Melcor Developments Ltd T.MRD

Q3 - Management Language

[longrun86]

It has been interesting to watch a bit of the communication switch coming from Management.

I found it interesting earlier in the year when they decided to put the REIT through a strategic review and suspend the distributions. At the time they did not do a good enough job at signalling how bad the situation was at the REIT in either the commentary or the property impairments. With the FC and Telsec shareholders getting into the mix it seems like they finally figured out their messaging for Q3. 

I am looking forward to them putting the REIT purchase behind them. 

In the Q3 press release they once again signal their desire to focus on the Alberta market which I agree with. If they are true to their word, then the US and BC properties should get sold off. Maybe I am reading too much into the situation but it would make a ton of sense for them to do this and free up capital.

The US division assets are carried on the balance sheet at $245 million and is comprised of 6 Office Properties, about 70 residential units, and roughly 1,400 acres of land development (primarily CO and AZ). These US assets are extremely saleable and Aurora CO was one of the fastest growing regions in the US over the past 3 years. Based on the 2023 statements there was $45 million in debt associated with the US investment properties and there could be some additional debt related to the Aurora development (was not able to figure that out).

The current market capitalization is $389 million and the shares trade at a stunning 0.3x book value. 

If they tell us they are going to focus on the Alberta market, then we should believe them. What I would like them to then do is to distribute at least half the net proceeds to shareholders as a special dividend so that shareholders actually get a return and that the money doesn't just get sunk back into development.

A $100 million distribution to shareholders is roughly $3.30 (based on 30.3 million shares O/S) or 25% of the current share price of $13.10. A $150 million distribution is $4.93. The company would still have more than enough capital to focus on the Alberta market (and lord knows they still hold enough land).

Said differently, they could sell the US division and pay out 25% to 38% of the existing market capialization while impacting the earnings power by I would guess less than 10% annually.

This is the right thing for Management to do and this is how shareholders will be rewarded for their years of patience and underperformance.

Happy to hear the thoughts of others.

LR

[Thor16]

I don't believe they have any interest in returning capital to shareholders.  If they did, they would. Nothing is stopping them. 

[longrun86]

I am of the view that they lacked the strategic focus and discipline to allocate capital in a way that generated sufficient returns. The company went through a period of empire building. They will now bring the REIT back in-house. They have also indicated that they will focus on the Alberta market rather than chase deals in jurisdictions where they do not have a competitive advantage. They have

[Northforce13]

"I am of the view that they lacked the strategic focus and discipline to allocate capital in a way that generated sufficient returns." When compared to other REITs, MRD's long term growth in total book value including dividends was top quartile. "They have also indicated that the Land development is in "harvest" mode." I did not see that, but agree it

[longrun86]

1. MRD Vs Other REIT's: I have always considered them to be one part land developer and one part REIT. The Land development is significant and I would expect a higher return profile on this given the risk.  2. Harvest Mode: They have included this in their MD&A "While we may participate in strategic land purchase opportunities such as this, our primary focus is on harvesting our

[Thor16]

Business as usual until they privatize many years in the future.