- Temple faces significant financial, operational and governance challenges today
- Temple's third-party asset manager is highly conflicted and not acting in the best interests of all shareholders
- Current board lacks independence, and refuses to provide meaningful oversight of its third-party asset manager
- Centennial's independent nominees have a plan for immediate change to preserve and enhance value
- Centennial's campaign for change has the general support of Temple's largest institutional shareholder, who owns greater than 15% of Temple's outstanding common shares today
TORONTO, May 26, 2015 /CNW/ - Centennial Group Limited ("Centennial"), an indirect owner of approximately 5% of the outstanding shares of Temple Hotels Inc. ("Temple" or the "Company") (TPH:TSX), announced today that it is calling on all Temple shareholders to join a campaign for immediate change at Temple to address mounting financial, operational and governance challenges. Centennial is seeking the support of shareholders to elect five highly qualified and independent nominees to Temple's board of directors at the upcoming meeting of shareholders to be held on June 25, 2015.
Centennial believes Temple's hotel portfolio is a unique investment opportunity in the Canadian capital markets. However, Temple is currently plagued by a number of substantial financial, operating and governance problems that include: (i) a part-time external asset manager (Shelter Properties Ltd., a private entity controlled by Mr. Arni Thorsteinson, Temple's CEO) whose interests are not aligned with Temple's other shareholders and who has a long history of poor operating performance and related-party dealings, (ii) a board of directors that provides no meaningful oversight or accountability of Temple's external asset manager, and (iii) investment and capital allocation decisions that have led to a stressed balance sheet and industry-worst leverage of 85% (debt / enterprise value) today.
The result has been a 60% decline in Temple's share price and two dividend cuts in the last 18 months. While operating headwinds in Western Canadian markets have contributed to the recent weak operating results, several years of poor capital allocation decisions by current management, along with poor oversight by the board, have put all shareholders at risk today. Without immediate and significant change, going-concern risk continues to mount.
Given the consistent failure of the majority of the incumbent board of directors at Temple to address the significant problems facing the Company, Centennial believes that the only way to achieve real and meaningful change is to propose new independent nominees who are willing to take decisive actions to restore financial, operating and governance accountability to Temple.
Centennial's Independent & Experienced Board Nominees
Centennial's nominees, Peter Aghar, Jon Hagan, Neil Labatte, Aida Tammer, and David Nunn, are highly experienced individuals who are committed to restoring independence to the board and holding management accountable for their actions. Each of Centennial's nominees has held senior leadership positions at leading Canadian companies, including Legacy Hotels REIT, KingSett Capital, Cadillac Fairview and CIBC World Markets. Each nominee has considerable experience in hospitality, real estate, operations management, corporate finance and/or corporate governance. While the nominees will act as independent fiduciaries, they all support a campaign for immediate change at Temple.
Significant Support From Other Shareholders
Centennial believes that Temple's other shareholders share its view that immediate change at Temple is required. A major institutional shareholder, who currently owns in excess of 15% of Temple's outstanding common shares, has informed Centennial Group that they are generally supportive of the campaign for change at Temple and agree that immediate action is needed.
Centennial's Letter to Temple's Current Board of Directors
Centennial has sent a letter to the current board of directors of Temple reminding them of their fiduciary duties to all shareholders and warning them against entrenchment tactics in light of Centennial's proposed nominees. In its letter, Centennial strongly cautioned the current board against taking any ill-considered actions including renewing or extending the Shelter management contract, issuing shares or other dilutive securities that could further entrench the board of directors or Shelter or undertaking any asset acquisitions that could further dilute current Temple shareholders without a vote of shareholders.
Centennial has engaged Trimaven Capital Advisors Inc. as its financial advisor, Goodmans LLP as its legal advisor, Kingsdale Shareholder Services as its proxy solicitor, and Bayfield Strategy, Inc. as its communications advisor in connection with its investment in Temple.
