The former president of Boardwalk REIT and current CEO of Nexus Industrial REIT are among a group of investors who will spend the equivalent of $87.5 million in cash and shares to purchase three class-A multifamily properties in Calgary comprising 149 units.
Capital pool company Trillium Acquisition Corp. will pay $17 million in cash and 94.8 million in common shares to acquire:
- Nimmons Residences, an 84-unit apartment building at 1420 19 Ave. SW that includes a heritage home now used as a law office;
- Cunningham, a 41-unit apartment building at 1509 15th Ave. SW; and
- Wilderness Ridge, a 24-unit townhouse complex at 1426 23 Ave. SW.
Rob Geremia, who was president of Boardwalk REIT for 15 years until his departure about three years ago, will become CEO of Distinctive Quality Living Residential (DQL), which will be listed on the TSX Venture Exchange (TSXV). It will replace Trillium once the deal is completed and approved and will focus on acquiring and managing class-A multifamily properties.
Kelly Hanczyk, CEO of Nexus Industrial REIT, will become one of the directors of DQL.
Building developers part of ownership group
Meanwhile, Jordan Giustini, president and CEO of Brava Development and Ryan Bazant, president of Lear Construction, who developed and built the three properties, “will own a significant share and position in the publicly listed company,” Geremia told RENX.
The three properties are 100 per cent occupied.
Geremia said having a capital pool company “gives us quick access to the public markets to raise capital.” While other opportunities were explored to raise capital in the private market “they weren’t quite as open as we believe the public markets are.”
Capital pool companies are shell companies set up to raise capital before going public on the TSXV.
Geremia said developers of multifamily rentals who are seeking cash can face exit strategy challenges. A mechanism that gives them some cash while maintaining an ownership position can be a viable option for them.
“Given the current new tax rules, particularly on capital gains, it’s becoming more and more attractive for a lot of owners. We can provide them with a rollover into a publicly listed shared company, rather than having to sell the asset completely. We’re getting a fair amount of preliminary interest in that model.”
The deal for the three properties was originally announced in May, but was amended in late October.
Geremia noted the TSXV requires an extensive amount of documentation, including audit statements for each property, which has slowed the approval process. He hopes the transaction will close by the end of the year, depending on feedback from the TSXV and modifications that may be required.
Buyers seeking newly constructed assets
The apartment buildings are within a stone’s throw of each other, he said, while the townhouse project is only a 10-minute drive away and “tends to be more hands off because there’s not a lot of common areas.”
All three buildings are new, ranging in age from three years to a few months post-completion.
“That’s one of the criteria I was looking for,” Geremia said, noting that some older buildings on the market are being sold at “very aggressive pricing,” close to 80 or 90 per cent construction value.
Once the deferred capital required to maintain these older assets and their lower operating margins are taken into consideration, “you’re almost better off to build brand new.”
“We thought there isn’t a significant discount in the older asset base, so why don’t we look at an opportunity to acquire really good class-A assets at very good cost?”
As a bonus, “these guys are high-quality developers who’ve developed a number of units in the past.”
No maintenance capital will be required for several years on the buildings, he said.
In addition, new assets tend to operate at much higher operating margins north of 75 per cent, while older assets tend to run in the 65 to 70 per cent range, Geremia said. “Every dollar at the top line gives you a better opportunity to deliver value to the bottom line.”
DQL to seek other acquisitions
DQL will be looking for other assets and Geremia said several projects underway in Calgary would be of interest, including three or four developments being built by Brava Development and Lear Construction.
“We do feel that we will be able to grow this portfolio in the next three to five years dramatically.”
Following the close of the transaction, Geremia, Hanczyk and Bazant will be directors of DQL. They’ll be joined as directors by Ted Manziaris, co-founder of Turtle Island Recycling which was later acquired by GFL Consulting, and a part owner of the NHL’s Seattle Kraken; and Shailen Chande, the former CFO of Northwest Healthcare Properties REIT.
“We’ve got a very strong board, not only from a governance point of view, but also from a transaction and finance point of view,” he said.
