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