- TZZ is trading at a substantial discount to its underlying $9.28 book value per share
- TZZ has no significant institutional support, retains virtually no cash flow, lacks the scale required to grow
- Initiating a wind-up of TZZ will provide shareholders with the highest available total return opportunity
- Strong support from other large shareholders and investment advisors for a wind-up
TORONTO, Feb. 8, 2016 /CNW/ - FrontFour Capital Group LLC, FrontFour Capital Corp., Concerned MIC Shareholders GP Inc., Performance Income Inc. and Windsor Private Capital Inc., as managers and/or general partners of certain funds and limited partnerships (collectively the "Concerned Shareholder Group"), owning directly or indirectly approximately 7% of the issued and outstanding Class A common shares (the "Common Shares") of Trez Capital Mortgage Investment Corporation ("Trez Capital" or the "Company") (TSX:TZZ), announced today that they will be formally requisitioning (the "Requisition") the Trez Capital Board of Directors (the "Board") to call a special meeting of shareholders (the "Meeting") for the purpose of (i) reconstituting the Board with three new independent directors, and (ii) voting on a special resolution to wind-up the Company.
The public mortgage investment corporation (MIC) structure in Canada faces a number of significant challenges today. Returns on mortgages have declined due to increased competition and interest rate compression in the alternative lending space. Loan underwriting standards are beginning to be questioned in a more challenging economic environment, and the common requirement to work-out non-performing loans has proven to be highly problematic for widely-held, publicly-listed entities with high dividend payouts and heavy external fee loads.
As a result, Trez Capital along with a number of the other Canadian MICs have experienced significant price declines and are now trading at sizable discounts to their intrinsic values. Trez Capital's 20-day volume weighted average price of $7.66 (as at close on February 5, 2016), represents a 17% discount to its $9.28 book value and a 23% discount to its $10.00 IPO price. We believe that in Trez Capital's case, the discount is now structural in nature and will persist into the foreseeable future unless addressed either by way of (i) an en-bloc sale of the company or the portfolio, or (ii) an outright liquidation of the underlying mortgage portfolio.
The Concerned Shareholder Group has represented approximately 50% of the total trading volume in Trez Capital shares since October 2015. Prior to our involvement, Trez Capital's shares were trading below $7.00. We are concerned that the wider trading discounts (30%+) previously experienced will soon return without immediate decisive action by shareholders.
Other Meaningful Challenges Faced By Trez Capital
In addition to the persistent valuation discount, the Concerned Shareholder Group believes that Trez Capital faces a number of other considerable challenges today, including;
- Lacks sufficient scale to attract institutional investors (<$150 million market cap company);
- A payout ratio that exceeds 100% given the current dividend level and the high external management fee load;
- Dividend sustainability is now being questioned by shareholders, as is the use of leverage to fund cash flow shortfalls;
- The current valuation discount prevents accretive equity raises to grow the loan portfolio;
- Growing credit quality concerns given the more challenging economic environment;
- Ongoing corporate governance concerns around management conflicts of interest.
We have also become increasingly concerned with the clear conflicts of interest between the Company's external manager and Trez Capital shareholders with regards to (i) capital allocation, (ii) related party transactions and loan syndications, and (iii) the direction and independence of the strategic review process announced in September 2015 to address the persistent valuation discount. We believe that these conflicts are materially impacting ongoing operations and have precluded the Special Committee process from achieving an outcome in the best interests of the Company. Notwithstanding public comments to the contrary, we believe the Special Committee has not explored the potential monetization of the portfolio in any meaningful way to date.
Letter to the Board of Directors
In a November 23, 2015 letter to the Board, members of the Concerned Shareholder Group cautioned the Special Committee against announcing, as part of the strategic review, any half-measure solutions (e.g. leveraged share buybacks, a merger of the Company with Trez Capital Senior MIC, or amendments to the external management agreement) that would only serve to benefit the external manager by preserving its fee stream but not address the fundamental value discount.
The Concerned Shareholders Group's Recommended Course of Action
We believe only an en-bloc sale of the company or portfolio or an organized wind-up (by way of ceasing new mortgage origination and returning capital to shareholders) will address these concerns and close the significant gap between Trez Capital's current share price and the value of the underlying mortgage portfolio. This course of action provides shareholders with what is by far the highest total return outcome (20%+) of any alternative available to the Company. Any other outcome simply serves to further enrich the manager at the expense of shareholders. As such, we will be asking shareholders to vote on a formal wind-up as part of the requisitioned special meeting of shareholders.
