High demand: Condos under construction in Toronto, Canada. Tricon, led by former Goldman Sachs Group Inc banker Gary Berman, has sought to capitalise on a housing shortage in Canada. — Bloomberg
NEW YORK: Blackstone Inc is betting some of the money from a record-breaking fund on rental housing, a corner of the real estate market it knows well.
The company’s US$3.5bil deal to buy Tricon Residential Inc, a Toronto-based landlord, will plunge the asset manager deeper into a single-family rental industry it helped create more than a decade ago.
The transaction signals that the undersupplied housing market remains an attractive target for investors as dealmaking picks up.
Blackstone famously led a charge of Wall Street firms buying houses in the aftermath of the US foreclosure crisis.
While the firm’s initial effort ended in 2019 when it sold off its shares in Invitation Homes, it has continued to deploy capital into the industry.
In 2020, the firm led a preferred equity investment in Tricon. The next year, it agreed to buy Home Partners of America, a single-family landlord that offers customers a path to homeownership through rent-to-own contracts.
Now, it’s adding Tricon’s 38,000 US rental houses, as well as apartment buildings in Toronto and land slated for development.
Blackstone’s US$30bil Blackstone Real Estate Partners X, which closed last year as the largest real estate drawdown fund, and Blackstone Real Estate Income Trust (B-REIT) are combining on the deal.
The company agreed to pay US$11.25 a share in cash for Tricon, according to the statement last Friday.
Tricon shares surged on the news, climbing nearly 28% to US$11.06 at 12:44pm last Friday. That’s up from a closing price of US$8.63 Thursday.
Blackstone plans to complete US$3.5bil of projects already in Tricon’s pipeline, and an additional US$1bil in capital projects over the next few years, according to the statement.
B-REIT will maintain its roughly 11% ownership stake in Tricon after the deal closes and has agreed to vote its common stock in favor of the deal, according to the statement.
“We are excited that our capital will propel Tricon’s efforts to add much-needed housing supply across the US and in Toronto,” Nadeem Meghji, global co-head of Blackstone Real Estate, said in the statement.
Single-family rentals were a hot commodity during the early years of the pandemic, as property funds sought to bet on surging household formation.
But the rapid rise in interest rates in the middle of 2022 brought transactions to a virtual halt, as higher borrowing costs threatened to eclipse the revenue landlords could generate in rents.
The Tricon transaction, which is expected to close in the second quarter, follows Japanese homebuilder Sekisui House Ltd’s US$4.9bil deal to buy US company MDC Holdings Inc.
Blackstone chief executive officer Steve Schwarzman said earlier this week that “animal spirits” are coming back to the market as more investors expect interest rates to come down.
Tricon, led by former Goldman Sachs Group Inc banker Gary Berman, also has sought to capitalise on a housing shortage in Canada.
The firm has more than 5,000 apartment units at various stages of delivery in Toronto. The company estimates that its Canadian real estate portfolio may bring in US$50mil of net operating income in 2028.
Even so, Tricon has attracted scrutiny from activist investor Land & Buildings Investment Management, which argued in an October presentation that the firm had set rents below market rates and that its overhead costs were excessive.
Land & Buildings said last Friday that it believes the Blackstone deal is the “right outcome” for shareholders.
Rental housing fundamentals remain strong. Record-low inventory of for-sale homes has meant more American families will rent for longer.
And in areas with high sales prices, renting is often less expensive. Those trends aren’t likely to dissipate soon, according to Mizuho Securities analyst Haendel St Juste.
“There’s been an underproduction of housing over the last decade and inventory remains tight,” said St Juste.
“For a family looking to get into a good school district, they can often get in cheaper by renting.” — Bloomberg
