Ewing Morris Investment Partners (EM) is working with First Capital (FCR) founder Dori Segal to push for Board changes at the REIT. FCR units have been weak and trade at a bargain valuation which appears to reflect broad market factors. EM has not yet made a compelling argument for new management or operating strategy.
First Capital Overview
First Capital was founded in 2017 by Dori Segal with initial backing from Gazit-Globe. The company focused on retail properties in core locations. Segal explained the history in this 2019 BNN interview and at a conference:
The REIT currently owns 147 grocery-anchored retail properties almost entirely within Canada’s largest markets (VECTOM). It has identified 23.6mm of intensification opportunities at its existing properties (in addition to their current GLA of 19.5mm sf). A leading example is the proposed 7.5mm sf development (50% FCR) at 2150 Lake Shore Boulevard West in Toronto. The project is a 5 minute walk from the waterfront, a 15 minute drive from downtown, and would have a new GO transit station with trains every 15 minutes.
FCR units traded at or above NAV until 2020 as investors attributed value to the development potential. Their price fell sharply amid COVID lockdowns and a Jan 2021 distribution reduction even though the REIT’s essential services tenants were resilient and development value rose due to the strong housing market.
The REITs closest public peers are Riocan (more malls) and Smartcentres (more suburban). Each has significant development potential above current NAV, but trades at nearly a 30% discount to 6/30/22 IFRS valuations.
FCR’s strategic plan is to advance rezoning for its development projects and then monetize some of those assets prior to construction. The company estimates that $1Bn of potential proceeds over the next two years would permit deleveraging and provide capital for continued unit repurchase and the recently announced distribution increase. Further details are in this company presentation. The company explained:
Ewing Morris Overview and Engagement with FCR
Ewing Morris (EM) is a Toronto-based investment manager whose strategies include “Selective Engagement” with companies to encourage steps that will improve shareholder returns. It mentions involvement with five companies
- Cedar Realty (company sold in March 2022)
- Uni-Select
- Undisclosed (3)
EM has not disclosed its ownership interest in FCR and under Canadian regulations has no obligation to disclose any stake below 10%. I believe EM assets under management do not exceed $500mm so its position in FCR is very likely to be less than 5% of the company’s C$3.2Bn market cap.
EM issued an Open Letter to Fellow First Capital REIT Unitholders on 10/6 making these arguments:
- Fact #1 – Current FCR Leadership has Consistently Underperformed
- Fact #2 – FCR is the Worst Performing Retail REIT in Canada Since 2017
- Fact #3– FCR’s Underperformance has Been Rewarded
- Fact #4 – FCR’s Strategy is Incoherent
- Fact #5 – FCR’s Leadership has no “skin in the game”
- Request #1: Immediate appointment of Kelly Marshall to succeed McDonell as independent Chair.
- Request #2: Immediate appointment of Darcy Morris to FCR Board.
- Request #3: Suspend all asset sales.
FCR responded press releases claiming that Activist Ewing Morris Being Directed By Dori Segal and First Capital REIT Reaffirms Value-Creation Strategy. FCR claimed that EM had solicited investors for a “Project Degel” intended to effect changes at FCR through a proxy contest. FCR did not offer any explanation for why it considered Dori Segal’s presence unwelcome and did not address EM’s points about executive compensation and insider ownership.
Dori Segal
Dori Segal founded First Capital in 1997, served as CEO until 2015 , Chairman until 2019, and board member until 2021. His last reported beneficial ownership interest was 2.5mm units in February 2021 (1.2% of current outstanding). Upon transition from his position his Chairman, Segal, CEO Paul, and new Chairman McDonell lavished praise on each other:
FCR claims that the “Project Degel” documents show that EM has partnered with Dori Segal, but this has not been confirmed by either party. FCR states that Dori Segal “departed the Board in 2021 at the request of the Trustees” and “cannot be trusted”. FCR says “Mr. Segal has attempted to negotiate a return to the REIT as Chair”. The Globe & Mail reported on Thursday at Segal said:
The nature of Segal’s partnership, if any, with Ewing Morris is unknown. The reasons for his departure from the board are unknown. He submitted two questions at the June 2022 Annual Meeting:
Investment Considerations
First Capital’s assets are very attractive with well-located essential retail tenants and intensification potential. FCR units are undervalued, but Ewing/Morris/Segal/Degel have not yet articulated a new strategy for closing the gap between the share price and NAV. The REIT is selling assets to fund unit repurchase, development, and higher dividends. EW wants to suspend asset sales and that implies that funding for repurchase would also end. EW suggests that the recent dividend increase was inappropriate, but made no proposal regarding future dividend policy. A dividend reduction and buyback suspension would probably be seen as negative by REIT investors.
FCR has relatively high leverage which increases its corporate risk in this environment of sharply rising interest rates, limits its capacity to repurchase units, and limits its ability to fully fund and retain development properties. The REIT’s Debt/EBITDA was 10.2X at 6/30 and its 2027 listed debt was trading at yields over 50bp higher than Riocan and Smartcentres. The REIT’s strategy of selling selected development sites appears rational. Current market turmoil may depress sale values, but also permits reinvestment of proceeds in unit repurchase at deeply discounted prices. FCR’s unit price has fallen (along with peers), but EM presented no convincing facts to support its claim of “value destruction”.
EM made valid points about the lack of Executive and Director investment in the REITs strategy, but these issues do not seem significant enough to sway independent institutional holders whose support would be necessary to win any proxy contest. Ownership of an undisclosed equity interest (very likely less than 5%) does not entitle EM to request Board representation and replacement of the Board Chairman.
FCR’s unit price has fallen 2.5% (to 10/11) since the release of EM’s Open Letter after the market close on 10/6. Investors have not seen it as a positive development. The attempted “engagement” with FCR appears to have failed. EM could make a new attempt to play a constructive role in communication with management, board, and fellow unitholders. Or it could take a confrontational approach and more clearly explain problems it perceives with FCR’s governance and strategy. It’s possible that the process could be affected by badwill between Dori Segal and FCR’s Trustees.
Developments will be interesting to monitor, but at this time I do not see them as providing a new catalyst for unit price appreciation.
Disclosures and Notes
At the time of publication the author held NO position in any securities of First Capital REIT. The author does not make any recommendation regarding any investment in First Capital. Investors are encouraged to check all of the key facts cited here from SEDAR filings and other sources prior to making any investment decisions.
The author welcomes public and private feedback about the merits of investing in FCR at this time and the likelihood that changes to the Board and strategy could be beneficial.
The author regrets not providing a cat meme for this article. The names involved suggest a scene of greed and betrayal. Relevant?
Koneko Research 