Significant Support From Other Shareholders
The Concerned Shareholder Group believes that the Company's other shareholders share its view that immediate change at Trez Capital is needed. The Investment Advisor community across Canada has been particularly vocal in expressing their displeasure with management and the Board over the last 9 months – we believe they are highly supportive of our recommended course of action. A major Institutional Shareholder and a very large Investment Advisor, who collectively own a further approximately 11% of Trez Capital's outstanding Common Shares, have both indicated that they are supportive of a wind-up of Trez Capital in an efficient process with truly independent oversight.
Experienced Board Nominees
The Concerned Shareholder Group will be nominating Zachary George, John Cundari and Matt Goldfarb (the "Concerned Shareholder Nominees") as new independent directors. Each of these nominees is a highly experienced individual who is committed to representing the interests of all shareholders while addressing the fundamental value discount. Subject to their fiduciary obligations if elected, the Concerned Shareholder Nominees are supportive of a wind-up of the Company.
Zachary George is a Co-founder and Portfolio Manager of FrontFour Capital, a value oriented, investment firm. Mr. George has worked in a management capacity and with numerous corporate boards to turnaround operations, effect corporate action, and implement governance policies in order to maximize shareholder value. He recently served as the Chairman of the boards of FAM REIT and Huntingdon Capital Corp. and previously served as the lead independent director of both Cornell Companies Inc. and PW Eagle, and on the boards of Allied Defense Group, and IAT Air Cargo Facilities Income Fund.
John Cundari is Managing Director at Windsor Private Capital Inc., a private equity firm headquartered in Toronto, Canada that makes strategic investments, administers a diverse real estate portfolio and provides advisory services and structured credit and bridge financing solutions to small and middle-market companies, both public and private, as well as entrepreneurs and high net-worth individuals. Windsor Private Capital Limited Partnership's portfolio includes forty-five private companies located in Canada and the United States. Windsor Private Capital Inc. has in excess of $700 million in assets under administration. Previously, Mr. Cundari was an investment banker with a large U.S. broker dealer advising corporate clients on all aspects of the capital markets, including public and private financings, mergers and acquisitions opportunities and other strategic initiatives. Mr. Cundari has a law degree from Osgoode Hall Law School, an MBA, with an emphasis in finance, from York University and a BSc. (Mathematics) from the University of Western Ontario.
Matt Goldfarb currently serves as Chief Restructuring Officer and Acting Chief Executive Officer of Cline Mining Corporation, a Canadian mining company. Prior thereto, Mr. Goldfarb served as Chief Executive Officer of Xinergy Ltd. (TSX:XRG), a Central Appalachian coal producer, having previously served as its Vice Chairman and lead independent director since its IPO in December 2009. Previously, Mr. Goldfarb was a Director and Senior Investment Analyst of The Blackstone Group/GSO Capital Partners from January 2007 until December 2008 and a Director and Senior Investment Analyst at Pirate Capital LLC, an event-driven hedge fund, from January 2005 until September 2006. Prior to that, Mr. Goldfarb was with Icahn Associates Corp. for approximately five years and prior to joining Icahn, was associated with the law firm of Schulte Roth & Zabel LLP. Mr. Goldfarb currently serves as a director of Sevcon, Inc., and Midway Gold, and has served on the boards of directors of Pep Boys, Huntingdon Capital Corp., Fisher Communications, Inc., CKE Restaurants, Inc., and James River Coal Company.
The Special Meeting of Shareholders
Under Canadian law, the existing Board must, within 21 days of receiving the requisition, call a shareholders meeting. Given continuing concerns regarding capital allocation and the direction of Company's previously announcement strategic review, the Concerned Shareholder Group will be requesting that the meeting be held no later than March 23, 2016.
The Concerned Shareholder Group has engaged Trimaven Capital Advisors Inc. as its financial advisor, along with Norton Rose Fulbright Canada LLP and Goodmans LLP as its legal advisors in connection with its investment in Trez Capital.
For further information contact Zachary George at FrontFour Capital Group LLC – (203) 274-9053.
