Why Invest in Canadian Multi-Family?

Hosted by Bob Simpson, today we shift the focus to answering the question "Why Invest in Canadian Multi-Family?".

Learn from our host Bob Simpson and our expert guest, Geoff Lang, Senior Vice President at Equiton Inc.

Today's questions of interest:

0:00 - Intro
2:47 - Tell us about your story and the work your firm does with investors.
4:15  -Could you explain Canadian Multi-Family in terms of your buy and hold strategy?
5:28 - What kind of financing do you have in place in your portfolio?
6:18 - Do you have lower leverage compared to a buy and flip model?
7:23 - What's your forecast on future interest rates?
9:44 - Could you touch upon value add as it relates to multi-family?
11:52 - Where do you get the best deal when it comes to value add's?
13:56 - How does the Canadian Multi-Family model help those interested when starting in this space?
16:40 - How does this investment fit into a typical investor portfolio?
19:23 - How does this model work for the millennial demographic who have difficulty finding housing?
21:13 - Can you explain the difference in public versus private when it comes to Canadian Multi-Family?
25:03 - Are we currently in a buyer's market? 
28:07 - Final thoughts.

If you enjoyed this episode, please subscribe and visit our website at https://www.privatedebtandequity.ca/ for any questions or to learn more!

Transcript

0:15

Greetings, fellow seekers of investment wisdom and early adopters. I'm your host, Bob Simpson, and you're tuned in for another educational episode of my private network podcast. We're absolutely thrilled to have you back with us today. Now on today's podcast, we're going to do more than just scratch the surface of the investment world. Each week we swing open the doors to introduce you to truly exceptional individuals. These are not just specialists in the investment community. They're disruptors, pioneers who fearlessly embrace uniqueness. In a world increasingly defined by constraints and regulations. Our ultimate goal is to empower you to achieve your financial success, the success that you desire for yourself and your loved ones. So stay tuned as we embark on another enlightening journey through the world of investment, innovation, and financial freedom. Welcome to my private network. Today, we've got something special in store. The presence of a distinguished guest, Jeff Lang, a true expert in the field of multifamily investing. Jeff graced us with his insights back in Episode 2, where our panel were asked the question, Why should one invest in private real estate? In that episode, Jeff's focus was On the intriguing topic of Canadian multifamily investments, specifically apartment complexes comprising around 100 residential units and primarily focused in the GTA in the greater Toronto area and some of the neighboring locales. So, as introduced earlier, our guest for today is Jeff Lang, who holds the position of senior vice president. at Equiton Inc, prominent player in the Canadian multifamily sector. Jeff, we really appreciate that you've taken the time today to join us. And, uh, and we appreciate you being here. Yeah. Looking forward to it, Bob. Thanks so much. And, uh, it's great that we can delve a little bit deeper in private Canadian apartments and get into the weeds on what we do here at Equiton. So, thanks for having me on. Yeah. So, you found five minutes was a little bit tight to tell your whole story, right? I like to talk. So, yeah, you know, five minutes was tight. Thirty minutes is that perfect window for me. Yeah. I think we're good. So let's kick things off and maybe just talk a bit about who you are, you know, how did you become associated with Equiton, about your firm and, you know, the kind of work that you're doing for investors in Canada today. Yeah, for sure. And everyone listening, thanks for tuning in and again, thanks for having me. Um, I've been immersed in the private equity space for a long period of time. Predominantly, uh, previously to Equiton dealing with U. S. private companies but always had that desire and passion for real estate. So when the opportunity at Equiton came about where they're investing in private Canadian apartments or multi family residential, it piqued my interest. Who we are at Equiton, we're a wholly owned and operated private Canadian real estate company, which is an emerging leader in the private Canadian real estate space. And we focus predominantly on those private Canadian apartment buildings. As you touched upon Bob, that 100 to 200 unit apartment building or townhouse complex. We pool those assets into a fund that investors can participate in and get exposure to real estate without having to have the headache of being the property manager themselves. You know, I think we could go deeper on that too, is that Your particular investment or concept as we like to talk about it, uh, is more diversified right as compared to go out and buying a limited partnership, uh, in a multifamily, like, you know, buying into a specific building in Toronto or in Phoenix or in. Uh, Fort Lauderdale or anything like that. This is more of a, a broader buy and hold strategy as compared to some of the LPs that are more buy and flip. That's exactly it. We're, we're a buy and hold strategy. We have, you know, 39 properties, 39 buildings. And as I said, we're townhouses, private Canadian