Canadian Apartment Properties REIT
(CAR.UN-T) C$53.86
CAPREIT Announces Termination of IRES Management Agreement
Event
Last night, CAPREIT announced that it has provided 12 months notice of the termination of its management agreement with IRES (HOLD-rated, €1.65 Target). The termination is effective March 31, 2022.
Impact: NEUTRAL
This announcement does not come as big surprise to us, as the initial five-year term of the agreement concluded on November 1, 2020 and no new agreement had been reached. In our view, terminating the agreement makes sense for CAPREIT as it allows ERES (BUY-rated $5.50 target) to be its sole European operating platform (ERES cannot currently acquire assets in Ireland).
Under the terms of the management agreement, following the initial five year term, it automatically rolled over for a further five-year term. The investment manager, a 100%-owned subsidiary of CAPREIT, has the right to terminate with 12 months notice, which it has exercised. The services agreement will also automatically terminate along with the management agreement. IRES still has the right to terminate prior to the end of the 12 month notice period, if it determines it is in its best interest to internalize, at which point it could purchase the investment manager for €1. CAPREIT will continue to work with IRES to ensure an orderly transition to IRES or another manager, as designated by IRES.
As a result of the termination, CAPREIT will no longer generate fee income from IRES. We note that in 2020, IRES management fees were ~$9.6mm ($0.056/unit or ~2% of our 2022E FFO).
CAPREIT continues to own an 18.8% interest in IRES, or 98.9mm units, which amounts to roughly $237.6 million based on last night's close, or ~1.5% of its total asset value as at December 31, 2020. We note that in 2020, CAPREIT received ~ $8.9mm of dividend income from its investment in IRES.
We do not anticipate CAPREIT making any near-term decisions with regard to its long-term investment in IRES.