Matching money and assets

For more than a decade, Stephen Pincus, chair of REITs and income securities practice at Goodmans, has been at the forefront of developing structures for crossborder initial public offerings — a growth business in Canada, given the efficiency of the capital markets and the desire of local investors for yield.

And, given the development of a slew of different structures and despite the massive size of some prospectuses, Pincus argues the structures are getting simpler.

“The interesting theme from a structuring perspective is the drive to simplicity,” said Pincus, noting that with the early-days of such offerings, “there were pages and pages of charts and boxes and arrows. They were very complicated beasts.”

But two recent financings, by Milestones Apartment REIT and WPT, both of which used the same structure, show there is greater simplicity. “As you develop a market, you refine it out and refine it out,” he added.

Milestones and WPT were noteworthy because both are Canadian trusts that qualify as U.S. REITs. “For a Canadian investor, the treatment is the same as if they bought a Canadian REIT, meaning there is return of capital on the distributions. For a U.S. investor, the treatment is as if they were buying a U.S. REIT but it’s a Canadian entity.”

In Pincus’s view, the different structures based on non-Canadian assets started with U.S. real estate through an issuer known as IPC US REIT, which at the time was the only real estate investment trust that invests in U.S. real estate. Taken public in late 2001, the issuer that used a fixed investment trust structure was taken private in 2007. ACS Media Income Fund followed. The yellow pages business of Alaska was taken public in 2003 and privatized in 2006.

In time the fixed investment trust structure, gave way to a security known as income participating securities. “It was a better structure but also added complexity because debt and equity were combined,” said Pincus. IPS was a trademark of BMO Capital Markets. Over time, a number of issuers that owned U.S. assets raised capital in Canada. Examples include: Student Transportation of America Ltd.; Medical Facilities Corp.; Atlantic Power; FMF Capital Group Ltd. and Great Lakes Carbon Income Fund (which sold units, another variation.)

Those issuers, all incorporated in Canada, were acquired or went out of business. “IPSs started as complicated [structures] but they got simpler by converting to a corporation,” noted Pincus.

The next development came after Ottawa essentially killed off the local income trust business in 2006, a move that opened the way for issuers owning non-Canadian assets to sell units in Canada — provided certain restrictions were met. Those issuers were “an unincorporated open-ended limited purpose trust” that qualified as a “mutual fund trust” under the Income Tax Act. A number of oil and gas companies (Eagle, Parallel and Argent) raised capital, a couple of others tried before Crius Energy (an electricity distributor) broadened the asset base.

So what’s next? Pincus argues the structure used by Crius Energy and a recently filed IPO for Silver Ridge Power Corp. could be extended to operating businesses. “It always starts with real estate, moves to power and pipelines and then to the broader operating businesses.”

And judging from the success of Inovalis REIT, a business based on commercial real estate in Germany and France, those assets won’t always be found in the U.S.