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TransGlobe Apartment REIT (TGA.UN: TSX) |
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November 18, 2011 Issue |
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The Most Powerful Name In Corporate News and Information |
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CURRENT ISSUE | COVER ARCHIVES | INDEX | CONTACT | FINANCIALS | SERVICES | HOME PAGE |
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In about 16 Months Since Inception TransGlobe Apartment REIT has Grown by Approximately 163% - Positioning Them as the Third Largest Apartment REIT in Canada |
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TransGlobe Apartment Real Estate Investment Trust is an unincorporated,
open-ended real estate investment trust owning a growing portfolio of high
quality apartment and town house properties well-located in urban centres in
Alberta, Ontario, Québec, New Brunswick and Nova Scotia. |
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Interview conducted by: Lynn Fosse, Senior Editor, CEOCFOinterviews.com, Published – November 18, 2011
Mr. Hanczyk: We started off with approximately 8,200 apartment suites in Canada, and since then we have managed to grow significantly to approximately 22,000 apartment suites. In about 16 months since the inception of the REIT we have grown by approximately 163%. We are now the third largest apartment REIT in Canada and that is pretty much where we are going to settle in for now. What we are going to do is focus on running our existing portfolio and generate significant same-store sales increases from our existing portfolio, whether it is repositioning assets or whether it is just managing them better than they were previously. That is our vision. We provide clean, safe, affordable apartments. We do not focus on the high-end, we do not focus on the low-end, but we have a nice niche, right in the middle and that is what we focus on. We are going to continue to do that; we are going to continue to grow; and we are also going to take a good opportunity to generate same-store sales growth from our existing portfolio.
Mr. Hanczyk: TransGlobe itself has been around for about fifteen years; it was a private company run by a German family from Berlin. They had an office here in Canada and they started to build an apartment portfolio nationally. When the global crisis hit they found themselves a little bit over leveraged, so one of the reasons that the REIT was created was to de-lever their portfolio to allow them to continue to operate in Canada. At that time, there were approximately 27,000 apartment suites in the TransGlobe private portfolio, and we created the REIT from about 8,200 of these apartments. It was always the intention to roll the majority of those units into the REIT, and then once we became significantly larger, the two entities would separate. That happened in September 2011 when we completed our last large transaction with the private company. We purchased 7,518 suites in Ontario, Quebec, Atlantic and in Alberta, which brought us close to our existing 22,000 apartments. In addition, what this transaction did was allow us to internalize our property and asset management functions, where prior to that we were an externally managed REIT. We were managed by the private company with an asset management and a property management contract. Now the two groups have separated, we are TransGlobe Apartment REIT, and that is the only TransGlobe name that exists. The private company has been rebranded and they have their own portfolio outside that they run.
Mr. Hanczyk: No, I do not think it has changed. Everyone still has opportunity and has choice so you need to be very receptive to your tenants’ issues. There are a lot of apartments that are being taken off line and condo titled throughout Canada, and there are many that are getting repositioned. The full repositioning, where you might have a $1,000 rent, you come in and reposition the building to more condo style luxury apartments, but you are now charging $1,800-$2,000 rent, and not everyone can afford that. Therefore, what we settle in for the most part in our portfolio is clean, safe, and affordable. We have a call center here at TransGlobe that people call in for maintenance items and also for the initial leasing experience. That starts with the moment you call for an appointment. It is a little bit more professional and it is always the way we have done it. We try to offer accommodations in the affordable sector: clean, safe and affordable. We do not focus on the luxury market, and we do not try to down-market either. The real niche is that nice middle market where people know the level of service that they are getting. We are responsive to our tenants needs and have a maintenance department that allows us to be. I would like to say that no, services levels have not changed, because even though it is a tight market, for the most part you still need to offer a good level of service to keep and retain your tenants.
