Premier Doug Ford's Ontario

[lenaitch]

Not unless it’s a condition of building there, which it seems might be the case- we know there will be conditions of some kind. Something to the effect of ‘units must be priced x% lower than market mean/median value’ akin to an affordable housing requirement.


Unrelated, but a bit of my perspective here because no one’s discussing how we can nudge this in a better direction. Ford’s interest is to dig himself out of this hole and somehow get the public on his side with his reckless decision(s); the public’s interpretation cannot become reality.

For the sake of argument let’s suppose this isn’t simply corruption, but a misguided means to deliver housing. There is a way to do this, even if it’s retroactive; present the supposed flaws with the greenbelt as-is, with the quantitative criteria showing x sites are more readily developable than others. There will necessarily be whitebelt lands that cannot be built on soon, so those must be added to the greenbelt. In short, it shifts from a land grab to a “more now, less later” growth management strategy. This might still be bad politics, but its far more palatable than the alternative.

I’m personally of the belief that if the greenbelt’s effects on land value are true, then the government should shut up, buy these viable lands (which should be cheap…) and develop it themselves to undercut the market in the public’s interest. Anything else is, as we have seen, far too muddy.

So they, somehow, manage to convince builders to get houses on the market for less than the prevailing market. Cool - I buy one, wait a year, then put it on the open re-sale market.

The government as a developer - what could possibly go wrong. If they get a developer to do it on their behalf (because no part of the civil service has a clue how to do that), they're not going to do it for charity. Their costs will be the same as for any other development, probably higher because the industry knows the government is backstopping it.

 

[afransen]

This might seem far fetched; but Capreit is only 8 billion in market cap. Ontario could recover a chunk of that selling off out of province assets. But it would instantly pick up 24,000 units in province.

For a net-out cost of say ~3B, that's only $125,000 per unit; way cheaper than you could ever build new.

Cap REIT has an enterprise value of $15.4B. Not only would the province have to buy out the equity holders (likely at some premium to the current $8.3B market cap), they would need to assume the debt currently on the company's balance sheet. It looks like they have about 63% of their 46k rental units in Ontario. Assuming the value per unit is uniform, it averages about $335k per door.

https://s25.q4cdn.com/722916301/files/doc_downloads/2023/09/CAPREIT-Investor-Presentation-September-2023.pdf

 

[Sunnyside]

The Ontario government has so many better tools at its disposal.

Aside from the typical, and obvious (build more deeply affordable housing, curtail demand, and raise wages (by reducing labour supply and raising minimum wage).......

They could:

1) Buy an existing REIT and simply convert it to mixed income public housing (lowering the rents of existing tenants or on vacant units as guidelines would have one do.

This might seem far fetched; but Capreit is only 8 billion in market cap. Ontario could recover a chunk of that selling off out of province assets. But it would instantly pick up 24,000 units in province.

For a net-out cost of say ~3B, that's only $125,000 per unit; way cheaper than you could ever build new.

If just 20% of those units represented people being removed from a 'high needs' category/housing waiting list, that's about 4,800 apartments/households and about 6,700 people no longer in acute poverty. That's great bang for the buck.

2) If the province wants to create cash through land value, such that they can reallocate that to pay for new public housing/coop housing, and/or buying REITs..... that too isn't hard, the province has already shown the way with the TOC along the Ontario Line, except that they're doing a crap job of securing affordable housing as part of that.

But just imagine the province, say, buying a bunch of low-density sites near Ossington Station on Line 2, at market value, but with expropriation, so it moves quick. They assemble say 2ha/5 acres, they MZO it to medium or hirise density and MCR.
Say that's 100 houses at 1.3M a pop or about 130M, with the simple MZO, that land just tripled in value, very conservatively, you flip it to a developer and take your choice:

a) Bank the 260M net profit and invest that in new build public housing

b) Sell to the developer at cost, in exchange for 260M of in-kind affordable housing, and 100% purpose-built rental.

That's roughly 1,000 units of affordable rental housing, depending on the rent level set.

Rinse, repeat 30 times across Toronto and you get 30,000 units of affordable housing for a cash--out lay of only 3.9B; you do that through the value-creation of the MZO and the instant-assembly of expropriation.

I don’t really see how buying a REIT is on the table- where does that money come from? You know as well as anyone $8B is not a small sum of money. The government didn’t spend any money on unlocking the greenbelt. Not that there isn’t merit; it’s just not something I see as rectifying the issue at hand, which is substantial acreage in the greenbelt which is now developable. The same is true for your other suggestion; it’s great, but is this government likely to take the ‘big gov’ role needed?

