A syndicate led by Blackstone Real Estate Investment Trust Inc., (BREIT) will invest $395 million in Toronto-based rental housing company Tricon Residential via a preferred equity investment to lower the firm’s overall debt by about 10 per cent.

The investment will take place via the purchase of new exchangeable preferred units in Tricon (TCN-T). The units will be issued by a Tricon subsidiary on a private placement basis and will be exchangeable into a minority investment of Tricon. BREIT will acquire $314.6 million of the preferred equity.

“This investment in Tricon illustrates Blackstone Real Estate’s confidence in our business fundamentals and the value in our stock,” said Gary Berman, CEO of Tricon Residential, in the release.

A spokesperson for Tricon told RENX no company officials would be available for comment on the deal.

Tricon’s stock was at $10.54 in morning trading on the TSX, up 64 cents or 6.5 per cent on the day. It had traded as high as $12.11 earlier in 2020 before plunging, along with most other stocks as the COVID-19 pandemic hit, to $5.45 in late March.

Proceeds to pay down Tricon’s debt

Tricon plans to use the full net proceeds of the investment to pay down debt, reducing its proportionate leverage by approximately 500 basis points to approximately 56 per cent net debt to assets (excluding convertible debentures) and enhancing balance sheet flexibility.

The company’s net debt as of its Q2 2020 financial report (excluding convertible debentures) was $4 billion, compared to total assets of $6.6 billion, for a net debt-to-assets ratio of 61.3 per cent. Tricon is attempting to reduce that ratio to between 50 and 55 per cent.

“Blackstone inherently understands our business and is exceptionally well-positioned to help us bring our tech-enabled operating platform to its full potential,” Berman said in the release. “We are excited to have the support of one of the world’s largest real estate investors, and we are confident that this investment will create significant value for both Tricon’s and BREIT’s shareholders.”

The exchange price per share of $11.18 represents a 16 per cent premium to Tricon’s 30-day volume weighted average trading price as of Aug. 26. It is also in line with the company’s reported IFRS book value per share as of Q2 2020, Tricon says in the release.

Blackstone bought Tricon portfolio

This is the second time in recent years the firms have done business.

In 2018, Blackstone made its first foray into the U.S. manufactured housing sector, acquiring Tricon Lifestyle Communities in a $200-million-plus deal. The portfolio included 14 assets in Arizona and California.

“We are pleased to make this preferred equity investment in Tricon,” said Frank Cohen, chairman and CEO of BREIT, in the release. “We continue to see strong underlying fundamentals in the rental housing sector and believe the company’s high-quality, income-generating assets are poised to generate stable performance under the leadership of its best-in-class management team.”

Cohen will join Tricon’s board of directors.

Tricon Residential is focused on the mid-market housing demographic across North America. Founded in 1988, it owns and manages over 30,000 single-family rental homes and multifamily rental units. The vast majority of its investments are in the U.S., particularly the Sun Belt states.

However, Tricon does own the The Selby, a 500-apartment high-rise in Toronto, and is involved in a series of other major GTA multifamily developments.

Other terms of Blackstone’s investment

Other key terms of the investment include:

* a quarterly cash dividend of 5.75 per cent per annum for seven years, subject to subsequent increases;

* exchangeable for common shares of Tricon at $11.18 per share (subject to adjustment), representing approximately 14 per cent of fully diluted common shares at closing;

* the investment does not entitle the holders to vote as common shareholders of Tricon.

The closing date is expected to occur in late August or early September, subject to receipt of TSX approval.

Morgan Stanley acted as Tricon’s sole private placement agent. Goodmans LLP acted as Tricon’s legal advisor, with U.S legal support provided by Paul, Weiss, Rifkind, Wharton & Garrison LLP.

Skadden, Arps, Slate, Meagher & Flom LLP acted as legal advisor to Morgan Stanley. Simpson Thacher & Bartlett LLP and Davies Ward Phillips & Vineberg LLP acted as BREIT’s legal advisor.