Primaris has quietly outperformed the market this year, buoyed by a strong portfolio of shopping malls and a balance sheet that features a pile of cash and lots of breathing room on debt maturities.
But investors have been given something else to mull over: Toronto-based KingSett Capital has increased its holdings to 12.16 per cent this week. The private investment firm said the purchase was done solely for "investment reasons," but KingSett's history - it structured and financed the $585-million takeout of Atlas Cold Storage in 2006 - hints at a broader move.
"By going over the 10-per-cent reporting threshold and making its stake in the REIT public, KingSett has dangled the possibility of a major payday in front of Bay Street's investment banking community," said Michael Smith, an analyst at Macquarie Securities. "My guess is that their phone is going to ring off the hook."
What does Primaris do?
The retail-focused REIT handles all aspects of its business - owning, managing, leasing and developing properties across Canada. It was created when the Ontario Municipal Employees Retirement System spun out some of its retail assets in 2003.
It started out with a portfolio of six properties in five markets, and now owns 28 properties in 21 markets. The portfolio's approximately 10.5 million square feet of retail space are 97-per-cent occupied.
Its largest property is the Sunridge Mall in Calgary, an 810,000-square-foot shopping centre that was built in 1981 and boasts a 99.7-per-cent occupancy rate. Other major properties include Place D'Orleans in Ottawa, Midtown Plaza Shopping Park in Saskatoon and Place Fleur de Lys in Quebec City.
"What the market may under-appreciate is the value of the Primaris franchise," said Mr. Smith, who has an "outperform" rating on the units. "They have a full slate of accounting and leasing staff that's very hard to duplicate."
How have its units done?
In a choppy year for equities, Primaris has seen its units move 7 per cent higher since Jan. 1. It's a strong gain, considering the S&P/TSX capped REIT index - which tracks real estate investment trusts on the TSX - has posted a 1-per-cent gain and the broader TSX has fallen 1.3 per cent.
Its units yield 7.1 per cent, and pay a 10-cent monthly distribution. They closed Wednesday at $17.33.
"Improving retail fundamentals and recent high-quality acquisitions position Primaris for a good year of funds from operations [earnings]growth in 2010," Canaccord Genuity analyst Shant Poladian wrote as he raised his price target to $20 last month from $19.50.
Nine analysts follow the company's units, according to Bloomberg. Seven maintain "buy" ratings, while two maintain "hold" ratings. They have an average price target of $18.89.
The firm earned $22.5-million in the first quarter, or 35 cents a unit, up from $21.8-million, or 34 cents last year.
"Primaris has been a leader in the REIT group for value creation and we expect this to continue with the internalization of management, slated development programs and the improving portfolio quality through acquisitions," said Mandy Samols, an analyst at Raymond James.
What has it done lately?
Primaris completed an $82.5-million equity offering at the end of May, and another $12.5-million was added to the coffers last week through the over-allotment option. While $16.5-million is earmarked for debt reduction, Scotia Capital analyst Pammi Bir expects the rest of the money will be used to expand its portfolio.
"We believe the majority will be earmarked for acquisitions, particularly in light of the recent increase in both on- and off-market investment opportunities that appear to fit the REIT's strategic profile - major retail centres in secondary cities and mid-market retail in major cities," he said, recommending investors focus on "buying on weakness."
A keen investor
KingSett Capital, a private investment company led by Jon Love that owns commercial real estate across Canada, raised its stake earlier this week by buying another 200,000 units at $17.20 each.
There's another reason for takeover speculation: Mr. Love used to be chief executive officer at Oxford Properties Group, which once owned several properties now owned by Primaris. In other words, he knows the goods.
"It makes a lot of sense for KingSett to make an acquisition here," said Dennis Mitchell, a senior portfolio manager at Sentry Select Capital. "They have good assets and would fit well together."
Others aren't so sure. Ms. Samols at Raymond James said it's more likely that KingSett simply considers the units a good buy at current prices and moved when the opportunity presented itself.
"We believe that KingSett's willingness to acquire additional units in the REIT … is a strong indication of the relative attractiveness of the REIT units," she said.
A REIT primer
Why invest in a real estate investment trust?
REITs buy and sell properties, giving investors a passive way to own real estate. They also pay cash distributions.
Net asset value (NAV)
Values of all assets, minus the debt.
Funds from operations (FFO)
Comparable to earnings per share for stocks, this measures a REIT's profitability. Or lack thereof.
Adjusted funds from operations (AFFO)
A more precise measure of profitability that strips out one-time capital expenditures.
The amount of money a REIT pays its unit-holders, relative to how much it earns. A lower ratio means it is hanging on to its cash; ratios close to 100 per cent could mean the distribution is in peril of being reduced.