CIO asks advisors to return to investment fundamentals and give company the chance to earn their trust
Equiton bought an apartment building in Markham this year. That’s hardly big news for the Ontario real-estate investor. It’s what they did with it, though, that stands out.
The building’s previous owner had an agreement with an executive rental company, giving them exclusive rights to 12 units which they rented out on a short-term furnished basis. Equiton’s team saw that the rental company was paying about 20% below market value for the units, and they’d let their contract with the previous owner lapse. Quick as you like, Equiton cancelled the contract and rented the units at the going market rate.
“This action alone increased the overall value of the building by $3 million, a 15% increase in value,” Greg Placidi, Equiton’s chief investment officer, told WP. “We stayed true to our corporate motto, ‘we see what others don’t’.”
Through this past year Equiton stuck to that motto. In 2019 their asset base doubled, their property values rose, and their vacancy rates stayed low. According to Placidi, Equiton is likely to deliver its best returns for investors ever. They’ve done it, he says, through a no-nonsense approach, consolidating Ontario’s fragmented apartment industry and welcoming opportunities other owners see as a burden. He thinks this is a year when Equiton has earned advisors’ trust, showing how they can generate stable cashflows and capital appreciation by taking a different approach to renting.
Key to Equiton’s strategy is turnover rates. A lot of the multi-residential owners think of unit turnovers as a pain. They’ll keep tenants on, even at well-below market rates, to avoid the hassle of repainting, cleaning, and listing the unit for rent. Not to mention the potential loss that comes with a month or two of vacancy. Equiton, though, likes a healthy turnover rate. Placidi looks for buildings with relatively high turnovers when he’s shopping for the next one to buy.
“Every time a unit turns over you can increase the rent on that unit to whatever the market will support and depending on how long the old tenant had occupied the unit this rent bump could easily be in the 10% to 20% range,” Placidi explained. “The trick of course is cost effectively turning over the unit and making the necessary, if any, cosmetic and/or unit upgrades to quickly attract a new tenant at the current market rent for the area.”
Turnovers don’t mean vacancies, though. Equiton insists they’re fastidious about keeping vacancies low and turnovers high. Overall demand for rental units in Ontario, and especially the GTA, have been a boon to Equiton on that front. Demand isn’t likely to abate any time soon with immigration, lifestyle changes, and supply constraints keeping rents high and vacancies low.
Equiton’s investment strategy will stay steady into 2020. They see an apartment industry in Ontario dominated by individuals, families, and small limited partnerships. Placidi estimates as much of 70% of the market is in the hands of these small owners. Equiton uses a proprietary property database to find these owners and come to an amicable deal, buying the property off-market and lifting the owners’ burden of listing and managing their properties.
Placidi thinks advisors planning to invest in real-estate funds should look at the underlying components of the real-estate sector. Just like tech, the sub-sectors of real estate have very different drivers. Advisors should be looking at the underlying nature of the investment, and the skills of the management team. Those will be the key factors determining the long-term performance of an investment.
Placidi doesn’t make a hard pitch for Equiton, though. For all the firm’s successes in the past year, he isn’t telling advisors that their funds will “guarantee” a client’s happiness. Instead, he thinks advisors should look at those fundamentals, see what sub-sector of the real estate market they want to invest in, and see where the best returns lie.
“All I would ask of advisors is to think about taking a step back to basic investment fundamentals and giving us a chance to earn their trust,” Placidi said. “They’ll see how we can generate stable highly tax efficient monthly cashflows for their client while simultaneously generating capital appreciation through insightful property acquisitions and active hands on management.”