H&R REIT CEO’s investor role in proposed takeover deal draws opposition

A founder-backed takeover bid for H&R Real Estate Investment Trust is facing growing opposition ahead of recommendations from proxy advisory services that could kill the $3.4-billion acquisition.

Last week, several institutional investors came out against a units-and-cash offer for Toronto-based H&R from a consortium led by GO Residential Real Estate Investment Trust and including H&R’s founder and chief executive officer, Tom Hofstedter.

Asset manager Mill Pond Capital LLC, which owns 2.2 million H&R units, said the offer favours Mr. Hofstedter and his family at the expense of other unitholders.

Mr. Hofsteder has consistently said his family holding company, CRAL, formerly known as Canadian Realty Advisors Ltd., is making the GO REIT takeover possible by acquiring properties no other bidders want. Two investment dealers, CIBC Capital Markets and National Bank Financial, have said the transaction is fair to H&R unitholders.

Passive H&R owners such as index funds, which control 13 per cent of the REIT’s units, are emerging as kingmakers in a takeover vote scheduled for Nov. 13.

Passive fund managers are expected to rely on recommendations from advisory services Glass, Lewis & Co. and Institutional Shareholder Services Inc., or ISS. The recommendations are expected to be published in the next two weeks.

RBC’s asset management arm to vote against H&R REIT takeover

On Monday, investment bank Raymond James Ltd. sent a report to institutional clients estimating there is a 75-per-cent probability that ISS will recommend H&R unitholders vote against the GO offer, and a 60-per-cent probability that Glass Lewis will tell investors to turn down the deal.

“Negative recommendations could derail the transaction, force the parties back to the negotiating table or accelerate a renewed asset monetization strategy under potentially new leadership,” Chris Porraccio, head of alternative equity strategies at Raymond James, said in the report.

On Tuesday, Mr. Hofstedter was not available for comment.

Last week, H&R filed a takeover circular that showed the REIT is selling two assets: development properties in Caledon, Ont., that fetched $436-million, and a Toronto office building sold for $81.5-million. The circular showed the REIT is using this cash to lower the price Mr. Hofstedter’s company, CRAL, pays for H&R assets.

“Post circular review, we struggle to see how HR unitholders will approve the deal,” analyst Jimmy Shan at RBC Capital Markets said in a report on Tuesday.

GO REIT is only buying H&R’s U.S. properties, offering its own units as payment. CRAL is purchasing Canadian assets with a book value of $1.98-billion for $1.56-billion, according to the H&R takeover circular. Mr. Shan said the deal represents a “disproportionate residual value transfer to CRAL.”

To win the support of institutions and services such as ISS and Glass Lewis, Mr. Porraccio said H&R and Mr. Hofstedter could redo the terms of the transaction to give more cash and tax benefits to all H&R unitholders.

Sharing the value of the Caledon land sale would add 78 cents a unit to the takeover bid, Mr. Porraccio said. The analyst said there is 46 cents per unit in tax relief available from “a more equitable allocation of taxable income and gains to CRAL.”

The price of units in both H&R and GO REIT has fallen since the two REITs and Mr. Hofstedter announced the transaction in August. On Tuesday, H&R units closed at $9.72 on the Toronto Stock Exchange, down 5.5 per cent so far this year, and GO REIT closed at US$8, down 30.6 per cent this year.

New York real estate moguls embrace Canada with $3.4-billion takeover bid for Toronto-based H&R

The proposed merger of the two REITs is “a unique “lose-lose” privatization deal,” Scotia Capital analyst Mario Saric said in a report on Tuesday.

In the last two decades, there have been 22 acquisitions involving two publicly traded REITs, and only one other deal saw units in both companies decline in value. That was the 2015 transaction involving NorthWest International Healthcare Properties REIT.

“We think H&R unit price has near-term unit price upside if a deal is not consummated, but longer-term strategic execution would still be required,” said Mr. Saric.

The proposed H&R takeover would see the REIT sell industrial properties to three other fund managers: Blackstone Inc., Crestpoint Real Estate Investments Ltd. and the Public Sector Pension Investment Board.

Blackstone and Crestpoint are acquiring H&R properties at a 9-per-cent discount to their book value, Mr. Saric said. CRAL is purchasing H&R properties at a 21-per-cent discount to their book value, he said, although “the assets are less liquid, less desirable and more difficult to value.”