I want to give an update on what has transpired with our Nicola Wealth Real Estate Funds since our last newsletter. April rent collection was the first of several “monthly tests” we will face in this COVID-19 environment but it has provided some data points we can share with our investors.
In a normal environment, real estate functions consistently: tenants pay rent, operating costs, and property taxes are based on the contractual agreements allowing landlords to pay their mortgages and maintain the buildings in accordance with the lease. But these are not normal times and this has changed.
The foundation of real estate is undergoing a serious “stress test” the likes of which has never been experienced before. Everyone, including all levels of government, was caught off guard putting us on the defensive. How long the government imposed shutdown will last and how severe the impact will be on rental income and property values is a concern for the entire real estate industry.
Real estate has historically been viewed as a desirable product in any investment portfolio. The current environment tests the stability of real estate as a reliable investment in terms of the fund composition, asset type, geography, and tenant profile. Owners have financial obligations such as mortgage payments, operating costs, and property taxes not to mention the distribution of cash flow to investors. Revised budgeting and cash flow forecasting are required to understand how long properties can weather the storm.
Over the past four weeks, our Nicola Wealth Real Estate (NWRE) team has been focused on rent collection for our Canadian and US income properties. Landlords around the world learned very quickly how their real estate portfolios would absorb the shock of the new reality.
As bad as the press reports predicted, there were actually many positive outcomes. Residential and commercial tenants who legitimately could pay their rent in fact did. There were delays by some tenants who were attempting to preserve cash but ultimately paid their rent. In other instances, landlords were forced to work on rent deferral programs with tenants whose businesses were directly impacted by the government-mandated shutdown.
We want to say a big “thank you” to those tenants in our portfolio who paid their April rent. Our approach to rent collection in this environment is a balancing act between being firm and fair, assisting tenants, and preserving relationships. We want our tenants to succeed as payment of rent underpins the foundation for real estate investing.
As stated in our previous newsletter, we have suspended all acquisitions and capital expenditures in response to this challenging environment in order to preserve our already significant cash balances. As such, over the past month, our NWRE team has re-positioned its’ people resources to focus on rent collection and implement a very tenant-specific strategy on the deferral program for those tenants seeking relief and deferral for the “uncollected rent.”
At this point, none of us knows how long the government imposed shutdown will last. For our NWRE funds, April saw a very respectable outcome but the industry is bracing for tougher months ahead.
Rent recovery in April for various asset types, as reported by major landlords in North America, appears to be 85-90% collected for the Office & Industrial sectors, 90-92% for Multi-Family Rental Apartment, and 50-60% for Retail.
Below is a detailed breakdown of the results and performance in April for each of the NWRE funds.
Nicola Canadian Real Estate LP (NCRE LP)
As of April 24th, NCRE LP was successful in collecting 90% of the budgeted rent owing. This figure is expected to rise as we continue to receive rent from tenants who are either late paying and/or receiving subsidies and/or relief through government assistance programs. Nicola Canadian Real Estate LP is well diversified by asset class and geography. Below is a summary of the performance level and details for each asset class within NCRE LP. Note, the Dev/Other category listed below relates to the development of multi-family rental apartments or industrial projects that are either in planning stages or under construction in our “build to own” program.
Rent Collection by Asset Class
South Calgary Health Centre, Calgary, AB
Office: This asset class comprises 11 office properties and represents 23% of the Gross Asset Value in NCRE LP. We collected 93% of the budgeted rent owing. This asset class has performed well even though many of the tenants are working from home. Businesses are still operating remotely. Our office portfolio is primarily multi-tenant properties with a few select single-tenant buildings.
27450 55th Avenue, Langley, BC
Industrial: This asset class comprises 23 industrial properties and represents 29% of the Gross Asset Value in NCRE LP. We collected 94% of the budgeted rent owing. This asset class has also performed well. It would appear that several of these tenants are still operational in their premises. The companies that requested rent deferral were those who were directly impacted by the shutdown.
Lougheed Super Centre, Coquitlam, BC
Retail: This asset class comprises 4 retail properties and represents 7% of the Gross Asset Value in NCRE LP. We collected 80% of the budgeted rent owing. This asset class has been significantly impacted as many of these tenants cannot conduct business during the shutdown.
The James at Harbour Towers, Victoria, BC
Multi-Family Rental Apartment: This asset class comprises 3 multi-family rental apartment properties and represents 5% of the Gross Asset Value in NCRE LP. We collected 98% of the budgeted rent owing. This asset class has performed very well with minimal disruption.
Squamish Self Storage, Squamish, BC
Self-Storage: This asset class comprises 6 self-storage properties and represents 12% of the Gross Asset Value in NCRE LP. We collected 91% of the budgeted rent owing. We are able to operate these facilities with minimal staff on-site making it relatively safe for existing clients to access their lockers as well as attracting new clients who can sign up online.
