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Alberta & Prairies  + Pacific Canada  + Finance  | 
Melcor has appointed two new trustees to its board amid a strategic review designed to improve the REIT's finances.

Firm Capital, Telsec Launch Mini-Tender Offer for Melcor REIT

Firm Capital and Telsec Property Corporation have issued an all-cash mini-tender offer for Melcor REIT.

The offer is designed to block a proposal to take the REIT private. Firm and Telsec expressed strong-opposition to it in recent weeks.

The REIT’s board has advised unitholders to take no action on the mini-tender offer until an independent committee consults with the board and they decide how to respond.

Firm and Telesec announced a plan to acquire up to 1,296,316 of the REIT’s units for $4.95 per unit. The mini-tender offer, described as a “first come, first served” opportunity, seeks to allow minority unitholders to monetize their holdings independently of the proposed going-private transaction led by Edmonton-based Melcor Developments, the largest stakeholder in Melcor REIT.

Toronto-based Firm and Calgary-headquartered Telsec view the take-private offer as being undervalued. Together, the two companies hold 12.2% of Melcor REIT’s voting units.

Firm and Telsec have committed to voting against what they call the “take-under” offer on its current terms, citing its significant discount to Melcor REIT’s estimated net asset value of $9.09 per unit.

The companies 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.

Firm and Telsec also raised concerns about Melcor REIT’s take-private process and the terms of the offer, calling it a “substantially undervalued bid.” Despite being described as a “premium,” the proposed purchase price would represent a 46% discount to the net asset value and a discount to the REIT unit’s $5 January 2024 market price, Firm and Telsec argue.

The mini-tender offer is open until November 18, 2024, or until all available trust units are purchased.

“Having taken note of the press release announcing the mini-tender offer, the independent committee will consider it with its advisors before making a formal recommendation to the board,” said the REIT in a news release.

The REIT’s board has scheduled a special meeting on November 28 in Edmonton for a vote on the take-private offer.

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 represents a 45% discount to the REIT’s net asset value of $8.93 per unit on July 30. Firm previously contended that the offer 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.

The $4.95-per-unit offer is also well below the REIT’s $10 IPO price, Firm noted previously. 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

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About Monte Stewart

Monte Stewart serves as Content Director - Canada for Connect Commercial Real Estate. Based in Vancouver, British Columbia, Monte provides daily news coverage of major Canadian commercial real estate markets, including Vancouver, Toronto, Montreal and Calgary. He has written about the real estate sector for various media outlets and Avison Young since the early 2000s. In addition, he has covered sports, general news and business for several leading wire services and publications, including The Canadian Press, The Associated Press, The Calgary Herald, The Globe and Mail, Research Money, The Daily Oil Bulletin, Natural Gas World and The Toronto Star. Monte is active in his community as a youth basketball coach and raises funds for such charitable causes as Movember.

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