Firm Capital and Telsec have significantly increased their ownership stakes in Melcor REIT while continuing to fight what the company’s call a “take-under” proposal.

The two minority shareholders contend that the board’s take-private offer does not value the REIT’s units fairly.

Since October 22, Firm and Telsec have acquired an additional 237,90 units altogether through purchases on the Toronto Stock Exchange and a mini-tender offer aimed at other minority shareholders.

Following the transactions, Toronto-based Firm and Calgary-based Telsec now hold a combined total of approximately 3.7 million units, representing 12.8% of the REIT’s total units and 28.7% of those held by minority shareholders. Firm and Telsec said the combined increase underscores the companies’ interest in the REIT, which has seen controversy over parent firm Melcor Developments’ offer to take the REIT private at a price of $4.95 per unit—43% below its estimated net asset value (NAV) of $8.70 per unit.

Firm and Telsec are urging minority shareholders to participate in their mini-tender offer or vote against the Melcor board’s proposal at a special meeting of unitholders scheduled for November 26. The two dissident shareholders argue that the undervaluation in Melcor Developments’ offer creates a significant potential loss for minority shareholders while benefitting the parent company, which originally listed the units publicly in 2013 at $10 per unit.

In a news release, Firm and Telsec stressed the importance of transparency and shareholder value. They warn of conflicts of interest between Melcor REIT’s board and its parent company, asserting that the privatization at a steep discount could unfairly benefit Melcor Developments at the expense of minority shareholders.

Firm, a private-equity real estate investment company, and Telsec, a property developer, contend that their effort to block the take-private deal reflects their commitment to fair valuation and corporate governance.

The REIT’s board has recommended that shareholders take no action on the mini-tender. The board contends that take-private plan has resulted from a rigorous arm’s length negotiation process that was undertaken between a committee of the independent trustees of the REIT and “its experienced, qualified and independent financial and legal advisors, on the one hand, and Melcor and its advisors, on the other hand, the board argues.

The board also contends that independent committee’s members are “free from any conflict of interest” regarding Melcor Developments and the REIT’s management.

Firm and Telsec have made it clear that the $4.95 tender price is not an endorsement of fair value but rather an immediate liquidity option for minority unitholders. Unlike the board’s offer, the mini-tender requires no unitholder approval and offers a guaranteed cash payment, giving unitholders a quicker way to liquidate their holdings, if desired.

Firm and Telsec contend that the current take-private bid undervalues the units and fails to account for unpaid distributions in 2024 totalling $0.44 per unit. The dissident unitholders also allege that the REIT’s board ignored a good-faith offer to support a higher bid of $6.50 per unit, which would still fall below the REIT’s net asset value but reflect a more substantial premium to recent trading prices.

The mini-tender offer is open until November 18, or until all available trust units are purchased.

Telsec Property Corporation has joined Firm Capital in opposing a proposal to take Melcor REIT private.

Calgary-based Telsec is urging fellow minority unitholders to support Firm’s position and reject the proposal launched by the REIT’s parent and majority owner, Melcor Developments.

Telsec and Toronto-based Firm contend that the offer is too low and only benefits Melcor Developments and insiders.

“To suggest we are disappointed in the Melcor REIT [board], Melcor Developments and those associated with this transaction is an understatement,” Telsec said in a scathing news release issued Tuesday.

“At the outset, with the Melcor parent owning about 55% of the REIT, it reassured us that someone from the outside could not take advantage of a low unit price. Who knew that the group that we needed to concern ourselves with was the same group that spun the REIT out to the market in the first place?”

Telsec owns about 21.9% of the REIT’s publicly traded units and 9.7% of the REIT. Both Telsec and Firm want Melcor Developments to boost the take-private offer to $8.48 per unit or sell all of the REIT’s real estate assets and liquidate the proceeds.

“Telsec believes Melcor Developments is taking advantage of minority REIT unitholders by trying to buy the real estate back at roughly 54.5% of the net ssset value,” said Telsec, echoing comments that Firm made in September.

“The REIT’s Unit value was established at inception using the net asset value, now Melcor would like [minority unitholders] to ignore the net asset value and use the recent trading pattern of the unit to establish the ‘take-under’ value. The unit performance has been directly affected by decisions made by those that were in control and are on both sides of the table of this transaction.”

Edmonton-based Melcor Developments plans to dissolve the debt-laden REIT and bring its $673.6-million portfolio back under the company’s full ownership.

In September, the company announced that it had agreed to acquire 100% ownership of the REIT. The proposed deal calls for the development company to purchase all REIT units that it does not own for $4.95 per unit through a plan of arrangement.

Richard Kirby, a member of the REIT’s board, said then that the proposed deal resulted following an in-depth strategic review process. Kirby chaired a REIT independent committee that examined the proposed transaction. He is not an employee of the company.

“Both the REIT and the parent are run by sophisticated real estate executives, so it was surprising to us that a special committee needed to be formed at all,” said Telsec. “It didn’t occur to us that the need for the special committee was to formulate a ‘take under’ and isolate the executive team, who represent both sides, from reproach.”

Telsec and Firm say the proposed deal is also “far below” the value of the REIT’s entire real estate portfolio.

The portfolio comprises interests in 37 diversified commercial properties spanning 3.12 million square feet of gross leasable area across Alberta and in Regina and Kelowna, B.C.

Firm has been publicly urging Melcor Developments, to take the REIT private since November 2020.

Melcor’s take-private offer came after Firm called in February for the development company to take the REIT private or bolster its low unit value.

At that time, Firm said a take-out price of 95% of the REIT’s net asset value, based on the then $7.69 unit price, would provide minority unitholders with $100 million. Minority unitholders now stand to receive much less.

In another move that Firm sought, Melcor Developments has agreed to pay out $46 million worth of 5.1% convertible subordinated unsecured debentures.

The company contends that the current proposed purchase price represents a 46% premium. The REIT had been granted a 30-day go-shop period that allowed it to solicit prospective third-party buyers until October 14. If the REIT succeeds in securing a better offer, the REIT must pay Melcor Developments a $2.9-million go-shop fee.

The company can also collect a $5.8-million termination fee if a go-shop fee is not workable.

The current proposed transaction will be subject to court and two-thirds unitholder approval, among other conditions, and is slated to close in the fourth quarter of 2024.

Pictured: Melcor REIT retail property in northwest Calgary

Photo: Melcor REIT