Unhappy with years of discounted stock prices, FC Private Equity Realty Management Corp. (Firm Capital) is calling for Melcor REIT’s (MR-UN-T) majority shareholder Melcor Developments to take the trust private in a buyout to return about $100 million to minority shareholders.
In a public statement issued Wednesday night, Firm Capital states it sent a letter on Feb. 29 to Melcor CEO Andrew Melton and the firm’s board of trustees reiterating longstanding concerns first made public about four years ago.
“As significant unitholders of the REIT, we are disappointed with the consistent disconnect between the REIT’s trading price and Net Asset Value (NAV). Since the spinoff and IPO of properties originally owned by the parent company in 2013, Melcor Developments Ltd., (Melcor Parent) the trust units have consistently traded at a discount to NAV,“ the most recent statement says.
Melcor REIT’s shares were trading at $2.58 per unit on the TSX at close of day Wednesday, a 68 per cent discount to its most recent NAV of $8.09 per unit as of Q4 2023.
What Firm Capital is seeking
Firm Capital is Melcor REIT’s largest minority shareholder. Edmonton-based Melcor Developments and its related entities control 55 per cent of the REIT’s units and the Melcor parent firm acts as the asset manager.
Firm Capital calls for a take-out price at 95 per cent of the REIT’s current IFRS net asset value of $7.69 per unit.
“This would be a successful outcome for both the Melcor Parent and long-suffering minority unitholders. Anything less than this would be an oppressive action to minority unitholders,” the statement reads.
Firm Capital is also calling for other minority shareholders to lend their support to the take-private campaign.
Melcor REIT’s portfolio and recent moves
Melcor REIT’s portfolio includes interests in 38 retail, office and industrial properties in Western Canada, comprising approximately 3.15 million square feet of gross leasable area. Its key market is Alberta, with other properties in Regina and in Kelowna, B.C.
As of its Q4 2023 financial report, the portfolio was valued at $629 million, with approximately $33.8 million of assets held for sale. The REIT lists total assets of $701 million.
The investment properties have been the subject of a series of writedowns during the past couple of years.
As the commercial real estate industry has dealt with continuing fallout from the COVID-19 pandemic and work-from-home issues, as well as an uncertain economy and elevated interest rates, Melcor’s properties have lost almost $29 million in value during the past two years.
In February, Melcor announced a strategic review to determine the best future course of action for the REIT and suspended its distributions in an effort to retain about $1.2 million in cash per month.
Acrimonious history between Firm and Melcor
Melcor REIT units were valued at $10 during its IPO in 2013. Firm Capital states the units have consistently traded below that value other than for a period of time during 2014.
Firm Capital had publicly voiced similar concerns in November 2020. At that time, Melcor REIT units were trading at just under $4 on the TSX.
In the most recent statement, Firm Capital notes Melcor REIT has a series of credit facilities maturing during 2024.
The REIT disclosed in its Q4 2023 financials that negotiations are underway for the renewal of its $37.9 million revolving credit facility, as well as for mortgages valued at $53.7 million on various properties.
Firm Capital, however, noted a lack of disclosure regarding a $46 million convertible debenture due in June nor regarding the liability or repayment of $2 million of class -C LP units.
The statement says Firm Capital analyzed the REIT’s financial position and is questioning how those liabilities would be repaid.
While the REIT is in the process of selling some assets in British Columbia and Saskatchewan, Firm Capital claims those sales (if realized, and if they close in time), combined with cash on hand and expected additional cash available from the recent suspension of distributions, could still leave Melcor REIT up to $8 million short of the obligations.
It states the shortfall would need to be covered by operational cash or additional credit.
“Firm Capital has been engaged with both the Board of Trustees and Management of the REIT since October 2019. Firm Capital has tabled numerous concerns to the board that have largely gone unanswered,” the statement says.
Melcor has yet to formally respond to the latest Firm Capital statement.