FC Private Equity Realty Management Corp. Responds to Melcor REIT “Take Under” Transaction:

As Feared, Melcor Developments Ltd. is Fleecing Melcor REIT Unitholders! 

Melcor Developments Ltd. Needs to be Honourable and Take Melcor REIT Private at NAV and Stop the Self Dealing That Negatively Impacts Minority Unitholders 

Do Not Tender – Vote No!

TORONTO, Sept. 18, 2024 (GLOBE NEWSWIRE) -- FC Private Equity Realty Management Corp. (“Firm Capital”), through affiliated entities, is an owner of Melcor Real Estate Investment Trust (TSX: MR.UN) (the “REIT”) Trust Units.

Since November 2020, Firm Capital has been publicly urging Melcor Developments Ltd., (the “Melcor Parent”), who is the founder, 55% owner, and the external manager of the REIT, to take the REIT private at Net Asset Value (“NAV”) given that the growth plan of the REIT at the time of the $10.00 per unit IPO has failed and minority unitholders have suffered with a perpetually underperforming unit price as detailed in our press releases and letters to the board on November 4, 2020, and November 19, 2020. The REIT’s responses to our various letters and their subsequent press releases dated November 23, 2020, and December 8, 2020, proved to be wholly inadequate for minority unitholders. This is evidenced by a prolonged period of underperformance and two distribution cuts that were also highlighted in previous press releases.

On February 22, 2024, the REIT announced the suspension of the distribution entirely and the commencement of a Strategic Review process. Under the Strategic Review process, the Board of Trustees of the REIT and the Special Committee are obligated to find ways to maximize value for all unitholders, by exploring all avenues. Failure to do so is an oppressive action toward minority unitholders. On February 29, 2024, Firm Capital wrote a letter to the REIT Board questioning the rationale for the suspension of the distribution since the AFFO payout ratio was only 90% and asked for public disclosure regarding the near term debt repayments including: (i) Repayment of the $46.0 million, 5.1% Convertible Unsecured Debentures due December 31, 2024 (the “Debentures”); (ii) the mortgage debt maturities and, (iii) the repayment of the $20 million Class C units due to the Melcor Parent.

Our letter went unanswered and as such, Firm Capital issued a press release on March 13, 2024, urging the Melcor Parent to do the right thing for long suffering unitholders and take the REIT private at 95% of NAV.

Since October 2019, Firm Capital has tabled numerous concerns and issues to the board that have largely gone unanswered. This includes a dilutive private placement offered solely and unfairly to the Melcor Parent on Oct. 10, 2019; inquiries as to the rationale for now two distribution cuts; and issues surrounding the 2024 debt maturities. Most recently, Firm Capital sent a letter addressed to the Special Committee on September 11, 2024, asking for an update on the Strategic Review.

FIRM CAPITAL IS ADVISING UNITHOLDERS TO NOT TENDER TO THE “TAKE UNDER” AND SELF DEALING TRANSACTION BY MELCOR PARENT – THE $4.95 PER TRUST UNIT OFFER REPRESENTS A 45% DISCOUNT TO NAV
However, as feared, the REIT issued a press release recently announcing a “Take-Under” transaction from Melcor Parent to take the REIT private at $4.95 per Trust Unit. This is a 45% discount to the REIT’s NAV of $8.93 per Trust Unit (based on the REIT’s own published Q2/2024 Financial Statements and MD&A issued on July 30, 2024 and assumes par value (including Debentures) of all liabilities), being only 50 days prior to this announcement. In addition, the REIT announced several self-dealing initiatives that solely benefit the Melcor Parent at the expense of Unitholders (collectively the “Transaction”).

In summary, Firm Capital is advising REIT Unitholders to not tender to this “Take Under” Transaction by Melcor Parent. The Transaction is highly beneficial to both Melcor Parent and insiders, namely the Melton family, who are members of senior management and the trustees of both Melcor Parent and the REIT.

To successfully oppose this Transaction, a majority of the minority unitholders who cast a vote, are required to vote “NO”.

