There are a lot of things about Canada that leave other countries envious: The Rockies and the Great Lakes; bison burgers and craft beer; friendly folks and phenomenal cities coast to coast to coast. From a foreign investor perspective, our relatively strong and stable economy yields a strong appeal. Put it all together and Canada is downright irresistible. Or so it would seem, given the recent announcement that InnVest Real Estate Investment Trust – one of Canada’s largest hotel portfolios–will be scooped up by Bluesky Hotels and Resorts, Inc., for a cool $2.1 billion.
Bluesky, which describes itself as a Canadian-based company backed by Hong Kong capital, will acquire Toronto-based InnVest, including net debt, along with its 109 hotels representing 14,500 rooms, a 50-per-cent interest in franchisor Choice Hotels Canada and a 20-per-cent stake in Toronto’s historic Fairmont Royal York. The deal was announced May 10th and was set to close in the third quarter of 2016 following InnVest’s annual meeting of unitholders, which was scheduled for June 28th, where it had to be approved by no less than 66.66 per cent of votes. The arrangement is already unanimously supported by InnVest’s board and also has the support of 29.1 per cent of unitholders, including KingSett Real Estate Growth LP No. 5. This comes as no surprise, given the $7.25-cash-per-unit offer — a 37-per-cent premium over the 30-day volume-weighted average trading price of $5.28 per unit on the Toronto Stock Exchange – plus a $100 million deposit.
“The deal was totally unsolicited and was not part of our strategic plan, but Bluesky presented an offer through our board chair in early April that was extremely compelling,” says Drew Coles, president and CEO of InnVest. “Their offer demonstrated they are serious about wanting to be in the hotel space in Canada. They did their research and were extremely well-advised by McCarthy Tétrault law firm. We took the offer to our board of directors and they unanimously approved to accept it and move forward with proposing the transaction to the unitholders,” he says.
The deal follows another significant purchase by Asian capital in Canada earlier this year. In February, Beijing-based Anbang Insurance Group Co. Ltd., which reportedly holds US$14 billion in assets, purchased a 66-per-cent stake in Vancouver’s Bentall Towers I, II, III and IV — a 1.5-million-sq.-ft. office complex with retail space. The Chinese company was also set to buy Starwood Hotels and Resorts Inc. for US$14 million in March, but walked away from the deal. “Some investors view Canada as more stable than other foreign markets,” explains Coles. Outside of Alberta, the economy is looking stronger all the time and there’s a good balance between safety and opportunity for investors. Certainly, hotels in particular are considered very good performers right now.”
David Larone, senior managing director of Toronto-based CBRE Hotels, agrees the Canadian marketplace appeals to foreign investors. “If you look at the major industry transactions over the past couple of years, they are predominantly Canadian, and about 60 per cent of that private equity has come from offshore capital,” he says. “There is money looking to come from Europe and the Middle East as well. Offshore investors look at the stability of the Canadian market. It’s not in the same wild swings as the U.S., so when it comes to moving dollars into hard assets, Canada is on the shopping list for sure. The weak loonie ups the game, too, making an acquisition in Canada even more attractive. The advantage to getting in with a low dollar is that you have the potential opportunity to get out with a higher dollar, plus market appreciation.”
When the transaction closes, InnVest will become a private enterprise, meaning there will be significantly fewer opportunities for the public to invest in the industry, but it’s a boon on the flipside. “Currently we are reliant on the public markets to raise capital and in order to grow this company we are dependent on capital,” says Coles. “Bluesky is able to provide private capital and that means we can accelerate our strategy. In 2014, InnVest became focused on internalizing the organization, rather than relying on outside third-party assistance in departments including human resources, asset management and back-office finance. Since then, the company has developed a robust platform driven by asset management.”
“Bluesky was attracted to InnVest because they know we’re capable of driving results out of the assets,” explains Coles. “It’s about the portfolio itself, which gives scale and diversity of assets, from Fairmont to Holiday Inn, as well as diversification of geography across Canada. But, they also like the internalization of the company and knowing we have the talent and capabilities to make it happen; plus we have strong, established relationships with all of the hotel brands and managers, lenders, consultants and financial institutions.”
Bluesky is intent on keeping the entire management structure of InnVest in place and continuing with the company’s ongoing strategy to improve assets by selling off those in lower markets and acquiring higher-market properties. Case in point: InnVest recently acquired the Hyatt Regency Vancouver, the Marriott in Ottawa and a partnership stake in Toronto’s Fairmont Royal York. “We’ll continue to grow and reinvest in our assets,” says Coles. “We’re growing our talent and focusing on asset management to drive results and if that causes competitive tension, it only makes the Canadian hotel landscape even stronger. Overall, we view this transaction as a very positive thing for our exiting unitholders, our management team, the industry and Bluesky.”
Bluesky chief executive officer Li Chen echoes those goals in a statement released when the deal was announced, saying “This transaction is an investment that will establish a global platform from which Bluesky will continue to pursue growth opportunities in North America.”
Volume 28, Number 5
Story By Lindsay Forsey