REIT holders not all equal
REIT holders not all equal
The extra complications of a Canadian real estate investment trust buying another Canadian-based REIT with non-Canadian investors played out Wednesday when Dundee REIT closed a $231.8 million financing.
It may not be a first but the extra complications of a Canadian real estate investment trust buying another Canadian-based REIT with non-Canadian investors played out Wednesday when Dundee REIT closed a $231.8-million financing.
Dundee raised capital to partially repay debt taken on to acquire the outstanding units of Whiterock REIT, a transaction announced two months back. In the financing, Dundee REIT also sold an additional 1.356 million units.
Those units were issued with the acquisition of Whiterock “and are being held for the benefit of former unitholders of Whiterock who are non-residents of Canada.” The reason: The non-Canadian unitholders “are ineligible to directly receive units as consideration in connection with the acquisition.” Given that inability to receive Dundee REIT units — unitholders were offered either $16.25 cash or 0.4729 units of Dundee REIT — the select group of Whiterock unitholders had to be offered an alternative.
The joint circular prepared by Dundee and Whiterock provides further clarification on this point given that Dundee’s offer was not made to those unitholders of Whiterock who are non-residents of Canada. “Upon the completion of the Acquisition, all Whiterock Unitholders who are non-residents of Canada will have their Whiterock Units redeemed by Whiterock and the Dundee Units to which they would otherwise be entitled will be issued to the Depositary, which shall as their agent … sell all such Dundee Units through the facilities of the TSX, and pay … the net proceeds of such sales…..”
Accordingly, that group of unitholders are being redeemed, which in normal circumstances would give them units; instead they will receive the net cash.
Given the situation, the underwriters were faced with an issue: how to sell the Dundee units that the Whiterock unitholders were entitled to. In the end, they decided to do the two transacations — the $231.7-million primary sale out of Dundee REIT and the 1.356-million-unit secondary offering out of Whiterock — marketed as one offering. In this way the underwriters bought those units, which were sold as a block trade, meaning they weren’t part of Dundee REIT’s prospectus.
In a release Wednesday, Dundee said the non-resident units were sold “in a separate and unrelated transaction” at $35.35 per unit” — a $47.9-million financing.
Analysts reported Wednesday that on other transactions involving non-residents unitholders/shareholders, an alternative approach is sometimes used as a way around withholding taxes. If a redemption process is being employed, unitholders are better off to sell their units in the market ahead of time to an non-taxable buyer, even if it takes a small discount. In that situation, the non-taxable buyer makes a small gain.
The Dundee/Whiterock deal was noteworthy for another reason: The large payout given to Jason Underwood, Whiterock’s chief executive.
The circular said Whiterock entered into an employment agreement with Underwood in August 2009 whereby in the event of a change in control at Whiterock and Underwood’s subsequent termination without just cause or his resignation over the following 24 months, he would receive certain payments that varied from 0.75% of market cap to 1% of market cap. Whiterock has a market cap of almost $600-million, meaning he stands to receive a maximum of $6-million.