The reason for the termination, according to the announcement, is due to the high interest rate environment relative to the anticipated purchase capitalization rate of the asset.
Up until now, Minto Apartment REIT had the exclusive option to purchase the property at 95 per cent of its market value as determined by a third-party appraisal.
"Fifth + Bank is a new, attractive urban asset that any apartment owner would like to have in its portfolio. However, current market conditions plus our cost of capital must be factored into any decision and as a result we believe it's in the best interest of the REIT to terminate the Option to Purchase,” Jonathan Li, the REIT's president and CEO, said in a statement.
“The CDL (convertible development loan) pipeline is a strategic program that gives the REIT access to newly constructed multifamily assets in major urban markets and we remain hopeful that once market conditions are more favourable, the REIT will be better positioned to execute on opportunities arising from the CDL pipeline, which is a strategic advantage for the REIT.
"The decision to terminate the Option to Purchase is not related to our capital recycling program, which continues to be a strategic priority for the REIT."
Minto REIT (MI-UN-T) has a portfolio of 32 multiresidential properties in Toronto, Montreal, Ottawa, Vancouver, Victoria, Calgary and Edmonton.
Fifth + Bank
Fifth + Bank is a newly constructed, mixed-use multiresidential rental and retail property at 99 Fifth Ave. in Ottawa's downtown Glebe neighbourhood. Construction of the 163-suite property was completed in Q3 2021.
The property is 100 per cent leased and is not subject to rent control because it was delivered after November 2018.
The $30-million convertible development loan for Fifth + Bank matures on Jan. 31, 2024, but the REIT will work to negotiate an option for MPI to repay the loan prior to that date.
The REIT will also use a portion of the proceeds from this repayment to repay a portion of its revolving credit facility.
"Fifth + Bank is an asset that MPI will retain – brand new assets of this quality in urban locations are irreplaceable,” Michael Waters, Minto Group’s CEO, said.
“MPI will evaluate its alternatives and although not guaranteed, MPI will endeavour to preserve an ability for the REIT to purchase the property at some point in the future."
The REIT also stated the decision to terminate the purchase allows it to reduce its variable-rate debt exposure by $30 million, consistent with its stated strategy.
In March, MPI had agreed to extend the outside date for the REIT's option to purchase Fifth + Bank by six months to Dec. 31 and to extend the maturity date of the convertible development loan until Jan. 31, 2024.