The recent proxy vote resulting in a new slate of trustees at Partners REIT should raise a red flag to investors.

Management has essentially been taken over by entities related to League Investments and IGW REIT.

IGW REIT is a private REIT, and is part of a complex conglomerate of associated real estate development and investment companies, known as League and run by Adam Gant and others.

The IGW REIT has been mismanaged since its inception. Until 2012 it typically paid distributions which far exceeded its funds from operations, and which primarily came from new investors. In 2012, the IGW REIT suspended distributions.

IGW carries on its books several loans, amounting to over $90 million in value, to related parties. These loans bear high interest rates but appear to have no specified term or conditions of repayment. These loans are related to real estate projects which are of questionable value, and in some cases are in foreclosure.

The change in trusteeship at Partners means that Partners REIT no longer has a management which is independent and at arms length from IGW. It is the intent of the new board of trustees to return to an external management structure, managed by League.

I quote from CIBC analyst:

"Although the complexity of League’s current corporate structure makes it somewhat difficult to ascertain the financial strength of the company, it would appear League may be in some financial distress. An internal structure would protect the REIT from any financial difficulties its external manager may be experiencing"

Investors should be wary of this move back to external management, and in particular of any future transactions between the financially troubled League or IGW REIT and the Partners REIT.