apartments. But what we're seeing right now in the space is that occupancy rate is extremely high, right? It's so. We're not looking at, you know, let's buy it to flip. We have good cash flowing buildings when you're close to 100 percent occupancy rates, cashflow coming in quality tenants. Why would you flip that? Because you're just gonna have to go buy in something else, right? So when you're having these strong fundamentals in the buildings and we can touch on our due diligence process a little bit further on in the call, but it's impactful that you have that high occupancy rates, solid tenants, and thus we don't have to do that. That flipping that a lot of the LPs do that you alluded to. It also gives you a bit more flexibility where one of the things that we've found in the limited partnerships is that, you know, if you're buying flipper, you have less flexibility on financing. And I think that's been one of the areas that you've done really well. Compared to some of the LPs, uh, on your financing, maybe just touch a bit on what kind of financing you have in place in your portfolio. So the LP point and LPs focuses in exit or liquidity for their clientele's. We pay a monthly distribution. That's a hundred percent return of capital. So you're getting that monthly cashflow, which is fantastic. And to your financing point, interest rates are major topic of conversation. We locked in 10 year fixed mortgages or, you know, our mortgage rate financing rates, 3 percent with a seven year term to maturity, meaning that the majority of our mortgages aren't coming due until 2029 2030 and bank of Canada seems to be holding rates, potentially cutting rates this year. This will benefit, but we're very prudent from a risk mitigation strategy to lock in those rates. And we also keep our loan to value currently below 50%. That's really nice from. The standpoint of an investor currently. Yeah. So you again, comparing it to limited partnerships, you have much lower leverage than you do in the buy and flip model. Yeah. And I think it's, it's important to look at, and this is a common question I get, you know, we do tenure fix. What's the rate right now? Um, five, 6%, right. But when you're looking at purchasing buildings. There's a lot that have come up for sale that potentially have, I don't want to say distress sellers, but individuals that potentially need liquidity, right? You know, cost of life has gone up and it's expensive to maintain these properties. We're looking at taking over existing properties that have low mortgage rates, low financing. So a property that we just purchased in December of 2023, we took on that existing rates, Bob, at a rate of 2. 28%. And it doesn't come due until September of 2029. So being opportunistic right now, it's a great buyer's market. It's a very small window. I wish we had billions of cash to spend because we could deploy it. But it's a rare window in time where rates are where they are, where we can be advantageous, scoop up property, and we feel a discount to fair market value. Yeah, so what's your, what's your forecast for interest rates for September of 2029? Yeah, yeah, you know, and if I knew that I'd be in Boca Raton, Florida, or wherever in the world I'd like to be, but you know, it's tough to predict, but You know, going back four or five years, did we like to have variables? Probably, but you know what? Our goal is to mitigate risk for a long period of time for our investors. And the prudent thing to do was let's lock these in. We understand that 3 percent is pretty low in the grand scheme of things over the course of time. We can lock that rate in for a long period. Then we can take that risk out of, out of play, focus on buying good properties. Generating strong cash flow for the buildings and obviously distributing out that, uh, that monthly income for our clients. Yeah, you know, and I think it's interesting, you know, I've been involved in interest rate markets for much of my life. And I started in the business back in 1981 when Canada savings bonds were 19. 5%. And mortgage rates were 14 and we were locking in 14 percent because we thought rates were going to go back up to 16 or 17 and we wanted that certainty. And when my, when my daughter bought a condo and she was waiting, you know, as a pre construction, she was waiting for it to close and rates were next to zero. I'm, I'm yelling at her saying, we got to lock in, we got to lock in, we got to lock in. And you know, people looked at interest rates down then and they, and you know, they went variable and it's, you know, it's pretty amazing to me that people would, when rates were zero, that you wouldn't lock it in forever. Yeah, like taking a variable at like a 1. 82, like lock that in for five years. Yeah, because you're, because the spread between the 1. 82 and the 2. 2 to lock in, why would I spend that extra when I can get 1. 