Northern Property deal for True North Apartments creates third-largest trust in ‘bulletproof’ apartment sector

By Garry Marr, Financial Post

Investment in the Canadian apartment sector is heating up across the country as vacancy rates remain tight and home prices continue to be out of reach for some households.

Calgary-based Northern Property Real Estate Investment Trust pulled off one of the biggest real estate deals of the year on Monday, buying True North Apartment REIT and a 4,650-suite apartment portfolio that will catapult it to the third-largest publicly traded residential landlord in the country with a market capitalization of $1.2 billion.

Canadian Apartment Properties, based in Toronto, with a market cap of almost $3.3 billion, and Boardwalk Real Estate Investment Trust, also based in Calgary, with a market cap of $2.97 billion, are the two biggest.

“We are generally seeing record apartment pricing across the country,” said Ross Moore, director of research for CBRE in Canada. “Everybody loves apartments. Now the pension funds are in there, the foreign investors, the REITs, the private investors love it. It’s just bulletproof. Your buildings are full and they have been full for the last 10 years.”

The deal announced by Northern Property, which gives it a portfolio of about 25,000 residential units spanning eight provinces and two territories, will see it acquire True North Apartment REIT for .3908 Northern Property trusts units for each True North unit. Northern Property also acquires a separate portfolio from Starlight Investments Ltd and a joint venture Starlight has with the Public Sector Pension Investment Board.

Under the proposal, a new company will be created, called Northview Apartment REIT. Daniel Drimmer, chairman of Truth North and a controlling owner of Starlight, will hold a 14.5 per cent stake in the new Northview and be its largest unitholder.

Todd Cook, chief executive of Northern Property, will continue on in the same job at Northview. He said a key to deal is creating a company that stretches across the country.

“The real reason to do this is the national platform, the diversification. We get access to Eastern Canada that we didn’t previously have and True North unitholders get access to Canada’s North and Western Canada,” said Cook.

He said the company’s vacancy rate has been impacted by the price of oil, but added its recently released second-quarter results were still the strongest on record for Northern Property REIT.

“That’s part of being invested in the resource sector. (The company’s) unit price trades like an oil stock and were not an oil stock. Our diversification into Northwest Territories, Nunavut, southern British Columbia and Newfoundland has all been designed to reduce our risk and stabilize our results. The market just hasn’t rewarded us for that.”

The price on the 4,650 portfolio was based on a capitalization rate of 5.5 per cent, an indication of the strength of the demand of the apartment market.  The lower the ratio, the higher the value of the property.  A five-per-cent cap rate indicates a property will pay for itself in 20 years.

The valuation of the deal is in the same range as a $136 million transaction announced in July by Boardwalk REIT which will see it sell its 1,685 units in Windsor at a cap rate of 5.43%.

“The benchmark is the Boardwalk sale and the prices for these were in the zone,” said Cook, noting his transaction has been in the works since March and Boardwalk’s sale just confirmed the pricing on his deal was correct.

Cook said low-interest rates continue to drive real estate prices to record highs across all sectors. But he also thinks it doesn’t hurt his business that housing has become unaffordable for some.

“In certain markets the price of housing continues to increase which makes the dream we all had when we were young of owning our own house less of a reality,” said Cook.

The deal was panned by investors Monday who drove the stock down $1.94 to $21.09. RBC Capital Markets analyst Neil Downey lowered his 12-month target price on the stock by $2 to $25.

He said, in a note to investors, “the transactions increase debt (currently 51% for Northern Property; pro-forma at 59%),  they appear to be dilutive relative to current funds from operations per unit expectations and appear to be net asset dilutive by $1.50 per unit.”

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