Slate Office REIT – attention to details

It looks like things are getting heated in the board backroom of Slate Office REIT (TSX: SOT.un). 17 days before the scheduled Annual General Meeting, George Armoyan decided to let loose a proxy solicitation to install two additional directors out of six. If he won, including himself, that would constitute a board of six directors – George himself, two controlled by him, two directors (the co-founders, who are brothers) and an independent.

To take action this late in the game suggests that there was some sort of board decision that pissed him off.

Armoyan controls 17.7% of the units, or 15.1 million units of Slate, which gives him huge sway considering that only 36 million units voted on the resolution to increase the gross book value to debt ratio of 65% earlier this year. When adding the 1,123,880 units that one of the director nominees owns, it’s a near majority. 32 million units voted in the 2023 annual general meeting. It’s quite likely that Armoyan will find at least a million or so disgruntled Slate Office holders to vote in his direction to put him over the top.

Part of the previous vote was a consent to decrease the board size from 8 to 6 trustees, which means there are less people for him to take out. If he is successful, he will effectively have at least a veto on every decision from the board, which is close enough to having control of the entire operation.

I do note, however, when reading the proxy solicitation statement, that it must have been hastily constructed. Witness the following from their proxy solicitation:

On the bottom, “PROTECT YOUR IVESTMENT IN SLATE OFFICE REIT”. Not the greatest look for the professionalism of Morrow Sodali, the firm being engaged to solicit the proxies.

Perhaps they all just need to hold on until after June 25 before going into CCAA – at least when everybody disposes their units for zero, they get 2/3rds and not 1/2 inclusion on the capital loss. To be clear, this was a joke and not a prediction although the last financial statement released by the trust is not looking that good!

The nuclear insurance trade – Mirion

(See previous article: November 4, 2022)

Unfortunately, due to my complete inability to properly read the warrant indenture for Mirion’s public warrants (NYSE: MIR.wt), they have called out their warrants because their common stock satisfied a particular call criteria. Unfortunately I was mislead to believe that they could only call out the warrants when the stock was trading above US$18/share when there was a provision that allowed for a call above US$10/share! Oops!

The announcement has the salient paragraph:

Warrant holders may continue to exercise their warrants to purchase shares of Common Stock until immediately before 5:00 p.m. New York City time on the Redemption Date. Holders may exercise their warrants and receive Common Stock (i) in exchange for a payment in cash of the $11.50 per warrant exercise price, or (ii) on a “cashless” basis in which case the exercising holder will receive a number of shares of Common Stock determined under the Warrant Agreement based on the redemption date and the redemption fair market value, as determined in accordance with the Warrant Agreement. The “fair market value” is based on the average last price per share of Common Stock for the 10 trading days ending on the third trading day prior to the date on which the Notice of Redemption is sent. In accordance with the Warrant Agreement, exercising holders will receive 0.220 of a share of Common Stock for each Warrant surrendered for exercise. If a holder of warrants would, after taking into account all of such holders’ warrants exercised at one time, be entitled to receive a fractional interest in a share of Common Stock, the number of shares of Common Stock the holder is entitled to receive will be rounded down to the nearest whole number of shares.

Given that the stock is trading at about US$10.90/share, there is no way that people would rationally choose to exercise for US$11.50/share. At 0.22 shares per warrant, the break-even price for the $11.50 strike provision would be about $14.70/share. So the warrants, for a month, are effectively trading at 0.22 MIR shares per warrant. They will get delisted on May 17 and if people did not exercise or sell them on the open market by then, they will get cashed out for 10 cents a piece for those too sleepy to take action.

The 0.22 share conversion number came from a result of this table, which applies a premium to an early redemption when the stock is above US$10/share:

The warrants were to expire on October 20, 2026 and hence there are about 30 months remaining.

Anyhow, sadly I had to close off this trade – while my gross incompetence did not result in a loss, I do consider it a completely failed trade for my financial illiteracy.

The reason why this trade is so good for “nuclear insurance” is because of the embedded leverage of the warrants – especially the leverage that would occur if there was a nuclear event of prominence. The stock price would skyrocket and the percentage gain on the warrants would be astronomical. While the common stock is an acceptable way of achieving an “insurance payout”, the cost of capital is a lot higher than going down the warrant route. Essentially you just want to purchase as much out of the money as possible (just like how a life insurance policy is effectively selling a call option on the low probability expiration of your life!). The publicly listed equity options do not sufficiently go out in time and are illiquid so you will have to pay the market maker spread – the November 15, 2024 call options with a strike of 12.5 are trading at bid/ask 0.75/0.85, which is a terrible value compared to the October 2026, 11.5 strike for the warrants that were trading at $1.80-ish just a few days before this announcement. Too bad! This really hurt me.

