Real Estate in the Crosshairs
they remain vulnerable due to the gap between the self-assessed net asset value of their assets and the public value of the REIT’s equity.
In Canada, REITs—the most common form of publicly-traded real estate entity—continue to be the target of investor demands. Over the past six years, REITs made up an average of 5% of targeted issuers in the relevant year, increasing to 8% of targeted issuers in 2024. This increase might be linked to the COVID-19 pandemic, which ushered in work-from-home policies and online shopping habits that shaped perceptions among investors of the viability of the REIT sector. Additionally, the Canadian real estate sector experienced stagnant levels of growth and declining asset values in 2022 and 2023 as the economy wrestled with inflation and high interest rates. These factors have resulted in turbulent times for real estate issuers. With macroeconomic and sector-wide trends shining the spotlight on REITs as underperformers, activists have put their capital to work looking for solutions to the problems faced by REITs. Two of the most critical problems are discussed below.
INVESTOR PROTECTION
Unlike corporations, which are creatures of statute, REITs are formed and largely governed by contract. Historically, this has resulted in differences in investor protections and customary corporate governance practices. The Canadian Coalition for Good Governance and other stakeholder groups have warned investors that REITs may not offer the same standards of investor protection as companies subject to the rules and requirements of corporate statutes. Although many REITs have amended their governing contracts to introduce investor protections substantially similar to Canada’s federal corporate statute (such as the right to requisition a meeting of unitholders, an oppression remedy and a prescribed fiduciary duty of trustees analogous to the duty of loyalty owed by corporate directors), inconsistencies remain. In addition, externally managed REITs have been targeted by activists asserting that an internal management structure would be less costly and more efficient and would minimize conflicts of interest between management and unitholders.
THE GAP TO NET ASSET VALUE
In recent years, many REITs have experienced a disconnect between the value of their public equity and their underlying assets. With the COVID-19 pandemic, retail, office and diversified REITs have been especially affected. With unitholder bases consisting mostly of retail investors, REIT unit prices are subject to gloomy public speculation. Although REITs have proposed value-creation plans to demonstrate thoughtful capital allocation,
10
Davies | dwpv.com
Powered by FlippingBook