Manufacturing alpha: Avenue Living’s three-factor formula for success

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Firm’s multi-family residential strategy offers portfolio defense and long-term investment outperformance

FOUNDED ON the principle of “Investing in the Everyday,” Avenue Living Asset Management has established a solid reputation as a Canadian alternative investment manager focused on multi-family residential, commercial, agricultural land, and self-storage assets. With $3.9 billion in assets under management, the firm has thrived through the years not by banking on rising tides in real estate markets, but by relying on its own ability to create value. “We've always had to manufacture alpha by out-operating our peers,” says Jason Jogia, chief investment officer at Avenue Living. “By being able to operate effectively, we've been able to create a defensible multi-family portfolio.” With the current headwinds of unprecedented inflation and

Avenue Living Asset Management, which operates as part of the Avenue Living Group, is a leading Canadian alternative asset manager with over $3.9 billion in assets under management and four alternative investment products. Avenue Living entities own and operate assets throughout Canada and the United States that support sectors essential to the everyday lives of North Americans – workforce housing, commercial real estate, farmland, and self-storage. A vertically integrated platform, access to capital, operational expertise, and a proven investment strategy serve as catalysts for continued growth.

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Avenue Living Real Estate Core Trust – Class F: Return Highlights

Since inception (annualized)

10.48%

“We don’t over-renovate or over-gentrify an asset such that we outstrip the income level of our residents.… We add value where we can, creating more efficiently run buildings while enhancing them for those living there”

Jason Jogia, Avenue Living Asset Management

rising interest rates, as well as clouds of recession ahead, investors are on the hunt for alternative investments for portfolio defense and growth. That’s exactly the opportunity offered by the Avenue Living Real Estate Core Trust, an investment fund focused on multi-family rental residential assets that’s built upon a trifecta of success factors: strategic diversification, customer focus, and operational integration. Casting a wide net in blue waters Since its inception, Avenue Living has built up its Core Trust portfolio with strategic intention. Today, it has more than 460 properties across 20 geographies in Canada and the US, and it continues to shop for low-to-medium-density rental stock in both primary and secondary markets.

“We don't buy an asset and then figure out who's going to live there based on how much rent we need to collect,” Jogia says. “We buy assets in a very targeted way.” Concentrating on moderate-growth regions such as the prairie provinces and the American heartland, the firm looks for markets that provide comparable demographics, economics, and regulatory frameworks that, together, show a need for Avenue Living’s proprietary owner/operator model. Such geographic diversification, which sees the company considering customers first while expanding into new regions, ensures no one building, market, or geography has a high-enough weighting within the portfolio to create material concentration risk.

Jogia estimates over 70 percent of multi-family assets across Canada and the US are still fragmented in ownership across individuals and private entities, giving the firm a rich field from which to continue picking. With private landlords looking to divest themselves of their assets in favour of passive income, he sees an opportunity to acquire and optimize more properties. “We’re responsible landlords,” Jogia adds. “Our aim is to retain residents. It’s important that we not over-renovate or over-gentrify an asset such that we outstrip the income level of our residents. At the same time, we add value where we can, creating more efficiently run buildings while enhancing them for those living there.” Understanding the rental spectrum Within the spectrum of multi-residential real estate renters – which includes short-term, long-term, and even life-long residents – Avenue Living focuses on the workforce housing demographic. While these individuals may be overqualified for affordable housing, average market rates to purchase a home are often out of reach. According to Jogia, many of their residents are essential workers who, based on their life stage and income level (between $15 and $50 an hour), are renters by necessity. “We don’t try to be the landlord of all things to all people,” Jogia says. “The average customer at Avenue Living currently earns somewhere between $53,000 and $56,000 a year, and we set our rents to be below 30 percent of their current earnings.”

