Bluesky Hotels to Acquire InnVest REIT – and What?Author: Kathryn Gaw
A little-known Asian investment company has bought Canada’s InnVest Real Estate Investment Trust (REIT) for a reported CAN$2.1 billion (US$1.6 billion), putting Canadian real estate on the map once again.
The company behind the purchase – Bluesky Hotels and Resorts Inc – is believed to be a Hong Kong-backed real estate investment group with links to China’s Anbang Insurance Group Co. Anbang recently hit the headlines after it bought a 66% stake in Vancouver’s Bentall Towers I, II, III and IV, then unexpectedly walked away from a CAN$18.3 billion deal to buy Starwood Hotels and Resorts Inc.
This latest acquisition suggests that Asian investors are keen to take advantage of the weak Canadian dollar which has been dragged down by falling oil prices over the past year. It also points towards a growing interest in REIT investments, which typically offer access to a wide range of commercial and residential real estate portfolios under one umbrella fund.
In Canada (where Bluesky is incorporated), REITs are structured just like mutual funds, except that stakeholders are paid in ‘distributions’ rather than dividends. This means that any profits are taxed at the lower marginal rate rather than capital gains, while taxation on the initial capital can be deferred. With such favourable investment terms, it is no surprise that Canada’s REIT market is catching the eye of international investors.
But where does this leave InnVest?
InnVest is a Toronto-based investment trust which holds an impressive portfolio of 109 hotel properties, including the historic Fairmont Royal York Hotel. It also owns a 50% stake in the Choice Hotels Canada franchise, as well as numerous branches of the Comfort Inn, Holiday Inn, Radisson, Sheraton and Hilton hotels. It has been listed on the Toronto Stock Exchange since April 2005, and was worth CAN$731.7 million ahead of the deal, having lost 20% of its value over the previous five years.
As part of the Bluesky deal, unitholders will receive CAN$7.25., a 37% increase on its previous 30-day volume-weighted average of CAN$5.28. It includes a CAN$32 million break fee, and is expected to close in the third quarter of this year. InnVest’s chief executive Drew Coles described the deal as “a winning outcome for all stakeholders.” He added that the portfolio interests of InnVest and Bluesky were “aligned” and that he expects to see further growth in the future.
Bluesky CEO Li Chen echoed Coles’ statement, saying : “This transaction is an investment that will establish a global platform from which Bluesky will continue to pursue growth opportunities in North America.”
It may be a nascent company, but ambitious Bluesky is set to make its mark on the Canadian real estate sector. The InnVest acquisition gives it a major foothold in the country, with an enormous hotel portfolio and a series of indirect partnerships with InnVest’s unitholders, who include Orange Capital LLC and KingSett Capital.
Meanwhile, analysts predict that this is just the beginning of a flood of Asian investment in the Canadian REIT market. Anecdotal evidence suggests that Bluesky approached InnVest and not vice versa. Given the current slump in the Asian equity market, and the erratic performance of alternative investments such as hedge funds and emerging markets, it is no surprise that investors are seeking out new sources of income, and the weak Canadian dollar, attractive taxation laws, and buoyant real estate sector mean that Canadian REITs may be seeing a lot more interest in the year ahead.