8? So yeah, it's interesting. Um, it's interesting that, that whole idea. Now talk about value add as it relates to multifamily, right? Because it's not like you're buying an apartment building and you're just going to keep it the way it is. And jack rates on people. That's what I think a lot of people who have concerns about firms like yours who are buying buildings, you know, rents are expensive and they're jacking rates. But you're not just doing that talk about value add and how, you know, you're really creating, you're really creating properties that people want to live in. Yeah, absolutely. And if you looked at our portfolio as a whole, we have a mix of value add and newer builds, right? So we look under the hood, do our due diligence. Does it make more sense where we can do some capital expenditure and make the building. You know, enhance it. And then does that make more sense or does it make more sense to buy new? When we're looking at a value add, we have to look at the upfront costs, but we're enhancing the quality of these buildings and Bob, to your, to your point, we can't just go in there and increase rent. There's rent control. We're in Ontario, right? No, you can't. Yeah, yeah, no, we can't. So as units turn over, we can increase them to market. We're historically below market. Like right now, our revenue gap to market or. Growth opportunity, however you'd like to call it, is around 30%. So if you think of the big bad landlord being equiton, it's not the case. Our rents are cheaper than the average than the market, right? So we look at value add and we have a couple of those buildings where we can, you know, put on a new roof. Make the lobby enhance, you know, put in a gym, whatever it may be, just the quality of the unit and that can add significant value, not just to the valuation of the property, but the quality of the tenants in place, you do a renovation that improves the quality of the building and you can't increase rent to that because these tenants have been long term there. That's a significant value. To both the property and to the tenants. And one thing we do at Equiton, a subsidiary of Equiton is Equiton living. So the property management is done in house by Equiton. We don't outsource that. Number one, it's very expensive. But number two is you don't get that same quality with the building and the tenant. We have boots on the ground. Those are Equiton employees. And that's really impactful because they care and they have a better relationship with the tenants. And they can bring it back to us. And if there's any concerns, we can address that right away. And from a multi or from a value add property. It can be really impactful to both the valuation, which is great for the fun, but also to our tenant base. Yeah, so if you look at, at some of the work that you do in value add, where do you get the best bang for your buck? Um, a variety of ways. Sometimes there's old storage units that aren't being used and we can turn them into units, make them more beautiful. A lot of people like, you know, when The lobby gets enhanced. Sometimes it's not the best bang for your buck. Like you, you fix the boiler, the roof windows and buildings that can add significant value to the building going forward, but also as tenants move, we can update the appliances. We can, you know, paint the place, new flooring. Um, You know, low flow toilets to make the buildings more efficient. We have a big ESG component, um, at Equiton to make buildings more efficient just from a cost basis, but also enhancement for the tenants. So a variety of different ways. Um, one of our properties out in, uh, out in Hamilton area. There was just a massive admin space, um, being used and we were able to turn those into more units. It was more efficient, generated greater cash flow for our investors and really added value to the property. Yeah. So take, you know, it's, it's similar to if you're in an agriculture, how do you convert some nonproductive space into productive space? That's exactly it. You have square footage. Let's, let's use it to our best of our abilities. Yeah. No. And some people like living in storage units anyway, it's cheaper, isn't it? They're big storage units, let's make sure that's included in the podcast. Storage unit, put in a toilet, you'll be good, right? Now one thing, you know, a year or so, I think it was a year ago around this time, I went to the big multifamily conference in Toronto. And you had a booth there. You know, I, you got lots of people, you got lots of people working there. Um, but it seemed like a lot of people look at multifamily and they start small. You know, can I buy a duplex and can I rent it out and do a bit of, uh, of upkeep and, and update maybe some value add stuff? Can I flip that thing? It seemed to me as though a lot of people there were really get rich quick guys, right? That's not your model. No, we're, we're. Get rich efficiently and prudently. I'd say, um, you know, we've done over 11 percent since inception on our F class fund. We returned 15 percent in 2022 and almost 12 percent last year. So, you know, our clients are getting a good, good, stable return. It's so difficult. It's so difficult to manage your own properties and you can go to, you know, I think it's, I think Alex Rodriguez was there at one. You can see Tony Robbins at another one. They all preach, you know, you can do it yourselves and everything like that. It's so difficult. It's time consuming, especially if you have a full time job already, leave it to the professionals, the property management team that we use, and this is a great way to invest with a lot lower. Upfront cost, right? Minimum investment in our fund is 10k. And we wanted to democratize private equity real estate to all Canadians. And you get an efficient way where you're holding multiple properties. So you have