Management of Firm Capital Apartment REIT (FCA-U-V) has initiated a strategic review to explore alternatives as the trust deals with a discounted unit price and an inability to raise capital to fund its growth plans.

The announcement, contained in Firm Capital’s Q3 2022 financial release this week, also announces a suspension of its distributions pending the outcome of the review.

“As outlined in the trust’s Aug. 18, 2022 press release, the current macro environment of rapidly increasing interest rates and persistent inflation is presenting a challenging investing environment,” the announcement states.

“Particularly, capitalization rates on apartment buildings are below the cost of five- and 10-year mortgage debt, resulting in a negative investing spread for the first time in many years.”

Firm Capital had been trading recently at a discount of 46 per cent to its NAV “and has been so for many years” the release states.

The stock’s 52-week high was $7.39 (all figures in US dollars) and its low was $4.25, where it opened Thursday on the TSX Venture exchange. Prior to the announcement, it was trading in the low $4.60 range.

As of the end of Q3, Firm Capital reported its NAV per unit at $8.44.

The continued discount has been impairing REIT management from accessing additional capital. 

The review will be overseen by a committee of trustees comprised of Geoffrey Blendin, Eli Dadouch, Valentina Kalyk, Pat DiCapo and Sandy Poklar.

Options to be explored by the REIT

Formed in 2015, Firm Capital Apartment REIT is focused on the rental apartment sector in the U.S. and owns interests in a portfolio of 89 properties in seven states, comprising 1,846 apartment units.

In the announcement, management lists four options it is considering, including liquidation or exiting the business model. They are:

• Mergers and acquisitions: Consider merging the trust through either a take-over, reverse take-over, etc. with another real estate owner/operator, REIT or private real estate company to gain critical mass, size and scale. The trust has had informal conversations with third-party groups to explore this option;
• Asset dispositions: As a result of the negative investing spread, the board believes disposition of some properties could be beneficial. It has “commenced the process to opportunistically dispose of certain wholly-owned and some of our joint venture partners have started the process to realize value on some of our joint venture real estate investments.” The trust has also been told one of its preferred investments will be repaid prior to maturity, returning approximately $3.5 million of capital by year end;
• Change of business: In conjunction with the decision to opportunistically dispose of some assets, the trust may ultimately change the operation of the business and become either: (i) a real estate merchant bank, or (ii) an entity focused on value-added equity and growth; and
• Privatization: With its $35-million market capitalization at the end of Q3, the trust considers itself too small to justify staying public, “particularly in light of increasing public company costs.” So, taking the trust private and monetizing the assets over time will also be considered.

As the review proceeds, the board will continue to assess the situation on a quarterly basis to determine if the REIT should:

• distribute excess income;
• distribute net proceeds from asset sales, after debt repayment;
• reinvest net proceeds into other investments;
• distribute proceeds as a return of capital or special distribution; and/or
• use excess proceeds to repurchase units.

The board has also stated there will be no further comments on the process until it is complete, or as required by law.

Firm Capital Apartment REIT Q3

On the financial front, Firm Capital Apartment REIT reported a net loss of $1.4 million in Q3, for a total net loss so far this year of $12.1 million. During the same period in 2021, it reported a net income of $0.4 million.

Excluding non-cash, fair-value adjustments, net income was $0.4 million for the quarter, compared to $0.8 million in Q2 and $0.6 million year-over-year. On the same basis, net income was $1.7 million so far in 2022, almost identical to the same period in 2021.

Finally, AFFO in Q3 was approximately $0.7 million, comparable to Q2 and up from the $0.6 million reported for Q3 2021. For the nine months ended Sept. 30, 2022, AFFO was $1.8 million in comparison to the $1.7 million reported for the year-over-year period.

Firm Capital is a Toronto-based company established in 1988.

Through its various affiliates, Firm operates as a boutique alternative private equity real estate firm in partnership with capital pools, partnerships, private and public equity funds. It deploys in both debt and equity in the real estate private and public markets.

It has approximately $5 billion in mortgage and real estate related assets under management.