About FrontFour Capital Corp.
FrontFour Capital, located at 140 Yonge Street, Suite 305, Toronto, ON M5C 1X6, was formed in January 2011 and is incorporated in British Columbia. FrontFour Capital is registered with the Ontario Securities Commission as an Investment Fund Manager, Portfolio Manager and Exempt Market Dealer.
FrontFour Capital Group LLC
FrontFour LLC, located in the United States at 35 Mason Street, Greenwich, CT 06830, was formed in December 2006. FrontFour LLC is registered with the Securities & Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended.
About Concerned MIC Shareholders GP Inc.:
Concerned MIC Shareholders GP Inc., the General Partner of Concerned MIC Shareholders Fund, is a corporation incorporated under the laws of the Province of British Columbia.
About Windsor Private Capital Inc.:
Windsor Private Capital Inc., the General Partner of Windsor Private Capital Limited Partnership, is a corporation incorporated under the laws of the Province of Ontario and is located at 28 Hazelton Ave., Suite #200, Toronto M5R 2E2.
About Performance Income Inc.:
Performance Income Inc., the General Partner of Performance Balanced Fund, is a corporation incorporated under the laws of the Province of Ontario and is located at 28 Hazelton Ave., Suite #200, Toronto M5R 2E2.
Information Concerning the Concerned Shareholder Nominees
As will be set out in the Requisition, the Concerned Shareholder Group will be nominating Zachary George, John Cundari and Matt Goldfarb as new independent directors (the "Concerned Shareholder Nominees"). The table below sets out, in respect of each Concerned Shareholder Nominee, his name, province or state and country of residence, his principal occupation, business or employment within the five preceding years, and the number of common shares of Trez Capital beneficially owned, or controlled or directed, directly or indirectly, by such Concerned Shareholder Nominee.
Name, Province or State and
Country of Residence
Present Principal Occupation, Business or Employment and Principal Occupation,
Business or Employment During the Preceding Five Years
Number of Common Shares Beneficially Owned or Controlled or Directed (Directly or Indirectly)
Principal and Portfolio Manager, FrontFour Capital Group LLC, present
Managing Director, Windsor Private Capital Inc., present
Acting Chief Executive Officer, Cline Mining Corporation, since December 2013
Chief Executive Officer, Xinergy Ltd., May 2012 – November 2013
Executive Vice-Chairman, Xinergy Ltd., 2011 – May 2012
(1) 633,962 shares are beneficially owned by Concerned MIC Shareholders Fund, for which Concerned MIC Shareholders GP Inc. is the general partner, of which Mr. George is a principal. 101,669 shares are beneficially owned by FrontFour Master Fund, Ltd., which is managed by FrontFour Capital Group LLC, of which Mr. George is a principal and portfolio manager. 7,069 shares are beneficially owned by FrontFour Opportunity Fund, which is managed by FrontFour Capital Corp., which is an affiliate of FrontFour Capital Group LLC.
(2) 250,000 shares are beneficially owned by Performance Balanced Fund, for which Performance Income Inc. is the general partner, of which Mr. Cundari is President. 235,000 shares are beneficially owned by Windsor Private Capital Limited Partnership, for which Windsor Private Capital Inc. is the general partner, of which Mr. Cundari is Managing Director.
Mr. Goldfarb currently serves on the boards of Midway Gold Corp. and Sevcon, Inc. None of the other Concerned Shareholder Nominees are currently directors of other reporting issuers.
Except as provided below, to the knowledge of the Concerned Shareholder Group, no Concerned Shareholder Nominee is, at the date hereof, or has been, within ten (10) years before the date hereof: (a) a director, chief executive officer or chief financial officer of any company that (i) was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than thirty (30) consecutive days (each, an "order"), in each case that was issued while the Concerned Shareholder Nominee was acting in the capacity as director, chief executive officer or chief financial officer, or (ii) was subject to an order that was issued after the Concerned Shareholder Nominee ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; (b) a director or executive officer of any company that, while such Concerned Shareholder Nominee was acting in that capacity, or within one (1) year of such Concerned Shareholder Nominee ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or (c) someone who became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or became subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of such Concerned Shareholder Nominee.
