RE Newsletter October 2023

Dear Magic Investor, 

We are pleased to share with you the RE Newsletter October 2023 edition highlighting the recent developments.

US Housing Market:

According to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which is a leading measure of home values, average U.S. existing home prices have increased by nearly 6% year-to-date and 2.6% year-over-year. This year-over-year increase is notably above the median full calendar year increase in over three decades.

Home prices nationwide have shown a remarkable refusal to drop, with existing-home prices experiencing their seventh consecutive month of growth, even amid the challenges of soaring mortgage rates.  However, despite the resilience of the housing market in recent years, cracks are beginning to appear, especially on the seller's side.

Seller Troubles and Price Drops:

While soaring home prices might seem like good news for sellers, a recent report by Redfin reveals a concerning trend. Nearly 7% of homes for sale in the U.S. posted price drops during the four weeks ending October 29. This is the steepest drop since Redfin began tracking this data in 2012 and is well above the average monthly rate of 3.6% for homes lowering their prices. This trend emerges as mortgage rates have stabilized at their highest point in two decades, around 7.5% to 8%.  In fact, thirty year mortgage rates with conforming loan balances ($726,000 or less) saw the biggest drop in over a year last week from 7.86% to 7.61%

Despite the above mentioned  price drops, it's crucial to note that home prices are still up by 3% year-over-year. However, it is becoming evident that the challenges of high mortgage rates and home prices are impacting both buyers and sellers alike.

Impact of High Mortgage rates:

Rising mortgage rates have forced sellers to cut prices to account for the added expenses that buyers face in their monthly mortgage payments. A substantial 15% year-over-year drop in existing-home sales activity was recorded in September. These high rates are affecting a significant portion of potential buyers, making homeownership less affordable for many.

Future Expectations:

For the housing market to regain momentum, there are two potential pathways: mortgage rates must decrease, or home prices need to drop or both. Economists and real estate experts anticipate that home prices will continue to fall through the end of 2023. Moody's Analytics predicts that home prices will drop by around 4.5% over the next two years.

The housing market faces a challenging period ahead, with affordability concerns and buyer demand impacted by high prices and mortgage rates. Home sellers may need to adjust to the evolving market trends as they seek to attract buyers in this shifting landscape.

US MULTIFAMILY

In October, the multifamily rental market showed modest growth in asking rents, despite weakening demand and a deceleration in year-over-year growth. The U.S. saw a slight increase of $3 in asking rents, bringing the average to $1,727. However, year-over-year growth slowed to 8.2%, marking the slowest growth since the summer of 2021.

While the deceleration in asking rents is gradual, it's important to note that all of the Matrix's top 30 metros experienced year-over-year rent increases. Despite this, concerns remain about how the multifamily market will react to the rapid rise in short-term interest rates as the Federal Reserve has sought to combat inflation.

Occupancy: U.S. occupancy rates decreased 1.3% year-over-year in September, although they remain strong at 96.1%. Occupancy rates of stabilized properties are negative year-over-year in 24 of the Top 30 metros and occupancies have fallen at least 0.5% in 19 of them. Metros in which occupancy rates have dropped by at least 1.0% year-over-year include the Inland Empire (-1.0%), Tampa and Atlanta (-1.1%), Sacramento (-1.3%), and Phoenix and Las Vegas (-1.8%).

US Fed November meeting:

The Federal Reserve kept the target range for the federal funds rate at its 22-year high of 5.25%-5.5% for a second consecutive time in November, reflecting policymakers' dual focus on returning inflation to the 2% target while avoiding excessive monetary tightening. Policymakers emphasized that the extent of any additional policy tightening would consider the cumulative impact of previous interest rate hikes, the time lags associated with how monetary policy influences economic activity and inflation, and developments in both the economy and financial markets. During the press conference, Powell signaled that the September dot-plot showing the majority of participants forecasting one more rate hike this year may not be accurate anymore. 

Outlook: The multifamily market has changed dramatically in recent months. Rising rates have weakened demand and rent growth, while transaction activity is slowing as market players gauge how far values are dropping. The Fed’s aggressive moves to contain inflation have led commercial real estate investors to downgrade the economic outlook, increasing the likelihood of a recession and the expected depth of that downturn. 

MaGiC USA Portfolio

MaGiC USA currently has investments in 20 multifamily assets through equity and mezzanine debt. The majority of the company's real estate portfolio is located in sun belt submarkets, such as Texas, Arizona, North Carolina, Atlanta, and Florida.

Sponsor focus on operational efficiency continues, with the goal of increasing occupancy rates and average rent. Property managers are working to improve tenant quality and maximize the benefits of completed renovations and other developmental works.

Increasing interest rates have had a subdued effect on MaGiC's portfolio due to interest rate caps being in place, but they have led to increased debt service costs compared to initial projections. Therefore, operational efficiency becomes even more critical in the current market.

Some of the assets in MaGiC USA portfolio includes:

1. Brandt – consists of 504 units, located in Irving, Texas. The property has been operating steadily at 93%+ occupancy over the last six months. Renewals are also achieving average rent increases of 3.5% over the trailing 90 days.
2. Arlington – consists of two properties named Mark at 2600 and the Felix, both Multifamily properties in Arlington, TX. Occupancy has continued to trend upward, reaching 91% as of Q2 2023. Average effective rent also increases around 9% QoQ levels.
3. Keystone – a 276-unit, garden-style apartment community located in the Timberglen submarket in North Dallas. As of Q2, Occupancy is at 90%, and  Effective rent, after reaching all-time highs, has started to normalize, with a modest 0.3% increase between the first and second quarter of 2023.
4. Carolina – a group of 11 assets, totaling 1,203 units, spread across 4 MSAs – Charlotte (North Carolina), Greensboro (North Carolina), Greenville (South Carolina) and Oklahoma City (Oklahoma). In Q2 2022, 177 new leases were signed at an average increase of 23.4% per unit. 50 renewed leases were signed in Q2 at an average increase of 18.1% per unit.
5. Sheraton – a 265 key full-service hotel in Fort Lauderdale, Florida USA. Hotel occupancy during Q2 stood at 80.67%. Average daily rent is also up by 7.7% in Q2 2023 as compared to Q2 2022.
6. A few investments are approaching their planned exit dates, and MaGiC's mandate, along with its Investee partners, is to wait for the economic environment to stabilize and the cap rates to start approaching their attractive normal so that end-of-project cash flows can be protected (hence, the IRR).

As previously mentioned, there are also significant rate cap maturities in the next 1.5 years. One can avoid purchasing a replacement rate cap by refinancing the loan or selling the underlying asset. However, lower valuations make it unviable to sell the underlying asset because many of these real estate assets should appreciate significantly over the next 18 months. As a result, some partnerships may require additional cash to purchase a replacement rate cap for the short term.

These factors impact MaGiC's real estate portfolio to varying degrees. Although the net operating income (NOI) of the projects has begun to show the economic impact of increasing interest rates, almost all properties have been NOI positive in Q4 2022 and a mixed-bag in 3Q23. We believe this is a short-term issue and expect NOI to return to historical levels.

If you have any further questions, please contact the Investor Relations team at ir@peermagic.com