requirements and regulations associated with making the workplace safer as well as reducing the hazards to which workers are exposed. In reality MOL regulations take precedence over TSSA. Their “right of access” is permitted notwithstanding the requirements of Ontario Regulation 209/01 where access to elevator machine rooms is restricted to certified and qualified elevator personnel. The building owner or the owner’s representative must grant the inspector “right of entry” to the building in accordance with Ontario Regulation 851. The MOL has recently increased the number of safety inspectors on staff and now are capable of visiting and assessing worker hazards in areas which may never have been visited before. Why now, you ask? The utilization of previously restricted spaces for other building services
© 2009 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
We’re proud to salute
Timbercreek Asset Management Inc. KPMG congratulates Timbercreek Asset Management Inc. on their continued success. KPMG’s Real Estate Group provides a wide range of independent reporting and tax and advisory services to participants in the Canadian real estate industry. www.kpmg.ca
Before: An elevator machine prior to MOL required guarding.
has increased hazard exposure. To enhance worker safety the MOL has been tasked with reducing the number of workplace accidents and incidents by 20 percent. As a result, their budget has been increased to permit them to expand their complement of safety inspectors. As a building owner you should be aware that this is a current requirement and not a “new one.” (The laws have been in the “green book” for a long time.) If during the safety inspection, hazards are identified, then orders will be issued by the inspector. There may or may not be “fix it” time allowed on the order. The owner should stop and take a breath and think it through a little. First of all, under Ontario Regulations it is the owner of the building who is responsible for maintaining a safe working environment and it is the owner who will be cited with the order. Consult with your elevator contractor. In the end the elevator contractor will be the one you will be depending on to fix the problem. The elevator contractor’s knowledge and expertise will permit you to get over this situation in as short a time as possible. They will do their best to resolve the problem within the timelines permitted. Anyone performing work or services on elevator equipment must be a certified and licensed elevator mechanic. TSSA rules also state that when an alteration to the elevator equipment is performed, 20 Canadian Apartment Magazine
After: The same machine after MOL-compliant guarding has been affixed.
it must be carried out by a registered elevator contractor who provides an engineering submission to the TSSA prior to commencing the elevator modifications. These rules are for the benefit of the public, ensuring that the elevator modifications are performed in a proper and workmanlike manner and do not compromise the safety of the riding public. They are the owner’s “best friend” in that they remove or drastically reduce your liability exposure. Ensure that your elevator contractor has the proper facilities and personnel to ensure that the modifications are code compliant and designed in accordance with good engineering practices. The chosen contractor should be an established company who has developed a well trained and competent design staff. In conclusion, the owner is advised to “be prepared” just like the Boy Scout’s motto says! Now is the time to be proactive. Discuss the requirements and the solutions with your Occupational Health and Safety Committee and start budgeting for alterations as soon as possible. CAM Dave Balmer is an employee of Quality Allied Elevator, an elevator maintenance, installation and modernization company, located in Markham Ontario. He can be reached at 905-305-0195, or www. qualityalliedelevator.ca.
RECOGNIZING ANOTHER YEAR OF GREAT GROWTH AND SUCCESS.
Congratulations to Ugo Bizzarri and Blair Tamblyn and their first-rate team on their dedication and contribution to the growth of the Timbercreek REIT. Borden Ladner Gervais LLP wishes you continued growth and success. Our Commercial Real Estate Group consists of more than 50 lawyers across the country with expertise in all facets of commercial real estate law. To find out how we can help you, contact a member of our team below, or visit us at www.blgcanada.com.
