The situation for Northern Property and True North is more complex because a takeover is involved. The two companies have very different businesses – Northern owns a portfolio of properties that are heavily skewed toward the North, with apartment units in places such as Iqaluit and Yellowknife, as well as Alberta, while True North is focused on apartment units in Ontario. Some investors think it doesn’t make any strategic sense to combine the two.John Lehmann/The Globe and Mail
The chief executives trying to complete Canada's latest real estate merger have something new to explain to investors: a $9.8-million incentive fee.
From nearly the moment that Northern Property REIT announced plans in August to buy True North Apartment REIT and a portfolio of properties from Starlight Investments, investors have been skeptical of the combination. Northern Property's units fell 10 per cent after it was announced, and they haven't recovered since. It seems shareholders are uneasy with the $3-billion marriage, to be named Northview Apartment REIT.
A spokesperson representing the two companies in the takeover declined to comment on their behalf.
As the investor vote approaches, executives from both companies are looking to change the narrative, launching a new website to explain the deal and putting together a presentation to better explain themselves.
Yet a new disclosure made in corporate filings has added an extra wrinkle.
Tucked into the proxy circulars filed last week is the news that True North founder Daniel Drimmer will be paid a $9.8-million "incentive fee" as part of the combination. On top of founding True North, Mr. Drimmer also owns Starlight Investments, and an existing asset management agreement between True North and Starlight stipulated that Starlight was eligible for an incentive fee from the REIT every year.
As part of the proposed merger, that agreement will be scrapped. Northern Property has agreed to pay Mr. Drimmer a $9.8-million lump sum to do away with the contract.
Such a payment is common when a real estate management contract is cancelled, but that doesn't mean investors are usually happy with it. Earlier this year, Michael Cooper charged his REIT $127-million to buy out his management contract, a deal which one fund manager referred to as "some of the most egregious corporate governance I've seen in my career."
The situation for Northern Property and True North is more complex because a takeover is involved. The two companies have very different businesses – Northern owns a portfolio of properties that are heavily skewed toward the North, with apartment units in places such as Iqaluit and Yellowknife, as well as Alberta, while True North is focused on apartment units in Ontario. Some investors think it doesn't make any strategic sense to combine the two.
Rough math also suggests Northern's earnings per share could drop by double-digit percentage points if the deal goes through.
To investors potentially opposed to the deal, the $9.8-million upfront payment to Mr. Drimmer might not sit very well.
Tim Kiladze