Founder's H&R REIT Bid Faces Investor Revolt

A proposed $3.4-billion takeover of H&R Real Estate Investment Trust is encountering substantial resistance from key institutional investors, threatening its approval. The offer, a joint bid from GO Residential Real Estate Investment Trust and H&R's founder Tom Hofstedter, has drawn criticism for allegedly benefiting Mr. Hofstedter and his family at the expense of other unitholders.

Mill Pond Capital LLC, a significant unitholder, explicitly stated the offer favors the founder. While Mr. Hofstedter claims his family's company, CRAL, is facilitating the deal by acquiring less desirable properties, analysts suggest the transaction structure unfairly transfers value. Two investment dealers, CIBC Capital Markets and National Bank Financial, have opined the transaction is fair.

Passive H&R owners, controlling 13 percent of units, are now pivotal. They are anticipated to follow recommendations from proxy advisory services Glass Lewis & Co. and Institutional Shareholder Services Inc. (ISS). Reports indicate a high probability of negative recommendations from ISS and Glass Lewis, which could lead to the deal's failure or renegotiation.

Recent filings reveal H&R is selling development properties and a Toronto office building for a combined $517.5-million. This cash is reportedly being used to reduce the price CRAL pays for H&R's Canadian assets. GO REIT is acquiring only H&R's U.S. properties using its own units, while CRAL is purchasing Canadian assets valued at $1.98-billion for $1.56-billion, a 21% discount.

Analysts suggest adjustments, such as sharing proceeds from asset sales or reallocating tax benefits, could improve unitholder support. Both H&R and GO REIT units have seen price declines since the deal's announcement in August. The transaction's structure has been called a "lose-lose" privatization by some analysts, with only one other REIT merger in two decades exhibiting similar unit price declines for both parties.