Noella M. Milne Partner, Toronto 416.367.6237 email@example.com
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David C. Longcroft Partner, Vancouver 604.640.4211 email@example.com
Terence G. Lidster Partner, Calgary 403.232.9573 firstname.lastname@example.org
Rocco D’Angelo Partner, Ottawa 613.787.3549 email@example.com
Timbercreek Fin in Overlooked Implements “Alternative Asset Class” Investment Management Structure
For many investors, real estate has always been seen as a safe haven and in today’s volatile financial markets, that axiom is truer than ever. Part of real estate’s allure for investors is that the asset can generate a steady return in even the most difficult of markets. That’s especially true of multi-residential real estate and it’s one of the reasons that many individual and institutional investors have turned to the multi-residential sector. By Randy Threndyle
22 Canadian Apartment Magazine
nds Value Properties
January/February 2009 23
“We are absolutely not passive investors.” Left to right: Ugo Bizzarri - CFO, Chief Investment Officer & Director, Blair Tamblyn - CEO & President, Jeff Hutchison - Chief Operating Officer
One such company, Timbercreek Asset Management Inc., has invested almost exclusively in the multi-residential market. Formed in 1999, the company started out with one 30-unit building in Oakville Ontario. Today Timbercreek has just over $850-million in assets under management of which the majority is invested in multi-residential real estate. Currently the company owns and manages about 7,500 apartments in Ontario, Quebec and the Maritimes. Blair Tamblyn, one of the original partners and now the company’s President and Chief Executive Officer says the partners that formed the company believed there was an increasing demand in the investment community for simplystructured, transparent “alternative asset class” investment opportunities. The investment principles the partners shared were twofold. The company adopted a value-oriented investment philosophy where Timbercreek would look for real estate assets that were undervalued or had been overlooked by the market. They combined that with an active management style. Through active management, the firm hoped to realize value that others have overlooked. 24 Canadian Apartment Magazine
As Tamblyn explains, “Simply said, value-investing means we focus on acquiring assets at prices that will make us comfortable over the long term, while the active management is implemented subsequent to acquiring a building when our asset and property management teams roll up their sleeves and surface value to create a better return from that investment. We are absolutely not passive investors.” The area of real estate that Timbercreek thought had been most overlooked by the market was multi-residential real estate or apartment buildings. There were a number of reasons for that says Tamblyn, but chief among them was that ownership of the asset class in the Canadian market was quite fragmented. Despite a decade of consolidation in the multi-residential sector the majority of multi-residential apartment buildings continue to be owned, to a large extent, by smaller-scale or individual investors. Fragmentation, or having a large number of owners, would, they reasoned, make it fairly easy to acquire assets at a reasonable or value-oriented price.
coverstory “There was very little and there continues to be very little, on a relative basis, institutional ownership of this asset class,” says Tamblyn. Ownership of office, retail and commercial space, on the other hand, is largely dominated by institutional investors like pension funds and life insurance companies. The fragmented ownership meant that many small owners were “doing a less than exemplary job of squeezing all the value out of their buildings,” says Tamblyn. That, combined with the lack of institutional ownership meant that assets could be acquired at a reasonable price. Today it continues to make investment in multi-family residential very attractive to Timbercreek.
Priced Below Replacement Cost Another factor in favour of an investment in multi-residential real estate was that the asset was priced at less than replacement cost. “That is something that is very important to us. As value investors you need to find a metric that gives you comfort that you are not overpaying. To this day, nine years later, it is very rare for apartment buildings to trade at a price that is greater than replacement cost.” “Those were the key reasons we focused on multiresidential. At the end of the day we felt we could generate a return that was greater than the risk involved in investing in multi-family buildings,” says Tamblyn. From the outset, generating a predicable yield with as little risk as possible has been Timbercreek’s investment philosophy. Timbercreek’s investors include institutions, trusts and endowment funds, discretionary investment advisors and qualified individuals. In 2004 the company formed a private real estate investment trust, known as Timbercreek REIT. The private REIT is invested exclusively in multi-residential apartment buildings. It owns assets valued at approximately $460 million. The private REIT, says Tamblyn, is identical to a public REIT in that the shares or units are entitled to all of the cash flow of the business and the REIT has title to all of the assets. “It’s the same as any of the public REITs in Canada. The only difference is it doesn’t trade publicly.” Tamblyn says while Timbercreek REIT is large enough to be a publicly traded REIT, the private REIT model offers investors several advantages. The share price is not affected by fluctuations in the public markets and it allows investors an opportunity to diversify their portfolios by adding private securities. Many investors, says Tamblyn, want to put a certain percentage of their investment portfolio into an investment that has little correlation to the public markets. They are looking for an alternative type of investment with a predictable cash flow. Timbercreek REIT, says Tamblyn, has attracted a blend of individual and institutional investors who are interested in the steady returns offered by an investment in multiresidential real estate. Some investors are former building owners who have sold their building to the REIT and now 26 Canadian Apartment Magazine
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“We go in and renovate a building from scratch. We take a 1975 building and bring it up to today’s standards.”
own Timbercreek units. “It’s great for them because they no longer have to manage the building, but they still receive the cash flow or income stream.” As an added incentive, investors are allowed to redeem their units on a monthly basis. “When we are looking for ways to generate a predictable yield on an apartment building, where the rent comes from tenants who are paying for a roof over their heads, is far more predictable than owning a shopping mall were the tenants’ ability to pay rent is driven by sales of a business,” he says. As an example, an apartment building with 100 tenants might have three or four vacant apartments or tenants that can’t pay the rent. That means you are still collecting 96 or 97 percent of the rent. An industrial building might have only one tenant so you either get all of the rent or none. “In our opinion the predictably of multi-family income is much higher than other types of real estate so you’re reducing the risk,” he says.
