Minuk's Musings and InterRent REIT

This week Canadian Real Estate company InterRent REIT agreed to being acquired by a group that interestingly included Singapore’s sovereign wealth fund.

 

Shareholders will receive $13.55 per unit and the stock quickly jumped to that price.

 

Source: factset

 

Why was the stock trading at only $11.75 if the value of the company was in fact $13.55? Was the stock market simply undervaluing InterRent? Or is Singapore’s sovereign wealth fund grossly overpaying?

 

Well, there is currently a phenomenon across the publicly traded real estate sector where the stock values of many publicly traded REITs are trading at a discount (below) their Net Asset Value. In other words, for the same REIT, stock market participants are valuing the companies for less than would private investors.

 

If we knew exactly which publicly traded REIT would be taken private next and when, then we could easily take advantage of this phenomenon.

 

But the reality is that most REITs will stay public and therefore, it would be risky business trying to time investments based on potential acquisition news – you might be waiting forever for an acquisition that never comes.

 

Nonetheless, it can be expected that over time the valuation gap closes one way or another and this can occur faster in an environment with more acquisitions taking place.

 

With that said, it wasn’t just InterRent shareholders that benefited from this deal announcement. The entire REITs sector in Canada is +4% this week following the news in hopes that this deal is a signal of more acquisitions to come.

 

Source: Morningstar.ca

 

What happens next for InterRent? InterRent starts a 40-day "go-shop" period during which they may actively solicit and negotiate better deals with anyone willing to offer more for the company. That may explain why the stock is now trading even slightly above the $13.55 takeout value.

 

If you, or someone you know, would like to discuss BMO’s top REIT picks, feel free to reach out.

 

Have a great weekend,

 

Rich

Investment Advisor