A look at debate over Milestone
For the second time in about eight months, the spotlight is being shone on the inner workings at Milestone Apartments REIT, a TSX- listed entity whose assets are all in the United States.
The first look came last July when the REIT, listed in early 2013, announced an internalization of its asset management activities.
The second look is occurring at present thanks to a proposed transaction where Starwood will acquire the company for US$ 16.15 a share. The transaction has attracted some opposition from institutional shareholders who argue the price is too low given the work Milestone put into acquiring the portfolio.
A quick perusal of the background to the transaction section in both circulars shows there is more information in the second document, a situation that has led to some debate.
To those comments — essentially that more information is better — one securities lawyer detailed the general rule: what shareholders “ought to know about whether a deal is good or not and whether they should vote for it,” depends on the transaction being proposed.
Some participants honed in on disclosure in the proposed takeover by Starwood. In that document, unit-holders were informed that since its IPO, Milestone has been approached by parties to discuss a “potential acquisition.” Over the last two years, “three of these unsolicited advances ... resulted in confidentiality agreements ... under which the REIT provided certain nonpublic information.”
But “none of these prior discussions resulted in the REIT receiving a firm offer representing a compelling value proposition for unitholders, and discussions were subsequently terminated.”
That information is missing in the circular for the asset management internalization. “If investors knew that there had been takeover discussions, would it have affected their vote? I think so,” said one market participant.
When Milestone went public, the manager was given a five-year contract that “is renewable automatically for an additional five years,” if certain targets were achieved.
In the internalization, overwhelmingly supported by unit-holders (even though it was “not required under the REIT’s declaration of trust”) Milestone acquired the asset manager for $106.5 million. Of that amount, $25 million was paid in cash and the rest in 5.3 million units. Of the units issued, 1.3 million units couldn’t be sold for two years and four million for five years. The transaction, which saw the insiders boost their equity stake to about 14 per cent, was deemed to be accretive to the unit-holders.
The transaction effectively saw the manager receive the net present value of the payment stream for the next seven years. The transaction, based on $ 300 million to $ 400 million of net acquisitions a year, was backed by a fairness opinion from National Bank. At the time some argued the internalization could lead to a takeover.
In late October, or less than one month after the $ 106.5 million asset management purchase closed, Milestone’s management was approached by representatives of Starwood. The agents indicated, “Starwood was interested in engaging in discussions regarding a potential going private transaction involving the REIT.” And Starwood wanted all the assets and most of its employees other than the senior executives.
Two weeks later a special committee was formed and on Jan. 19 the acquisition was announced. BMO Capital Markets and National Bank both provided a fairness opinion. The vote is in early March. So what gives? In an email reply, Milestone said “the information circular for the internalization contained all information that would reasonably be expected to affect the decision of a unit-holder to vote for or against the internalization transaction.”
Milestone added that historical confidentiality agreements “that never resulted in a firm offer representing a compelling value proposition were not relevant to that decision.”