THE TRANSACTION IS SIGNIFICANTLY BELOW THE REIT’S OWN $8.93 NAV
As mentioned, the Transaction from Melcor Parent to take the REIT private at $4.95 per Trust Unit is a 45% discount to the REITs own NAV of $8.93 per Trust Unit (based on the REIT’s own published Q2/2024 Financial Statements and MD&A issued on July 30, 2024), and lower than the $10.00 per Trust Unit IPO price. The NAV calculation assumes the par value (including Debentures) of all liabilities. While the REIT likes to state that the Transaction is a “premium of 46.0% to the REIT’s closing price on September 12, 2024…and a 61.3% premium to the 30-day volume weighted average unit price”, the truth is that the $4.95 per Trust Unit price values the entire real estate portfolio at an 8.6% weighted average capitalization rate (based on Q2/2024 NOI, annualized). This is far below the value of the REIT’s assets if they were to be sold individually. For context, the market has rarely seen investment transactions higher than a 7% capitalization rate in the past 12 months. Even if the REIT were to value the office portfolio at a 10% capitalization rate, then the retail, industrial and MHC portfolios would have an implied capitalization rate valuation in the 7% - 8.2% range, which is an extremely high capitalization rate range (i.e. low valuation) in the context of these assets classes, which typically trade in the 5% - 7% range, and particularly with the cost of five and ten year mortgages being under 4.8% today (driven off the decline in Government of Canada bond yields).

The Board of Trustees (which includes a member of Melcor Parent) drove the Unit price down to a 5-year low when they announced the distribution suspension on February 22, 2024. They are now presenting the offer as a substantial premium to the depressed trading price (that they caused) as being beneficial to minority unitholders. What they fail to mention is that this is a lowball offer at a 45% discount to NAV. In our opinion, this is a complete breach of fiduciary duty by the Board. Furthermore, the distribution suspension from February 2024, saves the REIT $14.0 million per annum, yet not a penny is benefiting REIT Unitholders; rather the Melcor Parent will benefit.

As we have been saying for months, the take-out price for the REIT should be 95% of NAV or $8.48 per Trust Unit. 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. In simple terms, we don’t see how the financial advisors can advise on this Transaction and ascribe a fair market value of the Trust Units in the range of $3.50 to $5.00 per Trust Unit range. A better outcome would be to liquidate the real estate and distribute the proceeds.

A copy of the REIT’s NAV is in Appendix A of this letter.

THE DISTRIBUTION CUT WAS THE PRETEXT TO THE TAKE UNDER DEAL
On February 22, 2024, the REIT announced that it was: (i) initiating a Strategic Review and (ii) cutting its monthly distribution to zero. The rationale at the time by the REIT was due to:

“uncertainties surrounding the current capital and property market conditions, management and the Board carefully conducted a comprehensive review of the REIT’s capital structure and operations in order to ensure the long-term viability of the REIT’s cash flow and preserve value for its unitholders…The distribution suspension is expected to enable the REIT to retain approximately $1.2 million of cash, monthly, improving the REIT’s financial flexibility as it continues advancing its short and long-term objectives.”

While we applauded the announcement of the Strategic Review at the time, we are perplexed by the complete distribution suspension given that the AFFO payout ratio was 90% and overall property metrics were reasonable despite the occupancy pressures in the office portfolio. Furthermore, the $14.0 million of annualized cash flow savings from cutting the distribution would do nothing to alleviate the $135.9 million of debt coming due in 2024 at that time.

The announcement of the distribution suspension caused the REIT Trust Units to immediately decrease 23% from $4.15 to $3.20 per Trust Unit and eventually to a 5-year low of $2.19 per Trust Unit. This equates to $27.6 million in lost equity value just day one of the distribution cut announcement! Had the distribution cut not occurred and the same 46% premium were applied to the stock price, the takeout offer price would be approximately $6.06 per Trust Unit. While not all the way to NAV, it certainly would be better than the current $4.95 per Trust Unit take out price being offered to minority unitholders.

