Your write up following the last quarter reporting was prescient - as to your concern about the 10 year yields - well spotted back in November. The longer yields have risen, despite short term declines - so - near term improvement in the leveraged REITs has been muted. Prevailing interest rates for TNT appear to have been flat around 4.0% - so expected declines, and current stubbornness of decline - seem to have a limited impact to TNT.
The 'advantageous' purchases have not helped the per unit returns as the absolute earnings have reduced, and management has blamed this on the reduced number of properties - fair enough - but there has been no realized benefit to the reduced units outstanding - other than should some realization event occur - which does not help unit holders.
Hopefully, the dogs are being sold, and remaining properties are better quality with stronger tenants, and lease values.
Hopefully the vacant Calgary property is now sold, which leaves one other vacant property and one low occupancy property - two dogs remaining?
Your comments reflect the improved financial and operating environment, and prospects for the REIT, so why have unit prices dropped, significantly, and continuously? Now approaching the low price range last year when distributions had been discontinued with limited prospects for return to distributions.
Since your research presentation of November - unit prices are down 15%. As you state, at the time of the last quarter report, management told unit holders to wait, another quarter.
Since your previous 3 rd quarter reporting, another quarter has passed = another $9M of cash retention from operations, beyond what has been reported. Since suspension of distributions, cash retention (roughly) 5 quarters x $9M/quarter + $19M equity from property realizations (reported) = $64M, less 'advantageous' purchases of $13, so net cash improvement (repayment of credit line) by ~ $50M or $3/unit, yet stock is down 15% from your report. Why?
Small cap, management controls the REIT, management pays itself significant compensation, management (investor relations??) ignore REIT unit holders communications, management provides no guidance to unit holders looking for cash returns, Canadian listing (??!!), you are right = value trap.
You are correct, REIT legislation and tax rules require distributions (beyond what management describes as 'implied distributions'. You will have seen the magnitude of audit and tax bills - so management has better information than you or I. Management continues to ignore unit holder interest for cash returns - capitulation occurs as unit prices drop = better 'advantageous purchases for benefit of management interests - not unit holders!
In my opinion, it really comes down to management's parameters concerning cash distributions to unit holders - and they are not forthcoming with that information - like yourself, they have not responded to my requests for information - why not? Why would they? Unit holder interests conflict with that of management, so there is no benefit to management for improved market for the units - they control the market.
Your analysis is all correct - the unknown is whether management will comply with REIT requirements for distributions, or at least provide guidance to unit holders as to distribution of their entitlement to cash distributions. Any ideas as to information in that regard?
I hope that TNT works out better than the US REITs have performed with the TNT management team!! I am cutting my losses on those bad investments. And may exit the trap with TNT.
You highlight several points concerning the alignment of management and minority shareholders. I will continue to monitor this, and the next meeting in June will be crucial in providing us with more information.
I don't have the answers to all your other questions. But to sum up, the management in place will have to prove its alignment with minority shareholders in 2025. Especially with more than $2 in cash available for distribution. That's still more than $3 million for the CEO/Chairman per year.
Your insightful, and learned comments are valuable.
I did not suggest that True North, or their management, have a bad reputation, but they may - I don't know and I am not making that assertion. What is problematic to me is the magnitude of, very large, cash fees paid to a management through a related company, with common ownership. There is a conflict of interests between the unit holders, who's cash distributions have been withheld by management, and the management which continues to receive large cash fees paid to, itself. One loses, one gains.
Management is not remitting cash to its unit holders, but does pay, large management fees, to itself. The pain is being felt by the unit holders, not management.
As management has a large ownership interest, with defacto control, the point could be made that absence of distributions is aligned with unit holders. But this is false due to the magnitude of funds/cash flow, in the form of fees extracted and paid as cash to management.
With a small market company, such as this, and in the Canadian stock market, this is always an issue that management bleeds small companies dry, and many go broke - and old story. Although I am not saying that is the case here, but it is the RISK!
Something that does not look right. With all the advantageous share purchases, and associated cancellation of units - the return to the unit holders AFFO/FFO has not increased, (as mathematically it should so all the benefit of expenditure of share buy backs ~$13 management has spent has accomplished nothing on an AFFO/FFO per unit return basis. As always, management will have an explanation for this - which is incorrigible.
Further to the point on per unit holder returns, what happened to the proceeds of the 4 properties sold, that created about $20 net to unit holders. Cash balance is the same - mortgages payable and the line of credit has been paid down - but cash position unchanged = no funds for unitholders.. With debt paid down the and funds avaialble to unit holders, unchanged, and the reported AFFO/FFO to unit holders is unchanged , or dropped- the math does not make sense and does not work.
