Dream Residential REIT makes a rare IPO in an ugly market to bet on the rise of US rental housing.

The Dallas, Texas skyline in 2018. Dream Residential will initially own 16 multi-residential properties in Oklahoma, Texas, Kansas, Kentucky and Ohio. Seventy percent of its portfolio will be located in Greater Oklahoma City and Dallas-Fort Worth.Tom Fox/The Associated Press

Dream Residential REIT, the latest company to be spun off from Michael Cooper’s real estate empire, beat the odds and completed its $125 million initial public offering in an ugly market. Expanding your portfolio in these turbulent times can take so much magic.

When the real estate investment trust launched a $160 million initial public offering in Canada in early April, stock markets were already jittery because of expected interest rate hikes and because the Russian invasion of Ukraine was still fresh. . Despite the uncertainty, Dream Residential, led by CEO Jane Gavan, found a way to raise the money needed to purchase its initial portfolio.

Initially, Dream Residential will own 16 multi-residential properties in Oklahoma, Texas, Kansas, Kentucky and Ohio. Seventy percent of its portfolio will be located in Greater Oklahoma City and Dallas-Fort Worth.

But to do so, the deal size had to be reduced to $125 million, and the initial public offering price was $13 a share, the low end of its trading range.

Dream Residential, which begins trading on Friday, echoes what Cooper and his longtime business partner Ms. Gavan did in 2011 when they launched Dream Global REIT to capitalize on cheaper property values ​​in post-crisis Europe. world financial crisis in 2008. At that time, they raised money to acquire a portfolio of Deutsche Post properties in Germany and then increased it with subsequent acquisitions over time.

This time, proceeds from Dream Residential’s initial public offering will be used to acquire properties currently owned by another of Mr. Cooper’s companies, as well as a joint venture Mr. Cooper created with a business partner.

The market timing of the initial public offering is also materially different from that of Dream Global. In 2011, it was possible to take advantage of strong equity markets in Canada, allowing the REIT to raise cash to purchase European properties at discounted prices.

Meanwhile, Dream Residential goes public as REITs are struggling as interest rates are rising. It will also have to grow by acquiring properties at probably higher prices. The US real estate market is currently on the upswing, similar to Canada’s during the first two years of the pandemic.

In an interview, Ms. Gavan said Dream Global’s success only seems like a sure thing now. (The REIT was sold to Blackstone for $3.3 billion in 2019.)

“In retrospect, it seems obvious,” he said, but when Dream Global launched, “we felt like we were running into a burning building.” At the time, Europe was in the throes of a sovereign debt crisis, and some very smart people thought that the euro would not survive as a currency.

Dream Residential also has some solid economic fundamentals working in its favor. In the US, the percentage of young adults ages 25 to 34 living with their parents is now 16 percent, up from the historical average of 12 percent. This group is one of the most likely to seek rental housing, especially with rising housing prices.

Market rents in the regions where Dream Residential now owns properties are also above existing rents in its portfolio. The REIT expects an average rent increase of 12 percent when a tenant moves out.

However, Dream Residential faces competition from some rivals that are already listed in Canada and operate similar businesses, albeit sometimes in different locations, including Toronto-based Tricon and Arkansas-based BSR REIT, which have gone public on the Stock Exchange. Toronto values ​​in 2018.

Despite some geographic overlap, Ms Gavan said Canadians often underestimate the size of the US market. The Greater Oklahoma City metropolitan area alone has 1.42 million people.

Unlike mainstream Canadian apartment REITs such as CAP REIT and Minto Apartment REIT, the properties owned by Dream Residential are not high-rise apartment buildings, but rather what are known as “garden-style” apartments that tend to resemble blocks. of terraced houses. .

Investing in such properties has been lucrative for those already in the business. Despite the recent market correction, BSR units are still up roughly 35% since the start of the pandemic, and Tricon shares are up 40%.

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