Mr. Hanczyk: The way we are set up is I am in charge of the overall performance of the REIT. I have a CFO and a Senior VP of Operations. The Senior VP of Operations is responsible for the overall operations platform. Under her, we have a series of regional directors. There are two in GTA, one in Kitchener/Waterloo area, one for the Atlantic Provinces, and one out West. Every region has its own regional director and it is their own mini-business unit and we judge their performance based on how well their business unit performs. Reporting to them is a series of property managers who then have a portfolio of properties and they are judged on the performance of their portfolios. Everyone is geared to performance for their region, and then that rolls up to a national level for our results. We have very good control over all the regional managers and regional directors. That is how we break down the control on the operations side.
Mr. Hanczyk: Yes we do. We advertise in the papers and the local papers for the most part and all the rental websites that typically are used. We try to be a little more internet based than paper based. We find it very highly affective today when everyone has a computer and they are looking. We have a full marketing team that analyzes the portfolio and allocates advertising dollars every month.
Mr. Hanczyk: The way we looked at things is when we created the REIT we had physical reports completed on every property. These are physical reports on the condition of the property, and we came up with a budget for a ten-year period. Items were identified and in the apartment business it is pretty simple stuff. It is roofs, balconies, concrete, and windows, which are the things on the expenditure side that are your big ticket items. We are in the budgeting process right now, so we looked at our portfolio and identify what needs to be done to keep the apartments in good shape, which includes the building structure. We also look at the items that may beautify the buildings, whether it is corridors, lobbies, landscaping, and grounds. We also look at what is also value creation. We take a good hard look at that as to whether we have any building that can be repositioned due to location, or due to demand for units in that location, where we can condo style or upgrade the units significantly and increase the rent accordingly as well and get a good return for our money. We also look at boiler replacements, energy lighting retrofits and water retrofits. It all adds value by reducing our expenses. That is sort of the way we break it out when we look at our capital spending. We are in that process right now for next year’s budget, coming up with the number of what we are going to do. It breaks down as what is required to do, what we would like to do, and what is identified as value creation opportunities for us.
Mr. Hanczyk: It depends. Turnover is not necessarily such a bad thing. One thing that we do have here in Canada is rent control. In Quebec and Ontario, which is a significant part of our portfolio, there is rent control. That leads to people that have been in their apartment for a while that may have entered in at a lower rent market than what it is now. So a healthy turnover allows you to be able to turn those units and bring the rent more in line with market. Therefore, some turnover is very good for your return. What you want to do is reduce the turnover for tenants that are at full-market rent. It is where you have people that have only been there about a year leaving that really hurts you. That is how we try to look at it. What is the length of stay of a tenant, versus just a turnover number.
Mr. Hanczyk: Yes, it is provincial.
Mr. Hanczyk: Right now it is 96.7%. That is for our entire portfolio and that includes the Atlantic provinces for us, which are underperforming significantly. One of the things that we have recently completed is, on October 17th, we purchased approximately 1,300 units out east, and we are managing this new portfolio ourselves. Our existing east coast portfolio has a third party property management company managing it. So when we purchased this portfolio effectively with 1,200-1,300 suites, it also allowed us to keep that management team and create our management platform out east. We are right now imparting what we do as TransGlobe to them and they are learning the processes. Then in January 2012, we will take the remainder of our portfolio in the Atlantic Provinces over. That will help us control our portfolio better and put the time, attention and caring to get our occupancy rate up. We are at about 12% vacancy in Atlantic right now and that is really what is dragging down our overall occupancy. If you took Atlantic out of the equation, we would be somewhere around 98.5 to 99%, which is effectively full occupancy. It is really the Atlantic Provinces for us right now that we are going to get under control under our own management, which will allow us to reduce that vacancy significantly.
Mr. Hanczyk: One of the things is we are a REIT. We know how we manage and our philosophy. The control of the portfolio which allows us to respond to our tenants promptly is key. If you have a third-party manager there is a middle man. They need to come to us as the owner and then get approval for something, versus if we have our own regional manager and we are running it. It takes out one level of authority of approval limits. Quite frankly, when you are running it for your own results and your regional director is running his own business unit and he is compensated based on the business unit’s performance, there is a lot more incentive than a third-party manger that may have other clients around Canada, and you would have to ask if they are giving enough time and attention to your portfolio. Therefore, it is just the overall performance and the care and response time to our tenants that we need to keep our occupancy at a high level.