Should the conditional sale be closed, what will happen to the $10 of equity?
Further, there are another two remaining Toronto properties for sale, strong markets, unsold, although one has no tenants - and that may gut the value of the property, I don't know.
The units are down close to 40% from recent highs, and approaching lows for the year. The fund continues to buy the units, but at a reduced scale,and managment has scaled back insider purchasers. The most informed owner, Management, is personally buying less and directing the fund to be less aggressive. That party has ALL the answers, and the directive is less aggressive buying - why?
There has been no reporting to shareholders as to a plan to return funds to unit holders. They don't answer my calls. And that is a bad sign. They have a investor relations contact - but I have received not response.- why would they bother.
The fact is the managment team has a conflict over payments made to themselves, and not paid to unit holders, yet using those unit holder moneys to repurchase units, and enhance the value of the REIT - which managment controls.
Notwithstanding the outline above, all your points are valid and useful, in the event that management has been fully, and fairly disclosing the affairs of the company, and intentions of management -- which I have not seen or heard,
Is management doing the right thing for the unit holders that bought this REIT for distributions - not received, in over a year., and no suggestion of the prospects of payment until March 2025.?
Managemet has not addressed the above issues with unit holders, and have not addressed the inherent and extreme conflicts between unit holders and management, who are precluding payment to unit holders in lieu of themselves.
Your hypothesis seems to be that with the earnings generated accumulated and unremitted distributions + equity proceeds from property dispositions, represent a signficant amount of funds that could be repatriated to unit holders - but management has not provided a prospect or basis for such an action - but has so far declined the suggestion.
Whether they have to make a 'distribution in cash this year to avoid taxes' - that is a bold statement. Do the buybacks constitute distributions, hence no distributions required. Or are there amortizations/tax losses and such (Revenue Canada) or other tax tricks - tax losses created - to avoid a taxable situation and defer distributions. Look at how much they pay their tax, and audit advisors, to get around such issues.
Meanwhile, large management fees are paid and are current, units are being redeemed,. unit prices are dropping as there is no liquidity as there is no indication of improved prospects for the REIT - management seems to be conducting all affairs for their benefit, in conflict to unit holder interests.
No distribution to unit holders, no foreseeable distributions to unit holders, no commentary from management, management vested interests to freeze out unit holders to capitulation, all works in favour of management. This is an often repeated practice of small cap listed Canadian companies on Canadian exchanges.
Again, if you can indicate how they must change strategy, I would like to know.
I agree with your comments, and if no changes are made, I'll find myself invested in a value trap. I have the same problem communicating with management by email. I have received no reply to my 2 emails.
I also agree that we pay a hefty fee and salary for existing management ($1m+) and Starlight of $4.7m (Asset Management Fees (exclude others)) every year. This is equivalent to more than 7% of EBITDA. However, this amount is not entirely beneficial to Starlight. He also works for True North Commercial with employees to pay.
The decline in AFFO/FFO is mainly due to the reduction in office space held by True North Commercial (office sales). We had 47 offices at the beginning of 2023 and are now officially down to 40, but only 37 are non-vacant.
They need to refinance their substantial debts in 2025 and 2026. It is imperative that they quickly return to a debt-to-equity ratio of 3 times or more. Reducing/removing the dividend and having cash on the balance sheet helps them reduce credit risk and improve their track record. The rapid fall in interest rates will help them, but refinancing will cost slightly more than in the past. They have also had to invest capital to improve certain offices.
And let's not forget that True North Commercial will have Lease maturities in 2025-2026, so this increases the risk on AFFO/FFO.
They've mentioned this at every earning, but here's an excerpt from Q3-2024 ->
“The REIT intends to continue the significantly accretive purchase of Units under the 2024 NCIB until the release of the Q4-2024 results in March of 2025 at which point the REIT will evaluate the various options for allocation of its capital including the 2024 NCIB and the reinstatement of a distribution as operating and capital market conditions improve.”
When you say 'their' or 'they' you are referring to the management team that has voting control over the REIT. That 'management' team has received, and continues to receive, regular, recurring, significant fees - in cash - payments. Unit holders of this REIT have not received any return in over a year. And, generally, REIT owners are motivated by 'cash' returns, moreso than advantageous repurchases that only provide a return - in the longer term - to the longer term unit holder.
So, does it matter if this trades at 5x, or 4x, 3x or less, when the unit holder is not realizing anything, such as a cash return, from the REIT?
Is it the case that the buyback constitutes, for Revenue Canada, a return to unit holders. If so, then does the REIT ever (in the near term) have to make a 'cash' distribution?