Life, death and taxes… and taxes after death!

Federal Budget 2024 made headlines yesterday, primarily for the reason that the capital gains inclusion rate is increasing from 50% to 66 2/3% for corporations and trusts, and for individuals reporting capital gains above $250,000.

Two broad implications:

1. The concept of “integration” between the income earned in a corporation vs. that earned individually is further broken – it is significantly more advantageous for an individual to take the first $250k of capital gains. Small corporations now have an increased disincentive to engaging in activities that will net them capital gains (the net reward after such an action will be lessened with the increase in the inclusion rate);
2. This change is very obviously a tax grab for estates, and to a lesser degree, will disincentivize sales of non-primary residences.

In particular, the cited reason for individuals (“tax fairness”, i.e. an excuse to tax more) was in the following chart:

For most individuals, there are two common triggering events that will cause capital gains going over $250,000: the disposal of a non-principal residence property that has been held for a considerable period of time, and death.

While it is true that Canada does not have an inheritance tax, there is a functional equivalent of it – the deemed disposition upon death.

In Canada, when you die, your capital assets undergo a “deemed disposition”, where it is assumed for tax purposes they are sold and re-acquired at the fair market value of the time of death.

For many people, this will result in a significant capital gain pushing estates above the $250,000 threshold. This especially applies for long-held assets that have had their nominal values increase over time due to inflation, but the real value has remained constant (say a cottage out in Ontario, or shares held in the Royal Bank for the past 20 years). The entire slab of capital gains becomes payable in a single tax year and the only element of taxation strategy is to choose to die early in the calendar year instead of later when you have a bunch of other (pension) income accumulated in the year!

By the time of death, there are few tax planning options to “smooth” this out. You inherently have to predict your passing in advance to construct an optimal tax plan. Needless to say, this is a morbid exercise, but one that potentially made much easier with one industry in Canada that is exhibiting huge growth rates – Medical Assistance in Death (MAID), AKA assisted suicide!

Eyebrows are perking up… just a little

Today we are getting some more fear headlines out of the usual places:

The entire commodity complex was on fire earlier in the morning, but ended trading down, along with a rise in volatility.

In particular, gold got a huge bid, but ended up down for the day:

The lesson here is that the nanosecond before a crisis materializes, the only safe asset is cash. It’s not gold or Bitcoin. I don’t know if this is a correct metric or not, but one possible indicator of cash demand is the (TSX: HSAV) ETF. It is trading so much higher than NAV – rationally it doesn’t make a hell of a lot of sense.

Today’s trading action was fairly pronounced in that the commodity complex companies that have been trending from bottom-left to upper-right charts over the past month have been exhibiting whip-saw trading action. It’s as if you have a bunch of hedge fund managers taking a look at their trading screens on Friday morning and deciding this is a good time to take some chips off the table, all in unison – which seems to be the easy trade. Easy trades are most typically not correct.

There are a bunch of other firms on my watchlists, some of which have gone down sharply, that are catching my attention. Not close to buying them, but just paying more attention than I was a couple days ago. When I see synchronized price action (most of it on the downside) like today, it makes me wonder what will happen if we truly had a liquidity crisis in the markets. VIX has perked up a few percent from the previous couple weeks and if those headlines above come to fruition, coupled with other stress in the markets, might create a fertile environment for some tactical capital allocation.

Late Night Finance – Episode 27

Date: Wednesday April 10, 2024
Time: 7:00pm, Pacific Time
Duration: Projected 60 minutes.
Where: Zoom (Registration)

Frequently Asked Questions:

Q: What are you doing?
A: Quarterly review, economic thoughts, and more crystal ball gazing, and finally time permitting, Q+A. Please feel free to ask them on the zoom registration if any questions.

Q: How do I register?
A: Zoom link is here. I’ll need your city/province or state and country, and if you have any questions in advance just add it to the “Questions and Comments” part of the form. You’ll instantly receive the login to the Zoom channel.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: If you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: Why do I have to register? I just want to be anonymous.
A: I’m curious who you are as well.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me, but the majority will be on “screen share” mode with MS-Word / Browser / PDFs as I explain what’s going on in my mind as I present.

Q: Will I need to be on video?
A: I’d prefer it, dress code is pajamas and upwards.

Q: Can I be a silent participant?
A: Yes.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Will there be a summary of the video?
A: A short summary will get added to the comments of this posting after the video.

Q: Will there be some other video presentation in the future?
A: Most likely, yes.