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July 18, 2024
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Private Equity

FC Private Equity Realty Management Corp. Sends Letter to

TORONTO, March 13, 2024 (GLOBE NEWSWIRE) — FC Private Equity Realty Management Corp. (“Firm Capital”), through affiliated entities, is an owner of both Melcor Real Estate Investment Trust (TSX : MR.UN) (the “REIT”), and Melcor Series B Convertible Unsecured Debentures (TSX : MR.DB.B) (the “Convertible Debentures”).

As significant unitholders of the REIT, we are disappointed with the consistent disconnect between the REIT’s trading price and Net Asset Value (“NAV”). Since the spinoff and IPO of properties originally owned by the parent company in 2013, Melcor Developments Ltd. (“Melcor Parent”), the trust units have consistently traded at a discount to NAV. The Melcor Parent is the 55% majority unitholder and is also the asset manager of the REIT. In addition, the trust units have consistently traded at a discount to the REIT’s IPO price of $10.00 per unit, save for a period in 2014. The REIT is currently trading at $2.66 per unit, which is a 67% discount to the Q4/2023 IFRS NAV of $8.09 per unit.

On February 29, 2024, Firm Capital sent a letter to the Melcor CEO and Board of Trustees raising its concerns regarding: (i) the distribution suspension; (ii) the 2024 mortgage maturities; (iii) the 5.1% Convertible Debenture coming due in 2024; and (iv) the risk of a take-over proposal by Melcor Parent whereby the Melcor Parent could take the REIT private at a price significantly lower than the REIT’s IFRS NAV.

The Melcor Q4/2023 press release on March 5, 2024 addressed some of our concerns namely:

  • The Revolving Credit Facility of $37.9 million is maturing June 1, 2024 and is expected to be renewed is Q2/2024. Negotiations are underway; and
  • Mortgages of $53.7 million are maturing in 2024. The REIT is in discussions with its lenders to refinance its mortgages at competitive market terms. Management also provided disclosure on its one unencumbered asset.

However, there was no disclosure regarding the repayment plan for the $46 million Convertible Debenture coming due in June 2024, nor any disclosure regarding the liability/repayment of $2 million of the Class C LP units.

Also in the Q4/2023 press release, Melcor announced that it was in the process of selling certain assets in British Columbia (“BC”) and Saskatchewan (“Sask”) and that proceeds would be used for debt repayment.

Based on our analysis, if we assume the REIT utilizes (i) cash on hand, (ii) the expected savings from the suspension of the distribution to June 30 2024, and (iii) net expected sale proceeds from the BC and Sask asset sales to ultimately repay the Convertible Debenture at maturity on June 30, 2024, the REIT would be able to repay approximately $38 million, leaving it short by approximately $8 million. This shortfall will be required to be covered by any operational cash generated prior to the June 30, 2024 maturity plus any availability on the Revolving Credit Facility (assuming that there is any availability given that as at Q4/2023 there was approximately $8.2 million available). This also assumes that the BC and Sask sales are completed by June 30, 2024. The REIT should provide additional disclosure in the interim as to how they will account for this contingency in light of this looming debt maturity.

Furthermore, the REIT should also provide an overall plan in regard to the repayment of the Convertible Debentures.

Please see Appendix A for a copy of this letter and questions asked for Melcor to disclose to the public in a press release prior to the Q4/2023 results.

Firm Capital has been engaged with both the Board of Trustees and Management of the REIT since October 2019. Firm Capital has tabled numerous concerns to the board that have largely gone unanswered. This includes a dilutive private placement offered solely and unfairly to the Melcor Parent; inquiries at to the rationale for now two distribution cuts; and issues surrounding the 2024 debt maturities.

Melcor Developments Ltd. took the REIT public. It is obvious to Unitholders that the process has not worked out. As such, as the 55% owner and external manager, they should now take the REIT private.

The Board of Trustees are obligated to find a way to maximize value for all unitholders. Failure to do so is an oppressive action toward minority unitholders. While there are possibly many scenarios that the board can seek to maximize unitholder value, we believe the current best solution would be for Melcor Parent to repurchase the 45% minority interest in the REIT and regain full ownership.

  • Trust Units Issued & O/S (including Class B LP Units): 29.1 million
  • Trust Units not already owned by the Melcor Parent: 13.0 million

A take-out price at 95% of IFRS NAV is $7.69 per Trust Unit, or approximately $100 million for minority holders. This would be a successful outcome for both the Melcor Parent and long-suffering minority unitholders. Anything less than this would be an oppressive action to minority unitholders.

To our knowledge and based on disclosed ownerships, Firm Capital, through affiliated entities, is the largest minority unitholder of the REIT and would vote in favor of this proposed takeout transaction.

We are reaching out to all Melcor REIT Unitholders to support our position regarding Melcor Developments Ltd. taking the REIT private and ask all Unitholders contact Melcor to voice their concerns. Supporting Unitholders should feel welcome to reach out to show support for this position.

For further information, please contact:

Eli Dadouch   Sandy Poklar
President & Chief Executive Officer   Chief Operating Officer
(416) 635-0221   (416) 635-0221

FC Private Equity Realty Management Corp. is a real estate private equity investment firm in Toronto, Canada.

This press release may contain forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “continue”, and by discussions of strategies that involve risks and uncertainties. The forward-looking statements are based on certain key expectations and assumptions made by the Trust. By their nature, forward-looking statements involve numerous assumptions, inherent risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and various future events will not occur. Although management of Firm Capital believes that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that future results, levels of activity, performance or achievements will occur as anticipated. Neither Firm Capital nor any other person assumes responsibility for the accuracy and completeness of any forward-looking statements, and no one has any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or such other factors which affect this information, except as required by law. Neither the Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release. Additional information about Firm Capiral is available at www.firmcapital.com.



