1. To start off, the most obvious question, with nearly a billion dollars of investor money under management, why have you resisted the call to become publicly listed?
There are a few reasons. The first is that it’s not what our investors want. They are looking for diversification away from the stock market. If they wanted to buy a public REIT and take the stock market risk, there are lots of options for them to do so. Second, we have carved out a very nice niche. We are one of the very few seasoned, diversified, large scale private REIT’s in Canada. We are the only one available via FundServ as far as I know. If an advisor or an investor wants the benefits of a private REIT, we are one of very few compared to if we were public. As a public company, we’d just be an ‘also ran’…one of many.
As an entrepreneur, choosing between a crowded public market and a less crowded private one, the choice seems obvious to me. Two, access to capital in the public markets can ebb and flow violently. The market can be closed to you at times. I’ve found the exempt market to be more stable, and since we are able to accept less cash than we are offered, when we’ve needed equity, it has been available even when the public markets have been choppy. Third is reporting and compliance requirements. As a public company, you get on the quarterly reporting cycle and have all the extra compliance requirements that entails. As a private company, we have been able to use an annual reporting cycle which I believe has allowed us to stay focused on the long term and actually running the business.
2. In most jurisdictions, those that distribute an investment via an OM now have to provide ongoing audited financial statements. Has regulation in the exempt market evolved to the right point or gone too far?
Providing ongoing audited financial statements is a good thing. This is the bare minimum for the privilege of accessing the capital markets. I think things are headed in the right direction. I think exempt issuers being able to use SEDAR is a good thing. However, it would be better if all jurisdictions worked together on this rather than the piecemeal which exists today. I would say that every year our OM grows a few pages because we get asked to throw in another table, or add other commentary or disclosure. We do it and think we have a very comprehensive OM as a result, but at nearly 200 pages, I question whether more data, commentary or disclosure helps anyone.
3. With the legal costs of putting an OM together, due diligence fees to EMDs, sales commissions, etc., do you think it’s too expensive to get distribution the exempt market?
Unless you are doing a large offering, it is too expensive. If you are doing a small issue, your marketing and sales costs could easily hit 10% or more of proceeds. As an asset manager, if you have a small vehicle, you likely will either have to overcharge on fees or charge reasonable fees and have the financial resources to survive until you’ve built your vehicle to scale.
4. Do you think Canada’s housing market is due for a correction soon? Is it too hot, in particular in the condo market?
The housing market is way too hot in Toronto and Vancouver. This is speculative excess untied to the performance of the underlying economy. I hope it corrects soon, however, given that I believe rates are not going up for a very long time, this seems unlikely. Further, with population growth, there’s tremendous demand for housing and all that is currently affordable are condos. But there is too much foreign hot money. I’m usually a laissez faire capitalist, and I hate taxes but I think we need extra property taxes and land transfer taxes on non-resident owners of residential property to prevent them being used as foreign bank accounts.
5. You wrote a scathing article in our magazine about the hypocrisy of scrutinizing related party EMDs for their conflicts of interest when the banks run unquestioned in this country doing the exact same thing. Do you think we’ll ever see that change?
No I don’t. The issue still makes me boil. Somehow, best practice for me is to sell my competitors funds. But the banks will never have to sell each other’s funds, deposits or mortgages. Imagine McDonalds being required to sell Harvey’s hamburgers or the Apple Store having to sell Microsoft PC’s. It’s preposterous. Banking is a coddled, protected industry in Canada. Compare us to the USA where they have thousands of banks competing for your business. Not here. As Canadians, we’ve had the oligopoly shoved down our throat like medicine because ‘it’s good for us.’
6. You recently received $12.9M of financing on one of your properties for 1.33%. Do you think rates like that are the new norm or bound to go up sooner than later? How material are interest rates to your business model working?
It was the lowest rate on any mortgage that we’ve ever done. It was for a five year term as well. Rates like these are the new normal. I have been for years calling for rates in Canada to go negative. People thought I was nuts. However, as country after country around the world has seen their rates go negative, this view is becoming more main stream. There are now even countries with negative mortgage rates.
Interest rates are a material part of our business. We are both mortgage investors and mortgage borrowers. Interestingly enough, we now earn more money on our mortgage investments than we pay on our mortgage liabilities.
7. Looking at your apartment portfolio, you’re very Ontario centric. Is that simply because you live there or for other reasons?
There are a couple of reasons. Ontario and Quebec have about 70% of the national rental market so the largest opportunities are here. Simply speaking it’s also where I live, and where many of my relationships are. Going outside your core requires scale and that’s just not always easy to find in a single purchase. For years we focused on Ontario only just to build scale. It was only when we had achieved some scale did we determine that we could start to build in select centres outside Ontario. Almost all of our opportunities there are new construction, originating from our joint venture with developers.
8. For all your successes, you must have had a misstep or two that taught you a valuable lesson. Can you share that with our readers?
I wish there was only one or two. However, I ascribe to Nelson Mandela’s saying that “I never lose. I either win or learn”. Each misstep is an opportunity for growth and improvement both personally and professionally. I would say that one of the things I learned the hard way was the value of hiring empowered staff. As a business is growing, your resources are taxed to the limit.
To meet this challenge, among other things, you need people that can execute on your strategy. When I started out, I did way too many things myself because I tried to economize. My time was wasted on things that weren’t creating value although they did have to get done. It was a false economy. As we’ve grown, we’ve hired increasingly talented team members that the business needs in order to grow.
As an entrepreneur, it is hard to ‘let go’ of key responsibilities and to pay the salaries that those talented individuals command, but in the end, having these people is what allows you to really build a business and takes down your stress level significantly.