Sam Kolias, who manages one of the country’s largest residential landlords, got a deal he couldn’t avoid – not an unusual situation in the red-hot apartment sector.
Housing may get the headlines, but apartments are trading at prices that are the envy of investors in every other property class, including office, industrial and retail.
Calgary-based Boardwalk Investment Trust said it is selling its 1,685 units in Windsor to some private REIT in a deal worth $136 million. That values the units at $80,800 each or $106 per sq . ft .. The deal, which closes in September, includes $20.5 million in debt.
“It was unsolicited, but we thought the cost was a fair one. We were really happy,” said Kolias, the chief executive at Boardwalk, which currently owns a lot more than 34,000 residential units.
Boardwalk didn\’t disclose the customer, but sources tell the Financial Post that it\’s Skyline Apartment REIT, which on its website said hello now control 12,447 apartment units in Canada and it is paying out a 7.4-per-cent distribution rate to its unitholders.
Kolias said the deal’s capitalization rate – net operating income in accordance with property value – was higher than the implied cap rate of Boardwalk’s publicly traded units. The low the ratio, the larger the value of the property. A five-per-cent cap rate indicates a property will pay for itself in 20 years.
Getting an offer for that Windsor portfolio that valued it at a lot more than what its very own units sell for gives Boardwalk the chance to use the net proceeds to pay a special distribution or repurchase after which cancel its shares.
Kolias said low interest have been a strong driver from the apartment market because it’s be a major challenge to locate assets that yield a good return. “Apartments historically have been pretty stable and predictable,” he said.
Despite the sale, Boardwalk continues to try to bid on assets as it goes after higher-quality newer buildings, however it has been shut out so far this year as transaction prices have proven excessive for the REIT.
The trust has become looking at development opportunities it said have become viable according to today’s high property prices. Within the last year, it has built two buildings on its existing properties.
“Boardwalk takes some chips off the table,” said Derek Lobo, leader of Rock Advisors, one of the country’s largest apartment brokerage firms.
Lobo said the reduced interest rates make apartments easily profitable, noting investors purchasing a deal at 5.43 percent today can finance it with debt as low as 2.7 per cent, with the difference in that rate of interest spread profit.
“There is a shortage of available properties. This can be the only available 1,600-unit portfolio in the entire country available this season,” Lobo said. “Buyers are more than prepared to go to Windsor and pay for something like this.”
He notes that building a similar apartment portfolio towards the one Boardwalk sold would probably cost more than double the amount on a per-unit basis.
Ross Moore, national research director of CBRE in Canada, said the need for existing apartments will remain strong because supply is limited when it comes to new construction.
“When you are building anything, you need to be spot on,” he explained. “You go over on any costs, your return winds up being under three percent.”