THIS WAS A SELF-IMPOSED REIT UNIT VALUATION DROP THAT BENEFITS THE MELCOR PARENT
Since February 2024, not a word was mentioned by the Board on the mortgage and debt repayment plan. Or, if there was an ability to secure mortgage financing to replace the maturing Debentures.

It is our belief that the distribution cut was the first step in this Take Under Transaction as it allowed Melcor Parent to offer a price to Unitholders far lower than if they had kept the distribution in place. Said differently, the REIT purposely impaired value for the benefit of Melcor Parent. Furthermore, the cash savings from the distribution cut rightfully owed to Unitholders between February 2024 and December 2024 equates to $12 million, which we believe is now being used by and benefiting Melcor Parent for their own self-interest (see below).

THE LEVEL OF SELF DEALING BY MELCOR PARENT IS PALPABLE
As part of the Transaction, the REIT announced the following related party transactions with Melcor Parent:

• Debenture Loan: The Debentures will be redeemed, but to do so Melcor Parent and the REIT have entered into a credit agreement (the “Backstop Loan Agreement”) which Melcor Parent will loan the REIT $46 million (par value of the Debentures). If the Transaction is not completed prior to December 17, 2024, the Backstop Loan Agreement will bear interest at a rate of 12% per annum for up to three years; and
  
• Go Shop Period Termination Fees: The REIT will have a 30-day go-shop period (the "Go-Shop Period"), during which they will solicit third-party interest for a superior proposal made by Melcor Parent. Melcor Parent will have the right to match. If the REIT is successful in soliciting a superior proposal, there is a fee payable to Melcor Parent of $2.9 million. The transaction also includes customary provisions, including non-solicitation by the REIT of alternative transactions following the conclusion of the Go-Shop Period, and a $5.8 million termination fee payable to Melcor Parent under certain customary circumstances where a Go-Shop Fee is not otherwise payable.
  

It is our belief that both the Debenture Loan credit obligation and the Termination Fees potentially earned during the Go Shop Period are blatant self-dealing by Melcor Parent. For starters, the Backstop Loan Agreement terms are grossly off market.

With respect to the termination fees, these are typically paid when unrelated third parties enter into a transaction and there is a risk that either party may be unfairly penalized for spending a significant amount of time and resources on due diligence and a transaction not consummated. In those cases, the termination fees (based on size of market capitalization) may range in the 1% - 2% of the equity value.

At $4.95 per Trust Unit, the REITs market capitalization is $144 million. Thus, a break fee should be in the $1.4 - $2.8 million range. The fees that have been negotiated between Melcor Parent and the REIT are significantly above market and not even required given that the Transaction is with not only a significant 55% unitholder, but also the original Sponsor of the REIT and the current asset manager, who co-shares senior management teams. Said differently, the current Transaction from Melcor Parent’s perspective bears no risk as they: (i) stand to profit long-term by acquiring the assets back from the REIT well below both current fair value what they sold the assets originally to the REIT at $10.00 per Trust Unit and (ii) in the event of a superior bid by an unrelated third party, Melcor Parent will profit from a higher take-out price by virtue of their 55% holding.

Clearly, Melcor Parent is using this “Take-Under” Transaction as an opportunity to fleece REIT minority unitholders.

THE FIRM CAPITAL ORGANIZATION WILL FORMALLY LOAN THE REIT THE CASH REQUIRED TO REPAY DEBENTURE AT A LOWER INTEREST RATE
We have the following questions for both the Special Committee and the Board of Trustees:

(1)   Did the Board shop around for replacement debt for the maturing Debenture, including asking current debenture holders to extend for 3 years?
(2)   Did the Board assess if the REIT could upward mortgage finance their assets to secure funds to pay out the maturing Debenture?

At this stage, nobody knows as we at Firm Capital were never approached.

