December 4, 2017 Comment on Melcor

Melcor Developments has announced it is selling 5 commercial rental properties to the Melcor REIT for $80.9 million. The properties are fully leased and are mostly retail but one of the properties is Industrial.

There was no disclosure by Melcor Developments of whether there was any gain or loss on the transfer. Since these properties were already marked to market, I would normally expect there was little or no gain or loss except possibly a small loss due to the transaction costs. But I see that the Melcor REIT disclosed it is buying the properties at a $1.5 million discount to appraised value. This would seem to imply a loss for Melcor Developments unless the properties were on the books for less than book value.

Melcor management indicated that the proceeds could be invested in new projects or raw land.

There was no mention of any of the money going to dividends or share buy backs.

The REIT will issue shares (units) and debt to pay for these assets and the share unit issue will reduce Melcor’s ownership from 56.7% to 53.6%.

For Melcor Developments $80.9 million represents 21% of the investment properties that Melcor owns that were not already part of the REIT.

Overall, there may be little reason for the moribund share price to react to this news.

Melcor REIT

The REIT is issuing $15 million in new units at $8.50 (approximately a 6.7% increase to the unit count) and $20 million in convertible debt paying 5.25%.

These new issues seem attractive as investments and the new issues both sold out quickly.

$2.5 million off the purchase price is paid by issuing a form of REIT units to Melcor. So it seems Melcor is not getting $80.9 million in cash. The external cash coming into Melcor appears to be $35 million.

There is also some debt on the properties which the REIT is taking over.

This transaction is probably moderately positive for the REIT’s unit price since it constitutes growth for the REIT.

Overall

The transaction and its impact is certainly not entirely clear to me. It’s all a bit confusing when a building is sold to an entity 53% owned by the seller. This transaction is in keeping with why the Melcor REIT was established.