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.