What were they thinking?
All we all know is that the decisions made by WPT Industrial REIT following an eight-month strategic review – which failed to find a buyer for the whole company – have disappointed investors plus some property analysts.
How much? The units, which traded in the US$11 range within the week before the decision’s release, have fallen, by about US$2 to an all-time low, closing Thursday at US$9.10. Trading volume continues to be bigger than normal and a quantity of analysts have either changed their rating or their target price.
Overall five from the seven analysts who cover the TSX-listed REIT – whose assets have been in the U.S – rate the company a buy with the other two deeming it a hold. Before the review, WPT was rated a buy by all seven. Price targets now vary from US$11.25 to US$12.75.
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Neil Downey, Managing Director, Global Research, at RBC Capital Markets termed the “review outcome,” at least in the near term, as “disappointing. We’d thought the REIT’s modest size, top quality, albeit largely secondary market portfolio would attract a powerful en-block bid.”
Downey made those remarks following the review that saw Alberta Investment Management Corp. become a large shareholder – using the majority of that stake coming from the purchase of units of the REIT’s advisor, Welsh Property Trust. Despite the fact that AIMCo is paying an above-market price of US$11.75 per unit, “no such premium or liquidity avenue were provided for the advantage of other unit holders,” he wrote.
In accessory for as being a large investor – having a possible 29 per cent stake – there’s another benefit for AIMCo: it is a partner inside a new management company WPT Capital Advisors which will manage the REIT along with other funds which may be developed. In this manner AIMCo is within a different position than other unitholders.
That few the different interests held by WPT’s unitholders is a theme Downey has noted previously. Last May Downey “highlighted the potentially conflicting interests between one sizable investor having a shorter-term internal rate of return-driven goal and many unitholders and also require preferred a long-term return profile, albeit with a lower IRR.”
Never someone to restrain, Downey, in his recent note, added: “In surprise fashion, these inherent conflicts have the symptoms of materialized.” After noting the “asymmetrical economics in favor of the advisor,” Downey promptly cut his rating and target price (to US$11.25 from US$13.25.)
Downey isn’t completely negative around the deal – even if a few of the potential positives “are likely to take many years to materialize.” Two positives are the “endorsement” with a large and sophisticated institutional investor, and the possibility of the REIT to participate in opportunities that could leave the WPT pipeline.
Jimmy Shan, a real estate analyst at GMP Securities also reduced his target, while keeping his buy rating. “The disappointing news is that after running a full process in what was a hot investment market, the outcome is no sale,” he said.
For its part, WPT said throughout the strategic review process, “the REIT explored a number of alternatives. The REIT received several expressions of great interest from prospective purchasers and strategic partners.” However, “after careful review, its Board of Trustees unanimously determined the transactions announced today are in the best interests from the REIT and it is unitholders.”
Maybe, however in his note, Shan added, “management offered little details on the process.”
bcritchley@nationalpost.com