Letter to Temple Shareholders
Centennial also released an open letter to fellow Temple shareholders today, outlining the current financial, operating and governance crisis at Temple and the urgent and unequivocal need for real and meaningful change. Centennial looks forward to the support of Temple's shareholders at the shareholders meeting on June 25, 2015. The full text of the letter follows:
May 26, 2015
LETTER TO TEMPLE SHAREHOLDERS
Dear Fellow Temple Shareholders,
Today, Centennial is an approximate 5% shareholder of Temple Hotels (the "Company" or "Temple"). We became a shareholder as part of the sale of three East coast hotels to Temple in early 2013. When we agreed to become shareholders of the Company, it was because we believed that Temple had a diverse, irreplaceable hotel portfolio and that the Company, with the appropriate guidance and capital markets discipline, could be a leading hotel industry consolidator in Canada. Instead, what we have discovered is a Company with a broken governance structure, minimal board oversight and an external asset manager that is highly conflicted and acts in a self-interested manner at the expense of other shareholders. Since early 2014, Temple's share price has declined over 60% and the Company's current leverage ratio of 85% puts all shareholders at risk today.
The headwinds Temple has experienced as a result of its exposure to Fort McMurray, Alberta account for only a small fraction of the value destruction that has been underway for the last few years. Temple's current board and management have made a series of strategic decisions with respect to new acquisitions, capital allocation and balance sheet management that have put shareholders in a very precarious situation today. While I have challenged a number of these decisions as a current board member, it has become clear that the majority of the incumbent Temple board is content to support a CEO that is also our third-party manager, and has a clear misalignment of interests and a long track record of poor performance. In the face of these very real operating and financial challenges, a new strategy and real independent oversight is badly needed.
Fellow shareholders, our Company is in urgent need of change and to do that we require shareholder representatives who can bring a no-nonsense approach, relevant experience and capital markets acumen to the Temple board. We simply cannot afford to continue sitting idly by with the potential for further value destruction. As shareholders we have to act now to protect our investment.
Centennial has nominated five independent and highly qualified individuals to the Temple board: Peter Aghar, Jon Hagan, Neil Labatte, Aida Tammer and David Nunn. If elected to the board, the nominees will provide strict independent oversight of management, have final decision-making authority on all capital allocation decisions, commit to de-leveraging Temple's balance sheet and taking all necessary steps to preserve existing value and put Temple back on course to create value for all shareholders.
TEMPLE'S TRACK RECORD OF FAILING SHAREHOLDERS
1. External Management Structure – A Misalignment of Interest
Our third-party manager is not motivated to act in the best interests of Temple's shareholders. Mr. Arni C. Thorsteinson, the Company's CEO and Chairman, is also the president of Shelter Canadian Properties Limited ("Shelter"). Shelter serves as Temple's external asset manager and receives a fee of 1.5% of all gross revenues for providing part-time asset management services. Shelter also receives a 5% fee for "cap-ex" and construction management. Since 2006, Shelter has generated close to $13 million in management fees and now collects approximately $3.8 million per year in aggregate asset and construction management fees. A key problem with the Shelter asset management contract is the lack of any financial motivation to sell underperforming assets, pay down corporate debt, control cap-ex spending and moderate other operating costs – all steps that are necessary to preserve and enhance value for Temple's shareholders. A decrease in cap-ex spending and revenue from disposition of underperforming assets reduces the fees paid to Shelter, and Shelter has governed itself accordingly.
2. Conflicted Board with a History of Poor Decision Making & Unwillingness to Provide Oversight
We believe that the majority of the current Temple board lacks independence and are unwilling to challenge the decisions of Temple's external asset manager and CEO.
- Conflict of Interest: Mr. Thorsteinson is Temple's "part-time" CEO and Chairman, as well as the CEO of Temple's external management company, Shelter. The three other current "independent" directors all have strong historical business and personal ties to Shelter and Mr. Thorsteinson.
- No Oversight: The majority of Temple's independent directors effectively conform to Mr. Thorsteinson and Shelter's wishes, providing no real oversight or governance of the third party manager. This has led to significant questions around capital allocation, balance sheet management and asset pricing. Without meaningful oversight, we believe that the current misaligned management structure does not work.
- No Investment Committee: Notwithstanding the misalignment of interest between the Company and the external manager, Temple shockingly has no Investment Committee; an inherent conflict of interest given the structure of Shelter's management agreement.
