Strategic Scaling: Why Avenue Living is doubling down on the Prairies

This article was produced in partnership with Avenue Living.

Since its inception in 2006, Avenue Living has pursued its commitment to “invest in the everyday” with a steady cadence of judicious multi-residential acquisitions in the Prairies. But 2022 saw a change of pace for the business as they responded to the favourable market conditions by acquiring 2,361 units, growing their Core Trust's AUM by 29%. However, as the market shifted, so did their approach.

“We held steady on the acquisition front for much of 2023, out of pure prudence. With a fluctuating market and rising interest rates, we wanted to be calculated in our deployment of capital,” says Gabriel Millard, senior vice president, Capital Markets – Equity and Research at Avenue Living. “It was an opening for us to take a step back from acquisitions, focus on our same-door performance, and let opportunities come to us.”

From pause to acceleration

As recently as three years ago, Avenue Living was capitalizing on the low-interest rate environment to acquire large numbers of units in its backyard. But as the market shifted and peer companies across North America had to adapt to investor sentiment, Avenue Living remained defensible by pausing and carefully assessing the environment.

“Two things quickly became apparent. First, defensibility and liquidity were going to be very important during this time,” Millard says. “Second, the issues we saw other investment funds facing either pertained to a specific geography, a specific real estate asset class, or how a sponsor’s capital stack looked going into this changing rate environment.”

As it paused to evaluate its capital picture, Avenue Living saw costs of capital rise within its markets, though these were more than offset by increases in occupancy and continued operational strength enabled by scale and vertical integration across its portfolios. The upshot, Millard says, has been a record-breaking NOI gain on a same-store basis during the first half of 2023.

Now, the business is adopting a more aggressive growth strategy for the back half of 2023 and early 2024. Within its backyard, it has acquired two relatively newer-built Edmonton properties totalling 266 multi-family units, with factual offers out on some 2,500 more units across the Prairies. The organization is currently targeting an expansion offering which will support their upcoming acquisitions.

“We’re seeing a lot of uniquely attractive areas that may not have been possible for us to access earlier or in a different rate environment,” Millard says. “Some players looking for an exit strategy have come to light, and as a well-capitalized player, we’re willing and able to seize those opportunities.”

Positioning for opportunity

According to Millard, multi-residential investment in the Prairies has historically been challenged by a shortage of strong institutional property management. With costs on the rise and staffing a challenge, many recent industry entrants are now looking to exit after a tougher-than-expected period of squeezed profit margins.

“We’re seeing this shift among individuals, builders using third-party management, and even institutions that have in-house management, but whose primary focus isn’t the Prairies,” he says.

Amid its ongoing acquisition sprint, Avenue Living is over $5 billion of assets under management, a testament to its ability to grow as a business.

“When we look at growth, it’s about achieving economies of scale … Adding to our portfolio means new units are contributing to revenue without needing to increase head office or management staff,” Millard says. “Each additional unit now has a higher contribution margin to our bottom line.” 

Avenue has also deftly navigated the fluid fixed-income backdrop of the past eighteen months. In the earlier stages of the Federal Reserve and the Bank of Canada’s rate-hiking cycles, the long end of the U.S. and Canadian yield curves rose quickly but have since remained largely range-bound. Meanwhile, yields on shorter-duration fixed income continued to increase, leading to the deeply inverted North American yield curves of today.

“During the low-rate years, we took on shorter-term debt as it allowed flexibility on a new acquisition to improve the overall asset value,” Millard says. “Now we’ve been able to rotate into longer-term Canadian Mortgage and Housing Corporation (CMHC) debt. We’ve extended our weighted term-to-maturity through longer-term mortgages at very attractive rates.”

Today, over 80% of Avenue Living’s debt stack is in fixed-term debt with a total weighted term to maturity of over four and a half years. For the organization and its investors, that means more certainty on the borrowing costs they’ll pay. Perhaps more importantly, it’s potential insurance against the risk of increased debt costs should stickier-than-expected inflation force central banks into more rate hikes.

Prairie markets see their time in the sun

According to Millard, the rental market in the Prairies today is as strong as it’s ever been. Canada’s policy changes and subsequent increase in immigration have led to historic population growth across the country, even as housing supply remains constrained. Between 2001 and 2021, purpose-built rental housing per capita across the country has decreased by 15% to 35%. The CMHC projects if current rates of new construction continue, the housing stock will increase to close to 19 million housing units by 2030. Canada will need an additional 3.5 million units in that period to restore affordability.

“The challenge is that there isn’t additional workforce housing being built,” Millard says. “Based on current build and market conditions, developers need to put up more A-class apartments or condos to make the economics work, so that’s where the new supply is going.”

There’s also the trend of migration into Western Canada. Over the past decade, areas such as Ontario and Vancouver have seen a continued tightening in vacancies and record-high rental growth. Meanwhile, Statistics Canada estimates that Alberta added 56,594 residents in Q1 2023, posting a growth rate of 1.2%, significantly higher than the country’s average, which was 0.7%. This growth was driven partly by interprovincial migration; this indicates the continuation of a trend that has lasted five consecutive quarters.

“Over the past decade, I think we’ve had an environment where people took advantage of abundant, low-cost capital to focus on longer-term high-flying investments like technology,” Millard says. “Now that liquidity’s being pulled from the system, investments in real assets with real yields are piquing investor and public interest … People are looking for something that they can see and understand, and that is defensible in volatile periods. This is a trend that we expect to continue.”

This commentary and the information contained herein are for educational and informational purposes only and do not constitute an offer to sell, or a solicitation of an offer to buy, any securities or related financial instruments. This article may contain forward-looking statements. Readers should refer to information contained on our website at https://www.avenuelivingam.com/forward-looking-statements for additional information regarding forward-looking statements and certain risks associated with them.