KEYreit – A Great Problem To Have

At A Glance (from Google Finance):

Symbol: KRE-UN:CAN
Price:$8.14
Market Cap: $121.02MM
Yield: 7.38%

Me

Wife

Mom

Stock

Option

KEYreit is a Real Estate Investment Trust (REIT) – they own 200+ single retail locations across Canada but primarily in Ontario and Quebec.  These properties are leased to Shoppers, Staples, and Taco Bell, Pizza Hut and KFC franchises.  See at the very bottom  for an idea of some of their properties.

I want to focus on the news of the day – but since this is pretty new, I’ve got a why I bought this investment and what I liked and didn’t like at the end of the post.

What Happened?

KEYreit announced an agreement to be bought by Plazacorp. Plazacorp (PLZ) also owns retail real estate, primarily in Atlantic Canada. According to the terms of the deal:

  • Offer price of $8.35/unit values the REIT at $124MM
  • “Unit holders with have the option of $8.35 / unit in cash, subject to a maximum aggregate cash amount of approximately $62MM, and then 1.7041 Plazacorp shares or any combination thereof, subject to proration”

I’m jumping up and down from the offer (you’ll know why shortly why I’d be excited for a 2.5% buyout premium) but unsure what that last condition means. Based on the price of PlazaCorp shares today, the value / share was only $4.75 * 1.7041 = $8.10.  In an ideal world, the price of PLZ should move up to close the $8.35 gap as we move closer to the deal close at the end of April.  The $62MM in aggregate is what threw me for a loop – does that mean:

  • the first 50% of shareholders to give their shares and request cash get $8.35 in cash, the remainder get shares; or
  • everyone gets 50/50 split in cash/shares?

In the event that I ended up with PlazaCorp shares, I did a little digging and didn’t like a few things:

  • Market – with the majority of presence in the Atlantic provinces, I questioned the ability for the community to support the tenants, especially if times got tough
  • The CVE – PlazaCorp trades on the Canadian Venture Exchange(CVE) and not the Toronto Stock Exchange (TSX).  To me this created liquidity questions – if I ended up with shares, how quickly could I sell them on the market?  Would I be forced to get below the $8.35 value if there weren’t enough buyers?

I looked at a couple of options:

  1. Sell all shares on the open market – price at $8.14; and lose out on the remaining $0.21 in the deal; or
  2. Let the takeover happen naturally and sell whatever PlazaCorp shares I ended up, hoping not to take a hit on liquidity, or any additional selling from all KEY REIT shareholders, etc.

I’m actually leaning towards a 50/50 split – sell half now to reap some of the increased share price; and give Plazacorp a chance.  Luckily, there was a 3rd option:

3) Wait and see and hope for another bidder

What actually happened earlier in the year (which made me want to post about the experience) is a bid from another REIT (Huntingdon Capital – HNT) at $7.00 / share for 45% of the outstanding units.  They had already bought 5% through a unit offering – this deal already raised some other questions – such as if I wasn’t in the 45%, would I get my $7.00?  Anyways, long story short, they eventually upped the bid to $7.00 for all units, then $7.50.  During this time, the KEYreit board was looking for alternatives and that’s when the first bid from PlazaCorp came – at a value of $8.00 / unit (with the same 50% aggregate term) – see timeline below:

KEYreit Timeline

At the time of the first PlazaCorp bid, I had the same questions and the same options.  I likely would have gone for the sell half / keep half approach but with Huntingdon Capital in the background, I decided to wait it out and see what happened.  As it turned out, Huntingdon upped their bid to $8.00 (all cash) which leads us to today – PlazaCorp’s $8.35 bid.  It’s a much easier decision to make when you have two bidders jacking up the price – but I did want to talk about just the PlazaCorp dilemma.  In any case, I’ll just wait and see until the dust settles and a winner comes out:

  • PlazaCorp wins, shares = buy out price -> sell all shares
  • PlazaCorp wins, shares < buy out price -> sell half
  • Huntingdon Capital wins -> sell all shares

With the proceeds, I look to invest in another REIT (which I’ll hopefully write about).

…and the history behind buying KRE.UN

I found KEY REIT, called Scott’s REIT at the time, by sheer luck – when I was looking for high yield investments.  The REIT’s major tenant was Prism Holdings (owner of Pizza Hut, Taco Bell, and KFC franchises).  In 2011, the REIT experienced a major tenant issue (Prism going bankrupt) that caused a significant drop in share price. At the time, the REIT was $5.50 and issuing a $0.08 monthly distribution resulting in a 17% yield!  I started a position thinking that the drop in share price might be temporary; and that once new tenants were found, the stock price would go back to the $7-8 range. In the meantime, a 17% yield would tie me over while waiting for the price to go up.

There was always a risk that the dividend would no longer be paid out – REITs by law must distribute 90% of their income to unit holders.  Since Prism Holdings accounted for a significant chunk of the REIT’s business – the ability for the REIT to replace Prism with new tenants would affect how sustainable the yield would be. As it turned out, the Prism issue did have an impact and in 2012, the REIT dropped the monthly distribution to $0.05. With the stock trading at $6 – the yield still was relatively high at 10%; with potential to go back to $0.08/month once the bankruptcy issue was dealt with.  That theory unfortunately won’t play itself out with the bidding war now, but considering that the all the properties are now leased; and the buyout price is the same as the unit price before the bankruptcy issue came about, I’m thinking this would have eventually happened.  Unfortunately, I would have liked to collect the distributions while waiting.

One thing I have discovered about the REIT – they have some very eyebrow raising independence practices. The CEO, John Bitove Jr., is the largest shareholder at ~16%. Because the REIT only owns properties, it hires a firm to help lease the properties – in this case, JBM, which is also owned by the CEO. In 2012, JBM and KEYreit increased the management fees despite the Prism bankrupt situation. The kicker – John Bitove Jr. was also CEO of Prism Holdings up until the point when the company declared bankruptcy.

Some Sample KEYreit Locations
1 Mont-Royal Road in Montreal
KEYreit - 1 Mont-Royal Rd

466 Queen St. in Toronto
KEYreit - 466 Queen Location

636 Bloor St. in Toronto
KEYreit - 636 Bloor St

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