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Streetwise Partners REIT in public spat with its own trustees

Partners REIT's plans to internalize its management team won't be such an easy task: the company's major shareholder opposes the idea.

Just last week, Partners announced that its independent trustees decided that internalizing the management team was in the best interest of the REIT and its investors. However, their plan needs shareholder approval, and obtaining it could be tricky because the largest owner has close ties to both the company and the external manager.

Partners' biggest shareholder is an entity named IGW Public, which owns 14.7 per cent of the REIT. IGW is a subsidiary of League Asset Management, the REIT's external manager, and was also co-founded by Adam Gant, who until last month was Partners' chief executive officer. He is now vice-chair.

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Currently, Partners pays League annual fees every year for looking after its properties, rather than having an in-house team do the same. This model is widely accepted as making sense for smaller REITs because the annual fees paid are typically calculated as a percentage of the value of the REITs assets. When you're small, the fees don't amount to much, so you get access to top-notch property managers for cheap.

However, as the REIT grows, it has to pay more and more money to the external manager. It also has to pay things like acquisition fees that are embedded into the management contract. Every time Partners buys a new property, it has to pay League 0.5 per cent of the total cost of the deal.

The independent trustees who want to bring management in-house argue that this arrangement is no longer cost effective. But they've also raised some ethical issues that helped them make up their minds.

"The independent trustees have had to deal with an extraordinary number of situations involving a conflict between the manager, or an affiliate of the manager, and the REIT," they said in their new proxy circular.

"On several occasions [League] has brought forward proposals whereby the REIT would purchase properties held by its affiliates or other entities in which Mr. Gant is involved. " To block the internalization, the major shareholder has put forward its own slate of four completely new trustees, and is proposing to shrink the size of the board from six people to four.

The two key men who are not on the shareholder's slate are John van Haastrecht, who has been an independent trustee since 2007 and is leading the internalization charge, as well as Louis Maroun, current chair of the trustees.

The move surprised Mr. van Haastrecht. "We have no vested interest other than fulfilling our fiduciary role for unitholders," he said.

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Mr. Gant could not immediately be reached for comment.

The current spat will be settled at Partners' annual general meeting, held on June 6, where the results of the shareholder vote for directors will be released. Though IGW holds 14.7 per cent of the outstanding shares, there is speculation that its opinions will hold much more sway in the total vote because Partners is largely owned by retail investors, and these investors typically don't cast their votes.

(Tim Kiladze is a Globe and Mail Reporter.)

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