The latest Canadian rental apartment owner to try going public has scrapped its deal despite heavy investor demand, deciding instead to sell to a private buyer at a premium price.
Toronto-based Continuum Residential Real Estate Investment Trust filed the paperwork for an initial public offering in early October, and the deal was set to price this week. However, the company quietly ran a dual-track process for a potential sale while marketing the IPO and ultimately decided to sell to Canada’s Starlight Investments.
Continuum hoped to raise around $300-million by selling a roughly 40-per-cent stake and pricing its shares between $15.50 and $16.50. After wrapping up its marketing roadshow, the company received orders for roughly $1-billion worth of shares.
While the demand gave Continuum the potential to price above its marketing range – the hallmark of a highly successful IPO – Starlight Investments offered a price too good to turn down: $20.10 a share, valuing the REIT at $1.7-billion, including debt.
Starlight “gave us an offer that was so superior that we had to say yes,” Continuum chief executive Dan Argiros said.
The offer price translates to a 3.5-per-cent capitalization rate for Continuum’s portfolio. Cap rates have an inverse relationship to total values – the lower the cap rate, the more expensive the portfolio. Rival publicly traded companies Canadian Apartment Properties REIT and Minto Apartment REIT trade at implied cap rates of 4 per cent and 3.8 per cent, respectively.
The rich purchase price is more proof that investors are clamouring for rental apartment properties. Historically, REITs were known for paying annual yields around 5 per cent, yet Continuum was set to pay roughly 2 per cent – and the purchase price translates to an even lower rate.
Despite the steep cost, Starlight still sees value. “Portfolios of this nature and composition are few and far between in the Canadian multiresidential sector,” CEO Daniel Drimmer said in a statement. Multiresidential is the real estate sector’s term for apartments.
Continuum owns 44 apartment buildings, the majority of which are in Toronto and neighbouring Mississauga. Canadian housing developers spent years focused on building single-family homes and condominiums, leading to a shortage of rental apartment buildings.
While more rental buildings are now being constructed, population growth is outstripping the new supply, and Continuum has a 97-per-cent occupancy rate across its portfolio. Because of the tight supply, apartment-building owners have seen rents jump as high as 25 per cent when a tenant turns over.
Although the sale is a win for Continuum and its current private backers, which include CI Investments and 1832 Asset Management LP, Canada’s public markets are losing out on another new listing. Earlier this week, GFL Environmental Inc. scrapped its billion-dollar IPO, but for a different reason – weak investor demand. It is a common theme: Public markets around the world have been losing companies to private firms that are flush with cash.
Continuum’s CEO said the company was serious about an IPO, but once the deal’s early paperwork was filed, he received unsolicited interest from multiple buyers in Canada and abroad. The IPO’s order books were closed Thursday afternoon and the deal was expected to price shortly after. “The Starlight offer came in last minute,” Mr. Argiros said.
While he appreciates that an IPO would have been nice for Canadian public investors, it helped that the private buyer is a domestic organization. “What’s exciting is that another Canadian bought this portfolio,” he said.
Canadian REITs have been the hottest sector on Bay Street of late, with a rush of financings raising more than $1-billion since the start of September. REITs have benefited from falling interest rates, which sent bond yields tumbling – making the trusts’ distributions that much more compelling. The S&P/TSX Capped REIT Index currently pays an average yield of 4.5 per cent.
Apartment REITs in particular have shined. Minto went public in 2018 in a $200-million deal, and the shares have jumped 57 per cent since, before distributions.
However, it is possible that the sector’s heavy investor demand will start to wane. The prospect of a trade war truce between the United States and China has sent long-term bond yields higher in recent weeks, with the 10-year Government of Canada bond yield jumping to 1.58 per cent from a low of 1.09 per cent in August.
While many of the banks in Continuum’s underwriting syndicate did not advise on the sale to Starlight, Continuum said they will all still be paid as if the IPO had been successful. They were set to earn $16.5-million on a $300-million offering.
With a report from Sean Silcoff
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