All that to say that the real question here I’m asking is what do we do with these lands if they aren’t added back- and originally, what the implications are for the greenbelt if evidence surfaces to justify that (if only politically). Requiring some affordable housing of some sort is making lemonade out of the lemons- I know we all know a recipe to make the proverbial affordable housing lemonade. We can argue to just put the lands back, and that might be doable, but we can’t count on it. The province buying blocks and developing them is hardly an obvious pivot given the removed lands’ status will still need to be resolved.

If you can tell, I don’t really see these lands reverting being on the table- the Ford government will try to dangle carrots themselves first. Maybe I’m being far too pragmatic for the scope of the issue at hand, but we concede whatever gets delivered if we don’t come up with our own creative ‘carrot’. My buy-back-and-develop idea, or any other, ought cause a financial headache substantial enough to discourage any government from touching the greenbelt again if it becomes onerous enough to deliver.

 

[Northern Light]

Cap REIT has an enterprise value of $15.4B. Not only would the province have to buy out the equity holders (likely at some premium to the current $8.3B market cap), they would need to assume the debt currently on the company's balance sheet. It looks like they have about 63% of their 46k rental units in Ontario. Assuming the value per unit is uniform, it averages about $335k per door.

First, let's be clear, I'm not a novice when it comes to investing.

No one in their right mind pays Enterprise value, yes, a modest premium to market-cap is normative; though highly debatable if you move to expropriate, because your obligation under the act is to pay fair market value, not a premium there to.

The market cap is the fair market value; a premium is paid to induce sale; the province doesn't pay a material premium when expropriating land, generally, it pays the assessed value; though, yes, there is wiggle room to avoid the cost/hassle of some form of price arbitration.

Second, the province would initially assume the debt within the corporate entity (the same way it does for OPG or other agencies/crown corps); which is already cash-flowing the obligations associated with that debt; however, should the province absorb the debt, likely on the same terms as its general debt or the debt of a comparable public entity, (ie. TCHC), the interest rate paid would likely drop.

* though it needs to be said, I looked up the weighted average of the mortgage debt for Capreit and its surprisingly low; the rates TCHC have on their books vary wildly depending on when it was accrued; but its lowest rate payable is currently 0.64%; though I would not expect any re-fi debt in the current market to be that low.

But current renewals for commercial mortgages are coming in well in excess of 5.5%; where the province can borrow at 3.5% on the open market. (current to bonds issued Q2 2023)

Put simply the asset value is higher in public ownership than private ownership, due to lower long term borrowing costs.

****

Allowing for the above, and understanding that I do not accept your assessment of $335,000 per unit which would be a vast premium to market-cap..............

I will still point out that even that inflated sum is far cheaper than any public entity can build new.

That price for units that will average something like 800ft2 is less than the cost of Toronto's modular housing program per unit, for units less than 1/2 that size, on land the City donated no less!

 

[Northern Light]

I don’t really see how buying a REIT is on the table- where does that money come from? You know as well as anyone $8B is not a small sum of money.

It is a nothing-burger sum to the province of Ontario.

The current provincial budget is ~205B.

The province already spends tens of billions on capital projects, including affordable housing, at a higher cost per unit than acquiring an existing REIT.

Ontario's total current debt is 400B, so assuming you debt-financed an 8B purchase, you'd bump that number by 2% (to a sum below what the debt was projected to be at this time in 2022.

All that to say that the real question here I’m asking is what do we do with these lands if they aren’t added back- and originally, what the implications are for the greenbelt if evidence surfaces to justify that (if only politically). Requiring some affordable housing of some sort is making lemonade out of the lemons- I know we all know a recipe to make the proverbial affordable housing lemonade. We can argue to just put the lands back, and that might be doable, but we can’t count on it. The province buying blocks and developing them is hardly an obvious pivot given the removed lands’ status will still need to be resolved.

I cannot and will not accept that the lands not be added back. There is no reasonable basis on which to suggest their removal doesn't have the appearance of corruption, and in any event is unpopular, even among Conservative voters and is indisputably bad public policy.

If you can tell, I don’t really see these lands reverting being on the table- the Ford government will try to dangle carrots themselves first. Maybe I’m being far too pragmatic for the scope of the issue at hand, but we concede whatever gets delivered if we don’t come up with our own creative ‘carrot’. My buy-back-and-develop idea, or any other, ought cause a financial headache substantial enough to discourage any government from touching the greenbelt again if it becomes onerous enough to deliver.