The Wexford by Bria Communities, Delta, BC
Seniors Living: This asset class comprises 5 independent seniors living residences and represents 8% of the Gross Asset Value in NCRE LP. We collected over 95% of the budgeted rent owing. This asset class has performed well through this challenging period. Our primary concern and focus on this asset class is providing a safe environment for both the residents and caregivers. All residences have been closed to visitors and strict provisions have been implemented as mandated by the governing health authority.
Nicola U.S. Real Estate LP (NUSRE LP)
As of April 24th, NUSRE LP was successful in collecting 93% of the budgeted rent owing. This figure is expected to go higher as we continue to receive rent from tenants who may also benefit from government assistance programs. Nicola U.S. Real Estate LP is diversified by asset class and geography but has a greater concentration of multi-family rental apartments. Below is a summary of the performance level and details for each asset class within NUSRE LP.
Rent Collection by Asset Class
144-156 Second Street, San Francisco, CA
Office: This asset class comprises 14 office properties and represents 24% of the Gross Asset Value in NUSRE LP. We collected 89% of the budgeted rent owing. This asset class has performed well even though many of the tenants are working from home. Businesses are still operating remotely. Our office portfolio is primarily multi-tenant properties with a few select single-tenant buildings.
Pinnacle Peak Commerce Centre, Phoenix, AZ
Industrial: This asset class comprises 8 industrial properties and represents 6% of the Gross Asset Value in NUSRE LP. We collected 88% of the budgeted rent owing. This asset class has also performed well. It would appear that several of these tenants are still operational in their premises. The companies that requested rent deferral were those who were directly impacted by the shutdown.
South Hill Village, Seattle, WA
Retail: This asset class comprises 4 retail properties and represents 5% of the Gross Asset Value in NUSRE LP. We collected 77% of the budgeted rent owing. While some tenants are still operational, this asset class has been significantly impacted as many of these tenants cannot conduct business during the shutdown and required rent deferral.
West 46th Apartments, Nashville, TN
Multi-Family Rental Apartment: This asset class comprises 60 multi-family rental apartment properties and represents 58% of the Gross Asset Value in NUSRE LP. We collected 97% of the budgeted rent owing. This asset class has performed very well through this challenging period.
Nicola Value Add Real Estate LP (NVARE LP)
The Nicola Value Add Real Estate LP functions differently from the two-income funds highlighted above. We currently have 47 projects at various stages: preliminary design, zoning & permit approval, under construction, and nearing completion. The majority of our projects under construction have been “de-risked” whereby they have been either “pre-leased” or “pre-sold”.
Due to delays relating to permit approval from municipalities and “pre-sale” / “pre-lease” commitments from consumers, some of the projects in the fund may potentially be impacted by time and cost. However, it is too early to understand the nature and extent of the impact. On an optimistic note, several projects have completed over the past two months, a positive sign that real estate transactions are still being completed. Another encouraging factor is that all our construction sites remain active allowing projects to stay on time and budget.
The fund composition is notably diversified by asset type including industrial for lease, small-bay industrial strata for sale, office strata for sale, creative office for lease, multi-family rental apartment, and residential condo. The fund is also further diversified by geography with Canada representing 66% and the US at 34%.
The Nickel, Vancouver, BC
In addition to the above breakdown, NVARE LP also has two income properties, both Class A fully leased office buildings known as the “Nickel” and the “Lightworks” building in Vancouver (Mt. Pleasant). Rent was collected from the major tenants in both buildings however there was some rent deferral provided to the ground floor retail tenants.
Although a lot of the energy of our NWRE team is focused on rent collection, we are also looking to “when and how” we will invest in the future. The valuable data we receive through this crisis increases our understanding of how certain asset types perform under extreme circumstances and will be instrumental in guiding the NWRE team on future investment strategy.
Currently, we have five additional multi-family rental apartments at various stages of planning and construction that will be added to our portfolio over the next 18 months which will increase the allocation of this asset type to approximately 10% of the Gross Asset Value in NCRE LP.
This will be one of the hardest tests real estate portfolios have experienced in recent history and the asset composition of the fund will matter more than ever. No real estate fund or investment is exempt from the current crisis but it will be easier to ride out the storm with a balanced and diversified portfolio.
An important fact to remember is that significant portions of real estate in North America are predominantly controlled by large institutional and private owners who have a long-term investment horizon. They are well-capitalized to ride this period out and as a result, we do not expect to see a significant volume of distressed transactions that would impact values across the board.
Many of the leading real estate fund managers believe that the government imposed lockdown will continue for several months, possibly well into the fall. The favorable rent collection results for April will serve as the “high water mark” as many say it will deteriorate until we get back to some semblance of normality.
The months ahead will prove to be even more challenging than the past 45 days but will also produce tremendous opportunities for those who are positioned well with capital. There will be questions and challenges with tenant solvency, financing, and future economic projections for the balance of 2020.
The world has experienced many major crises over the past 100 years: the Spanish Influenza, World Wars I & II, New York’s 9/11, the Great Recession of 2008-09. Real estate was undoubtedly impacted through each of these eras, however, real estate as an asset class continued to perform over the long-run. In all instances, there was no consistent timeline but there was always an end to the crisis and a start of a recovery.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. 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.