If the management team (for example if they were young and had a significant investment, and controlling interest) had/has a long term time horizon, why would they distribute any funds, but rather continue to make 'distributions' by way of share repurchases at a time when the general body of unit holders are throwing in the towel in capitulation, and hence the controlling unit holder, enhances their longer term investment?
They -continue to receive cash distributions through management fees, and enhance their value, to the detriment of departing unit holders, who, most likely, are taking losses on any longer term position, that have now capitulated due to lack of any foreseeable 'cash' return to unit holders. And, the unit holder situation gets worse, to the benefit of the management team, as the lack of cash distributions, leads to lack of liquidity, and reduced market (and price softness) leads to decreasing unit prices, exacerbating losses, yet enhancing the value to the management team.
You are right, that the repurchases are 'advantageous' but to whom? Certainly the management team, but what about the unit holders that are seeking a shorter term time horizon?
The fact situation seems to be that unit holders are becoming fatigued and frustrated from the lack of any 'cash' return, and therefore capitulating, and management is withholding any 'cash' distribution to unit holders which action is benefiting the management team with their controlling interest.
Of course the REIT has a board in place, of 'independent' directors, who have been chosen by the management team that controls the REIT and the nomination process, so do those independent directors truly consider the interests of the unit holders, or the management team that has selected them for their REIT funded positions?
Your research piece was well written and informative, so kudos to you.
What you do not address, in my opinion, is the conflicting interests (including the significant cash remuneration) of management contrasted with the unit holders who receive no distribution or compensation.
As the current strategy, of suspending and not reinstating distributions, is to the advantage of the management team, I would be most curious to understand how you conclude that the management team has no choice to change their strategy?
I totally agree with your comment that share buybacks favor a particular type of investor (long-term) and the management in place.
For me this is a good thing (Having a 2-year+ horizon and buying between $9-12 seems to me to be very advantageous), but I understand that for former shareholders who bought for the dividend, it's a very long time: +1 year without a dividend.
They reduced, then cut the dividend, to reduce their risk with debt and vacant office space. The aim is to focus on selling assets that are unprofitable or too risky to let. Over the past 2 years, they have finalized the sale of several offices and over 10 million in cash on the balance sheet post buyback and office improvement.
Although it's not yet official, they have managed to sell (conditionally) the large Calgary office (1020 - 68 Avenue NE), estimated at 30-35 million. So, they only have 2 offices left to sell to completely reduce the risk of expensive vacant offices.
Using the cash on the balance sheet, the profit from the sale of the Calgary office and the FFO of the non-vacant offices. They will have to act quickly (during 2025) to modify the distribution to shareholders. It is conceivable to reinstate a dividend so as not to end the 2025 fiscal year with taxes due on the profit.
Calculating quickly with buybacks in the first and second quarters of 2025, it is possible that the dividend will return in the third quarter or sooner.
I would like to thank you for your very constructive comments. I had underestimated the impact of former shareholders and True North Commercial bad reputation as poor dividend payers.
You might want to ask them yourself. The notion of any foreseeable return to 'cash' distributions is not a consideration. There seems to be no consideration of retail unit holder interests - almost as if it was a strange concept. The response was that you have to wait years to get any return, and they have the view that is acceptable to the preponderance of unit holders. I repeated that I, and others, have a contrary view. There appears to be no broad consideration beyond the controlling interest of the REIT - which management is satisfied that distributions 'cash returns' are not a priority.
In my opinion, a conflict exists between management, that receives cash fees, and unit holders that receive nothing other than 'inferred distributions'. This conflict exists on a financial, and even an ethical basis, and I had expressed this point. Which was immediately and consistently rejected as fantasy.
As unit holders come to appreciate that this REIT will provide no return in the foreseeable future, why would they hold? Why would a controlling shareholder, funded by management fees paid in cash to it - from the REIT, provide any return to unit holders, that would otherwise support the market valuation, when that party is using the corporate treasury, in a market without liquidity, to pick up the capitulating units, at discounted prices? Clearly a conflict.
In fact, the current market is now less than the trading price a year ago and the NCIB 'advantageous' purchases throughout the year were at higher prices, so how do the trustees endorse such purchases as an "effective" use of corporate funds? Effective for whom?
Welcome to small cap, Canadian markets, with public companies being treated as private companies where corporate funds, and markets, are for the privilege of the controlling owners.
June will be too late to act. How/where did you source your information, such as expected proceeds from the Calgary property? Your information is helpful and valuable.
Your insightful, and learned comments are valuable.
I did not suggest that True North, or their management, have a bad reputation, but they may - I don't know and I am not making that assertion. What is problematic to me is the magnitude of, very large, cash fees paid to a management through a related company, with common ownership. There is a conflict of interests between the unit holders, who's cash distributions have been withheld by management, and the management which continues to receive large cash fees paid to, itself. One loses, one gains.
