‘Asymmetrical economics’ in WPT Industrial REIT deal leave some disappointed

What were they thinking?

All we know would be that the decisions made by WPT Industrial REIT following an eight-month strategic review – which failed to look for a buyer for the entire company – have disappointed investors plus some property analysts.

How much so? The units, which traded within the US$11 range in the week prior to the decision’s release, have fallen, by about US$2 to an all-time low, closing Thursday at US$9.10. Trading volume continues to be bigger than normal and a number of analysts have either changed their rating or their target price.

Overall five from the seven analysts who cover the TSX-listed REIT – whose assets are in the U.S – rate the company a buy with the other two deeming it a hold. Before the review, WPT was rated a buy by all seven. Price targets now vary from US$11.25 to US$12.75.

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Neil Downey, Md, Global Research, at RBC Capital Markets termed the “review outcome,” a minimum of in the near term, as “disappointing. We’d thought the REIT’s modest size, top quality, albeit largely secondary market portfolio would attract a powerful en-block bid.”

Downey made those remarks after the review that saw Alberta Investment Management Corp. become a large shareholder – with the majority of that stake coming from the acquisition of units owned by the REIT’s advisor, Welsh Property Trust. Even though AIMCo is paying an above-market price of US$11.75 per unit, “no such premium or liquidity avenue were deliver to the advantage of other unit holders,” he wrote.



In addition to as being a large investor – with a possible 29 percent stake – there is another advantage for AIMCo: it will become someone inside a new management company WPT Capital Advisors that will manage the REIT along with other funds which may be developed. In this manner AIMCo is in another position than other unitholders.

That few the various interests held by WPT’s unitholders is really a theme Downey has noted in the past. Last May Downey “highlighted the potentially conflicting interests between one sizable investor having a shorter-term internal rate of return-driven goal and lots of unitholders who may have preferred a long-term return profile, albeit with a lower IRR.”

Never one to hold back, Downey, in the recent note, added: “In an unexpected fashion, these inherent conflicts appear to have materialized.” After noting the “asymmetrical economics in support of the advisor,” Downey promptly cut his rating and target price (to US$11.25 from US$13.25.)

Downey isn’t completely negative around the deal – even when some of the potential positives “are likely to take many years to materialize.” Two positives would be the “endorsement” with a large and complicated institutional investor, and the possibility of the REIT to sign up in opportunities that may emerge from the WPT pipeline.

Jimmy Shan, a real estate analyst at GMP Securities also reduced his target, while keeping his buy rating. “The disappointing news is that after running a full process in what would be a hot investment market, the outcome is no sale,” he said.

For its part, WPT said throughout the strategic review process, “the REIT explored a variety of alternatives. The REIT received several expressions of interest from prospective purchasers and strategic partners.” However, “after careful review, its Board of Trustees unanimously determined that the transactions announced today have been in the very best interests from the REIT and it is unitholders.”

Maybe, but in his note, Shan added, “management offered little information on the process.”

bcritchley@nationalpost.com