that diversification that you touched upon, Bob. Yep. We have that property management expert already put in place. We have tenants in the buildings. If they're not there, we're renovating them to make them more efficient. And then we give out that stable cash flow, which I think what clients are looking for anyway, right? Yeah. And income producing. investment that can get a little capital appreciation on top of that. So we try and take the stress out for the end investor and maybe we're not getting rich quick, but I think getting rich prudently and efficiently is, is also nice as well. You know, it's also the power of compound growth, isn't it? That's not fully understood until the latest, uh, Questrade commercials came up and talked about the, uh, the power of compound interest. And, and, you know, to me, that was a great message to send out to investors is. We really, you know, you really should be, be looking at that. But, you know, I thought, I thought it was interesting. Uh, A Rod's talk at that conference last year, I think the title of it was multifamily on steroids or something. Um, that's ironic. A little, yeah, yeah, absolutely. Yeah. I think he's not going to make the hall of fame. No, that Mitchell report, Seward him. He was one of those, him and Conseco, right? Yep. No, they were, they were big boys. Yeah. Um, people have investment portfolios. Now, one of the things that I like to say is that when you're building a portfolio, you should be looking at adding great assets to your portfolio that have good long term potential. That's really what it should be. You know, whether you're buying Microsoft or you're buying an apartment building in Hamilton, is it a good asset that is going to generate Good returns with solid cash flows. So how do you see using something like this? How does it fit into a typical investor portfolio? Yeah, I always look at it from a couple ways. Um, from a standpoint, like how does it compare to other asset classes? So you want it to be efficient when you're putting it in a portfolio. So does it have a low correlation? To other assets that you might invest in. And I always look at 2022, Bob, is sort of that focal point as to why alternative investments make sense. When equities and fixed income are both down double digits, and you know, we are an alternative fund. I don't like to think of real estate as an alternative, but it gets lumped into that bucket. We return 15. So it's either low or negatively correlated to a lot of the major asset classes out there. You know, Canadian equities, fixed income, US equities, EM equities. We have that low correlation to that. So that's number one. Another thing you'd like to look at is what's the volatility like something with nice stability makes a lot of sense. Private Canadian apartments going back 30 years since the inception of the index, never a negative year, very consistent, stable returns. So from a portfolio construction standpoint, Low correlation with stability. That's kind of nice. Then you have to look at, does the long term investment thesis make sense? So, for our thesis, Private Canadian Apartments, what is that? Population, is that continuing to grow? Is there a supply demand issue? Big time here in this country, right? Is another option unaffordable? So when you look at single family homes, the price of that in Canada, super expensive. Driving people to rent. Renting is becoming more mainstream. More popular, right? Used to be 40 years ago. You can't afford a house. That's why you rent today. It's, it just makes sense for my quality of life, my lifestyle. We know if you own a home, it can be very, very costly. And you're seeing also the baby boomer generation because of that. unaffordability in homes, they're selling, they might have a different property somewhere else, and they're renting here in Canada. So there's a lot of these tailwinds. So I know that was a super long winded answer to your question, but when you're looking at portfolio construction, and then if the investment thesis makes sense, I think that's how we fit in the portfolio and why we're a decent solution for clients. You know, you talked about the boomers. Who maybe it's now let's sell it. Let's rent and let's go spend the winter in Florida. Let's get away from these nasty winters that we've got. But you also have Canada's biggest demographic group, which is the millennials who just can't afford to buy a place. You know, I think millennials look at things and they say, I don't want to live in a dump. I would rather pay a bit more money and live in a place that. You know, a firm like yours has upgraded and made it a good place for them to raise their families. Yeah, that's a, it's a great point because a common question I get asked is, you know, single family housing has come off a little bit softened, but your interest rates a lot higher. We were talking earlier in the podcast about, you know, 0%, 1. 1 percent 2%. Well, you do a 5 percent fix. Yeah. Your 1. 5 million house is now worth 1. 