Melcor REIT (TSX: MR.UN) is a small REIT containing 38 properties that is controlled by parent Melcor (TSX: MRD). The book value of assets are $700 million, debt about $420 million and about $12 million in cash flow from operations each in the past couple years. At 13 million units outstanding and at $3/unit, I will leave it up to you to calculate the market capitalization and relative size of this trust to others.
On March 5, 2024 they announced their year-end results. While the actual results were tepid, the big news was the trust finally reduced its distribution to zero citing financial flexibility.
Putting a long story short, they are hitting a debt wall as outlined by one of their significant holders, FC Capital in a letter that came public on March 13.
I won’t delve too deeply into this other than that we have a couple themes in action with this and Slate Office and other marginal REITs:
1. Debt maturities are killing equity value
2. The valuation of illiquid private equity (or in this case illiquid property holdings which is almost as bad) on balance sheets is highly suspicious when it comes to the time that you actually need to liquidate said properties.
You’ve got Allied (AP.UN), Dream Office (D.UN), Artis (AX.UN), H&R, etc, etc., all trading at wildly deep discounts to book value. The financial engineering solution is to liquidate the assets at their stated value and watch the magic happen, right? If it only were that simple!
Just wait until the CPP and other pensions that are heavy on “private” or otherwise illiquidly-valued assets finally get their day in the valuation sun.
In the meantime, the REITs appear to be a reasonable canary in the coal mine, begging central banks for supplemental oxygen.
One can say hind-sight is 20/20. But commercial real estate feels like XIV – it works until it doesn’t and when it doesn’t, it’ll blow up ‘spectacularly’. The cap rate of these things were just absurd – unless you are a believer of an economic paradigm of low interest forever. The current rate is just historic average and we are there for a relatively brief period and already cause a lot of carnage.