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Initial Public Offering

Yong Hian Lim/Getty Images/iStockphoto

Investors in one of Canada's largest private real estate investment trusts have raised questions about management's timing for going public.

Based in Victoria, with roughly $180-million in client funds, IGW REIT is converting to a public company that will be known as League Financial Partners. But instead of raising cash in the process, which most companies do during an initial public offering, League will simply look to list its shares on the Toronto Stock Exchange.

In some ways, the move makes sense, given what has been – until recently – a hot market for REITs. Prices of REIT units have soared in recent years as income-starved investors have clamoured for dependable sources of yield, prompting the likes of Loblaw Cos. Ltd. and Canadian Tire Corp. to spin out their real estate assets into new public trusts.

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However, the timing is peculiar for IGW because REITs typically attract investors with monthly payments, known as distributions, that provide steady income streams. Yet IGW's management halted distributions of cash on its common units last June and has yet to restore them.

The suspension irked many investors who worried that the REIT was in financial trouble. Those who asked to withdraw their funds were told that total retractions, an industry term for withdrawals, had been capped at 0.25 per cent of the REIT's net asset value a month – roughly $250,000 monthly based on a valuation when retractions were halted.

Jack Smith, a retired Alberta engineering consultant, invested a six-figure amount with IGW starting in 2008 and said he was blindsided by the halt in distributions. He was also told it could take up to five years to get his money out, based on when he entered the queue for retractions, which frustrated him because he said IGW originally touted a 90-day retraction guarantee.

Adam Gant, IGW's co-founder, said the REIT changed the retraction rule in 2011 after putting it to a shareholder vote. He argued that the previous retraction rule had the potential to hurt investors. Many of IGW's investors are approaching retirement age and management worried that if too many of them withdrew their money in a short period, the REIT wouldn't have enough cash on hand to fund the payouts. "It's almost unfair for the people still invested," he said, adding that it could force the REIT to sell assets in a fire sale to raise cash.

It was a desire to help investors to cash out that persuaded management to take the business public, Mr. Gant said. Because IGW is a private REIT, existing investors have to be "accredited," meaning they must meet certain standards for personal wealth or have other evidence of financial sophistication. Once the company is public, those restrictions won't apply, allowing the trust's existing investors to sell into a much wider pool of potential buyers, according to Mr. Gant.

Mr. Smith doesn't accept this explanation. In October, an IGW customer service agent e-mailed to explain why it would take so long to get his money back. "As I am sure you are aware, the primary method for funding retractions is through new subscriptions, which are again flowing into the IGW REIT," the agent wrote.

In other words, it appears that the intention was that existing investors could only be paid out quickly with cash from new investors.

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Faced with the prospect of waiting years to get their money out, IGW's investors overwhelmingly approved going public in a May shareholder vote.

"What choices do I have?" said Jeff Cohen, an early investor in the REIT, referring to the vote. "I had to [vote to] go public, because I may never get my principal back."

Had IGW stayed private, Mr. Cohen said the company only offered him two options: Either join the long queue for redemptions, or invest in a form of preferred shares that locked in his money for five years or seven years.

The latter option was especially vexing because right up to the distribution halt, IGW offered investors the option of short-term preferred units that could be held for six months, one year and three years. After the halt, the short-term alternatives disappeared, Mr. Cohen was told.

The lack of options, combined with the distribution halt and the long queue for retractions, started to worry him. "Our principal is being held hostage, and that makes us think something's wrong," he said.

Mr. Gant said he believed a one-year investment was still available for those unsure of what they wanted to do following the distribution cut. However, he acknowledged that most short-term options were removed, and argued that doing so did not stem from a budget issue but rather a move to satisfy investors' desires. Yields have fallen dramatically over the past few years, but investors wanted something that paid substantial distributions, and the only way to do that was to lengthen the term of the preferred shares.

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Yet some investors don't seem satisfied with the solution. "I hope [this] has a happy ending, but it may not," Mr. Cohen said.

(Tim Kiladze is a Globe and Mail Reporter.)

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