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Merger of REITs to create colossus

Property trusts in $510 million deal
Fierce business rivals join forces

Toronto Star - March 31, 2004
by Tony Wong

It was over a breakfast of fruit and coffee in a north Toronto diner several weeks ago that Thomas Schwartz and Dino Chiesa first talked seriously about a deal that would result in the creation of one of Canada's largest owners and operators of residential real estate.

Schwartz, chief executive officer of Canadian Apartment Properties Real Estate Investment Trust, and Chiesa, CEO of Residential Equities Real Estate Investment Trust, had known each other from the late '70s. Schwartz was a small developer then, and Chiesa was an executive at the Canada Mortgage and Housing Corp.

The two friends would eventually become fierce business rivals as their companies became major owners of apartment buildings across the country.

Yesterday, they joined forces, as CAP REIT announced that it would buy ResREIT in a deal worth about $510 million.

The acquisition nearly doubles CAP REIT's portfolio by adding 10,890 suites to its own stable of 13,438 apartments and townhouses.

"Bay Street has been saying this has been a move that makes sense, and we've been friends for a long time, but we didn't get serious until recently," said Schwartz in an interview. "It's a good accretive transaction. We're buying 11,000 apartments in one transaction and getting one of the finest portfolios in Canada."

Schwartz said the companies complemented each other geographically and strategically.

"We've tended to concentrate on mid-tier and affordable apartments, and ResREIT has more of a luxury portfolio, so this diversification will spread some of the risk," said Schwartz.

In some areas of Western Canada and cities such as Montreal where the REITS were not as dominant, the combination of the two should create synergies and economies of scale, he said.

The cash price of $18.60 for each ResREIT unit represents a 15 per cent premium based on the 20-day weighted average price of ResREIT units on the Toronto Stock Exchange to March 29.

ResREIT unit holders will get either the $18.60 a unit in cash or 1.216 units of CAP REIT. The offer provides for cash up to a maximum of $175 million. At yesterday's stock closing, the non-cash component of the deal values ResREIT units at $19.11. CAP REIT will also assume about $400 million in the target firm's debt. CAP REIT said the purchase would raise its annual distributable income to about $1.35 a unit.

"Size is important in the marketplace, and this gives larger investors who are looking for liquidity something to look at," real estate analyst Harry Rannala of Raymond James Ltd. said yesterday. "It's also a very competitive market that is tough to find deals that make sense, so an acquistion of another REIT is one way to go."

But Rannala cautioned this "is not a cheap deal. They are paying a premium for this transaction and they're offsetting that premium by use of lower interest rates and the synergies and savings going forward."

In an interview, Chiesa said the "price paid represents half the cost of replacing the buildings. That's notwithstanding putting together a portfolio of this magnitude."

ResREIT unit holders will vote in late May on the deal, which has already been approved by its board.

Chiesa said that 32 per cent of the company's unit holders, including the Ontario Municipal Employees Retirement System, support the deal.

The transaction comes at a time, however, when analysts are warning that the real-estate sector may be in for a decline.

"We have an underperform on the real-estate sector in general looking forward," said Rannala. "We clearly believe real estate is very expensive relative to the fundamentals."

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