CAPREIT (CAR-UN-T) is continuing to shift its focus and reposition its extensive apartment portfolio, announcing the sale of its non-managing 50 per cent interest in three apartment properties in Ottawa, comprising 1,150 units, for $136.25 million.
The properties are the Alta Vista Towers at 1545 Alta Vista Dr., the Wellington Towers at 1265 Wellington St. and the Riverview Place Apartments at 180 Lees Ave.
Kenney was unable to identify the buyer or comment on other details of the transaction due to confidentiality restrictions, but RENX has confirmed all three properties had been held for many years in a joint venture with Ottawa-based Paramount Properties, which acts as the property manager.
The transaction is a considerable step in CAPREIT’s ongoing plan to modernize and upgrade its portfolio, which has been underway in earnest for over a year.
CAPREIT modernizing apartment portfolio
“We’re trying to turn an A-class portfolio into an A-plus,” said CAPREIT president and CEO Mark Kenney in an interview this morning with RENX.
The buildings were constructed between 1969 and 1981 and require “ongoing capital expenditure to support their current growth profiles” the trust notes in its release. The reported cap rate is “in the mid-three per cent range.”
As part of the transaction, CAPREIT also transferred $38.7 in existing mortgages to the buyer.
There are a number of facets to the strategy, including deleveraging and an ongoing buyback of the REIT’s shares, which continue to trade below its reported diluted NAV of $56.44 per unit in its Q3 financial report.
“The strategy is clear. We are selling more affordable, value-add properties and deploying that capital into share buyback as our shares are significantly below NAV, and we are selling above NAV, so it’s a choppy time in the environment,” Kenney explained.
“Properties in the value-add, affordable end are tending to get higher pricing than the traditional core assets that were being bid up by all the institutions. We are in a transition market, where the private market is more aggressive than the traditional institutional core buyers of apartment buildings.
“Where that leaves us is an opportunity to buy back our shares at a considerable discount or recycle that capital into new construction rental, or pay down debt and de-lever. This is the strategy.”
After bottoming out around $40 in the fall of 2022, CAPREIT’s stock has risen steadily and was at $48.25 when trading opened this morning. The REIT will report its Q4 2022 earnings on Feb. 22.
In Wednesday’s announcement of the Ottawa portfolio sale, CAPREIT’s chief investment officer Julian Schonfeldt said the REIT invested $245 million in its NCIB program at a weighted average price of $45 per unit.
Advantages to new-construction assets
Kenney said the strategy to divest other non-core properties will continue for a variety of reasons including risks involved with older properties and an increasing amount of government regulation and scrutiny of the sector.
Rent controls in several Canadian provinces, including Ontario, mean building revenues don’t keep up with inflationary costs.
“As we sell these more affordable value-add properties, we are de-risking the investment at the same time,” Kenney noted.
Selling existing assets, buying back shares and paying down debt (CAPREIT’s leverage is currently around 38 per cent, Kenney noted, which is a conservative figure within the industry) will position the trust well to move ahead with new construction investments.
“We are high-grading the investment by modernizing the portfolio, while at the same time contributing to Canada’s housing crisis. We are simplifying the story,” Kenney said.
Newer properties mean owners can continue to charge market rents.
“There are other advantages to new rental construction, like rental regulatory risk. When you are investing in that sector of new construction apartments, you don’t have the same rent control hanging over you in provinces like Ontario and some others.”
Looking ahead, Kenney said rather than focusing on developing its own projects, CAPREIT is looking at other development and investment options.
“We are accelerating our entitlement process (for multires development land the trust owns),” he said. “We think now is a great time to get land entitled because when development picks up in a better financing environment, we’ll have these properties titled.
“But in the meantime it is our intention to sell the entitled land opportunity, not build on it. That is creating equity from nowhere, when you are mining the land value with entitlement, that is equity that previously wasn’t there.
"So then to take that equity and buy back shares on discount it is a no-brainer.”
Kenney said that gives CAPREIT more resources to invest in new construction projects – and forward purchases, a strategy it has used in several recent acquisitions.
“There is still lots of apartment value available, especially new construction apartment value available . . . lots of development opportunity available. We’d like to participate in providing Canada with new rental accommodation.
“We like forward purchase.”
Toronto-based CAPREIT is Canada’s largest publicly traded provider of rental housing.
The REIT owns or has interests in approximately 65,000 residential apartment suites, townhomes and manufactured housing communities across Canada and the Netherlands, with approximately $17 billion of assets under management globally.