InnVest Reviews Orange Capital Push for Board Shakeup at REIT

InnVest Real Estate Investment Trust is considering its next move after meeting with Orange Capital LLC, a New York-based hedge fund that’s urging a shakeup at the Canadian hotel REIT.

InnVest, which counts Fairmont and Comfort Inn hotels in its portfolio, said yesterday a special committee of the board of trustees met with Orange Capital Feb. 10. InnVest has until Feb. 25 to respond to Orange Capital’s proposal to install its own slate of directors, a new chief executive officer, and sell assets after the hedge fund amassed about a 10.3 percent stake in the company, according to data compiled by Bloomberg.

“We had what we thought was a very informative and constructive discussion with Orange Capital,” Laurence Geller, chairman of the special committee that InnVest formed after Orange Capital issued its proposal for the Mississauga, Ontario-based company. “The InnVest Special Committee will discuss and determine appropriate next steps.”

Orange Capital wants InnVest to add seven new independent directors including Anthony Melman, who activist investor Bill Ackman added to Canadian Pacific Railway Ltd.’s board. Orange also wants the REIT to overhaul its relationship with external asset manager Westmont Hospitality Group Inc., a closely held Houston-based company. Orange Capital said the moves can pump up InnVest’s value by 50 percent.

“We’re always happy to engage and listen,” Daniel Lewis, co-founder and managing partner of Orange Capital said Feb. 10 by phone before the meeting with InnVest. “It’s always better to avoid a fight when possible.” It’s the fund’s first public campaign in Canada.

Shares Drop

“We’re not looking to do a quick flip but to build value,” Lewis said.

Beutel Goodman & Co. Ltd., a Toronto-based investment manager and the largest shareholder in InnVest with about a 11 percent stake, according to Bloomberg data, said it backs the activist investor’s plans.

Shares in the REIT have dropped about 47 percent since it started trading in July 2002, compared with about an 80 percent gain in the Bloomberg Canadian Real Estate Investment Trust Index over the same time period. InnVest rose 0.6 percent to C$5.23 at the close of Toronto trading yesterday.

The slide is partly a result of the financial crisis in 2008 that shaved value off hospitality stocks as lodging demand slowed, according to Mark Lutenski, an analyst at Bank of Montreal. Since then, the firm hasn’t recovered because of a high leverage ratio and investor uncertainty, he said.

InnVest for the past year addressed lagging profit by putting in place its own plan to sell assets and pay down debt and it may not be enough, Jenny Ma, an analyst at Canaccord Genuity Group Inc., said in a Feb. 5 note to clients. She changed her 12-month target price to C$5.30 from C$4.70.

InnVest owns about 127 hotel real estate across Canada, including several Holiday Inns Inc. and Hilton Worldwide Holdings Inc. hotels.

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