Montreal asset manager Letko Brosseau returns to the charge against the proposed sale of real estate investment fund Cominar, this time denouncing the very foundations of the transaction.
According to a document obtained by Press, the institutional investor with a 3.3% stake in Cominar must explain this Friday why “all” the reasons mentioned by Cominar are questionable.
Cominar revealed on October 24 an agreement with a consortium led by Canderel surrounding its sale at a unit price of $ 11.75 per share, a transaction valued at 5.7 billion including debt.
As part of this transaction, the consortium is to resell commercial and office buildings to Groupe Mach and some 190 industrial buildings to the US investment firm Blackstone.
“The timing does not seem right to make this proposal since Cominar is barely emerging from the pandemic which has led to long closures of shopping centers and offices in 2020 and 2021. The stock of Cominar has fallen significantly compared to its level of before the pandemic and has not yet recovered all the lost ground ”, we read in the document obtained by Press.
“Currently, the operating conditions are very encouraging. Investments in commercial real estate continue to gain momentum, with an increased level of investment and growing interest from developers on the lookout for well-located sites. Canadian lenders continue to provide abundant liquidity to the real estate market. There is unprecedented demand for industrial buildings, such as those owned by Cominar, ”he said.
“Given the continued economic recovery, the considerable possibilities for real estate development and the remarkable performance of industrial buildings, Cominar is well placed to continue to increase its revenues, optimize its portfolio and strengthen its balance sheet. A competent and diligent management team should be able to deliver shareholder value that is significantly greater than the offer made to them. Our preference is for Cominar to remain on the stock market. ”
Disagreement on several points
The document displays Letko Brosseau’s disagreement on several points made by Cominar in its information circular published last week.
“Circular says open real estate investment trust (REIT) structure is not optimal for Cominar and diversified REITs trade at a discount in the markets. We believe that REITs provide a liquid and tax-efficient structure for investors seeking exposure to the real estate industry. The current proposal aims to close the capital of Cominar and sell its assets, the price offered should not reflect such a discount ”, it is indicated.
“The circular affirms that Cominar’s capital structure is characterized by high indebtedness and limited liquidity, whereas Cominar’s indebtedness of 55% and Cominar’s debt / EBITDA ratio of 10.5 are within the range of those of comparable companies. Liquidity is sufficient with an interest coverage ratio of 2.5, cash and unused credit facilities of 341 million and unencumbered assets of 1.7 billion, ”he added.
“The circular affirms that Cominar will have to make significant capital investments to pursue its growth in the office and retail segments while Cominar has identified opportunities for intensification, including a potential of nearly 10,000 residential units on its current properties. Value can be derived from the sale of a combination of air rights, partnerships and stand-alone real estate projects. About a third of Cominar’s buildings are located near new public transport projects such as the REM and the tramway. Cominar should directly benefit from these major infrastructure projects. ”
The document also states that the independent opinion on valuation and fairness produced by Desjardins Securities contains unreasonable assumptions, including punitive capitalization rates, includes “comparable” transactions dating back to 2006 and applies a discount of around 20 to 30% to the declared net asset value of Cominar while showing “comparable” transactions concluded at an average premium by 18%.
Letko Brosseau also maintains that unitholders do not have all the information necessary to fully assess the offer made to them. ” Despite requests from shareholders and analysts, the company has disclosed neither the price at which Blackstone will acquire the industrial properties from Cominar, nor the price at which the buying consortium will acquire its share of the assets. “
Severance pay
Letko Brosseau also points out that, according to his calculations, if the proposal is adopted, the CEO of Cominar will receive 11.6 million, including severance pay of 5.2 million.
On November 10, Letko Brosseau publicly denounced the arrangement for the first time, highlighting in particular “deficient” governance practices at Cominar.
It was not possible to obtain a reaction from Cominar management in the evening of Thursday.
Cominar has faced several criticisms in recent weeks and Press revealed that at least two groups were trying to put together competing bids ahead of the special meeting of unitholders scheduled for December 21.
The arrangement concluded by the consortium led by Canderel came at the end of a strategic review process lasting more than 13 months, notably launched due to financial difficulties at Cominar and when the pandemic caused additional uncertainty surrounding the activities.
During the review process, Cominar’s advisers officially approached 33 parties (including 25 financial investors and 8 strategic investors) potentially interested in all or parts of the company. Seven financial investors and three strategic investors signed confidentiality agreements allowing for due diligence.
Cominar owns 310 industrial, commercial and office buildings in Quebec and Ontario.