Some of the largest fund managers in the world are snapping up out-of-favour real estate investment trusts.Spencer Colby/The Globe and Mail
For almost a year, investors have been steering clear of rental real estate owners, on expectations that a property bubble was about to burst.
But the boom times for apartment building owners never turned into a bust.
Now some of the largest fund managers in the world, along with experienced property developers, are snapping up out-of-favour real estate investment trusts. Last week, Singaporean sovereign wealth fund GIC teamed up with InterRent REIT executive chair Mike McGahan to bid $2-billion for the Ottawa-based owner of 12,000 apartment units across the country.
The InterRent takeover offer, prompted by a successful activist campaign from Anson Funds, has analysts urging investors to review their pessimistic stands on a sector that has underperformed office, retail and industrial REITs facing significant economic headwinds.
In October, 2024, the federal government rocked the rental property market by cutting back on immigration, foreign students and temporary workers.
The price of InterRent REIT and six other apartment-focused trusts plunged as investors anticipated occupancy declining and rental income dropping for the first time in living memory.
REITs that commanded a premium to their net asset value (NAV) during a red-hot real estate market suddenly began trading at 20-per-cent-plus discounts to NAV, on expectations that landlords would be forced to cut rents to attract tenants.
The slump has yet to materialize, as rental REITs continue to bump up rents in buildings filled with tenants.
Occupancy rates at InterRent’s apartments, many of which house students near colleges and universities, rose slightly over the past year, with 96.8 per cent of units filled at the end of March. The average rent jumped 6.2 per cent year-over-year, to $1,723 a month. Larger peers such as Canadian Apartment Properties REIT, which owns 49,000 units, posted similar results.
Yet apartment REITs continued to trade at valuations that implied floor upon floor of their buildings sat empty.
In March, the 30-per-cent-plus gap between where InterRent units traded and what the portfolio could be worth to a private owner, such as a pension plan, prompted hedge fund Anson to launch a campaign pressing for the REIT’s sale.
Last week, Mr. McGahan, InterRent’s former chief executive officer and owner of a 7.8-per-cent stake in the REIT, teamed up with GIC to bid $13.55 a unit for the REIT. The offer is priced at a 10-per-cent discount to InterRent’s NAV. GIC manages US$800-billion of Singapore’s foreign reserves and is one of the world’s largest real estate investors.
Analysts say the InterRent bid and Anson’s successful activist campaign show that the entire rental property market deserves more respect from investors.
“The transaction should, we believe, cause a knock-on valuation effect through the remainder of the Canadian multifamily REITs,” analysts Dean Wilkinson and Sumayya Syed at CIBC Capital Markets said in a report. They said investors need to revisit “unwarranted fears of declining population in Canada owing to comments from the federal government – declines in population that we have yet, and believe are unlikely, to see.”
Federal Liberal Leader Mark Carney won the recent election campaign on a platform that included keeping immigration at “sustainable levels.”
From last October’s government announcement to this February, ahead of Anson’s campaign at InterRent, apartment REITs underperformed trusts that own office buildings, shopping malls and warehouses by 16 per cent.
If U.S. President Donald Trump’s trade war sparks a recession, analyst Mario Saric at Bank of Nova Scotia said in a report, the multifamily REITs represent a safe harbour for investors. He said that historically, rental property owners have “outperformed during a weak economy and we’d expect the same this time around.”
Singapore’s GIC is following in the footsteps of another global investor, New York-based Blackstone Inc., by acquiring Canadian rental properties. Last April, Blackstone bought Toronto-based Tricon Residential Inc. for US$3.5-billion, a price that was 11 per cent below Tricon’s NAV.
Boards and executives at rental REITs are also signalling that they believe fears of a downturn in the sector are misplaced by aggressively buying back their own units.
Canadian Apartment Properties REIT, the country’s largest publicly traded apartment owner, bought $88-million of its own units in the first three months of the year at an average price of $42 each. The REIT said its NAV is $56 a unit. In a quarterly financial report, the REIT’s CEO, Mark Kenney, said that by buying back units, “we can effectively achieve higher returns by investing in our own portfolio, versus acquiring comparable assets in the private market.”