In mid-March, First National’s commercial team retreated to home offices across the country to do their part to stop the spread of COVID-19. Now, more than a month later, we touch base with the members of our origination teams to see how they are coping with the pandemic and what type of work they are doing for clients. These Words of Wisdom come from Damir Jesic, Assistant Vice President, Commercial Financing at First National in Calgary. Damir spoke to us from home on June 26, 2020.
How is Alberta coping with the pandemic and depressed oil prices?
It’s difficult and doubly so because the main economic engine in our province was in low gear for the better part of five years before COVID-19 took hold as a result of commodity prices. However, the situation has improved somewhat since the pandemic lockdown was declared as oil prices have rebounded from about $5 per barrel in March to about $40 at last check. With that in mind, I think Albertans have gotten used to volatility and the tough times it can bring.
It must be difficult to stay positive.
It is but there is a different spirit at work here among Albertans. We’re a resilient group and we know things will eventually bounce back. When I talk to my clients and my friends, they draw on the experiences they had in downturns in previous decades. They say things like we’ve faced challenges before, volatility is a way of life and we’ll make it through. There is sort of a mental bandwidth here that keeps everyone on an even keel and creates a resilient community spirit that is, I think unique to our province.
How are you personally coping with the lockdown?
Well I’m operating out of my office, which used to be called my living room and my wife is upstairs in her office. We have a cat no kids so it’s easy for us to work from home. We pretty much stick to our own areas of the house during business hours and at 5 or 6pm often say to each other, ‘I haven’t seen you all day, what have you been up to?’ Early in the lockdown, I decided to do something unconventional, so I grew a pandemic beard but that was short lived.
What about your team, how are they faring?
I believe every member of our team is coping well. Penny Aynbinder and Mark Jewells have younger kids at home so in addition to First National work, they spend time with their families, which in the spring meant helping with their kids’ homework. So it’s tougher for them but individually and as a group, we continue to be productive, notwithstanding home distractions. I’ve personally reduced travel by about 2 hours on some days and that time is now available for focused, undisrupted work. As a group, we have team calls twice a week to stay in touch with our business pipeline and the focal point of all of our work: our clients and their needs. I should add that a recent survey found that the majority of First National employees across the country are content to work at home, meaning they’ve adjusted to the new normal and that is certainly our experience in Calgary. That said, I’m personally looking forward to getting the chance to restart in-person meetings with clients, which is something that I hope is around the corner.
Are you still lending?
Yes, in fact we were one of just a few institutions in Canada lending once COVID 19 hit, which signaled our commitment to execution and certainty for our clients. We continue to offer the same level of service as the Alberta economy slowly opens and the market becomes more liquid. In fact, Mark Jewells just closed a $7.5 million refinancing of a multi-family property in Calgary. Mark recently joined our team from the residential side so his career in commercial has gotten off to a very strong start despite the pandemic. Overall, a large part of our focus is the multifamily sector and we’re working on CMHC insured loans…construction, takeout term, and conventional bridge to CMHC term. I think our ongoing presence despite market challenges will lead to more opportunities down the line with our clients.
Are construction projects moving forward in this environment?
I’ll answer that question with an example. We have a client that was originally a condo developer who decided they liked the cash flow economics of multi-family rental. They typically commit to two building projects per year. They were scheduled to start new projects this spring but decided to put things on hold because of the pandemic. Now, however, as lockdown conditions lift, they tell me they are planning to get back to it in September, which to my mind suggests a great level of resilience despite the headwinds.
What about asset purchases?
We’re working on several projects where buyers have quality real estate assets in their sights and have basically said they think tough times will pass and are, as a result, moving forward. Of course, they are moving forward on the basis of negotiating purchase prices that are below where the market was at the beginning of the year. One of the byproducts of the pandemic is that some institutional buyers stepped back from purchasing activity and that resulted in upward movements in cap rates for certain, although not all, properties. That said, well-located apartments still command strong prices due to their overall resilient performance. We expect this asset class to begin trading again in our region as the economy stabilizes.
What sort of support and advice are clients asking for right now and what are you telling them?
Every situation is different but in general, clients are asking us to work with them as their financial partner and to share ideas on how they can best manage through this period. I’m advising them to think about the bigger picture, to remember why they purchased real estate as an asset in the first place and to consider ways that they might want to improve their portfolios for the future. Challenging times like these remind owners to take care of their assets and their tenants and to think in a risk-managed way about leverage. Well-managed assets outperform, while being responsive to tenant needs also leads to outperformance. On the topic of leverage, I challenge clients to think about their level of comfort with debt across their portfolios. Sustainability during economic downturns is critical.
What kind of improvement might make sense?
I have clients who own commercial assets as well as multi-family apartments. In these situations, we talk about the pros and cons of shifting more of their portfolios to the multi-family sector. Apartments may be more demanding to manage than a retail or industrial property because of the number of tenants, but in an economic crisis, multi-family tends to far outperform all other assets because it’s more resilient. These types of discussions are generally held under the heading ‘how to bulletproof your portfolio’ for years to come.
One of the concerns early in the lockdown was that apartment landlords might lose good tenants. Has that happened and did you seen any novel approaches to this potential problem?
Certainly that was a concern in March and early April but less so currently. As for novel approaches, one of our long-time clients in Calgary decided to proactively reduce rents 25% across his portfolio for every single tenant – those who asked for it and even those who hadn’t – for four months. This gentleman is in his 80s and during this lifetime has experienced pretty severe economic disruptions so he has a pretty keen insight. While it meant forgoing some cashflow, he was of the view that this move would vastly reduce tenant turnover and the costs associated with finding new customers. At last count, he had just three tenants out of about 100 provide notice. By virtue of this action, he’s very likely going to come out of this situation in a much better position.
Did this owner enter the lockdown in good shape financially?
Yes, he refinanced a couple of his properties last year at 65% leverage. He could have gone higher and taken more equity out but at the time he said if there were ever any issues, he wanted to be able to manage his cashflow. He was very strategic which gives him more latitude to operate now.
It’s been about three months since the pandemic was declared. Did you see many owners seeking mortgage deferrals?
Mortgage deferrals turn on the level of success landlords achieve in collecting rent. That said, rent collections have been much better than anticipated – over 90% on average for multifamily properties. In the early days, we did receive inquiries about mortgage deferrals as owners contemplated worst case scenarios but as it’s turned out, these haven’t been necessary for the most part. The federal government’s wage subsidy definitely helped.
How would you describe the current state of the market?
Far from business as usual but better than March and better than expected. There is still lots of uncertainty because no one can predict the course of the pandemic but with the economy reopening, there is a bit more optimism.
You mentioned the recent refinancing that Mark Jewells secured. Have you had other wins?
Yes, we have and we expect more to follow this year. But I would add that some of our wins have also been ‘mental’ if I can call them that, meaning that we’ve been able to provide timely advice and support to our clients that they’ve been able to use to navigate current market conditions. To give an example, over the past month, our mandate was to be a leader in helping clients understand a recent change made by CMHC on use of proceeds for market refinancing. Being out in front in explaining the implications of changes like this, which First National is uniquely positioned to do because we are the largest CMHC-approved apartment lender in Canada, and using our knowledge to add value for clients, is definitely a win in our book.
The pandemic has challenged our clients and First National to change and adjust together, I think we are rising to that challenge.
Damir Jesic is safely, securely and productively working at home but you can reach him at firstname.lastname@example.org or any member of the First National commercial team at 1.866.298.0929.