3. Underperforming Share Price & Poor Balance Sheet Management
Since early 2014, Temple's share price has declined over 60%, from a high of over $6.00 to the current share price of $2.31 and the Company's equity market capitalization has shrunk to less than $100 million. Today, Temple employs the highest level of financial leverage (debt) in the sector and its only apparent source of liquidity is Shelter, the Company's asset manager, or other high-cost lenders of last resort.
High Level of Debt:
- Current debt / enterprise value (including convertible debentures) is 85%
- $615 million of total debt at face value versus a $710 million enterprise value
- Approximately $100 million of mortgage debt matures over the next 12 months
- Over $400 million of debt matures in the next three years
- $150,000 total debt/hotel room is significantly above industry norms
- Only $8 million of cash on the balance sheet as of March 31, 2015
- Current liquidity is coming from the parent company of Shelter in the form of a related-party $10 million secured revolving loan at an incremental cost of 8% today
4. Shelter's Track Record of Poor Management on Behalf of Shareholders
Shelter, Temple's external asset manager, has a long history of poor operating performance and related-party dealings. Shelter is the former manager of Huntingdon REIT ("Huntingdon") and current manager of Lanesborough REIT, a TSX-listed apartment REIT. Lanesborough REIT, while still a public company, has lost 75% of its market value since April 2014 and today has a market capitalization of only $7.5 million. Huntingdon was a mid-cap Canadian REIT, externally managed by Shelter, which owned a portfolio of office, retail, industrial and aviation-related properties in major and middle-market cities across Canada. By 2008, notwithstanding a $500 million asset base, Shelter had managed Huntingdon into an over-leveraged, high-cost of debt entity with nominal cash flow. Concerned shareholders quickly took notice and questioned Huntingdon's ability to refinance its costly debt. Similar to Temple, Huntingdon's unit price at the time began to trade well below its 52-week high. During this time, Shelter refused to cut the distribution to an appropriate level, and similar to Temple today, sell assets to get debt under control.
In 2008, one specific frustrated shareholder played an active role in campaigning for change at Huntingdon. The first critical step for turning around Huntingdon was to install meaningful board representation on behalf of all Huntingdon unitholders. Under a new board and with the right governance structure, Huntingdon was able to internalize management, significantly de-lever the balance sheet and grow cash flow over time. Today, Centennial proposes to also be a catalyst for change at Temple, and as was the case of Huntingdon, is campaigning for new board representation as the critical first step.
TEMPLE NEEDS CREDIBLE, INDEPENDENT AND EXPERIENCED DIRECTORS
Centennial nominees are highly experienced individuals with the financial, operational, capital markets and hospitality experience that the Company urgently needs. The nominees will bring a much-needed no-nonsense, shareholder-focused approach to the Temple board immediately.
Neil Labatte – Neil Labatte is the former CEO of Legacy Hotels REIT and former Head of Acquisitions, Development and Real Estate at Fairmont Hotels & Resorts. He is currently the CEO of Global Dimension Capital, Inc., a hotel real estate advisor and President and CEO of Talon International Inc. and Talon Luxury Collection. As former CEO of Legacy Hotels, he led Legacy through its very successful $2.5B privatization in 2008. Mr. Labatte was also a former trustee of Heathlease Properties REIT prior to its sale to HCN in 2014. Neil holds a Masters of Science, Finance, and a Bachelor of Science, Finance from the University of Utah and attended Brown University.
Jon N. Hagan – Jon Hagan is the former CFO of Cambridge Shopping Centres and Cadillac Fairview Corporation. Currently, Jon is the principal of JN Hagan Consulting. Mr. Hagan is the chair of the board of directors of Regal Lifestyles Inc., a director of First Capital Realty Inc. and a director of four of the public entities of the Walton Group. Mr. Hagan is a former director of Bentall Kennedy Group, former Chairman of Teranet Income Fund prior to its acquisition by Borealis Infrastructure Management Inc. and former trustee of Sunrise Senior Living REIT prior to its successful sale to Ventas Inc. in 2007. Mr. Hagan's experience spans corporate strategy, corporate and real estate finance, real estate acquisition and disposition, compensation programs, financial reporting, forecasting and budgeting. Mr. Hagan is a CA and holds a BSc degree in Mechanical Engineering from the University of Saskatchewan and attended the Executive MBA program at the University of Alberta.