Why would we 'buy' land at an inflated value that the province created; that would be rewarding 'unjust enrichment'. The province did not buy the original Greenbelt lands when it downzoned them. Legal precedent is clear, the province has the right to downzone without compensation.

That is exactly what it must do here, period.

IF the province bought any of this land, it should do so at the downzoned value, not the inflated value, and most of it is not good land to develop housing on (most of it isn't even serviced! (no sewer hook-up).

It would cost billions more to develop this land that comparable land in public ownership already or that could be purchased via REIT.

The only reason to buy the land (at the reduced value) would be to add it to Rouge National Park or other conservation parcels, where that makes sense.

 

[afransen]

First, let's be clear, I'm not a novice when it comes to investing.

No one in their right mind pays Enterprise value, yes, a modest premium to market-cap is normative; though highly debatable if you move to expropriate, because your obligation under the act is to pay fair market value, not a premium there to.

The market cap is the fair market value; a premium is paid to induce sale; the province doesn't pay a material premium when expropriating land, generally, it pays the assessed value; though, yes, there is wiggle room to avoid the cost/hassle of some form of price arbitration.

Enterprise value is what a company is worth. It is financed through debt and equity, the latter of which is represented by the market cap. It is quite analogous to a $1M home with a $700k mortgage. You can't buy/expropriate that home for the $300k equity the current owner has in it. The home is worth $1M on the open market, not $300k. Assuming debt is/would be part of the consideration of the transaction.

Allowing for the above, and understanding that I do not accept your assessment of $335,000 per unit which would be a vast premium to market-cap..............

I will still point out that even that inflated sum is far cheaper than any public entity can build new.

That price for units that will average something like 800ft2 is less than the cost of Toronto's modular housing program per unit, for units less than 1/2 that size, on land the City donated no less!

If you want some additional context, look at some recent transactions Cap REIT has engaged in.

• Sold a 50 year old Montreal property with 393 residential and 2 commercial units for $68.9M in consideration. $175k per unit
• Sold a Charlottetown property with 60 units for $9.4M, or $156k/unit
• Purchased a newly built Langley property with 93 units for $53.7M or $577k/unit
• Purchased a newly built Dartmouth property with 52 units for $20.4M or $392k/unit.

CAPREIT Divests $103MM in Non-Core Properties & Reinvests $74MM in New Build Properties

TORONTO, June 08, 2023 (GLOBE NEWSWIRE) -- Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”) (TSX:CAR.UN) announced today that it...

www.globenewswire.com

I'm not disagreeing with the idea of acquiring rental stock for social housing, just quibbling with what the financial impact would be.

 

[Northern Light]

Enterprise value is what a company is worth. It is financed through debt and equity, the latter of which is represented by the market cap.

I know what Enterprise Value is, I've been investing for 30 years; I fundamentally disagree with you that it is a metric that reflects the price paid in purchases in general.
Read this explainer which I agree with:

Enterprise Value vs. Purchase Price: Full Tutorial + Excel

Enterprise Value vs. Purchase Price: Excel Example and Video and Written Tutorial Explaining These Concepts in M&A Deals.

breakingintowallstreet.com

It is quite analogous to a $1M home with a $700k mortgage. You can't buy/expropriate that home for the $300k equity the current owner has in it. The home is worth $1M on the open market, not $300k. Assuming debt is/would be part of the consideration of the transaction.

I get that example, as I've explained, already, I disagree with how you're using it.

Assumed debt is not a cash payable.

And in the above case you cite, the home is not cash-flowing the debt, the owner is; in the case of any REIT, the asset comes with renters - 98% occupancy who are cashflowing the debt.

There is therefore no impact on the province fiscally, beyond the cash layout.

The only fiscal impact occurs when you reduce rents; that's an operating budget decision, rather than a capital one.

Besides, as I noted, the government can re-fi at a lower rate than CAPREIT can obtain.

If you want some additional context, look at some recent transactions Cap REIT has engaged in.

• Sold a 50 year old Montreal property with 393 residential and 2 commercial units for $68.9M in consideration. $175k per unit
• Sold a Charlottetown property with 60 units for $9.4M, or $156k/unit
• Purchased a newly built Langley property with 93 units for $53.7M or $577k/unit
• Purchased a newly built Dartmouth property with 52 units for $20.4M or $392k/unit.

