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(B)(N) PMZ.UN Primaris Retail REIT

January 19, 2013

Deal Book. The deal promoted by KingSett Capital and its deep-pocketed friends to buy all of the Primaris Retail REIT has gone off the rails and what amounted to a “steal” in our view (please see the December Post) of an all cash offer of $26 per share or $2.6 billion in total has been trumped by a cash offer of $28 per share now OR a cash plus stock deal in the “stapled units” or shares of the combined company with the much larger H&R REIT (Marketwire, January 16, 2013, H&R Enters Definitive Agreement to Acquire Primaris for Premium Value to Hostile Bid) and has been recommended by the Boards of Trustees of both companies.

And hola! The “hostiles” are repulsed and have a roughly +25% gain on their stock in the past month for their “trouble” and another $3 million or so in dividends for the 7% of the company that they currently own, and the “friendlies” get the girl, so to speak. So, again, let’s sharpen our pencils and see what this means to us as long term investors in Primaris.

H&R REIT currently has 194 million “stapled units” outstanding and they’re trading today at $23 to $24 per share. The dividend is $0.113 per month ($1.35 per year) or $264 million per year to the shareholders for a current yield of an extraordinary 5.8%. Primaris shareholders can elect (basically, but there are some complications – please see the Prospectus) to take $28 in cash for each Primaris unit currently receiving $0.106 per month or $1.27 per year and a current yield of 4.8% OR 1.13 “stapled units” of H&R which are, therefore, worth $1.53 (1.13 times $1.27 per share) per year in dividends and a current yield of an even more astounding 6.6% if the H&R stock price holds at around $23 to $24 per share (but please see below for our calculation of the Risk Price (SF) of the combined companies). If all of the current 98 million shares of Primaris are so converted, then 111 million “stapled units” will be required to effect the exchange and these would, presumably, be bought from the existing H&R shareholders by the company for $2.6 billion if the price does not increase too much as H&R effectively “takes itself over” to complete the deal by buying in nearly 60% of its own stock to distribute to the current Primaris shareholders in exchange for theirs. Cash or stock amount to the same thing in dollar terms but in stock terms the Primaris shareholders will obtain a long term interest in their enterprise as realized in the combined companies.

Exhibit 1: (B)(N) PMZ.UN Primaris Retail REIT – Risk Price Chart

(B)(N) PMZ-UN Primaris Retail REIT - January 17 2013

Primaris Retail Real Estate Investment Trust (REIT) is a real estate investment company that directly or indirectly owns, manages, leases and develops retail properties in Canada.

(Please Click on the Chart to make it larger if required.)

Primaris Retail REIT owns more than thirty properties in cities across Canada, including the Dufferin Mall in Toronto, the Cornwall Centre in Regina, Saskatchewan, the Tecumseh Mall in Windsor, Ontario, and the Woodgrove Centre in Nanaimo, British Columbia and more than a half dozen Zellers outlets that are now being converted into Target stores.

Exhibit 2: (B)(N) HR.UN H&R REIT – Risk Price Chart

(B)(N) HR-UN H&R REIT - January 17 2013

H&R Real Estate Investment Trust is an open-ended real estate investment trust, which owns and manages a North American portfolio of 289 offices, industrial and retail properties comprising over 45 million square feet, and two development projects.

(Please Click on the Chart to make it larger if required.)

The current stock prices exceed the Risk Price (SF) in both cases (please see Exhibit 1 and 2 above) and the “risk adjusted value” of Primaris is $2.395 billion at $24 per share and 98 million shares and of H&R REIT, $4.399 billion at $23.50 per share and 194 million shares. The Risk Price (SF) of the combined company is, therefore, $35 per share (($2.395 + $4.399)/194 million shares) which is substantially above both the current Risk Price (SF) of $23.50 and the current stock price of $24 which we might anticipate rising to $28 as H&R REIT completes the deal. Moreover, the Risk Price (SF) needs to be earned and the reasonable expectation of the investors who continue to buy and hold the stock of H&R REIT is that it will be. For more on the price of risk and the Risk Price (SF), please see almost any of these posts and The Nash Equilibrium & Its Stock Price, October 2012.


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