Typical Avenue Living residents, often essential workers, have proven to be resilient earners through challenging market periods, while some residents who lost employment due to lockdowns still benefited from government wage support. In the current environment of inflation and limited labour availability, this cohort of renters have been de facto recipients of wage increases. While Avenue Living has had to push rents upward to keep pace with inflation, it has done so responsibly, staying within its threshold of affordability for customers. To help keep costs constrained even as it commits to best-in-class service, the firm has entered into strategic partnerships that keep costs down through effective supply-chain management, and offers flexibility through offerings like Zenbase – a financial health solution that customizes rent payment schedules for those in need of such a service. “We’ve earned the trust of our customers and demonstrated added value in the rent they pay by serving them well operationally,” he says. Taking full operational ownership In the aftermath of the pandemic, both the multi-family rental landscape and tenant expectations have shifted. Aside from

“I see an overall systematic opportunity where, ultimately, the potential for more growth will catch up with the major Canadian markets.… We have a long-term vision that the markets we choose will continue to have affirmative returns”

Jason Jogia, Avenue Living Asset Management

the previous essentials, tenants now look for more in terms of safety, cleanliness, amenities, and service. Against that backdrop, Avenue Living differentiates itself through its vertically integrated platform, with every element of the management value chain staying within the organization. According to Jogia, the organization’s ability to source its own workforce gives clients comfort in knowing whom they can turn to for assistance. Internalized management also lends itself to better efficiencies of scale and cost control, supporting the firm’s strategy of “managing wide, not high.” “As a signatory to the Principles for Responsible Investment, we believe it’s important to cater to our clientele sustainably,” Jogia says. “We’ve found that certain operating methodologies through third-party management don’t necessarily keep up with customer needs.” The firm exercises active ownership, implementing value-add capex initiatives as it develops desirable home environments for residents. By bringing institutional-quality asset and property management to low-to-medium-density multi-family assets, Avenue Living elevates the resident experience and tenant satisfaction, which are key drivers for profitability. “It's all about being customer-focused, tech-forward, having the right infrastructure, and having a level of continuity as we deliver services across all the geographies and assets we play in,” Jogia says.

More road to run While the broad equity markets have been dipping into the negative, the Avenue Living Real Estate Core Trust F class unit has seen a 11.15% return year-to-date as of August 31. As a player that’s built its business on manufacturing alpha, Avenue Living sees a continuing opportunity for outperformance even as economic uncertainty and geopolitical risks dampen returns for traditional asset classes. “If you look at markets like Hamilton or the GTA, a two-bedroom unit within a circa 1980s building would arguably be renting for somewhere between $1,600 and $2,200 a month,” Jogia says. “An asset in downtown Calgary of the same vintage, quality, and profile of occupants would be renting for $1,300 or $1,400.”

Source: Avenue Living internal data (unaudited) as at August 31, 2022

15.88%

13.42%

11.97%

11.15%

Trailing 1-Year

Trailing 2-Year (annualized)

Trailing 3-Year (annualized)

YTD (August 31, 2022)

Avenue Living Group: Manufacturing Alpha since 2006

Source: Avenue Living Group internal data (unaudited); Presented on a consolidated basis as at July 31, 2022; Includes predecessor entities and other funds managed through Avenue Living Asset Management Ltd. (Avenue Living [2014] LP, Avenue Living Real Estate Core Trust, Avenue Living Real Estate Opportunity Trust, Avenue Living Agricultural Land Trust, and Mini Mall Storage Properties Trust). *Denotes partial period

Year

AUM (C$ millions)

2006

2008

2009

2010

2014

721

2015

840

2016

846

2020

2,051

2021

3,212

2022*

3,979

That difference in rental rates, he says, can be ultimately chalked up to the protracted bull market in housing that not all regions have been able to participate in. But he expects that financial arbitrage will be cured in the months and years to come by tailwinds such as net immigration, lack of housing supply, and continued housing demand. “I see an overall systematic opportunity where, ultimately, the potential for more growth will catch up with the major Canadian markets, versus those areas shrinking to where we are,” he says. “We have a long-term vision that the markets we choose will continue to have affirmative returns.”

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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 www.avenuelivingam.com for additional information regarding forward-looking statements and certain risks associated with them.

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