CAPREIT Divests $103MM in Non-Core Properties & Reinvests $74MM in New Build Properties

TORONTO, June 08, 2023 (GLOBE NEWSWIRE) -- Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”) (TSX:CAR.UN) announced today that it...

www.globenewswire.com

I'm not disagreeing with the idea of acquiring rental stock for social housing, just quibbling with what the financial impact would be.

Right, and the majority of CAPREIT's Ontario assets are old.

You've also failed note that I suggested that Queen's Park would sell any out-of-province assets which would then significantly reduce the one-time costs.

 

[Sunnyside]

It is a nothing-burger sum to the province of Ontario.

The current provincial budget is ~205B.

The province already spends tens of billions on capital projects, including affordable housing, at a higher cost per unit than acquiring an existing REIT.

Ontario's total current debt is 400B, so assuming you debt-financed an 8B purchase, you'd bump that number by 2% (to a sum below what the debt was projected to be at this time in 2022.



I cannot and will not accept that the lands not be added back. There is no reasonable basis on which to suggest their removal doesn't have the appearance of corruption, and in any event is unpopular, even among Conservative voters and is indisputably bad public policy.



Why would we 'buy' land at an inflated value that the province created; that would be rewarding 'unjust enrichment'. The province did not buy the original Greenbelt lands when it downzoned them. Legal precedent is clear, the province has the right to downzone without compensation.

That is exactly what it must do here, period.

IF the province bought any of this land, it should do so at the downzoned value, not the inflated value, and most of it is not good land to develop housing on (most of it isn't even serviced! (no sewer hook-up).

It would cost billions more to develop this land that comparable land in public ownership already or that could be purchased via REIT.

The only reason to buy the land (at the reduced value) would be to add it to Rouge National Park or other conservation parcels, where that makes sense.

This is fair, debating what to do if the lands remained was a hypothetical, and definitely a devils advocate perspective of mine. Glad you engaged with me anyways.

In any case, do you see these lands actually getting added back to the greenbelt? And if so, what will break the camels back here?

 

[Northern Light]

In any case, do you see these lands actually getting added back to the greenbelt? And if so, what will break the camels back here?

Difficult to say whether it WILL happen, but the prospect for that, in whole or in part is material.

1) The government has already initiated putting 2 parcels back into the Greenbelt in Ajax.

2) The single biggest landholding here is TACC's tract in the Duffins-Rouge Agricultural Preserve. The Federal government has launched a process to assess that proposal with an eye to blocking it, as it directly
impacts Rouge National Park. It would be a very obvious move to actually shift those lands into Rouge National Park, which could result in a buy-out or donation of the lands for ecological purposes for which a very generous
tax treatment applies.

It certainly would not surprise me to see Ford try to hold his ground; but neither would it surprise me to see him go the other way, he is nothing if not the master of 180 degree pivot!

 

[afransen]

I know what Enterprise Value is, I've been investing for 30 years; I fundamentally disagree with you that it is a metric that reflects the price paid in purchases in general.
Read this explainer which I agree with:

The explainer you referred to kind of agrees with my point that when you assume you are refinancing the debt, it contributes to the acquisition cost.

I get that example, as I've explained, already, I disagree with how you're using it.

Assumed debt is not a cash payable.

And in the above case you cite, the home is not cash-flowing the debt, the owner is; in the case of any REIT, the asset comes with renters - 98% occupancy who are cashflowing the debt.

There is therefore no impact on the province fiscally, beyond the cash layout.

The only fiscal impact occurs when you reduce rents; that's an operating budget decision, rather than a capital one.

Besides, as I noted, the government can re-fi at a lower rate than CAPREIT can obtain.

I never said anything about cash. I said the cost per door in consideration would be higher than you were suggesting. The debt is only being serviced at market rental rates. If you turn the units into affordable social housing, that debt (refinanced or not) becomes a stranded liability that would need to be paid by the taxpayer. Whether you consider it a capital or operating cost is merely an accounting exercise.

Right, and the majority of CAPREIT's Ontario assets are old.

You've also failed note that I suggested that Queen's Park would sell any out-of-province assets which would then significantly reduce the one-time costs.

I didn't really fail to note it. I expressed the cost on a per door basis, which is agnostic on whether the ex-Ontario assets are divested.

 

[Northern Light]

The explainer you referred to kind of agrees with my point that when you assume you are refinancing the debt, it contributes to the acquisition cost.