Management is not remitting cash to its unit holders, but does pay, large management fees, to itself. The pain is being felt by the unit holders, not management.
As management has a large ownership interest, with defacto control, the point could be made that absence of distributions is aligned with unit holders. But this is false due to the magnitude of funds/cash flow, in the form of fees extracted and paid as cash to management.
With a small market company, such as this, and in the Canadian stock market, this is always an issue that management bleeds small companies dry, and many go broke - and old story. Although I am not saying that is the case here, but it is the RISK!
Something that does not look right. With all the advantageous share purchases, and associated cancellation of units - the return to the unit holders AFFO/FFO has not increased, (as mathematically it should so all the benefit of expenditure of share buy backs ~$13 management has spent has accomplished nothing on an AFFO/FFO per unit return basis. As always, management will have an explanation for this - which is incorrigible.
Further to the point on per unit holder returns, what happened to the proceeds of the 4 properties sold, that created about $20 net to unit holders. Cash balance is the same - mortgages payable and the line of credit has been paid down - but cash position unchanged = no funds for unitholders.. With debt paid down the and funds avaialble to unit holders, unchanged, and the reported AFFO/FFO to unit holders is unchanged , or dropped- the math does not make sense and does not work.
Should the conditional sale be closed, what will happen to the $10 of equity?
Further, there are another two remaining Toronto properties for sale, strong markets, unsold, although one has no tenants - and that may gut the value of the property, I don't know.
The units are down close to 40% from recent highs, and approaching lows for the year. The fund continues to buy the units, but at a reduced scale,and managment has scaled back insider purchasers. The most informed owner, Management, is personally buying less and directing the fund to be less aggressive. That party has ALL the answers, and the directive is less aggressive buying - why?
There has been no reporting to shareholders as to a plan to return funds to unit holders. They don't answer my calls. And that is a bad sign. They have a investor relations contact - but I have received not response.- why would they bother.
The fact is the managment team has a conflict over payments made to themselves, and not paid to unit holders, yet using those unit holder moneys to repurchase units, and enhance the value of the REIT - which managment controls.
Notwithstanding the outline above, all your points are valid and useful, in the event that management has been fully, and fairly disclosing the affairs of the company, and intentions of management -- which I have not seen or heard,
Is management doing the right thing for the unit holders that bought this REIT for distributions - not received, in over a year., and no suggestion of the prospects of payment until March 2025.?
Managemet has not addressed the above issues with unit holders, and have not addressed the inherent and extreme conflicts between unit holders and management, who are precluding payment to unit holders in lieu of themselves.
Your hypothesis seems to be that with the earnings generated accumulated and unremitted distributions + equity proceeds from property dispositions, represent a signficant amount of funds that could be repatriated to unit holders - but management has not provided a prospect or basis for such an action - but has so far declined the suggestion.
Whether they have to make a 'distribution in cash this year to avoid taxes' - that is a bold statement. Do the buybacks constitute distributions, hence no distributions required. Or are there amortizations/tax losses and such (Revenue Canada) or other tax tricks - tax losses created - to avoid a taxable situation and defer distributions. Look at how much they pay their tax, and audit advisors, to get around such issues.
Meanwhile, large management fees are paid and are current, units are being redeemed,. unit prices are dropping as there is no liquidity as there is no indication of improved prospects for the REIT - management seems to be conducting all affairs for their benefit, in conflict to unit holder interests.
No distribution to unit holders, no foreseeable distributions to unit holders, no commentary from management, management vested interests to freeze out unit holders to capitulation, all works in favour of management. This is an often repeated practice of small cap listed Canadian companies on Canadian exchanges.
Again, if you can indicate how they must change strategy, I would like to know.
Their buyback is considered a distribution to shareholders. Repurchasing them at the current price is very advantageous.
Side note : This is the catalyst for 2025. They will have to increase buybacks quickly or restart the monthly dividend, possibly with a special dividend. 2025 with the current volume they will have no choice to change strategy to avoid paying tax at the end of the year
Your write up following the last quarter reporting was prescient - as to your concern about the 10 year yields - well spotted back in November. The longer yields have risen, despite short term declines - so - near term improvement in the leveraged REITs has been muted. Prevailing interest rates for TNT appear to have been flat around 4.0% - so expected declines, and current stubbornness of decline - seem to have a limited impact to TNT.
The 'advantageous' purchases have not helped the per unit returns as the absolute earnings have reduced, and management has blamed this on the reduced number of properties - fair enough - but there has been no realized benefit to the reduced units outstanding - other than should some realization event occur - which does not help unit holders.
Hopefully, the dogs are being sold, and remaining properties are better quality with stronger tenants, and lease values.
