Blackstone Inc., one of the world’s largest real estate investors, is jumping into the Toronto apartment market by bidding US$3.5-billion for rental property owner Tricon Residential Inc.
On Friday, New York-based Blackstone BX-N announced a friendly takeover offer for Tricon TCN-T, which has US$2.5-billion of apartment buildings under development in Toronto and plans to spend US$1-billion on single-family homes in the U.S. Sun Belt.
Founded in 1988, Tricon is one of Toronto’s largest rental apartment owners, with plans to build six downtown developments on transit routes in the next three to five years. The company also holds 37,000 single-family homes in cities such as Atlanta, Charlotte, N.C., Dallas, Tampa and Phoenix.
Tricon faced challenges raising the money needed to develop new properties, along with pressure to improve financial performance from an activist investor. Blackstone, which recently raised a US$30.4-billion real estate fund, said if its takeover bid is successful, Tricon will speed up construction of apartment buildings in Toronto.
“We are excited that our capital will propel Tricon’s efforts to add much needed housing supply across the U.S. and in Toronto,” said Nadeem Meghji, global co-head of Blackstone real estate, in a news release. In recent years, Blackstone made a series of investments in U.S. rental properties, on the logic that demand for homes is outpacing supply.
“Blackstone shares our values and our unwavering commitment to resident satisfaction, and we look forward to benefitting from their expertise and capital as we partner in building thriving communities,” said Gary Berman, chief executive officer of Tricon, in a news release.
Blackstone already owns approximately $14-billion of real estate in Canada, focused on logistics centres such as warehouses that serve online retailers. The fund manager, which opened an office in Toronto this year, is also investing in data centres, in expectation of increasing demand as companies incorporate artificial intelligence into their operations.
In Toronto, construction of new rental properties fell by 54 per cent in the first nine months of 2023 compared with the same period in 2021, according to a report from real estate date service Urbanation. Rental vacancy rates in the city are near historic lows at approximately 3 per cent.
“Starting off as a recovery from the pandemic, rents are now being driven to new highs on interest rates hitting their highest level in 22 years, the population increasing by a record pace, near record-low unemployment, and scarce supply,” said Shaun Hildebrand, president of Urbanation.
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Blackstone is offering $15.17 a share for Toronto-based Tricon, a 30-per-cent premium to the stock’s closing price Thursday, prior to the announcement of the offer. Blackstone currently owns approximately 11 per cent of Tricon’s shares on a fully diluted basis, after investing US$300-million in convertible preferred shares in 2020.
One of Tricon’s largest shareholders, Land & Buildings Investment Management LLC, announced an activist campaign last year aimed at boosting the company’s share price, which was below $10. The fund manager, founded by real estate analyst Jonathan Litt, previously successfully pushed for change at Hudson’s Bay Co.
In October, Land and Buildings said in a presentation that Tricon’s poor performance relative to other real estate companies reflected “poor balance sheet management, excessive overhead costs, underperforming revenue management” and excessive executive pay. In 2022, Mr. Berman’s compensation totalled US$19.8-million.
On Friday, Land and Buildings came out in support of Blackstone’s bid. In a statement, the fund manager said: “Consistent with our public presentation made in October, 2023, that highlighted an estimated 65 per cent upside, we believe this is the right outcome for all shareholders.”
Tricon’s board of directors also supports Blackstone’s bid. Peter Sacks, chair of the special committee that reviewed the offer and Tricon’s lead director, said in a news release the real estate company ran a sale process and “concluded that the transaction with Blackstone is in the best interests of Tricon and its shareholders.”
Blackstone’s offer for Tricon includes the right to match any superior bid from a rival company. If Tricon’s board accepts a richer offer prior to March 3, the company will pay Blackstone a US$61.3-million termination fee, or less than 2 per cent of the transaction’s value.
The termination fee doubles to US$122.8-million if Tricon opts for another suitor after March 3, a level consistent with the fees seen in other large takeovers. If Blackstone terminates the takeover, it will pay Tricon a US$526-million reverse break fee.
On Friday, Tricon’s stock price closed up 27 per cent at $14.83 on the Toronto Stock Exchange, slightly below Blackstone’s offer.
Blackstone is one of the world’s largest asset managers, overseeing approximately US$1-trillion for clients, including US$332-billion of real estate. In 2021, Blackstone acquired Home Partners of America, a single-family home landlord that offers rent-to-own contracts, in a US$6-billion transaction.