OSC Killing Home Capital Group

Terence Corcoran: The Kool-Aid man out to kill Home Capital raises a glass to the OSC

An investment banker with one of Canada’s major banks, surveying the devastated state of Home Capital Group, has a question: “I want to know why the OSC (Ontario Securities Commission) perpetrated this thing.” Did Home Capital, whose shares have lost 70 per cent of their value since April 19, “perpetrate a fraud on the market?

REI & CAR REIT Bombshell!

There is a lot of potential M&A that could be done in the Canadian REIT sector for companies to realize greater diversification and scale. There is also a rule in Canadian REIT laws that allows for a REIT to own up to 20% of its assets in shares of other REITs. RioCan & Canadian Apartment Properties are two of the largest REITs in Canada and both are based in midtown Toronto.  They operate in different REIT sectors.  RioCan is mostly focused on retail, while CAP is exclusively focused on multi-unit residential. With the liquidity for the traditional plazas that RioCan has historically been targeting drying up, and opportunities for growth in core urban markets remaining strong, RioCan has been developing its urban portfolio. This is particularly true in Toronto, Calgary, and Ottawa with announcements being made recently.

RioCan has a few large projects coming down the pipe including the Well in Toronto and a mixed use development at its head office at Yonge & Eglington in Toronto. But RioCan doesn’t have much expertise in residential management in house, and with a powerful balance sheet (and flush with cash from the upcoming sale of its US portfolio), it has now been confirmed by an analyst at RBC that RioCan owns more than $300 million worth of CAP units, making RioCan Canadian Apartment Properties largest shareholder.

Could this mean an eventual merger between the two large REITs?  As a unitholder in both companies, I think this would be a great idea. It would provide the combined entity with more scale and diversification.  RioCan has a market cap of $9 billion and CAP has a market cap of $4 billion. The combined entity would have a better chance of collecting minority investment from some of Canada’s pension funds because of its combined size. The combined entity would also be able to fund larger development projects in Toronto without pushing up against various legal REIT tax caps.

Based on the estimates from RBC, RioCan is getting close to owning 10% of CAP REIT. Anything over 10% and they would have to formally disclose their position and report any additional purchases of CAP REIT shares. I think its less likely they will do this. I think its more likely that they make an offer for the remaining shares, but at the current valuation of CAP (distribution yield of only 4%) RioCan shareholders will be paying a high price.

Sleuthing by RBC’s Neil Downey reveals CAP REIT’s surprise shareholder

According to Neil Downey, a managing director and real estate analyst at RBC Capital markets, the evidence is beyond a reasonable doubt. What’s less clear is the motives behind the news that one real estate investment trust is the largest shareholder in another real estate investment trust.

Brookfield Buying Rouse

Brookfield Asset Management has made an offer to purchase the remaining interest in Rouse Properties it does not already own. Shares of Rouse have been trending lower over the past year and currently have a dividend yield of just over 4%. Rouse owns a portfolio of malls across America.  Rouse was spun out of General Growth Properties a few years ago and has been floundering ever since. It was only a matter of time before Brookfield made an offer as they held a 33% stake since the spinoff. Some of Rouse’s properties have potential for intensification and development because they are in growing communities, while others are stuck in terrible locations in shrinking communities. Maybe full ownership of Rouse will give Brookfield the flexibility to restructure the portfolio aggressively.

 

Morguard taking control of Temple Hotels

Happy to hear this week that Morguard will take over management of Temple Hotels, details listed in the press release below. This is positive news for Temple which is being hurt by the Western Canadian slump and a weak balance sheet. Hopefully Morguard will clean up Temple’s balance sheet, re position and further diversify its assets, and ultimately create new shareholder value.

Temple Hotels Inc. Announces Conditional Assignment of Asset Management from Shelter Canadian Properties Limited to… — WINNIPEG, Dec. 23, 2015

Dec. 23, 2015 /CNW/ – Temple Hotels Inc.

CNQ royalty trade with PrairieSky

What’s interesting about this deal is CNQ will take cash and shares for selling its royalty lands to PrairieSky, and then give their CNQ shareholders a special dividend of PSK stock. With this transaction, PSK will get much bigger than rival Freehold Royalties, which needs to manage a controlling shareholder in the CN Pension Plan.

Casino REIT dominoes are falling

Last week MGM Resorts International announced they will carve out a REIT from their operations to be called MGM Growth Properties. This is the first major Las Vegas strip property owner to clearly give intentions on REIT creation. Caesars has a desire to convert to a REIT, but its still mired in a long bankruptcy battle with its creditors.  For MGM, 10 of their properties will be rolled into MGM Growth Properties including most of its Las Vegas strip properties with the Park development, but the REIT will exclude Bellagio and the MGM Grand.  The festival grounds on the corner of Sahara and the Strip as well as Circus Circus will also be excluded from the REIT. MGM Detroit and the gulf coast properties will be included, and MGM Springfield will likely be folded into the REIT once its operational.

The creation of an MGM REIT will have major impacts on the Las Vegas Strip, but at first, MGM Resorts International will retain a 70 percent stake in MGM Growth Properties. This means that MGM Resorts International will control the REIT and operate the two divisions with parallel business strategies.

Cenovus Shedding Royalty Assets

Cenovus Energy is likely joining a growing list of Canadian energy companies who are selling their royalty assets as a way to shore up their balance sheets as crude oil and natural gas prices stay a relatively low levels. TD will advise Cenovus on the best way to liquidate their royalty assets, which Bloomberg reports could be worth as much as $1.6 billion. The most obvious buyers, are Freehold Royalties with a market cap of about $1.35 billion and PrairieSky with a market cap of about $4.80 billion. The Bloomberg article referenced below also mentions Franco-Nevada as a potential buyer. FNV has a market cap of $9.5 billion and probably has the most conservative and balanced portfolio of royalty companies, although its portfolio is focused on metals. Adding this much energy royalties to their portfolio I think would be a wise strategic move.

The royalty market should not forget about Canadian Natural Resources, who is studying a possible sale of its own royalty portfolio, which could be worth about $2.5 billion. I think a CNQ royalty sale will also depend on the price of energy and the way it will impact its own balance sheet. A lower price may force CNQ to gain more liquidity and with low interest rates, a royalty sale will look more attractive. If energy prices rise, CNQ might be more likely to hold their royalty assets as there will be less pressure on their balance sheet. Royalty investors might be hoping for lower energy prices with this scenario in mind since royalty investors might be able to pick up the best bargains a lower points in the energy market price cycle.