Hopefully the vacant Calgary property is now sold, which leaves one other vacant property and one low occupancy property - two dogs remaining?
Your comments reflect the improved financial and operating environment, and prospects for the REIT, so why have unit prices dropped, significantly, and continuously? Now approaching the low price range last year when distributions had been discontinued with limited prospects for return to distributions.
Since your research presentation of November - unit prices are down 15%. As you state, at the time of the last quarter report, management told unit holders to wait, another quarter.
Since your previous 3 rd quarter reporting, another quarter has passed = another $9M of cash retention from operations, beyond what has been reported. Since suspension of distributions, cash retention (roughly) 5 quarters x $9M/quarter + $19M equity from property realizations (reported) = $64M, less 'advantageous' purchases of $13, so net cash improvement (repayment of credit line) by ~ $50M or $3/unit, yet stock is down 15% from your report. Why?
Small cap, management controls the REIT, management pays itself significant compensation, management (investor relations??) ignore REIT unit holders communications, management provides no guidance to unit holders looking for cash returns, Canadian listing (??!!), you are right = value trap.
You are correct, REIT legislation and tax rules require distributions (beyond what management describes as 'implied distributions'. You will have seen the magnitude of audit and tax bills - so management has better information than you or I. Management continues to ignore unit holder interest for cash returns - capitulation occurs as unit prices drop = better 'advantageous purchases for benefit of management interests - not unit holders!
In my opinion, it really comes down to management's parameters concerning cash distributions to unit holders - and they are not forthcoming with that information - like yourself, they have not responded to my requests for information - why not? Why would they? Unit holder interests conflict with that of management, so there is no benefit to management for improved market for the units - they control the market.
Your analysis is all correct - the unknown is whether management will comply with REIT requirements for distributions, or at least provide guidance to unit holders as to distribution of their entitlement to cash distributions. Any ideas as to information in that regard?
I hope that TNT works out better than the US REITs have performed with the TNT management team!! I am cutting my losses on those bad investments. And may exit the trap with TNT.
Regards,
DG Hunter
You highlight several points concerning the alignment of management and minority shareholders. I will continue to monitor this, and the next meeting in June will be crucial in providing us with more information.
I don't have the answers to all your other questions. But to sum up, the management in place will have to prove its alignment with minority shareholders in 2025. Especially with more than $2 in cash available for distribution. That's still more than $3 million for the CEO/Chairman per year.
Your insightful, and learned comments are valuable.
I did not suggest that True North, or their management, have a bad reputation, but they may - I don't know and I am not making that assertion. What is problematic to me is the magnitude of, very large, cash fees paid to a management through a related company, with common ownership. There is a conflict of interests between the unit holders, who's cash distributions have been withheld by management, and the management which continues to receive large cash fees paid to, itself. One loses, one gains.
Management is not remitting cash to its unit holders, but does pay, large management fees, to itself. The pain is being felt by the unit holders, not management.
As management has a large ownership interest, with defacto control, the point could be made that absence of distributions is aligned with unit holders. But this is false due to the magnitude of funds/cash flow, in the form of fees extracted and paid as cash to management.
With a small market company, such as this, and in the Canadian stock market, this is always an issue that management bleeds small companies dry, and many go broke - and old story. Although I am not saying that is the case here, but it is the RISK!
Something that does not look right. With all the advantageous share purchases, and associated cancellation of units - the return to the unit holders AFFO/FFO has not increased, (as mathematically it should so all the benefit of expenditure of share buy backs ~$13 management has spent has accomplished nothing on an AFFO/FFO per unit return basis. As always, management will have an explanation for this - which is incorrigible.
Further to the point on per unit holder returns, what happened to the proceeds of the 4 properties sold, that created about $20 net to unit holders. Cash balance is the same - mortgages payable and the line of credit has been paid down - but cash position unchanged = no funds for unitholders.. With debt paid down the and funds avaialble to unit holders, unchanged, and the reported AFFO/FFO to unit holders is unchanged , or dropped- the math does not make sense and does not work.
Should the conditional sale be closed, what will happen to the $10 of equity?
Further, there are another two remaining Toronto properties for sale, strong markets, unsold, although one has no tenants - and that may gut the value of the property, I don't know.
The units are down close to 40% from recent highs, and approaching lows for the year. The fund continues to buy the units, but at a reduced scale,and managment has scaled back insider purchasers. The most informed owner, Management, is personally buying less and directing the fund to be less aggressive. That party has ALL the answers, and the directive is less aggressive buying - why?
There has been no reporting to shareholders as to a plan to return funds to unit holders. They don't answer my calls. And that is a bad sign. They have a investor relations contact - but I have received not response.- why would they bother.
