Milestone investors ‘drowning in dimes’

If nothing else we now know the desire of some institutional shareholders to receive full value in a takeover is stronger than others.

Welcome to Milestone Apartments REIT, which announced Wednesday it had agreed to a revised offer from Starwood Capital while at the same time releasing “strong” fourth-quarter financials.

The buyer is offering an extra US$0.10 per unit bringing the offer to US$16.25. But the “cost” of the transaction will not increase because of concessions Starwood has extracted from Milestone insiders.

“We are drowning in dimes,” said one wag clearly bemused by what has transpired. But in a world where thinking big seems to have been forgotten, the price hike was enough to convince four institutional shareholders to vote for the transaction.

The shareholders — 1832 Asset Management LP, Connor, Clark & Lunn Investment Management Ltd., Manulife Asset Management Ltd. and Vestcor Investment Management Corp. — own about 16 per cent of Milestone.

(1832 is part of Scotiabank while Vestcor is the former New Brunswick Investment Management Corp.)

In the past, some of these institutions were among the transaction’s strongest critics.

And based on what analysts are saying, the support from the Gang of Four may be enough to get the transaction over the line.

After noting the “small victories” in the new offer, Neil Downey from RBC Capital Markets, expects the additional 16 per cent institutional support “will be sufficient to add momentum to the total number of unitholders who will put their support behind the Starwood offer.”

Downey contrasted the US$8 million of concessions given up by management with the $105 million received when the asset management contract was internalized last September. That payment was meant to cover seven years of work.

“This significantly boosts the probability that the transaction will succeed, in our view,” noted Michael Markidis, real estate analyst at Desjardins Securities. To succeed, the transaction requires the support of twothirds of all unitholders and half of the unitholders excluding those affiliated with the Milestone insiders.

In a note, National Bank analyst Matt Kornack said, “In the end this is an underwhelming conclusion to what was otherwise one of the best-performing REIT investments over the course of its existence.”

But all is not necessarily lost for those investors who believe that they were a little shortchanged.

So far ISS, a proxy advisory firm, has not yet issued a report on the new offer. Unlike Glass Lewis, another proxy advisory firm, ISS said unitholders should vote against the proposed transaction.

And some institutional investors are bound to vote in accordance with what ISS says.

In a Feb. 22 report, ISS said the “fact pattern in the transaction indicates speed and certainty were prioritized over price.”

It added the deal “proposes to crystallize value that looks low based on multiple analyses.”

Finally it expressed “red flag” governance concerns because of the “lack of a market check and management incentives.”

Let’s give the final word to two unitholders who have no intention of tendering.

For one, the revised offer doesn’t “properly recognize the value of the properties being acquired,” a point he explains by referring to residential real estate where houses are sold on the basis of recent prices, not levels of the past two years.

“And recent sales in (Milestone’s) part of the market place are at significantly higher premiums than what the assets are being sold for in this transaction, ” he noted, arguing the offer is short by at least 10 per cent.

“The fundamentals of this business aren’t rolling over. The new offer is pathetic.”

The other was equally emphatic: There is “no reason” to tender.