First National is a commercial lending market leader in Quebec. In 2017, the Company’s Quebec team originated over $675 million of commercial mortgages and is poised to set an all-time annual record for volume. In this interview, we talk to the founder of our Quebec operation, Robert St-Pierre about the past, present and future of our business in Quebec, the distinct cultural differences that have made the local multi-unit residential sector one of the most dynamic in Canada and what customers can expect from a relationship with First National. Robert just retired as Assistant Vice President, Commercial Lending and gives us the benefit of his broad and deep perspectives.
Robert, tell us about the origins of the Quebec operation.
We opened for business September 1999 with big ambitions but with a realistic attitude. We knew going in that it would take time to make inroads in a market that was pretty much dominated by big players. It was a one-man show and I was the man. Back then, I was ecstatic to write one loan a month. In 2017, our origination amounted to about $56 million per month, so quite a difference. You have to remember that Quebec is a tight-knit community and relationships mean everything. It took us about two to three years before we started to see repeat business but once that happened, it was a signal that borrowers liked what they got from First National and that created a reference point for us.
What kind of lending did you do back then?
We focused on CMHC insured loans and specifically for the apartment sector. We Quebecers like our apartments. We have the highest number of apartment units in the country. We knew that CMHC lending in the multi-unit sector was a growing niche and that we could capitalize on our specialized knowledge of that form of lending. It’s still our strength, which is reflected in the fact that a large part of our commercial business today in Quebec is apartment lending. Of course, because we have a full repertoire of conventional and insured products in our arsenal, we were also opportunistic, so we engaged in lending on a variety of asset types, just as we do today.
You used the term ‘we’. When did you start to add resources?
We added expertise over time but when you look at First National in Quebec today, we employ 110 people between our residential and commercial teams. On our commercial team we have great depth with experienced lenders like Benoit Allaire, our Director of Commercial Financing and Isabelle Rivrais, our Senior Analyst.
Do you remember the first customer you served?
Absolutely, we had several first customers and they are still customers today, which is great.
What changes have you seen in the Quebec commercial market since you started?
When we started the operation, Quebec had just come through a negative economic cycle. Real estate values had come down. It was discouraging but in the early 2000s things started to pick up again. That was good for us because we were able to take advantage of a really positive period in the economy as we got off the ground. Property values were going up as interest rates were going down. Then the financial crisis hit in 2009. That created a lot of uncertainty in the market, caused competitors to retrench and while it took time for the market to recover, it was actually the catalyst we needed to encourage borrowers to look more closely at First National as a committed Quebec lender.
What’s happening now in the market?
Quebec has turned in a very solid performance this year making it, if not the fastest growing provincial economy certainly a leader in economic growth in Canada. The province is no longer running budgetary deficits so we’re in better shape than Alberta and Ontario. With the province’s books in order and debt-to-GDP forecast to decline substantially, the next five to 10 years look pretty good. From a borrower’s perspective, economic improvement does create the prospect for rising interest rates, which is a risk. As a result, here in Quebec we’re seeing a lot more volume of re-financings as borrowers seek to lock in their rates.
But generally, the market is good?
Absolutely. Economic growth creates more jobs and with more jobs, more people will be looking to rent apartments and office vacancy rates, which have been declining, will continue to do so. So it’s all good. Compared to 20 years ago, the economy here is much more diversified. It’s really expanding in all sort of different directions. Investments in technology, e-commerce and video game companies for example have certainly helped stimulate good job creation here but we also have the cheapest electricity rates in Canada which is obviously positive for business as well.
Quebec is a distinct society. How is it different?
Language, culture and the province’s legal framework as it applies to lending are the big differences. Speaking from a real estate perspective, we also have lower apartment density than in a lot of other markets. As a growing part of our business is construction lending, we are starting to see high-rise apartments come into play, but that’s a more recent phenomenon.
How successful has First National been in attracting investors from other parts of Canada to put money into Quebec, to be your funding partners?
We have many funding partners in Western Canada who love the Quebec market and are very actively invested here because they get higher returns than in other parts of Canada and they like the stability of the multi-unit market. It’s perhaps the most stable market sector in Canada. We’re also experiencing a significant amount of foreign investment in our market. In fact, the National Post ran an article at the end of October suggesting that Montreal alone has attracted about $25 billion to the real estate sector this year and a large part of this new investment is from foreign investors and developers. You can see that in the large number of cranes that are active in the city.
What are apartment cap rates trading at in Quebec?
Right now trades are being done in the 4s and low 5s depending on the quality and location of the apartment building. Cap rates are perhaps 50 to 100 basis points lower in other parts of the country.
First National prides itself on being an advisor or consultant to borrowers rather than just a money lender. How do you deliver on that objective?
First, we don’t operate with specific volume targets and we never have. That frees us up to spend more time doing the right things for borrowers, getting to understand their goals and their vision and structuring deals that help them thrive. When we started back in 1999, we had an unwritten goal of becoming one of the lead lenders in the province. That required innovative, customer-focused thinking because let’s remember that there are many other lenders operating here and the only way we could create an edge for ourselves was to have and share our knowledge. In the real estate business, the three most important words are location, location, location. In the mortgage lending business, First National’s three most important words are service, service, service.
How have borrowers responded?
Let me put it this way. One of my clients says he won’t even look at an opportunity unless I look at it first. There is a trust that develops over time when borrowers realize where your true motivations lie. What people remember is not their mortgage. That’s just a commodity. What they remember is the service, the quality of advice they received.
How does your brand of service add value to customers?
Let me take one recent example. A client came to us saying he wanted to re-finance his whole portfolio. The loan was with a single bank and he was facing about $600,000 of fees and penalties from that institution to get out of the loans. We took the file away, reviewed it and came back showing him how he could avoid paying any of those penalties, zero dollars in other words. That’s the kind of service and value we like to provide.
Robert, you are planning to retire soon. What is your proudest moment?
There are a few but the proudest was during our 25th anniversary. Moray and Stephen, our co-founders, hosted a conference call for all First National employees across the country. They talked about our history and thanked everyone for their hard work and then they started talking about me. I was extremely proud about what they had to say about our operation and our team here.
How well positioned is First National in Quebec positioned for future success?
Very well. We have an incredible team to take us to the next level, really to take it much further than I could. They are energetic and great at understanding complex issues and challenges in the markets. Having younger people in charge makes perfect sense for the development of our business. I have full confidence in their abilities.
What do you plan to do in retirement?
Lots of different things, but I definitely want to go on proving that just because someone works in lending doesn’t mean he’s a big bad banker. It’s time for me to give back my time and knowledge to the community.