Investors piled into Retirement Residence Real Estate Investment Trust yesterday after news that the country's largest operator of seniors' homes is considering overtures from a buyer.
More than 2.7 million units traded hands following an announcement by Retirement Residence REIT that it had formed a special committee of the board to consider what it characterized as a "unsolicited approach from a third party."
Industry rival Chartwell Seniors Housing REIT is widely thought to be involved in the approach.
The announcement came at the request of regulators after the price of the units rose on high trading volumes this week. Units closed yesterday at $10.17 on the Toronto stock exchange, up 52 cents or 5.4 per cent. At that price, the trust is worth about $939-million. As of yesterday, the units were up 16 per cent from their close a week earlier.
David Beirnes, chief financial officer of Retirement Residence REIT, would not name the interested party, or the members of the special committee. He characterized the approach as an "expression of interest," rather than a formal bid. The board's special committee was formed in recent weeks, he said.
Mr. Beirnes also singled out three favourable reports from analysts in less than a week as a possible cause for the jump in activity.
Stephen Suske, vice-chairman and president of Chartwell, would not discuss the matter either. "It is a policy not to comment at all about the actions of our competitors."
Those familiar with the industry say Chartwell is a likely participant in any deal for the rival retirement home operator and suggested there could be other parties at the table.
Competition is fierce for all forms of real estate, and institutional and foreign investors have recently come to regard the retirement home industry as a sector that offers higher returns. That makes the REIT attractive, despite past performance difficulties.
"The reality is this is the largest portfolio of seniors housing in Canada," Raymond James analyst Gail Mifsud said. "In these tough acquisition markets it's next to impossible to assemble a portfolio of that size."
Last spring, Australian investment bank Macquarie Bank Ltd. bought privately held retirement home operator Leisureworld Caregiving Centres of Markham, Ont., for $598-million.
Chartwell also teamed up with ING Real Estate Australia Pty. to buy a portfolio of U.S. seniors homes.
"There is a heck of a lot of capital looking for the higher returns available in seniors housing if you can stomach the risk," Canaccord Capital analyst Shant Poladian said.
And the sector does come with risks. Retirement Residence REIT was forced to cut distributions in 2004 in response to dismal results, caused partly by an oversupply of units in the Ontario market. As well, the senior housing operator has faced major capital investments in its existing properties, which in some cases were badly in need of repair.
The unit price fell as low as $7.31 last fall, in part because of uncertainty over the government's tax treatment of retirement homes and the trust industry in general.
Since November, the REIT has gained more positive coverage from some analysts, who have pegged it as an undervalued stock that is likely to rise either because of improved results or an acquisition, although others are less bullish.
Scotia Capital analyst Himalaya Jain's $10 target for the units was the highest on the Street. He was one of the three analysts, along with Mr. Poladian at Canaccord and Neil Downey at Royal Bank, to single out the REIT in the past week.
Mr. Jain noted that Retirement Residence REIT is still "in the penalty box" with many investors because of its distribution cut in 2004. But he predicted its fundamentals will improve this year and next.
With yesterday's news, and unit prices above $10, several analysts cautioned that a deal may not happen or may take a long time to complete. They pointed to the experience this summer with O&Y REIT, where the original offer did not meet investor expectations, as an example of what could happen.
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