On Friday the S&P 500 was up 0.8% and Toronto was up 0.9%.
Cameco was strong with a 3.5% gain.
The Melcor REIT got hammered down 13% to $2.39. The market may fear that this is going to zero but that still seems unlikely.
Thinking about the Melcor REIT I wondered exactly what led the independent Trustees to pursue a strategic review. The press release says it is the (full) Board that is undertaking the review although it will be led by a committee of the independent Trustees. That Committee has retained legal counsel to represent it and I’m not sure if that is normal or represents a red flag and may be indicative of a disagreement among Board members.
It seems clear that the REIT was and is facing a liquidity crunch due to upcoming debt maturities including a line of credit that needs to be renewed in June.
It may also be the case that the auditors and or management have determined that a significant write-off of building values is required. That in turn could make it even harder to borrow and might even lead to being in breach of debt covenants although the debt covenants appeared to be set as a percent of original cost of the buildings and not market value.
The press release announcing the restructuring mentions three times that the goal is to preserve value for unit holders. While anything is possible, there was no indication that the REIT was going to have to (as a drastic example) enter creditor protection. Melcor Developments owns 55% of the REIT and certainly will not want to lose its investment.
The suspension of the distribution on its own has certainly driven the unit price down. But it does not fundamentally change the true value of the units. However, the market has probably considered that the suspension signals that the true value is lower than previously thought.
We’ll know more on Tuesday afternoon when the REIT’s financial results are to be released.