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REIT takeovers to be expected in this market

Competition for Canadian commercial and office real estate is getting so intense that Dundee REIT chief executive officer Michael Cooper was desperate to lock down a deal with Whiterock REIT .

The two firms have talked for years, but Jason Underwood, Whiterock's chief executive officer, was never that interested. On a conference call Tuesday, Mr. Cooper admitted that the recent Cominar-Canmarc transaction, paired with a flurry of pension fund real estate buying, made him put some extra oomph into his pitch.

"To be blunt, the Canmarc transaction made us look at values," Mr. Cooper said. "The environment's changed dramatically," he added, noting that pension funds are buying up real estate and driving capitalization rates on recent property purchases down to 4.8 and 5.2 per cent.

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"We bid on some properties that we were so far from winning, we were surprised."

"Everybody's accepting that we're in a low interest environment and that [rates are]going to remain there," he said.

Seeing all this activity around him, Mr. Cooper felt compelled to secure ownership of Whiterock, which he could still buy at an affordable cap rate of 6.5 per cent. "We felt that given our valuation parameters, we could do a deal with Whiterock that was exciting for them, and accretive for us."

Dundee likes Whiterock because both firms focus on the office market. Plus, over 50 per cent of Whiterock's properties are located in the Greater Toronto Area, and Dundee already has expertise in the region after acquiring a slew of downtown Toronto properties from Blackstone Real Estate Advisors LP and Slate Properties Inc. for $832-million last summer. Because Whiterock uses third party property management services, Dundee thinks it will realize some synergies by using its internal staff in the area instead.

Post-transaction, Dundee's portfolio will be 90 per cent comprised of office properties, 8 per cent industrial and 2 per cent retail. The small retail portion comes from Whiterock, and Mr. Cooper already said that his firm has no interest in these properties. Plus, going forward he wants to move into larger and larger assets, so Dundee will prune its portfolio over time.

As for management, Mr. Underwood, who started Whiterock seven years ago, said he will stay on with the firm until the deal closes "and from there Michael and I will discuss it." In other words, he didn't stipulate that staying involved had to be part of the deal.

But what a wild ride it has been for him. During the depths of the financial crisis in 2009, Whiterock had to issue $10-million of new units, which was viewed at the time as emergency funding. Less than three years later, the firm is being bought out at a premium.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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