MaGiC Real Estate Newsletter March 2023

Dear Magic Investor,?

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

U.S. MACROECONOMIC UPDATE

The Federal Reserve faced a challenge as Silicon Valley Bank and Signature Bank suffered heavy losses, leading to panicked depositors. The Fed assured depositors that even uninsured deposits would be protected, which helped restore confidence. The Fed also raised interest rates by 25 basis points to curb inflation. However, inflation data in February was higher than expected, indicating ongoing concerns. Fed Chairman Jerome Powell indicated that short-term interest rates are likely to remain high for some time to come, and the current rate of 4.5%-4.75% may increase to 5%-5.5% in the coming months.

Overall, the market is still facing challenges, and the Federal Reserve will continue to closely monitor developments and adjust policy as needed to ensure a stable economy.

Interest rate changes can have a significant impact on the real estate market, causing a decrease in transaction activity, an increase in capitalization rates, and negatively affecting property values. The cost of mortgage debt, which remained stable previously, is now on the rise. The 10-year Treasury rate was around 4%, while the SOFR index surpassed 4.5%, translating to loan coupons of 6% for fixed rates and 6.5% for floaters. This could result in a decline in demand for real estate investments, causing investors to demand higher returns to offset the additional borrowing cost. It is important to keep track of market trends and analyze how interest rate fluctuations could impact the real estate industry. Being informed about interest rate fluctuations can help investors make informed decisions, adapt their strategies and mitigate potential risks.

U.S. MICRO-MARKET UPDATE

Atlanta: Lower living costs and a growing life science sector are attracting young white-collar workers. Metro Atlanta will break records this year for completed units. Effective rent gains have slowed down, but the average rental rate is expected to increase to $1,800 per month.

Austin: The expanding tech industry supports local labor forces. After substantial increases in rent in 2021 and 2022, gains are expected to slow down with an average rental rate of $1,800 per month.

Charlotte: Light tax environment and moderate cost-of-living attract businesses, creating jobs. Charlotte's job creation is expected to rank among the strongest nationally in 2023.

Dallas-Fort Worth: Diverse job opportunities, lower urban living costs, and a central location make it a desirable place to live. Robust in-migration and an expanding job tally are expected to increase rental demand.

Fort Lauderdale: In-migration has led to a dramatic surge in rental rates, and continued job gains are expected to benefit rental metrics.

Miami-Dade: Lack of personal income tax, warm climate, and business-friendly environment make it an attractive location for corporate relocations. Miami-Dade County added over 58,800 non-farm jobs year-over-year, with the unemployment rate falling to 1.5%.

Source: Marcus & Millichap, Cushman & Wakefield

REAL ESTATE

The U.S. apartment sector has proven resilient despite uncertainty, with strong rental demand. However, delays in apartment production in 2022 led to an all-time high delivery slate, slowing down rent growth and increasing vacancy rates. Nevertheless, the longer-term outlook is positive due to demographics and barriers to homeownership. High mortgage rates and home prices have led to a slight softening in single-family sale prices, pushing more people towards renting. Elevated barriers to homeownership and shifting demand will direct more residents towards apartments, encouraging extended renting.

US Multifamily Trends

During the first quarter, multifamily rents showed no gains for the first time in a decade. Although the results were somewhat relieving, multifamily demand remained strong, and rents, as well as occupancy, remained stable. Affordability is a growing concern, and consumers are constrained by high inflation; therefore, it is likely that rent growth in 2023 will be modest. Nonetheless, a multifamily hard landing is not yet in the cards. Household formation is still supported by a tight job market, high single-family home prices, and mortgage rates that make homeownership unaffordable to some renters, while consumer balance sheets remain strong (for now). The economy's response to sharp interest rate hikes is, however, still uncertain.

• Recent data shows that although average asking rents in the US increased in March, the year-over-year growth rate continued to slow down to 4.0%, which is a decrease of 90 basis points from February.?
• The national occupancy rate also declined slightly by 10 basis points to 95.1%, due to a decline in Renter-by-Necessity occupancy rates to 95.2% in February. Demand has remained steady across the country, but the economy is expected to soften in the second half of the year.?
• Nationally, asking rent growth turned positive last month after four months of decreasing overall rents. Renewal rent growth increased by 30 basis points to 9.3% year-over-year through January, which was an unexpected development. However, renewal rent growth for in-place tenants is expected to eventually drop closer to the levels of asking rent growth, which was at 4.0% as of March.

The Sun Belt Factor: In the majority of metros in the Sun Belt area, rent-to-income ratios remain below 30%, which is the national rent-to-income ratio. This ratio is calculated by comparing the national median household income of $71,721 with the average monthly rent of $1,794 for 2022. This creates a pocket of opportunity where people who cannot afford homeownership can certainly afford to rent multifamily units.

Expected Volatility in 2023

MaGiC would like to reiterate its expectation of volatility in 2023, especially with the upcoming federal government elections. The state is expected to keep its focus on inflation, which may result in further interest rate hikes, especially in response to sudden issues like the one with SVB. This, in turn, is expected to keep the exits in real estate transactions at bay, as sellers may be reluctant to sell at lower valuations. However, operational efficiency will play a big role in managing these multifamily projects.

US Hospitality trends

February 2023 Top-line metrics (YoY change from Feb 2019): (hospitalitynet.org)

• Occupancy: 60.0% (-2.8%)
• Average daily rate (ADR): US$152.01 (+17.7%)
• Revenue per available room (RevPAR): US$91.22 (+14.3%)

The hospitality industry has seen unprecedented growth in average daily rates (ADR) and returning occupancy levels in the past eight months. This has led to a new supply growth cycle, as deferred projects are now being moved forward. Despite concerns of an economic recession in 2023, the hospitality industry has posted strong numbers, outperforming other sectors like technology and retail. Revenue per available room (RevPAR) has outpaced GDP growth, indicating a positive outlook for the sector. The desire to travel remains strong, suggesting continued growth in 2023, with RevPAR increasing by 8.1% in the US and 6.1% in Europe compared to 2019.

?(Source: hospitalitynet.org)

MaGiC USA Portfolio

Multifamily

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.

MaGiC's 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.

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

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.

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. 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