The Canadian Real Estate sector may be in for a shake-up. Reuters recently reported (here) that activists may be eyeing real estate investment trusts (REITs), and their approximate combined C$67 billion in market capitalization, as ripe targets for activist campaigns in light of: attractive prices, vulnerability in the market based on uncertainty surrounding the effects of interest rate shifts, and potential opportunities to unlock unrealized value.

In particular, with the Canadian REIT index down approximately 7% since August 2016, activists may ramp up efforts to target REITs for activist campaigns. Recent interest rate hikes may have the further effect of exacerbating vulnerability in the real estate sector and inciting further activist initiatives. Reuters attributes the appeal of REITs, as targets for activists, as a function of:

  • perceived corporate governance issues (including high management and board compensation);
  • underperforming stock results; and
  • recent successes in the REIT space for activist campaigns.

The potential uptick in activism may manifest in a number of ways. Capturing value in REITs that trade at a discount may be achieved by activists through various channels. By working constructively behind the scenes to generate value-enhancing solutions, activists may seek to close the gap between market price and net asset value by: boosting returns through asset sales, recapitalizing and consolidating, requisitioning shareholder meetings, or publicly announcing intentions to nominate alternative directors.

In Kingsdale Advisors’ annual Proxy Season Review for 2017, which we recently reported on (here), Kingsdale reported that the most active sector for proxy fights was the materials sector, followed by information technology and real estate. Shifting tides appear to be on the horizon for this historically robust corner of the Canadian economy. Further significant activity may be on the way.

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The author would like to thank Peter Valente, articling student, for his assistance in preparing this legal update.