It’s important to recognize lenders are swamped as they deal with the economic ramifications from the COVID-19 pandemic, and there are proper approaches for apartment building owners to take when they deal with them.
“Be organized, be positive and be transparent,” SVN Rock Advisors Inc., Brokerage chief executive officer Derek Lobo said early on in a 20-minute webinar on apartment financing on March 27. More than 600 viewers signed in to the live broadcast, which is now available via an archived version.
Lobo solicited advice during recent discussions with several lenders, whom he said are still developing their practices in this new COVID-19 environment. He shared what he learned during SVN’s third webinar in an ongoing series to help those in the purpose-built rental real estate sector manage the crisis.
Lenders will appreciate hearing from clients whose finances are in solid shape, without liquidity issues for the next few months, he said.
Sharing this information informs your financial partners they don’t have to worry about your business, so they can focus on more pressing matters.
Two things lenders don’t appreciate, however: clients who remain silent about potential payment issues until they miss a mortgage payment; and clients with significant capital and strong covenants, but who simply decline to make mortgage payments due to the COVID-19 pandemic.
“If you’re in good shape, you know it and we know it, so don’t come to me looking to game the system,” Lobo said is the reaction lenders will have in this situation.
“This is a time when everyone’s relying on everyone else. This isn’t the time to be taking advantage.”
CMHC isn’t a “Get-Out-of-Jail-Free” card
Some borrowers believe the Canada Mortgage and Housing Corporation (CMHC) will allow them to not pay their mortgages. Lobo stressed this isn’t the case, noting deferred rents don’t equal deferred mortgage payments.
“CMHC doesn’t lend the money, it only insures it,” said Lobo. “It’s the banks’ money.”
Lenders should be willing to help borrowers with real cash-flow problems, but asking for a payment deferral is an application for relief and not a guarantee. The CMHC is working with lenders to approve deferred mortgage and interest payments, according to Lobo.
Borrowers with “real evidence of financial hardship” should begin readying deferral applications now, as Lobo said the cut-off date for approvals is June 30. This includes collecting March and April rent rolls, balance sheets, beneficial owner financial statements and other pertinent paperwork.
Lenders will want to know how many of the applicant’s units aren’t paying rent, with the rent roll of units in arrears clearly marked.
Information packages should also include the percentage of the monthly mortgage payment the applicant wants deferred, how long relief will be needed, sincere cash-flow projections, and actions which have already been taken.
“Start getting ready to have a very good, candid discussion with them with information that’s easy to understand and documented,” said Lobo.
Stock market reaction to COVID-19
Though the stock market rallied somewhat last week, it had dropped by about 4,500 points in the one-month period ending March 27. The share prices of real estate investment trusts haven’t escaped this volatility.
For example: Boardwalk REIT (BEI-UN-T) saw its share price drop by about $25 during that time, while CAPREIT’s (CAR-UN-T) price fell by about $16, and Killam Apartment REIT’s (KMP-UN-T) price slid by about $6.
While Calgary-based Boardwalk may be in a somewhat more challenging position because of its large Alberta portfolio and the recent sharp decline in oil prices, compounded by COVID-19 issues, all three REITs are still solid operators.
Stock prices are likely to over-react both up and down over the next two quarters.
However, Lobo said large REITs are only 30 per cent leveraged, have plenty of liquidity and should be able to deal with any obstacles they face. This could include suspending capital expenditures to offset decreases in revenue cash-flow.
Apartment transactions slowing
Apartment transactions have dropped in March and are expected to slow for the next few months, perhaps longer because deals can take months to close.
“Pens are being put down and people are taking a wait-and-see approach, and that’s a completely rational thing to do,” said Lobo.
Once things return more to normal, Lobo believes there will be pent-up demand for apartment investment.
Demand from investors and tenants will remain strong, along with the business fundamentals of an undersupplied market, and many people will be wary of equities after witnessing stock market volatility.
Lobo also expects government programs to encourage developers to build apartment buildings.
Lobo said there were approximately 12,000 apartment units in Toronto renting on Airbnb a few years ago, and there’s anecdotal evidence some of those could come on to the rental housing market because people aren’t travelling.
That could play a role in reducing the demand for units, though more development is still needed.
New apartment construction and leasing
“If you’re a developer or a lender and you’re in new apartment construction and approaching lease-up, or you’re in lease-up . . . it’s going to be more of a challenge for you,” said Lobo.
He’s still bullish on the sector, though.
Lobo recommended developers and apartment owners at this stage devise a payment proposal for lenders that includes a detailed and written marketing, leasing and operational plan.
He said they should report regularly to lenders and, when this current period of physical distancing lapses, invite them to see their operations to let them know they have things under control to provide additional peace of mind.
“We think new apartment construction is the best programmatic development opportunity in Canada today. This is a bump in the road and I think it’s more a matter of timing than anything else.
“You’re not in the wrong asset class. You’re not building the wrong thing. You’re just at a bump in the road,” he said.
“We remain extraordinarily confident in new apartment construction. We think you’re in a great business and we think you’re going to get full. We’ve been through this many times and you’ll probably need to work with your lender.
“I think you can make it easier (for lenders) by having a written plan.”
The next SVN Rock Advisors webinar
SVN Rock Advisors will circulate an anonymous and confidential cross-Canada survey among landlords regarding how many of their tenants didn’t pay rent on April 1.
All survey participants will receive a copy of SVN Rock Advisors’ analysis. The survey results will be shared during the next webinar, which will deal with tenants who didn’t pay their April rent, at 10:30 a.m. on April 3.