3, but affordability is based on payment and not price your mortgages twice as much. So your monthly costs are more expensive, even though the sticker price on the house is less expensive than it was. So that's keeping that drive to renters continuing into 2024. Yeah, no, I think so. So let's change direction. What I want to talk about is public versus private, right? Because you can do the same thing. You can buy an equivalent investment in public markets. You can buy a REIT. You know, one of the ones that I did a comparison a while ago where I looked at the Minto apartment REIT. And I compared it to the Equiton portfolio. And it was interesting that comparison for us. Yeah, it was good. And it was that you had the same number of properties. The same value of investment. But if we look at investment portfolios, you know, the mental REIT, just check my notes here, trade on the Toronto stock exchange since the beginning of 2020 is down 21%, uh, whereas your fund in the same asset class was up. 59 percent or 12 percent annualized over that same period. So we're looking at 59 versus negative 21. How does that happen? How does a public investment like that drop 21 percent where the private rises in value so significantly? Yeah, that's a good question. And you know, I like to give credit to our acquisitions team and due diligence team on all that, but a lot of it. Plays and factors in number one. I always say emotional market forces. As you said, these public rates traded on exchange, they trade daily, their mark to market. And when a big factor of that was 2022, when the sky was falling and COVID as well, right? Sky is falling equities and fixed income. Is negative. People are running for the hills. They need liquidity and this drives down price. There's for selling as well. And I use the example of the run on the banks in the United States or, you know, Silicon Valley Bank signature bank, you know, starting to close down. Everyone starts pulling their money out of the banks. They're worried and on the entire sector goes down. That's pretty much what happened with public REITs, um, during that timeframe. And along with that is, I think it's important to note how we manage the portfolios. Yes, we're private, we're not marked to market, so you have a little bit more of underlying stability. But we also as a As I touched upon, we did 10 year fixed mortgages. We kept our mortgage rate extremely low. We were buyers in the market. So when you look at 2018, 2019, when the apartments were humming, public REITs were doing extremely well, a property goes up for sale, 15 to 20 bids in the marketplace. You look at 2020, 2021, and 2022. Two or three. That was us. So we were able to be buyers. And while they were worried about, you know, redemptions and the capital markets as a whole, we were buying property from individuals that need liquidity. And that really. Impacted our portfolio and really set us up for a great 2022 and 2023. But it's also that, you know, the pub on the public side that Things like mento reet were trading at a significant discount to their net asset value Significant discount to their nav. Absolutely. There's room for public rates and portfolios. I'm not saying yep It's private. Especially when they're at discounts, right? Yeah It can be I always say public rates can be a great trade A great opportunity and private rates can be that great long term steady eddy hold because when you see a public retraining on a significant discount to NAF, there's opportunity to scoop that up and get a good trade for clients. But from a long term thesis, we think private Canadian apartments make sense, but there's definitely room for both parties involved in a portfolio. Yeah. No, I think so. Yeah. And that, you know, I think if you, if you're watching the public side, you just watch the discount to net asset value. Absolutely. Big discount. That's, that's maybe a way to go, but on the private side. You know, it's again, a bit of market timing versus buying, as you referred to it as the steady Yeti. You know, I think most investors would, you know, they don't want to spend the time, they don't want to go in. It's difficult to discern what the net asset value is and what the discount is. Is it trading at discount? Is it trading at a premium? Yeah, you can get those, you know, 20 to 30 percent returns on public REITs in any given year. We're probably not going to do that, right? We target eight to 12. We're pretty much within that bandwidth each and every year. We're not going to have that. I can't tell you 2024 is going to be 35 because it's not right. And that's why there's room for both. Um, depending on clients, risk tolerance for sure. So let's, let's look at. You know, we're in a higher interest rate environment. Our last podcast that we did, I referred to it as a high interest rate environment. And, uh, and our, our guests said, it's not a high interest rate. It's, it's a higher interest rate environment compared to when rates were zero. You know, is this a buyer's market? Is this a place that you are, you're currently investing? Uh, are you seeing bargains out there? Yeah, we're actually fortunate in the, in the position that we are. I wish we had more cash on hand. As I mentioned earlier, if I had a billion dollars, I could probably spend it because there is that off market selling that's happening, right? And we bought two properties, um, at the end of last year. But we have to be very prudent. And as I touched upon the property we bought in December, we took it on at a 2. 