01/17/2012 11:58 EST | Updated 03/18/2012 05:12 EDT

Dundee Real Estate Investment Trust agrees to buy Whiterock for $582.1 million

TORONTO - Commercial property owner Dundee Real Estate Investment Trust has agreed to buy Whiterock REIT in a transaction valued at $582.1 million that will create the fourth-largest Canadian REIT by market value.

"Today we announce another stage in the development of Dundee REIT as a world class public real estate business providing the best way to participate in the Canadian office sector for both institutional and individual investors," Dundee chief executive Michael Cooper said Tuesday in a conference call with investors.

The deal combines two of Canada's most prominent commercial and industry property owners, with Whiterock unitholders receiving either $16.25 in cash or 0.4729 Dundee REIT units.

"Our offer values Whiterock at over $1.4 billion, including assumed debt," Cooper said.

Dundee (TSX:D.UN) has watched the evolution and growth of Whiterock for a number of years and was "excited to add its attractive portfolio of assets to the Dundee portfolio," Cooper said.

"About 90 per cent of Whiterock's assets (are) consistent with our long-term strategy," he told the analysts.

Dundee says the cash price of the transaction represents a 20 per cent premium to the 20-day volume-weighted average price of Whiterock (TSX:WRK.UN) units on the Toronto Stock Exchange as of market close on Jan. 16.

The deal includes a cash cap of $360 million and at least 40 per cent REIT units, which means a minimum of 248 million Dundee units will be issued.

Based on the closing price Monday of Dundee shares on the Toronto Stock Exchange, those taking payment entirely in units would realize $16.60 in value, Cooper said.

Whiterock CEO Jason Underwood called it a "great day for Whiterock investors," saying they would benefit from a platform about six times Whiterock's size on a market cap basis with lower leverage and high cash flow.

He also highlighted the commonalities between the companies.

"When you look at the two portfolios ... you look at the Top 10 tenant list, you're going to see a lot of similarities," Underwood told the analysts.

He described them all as "high quality, investment grade type tenants that really, for us looking for that monthly distribution, gives us a lot of confidence and certainty."

Underwood said he was also "excited" by the structure of the deal in which Whiterock unitholders can roll into Dundee units on a tax-deferred basis while at the same time "crystallizing a nice gain in the lift over the current share price at a time in the market where I think its a good time to realize that gain."

The transaction, subject to a $20-million break fee payable to Dundee in certain circumstances, including acceptance of an unsolicited better offer, is subject to the approval of two-thirds of Whiterock unitholders at a special meeting expected to be held Feb. 27.

Whiterock has a wholly-owned and co-owned portfolio of 79 office, industrial and retail properties totalling more than 10.1 million square feet of gross leasable space in eight provinces and two U.S. states. Over half is concentrated in the Greater Toronto Area, especially in the west and downtown.

About a third of Whiterock's properties are owned in various joint ventures with ROI Capital Ltd., which has waived its rights in respect of the transaction, the companies said.

Dundee, currently the sixth-largest REIT in Canada by market capitalization, would jump to the fourth spot with completion of the deal, while solidifying its position as the largest provider of office space in the Canadian REIT market.

The combined portfolio will be about 90 per cent office space, and the company would benefit from a number of efficiencies, including taking over the management of properties Whiterock currently has managed by third parties, Cooper said.

He said there would also be saving on the general and administration level, IT, accounting and others.