RE Newsletter September 2023

Dear Magic Investor, 

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

Navigating the Q4 2023 Housing Market:

As we head into the fourth quarter of 2023, the housing market is poised for its traditional year-end slowdown. With holiday plans, colder weather, and decreased buyer interest, Q4 typically marks a subdued period. Yet, the current market is marked by challenges. Skyrocketing mortgage rates have put homeownership out of reach for many. To put it in perspective, the average 30-year mortgage rate started the year at 6.48% and now stands at 7.8%. Coupled with this, home prices remain high, with the national median at $407,100, a 3.9% YoY increase. But what can we expect in the remaining months of 2023?

Historically, the fourth quarter sees a housing market slowdown due to the holiday season. A limited inventory of homes for sale will further restrict transactions. However, given this year's economic volatility, the market could surprise us. Factors like remote work reshaping housing demands, supply chain issues affecting new home construction, and the Federal Reserve's actions could all influence market dynamics. This could lead to a more active Q4 than usual, driven by macroeconomic conditions and a backlog of demand.

Mortgage rates reached 23-year highs in Q3, and they're expected to remain high. Experts project 30-year fixed mortgage rates between 7% and 8% in Q4, driven by increased government debt issuance. High mortgage rates and soaring home prices have sidelined many potential buyers. However, National Association of Realtors (NAR) anticipates a 30-year fixed-rate mortgage average of 6.3% for Q4. If this holds true, it could benefit hopeful homebuyers.

Home prices are likely to continue growing, though not at an astronomical rate. Projections suggest a 3-4% increase, with NAR forecasting a 3.6% price increase by year-end. A housing shortage and limited inventory, currently at a two-and-a-half-month supply instead of the usual six months, will maintain a sellers' market in Q4. Yet, improving wage growth and potentially lower mortgage rates in 2024 could enhance affordability.

US MULTIFAMILY

September marked the third consecutive monthly decline in rent growth and the first month of 2023 to end in negative territory. Despite the seasonal factors that typically affect apartment demand during this time of year, nearly 40,000 new units were introduced to the national market.

Rents: The U.S. market is currently on the cusp of declining, showing minimal 0.1% year-over-year rental growth as of September 2023, with numerous key markets already experiencing negative trends. This situation is quite unprecedented, marked by a swift slowdown in rent growth even in the presence of robust demand for apartments. Many have questioned why rents are flattening so rapidly despite favorable factors such as strong wage growth, low unemployment, and the increased difficulty of entering the housing market, making renting an appealing option compared to homeownership. This phenomenon reflects a unique scenario of disinflation in the rental sector without a corresponding demand decline.

In September, the top-performing rental markets for rent growth were primarily smaller markets, with many experiencing no new supply during the period. Fargo, ND, and Lake Charles, LA, despite adding some new supply, each achieved around a 1% increase in average effective rent for new leases. Buffalo – Rochester, NY, Wichita Falls, TX, and Lincoln, NE were close behind, with monthly gains of just under 1%. Among larger markets, Oklahoma City, Cincinnati – Dayton, and St. Louis stood out, each achieving gains of approximately 0.5%.

Occupancy: For the past four months, the national occupancy rate has remained unchanged at 95.0%. Occupancy rates were down year-over-year as of July 2023 in all but three of Matrix’s top 30 markets: Chicago (up 0.3% year-over-year), and New York and Denver, which were unchanged. Eight top 30 markets dropped by one percentage point or more, with the largest occupancy declines in Austin, Detroit and Atlanta (all down 130 basis points).

Outlook: Multifamily performance in 2023 has followed more predictable seasonal trends, unlike the disruptions seen from 2020 to 2022. Earlier in the year, the rental market experienced a brief peak in early summer, which began to wane by July, foreshadowing the likelihood of negative monthly rent growth in the approaching fall and winter months. September narrowly avoided this with a slight 0.1% gain in average effective rent. While there's a chance for October to rebound, it's more probable that rent growth could dip into the negative territory, aligning with the trends observed in workforce housing segments. This trend is attributed to several factors, including ongoing economic uncertainty, persistent inflation, the resumption of student loan payments, and the traditional seasonal decline in demand amidst a market characterized by high supply. Consequently, the most favorable conditions for sustained rent growth are expected to materialize sometime in 2024.

US HOSPITALITY:

August 2023 Top-Line Metrics (percentage change from August 2022):

• Occupancy: 66.0% (-0.3%)
• Average daily rate (ADR): US$153.60 (+1.8%)
• Revenue per available room (RevPAR): US$101.35 (+1.5%)

In August 2023, the U.S. hotel industry displayed stable performance, with minimal changes in demand and a slight decline in occupancy compared to the previous year. Luxury hotels stood out with increased occupancy, despite healthy supply growth. Weekday group demand rebounded after a sluggish summer, while weekends and shoulder periods continued to lag, potentially due to evolving corporate office trends. The Top 25 Markets showcased strong performance, indicating increased travel to major cities. Furthermore, the number of rooms under construction decreased notably, possibly influenced by evolving interest rates. However, U.S. hotel demand declined year over year for the third consecutive month, resulting in a growth trend hovering between +0.0% and -1.3% year over year, reflecting the challenges as the industry adapts to a post-pandemic normality.

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. Walnut – a 342-unit, apartment community located in Austin, Texas. As of Q2, Occupancy is at 91%, and  Effective rent, after reaching all-time highs, has started to stabilize, with a mere 0.1% increase between the first and second quarter of 2023.
4. Southwinds – Southwinds Point Apartment Homes  located in Atlanta, GA consists of 240 units, located in Irving, Texas. Occupancy remains strong at 95% in Q2 2023. Renewals are also achieving average rent increases of 7.5% over the trailing 90 days.
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 will 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 2Q23. 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