In December, 2013 and in contemplation of a financial restructuring, Mr. Goldfarb was retained by Cline Mining Corporation's ("Cline") board of directors, at the instruction of its senior lenders, to lead the financial restructuring and optimization of the mining assets of the TSX-listed issuer, Cline. Companies' Creditors Arrangement Act ("CCAA") insolvency proceedings and related Chapter 15 "recognition" proceedings relating to the "work-out" of Cline were initiated in December 2014, and the company emerged therefrom in July 2015.
On June 22, 2015, Midway Gold Corp. ("Midway") and certain of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Colorado, seeking ancillary relief in Canada pursuant to the CCAA in the Supreme Court of British Columbia in Vancouver, Canada. On January 29, 2016, Mr. Goldfarb was appointed as an independent director of Midway to assist the issuer in its ongoing financial restructuring efforts.
To the knowledge of the Concerned Shareholder Group, as at the date hereof, no Concerned Shareholder Nominee has been subject to: (a) any penalties or sanctions imposed by a court relating to securities legislation, or by a securities regulatory authority, or has entered into a settlement agreement with a securities regulatory authority; or (b) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable securityholder in deciding whether to vote for a Concerned Shareholder Nominee.
To the knowledge of the Concerned Shareholder Group, none of the directors or officers of the Concerned Shareholder Group, or any associates or affiliates of the foregoing, or any of the Concerned Shareholder Nominees or their respective associates or affiliates, has: (a) any material interest, direct or indirect, in any transaction since the commencement of Trez Capital's most recently completed financial year or in any proposed transaction which has materially affected or will materially affect Trez Capital or any of its subsidiaries; or (b) any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter proposed to be acted on at the Meeting, other than the election of directors.
The information contained in this press release does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable securities laws. Although the Concerned Shareholder Group will be requisitioning the Meeting, there is currently no record or meeting date set for such Meeting and shareholders are not being asked at this time to execute a proxy in favour of the Concerned Shareholder Nominees or any other resolution which will be set forth in the Requisition. In connection with the Meeting, the Concerned Shareholder Group intends to file a dissident information circular (the "Information Circular") in due course in compliance with applicable securities laws.
Notwithstanding the foregoing, the Concerned Shareholder Group is voluntarily providing the disclosure required under section 9.2(4) of National Instrument 51-102 – Continuous Disclosure Obligations in accordance with securities laws applicable to public broadcast solicitations.
This press release and any solicitation made by the Concerned Shareholder Group in advance of the Meeting is, or will be, as applicable, made by the Concerned Shareholder Group, and not by or on behalf of the management of Trez Capital. All costs incurred for any solicitation will be borne by the Concerned Shareholder Group, provided that, subject to applicable law, the Concerned Shareholder Group may seek reimbursement from Trez Capital of the Concerned Shareholder Group's out-of-pocket expenses, including proxy solicitation expenses and legal fees, incurred in connection with a successful reconstitution of the Board.
The Concerned Shareholder Group is not soliciting proxies in connection with the Meeting at this time, and shareholders are not being asked at this time to execute proxies in favour of the Concerned Shareholder Nominees (in respect of the Meeting) or any other resolution set forth in the Requisition. Any proxies solicited by the Concerned Shareholder Group will be solicited pursuant to the Information Circular sent to shareholders of Trez Capital after which solicitations may be made by or on behalf of the Concerned Shareholder Group, by mail, telephone, fax, email or other electronic means, and in person by directors, officers and employees of Concerned Shareholder Group or any proxy advisor that Concerned Shareholder Group may retain or by the Concerned Shareholder Nominees.
Any proxies solicited by the Concerned Shareholder Group in connection with the Meeting may be revoked by instrument in writing by the shareholder giving the proxy or by its duly authorized officer or attorney, or in any other manner permitted by law and the articles of Trez Capital. None of the Concerned Shareholder Group or, to its knowledge, any of its associates or affiliates, has any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter proposed to be acted on at the Meeting, other than the election of directors to the Board.
Trez Capital's principal business office is 1550-1185 West Georgia Street, Vancouver, British Columbia V6E 4E6. A copy of this press release may be obtained on Trez Capital's SEDAR profile at www.sedar.com.
SOURCE Concerned Shareholder Group of Trez Capital Mortgage Investment Corporation
For further information: Zachary George at FrontFour Capital Group LLC - (203) 274-9053