In Canada, investors have been pushed into publicly traded real estate companies, because REITs tend to pay distributions worth 5 per cent to 6 per cent annually.
Another rental apartment owner is looking to go public, capitalizing on a shortage of rental units in the Greater Toronto Area and a hot market for high-yield stocks.
Toronto-based Continuum Residential Real Estate Investment Trust has filed the paperwork for an initial public offering and is looking to raise $300-million, according to people familiar with the deal. The Globe and Mail is keeping their names confidential because they were not authorized to speak publicly. The company currently owns 44 apartment buildings, the majority of which are in Toronto and Mississauga.
Continuum is launching its deal into a strong market. REITs have been one of the hottest sectors on the Toronto Stock Exchange this year, with the S&P/TSX Capped REIT sub-index delivering a 25-per-cent return, including dividends, since January. The broader TSX has delivered an equivalent return of 17 per cent.
With roughly US$15-trillion in negative-yielding debt currently held by investors around the world, many institutional funds and retail stock pickers are looking to invest in dividend-paying companies that deliver some stable income. In Canada, this trend has pushed investors into publicly traded real estate companies, because REITs tend to pay distributions worth 5 per cent to 6 per cent annually. It has also benefited sectors such as utilities and telecommunications.
Within the REIT sector, rental apartment buildings have been one of the hottest asset classes – particularly properties located in major urban markets. This trend was behind the success of Minto Apartment REIT’s $200-million initial public offering (IPO) in 2018, which generated $900-million in demand.
For many years, Canadian housing developers focused on building single-family homes and condominiums, leading to a shortage of rental apartment buildings. Although rental buildings are now being constructed to correct the imbalance, population growth has been outstripping the new supply of rental units, leading to premium valuations for existing properties.
In a report on Canada’s rental market released last week, Royal Bank of Canada economist Robert Hogue concluded that the Toronto region – where Continuum is based – faces the largest apartment rental shortage of any major market in Canada, owing to inadequate new construction and soaring population growth.
He estimated that Toronto needs 53,500 new rental units over the next two years, or 26,800 a year, but construction activity is far from reaching that target.
Many of the buildings owned by rental apartment REITs are older and have long-standing tenants – which means they are subject to rent control in Ontario – but the REITs have shown that rents can jump when there is tenant turnover. In some Toronto properties, rents have jumped as much as 25 per cent because the supply of rental stock is so low relative to demand.
Given these dynamics, apartment REITs – which are known as multifamily REITs in the real estate industry – have watched their values soared. Canadian Apartment Properties REIT, which has 158,237 suites and an average occupancy of 98.3 per cent across its entire portfolio, has delivered a total return, including dividends, of 139 per cent since the start of 2016.
The success of Minto’s IPO last year has also encouraged rental building owners to consider going public. The deal priced at the high end of its marketing range, owing to heavy demand from institutional investors, and since the REIT started trading in July, 2018, it has delivered a total return of 64 per cent.
Continuum is a private REIT created in 2014 after the restructuring of an investment fund that was focused on real estate. The company is run by Daniel Argiros, who co-founded Conundrum Capital Corporation.
Continuum’s real estate portfolio has been valued at $1.5-billion, and its board will include figures such as John Ruffolo, the former head of OMERS Ventures, and Betty DeVita, the former head of MasterCard Canada. Desjardins Securities and CIBC World Markets are co-leading the IPO.
Continuum declined to comment for this story.
With a report from Janet McFarland
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Tim Kiladze