Nicola Wealth’s Strategy to Real Estate Investing Through Crisis


By Mark Hannah, Managing Director, Real Estate and John Nicola, Chairman & CEO

The COVID-19 pandemic has created the most volatile global equity markets in history with equities dropping as much as 30% from their highs in only a few short weeks.  Interest rates are also at record lows. Government lockdowns are likely to cause unemployment levels that have not been witnessed since the Great Depression.  Most countries will have a significant drop in their GDP in 2020 caused primarily by businesses that have to either drastically reduce their operations or close entirely. All of this is occurring because the world needs to respond aggressively if we are to contain the pandemic of Coronavirus. 

Our commentary below will address the following questions:   

  • What impact has the current crisis had on investment-grade real estate in North America? 
  • What steps can real estate owners take to mitigate the short and medium-term damage that might occur? 
  • Specifically, how is Nicola Wealth responding to COVID-19 with respect to the management of real estate assets for our clients? 
  • What measures can we implement now, and in the future, that will improve long term returns for investors in this asset class?  

Amidst the economic uncertainty in today’s world, it is challenging to predict how real estate as an asset class will weather the proverbial storm. Real estate has been an important part of Nicola Wealth’s model portfolio for a number of reasons.  Real estate as an asset class has an ability to provide secure cash flow that can grow over time, and as a privately held asset, it is not subject to the same pricing volatility as that experienced in public markets. The current challenge is testing this investment rationale.   

The COVID-19 pandemic has significantly altered the way we go about our daily lives; not surprisingly, it also casts a cloud of uncertainty over the commercial real estate market. During these unprecedented times the Nicola Wealth Real Estate team is focusing on what is within our control which is the active, hands-on management of the assets across all three portfolios: the Nicola Canadian Real Estate LP (NCRE LP), the Nicola U.S. Real Estate LP (NUSRE LP), and the Nicola Value Add Real Estate LP (NVARE LP).  

Nicola Wealth Team’s Four Pillar Strategy is: 

  1. Cash Management
  2. Tactical Asset Management
  3. Diversified Portfolio
  4. Debt Management

 

Cash Management 

It’s anyone’s guess how long the current situation will continue and what lasting effects it will have on the commercial real estate market. With this in mind, we are actively monitoring the cash position of each of our funds on a frequent basis. Our goal is to make sure we have enough cash to meet our obligations to maintain properties, repay lenders, distribute to investors, and have the capacity to look at acquisition opportunities. We currently have a healthy cash balance in each fund and are in a strong position to take advantage of opportunities that will no doubt arise as the world recovers, in addition to covering our more immediate obligations. 

In order to preserve cash, we have suspended all acquisitions until we get clarity on the marketplace. There has been minimal investment activity in the marketplace as the majority of brokers have also slowed their marketing efforts. Active deals that were close to completion are still proceeding while deals in the early stages of negotiation have been put on hold or dropped completely.  It is premature to forecast how this will impact values, however we are closely monitoring the various asset types and markets.  Assessing how they weather this challenging environment will help navigate our future investment decisions. 

In addition to halting all acquisitions, we have suspended any major capital expenditure programs for all of our income properties. We will patch and repair for critical issues that arise and continue with maintaining essential life and safety building systems for all assets. 

We are also exploring the possibility of property tax deferment. This is an opportunity that is rapidly evolving. Each jurisdiction has a different schedule for the timing of payment of property taxes. Some municipalities have already launched a program allowing for the deferment of property taxes. As we learn more about this, we may elect to pursue this relief in certain municipalities and for specific properties. 

Tactical Asset Management 

With acquisitions on hold, we have re-allocated our team resources to asset management. Our asset management team is in constant contact with our third-party property managers to maintain our properties and to ensure the buildings remain safe for our tenants and their employees. There has been significant media coverage around the pandemic’s impact on both residential and retail tenants.  The retail asset class will clearly be the most impacted as many retailers cannot open for business and generate revenue.  Similarly, some residential tenants whose jobs have been adversely affected will face challenges in paying their rent.  

Not surprisingly, we have received requests from tenants seeking rent relief and/or deferment.  We are proactive in our approach with our tenants who we view as valued partners. Our team is closely monitoring all Federal, Provincial, and State relief programs currently being rolled out to businesses, individuals, and landlords so we can help guide our tenants to seek compensation to assist them in the payment of rent. 

Remarkably, there is still leasing activity in the marketplace including at our properties.  While the volume is much lower and it is challenging to tour properties, renewals and some new leasing is still occurring. Our occupancy rate was very high for both income funds (NCRE LP and NUSRE LP) before the crisis started and we have minimal exposure to lease expiries over the next 18 months. Fortunately, we significantly “de-risked” our portfolio in 2018 and 2019, completing early lease renewals for several large tenants in our income portfolios. 

Diversified Portfolio 

Our funds are well diversified by asset type and geography. Retail and hotel sectors are expected to be the most negatively impacted versus other asset types (office, industrial and self-storage). However, no asset class, geography or operator is immune.  We do NOT own any hotels and we have minimal retail exposure; 7% of portfolio net asset value (NAV) in NCRE LP and 4% of the NUSRE LP.  When we examine potential acquisitions, we analyze the potential impact on the portfolio in terms of asset class and geographic allocation in addition to other important metrics such as portfolio lease expiries, mortgage maturities, and tenant profiles. We do this in order to maintain a balanced portfolio and to help minimize the impact of an “event” such as the one we are currently experiencing. 

Debt Management (Financing) 

The use of debt is a critical part of our strategy to help provide enhanced leveraged returns for our clients. We always endeavor to have a balanced mortgage maturity profile so that we are not exposed to a significant portion of the portfolio debt expiring at any one time. Debt financing is an opportunity the Nicola Wealth Real Estate team has identified as one to capitalize on by taking advantage of the current low-interest rate environment. Our funds have low overall leverage– 39% for NCRE LP and 49% for NUSRE LP.  We have identified several properties that are either debt-free or maturing in the near future as providing opportunities to explore larger financing packages at favourable rates that would be beneficial to the funds not only this year but in years to come.  

Our outlook on real estate has been, and always will be, a long-term perspective.  The COVID-19 pandemic will eventually pass and we are confident that our hands-on approach to asset management will reap its rewards. Our decision to build a proprietary in-house real estate platform was a long-term commitment to our clients to building a portfolio of real estate that will perform over the long run and will be able to weather the storms that may arise.  

We hope all our valued clients and their families stay safe and healthy through this challenging period.   

Winston Churchill said, “It is no use saying, ‘we are doing our best’. You have to succeed in doing what is necessary”. 

 

The Wealth Exchange Podcast: Real Estate Investing Through Crisis.

Managing Director, Real Estate Mark Hannah and Director of Acquisitions Alex Messina join host and Financial Advisor Mark Therriault for an in-depth discussion on what they are experiencing in the real estate markets during this period of uncertainty, addressing the most burning questions from clients.

LISTEN HERE

 

This investment is generally intended for tax residents of Canada who are accredited investors. Some residency restrictions may apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions. Nicola U.S. Real Estate Limited Partnership was set up in July 2007 but opened to investors in June 2010. Effective January 1, 2019 Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add Real Estate LP adopted new mandates and changed names from SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.