Fresh off the timely acquisition of a dozen mobile home communities from Killam Properties Inc. as part of a swap for a Toronto-area apartment building, Canadian Apartment Properties Real Estate Investment Trust (CAPREIT) is sticking to its prediction that it will continue to be a hungry corporate acquirer.
“I think I said publicly that this will be our best acquisition year since 2004,” said Thomas Schwartz, the REIT’s President and CEO.
That prediction does not count the 14 apartment building properties which the Toronto-based REIT expects to acquire as part of a $1-billion friendly takeover of TransGlobe Apartment REIT expected to close later this month. The properties (about 3400 units), which stretch from southwestern Ontario and the Greater Toronto Area, to Montréal Region, Québec City and Halifax, will cost the REIT $455 million.
The TransGlobe deal is headed by Daniel Drimmer’s Starlight Investments, a company that has been an active seller of properties to TransGlobe in the past and holds a large stake in the apartment REIT. Under the deal, Starlight will sell 14 buildings to CAPREIT, unload another 26 properties to Timbercreek Asset Management, will keep 63 TransGlobe properties for itself and package another 72 properties to be owned under a joint venture between Starlight and the Public Sector Pension Investment Board.
“This was a good opportunity and there are three of us who are basically splitting up that portfolio so it suits us very well,” said Schwartz. “From CAPREIT’s point of view the buildings are very strategic, they are in markets where we already have a management team and certain critical mass. So that allows us to add a lot of value instantly to the property.”
That’s Not All, Folks
Schwartz said the REIT will be far from done with that mammoth deal. “We have a couple other large transactions we are working on, you never know if you are going to get them because I still get less than one out of 10 things I bid on, but there is just such good deal flow and we have done so well so far that this will be a great acquisition year.”
Always on the hunt for properties that provide stable cash flow and expand its coast to coast multi-res platform, the Toronto REIT is accustomed to being outbid but that is not a problem in the current market, explained Schwartz. “Most of the stuff I bid on I get outbid but remember it is almost a perfect situation because the sellers are getting record prices so more sellers are coming to the market than ever before. Because of financing rates we are getting 10-year money at under 3% today so it is highly, highly accretive.”
Making the acquisition math work is not simply a function of the cap rate for CAPREIT, said Schwartz. “It is not just just cap rate, it has got to be cap rate and price per unit.
“One of the bits of magic to the apartment business in Canada is we buy assets at a significant discount to replacement cost,” he said. “The minute that we are getting closer to replacement cost, all of a sudden the equation doesn’t work as well. That is the big risk and we are not anywhere close to that. If we ever did start getting there the deals would not be being as good and you would not see us this active.”
CAPREIT’s investment criterion starts with a stipulation that cities it invests in have at least 25,000 apartments in their inventory. It is a list that runs from Halifax to Vancouver which includes most major cities and lesser ones such as Kitchener, London, Victoria and the province of Saskatchewan.
CAPREIT is also now a player in the trailer park business following the recent acquisition of the 12-park portfolio from Killam Properties Inc. for $72.3 million. The Toronto REIT likes the ultra-stable manufactured home community business in which people own their home but pay a monthly rental fee.
It’s a business characterized by long-term cash flows, high occupancies, steady increases in average monthly rents, and significantly lower capital and maintenance costs, according to CAPREIT. Also, although the homes are theoretically mobile, they rarely move.
Manufactured home communities also rarely go up for sale. “There is not a lot of trading in that area,” said Schwartz. “Other than the recent Parkbridge sale to bcIMC a couple of years ago (for $790 million in 2010), this was probably the biggest single transaction that there has been.”
CAPREIT is not actively looking to add to its MHC portfolio, but will listen to any offers. “This is the only manufactured home transaction that we have going right now. Often one transaction often becomes a magnet for another so I would not be surprised if my phone starts to ring with manufactured home deals in the next couple of weeks.”
CAPREIT had previously owned just two such manufactured home communities in Ontario and the deal gives it a more national footprint and this asset class now accounts for about 10% of the property on the REIT’s books.
Long term, the land that CAPREIT’s manufactured home communities sit on could be redeveloped. “We have never looked at it that way, but certainly the land always appreciates and they could be redeveloped at some point in the future so it is always a possibility.”