Mr. Hanczyk: Very good. We are coming out with results very shortly in another few weeks, and they will show that we are on track with our plan. Our occupancy is doing well, our share price is trading very well, so everything that we said we would do in the IPO is what we are doing. We are hoping that the markets recognize that and allow us to continue to grow and continue to build our portfolio.
Mr. Hanczyk: Yes. We are covered by almost every major analyst in Canada. Right now we have a fairly widely held institutional ownership. A lot of the funds do have significant positions in TransGlobe. It is a nice split between the retail market and the institutional market in the trading of our shares, which is very good as well. We are perceived as one of the hidden values out there in the Canadian REIT market right now.
Mr. Hanczyk: Yes, we market to the investment community every quarter. We choose a couple of cities. Toronto obviously is where a lot of our investors are and we hit Montreal. We have been as far as New York and San Francisco. We also were in Chicago recently. So yes, every quarter after the results come out we take about two or three weeks and we hit the brokerage community and the institutional trading community.
Mr. Hanczyk: We grew rapidly. It is very difficult in Canada to accumulate any kind of multifamily portfolio of any significance size. Just the nature of the ownership in Canada is very mom and pop oriented, so you can build a portfolio, but it is almost one building at a time. No one owns huge portfolios and they hardly ever come up for sale, so the opportunity to grow significantly is really not there. You can add 1,000 maybe 2,000 units a year and that itself takes a while. For us, now that we have internalized our property management and our asset management and we are running and managing our own product, we are not looking to grow rapidly from outside. I have not come up with my acquisition target for next year, but we would still like to grow obviously. However, we do not need to grow just for growth sake. We want to make smart acquisitions that fit our profile now and that are around buildings that we currently own, and get some economies of scale. We will continue to source those acquisitions, and like I said, it would be very opportunistic. With the demand for product, it will be a little bit harder to grow externally right now, but we are going to continue to look to add units; maybe 1,000 or 2,000 apartments next year. However, we are really going to focus on the management of our own portfolio and really create value and feel that we can with our existing portfolio. At 22,000 units, it is a big portfolio and with a big portfolio that was created over the short term we believe there is considerable growth within that existing portfolio that we have.
Mr. Hanczyk: Yes. The REIT has given us an opportunity to rebrand, so our message now is that this is not the old TransGlobe. This is TransGlobe Apartment REIT and these are the things that we do. What we do want to say is that, if you are in a TransGlobe REIT building, you can expect a certain level of service, a certain level of response time and a more professional renting experience as well. We would like to represent that we offer clean, safe, affordable, apartments. That is what we do and that is our business. It has given us a little bit of an opportunity to have a rebrand that we are going to launch relatively soon; probably in the new year. It is just to get people to know that this is TransGlobe Apartment REIT. TransGlobe Property Management Services, used to be the property owner. So it is a little bit of a different scenario; a publically traded company versus a privately held landlord.
Mr. Hanczyk: The investment community has been very receptive to us in the last little while. There is approximately 6 or 7 apartment REITs in Canada. We are still one of the last values out there. There has been an overhang on our stock, as we had the external management structure, but that is now gone. We are now internally managed, so for investors that did have an issue with an external structure, we have removed that issue. In time, as we continue to publish strong results and provide a stable business opportunity for people to invest in, you will see our share prices grow. Right now there is an AFFO multiple difference between us and our peers, where we trade somewhere around 13 x AFFO multiple, the rest are in the fifteen to twenty times. As that multiple shrinks, and we have been around longer and have proven ourselves, the investors that got in at the ground level and over the past year will be very happy with the returns that they have gotten from TransGlobe. At the end of the day, what we are looking to provide is a nice healthy return for investors with a fair amount of stability and I think the investment community knows that. It is just a matter of time before it starts to take off.
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We provide clean, safe, affordable apartments. We do not focus on the high-end, we do not focus on the low-end, but we have a nice niche, right in the middle and that is what we focus on. We are going to continue to do that; we are going to continue to grow; and we are also going to take a good opportunity to generate same-store sales growth from our existing portfolio. - Kelly C. Hanczyk |
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