Residential real estate investment firm Tricon Capital Group Inc. is jumping into the U.S. apartment market with the US$1.4-billion purchase of 23 apartment rental properties, saying the portfolio will become a platform to launch further growth in the multi-family rental space.
The Toronto-based firm already has a portfolio of over 17,000 single-family rental houses across southern U.S. states, but announced this week it will develop a new investment platform based on multifamily rental apartment units.
To launch the venture, Tricon announced late Tuesday it will buy the Starlight U.S. Multi-Family (No. 5) Core Fund, an investment fund launched by Toronto-based Starlight Investments in 2016. The US$1.4-billion price tag includes US$916-million in assumed debt and a US$496-million payment funded by issuing new Tricon common shares.
The Starlight fund has 23 properties stretched across eight Sun Belt states from North Carolina to Nevada, with each property typically containing a complex of “garden-style” low-rise buildings built around a pool area with landscaping. Each property averages about 320 units, for a total portfolio of 7,289 rental units.
Tricon chief executive officer Gary Berman said the strategy is to develop a large enough multifamily business to attract institutional investors to either partner on the existing portfolio or help finance further acquisitions, which the company has already done with its single-family rental operation.
“We’re sticking to our residential knitting, but we want to have multi-residential products that we can sell to major pension plans and sovereign wealth funds," he said in an interview. “This is a new platform that institutions love investing in. It’s very steady and very predictable income.”
Tricon has previously developed new-build luxury U.S. apartment buildings, and still has a small portfolio with just 500 units, but Mr. Berman said they are being sold and the company is shifting focus away from new construction in the Sun Belt region at this time.
“Right now at this point in the cycle, for multi-family in the U.S. Sun Belt, it does make more sense to buy existing assets – you’re not getting paid for the risk on development.”
He said rising building costs in southern states mean new units have to set rents at a rate that is out of reach for the average person, while existing units can charge reasonable market rents. For example, he said some of his firm’s new-construction units in southern markets have rents of US$2 to US$3 a square foot, which is needed to recoup construction costs, while the Starlight portfolio has rents averaging about US$1.30 a square foot, making it easier to keep the properties filled.
The Starlight deal is the second major acquisition for Tricon since it went public in 2010. The company bought Silver Bay Realty Trust Corp., also for US$1.4-billion, in 2017, which had a large portfolio of single-family rental houses.
Tricon made the original Silver Bay investment with its own financing, but announced last June that it had struck a joint venture deal with two investment funds, with each partner agreeing to commit US$250-million in equity for a total of US$750-million, which will be used to finance up to US$2-billion in new acquisitions of rental houses. The pension funds’ identities were not disclosed by Tricon, but various published reports say the partners are the Singapore government’s GIC Pte fund and the Teacher Retirement System of Texas.
When the investment deal was announced last June, Tricon said its goal was to have 25,000 to 30,000 houses in the portfolio within three years.
Mr. Berman hopes to follow the same pattern with the new multi-family rental portfolio, with Tricon making the initial investment itself and then drawing in investment partners.
“We’re going to follow that exact same playbook on this," he said.
Once the Starlight transaction is completed, Tricon said it will have 55 per cent of its assets in single-family rental homes, 30 per cent in multifamily rental units, and 15 per cent in “for sale” development projects, which are new housing construction projects that are sold to buyers at completion.