Issued by & reply to:

February 29, 2024

Chairman of The Board of Trustees
Melcor Real Estate Investment Trust
900, 10310 Jasper Avenue NW
Edmonton, AB
T5J 1Y8

Dear Mr. Young:


We are writing this as an open letter for all Unitholder and the Board of Trustees.

As you are aware from our prior correspondence, FC Private Equity Realty Management Corp. (“Firm Capital”), through affiliated entities is an owner of Melcor Real Estate Investment Trust (“Melcor” or the “REIT”) Trust Units and the $46 million, 5.1% Convertible Unsecured Debentures.

As significant unit and debenture holders, we read your press release issued February 22, 2024 announcing the commencement of the Strategic Review and Distribution Suspension. While we applaud the announcement of the Strategic Review, we are perplexed by the complete Distribution Suspension given that the AFFO payout ratio was 90% and your overall property metrics were reasonable despite the occupancy pressures in the office portfolio. Furthermore, the $14.4 million of annualized cash flow savings from cutting the distribution will do nothing to alleviate the $135.9 million of debt coming due in 2024.

Regarding the $135.9 million of debt coming due, we have the following questions as we feel that based on the amount, the intentions of Melcor to refinance need to be disclosed in detail to the public in a press release. Specifically:

  • Revolving Credit Facility ($31.8 million): Have you had discussions with your current lender(s) around the renewal of the Revolving Credit Facility? Also, what are the terms of the renewal? If so, will there be a material change such as a paydown of principal or will the current lender(s) offer a simple extension?
  • 5.1% Convertible Unsecured Debenture ($46.0 million): How do you plan on dealing with the Convertible Unsecured Debenture coming due this year? Do you plan on either: (i) refinancing with the capital markets by issuing a replacement debenture knowing that the interest rate could be materially higher; (ii) selling assets and taking net proceeds (net of existing encumbrances) and paying off the principal balance; (iii) do you have unencumbered assets that could be financed with mortgages to repay this liability; or (iv) going to debenture holders for an extension with possible revised terms? For the record, we would not be in favour of (i) because the interest rate would be higher than conventional mortgage debt and would be punitive to the REIT and (iv) given the poor precedent it would set for Melcor going forward.
  • Mortgages ($56.1 million): Have you had discussions with your current lenders around the $56.0 million of Mortgages and what the terms of renewals or refinancings will look like? Given the amount coming due, we believe it’s imperative that a press release be issued to discuss: (i) the status of renewals and refinancings with lenders; (ii) colour around any unencumbered or low LTV assets you have on the balance sheet to address these maturities; (iii) selling assets, taking net proceeds and paying off partially or in full the principal balances outstanding and (iv) where will interest rates and principal balances land upon any renewals given that the weighted average interest rates on all your mortgages are 4.5% and Melcor renewed its 2023 maturities at interest rates in the 6.97% – 8.01% range.

    Lastly, regarding Melcor’s 2023 maturities, were the renewals and refinancings short term in nature? Specifically, what were the terms to maturities of these mortgages?

  • Class C LP Units ($2.0 million): Given that this debt is held by the parent company, Melcor Developments Ltd. (“Melcor Parent”), we would hope that prior to any repayment or resolution of this liability, that the Revolving Credit Facility, Convertible Unsecured Debenture and Mortgages are addressed and dealt with first. Specifically, we would hope Melcor Parent and Melcor would come to terms and convert this liability to trust units at NAV to show support for the REIT.

In summary on this matter, unit and debenture holders such as ourselves feel that a detailed and extensive press release discussing how Melcor plans on refinancing this debt would be appreciated.

Furthermore, we are concerned that given the current unit price of $3.01 per Unit, Melcor Parent will use this opportunity to take Melcor private at a unit price significantly below its Net Asset Value or NAV. Based on Melcor’s most recent Q3/2023 financial statements, NAV is approximately $8.32 per Unit. This represents a trading discount of 63% to NAV. It is our expectation that the outcome of the Strategic Review will see that both: (i) the $135.9 million of debt maturities is addressed and (ii) unitholders will realize NAV on their investment and no “take-under” proposal is put forward by Melcor Parent and accepted by the Board of Trustees. The Board of Trustees are thus obligated to find a way to maximize value for all Unitholders. Failure to do so is an oppressive action towards the minority unitholders.

On the other hand, if Melcor Parent wishes to repurchase their 45% minority interest in the REIT and regain full ownership, we would be supportive provided that it occurred at the right unit price. The current float of the REIT is approximately 13 million trust units. As such, we suggest that Melcor Parent make an offer to purchase the REIT at a price per unit in the range of 95% of IFRS NAV of $8.32 per Trust Unit. This would equate to a takeout price of $7.90 per Unit for the minority interest, for total consideration of approximately $103 million. This would be a 162% increase over the current trading price and would be a successful outcome for both yourselves and long-suffering minority unitholders.

To our knowledge and based on disclosed ownerships, Firm Capital, through affiliated entities, is the largest minority unitholder of the REIT and would vote in favor of the proposed takeout transaction. We feel that remaining unitholders will also be in favour of this type of outcome. We will be releasing this letter to the public so as to gain minority unitholder support for our position.

Please ensure that all members of your board of trustees receive a copy of this letter. May we please get a written response by March 7, 2024, or simply issue a detailed press release in response to our letter.

Yours truly,

Eli Dadouch
Eli Dadouch

If you feel your response should be in a public form for all unitholders to see, then issue a press release, as you should expect all our correspondence to be publicly released, including your replies.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/d3253fd0-cbc8-4668-91c1-6b9dcc358da5

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