Centre Pointe West, one of Boardwalk REIT’s properties, in Calgary, Alberta.Boardwalk REIT
Real estate investment trusts are a long way from getting back in the property acquisition game, as evidenced by the most recent numbers from Boardwalk REIT.
Boardwalk is one of Canada's most valuable REITs, perenially trading at a premium to other REITs that specialize in apartments. And yet, the company feels shut out of the bidding for multi-family residential buildings, because prices are too high.
The issue comes back to the pricing mismatch between what private buyers are willing to pay for buildings and the lower valuations that public markets assign to shares in REITs.
Boardwalk is selling a portfolio of British Columbia apartments it views as not attractive enough to be part of the REIT's core business, and has found a buyer (that it is not naming). The sale price of $140-million for the B.C. apartments implies a capitalization rate of 4.2 per cent, estimated Ken Avalos, an analyst at Raymond James, in a report last week.
(Capitalization rates are the income a property or portfolio produces as a percentage of its purchase price. The higher the price relative to rental income, the lower the cap rate.)
Yet all of Boardwalk – i.e. the buildings management likes better and the company's operating business – trades on the open market at an implied capitalization rate of 5.5 per cent, Mr.Avalos noted.
In other words, private buyers will pay a far higher valuation for individual buildings than investors will pay for Boardwalk itself, including the whole portfolio that it runs. Using private market capitalization rates, Mr. Avalos estimates that Boardwalk would sell for about $8 a share more than it currently fetches in the public markets. That's about a 12 per cent increase, based on Boardwalk's current trading price.
Given that pricing mismatch, Boardwalk can't find anything to buy.
"Capitalization rates continue to remain low and high prices for multi-family assets continue to be the trend," the REIT said last week. "The trust continues to bid on higher quality assets; however, no new apartment acquisitions have been completed to date as the actual transaction prices on these assets would not prove to be in the best interest of the trust on a risk-adjusted basis."
So, Boardwalk is taking advantage of the arbitrage to sell properties and funnel the money into share buybacks.
But if Boardwalk – which always fetches a solid valuation in the REIT universe – can't find anything to buy at a doable price, it's hard to see what REIT can. And if the mismatch in REITs persists, it's easy to see why analysts such as Alex Avery of Canadian Imperial Bank of Commerce suggest that the country's prime REITs could end up being takeover targets for private buyers.