Two of Canada's largest apartment landlords are merging in a cash-and-units deal worth more than $500-million that could be the first sign of consolidation in the booming market for real estate investment trusts.
Canadian Apartment Properties REIT announced yesterday that it has agreed to buy smaller rival Residential Equities REIT in a transaction that will create a company with 24,328 units, concentrated in the Toronto market, but with properties in a variety of other major cities.
Under the terms of the deal, approved by ResREIT's board, CAP REIT plans to pay a combination of cash and units for all outstanding ResREIT units. Unitholders may take $18.60 in cash for each ResREIT unit, up to a maximum of $175-million, or 1.216 units of CAP REIT. ResREIT unitholders will be asked to approve the deal at a special meeting in May. The deal also includes the assumption of $400-million in debt.
Yesterday's announcement sent units of Toronto-based ResREIT up more than 10 per cent to close at $18.65 on the Toronto Stock Exchange. Units of CAP REIT finished the day up 27 cents at $15.72.
News of the merger comes as another large residential landlord, Calgary's Boardwalk Equities Inc., is preparing to convert into a trust. Boardwalk, which has more than 31,000 units, will hold a shareholder meeting in April on the conversion.
It is also widely expected that the Ontario government will address the issue of investor liability for the trust sector this spring -- a move that will likely bring more large institutional investors into the market that will be looking for REITs with larger public floats and the improved liquidity that brings. Alberta's Revenue Minister Greg Melchin also has indicated that he will introduce legislation during the spring session that will limit liability for unitholders of publicly traded income trusts.
"We have been talking about this combination since we both went public," Thomas Schwartz, CAP REIT's chief executive officer, said in an interview yesterday.
ResREIT CEO Dino Chiesa said he plans to stay on as co-CEO until the end of the year and will be vice-chairman of the board after that.
Mr. Schwartz said the deal gives his firm access to a portfolio with prime locations at a time when competition for apartment buildings is fierce.
But mergers are not to everyone's taste. Harry Rannala, who follows the real estate sector for Raymond James in Toronto, said with real estate valuations at high levels, a wave of consolidations at top-dollar prices would be a concern.
"As every real estate cycle matures, you start to see everything become more expensive and you see fewer opportunities and the players become more and more aggressive, and values keep being pushed up," he explained. "Is it sustainable? That's my question. Are these values sustainable?"