In light of the announcement of the 12% Backstop Loan Agreement and given that the Firm Capital Organization is in the real estate lending space and if Unitholders vote against this Transaction, Firm Capital would like to offer the REIT the $46 million that they require to repay the Debentures prior to maturity, but at much lower rates than being offered by the Melcor Parent, and for a 3 year term fully open in full and in part, so as mortgages are secured, they can repay, in parts, the Firm Capital debenture with no penalty.

Firm Capital requests that the Board of Trustees enter into such negotiations immediately. We encourage the Board / Special Committee to fulfil their duty and reach out to the undersigned for further discussions and a term sheet.

FIRM CAPITAL QUESTIONS BOTH THE STRATEGIC REVIEW PROCESS AND THE INDEPENDENT COMMITTEE
Considering the Transaction announcement, we are now questioning the entire Strategic Review process, particularly around the: (i) Valuation; (ii) Debenture Loan and (iii) Go-Shop Period and their associated termination fees as outlined above. Specifically, we question how did the Independent Committee of the Strategic Review come to terms with the “Take-Under” Valuation and the blatant Self-Dealing on behalf of Melcor Parent at the detriment of minority unitholders? In addition, why didn’t the Independent Committee announce a sale of the REIT assets by way of independent brokerage prior to the announcement of the Transaction? As owners and acquirers of real estate, we at Firm Capital can attest that we did not see a brokerage package since the commencement of the Strategic Review and yet now is the time to initiate an independent process, after a related party “Take-Under” Transaction is announced?

It should be noted, Firm Capital was never contacted by the Special Committee or the Advisors to the Special Committee offering us the ability to bid on buying the REIT. It was only after the REIT announced the sale to the Melcor Parent on September 12, 2024, that Firm Capital first learned of the opportunity to buy the REIT through a 30 Day “Go Shop” Period. It is absurd to expect that a transaction of this size can be done by an arm’s length third party entity within 30 days. It is a wholly inadequate amount of time for a buyer to conduct due diligence and present a viable, bankable offer.

Furthermore, we question the resignation of two of the independent trustees on February 6, 2024, just 16 days before the announcement of the distribution cut and the Strategic Review as to their reasoning considering the announcement of the Transaction and the appointment of two new independent trustees, one of which ended up on the Independent Committee for the Strategic Review.

GO-SHOP PERIOD NDA REQUIRES A STANDSTILL FROM ALL PARTICIPANTS – IS THIS REALLY A FAIR PROCESS FOR UNITHOLDERS?
Finally, we question the legitimacy of the Go-Shop Period…Period! As acquirers of real estate, Firm Capital is in receipt of the Non-Disclosure Agreement (“NDA”) from BMO Capital Markets Real Estate and was alarmed to find a “standstill” clause that effectively blocks anyone in receipt of information from the data room from:

“for any purpose, solicit proxies of security holders of the REIT, or seek to advise or influence any other person or entity with respect to the voting of any securities of the REIT, or form, join or participate in a proxy solicitation group; otherwise act alone or in concert with others to seek to control or influence, in any manner, the management, the board of directors of the business and policies of the REIT; make any public announcement or take any action that would reasonably be expected to require the REIT or you to make a public announcement (whether or not required by applicable law, regulatory authorities or stock exchanges) regarding any of the actions set forth above; or instigate, encourage or assist any third party (including forming a group or acting in concert with any such third party) to do, or enter into any discussions, agreements, arrangements or understandings (whether written or oral) with any third party with respect to, any of the actions set forth above.”

These terms are clearly unacceptable in the context of a current Unitholder being a bidder. The NDA effectively precludes anyone with a vested financial interest in the REIT from bidding on the REITs assets as they cannot comment on the entire process going forward from the perspective of a minority unitholder. As such and in the context of the REIT not announcing an earlier process to sell the individual assets, we question if the REIT and the Special Committee are truly interested in benefiting all Unitholders or just Melcor Parent.

We request the Special Committee to amend the NDA so that Unitholders such as Firm Capital can review the data room to determine a valuation, without being restricted to tell other Unitholders to oppose the Transaction.

