Another challenge for Pure Multi-Family REIT as unitholder seeks to replace all directors

The strategic review being conducted by a special committee of Pure Multi-Family REIT – a decision prompted by a proposal from a Florida-based private apartment owner to acquire the company – has become a little more complicated.

This week the Vancouver-based issuer received a notice from a unitholder, K2 Principal Fund L.P. indicating that it would be putting forward the names of seven people to be directors at the upcoming annual meeting. Those seven would replace the seven put forward by the committee for the May 24 annual meeting.

K2’s plan seemed to be a surprise for Pure Multi-Family. In a release, the company said the “dissident nominees have not advised whether they intend to provide a dissident proxy circular.” In addition, the company said that prior to receiving that notice, the REIT had “minimal communications” with K2 which focused on its potential sale.

K2’s action drew a response from at least one analyst, Neil Downey of RBC Capital markets. “We don’t think it’s warranted to replace any of the directors,” said Downey, adding Pure Multi-Family is a “top-performing REIT with good corporate governance and a bright future. This is not a case of looking for change because of poor performance or poor governance.”

Downey spoke of the REIT’s outperformance, the internalization of its property and asset management at “minimal cost” to unit holders, and its “disciplined capital allocation.”

Given that track record, Downey also mused about K2’s motives: is the hedge fund aiming for an outsized but very short-term return, or is it truly interested in helping to build a company for the long haul and benefiting from the power of compounding over many years?

Downey who has US$8.25 target on Pure Multi-Family, argues the company should follow the example of Pure Industrial REIT, a related company, which took time to negotiate an offer from Blackstone at a 27 per cent premium to its net asset value.

“There is no reason to doubt that RUF’s Board will not do the same,” wrote Downey. “In our opinion, replacing the Board, or even changing part of it, will compromise RUF’s negotiating position.”

The units closed Thursday at US$7.23.

Downey has a US$8.75 upside scenario that assumes the strategic review is successful and a downside scenario of US$6.50 if the review doesn’t generate a sale.

If US$8.75 is indeed the takeover price then it will be higher than the US$7.59 that was proposed by Electra America earlier this month.

Over the past six months the units have traded in the range US$5.78-US$7.37.