Huntingdon REIT for sale

July 8, 2008
Winnipeg Free Press
Written by: Martin Cash

Real estate value up, market down

Huntingdon Real Estate investment Trust is up for sale in an effort to extract higher prices for its 80 properties than Canadian equity markets have been willing to pay.

Huntingdon REIT CEO Arni Thorsteinson, the veteran Winnipeg real estate professional, said his Winnipeg REIT's units are trading at a 35 per cent discount to the appraised value of the properties.

While it is arguable just how big a discount the market is paying -- a Bank of Montreal survey released Monday indicated Huntingdon is trading at a 12.4 per cent discount to net asset value -- analysts agree that Huntingdon is not alone in suffering this fate.

Huntingdon owns close to 80 properties mostly in Western Canada, with a heavy emphasis on the Winnipeg and Manitoba markets.

Its portfolio includes properties like the Newport Centre and cityplace in the downtown, Northgate Shopping Centre on McPhillips Street and Charleswood Square on Roblin Boulevard, as well as four surface parking lots totalling 556 stalls.

Although Huntingdon's mostly western Canadian retail, office and industrial buildings are about 96 per cent occupied, the company's units are down 15 per cent this year on the stock market.

"It is disconcerting when the value of the real estate goes up and the stock market goes down," Thorsteinson said. "You have to look at what is the alternative."

Late last year FrontFour Capital Group, a New York City hedge fund that owned about 6.6 per cent of Huntingdon's units, started publicly agitating for seats on the board and demanding that management take action to maximize unitholder value.

Early in 2008, it got its seats in the boardroom and this spring the company said it was doing a formal review of strategic options.

One analyst said that hanging a formal "for sale" sign out at Huntingdon was a foregone conclusion when the FrontFour group got control of the board.

Michael Brooks, CEO of Real Property Association of Canada, said, "Hedge funds like to turn over their investments more frequently than a long term investor would. New York money is not always patient money."

But Jimmy Shan, analyst with National Bank Financial, said Huntingdon's decision to try to do something about the valuation plight may be part of a larger trend among REITs, especially smaller ones, trying to be more creative in getting recognition for the value of its holdings.

"The credit crunch is making it harder and more expensive to get financing and REITs are not able to use the equity markets to raise money," he said. "I would say it is a market-wide phenomenon for the small caps. A number of them are being penalized and so they are trying to be more creative."

Thorsteinson said there is no timetable for the sale and he believes potential buyers might be found among the ranks of pension funds, or foreign investors who may see Canada as a haven compared to the problems in the U.S. real estate market.

But it is clear that the timing may be challenging.

"I'll tell you one thing, financing is much harder to come by and more expensive than a year ago," said Brooks. "You would think that would push the price down."

While Huntingdon's properties have solid occupancy rates and would generally considered to be solid investments, most do not have the sex-appeal that would command top dollar.

"There is good demand for trophy-type properties but I don't know if you would call Huntingdon's commercial, mainstream assets trophy properties," Brooks said.

Because of the U.S. credit crunch and the fact the markets are discounting values, Brooks said REITs like Huntingdon are increasingly unable to make acquisitions that immediately add to their cash flows and profits.

"It is very frustrating for them," he said. "They are getting frozen out. They can't seem to make accretive purchases any more. They are getting outbid and they would have to reduce their payouts (to unitholders) if they paid a higher price (for properties). They can't grow."

Huntingdon's units closed at a new 52-week low on Friday but were up five cents on above-average trading on Monday to $2.

martin.cash@freepress.mb.ca

Fast facts

• Huntingdon Real Estate Investment Trust (as of Dec. 31, 2007):
• Number of properties -- 76 (including 26 retail, 26 industrial and 22 office buildings)
• Acquisition price of buildings in the portfolio -- $486 million
• Amount of mortgage financing owing on all the properties -- $327.3 million
• Amount of space owned and managed in its portfolio -- 5.4 million square feet
• Market capitalization -- $143 million
• Unit price as a discount to net asset value -- 12.4 per cent
• Average discount to net asset value of all REITs -- 12.9 per cent

HREIT selected holdings

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