The fact is the managment team has a conflict over payments made to themselves, and not paid to unit holders, yet using those unit holder moneys to repurchase units, and enhance the value of the REIT - which managment controls.
Notwithstanding the outline above, all your points are valid and useful, in the event that management has been fully, and fairly disclosing the affairs of the company, and intentions of management -- which I have not seen or heard,
Is management doing the right thing for the unit holders that bought this REIT for distributions - not received, in over a year., and no suggestion of the prospects of payment until March 2025.?
Managemet has not addressed the above issues with unit holders, and have not addressed the inherent and extreme conflicts between unit holders and management, who are precluding payment to unit holders in lieu of themselves.
Your hypothesis seems to be that with the earnings generated accumulated and unremitted distributions + equity proceeds from property dispositions, represent a signficant amount of funds that could be repatriated to unit holders - but management has not provided a prospect or basis for such an action - but has so far declined the suggestion.
Whether they have to make a 'distribution in cash this year to avoid taxes' - that is a bold statement. Do the buybacks constitute distributions, hence no distributions required. Or are there amortizations/tax losses and such (Revenue Canada) or other tax tricks - tax losses created - to avoid a taxable situation and defer distributions. Look at how much they pay their tax, and audit advisors, to get around such issues.
Meanwhile, large management fees are paid and are current, units are being redeemed,. unit prices are dropping as there is no liquidity as there is no indication of improved prospects for the REIT - management seems to be conducting all affairs for their benefit, in conflict to unit holder interests.
No distribution to unit holders, no foreseeable distributions to unit holders, no commentary from management, management vested interests to freeze out unit holders to capitulation, all works in favour of management. This is an often repeated practice of small cap listed Canadian companies on Canadian exchanges.
Again, if you can indicate how they must change strategy, I would like to know.
Regards,
DGHunter
I agree with your comments, and if no changes are made, I'll find myself invested in a value trap. I have the same problem communicating with management by email. I have received no reply to my 2 emails.
I also agree that we pay a hefty fee and salary for existing management ($1m+) and Starlight of $4.7m (Asset Management Fees (exclude others)) every year. This is equivalent to more than 7% of EBITDA. However, this amount is not entirely beneficial to Starlight. He also works for True North Commercial with employees to pay.
The decline in AFFO/FFO is mainly due to the reduction in office space held by True North Commercial (office sales). We had 47 offices at the beginning of 2023 and are now officially down to 40, but only 37 are non-vacant.
They need to refinance their substantial debts in 2025 and 2026. It is imperative that they quickly return to a debt-to-equity ratio of 3 times or more. Reducing/removing the dividend and having cash on the balance sheet helps them reduce credit risk and improve their track record. The rapid fall in interest rates will help them, but refinancing will cost slightly more than in the past. They have also had to invest capital to improve certain offices.
And let's not forget that True North Commercial will have Lease maturities in 2025-2026, so this increases the risk on AFFO/FFO.
They've mentioned this at every earning, but here's an excerpt from Q3-2024 ->
“The REIT intends to continue the significantly accretive purchase of Units under the 2024 NCIB until the release of the Q4-2024 results in March of 2025 at which point the REIT will evaluate the various options for allocation of its capital including the 2024 NCIB and the reinstatement of a distribution as operating and capital market conditions improve.”
When you say 'their' or 'they' you are referring to the management team that has voting control over the REIT. That 'management' team has received, and continues to receive, regular, recurring, significant fees - in cash - payments. Unit holders of this REIT have not received any return in over a year. And, generally, REIT owners are motivated by 'cash' returns, moreso than advantageous repurchases that only provide a return - in the longer term - to the longer term unit holder.
So, does it matter if this trades at 5x, or 4x, 3x or less, when the unit holder is not realizing anything, such as a cash return, from the REIT?
Is it the case that the buyback constitutes, for Revenue Canada, a return to unit holders. If so, then does the REIT ever (in the near term) have to make a 'cash' distribution?
If the management team (for example if they were young and had a significant investment, and controlling interest) had/has a long term time horizon, why would they distribute any funds, but rather continue to make 'distributions' by way of share repurchases at a time when the general body of unit holders are throwing in the towel in capitulation, and hence the controlling unit holder, enhances their longer term investment?
They -continue to receive cash distributions through management fees, and enhance their value, to the detriment of departing unit holders, who, most likely, are taking losses on any longer term position, that have now capitulated due to lack of any foreseeable 'cash' return to unit holders. And, the unit holder situation gets worse, to the benefit of the management team, as the lack of cash distributions, leads to lack of liquidity, and reduced market (and price softness) leads to decreasing unit prices, exacerbating losses, yet enhancing the value to the management team.
