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Alternative real estate lender Firm Capital is throwing its support behind Sandpiper Group in its proxy fight with Artis Real Estate Investment Trust, claiming the REIT’s plan to spin off assets into a separate company would harm investors who own preferred units.

On Monday, Firm Capital’s private equity arm FC Private Equity Realty Management Corp. said it would vote in favour of Sandpiper’s plan to replace five trustees on Artis’s board and urged other investors to do so as well.

The proxy battle flared up after Winnipeg-based Artis announced plans in September to spin off its Western Canadian retail properties into a separate company – a move intended to generate more value from assets that Artis believes the market is undervaluing.

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Sandpiper, a Vancouver-based activist real estate investor, responded to the proposal by launching a bid to oust five of Artis’s seven trustees, including its chief executive, Armin Martens, and replace them with its own slate of candidates in a move to stop the transaction.

Toronto-based Firm Capital also responded negatively to the spinoff plan and, in September, asked Artis to form an independent committee to assess the fairness of the transaction from the perspective of preferred unit holders. Preferred units are a type of security that functions similarly to debt, guaranteeing a regular payout to investors. Firm Capital has not disclosed how many preferred units it owns.

Firm Capital also asked Artis’s board to seek independent legal advice related to the proposed transaction, arguing that Artis’s existing legal counsel could not act for both common unit holders and preferred unit holders, whose interests differ.

Artis rejected both requests and, on Monday, Firm Capital threw in its lot with Sandpiper.

“We are of the view that Sandpiper’s proposed slate will bring a fresh transparent approach to management,” CEO Eli Dadouch said in an e-mail. “Management had no regard for the interest of preferred unit holders when they proposed the retail spin out.”

Firm Capital’s concern is that preferred unit holders will be left invested in a smaller company with a less-diversified real estate portfolio to support a guaranteed stream of payments.

“Based on our calculations, preferred unit holders are losing approximately $235-million of equity that formed a part of the protection in the capital stack that is relied upon to form the preferred unit security,” Firm Capital said in a news release in early October.

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Mr. Martens, CEO of Artis, responded to Firm Capital’s Monday announcement with an e-mailed statement saying that the company “welcomes constructive input from its unit holders.”

“The board, in consultation with its advisers, has unanimously determined the retail spinoff is an optimal strategy to maximize unit holder value as it simplifies Artis' business, ensures public markets ascribe proper value to the retail portfolio, and represents a non-taxable transaction to Artis," Mr. Martens said.

The proxy fight has become increasingly bitter in recent weeks, with Sandpiper questioning Artis’s disclosure of related-party transactions and Artis accusing Sandpiper of an “American-style smear campaign.” Sandpiper has already won the support Artis’s largest common unit holder, Jetport Inc., which owns 13.3 per cent of the company.

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