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A remarkable debut for Minto Apartment REIT

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It’s been one of the biggest surprises of the capital region’s investment universe. A real estate investment trust by the name of Minto Apartment has seen the value of its equity outpace all but marijuana stocks since it began trading last July 3 on the Toronto Stock Exchange.

Minto Apartment REIT closed at $19.84 per unit Monday — up nearly 37 per cent since its initial public offering, slightly better even than Ottawa’s e-commerce technology star, Shopify, over the same period.

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The disconnect here is that investment vehicles incorporating a bunch of apartments are generally pretty stable, often boring. The Minto Apartment REIT was formed by carving out nearly 4,300 suites owned by Minto Properties Inc.

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Minto, the real estate firm controlled by the Greenberg family, diluted its 100 per cent ownership in the REIT to 57 per cent last year by selling $230 million worth of investment units to ordinary investors through the Toronto Stock Exchange.

This IPO priced the units at $14.50 each. In exchange, the REIT promised to pay 41 cents per unit from its profits each year — for an initial yield of 2.8 per cent. With any luck, the value of the units themselves would rise too.

Pretty simple.

So what turbocharged the REIT?

First, good timing.

Apartment rents have been rising quickly, thanks to shrinking vacancy rates and exorbitant house prices that have put home ownership out of reach for many.

REITs rely heavily on apartment turnover to boost revenues. When a new renter takes over an apartment, for instance, Minto Apartment REIT can boost the rent to current market rates.

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During the last six months of 2018, for instance, the REIT signed more than 600 new leases for apartments in Toronto, Ottawa and Alberta. The average price hike per apartment was 7.6 per cent, ranging from 6.7 per cent in Ottawa to 12.5 per cent in Toronto.

Diversification also juiced the REIT’s price.  Minto launched its Apartment REIT with a view toward acquiring many new properties, then using its long experience to refurbish or transform the latter — allowing for higher rents and revenues. In 2014, for instance, Minto profitably converted a hotel a downtown Ottawa hotel into Minto one80five, into a 417-suite residential complex.

Diversification was the rationale behind Minto Apartment’s largest purchase to date — a $209-million deal, the details of which were published Tuesday, involving some 1,000 apartments in Montreal and 400-plus in Toronto.

The transactions are expected to close early next month. They will increase the size of the REIT’s portfolio by nearly one-third and mark an initial foray into Montreal. Assuming the paperwork goes through without a hitch, the REIT’s 3,060 Ottawa apartments will make up just half the total (compared with 72 per cent last July), with Toronto and Montreal accounting for 21 per cent and 17 per cent respectively.

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To help pay for the new apartments, the REIT plans to issue 8.8 million new units (assuming the underwriters exercise all their options) for gross proceeds of $172 million. The balance of the purchase price will be made up through the assumption of mortgages.  This will bring Minto Properties’ stake in the REIT to about 46 per cent.

The Toronto and Montreal purchases illustrate two separate approaches by the REIT.  The Toronto property — at Leslie Street and York Mills Road in the north-central part of the city — is part of privately held Minto Properties Inc., an entity owned by the Greenbergs. The REIT paid $75 million for its share of the apartment complex based on independent, third-party appraisal. Nine years ago Minto Properties shelled out slightly less than $25 million for its share of the same complex.

The REIT is obviously betting it can improve the value of the Leslie-York Mills property through a combination of upgrades and higher prices. At the same time, Minto Properties will be able to pocket some profits after deducting the costs of refurbishment and other expenses.

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In sharp contrast in Montreal, Minto Apartment REIT joined forces with I.G. Investment Management to buy 1,400 apartments at 4850-4874 Côte-des-Neiges Road from an independent firm, Ivanhoe Cambridge. The REIT will pay $134 million for its 50-per-cent share.

Investors thinking about buying some units in Minto Apartment REIT should probably pause here to consider some of the risks.

A big one concerns the economic cycle. A recession or slower growth generally would naturally hurt the REIT’s ability to raise rents and increase revenues.

Minto Apartment REIT is not the only real estate investment vehicle to benefit from recent economic trends, suggesting smart management goes only so far in explaining the recent jump in unit prices.

Consider the performance of investments in a couple of other REITs with a strong presence in the capital region: InterRent REIT (a partner with Trinity Development founder John Ruddy at 900 Albert St.) saw the value of its equity jump 28 per cent between July 3 and April 8 while Dream Industrial REIT (think Zibi, the development just north of LeBreton Flats) experienced a gain of 13 per cent over the same period.

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And, while Minto Apartment REIT priced its initial public offering last July at $14.50 per unit, it ended its first day of trading at $15.77 — a 26 per cent gain since July 3 to make it comparable with the other REITs.

Another way to look at it — the Greenberg family left a little money on the table for the investing public. Now it’s up to the managers of the Minto Apartment REIT to show just how much talent they really have for improving the value of their assets — current and future.


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