The report on the Melcor REIT is updated and rated Hold at $4.01. Unfortunately it appears that higher interest rates are a bigger problem than I had previously realised. Perhaps much bigger.
They are doing quite well getting the occupancy back up close to 90%. It’s difficult to get it much higher due to a glut of office space in Edmonton in particular. But the new and renewal leasing is coming at the cost of higher tenant incentives.
The good news is that most of their retail properties are attractive and can likely support rent increases over the years.
The bad news is that their recent debt renewals are at significantly higher interest rates. And they have significant debt renewals in 2024 and in 2025. If their average interest rates were to increase by 50% (from a current average of 4.50% to about an average of 6.75%) it appears that their distribution would likely have to be reduced in that case.
They are now attempting to sell several properties to reduce debt. On the conference call they appeared to indicate that a contract to sell two of the properties is imminent and it appears they they were able to sell for about book value. But nothing is for sure until the deals are signed and then closed.
It seems quite possible that they will announce a distribution cut. They did not announce a cut with the Q3 results last week. But they also did not declare any future distributions.
Unfortunately with the unit price way down it seems too late to Sell and so I will be holding my position.
I have mentioned (for example in my June 7th and June 8th comment) that some companies must be getting crushed by higher interest rates. But I slow to realise the impact on the Melcor REIT. On May 5th I mentioned it was an issue for them but I did not realise how big of an issue. And I always thought the the low price to book value on the units provided a margin of safety.