I never said anything about cash. I said the cost per door in consideration would be higher than you were suggesting. The debt is only being serviced at market rental rates. If you turn the units into affordable social housing, that debt (refinanced or not) becomes a stranded liability that would need to be paid by the taxpayer. Whether you consider it a capital or operating cost is merely an accounting exercise.

We'll just have to disagree, as we're talking past each other on this one.

I didn't really fail to note it. I expressed the cost on a per door basis, which is agnostic on whether the ex-Ontario assets are divested.

Its not agnostic, the Ontario assets are older than the rest.

 

[kEiThZ]

1) Buy an existing REIT and simply convert it to mixed income public housing (lowering the rents of existing tenants or on vacant units as guidelines would have one do.

I'm not sure what the point of doing this is. It reduces rents for current tenants but doesn't increase housing stock in total which is what is really needed to bring rent and purchase prices down.

But just imagine the province, say, buying a bunch of low-density sites near Ossington Station on Line 2, at market value, but with expropriation, so it moves quick. They assemble say 2ha/5 acres, they MZO it to medium or hirise density and MCR.
Say that's 100 houses at 1.3M a pop or about 130M, with the simple MZO, that land just tripled in value, very conservatively, you flip it to a developer and take your choice:

a) Bank the 260M net profit and invest that in new build public housing

b) Sell to the developer at cost, in exchange for 260M of in-kind affordable housing, and 100% purpose-built rental.

That's roughly 1,000 units of affordable rental housing, depending on the rent level set.

This is a much better idea. And I've heard several housing advocates push for a public development agency whose job it would be to basically do all the work necessary to accelerate and/or build in the public interest either by assembling land, upzoning or providing loan guarantees or taking equity stakes in development.

 

[Northern Light]

I'm not sure what the point of doing this is. It reduces rents for current tenants but doesn't increase housing stock in total which is what is really needed to bring rent and purchase prices down.

It (can) immediately alleviate financial hardship through said rent reductions, reducing the number of people needing food banks etc.

It can also remove some people from the waiting list of public housing if the rent in their existing housing is now manageable.

***

No question more supply is needed and the above doesn't resolve it; but it can more quickly abate the poverty of those already housed but financially strained.

I also like the Vienna model of public housing (largely self-financing, with mixed incomes in each building), which is essentially predicated on a significant one-time capital injection and some on going supports from a tax akin to the LTT.

If market units sustained most non-profit and subsidized units, the money now going to subsidize same could shifted to capital expenditure to build and maintain supply.

Of course, there are many moving parts and additional incremental costs and no one solution is a panacea.

***

We also need to come back to the need to promote wage growth and reduce demand growth while supply catches up.

 

[kEiThZ]

It (can) immediately alleviate financial hardship through said rent reductions, reducing the number of people needing food banks etc.

But this ignores the opportunity cost of what that same amount of capital could achieve if put into new construction. $8B with an average cost of $0.5M per door could yield 16 000 doors. That adds to the housing stock, reducing overall pressure on the market while allowing the government to offer relief to 16 000 renters. Is providing some relief to 8000 more renters really worth passing up the pressure on the market of 16 000 new units?

I also like the Vienna model of public housing (largely self-financing, with mixed incomes in each building), which is essentially predicated on a significant one-time capital injection and some on going supports from a tax akin to the LTT.

I like the Vienna model too. But I suspect, you're getting fixated on it at any and all costs. Hence the idea to buy a REIT instead of focusing on the best result for a given dollar being spent.

 

[zang]

I'm not sure what the point of doing this is. It reduces rents for current tenants but doesn't increase housing stock in total which is what is really needed to bring rent and purchase prices down. \

Throwing more units onto the market as it is just invites more speculators, small landlords and AirBnB micro-hoteliers. The incentives for profit and speculation need to get quashed first. Reducing prices for some units will ultimately reduce prices for others in the area, helping make both purchases and rentals more affordable.

This is a much better idea. And I've heard several housing advocates push for a public development agency whose job it would be to basically do all the work necessary to accelerate and/or build in the public interest either by assembling land, upzoning or providing loan guarantees or taking equity stakes in development.

I agree; we need more investment into properly sustainable public housing. But we also need to follow examples like those in Finland who for a long time have pushed that 25% of all new housing must be affordable, or Sweden where half of all rental units are publicly owned—meaning the government leads the market, and isn't just forced to exist solely for those who can't afford what the private market decides rent should be.