Tag: MR.UN

Melcor REIT – another cutting distributions to zero

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.

Melcor / Melcor REIT / Firm Capital

Looks like another dust-up happening in the Canadian REIT market. First we have the ongoing saga at Artis (TSX: AX.UN), but now Firm Capital (TSX: FC) is launching a salvo against Melcor REIT (TSX: MR.UN).

Considering that 55% of Melcor REIT is owned by Melcor (TSX: MRD), clearly Firm Capital won’t be trying to overthrow the board of trustees. However, they can threaten to make things very expensive:

If an oppression action was brought against MDL, MDL would be required to either purchase minority unitholders equity at fair market value or have the business sold accordingly.

The summary of Firm Capital’s argument is that the REIT has an NAV of about $9, while the market value is at $4. Melcor has it at NAV on their books, and is economically extracting far more than it should be, so therefore, the solution is to buy out the 45% it doesn’t own for a small fraction under NAV. Simple!

Firm Capital, in its letter, points out precisely the reason why I don’t invest in the equity of these majority-owned REITs that are spun off from the parent corporation – related party fees tend to put the minority in an unfavorable position. Another obvious corporation/REIT combo is Morguard (TSX: MRC), Morguard REIT (TSX: MRT.UN) and North American Residential (TSX: MRG.UN), where the terms of engagement are set by the parent corporation.

Within the capital structure of Melcor REIT, the convertible debentures are another story. As long as you get paid out in the end, it doesn’t matter if management has their hands excessively in the cookie jar, unless you paid excessively for the call option value of the equity conversion component. Fortunately, in Melcor REIT’s case, when I purchased my debt, they were so far out of the money that it wasn’t something I was banking on. The ultimate irony is that I was getting paid a higher coupon than the REIT units, yet having the security of a debt investment – isn’t safe yield what you’re supposed to be investing in a REIT for?

This soap opera was made even better with Melcor’s response, which included:

Melcor REIT confirms that the first it has been made aware of the November 4th , 2020 letter from Firm Capital was today.

And a few hours later, they went to clarify:

Further to our press release from earlier today, we have investigated the matter and discovered that the original letter, dated November 4, 2020 and sent to us via email by FC Private Equity Realty Management Corp. (Firm Capital), was caught in our spam filter and did not reach any of its intended recipients.

Caught in the spam filter! One wonders if they received any other solicitations that ended up in the spam bucket as well. A tough claim to believe.

I am loaded with plenty of microwave popcorn to watch this debacle unfold.