Toronto-based H&R confirmed it is in talks to sell part of its portfolio to Blackstone Inc.Mike Segar/Reuters
Blackstone Inc. BX-N, a great white shark of money management, is once again circling an unloved Canadian apartment owner, H&R Real Estate Investment Trust HR-UN-T.
Last Thursday, Toronto-based H&R confirmed it is in talks to sell part of its $6.5-billion portfolio to Blackstone, which has US$1.3-trillion of assets and a sterling reputation for snapping up Canadian properties when the real estate values hit cyclical lows. Analysts say Blackstone is targeting H&R’s 26 apartment buildings, many of which are in the New York area, and possibly its warehouses.
If a deal results, H&R would be the latest and unlikely the last publicly traded REIT to embrace private ownership of its properties.
Who else would attract sharks? H&R peers such as Halifax-based Killam Apartment REIT KMP-UN-T and Boardwalk REIT BEI-UN-T, which is headquartered in Calgary, are complaining they get no love from investors. Both make enticing takeover targets.
What do deep-pocketed asset managers such as Blackstone see in beaten-down apartment REITs that public investors are missing? In a line, a future that’s far brighter than the present.
H&R REIT restarts talks with U.S. fund manager Blackstone
New York-based Blackstone and other institutional investors are snapping up apartment REITs because they look past the short-term noise around interest rates, trade deals and falling immigration.
They make generational investments on themes such as Canada as a continued destination for skilled workers – despite tighter immigration rules, the federal government predicts 370,000 people will arrive in 2027 and 2028.
A few years back, these institutions put massive amounts of capital to work on another trend that now seems obvious, the continued expansion of warehouses that support e-commerce. In 2018, Blackstone paid $3.8-billion for Pure Industrial REIT, which owned 168 logistics centres across North America.
Now apartment REITs are the targets, as investors like Blackstone try to be early to the party, buying quality buildings when others are walking away. And the mom-and-pop investors who flocked to apartment REITs five years ago, when interest rates were low, are definitely moving out.
H&R, Killam and Boardwalk units all trade at significant discounts to what the REITs’ executives say is the underlying value of their assets.
The same discounted valuations haunted Minto Apartment REIT MI-UN-T until January. That’s when the REIT’s founders, the Ottawa-based Greenberg family, teamed with an arm of Connor, Clark & Lunn Financial Group and offered to take the portfolio private for $3.3-billion.
The same dynamic played out at Ottawa-based InterRent REIT IIP-UN-T. Last May, after being targeted by an activist investor, the apartment owner’s founder partnered with Singapore sovereign wealth fund GIC on a $2-billion takeover.
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Earlier this month, executives from Boardwalk and Killam took the stage in New York at an investor conference run by RBC Capital Markets. Their consistent message is that the rental property market is at the bottom of the cycle, poised for a turnaround.
Boardwalk management, with extensive holdings in Western Canada, said “we are close to a cyclical bottom,” according to a report on the event by RBC Capital Markets analyst Jimmy Shan.
“Construction starts are declining and a return to positive population growth in 2027 could see the necessary inflection,” Mr. Shan said.
Killam, with a $5-billion portfolio heavily weighted to apartments in Nova Scotia and New Brunswick, pointed out that increased spending on defence, including adding more members to the Canadian Armed Forces, will hike demand for rental housing in the Maritimes.
Retail investors are starting to pay attention to Boardwalk and Killam’s argument that rental market dynamics are improving. The price of units in both apartment REITs rose over the past six months. However, these portfolios continue to trade at a discount to their underlying value that attracts the attention of institutional investors.
One fund manager, Toronto-based Vision Capital Corp., has a long history of making outsized returns from taking stakes in REITs that trade at a discount, then talking up the potential for takeovers.
In 2021, Vision bought units in First Capital REIT FCR-UN-T, one of the country’s largest publicly traded shopping mall owners. Two years later, Vision executives highlighted the company at the Capitalize for Kids’ Investors Conference, which is often a launch pad for activist campaigns.
In April, Weston family-controlled Choice Properties REIT CHP-UN-T and KingSett Capital made a friendly $5.2-billion takeover of First Capital. Vision has made a 109-per-cent return on its investment since disclosing it at the conference.
Over its 17-year history, Vision’s real estate-focused flagship fund has sold 25 investments into takeovers, with the purchases coming at a 29-per-cent average premium.
The lesson for mom-and-pop investors is there is money to be made when the big fish in real estate start feeding on beaten-down REITs.