Managing Relationships With Apartment Lenders Amid COVID-19 | RENX
It’s important to recognize that lenders are overwhelmed as they deal with the economic ramifications of the COVID-19 pandemic, and that there are appropriate approaches for apartment building owners when dealing with them.
“Be organized, be positive and transparent,” said Derek Lobo, Managing Director of Brokerage, SVN Rock Advisors, in a 20-minute webinar on apartment finance on March 27. More than 600 viewers have tapped into the live stream, which is now available through an archived version.
Lobo sought advice in recent discussions with several lenders, who he says 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 specially designed rental property industry deal with the crisis.
Lenders will appreciate having clients with healthy finances without liquidity issues for the next few months, he said.
Sharing this information lets your financial partners know they don’t have to worry about your business, so they can focus on more pressing issues.
However, two things lenders don’t like: customers who keep silent about potential payment problems until they miss a mortgage payment; and clients with significant capital and strong commitments, but simply refusing to make mortgage payments due to the COVID-19 pandemic.
“If you’re in good shape you know it and we know it, then don’t come see me and mess with the system,” Lobo said, is the reaction of lenders in this situation.
“It’s a time when everyone relies on everyone. Now is not the time to take advantage of it.
CMHC is not a jail release card
Some borrowers believe that the Canada Mortgage and Housing Corporation (CMHC) will allow them to default on their mortgages. Lobo stressed that this was not the case, noting that deferred rents do not equate to deferred mortgage payments.
“CMHC doesn’t lend money, it just insures it,” Lobo said. “It’s the money of the banks.
Lenders should be willing to help borrowers with real cash flow problems, but asking for a deferral is a request for relief, not a guarantee. CMHC is working with lenders to approve postponement of mortgage payments and interest, according to Lobo.
Borrowers with “real evidence of financial difficulty” should start preparing deferral requests now, as Lobo said the deadline for approvals is June 30. This includes the collection of March and April rents, balance sheets, beneficial owners’ financial statements and other relevant documents. .
Lenders will want to know how many units the applicant is not paying rent with, with the list of rents for overdue units clearly indicated.
Information packages should also include the percentage of the monthly mortgage payment the applicant wishes to defer, how long relief will be required, candid cash flow projections, and actions that have already been taken.
“Start preparing to have a really good, frank discussion with them with information that is easy to understand and document,” Lobo said.
Stock market reaction to COVID-19
Although the stock market rallied somewhat last week, it had fallen by about 4,500 points in the one-month period ending March 27. Real estate investment trust stock prices have not escaped this volatility.
For example: Boardwalk REIT (BEI-UN-T) saw its stock price drop by around $ 25 during this time, while the price of CAPREIT (CAR-UN-T) fell by around $ 16, and that of Killam Apartment REIT (KMP-A-T) the price has dropped by about $ 6.
While Calgary-based Boardwalk may find itself in a slightly more difficult position due to its large portfolio in Alberta and the recent sharp drop in oil prices, made worse by COVID-19 concerns, the three REITs are still strong operators.
Equity prices are expected to overreact up and down over the next two quarters.
However, Lobo said large REITs only have 30% leverage, have a lot of cash and should be able to meet any hurdles they face. This could include the suspension of capital expenditures to compensate for decreases in cash inflows.
Apartment transactions are slowing down
Apartment transactions fell in March and are expected to slow over the next few months, possibly longer as deals can take months to complete.
“The pens are put down and people are taking a wait-and-see approach, and that’s a very rational thing to do,” Lobo said.
Once things get back to normal, Lobo believes there will be pent-up demand for the apartment investment.
Investor and tenant demand will remain strong, along with the business fundamentals of an undersupplied market, and many people will be wary of stocks after witnessing stock market volatility.
Lobo also expects government programs to encourage developers to build apartment buildings.
Lobo said there were around 12,000 apartments in Toronto that were renting on Airbnb a few years ago, and there is anecdotal evidence that some of them might come into the rental housing market because people don’t travel. not.
This could play a role in reducing the demand for units, although more development is still needed.
Construction and rental of new apartments
“If you are a developer or a lender and you are in the construction of a new apartment and you are approaching renting, or if you are in the process of renting. . . it will be more of a challenge for you, ”said Lobo.
He’s still bullish on the industry, however.
Lobo recommended that developers and apartment owners at this point design a payment proposal for lenders that includes a detailed and written marketing, rental and operations plan.
He said they should report to lenders regularly and, when this current period of physical distancing expires, invite them to view their operations to let them know they have things under control to provide additional peace of mind.
“We believe that building new apartments is the best programmatic development opportunity in Canada today. It’s a bump in the road and I think it’s more about timing than anything else.
“You are not in the wrong asset class. You are not building the wrong thing. You’re just one bump in the road, ”he said.
“We remain extremely confident in the construction of new apartments. We think you are in a great company and we think you are going to be full. We have been through this many times and you will 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 release an anonymous and confidential pan-Canadian survey of landlords on the number of their tenants who did not pay rent on April 1.
All survey participants will receive a copy of the analysis from SVN Rock Advisors. The results of the survey will be shared during the next webinar, which will focus on tenants who did not pay their April rent, at 10:30 a.m. on April 3.
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