Minto Properties, Inc. (MPI), a Greenberg family real estate company with more than 60 years’ experience, is preparing to launch the Minto Apartment REIT with an initial raise of $200M. The REIT is unincorporated and open-ended, registered in Ontario. The REIT plans to concentrate on urban areas in Canada. MPI will retain majority ownership of the REIT and will provide certain fee-paid support services for administration, development and construction.
The initial offering will consist of approximately 13.8M to 16.0M units priced between $12.50 and $14.50 per unit, representing about 39.3 percent of total units. The remaining 60.9 percent (22.9M Class B units) will be retained (the retained interest) by MPI. The retained interest will drop to 54.9 percent if underwriters exercise the Over-Allotment Option in full. Retained interest units will not trade during an 18-month lock-up period following the IPO closing. Class B units will have special voting units attached that provide one vote per unit. Units will trade as “MLUN” on the Toronto Stock Exchange.
The starting portfolio will consist of 22 multi-residential rental properties with 4,279 suites as follows:
- Ottawa: 14 properties, 3,060 suites, representing 63 percent of forecast NOI (net operating income) and 59 percent of appraisal value
- Toronto: four properties, 824 suites, representing 30 percent of forecast NOI and 34 percent of appraisal value
- Edmonton: three properties, 251 suites, representing 4 percent of forecast NOI and 3 percent of appraisal value
- Calgary: one property, 144 suites, representing 3 percent of forecast NOI and 4 percent of appraisal value
These properties are 98 percent occupied with an average monthly rent of $1,358, the highest in-place rent among public peers. They are received investment worth $29M in 2017 and $55M in the last three years. The fair market value of these properties was assessed at $1.179B as of May 22, 2018.
Minto REIT plans to employ a conservative AFFO payout ratio and leverage strategy. Financing will consist of:
- Long-term fixed-rate mortgages (95 percent): For the stabilized properties, the weighted average effective interest rate is estimated at 3.17 percent with a 6.2-year maturity. About 77 percent of the fixed-rate financing will consist of CMHC-(Canadian Mortgage and Housing Corporation) insured mortgage debt at interest rates significantly below that of conventional mortgage lenders. The insured mortgages will have amortization periods between 25 and 40 years, protecting the REIT from rising interest rates.
- Short-term floating-rate debit (5 percent): A $150M revolving credit facility from two Canadian chartered banks for acquisitions, repositioning and liquidity. The available balance of the short-term credit facility is based on a predefined minimum debt service coverage ratio and maximum loan-to-value ratio.
Total debt at IPO closing will total about $520M, translating to a 46 percent debt-to-gross book value ratio, with the final targeted range of 50 to 55 percent. At closing, $229.8M of the $520M in debt will be retained by MPI in the form of Class C units that will receive priority distributions.
Minto Apartment REIT is pursuing several growth avenues:
- Organic factors: Minto predicts a gain-to-lease on existing rents – that is, higher gross potential rent based on rent hikes upon vacancies and renewals. Part of these higher rents will be driven by making in-suite and common area improvements. In addition, Minto will intensify current holdings through new construction and rehabilitation.
- External factors: Minto Apartment REIT will have a strategic alliance with its Minto Properties (MP) sponsor giving the REIT the right of first opportunity to purchase sponsor property. The REIT will have access to MP financial strength, including $510M proportionate interest in $1.7B of high-quality multi-family assets for which MP is the managing investor. MP has approximately 1,500 suites in the development pipeline with a commitment of $800M. The Canadian multi-residential factor is highly fragmented, providing consolidation opportunities among high-quality urban properties throughout Canada. MP has a strong record of sourcing and executing real estate transaction, having closed $1.9B since 2010.
Opportunities for Investors
Investors in the Minto Apartment REIT have the opportunity to earn income in the urban multi-residential sector in Canada. Minto considers this sector to be attractive due to risk-adjusted returns superior to those from other asset classes. Investors benefit from a portfolio of properties with:
- Shorter duration leases: a hedge against inflation
- Diverse tenant base: limiting tenant concentration risk
- Defensive asset class: protection against recession, with limited rental supply growth and declining vacancy rates bolstering rental rates
- Positive supply/demand fundamentals: arising from barriers to entry, demographic trends and stringent regulation. Diminishing house affordability and tighter mortgage standards favor growth of rental market.
- Low-cost financing: insured by the Canada Mortgage and Housing Corporation
- Strong risk-adjusted returns: historically strong returns with relatively low risk
- Fragmented ownership: opportunity for consolidation
- Extensive network of industry relationships: MP has extensive relationships that will facilitate off-market transactions with limited competitive bidding.
- Strong financials: The REIT’s growth prospects will benefit from a strong balance sheet and conservative payout policy
The REIT plans to pay sustainable and predictable monthly cash distributions with an annual yield between 2.85 and 3.10 percent, translating into a payout ratio of 65 per cent of forecasted adjusted funds from operation (AFFO). For the 12-month period ending June 30, 2019, AFFO is forecast at $23.2M and NOI at $48.7M.
The Minto Apartment REIT appears to be an attractive play in the Canadian multi-residential real estate sector. The majority ownership by Minto Properties, the high-quality portfolio and reasonable IPO pricing bode well for this investment and should be considered by conservative investors seeking diversification with exposure to this sector.