Vancouver REIT urged to get sale done

Group of insiders could be main beneficiaries

If and when a sale occurs at Vancouver-based Pure Multi-family REIT, a group of insiders could be the big winners.

Recall that the company announced a strategic review early last month in response to two acquisition proposals from the same suitor, but shareholders have been at odds with each other ever since.

That insider-enriching possibility emerges from information contained in the 64-page circular prepared for the upcoming annual meeting, an event that may get more interesting because of the plans announced a few weeks back by K2 Principal Fund, a 0.70 per cent unit holder, to launch a full-on proxy bat- tle. Since then, K2 is understood to have increased its stake in the company and has stated it will not go through with an expensive proxy fight if some of its nominees were appointed to the board before the meeting.

The circular was prepared for the May 24 meeting after the second of the two proposals from Florida-based Electra America was made public. The first of those proposals (at US$7.54 per unit) was made, but not disclosed, last December, while the second (with a higher price of US$7.59) came in late March. At that time, details of both proposals were released.

Pure Multi-family rejected both because they were deemed inadequate, but it seems that between those proposals the board put in place a series of changes that have the potential to benefit insiders.

Specifically, the board has made changes in two areas.

Firstly, it changed the compensation plan allowing directors to take part of their consideration in units and not all in cash, as they did previously. The directors are set to receive higher fees as well. Also, given the work being done by the special committee, new retainers and monthly fees were added for the chair and members of that committee.

Andrew Greig, vicepresident of the company’s investor relations, said the increase in director’s fees, and the decision to pay in U.S. dollars with a portion in units, was approved “with input from third-party compensation consultants long before the initial bid from Electra America.”

Secondly, the board, acting on the recommendation of the compensation committee, expanded the company’s restricted unit plan.

From now on, two million units will be reserved for such issuance provided unit holders approve. The 2018 proposal replaces a May 2014 restricted unit plan that allowed for a mere 600,000 units to be issued. Pure had not issued any units in the four years the 600,000 units plan existed.

Restricted units are attractive because they convert to income when the units vest. At current prices, two million units translates into about $20 million — or about $0.25 a unit. “Optically, it looks terrible,” noted one unit holder.

Pure Multi-family said it didn’t issue units under the restricted plan “as management was external.”

That changed in September 2016 when market cap reached US$300 million — reaching its internal target for management. “These were part of management’s contracts from 2017 and thus the company was obligated to grant them,” said Greig.

Given the “strategic review” work being done by the special committee, Sandpiper Group, another unit holder with a two per cent stake, has weighed in with its suggestion.

The group is arguing that the focus be on a formal sale process — and not on the proxy fight. The argument is that proxy fights would deter potential bidders for the REIT, which means the highest takeout price may not be achieved.

Samir Manji, Sandpiper’s chief executive, said management’s full-time attention is needed to ensure a sale “and at a price above what Electra America had proposed. It will be higher than the US$7.59 Electra proposed,” he said in an interview.

Adds another unit holder: “Get it done, for the highest price and for cash. We are concerned about an alternative transaction not for cash.”

Robert King, the chair of the special committee, said “we are running a real process that will surface value for investors.”