Tag: MRD

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.

Dividend cuts

Those cash-flowing equities with yields are going to cut dividends simply because there’s no other outlet. If you’re depending on a stock for their yield, one must have a good grip on whether they can sustain it from a balance sheet perspective.

I won’t even cover the oil and gas sector – those that had dividends will surely lower or eliminate them (SU and CNQ may be exceptions here, but everybody else – good luck!). In Canada, nobody will make money with WCS at US$20/barrel. Interestingly enough, in the gas world, AECO/Dawn/Henry Hub are holding steady.

Chemtrade Logistics (TSX: CHE.UN) announced they are dropping their distribution from $1.20 to $0.60/unit per year. This wasn’t surprising to me since even at the current rate they are still questionable.

Melcor (TSX: MRD) decreased their quarterly payment from $0.12 to $0.10/share; as their property portfolio is entirely Alberta-centric they are secondary roadkill in the oil/gas slaughter.

Anything in the equity markets that are trading at double-digit yields – give the balance sheets a very careful look, and ask whether the cash flow, accounting for a decrease in the economic landscape, will be able to provide sufficient coverage.

There will be a few equities with double digit yields that will recover and maintain their dividends, but it will be few and far between. However, if you do manage to snag them, and the overall economy recovers, you will be the recipient of a yield compression and continue receiving distributions at your original (low) cost basis. High risk, high reward.