This is a column by real estate guru Rachelle.
I attended the Canadian Apartment Investment Conference on September 15th 2010. This was an industry conference for apartment owners, investors, property managers, mortgage providers, consultants & commercial real estate agents. My goal was to bring back information that all landlords could apply to better operate their business, regardless of the number of units. This is to be a four part series. There was a morning executive panel in a large great room where all attendees could have coffee and muffins.
The Executive Panel REITs
The executive panel consisted of five members who, rather than each presenting a formal speech, instead fielded questions from two moderators. This panel included: Jason Castellan, CEO of Skyline Apartment REIT (link); Derek Dermott, BMO Capital Markets Real Estate Inc.(link); Gregory Romundt, President & CEO of Centurion Apartment REIT (link); Tyler Seaman Vice President, Investments, Oxford Properties Group (link); and Blair Tamblyn, President & CEO of Timbercreek Asset Management Inc (link).
State of Capital Markets
All of the participants indicated that the conventional mortgage market has mostly recovered from the credit crisis. For a while, the only financing available for apartment buildings were CMHC insured mortgages. Now, conventional mortgage lenders are lending again and this gives purchasers an alternative. CMHC has been very conservative with their valuations of multi-residential buildings which means that purchasers have to put in more capital to complete the purchase. The benefits of a conventional mortgage versus a CMHC insured mortgage are: less conservative appraisals; no fees; and greater flexibility with amortization. With CMHC, the insurance fees are considerable, and there is a 25 year amortization requirement but lower interest rates. For some investments, for instance, shorter term holds or value add properties, it may make more sense to get a conventional mortgage with higher interest rates but more flexible terms. This is welcome news.
There is additional capital available to Canadian REITs in the form of access to foreign investors who consider the health of our economy and banking system very attractive. These investors like investing in apartment buildings due to the stability and cash flow of this investment class. The multi-residential building investment class has been a solid performer through thick and thin.
The consensus was that the residential apartment market was quite healthy. Even though capitalization rates were quite low on newly purchased assets, there were opportunities to add value, increase rents and lower operation costs.
Oxford Property Group is owned by OMERS pension fund and, being very well capitalized, their biggest problem is finding good rental apartment buildings to own. There are very few developers that build new rental buildings; most build condominiums. They like new rental buildings if they can get them, because the buildings are in great condition and not subject to rent control guidelines. Specifically, in Ontario buildings built after November 1991, property management can raise the rents to market rent once per year with 90 days notice. Considering that this year’s guideline increase is a measly 0.7%, it is easy to see why a building built after 1991 would be attractive. Oxford Property Group’s focus is to provide steady cash flow for the pension fund. Stability and lack of risk are valued much more highly than yield chasing. Capital preservation is paramount to their operations.
Skyline Apartment REIT and Centurion Apartment REIT are private REITs. Private REITs can start out syndicating buildings, that is: finding several money partners to fund the acquisitions of their initial investments. Every investor owns a piece of the building or the company that owns the building. Once the company reaches a certain size, it can then become a private REIT. Only institutional or qualified investors may invest in private REITs.
Private REITs, because they are not publicly traded, are subject to variations in their values; however the REIT unit values are based on the value of their portfolio rather than public sentiment and the vagaries of the stock market. Their unit prices tend to be much more stable. They also have the benefit of buying buildings that are much more distressed than the Publicly Traded REITs, and adding more value to those properties. They can and do also buy smaller buildings than the larger REIT’s. I’ve discussed this before: there is more profit in getting a building from 50% to 90% than in almost any other activity you can do in real estate. However, most investors are not impressed by the condition of these places and wouldn’t buy them at any price. Private REITs chase yields on the properties they purchase. Capital preservation and total return are also important but their investors tend to want return on investment. Distributions are generally higher by 1% to 3% compared to publicly traded REITs due to lower costs.
One issue mentioned by the panel was that investors don’t care too much about who the property manager or the property management company is, yet the efficiency of the property management team is essential to the return achieved.
Certainly, this is borne out by my own experience: the entire building staff is crucial to the smooth operation and stability of the building. The property manager, the building manager, the superintendents and even the cleaning staff set the tone and culture of the building. You would be surprised at the damage one single staff member can make to the real life returns of this kind of investment. Two identical buildings can experience vastly different rates of return based solely on the property management company. Even when vacancy rates were high in the Toronto area, some apartment buildings stayed full and even had waiting lists, while others experienced abnormally high churn (people moving out) and vacancy.
There are few (if any) property managers known to the investor, and most people would be hard pressed to name more than two or three property management companies, even though the skill and professionalism of these individuals is what makes a difference between poor or stellar performance of the building and collectively the REIT. Property managers are the unsung heroes of the apartment investment world.
I’d like to thank Laura Aaron of MMPI (link) for allowing me to attend the Canadian Apartment Investment Conference. Further thanks are due to the executive panel for providing such high quality information. Their news that capital markets are easing and conventional financing is again available is reassuring. I appreciated the insider’s view into the difference between public and private REITs; this is a question that comes up in comments on MDJ with regularity. Finally, the careful investor may want to do further research into the property management of their REIT assets.
Look for the next segment of my CAIC information about Tenant Demographics.
About the Author: Rachelle specializes in renting property on behalf of landlords and is the blogger behind Landlord Rescue. She also works with investors to find good investments in Toronto and surrounding areas. Her passion is bringing multi res properties back from the brink and maximizing profitability. Check out some of her other real estate posts on MDJ.