Melcor Developments (MRD-T) has proposed a plan to acquire all the equity interest in Melcor REIT LP (MR.UN-T) which the company does not already own (approximately 45 per cent of the units) for $4.95 per share in cash.

The move comes about six months after the REIT’s largest minority shareholder, FC Private Equity Realty Management Corp. (Firm Capital) called on Melcor Developments to take the trust private and return about $100 million to minority shareholders.

Firm Capital was seeking a take-out price at 95 per cent of the REIT’s IFRS net asset value (at that time) of $7.69 per unit.

Melcor and entities controlled by Melcor and its principals hold approximately 55 per cent of the REIT’s units. Its unowned interest comprises approximately 13 million Class A LP units, the company states in the announcement.

This values the share transaction itself at approximately $64.35 million.

Melcor also intends to redeem and pay out in cash $46 million (plus accrued and unpaid interest) of 5.10 per cent convertible unsecured subordinated debentures which are set to mature on Dec. 31.

Offer is 46 per cent premium to Sept. 12 closing price

“On behalf of the board of directors, I advise Melcor’s shareholders that the company has entered into this significant and strategic transaction that will bring Melcor’s income property portfolio back under Melcor’s full ownership,” Timothy Melton, Melcor’s executive chair and chief executive officer, said in the announcement. 

“Following an in-depth strategic review process, the REIT Independent Committee is pleased to announce this important transaction, which represents a 46.0 per cent premium to the REIT’s closing unit price on Sept. 12, 2024 and maximizes value for REIT unitholders,” Richard Kirby, trustee of the REIT and chair of the REIT Independent Committee, said in the announcement. 

The offer represents a 61.3 per cent premium to the 30-day volume weighted average unit price, the Melcor release notes. The difference in value between the 30-day price and the closing price on Sept. 12 is representative of a recent rise in Canadian REIT share values.

The deal includes a 30-day go-shop period for the REIT that will extend through Oct. 14, during which it is permitted to solicit third-party interest in submitting a superior proposal. Melcor will have the right to match any such proposal. 

If the REIT is successful in soliciting a superior proposal, a go-shop fee of $2.9 million would be payable to Melcor. The agreement also includes a $5.8-million termination fee payable to Melcor.

The transaction is subject to statutory closing conditions, including approval of 66 per cent of the shareholders and special voting units, as well as “minority approval” from investors deemed minority shareholders under securities law.

Longtime underperformance cited by Firm Capital

Whether those minority shareholders will accept a price of $4.95 is unknown at this time. Firm Capital expressed frustration with what it considers years of discounted stock prices when it issued its public letter in March.

“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 March statement from Firm Capital said.

Melcor REIT’s shares were trading at $3.39 on the TSX this morning.

In February, Melcor had announced a strategic review to determine the best future course of action. It also suspended distributions to retain about $1.2 million in cash per month.

Melcor REIT units were valued at $10 during its IPO in 2013. Firm Capital stated the units have consistently traded below that value other than for a period of time during 2014.

Firm Capital had publicly voiced similar concerns in November 2020. At that time, Melcor REIT units were trading at just under $4 on the TSX.

Melcor REIT’s portfolio includes interests in 37 retail, office and industrial properties in Western Canada, comprising approximately 3.1 million square feet of gross leasable area. Its key market is Alberta, with other properties in Regina and Kelowna, B.C.

As of its Q2 2024 financial report, the portfolio was valued at $673.7 million, up from $629 million in its Q4 2023 financial statement.