Looking for clues behind WPT

We are not sure if we’ll miss them given that they were here for two years. In May 2013, WPT Industrial REIT, one of a handful of REITs based on U.S. assets that raised capital in Canada and which is TSX-listed, announced the final closing of its IPO – with gross proceeds of US$114.3 million.

This week WPT – which has paid regular monthly distributions, seen it unit price has risen steadily and whose sponsors still have a large ownership stake — announced that it has formed a special committee to explore strategic alternatives.

The news was sudden – coming just a few days after its annual unitholder meeting – and seemingly unexpected. So what’s behind the review? Market participants are forced to speculate because WPT has given no explanations. Instead it named the members of the special committee, the financial and legal advisers — and warned there was “no assurance” the process “will result in any transaction.” As for the public, they’ll hear either when there is a transaction, or when the process ends without a transaction.

But the language and the shortness of the release compelled at least one analyst to conclude the strategic review was not company initiated – but in response to an unsolicited offer from a potential acquirer. And the speculation is that the potential offer was below what WPT considers fair value.

“In response,” noted one participant, WPT said that “if we are going to sell this company, we need to hold a proper process,” especially in light of how comparable U.S. REITs trade in the U.S. “There have been some transactions [in the U.S.] that suggest the stock could go as high as US$17,” he added.

So from the perspective of the largest shareholder, Welsh Property Trust, LLC (which has a 47.3% stake), the choice came down to the status quo of the market not properly valuing the assets or of trying to receive proper value through a sale.

In a note, GMP Securities analyst Jimmy Khing Shan argued, “the red hot U.S. investment market triggered this review.” Shan added the current U.S. investment market “is highly competitive and high quality big box industrial properties, like those of WPT, are very well bid. Cap rates, especially for large portfolios, have been compressing.”

He points to three recent large transactions, one of which was the US$8.1 billion paid by Singapore’s sovereign wealth fund to buy IndCor Properties from Blackstone Group. On those deals the cap rate was in the 5%-to-6% range.

The choice of financial advisers is another indicator the strategic review wasn’t initiated by the company. WPT is using two commercial real estate advisers (The Eastdil Secured division of Wells Fargo Securities, and CBRE)– and not the more traditional investment bankers.

So what’s the outcome? The market participant said, “I don’t think this company will be publicly traded by the end of August.” GMP’s Shan added: “We believe that there is a healthy list of potential buyers.”

Meanwhile, most of the analysts have moved up their targets. All seven, according to Bloomberg, have a buy rating.

Other similar REITs – Slate Retail, Milestone, Agellan Commercial and Pure Multi-Family – are presumably watching the process at WPT with interest.