You are right, that the repurchases are 'advantageous' but to whom? Certainly the management team, but what about the unit holders that are seeking a shorter term time horizon?
The fact situation seems to be that unit holders are becoming fatigued and frustrated from the lack of any 'cash' return, and therefore capitulating, and management is withholding any 'cash' distribution to unit holders which action is benefiting the management team with their controlling interest.
Of course the REIT has a board in place, of 'independent' directors, who have been chosen by the management team that controls the REIT and the nomination process, so do those independent directors truly consider the interests of the unit holders, or the management team that has selected them for their REIT funded positions?
Your research piece was well written and informative, so kudos to you.
What you do not address, in my opinion, is the conflicting interests (including the significant cash remuneration) of management contrasted with the unit holders who receive no distribution or compensation.
As the current strategy, of suspending and not reinstating distributions, is to the advantage of the management team, I would be most curious to understand how you conclude that the management team has no choice to change their strategy?
Respectfully submitted.
DG Hunter
I totally agree with your comment that share buybacks favor a particular type of investor (long-term) and the management in place.
For me this is a good thing (Having a 2-year+ horizon and buying between $9-12 seems to me to be very advantageous), but I understand that for former shareholders who bought for the dividend, it's a very long time: +1 year without a dividend.
They reduced, then cut the dividend, to reduce their risk with debt and vacant office space. The aim is to focus on selling assets that are unprofitable or too risky to let. Over the past 2 years, they have finalized the sale of several offices and over 10 million in cash on the balance sheet post buyback and office improvement.
Although it's not yet official, they have managed to sell (conditionally) the large Calgary office (1020 - 68 Avenue NE), estimated at 30-35 million. So, they only have 2 offices left to sell to completely reduce the risk of expensive vacant offices.
Using the cash on the balance sheet, the profit from the sale of the Calgary office and the FFO of the non-vacant offices. They will have to act quickly (during 2025) to modify the distribution to shareholders. It is conceivable to reinstate a dividend so as not to end the 2025 fiscal year with taxes due on the profit.
Calculating quickly with buybacks in the first and second quarters of 2025, it is possible that the dividend will return in the third quarter or sooner.
I would like to thank you for your very constructive comments. I had underestimated the impact of former shareholders and True North Commercial bad reputation as poor dividend payers.
Yes
You might want to ask them yourself. The notion of any foreseeable return to 'cash' distributions is not a consideration. There seems to be no consideration of retail unit holder interests - almost as if it was a strange concept. The response was that you have to wait years to get any return, and they have the view that is acceptable to the preponderance of unit holders. I repeated that I, and others, have a contrary view. There appears to be no broad consideration beyond the controlling interest of the REIT - which management is satisfied that distributions 'cash returns' are not a priority.
In my opinion, a conflict exists between management, that receives cash fees, and unit holders that receive nothing other than 'inferred distributions'. This conflict exists on a financial, and even an ethical basis, and I had expressed this point. Which was immediately and consistently rejected as fantasy.
As unit holders come to appreciate that this REIT will provide no return in the foreseeable future, why would they hold? Why would a controlling shareholder, funded by management fees paid in cash to it - from the REIT, provide any return to unit holders, that would otherwise support the market valuation, when that party is using the corporate treasury, in a market without liquidity, to pick up the capitulating units, at discounted prices? Clearly a conflict.
In fact, the current market is now less than the trading price a year ago and the NCIB 'advantageous' purchases throughout the year were at higher prices, so how do the trustees endorse such purchases as an "effective" use of corporate funds? Effective for whom?
Welcome to small cap, Canadian markets, with public companies being treated as private companies where corporate funds, and markets, are for the privilege of the controlling owners.
There will be NO distribution in the foreseeable future.There will be no turn around/improvement in the near term.
Time to cut losses. Management has a timeline of years, not quarters, and is not concerned about unit holder returns.
Small cap, essentially private company, and will not provide returns to unit holders.
Good luck. I am exiting my positions.
Have you spoken to management today?
Do you have any questions you want me to ask management?
If you manage to talk to them, please let me know.
- I'd like to know what their priority is for capital allocation for the year 2025-2026.
- Will reducing their short-term debt (Credit Facility) be their priority before restoring the dividend, for example?
- How much money do they think they'll need to improve their office over the next few years? Will they need to increase the capital reserve for this?
- If they persist in buyback instead of paying a dividend, will they increase their limit from 10% to 25% of volume?
- What is their forecast for the office market over the next 2 years? Are they confident that the worst is behind them?
Thanks
June will be too late to act. How/where did you source your information, such as expected proceeds from the Calgary property? Your information is helpful and valuable.