Active Management Techniques Ugo Bizzarri, Timbercreek’s Chief Financial Officer and the Vice President of Acquisitions, says when the company first began buying apartment buildings using 28 Canadian Apartment Magazine
the value investment philosophy they were able to find buildings that were in relatively good condition but had been neglected or mismanaged. Using active management techniques Timbercreek could improve curb appeal or increase energy efficiency to improve a building’s bottom line. They’ve also found value in properties that had higher than normal vacancy rates. One such building in Mississauga Ontario had a 50 percent vacancy rate when Timbercreek purchased it. After conducting due diligence they found the building was structurally sound, but the suites had become tired and dated. Over a six month period the suites were renovated and refurbished at a cost of between $4,000 and $7,000 per unit. In addition the original boiler was replaced which reduced natural gas consumption by 30 per cent. As a result of the improvements they were able to fully lease the building and increase rents from an average of about $1,000 per unit to $1,150 per unit, a price in line with market rents in the area. “We felt quite comfortable we could turn this building around. We’ve created a fair bit of value, by just spending money on the units, leasing it up and increasing the rents,” says Bizzarri.
coverstory Over the last 18 months, he says, we found the price of those buildings were too expensive for the Timbercreek business model so acquisitions for the Timbercreek REIT were minimal. During that period, the company focused on buying buildings that were in need of capital improvements such as windows, roofs or complete suite overhauls. “We go in and renovate a building from scratch. We take a 1975 building and bring it up to today’s standard,” says Bizzarri. In those cases the renovation costs are such that the building is owned by one of Timbercreek’s opportunity funds, rather than by Timbercreek REIT. Since the entire building needs to be renovated, the building will often experience high vacancy rates for the
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first year. The Timbercreek REIT is meant to pay a constant distribution, whereas buildings in the opportunity funds are aimed at investors who realize that there may be little or no cash flow on investment during the first year or two of ownership. There will also be high renovation costs associated with the purchase. “The reason it works better outside the REIT is if you go in and renovate the whole building, you are going to experience some vacancy loss and you’re income is going to go down in the first 12 months,” says Bizzarri. One such recent purchase was a group of five buildings totalling 700 units in Mississauga, Brampton and Ottawa. The buildings were part of a portfolio formerly owned by the EL-AD Group. The deal was put together by a consortium lead by TransGlobe Property Management Services Ltd. Other members of the consortium were CAP REIT and Homestead. In early December TransGlobe announced it had acquired a total of 25 properties in Ontario and Quebec. The deal added approximately 3,200 suites to TransGlobe’s portfolio of 31,000 rental suites. Bizzarri says while Timbercreek was part of the consortium, TransGlobe’s President Daniel Drimmer, deserves much of the credit. “If it wasn’t for him I don’t think the deal would have gotten done. ” Bizzarri says that Timbercreek intends to renovate the lobbies and hallways, install new boilers and windows to increase energy efficiency, and renovate the units in the buildings they have purchased. That will move the units up market and increase the value of the asset.
London, Ontario, which will be added to the company’s opportunity or value-added funds. Those sellers, he says, are typically people who own one or two buildings and want to sell the building to realize a gain. Others, he says, are estate sales and some sellers simply want to retire. Many of the buildings are located in areas where Timbercreek already has buildings. Timbercreek’s portfolio is mainly focused in the cities of London, Windsor, Ottawa Montreal, Halifax and the Greater Toronto Area. Bizzarri says the company would love to be in the Western Canadian market, but so far no acquisitions have been made. “We tried to buy a couple of portfolios out west, but we weren’t successful. We’re still looking, but prices moved up a fair bit in the western market.” The credit crunch has meant that today there are fewer buyers, but more sellers—a situation that he says favours Timbercreek. “It’s a funny market right now because I think there are more sellers than buyers, but there are no desperation sales right now. Unless a seller really needs to sell, they are not going to move off their price. Sometimes you get to a point where someone needs to sell and then we are able to get a better deal.” However, he says, “There’s definitely opportunity. There are a lot of assets coming to the market right now. Maybe the price is a bit less than they would have received a year ago, but it’s still a pretty good sell for them. As buyers, we are quite content to keep on buying. We think it’s a very solid market right now.”
30 Canadian Apartment Magazine
Closing a deal in today’s tight credit market is certainly a challenge, but, says Bizzarri, if you have a good name and a good reputation you can still get financing. The main factor in closing a deal is equity, he says, adding that lenders are willing to lend up to 65 to 70 percent of the cost at reasonable interest rates. “We were still able to get our lenders to the table and get the rates we wanted. Yes spreads have gone up but bond yields have dropped a fair bit, so in fact rates we are getting today are actually cheaper than they were a year ago,” he says. In addition to this most recent purchase Timbercreek also bought a building in Montreal and another in
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