Dan Argiros, CEO of Conundrum Capital, is a leading investor in private equity real estate in Ontario, with 44 apartment buildings and $1.4 billion in assets under management. In a virtual event hosted by National Capital Markets on April 28, Argiros talked about the impact of COVID-19 on this foundational sector, and the opportunity for M&A and investor appetite in what has been one of hottest asset classes before the pandemic.
Argiros made headlines last November when he sold off 44 apartment buildings, the majority located in the Greater Toronto-Hamilton Area, for $1.7 billion to Starlight Investments (National Capital Markets assisted with the communications on the transaction). The portfolio of properties had just completed a successful IPO financing at a record valuation before receiving a higher bid and have remained privately held.
The serial investor wasted no time launching a new $500-million financing round to build a new portfolio when COVID-19 hit. Despite expectations of a deep recession and significant market volatility, investor interest remains quite strong, says Argiros. Investors, he says, are looking for consistency and liquidity. “The investors that come into our funds want a seven- to ten-year strategy that delivers cash flow and appreciation. They are not interested in timing the market. [They] also want low volatility, and to date, we have seen zero volatility with no change in cash flow or value.”
Stability through the uncertainty
Conundrum will be distributing investor materials in May and expects the first close of the fund in September, coinciding with the fund’s first acquisition. Argiros acknowledges he has been approached by a few groups looking to sell assets and predicts some will come under pressure to generate cash flow to offset hard-hit assets in the hospitality and retail sector by selling their “best assets” in the multi-residential space. “It could be ‘do I sell my depressed assets now to generate cash, or do I sell my stable assets [to get cash] at a reasonable valuation?’” he said.
And for Argiros, the affordable mid-market multi-residential asset class that he targets is stable, and the least vulnerable to major economic downturns. Located in urban centres with public transit, shopping and schools close by, Conundrum-owned apartment buildings typically date from the 1960s and 1970s, when floorplans were larger and can, therefore, accommodate extended families. The asset class also occupies an affordable niche of the rental market compared to condos or the new purpose-built luxury apartment buildings. Market rental rates for mid-market apartments in the GTA have begun to flatten at $2,200 per month, notes Argiros, and most tenants pay a rent below that, with increases capped by government regulation.
Argiros notes that while it’s still early days, 99 percent of tenants paid their April rent, and tenant turnover remained in line with previous months. For May and June, he expects lower turnover due to the pandemic and doesn’t expect any disruption in rental revenue, particularly as governments continue their wage support and emergency funding programs.
Adjustments will be needed
The sector will no doubt need to adjust—Argiros is actively looking at how to reconfigure common areas and elevators as social distancing is expected to remain in place for some time. However, he only expects heightened demand for affordable housing—which was already significant in the GTA—as a result of what has been predicted to be the years-long impact of the health crisis.
While there is already a lot of new building underway, Argiros believes it is vital that governments at all levels continue to encourage the development of new affordable rental apartments. Over the past few years, private investors have been successful at building rental properties at an affordable level, he says, and they need a clear runway to continue investing.
“It’s rare to say I need more competition,” says Argiros. “There is no use in having a city where the people who work in it, can’t afford to live in it. And the best way to have affordable housing to build more and more of it.”