Thank you,
DG Hunter
You can see :: https://www.calgaryindustrialgroup.com/properties/1020-68-avenue-ne/
Did my second response to you - get posted?
Yes, I'll reply to your comment later today.
Your insightful, and learned comments are valuable.
I did not suggest that True North, or their management, have a bad reputation, but they may - I don't know and I am not making that assertion. What is problematic to me is the magnitude of, very large, cash fees paid to a management through a related company, with common ownership. There is a conflict of interests between the unit holders, who's cash distributions have been withheld by management, and the management which continues to receive large cash fees paid to, itself. One loses, one gains.
Management is not remitting cash to its unit holders, but does pay, large management fees, to itself. The pain is being felt by the unit holders, not management.
As management has a large ownership interest, with defacto control, the point could be made that absence of distributions is aligned with unit holders. But this is false due to the magnitude of funds/cash flow, in the form of fees extracted and paid as cash to management.
With a small market company, such as this, and in the Canadian stock market, this is always an issue that management bleeds small companies dry, and many go broke - and old story. Although I am not saying that is the case here, but it is the RISK!
Something that does not look right. With all the advantageous share purchases, and associated cancellation of units - the return to the unit holders AFFO/FFO has not increased, (as mathematically it should so all the benefit of expenditure of share buy backs ~$13 management has spent has accomplished nothing on an AFFO/FFO per unit return basis. As always, management will have an explanation for this - which is incorrigible.
Further to the point on per unit holder returns, what happened to the proceeds of the 4 properties sold, that created about $20 net to unit holders. Cash balance is the same - mortgages payable and the line of credit has been paid down - but cash position unchanged = no funds for unitholders.. With debt paid down the and funds avaialble to unit holders, unchanged, and the reported AFFO/FFO to unit holders is unchanged , or dropped- the math does not make sense and does not work.
Should the conditional sale be closed, what will happen to the $10 of equity?
Further, there are another two remaining Toronto properties for sale, strong markets, unsold, although one has no tenants - and that may gut the value of the property, I don't know.
The units are down close to 40% from recent highs, and approaching lows for the year. The fund continues to buy the units, but at a reduced scale,and managment has scaled back insider purchasers. The most informed owner, Management, is personally buying less and directing the fund to be less aggressive. That party has ALL the answers, and the directive is less aggressive buying - why?
There has been no reporting to shareholders as to a plan to return funds to unit holders. They don't answer my calls. And that is a bad sign. They have a investor relations contact - but I have received not response.- why would they bother.
The fact is the managment team has a conflict over payments made to themselves, and not paid to unit holders, yet using those unit holder moneys to repurchase units, and enhance the value of the REIT - which managment controls.
Notwithstanding the outline above, all your points are valid and useful, in the event that management has been fully, and fairly disclosing the affairs of the company, and intentions of management -- which I have not seen or heard,
Is management doing the right thing for the unit holders that bought this REIT for distributions - not received, in over a year., and no suggestion of the prospects of payment until March 2025.?
Managemet has not addressed the above issues with unit holders, and have not addressed the inherent and extreme conflicts between unit holders and management, who are precluding payment to unit holders in lieu of themselves.
Your hypothesis seems to be that with the earnings generated accumulated and unremitted distributions + equity proceeds from property dispositions, represent a signficant amount of funds that could be repatriated to unit holders - but management has not provided a prospect or basis for such an action - but has so far declined the suggestion.
Whether they have to make a 'distribution in cash this year to avoid taxes' - that is a bold statement. Do the buybacks constitute distributions, hence no distributions required. Or are there amortizations/tax losses and such (Revenue Canada) or other tax tricks - tax losses created - to avoid a taxable situation and defer distributions. Look at how much they pay their tax, and audit advisors, to get around such issues.
Meanwhile, large management fees are paid and are current, units are being redeemed,. unit prices are dropping as there is no liquidity as there is no indication of improved prospects for the REIT - management seems to be conducting all affairs for their benefit, in conflict to unit holder interests.
No distribution to unit holders, no foreseeable distributions to unit holders, no commentary from management, management vested interests to freeze out unit holders to capitulation, all works in favour of management. This is an often repeated practice of small cap listed Canadian companies on Canadian exchanges.
Again, if you can indicate how they must change strategy, I would like to know.
Regards,
DGHunter
What about the fact that the company has not made any distributions, and does not indicated any distributions to unit holders?
Their buyback is considered a distribution to shareholders. Repurchasing them at the current price is very advantageous.
Side note : This is the catalyst for 2025. They will have to increase buybacks quickly or restart the monthly dividend, possibly with a special dividend. 2025 with the current volume they will have no choice to change strategy to avoid paying tax at the end of the year