FIRM CAPITAL IS ADVISING UNITHOLDERS TO NOT TENDER TO THE “TAKE UNDER” AND SELF DEALING TRANSACTION BY MELCOR PARENT – REPRESENTS A 45% DISCOUNT TO NAV
As significant unitholders of the REIT, we are disappointed with the consistent disconnect with the REIT’s “Take-Under” price and NAV. Since the spinoff and IPO of properties originally owned by Melcor Parent in 2013, the Trust Units have consistently traded at a discount to NAV.

Considering the: (i) below market “Take-Under” Valuation; (ii) Self-Dealing and (ii) overall desire by Melcor Parent to fleece minority unitholders, Firm Capital is urging unitholders not to support the Transaction as recently press released. Considering “Board Approved” Financial Statement NAV being $8.93 per Trust Unit, the take-out price for the REIT should be at 95% of NAV or $8.48 per Trust Unit. 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.

Furthermore, Melcor Parent is the 55% majority unitholder and is also the external asset manager of the REIT. As such, the Self-Dealing items as outlined above is beyond the pale and should be removed from the offer immediately. Anything less than this would also be an oppressive action to minority unitholders, especially when Melcor Parent stands to earn upwards of $22.4 million over the next three years in interest and the high end of termination fees, versus the REIT finding cheaper third party credit, while unitholders saw their monthly distribution cut to zero just seven months ago.

Finally, we urge the Board of Trustees and Independent Committee of the Special Committee to take the Firm Capital Organization’s offer seriously regarding the loan to repay the expiring Debentures. We encourage the Special Committee to fulfil their duty and reach out to the undersigned for further discussions and a term sheet and amended NDA.

The Board of Trustees and specifically, the Independent Trustees of the Strategic Review are obligated to find a way to maximize value for all unitholders. Failure to do so is an oppressive action toward minority unitholders. In the context of this Transaction, to date they have failed to do so and must step up!

MINORITY UNITHOLDER SUPPORT
We are reaching out to all REIT Unitholders to support our position regarding the Transaction and ask all Unitholders contact Melcor to voice their concerns, and to publicly state their support. Supporting Unitholders should feel welcome to reach out to show support for this position and contact the undersigned below with their concerns.

Thank you,

For further information, please contact:

Sandy Poklar
Chief Operating Officer
(416) 635-0221        

Please send all emails to ir@firmcapital.com.

ABOUT FC PRIVATE EQUITY REALTY MANAGEMENT CORP.
FC Private Equity Realty Management Corp. is a real estate private equity investment firm in Toronto, Canada.

FORWARD LOOKING INFORMATION
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 Capital is available at www.firmcapital.com.

APPENDIX A
MELCOR REIT NET ASSET VALUE
(in thousands of $CAD)	IFRS NAV			adj.			Notes		FC NAV
Annualized NOI	$	45,928		$	-				$	45,928
Portfolio Cap Rate		7.08%								7.08%
Investment Properties	$	648,288		$	-				$	648,288
Accounts Receivable		1,529			-					1,529
Derivative Financial Asset		2,852			(2,852	)	(1)			-
Prepaid Expense and Other		6,172			-					6,172
Other Assets		25,430			-					25,430
Cash		3,294			-					3,294
Assets	$	687,565		$	(2,852	)			$	684,713
Mortgages Payable	$	312,295		$	1,501		(2)		$	313,796
Convertible Debentures(1)		45,491			509		(2)			46,000
Revolving Credit Facility		30,889			157		(2)			31,046
Accounts Payable		1,188			-					1,188
Distribution Payable		-			-					-
Accrued Liabilities and other Payables		12,076			-					12,076
Class C LP Units		20,818			-					20,818
Derivative Financial Liabilities		506			(506	)	(1)			-
Liabilities	$	423,263		$	1,661				$	424,924
NAV	$	264,302		$	(4,513	)			$	259,789
Units Outstanding (incl. Class B)		29,088								29,088
NAV Per Unit	$	9.09		$	(0.16	)			$	8.93
Take-Under Price Discount to NAV										(45%)
(1) Non-cash item.
(2) Adjust to Par Value.