Private equity investors have snapped up one of the largest blocks of privately owned apartment buildings in Canada after its owners decided not to test the public market's appetite for another real estate offering.
The $182-million sale of Timbercreek Real Estate Investment Trust is the latest in a string of deals in the apartment sector, a traditionally quiet segment of the commercial real estate market where returns are steady and predictable, but cash yields are thin.
Apartment buildings - there are about 100,000 in Canada - have attracted interest from buyers from as far away as Kuwait, largely because they held their value through the recession at a time when other types of real estate, such as office buildings and shopping centres, saw prices drop.
That stability is in part because apartment owners were able to access new debt inexpensively through Canada Mortgage and Housing Corp. - meaning they were able to refinance during the credit crisis, preventing fire sales at a time when other property owners found debt markets completely closed.
"This is an asset class that is clearly drawing attention from around the globe," said Dennis Mitchell, vice-president and senior portfolio manager at Sentry Investments. "And if you look at the real estate companies that really knocked it out of the park this earnings season, many of them were multiresidential REITs."
All of the units in privately held Timbercreek - which owns 5,112 units in 62 buildings in Manitoba, Ontario, Quebec and Nova Scotia - were tendered to a partnership led by Regina-based asset manager Greystone Managed Investments Inc. The price is a 15-per-cent premium to the REIT's net asset value. Timbercreek will continue to manage the buildings.
Greystone had $31.9-billion under management before the deal, about $4.4-billion of that in real estate.
While large private and institutional investors are keen to own apartment buildings, RBC Dominion Securities analyst Neil Downey said it's often not worth their time to buy them one at a time. So when a large portfolio is put into play, there is a high degree of interest.
"Buildings can be tricky for large funds because a lot depends on management, and when you buy buildings sometimes you need to make some investments," he said. "But the flip side is if there is an opportunity to buy something that has already been aggregated [into a large portfolio] there is some real value for you there as a buyer."
It's been a difficult year for initial public offerings of all sorts. TransGlobe Apartment REIT raised $247-million in its IPO, but its units have traded sideways since their May debut and are down 10 cents from their initial price of $10.
Several planned offerings have shelved until conditions improve. Porter Airlines pulled its plan this summer, while ING Real opted to sell its portfolio of industrial properties rather than spin them out in an IPO and risk an unreceptive welcome on Bay Street.
Timbercreek chief executive officer Blair Tamblyn said the sale was under consideration since last year, when the board decided it would be increasingly difficult to achieve its goal of 8 per cent returns because more investors were crowding into the apartment sector.