CAPREIT (CAR-UN-T) has an agreement to sell its Canadian portfolio of 75 manufactured homes communities (MHC) to TPG Real Estate for $740 million, a move president and CEO Mark Kenney calls a major step toward becoming a pure-play apartment REIT.

The communities comprise a total of 12,138 residential lots.

“The portfolio was unencumbered so it represented an opportunity to really get a lot of liquidity into the system at a time that is highly opportunistic," Kenney told RENX in an interview following Monday's announcement. "Cash is king when rates are high, so we can pay down our (revolving credit line). Cash is king when our shares are trading well below their true value, and there are apartment acquisition opportunities in the marketplace that we think are almost once-in-a-lifetime to be able to buy new construction, Canadian apartments at below replacement costs.

"So all these things were key drivers.”

TPG intends to pay for the acquisition via $600 million in cash and a $140-million vendor takeback loan.

CAPREIT's strategy to modernize, simplify portfolio

The transaction continues CAPREIT's strategy to modernize its portfolio, as well as concentrating on the multifamily sector. The Toronto-based trust has been divesting older properties, and reinvesting some of those proceeds into newly built apartment buildings over the past 12 to 18 months.

“We are committed to this high-grading exercise of dramatically improving the overall quality composition of the CAPREIT apartment portfolio," Kenney explained, noting newer properties are less subject to restrictive rent controls, and require less maintenance capital. "It’s always been high quality, but this is high quality without the (rent control) regulation in many cases and without cap ex, the unknown cap ex numbers.

"It’s just another level of being conservative.”

The communities are in Ontario, British Columbia, Alberta, Saskatchewan, Quebec and Atlantic Canada.

CAPREIT intends to utilize the net sale proceeds for:

• Repaying the $187-million balance on its Canadian revolving credit facility; 
• future acquisitions of “on-strategy rental properties” in Canada; and
• general business purposes, which it said may include capital expenditures, debt repayment and/or share buybacks under its normal course issuer bid.

Lowering "expensive leverage"

“We are listening very closely to our shareholders and with the support of the board we are very focused on cleaning up the balance sheet in areas of our core competency," Kenney said. “Lowering leverage is also on the lips of many investors given what’s happened; lower leverage is just seen as an extra level of safety.

"But getting rid of expensive leverage is obviously sensible. That’s our operating line. So something like this would allow us to make significant improvement in paying down the line.”

He noted CAPREIT's payout level is in the 60 per cent range, that its leverage of 41.8 per cent (before this transaction) also remains very low, and "we'd like to push those lows."

CAPREIT reported in its Q1 financials total debt of $7.168 billion, or a 41.8 per cent debt-to-gross-book-value ratio (up 1.7 per cent from the year-earlier Q1 2023 period, and slightly up from 41.6 per cent at year-end 2023). It reported total Q1 gross book value of $17.158 billion for its assets

Its debt service coverage ratio at the end of Q1 was 1.8 times. 

“The modernization is incredibly exciting. I don’t know that the market fully appreciates the difference in the quality of income coming out of CAPREIT right now," Kenney said. "Long-term investors will benefit from this but the quality of the income and the predictability of the income just continues to get better and better.”

“We are highly confident that we can continue our strategy of executing on the purchase of new-construction Canadian apartments.”

The transaction is subject to closing conditions including compliance with the Competition Act (Canada). Subject to all approvals, closing is anticipated in the fourth quarter of 2024.

About CAPREIT and TPG

CAPREIT is Canada’s largest publicly traded provider of rental housing. 

As of March 31 CAPREIT owned approximately 64,200 residential apartment suites, townhomes and manufactured home community sites across Canada and the Netherlands, with approximately $16.7 billion of investment properties in Canada and Europe.

Formed in 1992, TPG is an investment firm based in San Francisco with international holdings across several real estate sectors. Its real estate platform consists of an $18-billion portfolio of assets under management.