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The logo of Milestone Apartments Real Estate Investment Trust.

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Shareholders representing at least 5.6 per cent of Milestone Apartments Real Estate Investment Trust said a $1.3-billion (U.S.) takeover deal by Starwood Capital Group is too low.

Starwood agreed to pay $16.15 a share for the owner of U.S. rental properties, Milestone announced Jan. 19. The investment firm, controlled by Barry Sternlicht, needs to raise that bid by at least 11 per cent to $18 a share, said Steve Belisle, senior portfolio manager at Manulife Asset Management. Portfolio manager Peter Imhof at AGF Management Ltd. wants to either hold onto the stock or see Starwood increase its bid by at least 5 per cent.

"They're really giving it away, in my opinion," Belisle, whose firm owns 4 per cent of the stock through several funds, said by phone Jan. 20. "Investors should expect to get a better offer at some point. If we present a united front, we can stop the transaction." He said there are other shareholders who also oppose the deal on the basis of price, but declined to name them. Imhof's AGF owns 1.6 per cent of Milestone shares.

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Starwood's offer for Milestone, which trades on the Toronto Stock Exchange but owns rental properties in the U.S. Southeast and Southwest, was about 8.6 per cent more than the Jan. 18 closing price of $19.66 ($13.80). The shares closed at $21.53 Monday.

Milestone Shareholders

Scotiabank's 1832 Asset Management LP, with 4.4 per cent of the stock, is still evaluating the offer, portfolio manager Tom Dicker said in an e-mail. IG Investment Management Ltd., the No. 4 shareholder, declined to comment. Other top-10 investors didn't respond to requests seeking comment.

Robert Debs, Milestone's head of investor relations, declined to comment beyond the company's original statement on the deal. He said the company would have more information on the transaction in a regulatory filing in the next few weeks. An external spokesman for Starwood declined to comment.

Two-thirds of shareholders must vote in favour of the deal for it to proceed. It has already been approved by senior officers and trustees representing 14 per cent of outstanding units, according to Milestone's statement Thursday. BMO Capital Markets and National Bank Financial provided fairness opinions in favor of the transaction, according to the statement.

"I don't think anyone is happy with the deal," Imhof, who manages $800-million at AGF Investments, said by phone Monday. "If you let let the stock play out for the next year, it'll probably be higher than what the offer is for. Why would I want to replace it now for a short-term gain?"

Property Valuation

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The transaction has an enterprise value of $2.85-billion, including debt. It values the company's assets at about $120,000 per apartment, according to Neil Downey, an analyst at RBC Capital Markets. Belisle, the shareholder, said even that's low, and recalls Milestone presentations that estimated the company's 78 garden-style communities were valued at about $150,000 per apartment.

The agreement has a termination fee of $53-million to Starwood and $100-million to Milestone, according to the original statement. The fee doesn't preclude another purchaser coming in and offering a sweetened bid for Milestone, said Matt Kornack, an analyst at National Bank Financial. Although the offer gives fair value to the real estate investment trust's properties, it gives a "skinny premium" to the management platform, TMG Partners LP, which the company internalized last year, buying it for $106.5-million, he said.

"We see limited downside to holding off on tendering to the deal," Kornack said in a note to clients Sunday.

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