Canadian Apartment Properties REIT (CAPREIT) has issued three equity offerings to raise more than $1 billion in 2019, as president and chief executive officer Mark Kenney says investors appreciate its 20-year track record of sustainable and growing distributions.
“Our last equity raise in November is the largest equity raise for a REIT or a REOC in Canadian history, including IPOs,” Kenney told RENX. “We could have sold twice the amount. We’re humbled by that and grateful to have such strong investor support.”
CAPREIT (CAR-UN-T) intends to use the proceeds of the November offering to:
* finance the acquisition of approximately $194 million of multi-residential properties;
* repay approximately $127 million of the REIT’s acquisition and operating facility, which was used to fund $88 million of recently closed acquisitions and the purchase of $39 million of Irish Residential Properties REIT (IRES) shares;
* and finance approximately $14 million to exercise existing operating lease buyouts, converting two Toronto properties to traditional fee simple property interests.
The remainder of the funds will be used to finance future acquisitions, to fund intensification opportunities within CAPREIT’s existing portfolio and for revenue-enhancing capital expenditures and general trust purposes.
CAPREIT’s performance, acquisitions
CAPREIT’s focus remains on acquiring and managing apartments in large urban centres experiencing strong population growth and rising demand for quality rental properties, according to Kenney.
Kenney said CAPREIT’s earnings continue to grow on a per-unit basis as its debt level, at around 35 per cent, is the lowest in its history.
It’s seeing solid increases in monthly rent on both turnover and renewals in Canada, the Netherlands and its investment in IRES.
CAPREIT spent $1.05 billion to acquire 1,462 suites in apartments in Canada and 1,768 in the Netherlands, as well as 5,183 manufactured home community sites in Canada, through the end of September. The Toronto-based real estate investment trust hasn’t stopped there:
* The trust acquired a four-storey, 64-suite waterfront apartment in Summerside, P.E.I. for $11.6 million in October. It was built in 2017 and fully leased last year;
* Last month, CAPREIT completed its approximately $60-million acquisition of a one-third interest in 506 new rental suites in three towers at the mixed-use Kings Club development on King Street West in downtown Toronto. It was also granted the property management contract for the residential component of the development;
* CAPREIT acquired a new seven-storey, 121-suite apartment in the Montreal suburb of Boisbriand for approximately $33.3 million in November. Occupancy was at 96.3 per cent;
* CAPREIT intends to acquire six other multiresidential properties with 604 suites for approximately $194 million this quarter. They’re located in the Greater Montréal Area, Greater Vancouver Region, Calgary and Halifax. Four of the properties are newly constructed and two represent value-add opportunities.
“We remain true to our value-add strategy of buying apartments and adding value,” said Kenney. “The majority of our Canadian acquisitions in 2019 were brand-new construction buildings.”
CAPREIT now manages 64,028 suites and sites across Canada, the Netherlands and Ireland.
It owns directly in Canada, and indirectly in Netherlands through its investment in European Residential Real Estate Investment Trust (ERES) (ERE-UN-X), 48,687 residential suites and 72 manufactured home communities with 11,675 sites.
Operating lease buyouts
CAPREIT’s portfolio includes 15 Toronto apartments obtained in 2004 through its acquisition of ResREIT. The properties were subject to operating leases Kenney said “gave CAPREIT entitlement to revenues and obligations to all expenses, but not clear title.”
It intends to buy out several of the leases.
Through accelerating the buyout of these operating leases, CAPREIT can simplify its ownership structure, increase its net asset value and provide additional liquidity and flexibility to act on further growth opportunities going forward.
“The option to exercise a predetermined buyout price on those buildings happens in Year 25 and goes on to Year 35,” Kenney explained. “There’s such significant value-add in the fair market of those properties that we’ve negotiated an early buyout.
“It stages the process so we don’t have one balloon event. Where we feel we can get a compelling enough present value discount to the 25-year options, we’re looking at doing that because it allows us to free up liquidity and finance very efficiently with CMHC.”
CAPREIT completed its first buyout of an existing operating lease on a Toronto apartment with 155 suites, converting the ownership to traditional fee simple property interest, for approximately $8.3 million in November.
Intensification of CAPREIT properties
“We have a mature portfolio, but we continue to look for ways to always add value in the existing portfolio, whether it’s through energy initiatives or revenue-maximization efforts,” said Kenney.
CAPREIT believes it can add up to 30,000 apartment units on its existing properties in the long term. While lamenting the slow process of receiving entitlements from municipalities, Kenney said 11,000 units will be in various stages of the rezoning application process in 2020.
“We remain cautious about the costs of developing,” said Kenney. “Even with our free land advantage, we want to make sure that properties pen out to very accretive opportunities.
“Once the entitlements are done, we can choose to act on them when we feel appropriate.”
CAPREIT manufactured home communities
A manufactured home is constructed almost entirely in a factory, placed on a supporting frame and transported to the building site. Residents of these communities own their homes but lease the land, which reduces the cost of ownership.
CAPREIT made two of the biggest manufactured home community portfolio acquisitions in Canadian history this year and is now the second-largest owner in the country.
“They’re slow to buy one at a time,” said Kenney. “We can never predict when portfolios will come to market, but we saw them as unique opportunities.”
CAPREIT likes manufactured home communities because they offer stable revenues and, since residents own their homes, capital requirements and maintenance needs are significantly reduced.
They also enable the REIT to have a presence in smaller markets it wouldn’t normally enter and present an opportunity to boost revenues in the future by selling homes to residents.
CAPREIT, ERES and IRES
CAPREIT completed the sale of a portfolio of 18 properties with 942 residential suites in seven urban centres in the Netherlands to ERES for approximately $250 million on Sept. 30. That deal completed the sale of all of CAPREIT’s Netherlands properties to ERES, Canada’s only European-focused multi-residential REIT.
CAPREIT is the biggest shareholder in ERES, owning just under 74 per cent.
ERES owns 122 multiresidential properties with 5,116 suites in the Netherlands, as well as two office properties in Germany and one office property in Belgium.
“We will continue to participate in supporting that entity by participating in equity issuance, but we’ll likely see our position in it drop over time,” said Kenney. “We see value for CAPREIT shareholders by being invested in ERES, but also through fee opportunities of being the property and asset manager.“
CAPREIT has set a soft target of trying to keep its European exposure to under 15 per cent. However, its investors can choose to increase their own exposure by directly investing in ERES and IRES, knowing they still have CAPREIT as a partner and manager.
There are enough compelling opportunities in the Netherlands at the moment that Kenney said ERES will remain focused on the apartment sector there.
IRES is listed on Euronext Dublin and targets multi-unit residential real estate in Dublin and other major Irish centres. It’s externally managed by subsidiaries of CAPREIT. IRES had an equity offering this year, which allowed CAPREIT to increase its ownership position to 18.3 per cent.
“We continue to be supportive of our investment in IRES, having seen that entity also grow in record numbers in 2019,” said Kenney.
“We continue to grow our exposure to IRES and are enjoying the execution of our strategy on growing fee income by being the property and asset manager.”