Toronto's Dufferin Mall is seen in this file photo. Dufferin is one of a number of high-profile malls in the Primaris portfolio.RYAN ENN HUGHES/The Globe and Mail
The real estate sector's largest takeover battle is heating up after H&R Real Estate Investment Trust emerged Wednesday night with a multibillion-dollar offer for one of the country's premier mall owners.
H&R, which was part of the team that bought Bank of Nova Scotia's flagship headquarters in downtown Toronto last year, would become the largest REIT in the country should its friendly offer for Primaris Retail Real Estate Investment Trust succeed.
The new deal values Primaris at nearly $3-billion, or $28 a share, just above a hostile $26-a-share bid put forward in December by a consortium led by KingSett Capital. When Primaris's debt is taken into account, the new offer is worth about $4.6-billion.
It is believed to be the biggest takeover ever of a real-estate investment trust in Canada, and comes with the blessing of Primaris's board and management.
The escalation is a sign that commercial real estate assets are still attracting major investment, despite concerns the market may have peaked along with the housing sector.
Investors have been drawn to the property sector for its outsized returns at a time when stocks and bonds have underperformed, and have been enabled by low interest rates and easy access to money.
Primaris owns more than 30 malls and shopping centres across the country, such as the Northland Village Mall in Calgary and Place Vertu in Montreal. The malls have benefited from the influx of American retailers looking to expand northward over the last year, with 10 of them preparing to add Target locations in the coming months.
"We have succeeded in our mandate to attract a financially superior alternative to the hostile offer currently in the market," said Bill Biggar, chair of the independent committee at Primaris, of H&R's cash-and-stock proposal. "This transaction delivers greater value to our unitholders while allowing them to remain invested in the enclosed shopping centre asset class, and provides our employees with the opportunity to be a part of the largest consolidated REIT in Canada, with excellent growth prospects."
H&R chief executive officer Tom Hofstedter called the offer "a unique opportunity to acquire an irreplaceable and much sought-after enclosed shopping centre portfolio. It permits us to expand into a new and exciting asset class in Canada with an existing infrastructure having an experienced and dedicated professional team."
The original hostile bid caught industry insiders off guard. It was put together in December by private-equity firm KingSett, the Ontario Pension Board and Canada's largest shopping mall owner, RioCan REIT, who intend to divide the assets. The proposal was immediately dismissed by Primaris as unwelcome and too low to be taken seriously.
But the bidders weren't dissuaded, suggesting another counteroffer would not be likely. "It is a bit of a work of art to be able to create this premium, and we elected to put our best price forward," KingSett managing partner Jon Love said when the original deal was announced.
If the H&R deal falls through because of a higher unsolicited bid, H&R would receive a $106-million break fee. About $70-million of that is cash; the rest would come in the form of options to acquire Toronto's Dufferin Mall and other properties along Yonge Street in the city's downtown.
KingSett once held a 12-per-cent stake in Primaris, which it sold in the fall of 2010 as it concentrated its resources on buying a swath of industrial properties as part of a $2-billion joint venture with AIMCo. The bidders in the KingSett consortium now hold about 7 per cent of Primaris's units.
KingSett could not be reached for comment by the time of publication.