It’s probably as close to a classic private equity transaction as is possible: A group of investors finds an undervalued situation, gets board representation, makes some fundamental changes, gives the company a new mandate and waits for a buyer, prepared to pay a healthy premium, to come along. And then they sell.
That, in short form, is how events played out at InnVest REIT which announced Wednesday it had been sold to Hong Kong interests for $7.25 per unit — a 37 per cent premium to the 30-day volume-weighted average price.
Such an outcome was a long shot in early 2014 when New York based Orange Capital told the world it owned 10.33 per cent and wanted InnVest to call a unitholder meeting. Specifically, Orange wanted InnVest’s board to expand to nine from seven and Orange’s seven nominees appointed.
Foreign investment in real estate revs up as InnVest goes in cash dealOilpatch activist shareholders are getting restless as oilpatch downtown continues
On the day of that announcement (Feb 7), InnVest’s units closed at $5.28.
Reached yesterday, Daniel Lewis at Orange Capital, said: “We are pleased that through the work of a new independent board of directors and a talented CEO, InnVest has undergone a transformation of its portfolio and balance sheet over the past two years that has led us to this value realization opportunity, at a significant premium to the historical trading price.”
So how good was the deal? According to Bloomberg, on a total return basis from Feb 7 2014 to May 11 2016, InnVest was ahead by 56.90 per cent — more than eight times the gain for the S&P/TSX over the same period.
One lawyer, whose practice is geared to proxy battles, chimed in this way: “Fights are good but the end game is to make money.”
Following Orange’s request, InnVest — which in late 2008 received a request for a shareholders meeting, on that occasion from Royal Host REIT — formed a special committee.
On March 13, it announced a settlement with Orange (which avoided a proxy campaign) and the arrival of KingSett Capital. The latter had a 6.7 per cent stake and had become a “strategic partner” at InnVest.
On that day the units closed at $5.17.
In the plan, InnVest’s management would be internalized, the board of trustees would expand to nine members (from six) with six new appointees being named; and its strategic plan would be accelerated, all part of the goal to make the REIT “the leading growth platform in Canada’s hospitality industry.”
And InnVest would find a new chief executive, an asset management agreement would end and some assets would be sold.
KingSett would effectively become InnVest’s banker — all part of a process to wean InnVest off issuing potentially dilutive convertible debentures. So KingSett agreed to provide a $50 million four-year secured-term loan facility (with an option for a $50 million standby facility) with plans to repay maturing issues of convertible debentures.
On that day, April 28, InnVest’s units closed at $5.25.
Later in 2014, InnVest expanded when it acquired an interest in Toronto’s Royal York Hotel and full ownership of Vancouver’s Hyatt Regency. On the days the Royal York and Hyatt deals were announced the units closed at $5.03 and $5.36 respectively.
In 2015, acquisitions continued with purchases of all of Hotel Saskatchewan, one-third of Toronto’s Courtyard Marriott and 100 per cent of Ottawa’s Marriott Hotel.
So with a higher quality portfolio, InnVest was in a position to be acquired. And a buyer arrived.