Sometimes things work out, and sometimes they don’t. And sometimes simple things get complicated.
Disclosure: Some of us own this or intend to own this.
In 2012, Trez Capital Mortgage Investment Corporation (“Trez”) raised $230 million dollars to fund a mortgage loan book. The Company chugged along but by 2016 some wanted a change:
“On May 9, 2016, the Special Committee of the Board of Directors announced the completion of its strategic review process and a plan for the orderly wind-up of the Company’s assets and the return of capital to shareholders (the “Orderly Wind-Up Plan”). The Orderly Wind-Up Plan in its entirety was approved by shareholders at the Company’s annual and special meeting of shareholders held on June 16, 2016.”
Since then the Company has been in wind-up mode, with two mortgages left to finish up and some cash. And overall the team seems to have been doing a pretty good job at getting the book down to zero.
The Last Two Mortgages
As per the Company; “Of the two remaining mortgages, one mortgage totaling $0.5 million is expected to be paid out prior to the end of August 2018 and the other mortgage totaling $5.0 million is scheduled to mature in the first quarter of 2019. The Board will continue to assess all possible means to ensure the efficient wind-up of the Company to maximize shareholder value.”
So effectively they have one left, which is a first lien mortgage on a multi-residential building in Ontario due in Q1 2019 as per their Q2 MD&A . An issue is this last mortgage of $5 million is being carried at a Loan-to-Value (“LTV”) of 100%. As the Company initially underwrites mortgages at a LTV of 85% or less, this means that the value of the property has been written down by the Company for some reason.
The NAV
If you take a look at the Q2 2018 balance sheet, and adjust it for the dividend of $2.40/share paid subsequently to the quarter, the wind-up Net Asset Value (NAV) (excluding other wind-up costs/taxes/Christmas party and assuming no issue with the mortgage or other things), it might look something like this:
But this simple wind-up got a bit less simple.
The Prettiest Girl at the Wind-Up Dance
Instead of just letting Trez ride into the sunset, in August two separate funds came forward with proposals (and we encourage you to actually go to SEDAR.com to read through all of the notices) – FrontFour Capital corp. and Earlston Investments Corp. Here are snippets of their notices:
FrontFour
“Vancouver, British Columbia – August 20, 2018 – FrontFour Capital Corp. (“FrontFour Corp.”) and FrontFour Capital Group LLC (“FrontFour LLC”, together with FrontFour Corp., “FrontFour”) announced that they have, on behalf of certain investment funds and portfolios (collectively, “FrontFour Funds”) managed by them, made a proposal to the board of directors of Trez Capital Mortgage Investment Corporation (“TZZ”) in furtherance of which FrontFour would offer all TZZ shareholders an opportunity to either (i) receive cash for their Class A shares of TZZ (“TZZ Shares”) at the net asset value of TZZ or (ii) remain invested in their shares and participate in a new strategic path of TZZ, with additional opportunities to invest in TZZ (the “Offer”). The proposal contemplates that the Offer will be completed by early November 2018.
As of the date hereof, FrontFour Funds own an aggregate of 1,235,211 TZZ Shares, representing approximately 10.60% of 11,649,711”
Earlston Investments Corp.
“August 22, 2018, Vancouver, British Columbia - Earlston Investments Corp. (the “Acquiror”), announces that on this date it acquired 1,305,700 Class A shares (the “Shares”) of Trez Capital Mortgage Investment Corporation (the “Issuer”) on the Toronto Stock Exchange (“TSX”) at a price of approximately $2.99 per Share for gross proceeds of approximately $3,900,000 (the “Transaction”). The Shares acquired by the Acquiror on this date represent approximately 11.2% of the outstanding Shares as of August 22, 2018
As disclosed by the Acquiror on August 20, 2018, it submitted a written proposal to the board of directors of the Issuer relating to a proposed offer by the Acquiror to acquire all of the outstanding Shares.”
So of course now the poor management team and Board, who thought they would have this thing all buttoned up in no time, have to set up meetings and do some work..
“TORONTO, August 21, 2018: Trez Capital Mortgage Investment Corporation (TSX: TZZ) (the “Company”) announced today that the Board of Directors has formed a special committee of independent and disinterested directors, consisting of Mr. Gary Samuel and Mr. Steve Pustil, to consider certain non-binding acquisition proposals which have been received by the Company. Mr. Samuel will Chair the committee.
The Board cautions the Company’s shareholders and others considering trading in its securities that the Special Committee is reviewing the aforementioned acquisition proposals and no decisions have been made with respect to the Company’s response to the proposals. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to this or any other transactions, except as required under applicable law.”
Time to get out some popcorn, if you’re into this sort of thing of course.