Canadian real-estate speculators have been buying distressed U.S. properties.JONATHAN ERNST/Reuters
One of the busiest spots for Canadian IPOs right now is the U.S. real-estate market.
Canadian real-estate speculators have been on a spending spree in the United States over the past three years, buying up billions of dollars of foreclosed homes from Florida to California with an eye to renting those properties out and eventually cashing in on a rebound in home prices. Several companies have since gone public or are now laying the groundwork for initial public offerings.
The latest player to enter the fray is Toronto-based Delavaco Properties Inc., which began buying foreclosed homes in Florida in 2010 and is now preparing to go public as a real estate investment trust focused entirely on the U.S. distressed housing market.
The initial public offering is slated for early 2013 on the Toronto Stock Exchange, and will look to raise between $40-million and $50-million. Andy DeFrancesco, the private-equity investor who founded Delavaco Properties, expects the listing to be the first REIT on the TSX focused solely on single-family homes in the U.S. The company recently brought a group of Canadian bank analysts and investors to tour its properties in Florida. It has chosen GMP Securities to lead the IPO.
"We expect to be the first to market," Mr. DeFrancesco said in an interview Thursday. The company has amassed a portfolio of 700 distressed homes in Miami, Tampa Bay and Atlanta, from which it plans to generate rental revenue until the housing market picks up again in those cities. "Basically, we clip a really healthy coupon while we wait for the real-estate market to turn around."
It's an opportunistic market, and an increasingly crowded one. In addition to a dozen or so major U.S. private-equity firms buying up distressed homes throughout the country, at least six Canadian players have entered the market with IPOs or plans to list their companies or funds. They are targeting everything from single-family homes to apartments and commercial properties that have been battered by the drop in real-estate values since 2008.
The Canadian players include Tricon Capital Group, Slate Properties Inc., Timbercreek Asset Management and a handful of other Canadian-backed funds.
"It's starting to grow," Mr. DeFrancesco said of the competition private-equity players face for properties. "When we got into this business, there was nobody.There was one [company] that was doing it down here that we would bump up against."
However, since 2010, the market has exploded. Private-equity funds are planning to invest more than $6-billion on distressed homes in the U.S., according to Bloomberg data. Some of the names include Arizona-based Colony Capital LLC, which wants to acquire $1.5-billion of rental homes in Arizona, Nevada and California by the second quarter of 2013.
Arizona real-estate company Treehouse Group LLC is looking to buy $1.5-billion of single-family homes, while others such as KKR & Co., New York-based GTIS Partners, and Los Angeles-based Oaktree Capital Group have also talked of spending hundreds of millions to buy up swaths of homes.
It's a risky play, according to analysts, who note the costs of carrying properties can be steep.
Though homes can be purchased for 40 or 50 cents on the dollar from their previous selling price, the cost of managing and maintaining homes is steeper than operating apartment buildings, which are closer together and similar in age and design.
Mr. DeFrancesco said his company has inspected every home it purchases and looks to buy strategically in the markets it has acquired properties. "We cluster the homes, so we stay within a very specific area, and we try to buy as many homes in that area as possible," he said., which helps keep down maintenance costs. "It's a very focused buying plan."
Home-ownership rates in the U.S. have fallen to their lowest point since the mid-1990s after foreclosures swept through the country following the housing crisis, which saw lenders relax their underwriting standards as consumers amassed record amounts of debt, which eventually led to defaults.
The many investors now buying up swaths of U.S. real estate are pursuing different strategies, from large homes to commercial properties. Mr. DeFrancesco said his company is looking specifically at middle-class homes, which are rented to families through U.S. government housing-subsidy programs. Those programs let the company collect the rent directly from the government, which cuts down on management time and costs, he said. The company expects to have as many as 2,000 properties by the end of 2013.
"You're talking about very working class neighbourhoods is what we're buying," Mr. DeFrancesco said.
Grant Robertson