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InnVest Real Estate Investment Trust owns hotels with brands that include Holiday Inn.Kevin Van Paassen/The Globe and Mail

An activist investor is taking on the board of Canada's largest publicly traded hotel owner, arguing that shares of InnVest Real Estate Investment Trust can be pumped up 50 per cent with a plan to replace a majority of trustees and create a stronger lodging company.

New York-based Orange Capital LLC has bought up just over 10 per cent of InnVest, a stake worth about $50-million. On Tuesday, Orange will open a public proxy campaign to rally support from InnVest's owners for the fund's slate of seven trustee nominees. They include high-profile Canadian executives such as Robert McFarlane, the former chief financial officer of Telus Corp., and Edward Pitoniak, who ran hotel owner CHIP REIT before it was sold in 2007.

InnVest owns hotels with brands such as Sheraton, Holiday Inn, Delta and Comfort Inn. Orange argues that too many of those hotels are producing subpar results and InnVest investors have suffered as a result.

Orange's co-founder and portfolio manager, Daniel Lewis, says in a presentation to investors that the current executives and board are too cozy with the company that provides management services to InnVest, and that the management contract is wrong. The management company, Westmont Hospitality Group, gets paid based on revenue and capital expenditures, regardless of whether InnVest's hotels make money or the stock performs well. Over the long term, InnVest units have lagged other REITs by a wide margin, and dividends have been repeatedly chopped. Meantime, InnVest has paid Westmont $180-million in fees since 2002.

InnVest will be able to point to a strategic plan that it put in place a year ago to sell hotels that don't make enough cash and to give a makeover to remaining properties. Analysts say the plan is showing results and has been welcomed by investors. In the past year, InnVest's shares have perked up.

As in all elections, personalities and public relations are just as key as plans and performance numbers. Activist Bill Ackman's victory at Canadian Pacific Railway Ltd., for example, came after months of political campaign-style tactics and loud rhetoric.

Orange and Mr. Lewis are said to prefer less confrontational tactics. The hedge fund is a specialist in real estate, and has at least two other proxy battles under its belt. Orange is trying to position itself as different from activists who simply want companies sold or broken up.

Its plan at InnVest is to cut debt and sell more underperforming hotels. Once that has happened, InnVest will have stronger shares it can use to buy properties to create a growing Canadian-listed hotel company that is more popular with investors. That's something Canada has not really had since the takeovers of premier lodging stocks such as Fairmont Hotels & Resorts and Four Seasons.

That requires "a cultural shift and new independent trustees," Mr. Lewis said.

Mr. McFarlane's support is designed to signal that Orange's plan is focused on growth, not raiding the company. He was at the forefront of a long and bitter proxy battle between Telus and a fund called Mason Capital, in which Telus turned the phrase "New York-based hedge fund" into an epithet. Now, Mr. McFarlane is casting his lot with a New York-based hedge fund and saying that Orange "has a credible plan" that will "generate meaningful value."

InnVest will not be surprised by the public action. Orange has already written a letter to the board and InnVest said late Monday it will meet with Orange.

InnVest went public in 2002 as a way for Westmont and a partner to sell a stake in a portfolio of hotels they owned. Westmont is well known in hospitality, as founder Majid Mangalji has taken the company from a single hotel to a huge portfolio spanning North America, Europe and Asia.

In addition to earning fees, Westmont has the right to nominate two InnVest trustees. Mr. Mangalji is chairman and Westmont pays part of the salary of InnVest's chief executive officer and its chief financial officer. InnVest's head office in suburban Toronto is at the same address as a Westmont office.

One analyst, Mark Lutenski of BMO Nesbitt Burns, has already called for a "downsized role" for Westmont. In a December report, he noted the potential for conflicts of interest and said InnVest should have its own corporate management "focused exclusively on the profit earned for InnVest unitholders."

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