28 percent mortgage rate that comes due in 2029. So first off, how do we protect against that? We want to keep our mortgage rate as low as possible. That's sitting at 3%, as I, as I alluded to earlier, but there is opportunities. We're fortunate. We're in that net positive fund flow stage right now, where we can deploy capital in today's market. Um, some funds aren't in that same position and they might have to hunker down a little bit of cash right now. We're out there actively seeking buying opportunities and a lot more in the off market space where potential sellers, they might be not from here taking capital out of Canada, we can scoop it up. They're worried about refinancing higher interest rates, whatever. They might want to buy a different property, be opportunistic somewhere else. So we're able to. Scoop up properties that, you know, are discount to where we believe are fair market and seemingly where they're getting appraised at by CBRE. So that's a, that's a nice advantage that we're in right now. So it's find more money and you can buy more property. That's exactly it. That's it. We're looking to deploy and we have a, we have a good pipeline. We're predominantly in Ontario. We have a couple of properties in Alberta, but we're trying to diversify as much as possible. We've been out to, uh, BC recently looking in, you know, Langley, Coquitlam, Surrey, still looking to deploy capital here in the greater Toronto area, Southwest Ontario, and we're also looking to expand our presence in Quebec as well. Right. So are you more in Ontario or are you more of a buyer in GTA or are you more? Uh, in the London's and Kitchener's right now in the London's and Kitchener's. Um, but we are looking everywhere. Like we just scooped up a place in Brantford, but we also scooped up another place in London, Ontario. So we like both areas. Uh, we tend to stay away from. You know, buying existing buildings in the downtown core. Uh, there's a great opportunity to scoop up land, um, to develop in downtown Toronto right now. And we're looking to do so. We have a few developments on the go, but from existing private Canadian apartments, that Southwestern Ontario grade Toronto area is still a great opportunity. You also have the students in cities like, uh, like London. That's exactly it. The, the property we bought in London, it's not exactly, it's not student housing, but there's students. Right. And you're always going to have that nice demand. Yeah. Yeah. And I hear there's a good school in that, uh, in that town as well. Better there's better schools in Waterloo, Laurier specifically, but that's just me a little biased that way. Well, and it's, you know, you're, you're also talking to somebody from a. Who works in a firm where many of the people who work in the firm were Laurier grads. So that's okay too. There you go. Okay. So we won't, we won't hold that against you. Yeah. So yeah, just kind of wrapping things up. You know, do you have any final thoughts? You know what? I just wanted to stress where we are right now because real estate gets lumped in as to one, you know, whole asset class with office, industrial apartments, and there's just a nice. Nice tailwind right now for private Canadian apartments. We're really happy, um, in the asset class that we're investing in. There's consistent demand for the properties, but. It's really nice that the tenants are high quality and I, when we're bringing on new tenants, it's not just, let's fill it as quickly as possible. Let's get the right people in those apartments. So we want someone, you know, individuals or families with a good credit score and, you know, not too much of their income going towards rent because we want to keep our default rate as low as possible. And going back since inception, it's been less than 1 percent and that's through those COVID years where a lot of individuals were not paying rent. And. I think that's a twofold, the quality of our property management and the relationship with the tenants, but the high quality of tenants that we put in place. So, um, we're very fortunate in what we do here at Equiton. We're very fortunate of our investors and advisors alike, like yourself, Bob. So, you know, that covers everything I wanted to touch on today. Oh, so we did it. Yeah. Well, thanks for coming out. Thanks for joining us on, on today's and you know, back in the previous session that you've done, we'll have you back on on another time. Um, um, so thanks for. Thanks for sharing your thoughts with us today. Yep. Thanks so much for having me anytime, Bob. Appreciate it. So to learn more about Canadian multifamily, visit private debt and equity. ca. Click on the concept and just simply look for Canadian multifamily before making any investment decisions. It's essential to consult a professional advisor to determine suitability. We have full disclaimers. Available on private debt and equity. ca. Don't forget to follow us on your favorite podcast platform. Subscribe to our YouTube channel to stay updated on new episodes. We do send out a newsletter too. You know, if you do go, uh, sign up for anything, we'll keep you updated on, you know, what are the latest podcasts we're putting up and that sort of thing. So just to close up here, I'm Bob Simpson. It's been my pleasure to steer you through this enlightening conversation. Keep in mind that knowledge equips you to make well informed decisions and progress towards your financial objectives. So until we meet again, stay focused and disciplined on your financial journey. Thanks for listening today.