Thumbs down.
At least three analysts have poured scorn on the first of this week’s two real estate investment trusts acquisitions: the purchase of Huntingdon Capital Corp. by Slate Properties Inc. The second acquisition received a stronger reception given that the buyer, U.S. listed Health Care REIT Inc., is paying a healthy premium to buy Canadian-based HealthLease Properties REIT.
The three analysts — Matt Kornack from National Bank Financial, Mark Rothschild from Canaccord Genuity and Rob Sutherland from Euro Pacific Canada — argued against the transaction, in large part because of the collateral damage caused to FAM REIT, “a diversified commercial real estate investment trust focused on owning and acquiring strategically well-located industrial, office and retail real estate located primarily across Canada’s large population centres.”
FAM REIT is collateral damage for two reasons:
• Apart from being its largest unitholder with a 30% stake, Huntingdon Capital is its external manager, a role that will now transfer to Slate. As well the management contract will be amended allowing FAM to terminate the new manager near the end of 2022 provided it has reached a market cap of $750-million. (Current market cap is about $130-million.)
• Slate intends to position FAM REIT as an office focused REIT. FAM will buy seven office Toronto-area properties from Slate for $190-million and partly finance the acquisition by issuing 5.1 million units. If the transaction works as planned Slate will end up with about 48% of FAM.
According to Canaccord’s Rothschild, “it is not clear to us why FAM unitholders would vote in favour of a dilutive acquisition, especially considering that the management contract is being amended without much benefit to unitholders.” The analyst, who is hoping that the circular to be prepared for the September vote will provide “more information and give justification to this transaction,” said that the current bid by Slate “does not provide enough value for FAM unitholders.”
NBF’s Kornack was equally critical. Pending the release of more information, his initial take was that the transaction means a deviation of “FAM’s existing strategy of being an all-weather conservatively structured REIT with an institutional quality balance sheet and investment outlook.”
In addition, given what he terms “concerns in the market over supply and demand dynamics in the Canadian office segment we question the merits/value of this strategy decision.”
Finally the transaction means Slate “will gain effective control over FAM without paying a change of control premium and will be issued units at a significant discount to NAV.”
Euro Pacific’s Sutherland wrote: “We cannot look at this proposed acquisition or management agreement amendment favourably and believe it is not in the best interests of current FAM REIT Unitholders.”
Sutherland provided a number of reasons for that opinion: The “seemingly arbitrary move” to becoming a focused Canadian Office REIT, increases risk for the REIT.” In his view the change seems a move “tailored more as an exit vehicle for Slate’s current portfolio than the wants of existing unitholders.” As a result of the deal, FAM will have greater leverage than the “very admirable” current levels.
The deal has a number of hurdles to overcome. Aside from the negative reaction from some analysts, FAM has two large institutional shareholders. According to its latest management circular, Cambridge Global Asset Management, (part of CI Financial) has a 17.1% stake while TD Asset Management owns about 16.2%.