Aida Tammer – Aida Tammer was a long-time investment banker at CIBC World Markets, serving as Executive Director in the Real Estate Investment Banking group. During her time at CIBC, Ms. Tammer worked on numerous complex financial transactions for various public and private companies and is a capital markets expert. Ms. Tammer served for five years on the Board of Directors of Tricon Capital Group Inc., a TSX-listed issuer, and is a former trustee of Heathlease Properties REIT prior to its sale to HCN in 2014. She began her career as an architect and is a past member of the Toronto Real Estate Board and Ontario Association of Architects. She received her Bachelor of Architecture and Bachelor of Environmental Studies degrees from the University of Waterloo, MBA (Finance) from the University of Toronto and the Chartered Financial Analyst designation.
Peter Aghar – Peter Aghar was formerly President and founding partner of KingSett Capital, Canada's largest real estate private equity firm and formerly Managing Director at GE Real Estate. Currently, Peter is the founder and President of Crux Capital Corporation and will be joining the Board of PROREIT, a TSX-V listed REIT, this June. Mr. Aghar has a successful 20 year track record as an opportunistic value investor on an institutional scale, having been responsible for more than 100 real estate investments totaling over $6 billion in Canada and internationally, including equity investments, joint ventures, private equity funds, public companies and debt investments He is a CPA, CMA and a graduate of the University of Waterloo with an Honors Mathematics Degree.
David Nunn – David Nunn is the CEO & CFO of Centennial Group Limited, a private company with diverse corporate holdings and structures, including hotels, real estate, property development and oil and gas businesses. David is a Chartered Accountant, holds a Bachelor of Business Administration in Finance from Acadia University and is a graduate of the Institute of Corporate Directors. David has over 25 years of experience in corporate finance, in both publicly-traded and private companies. He was also a Professor of Finance at Mount Saint Vincent University in Halifax. David has been a sitting director of Temple Hotels since April 2013.
CENTENNIAL'S PLAN TO RESTORE VALUE FOR ALL SHAREHOLDERS
Centennial has a very simple plan to preserve shareholder value in the short-term, and to increase shareholder value over time. Centennial believes that immediate changes to governance, management oversight, and capital allocation will allow us to achieve this.
1. Restore Credibility and Independence to Board, Reduce Shelter's Role & Influence:
- Provide real oversight of Shelter and the Shelter management contract
- Have independent directors make all capital allocation decisions
- Strengthen Temple's board committees and restore formality to board process
- Establish a formal investment committee and an independent board chair policy
2. Remove Credit Uncertainty Through a Targeted Approach to Improving Temple's Balance Sheet
- Commit to a de-leveraging plan by exploring the sale of Temple's larger assets which have meaningful intrinsic equity that could be used to pay down debt
- Prohibit Shelter from providing expensive related-party financing to the Company by developing new external lending relationships
3. Address External Asset Management:
- Immediately require Shelter to allocate employees to Temple on a full-time basis
- Hire reputable hotel consultant to work with the new Temple board on a day-to-day basis for the next 12 months - integrate property manager systems with corporate and board level reporting
- Over the long-run, and in the absence of new third party best-in-class manager or sponsor, internalize asset management to be fully aligned with shareholders of the Company
4. Attract Institutional Sponsorship:
- We believe that by restoring credibility, implementing better governance practices and de-levering the balance sheet, Temple could attract significant institutional investor interest given its unique national footprint
CHANGE IS NEEDED TO PRESERVE VALUE IN THIS VERY CHALLENGING ENVIRONMENT
Shelter, the Company's external manager, has a long history of ignoring challenging conditions and proceeding with the status quo to the detriment of shareholders. Today's difficult operating environment requires a strong, independent board to make tough decisions and hold management accountable. Notwithstanding fiduciary obligations, the current Temple board lacks the motivation, independence and fortitude to provide the requisite oversight for the wider shareholder base. Urgent change is needed today to stop further equity destruction, preserve value and to restore shareholder rights.
We look forward to your support at the annual and special meeting of shareholders on June 25, 2015.
/s/ David Nunn
Chief Executive Officer
Centennial Group Limited
ABOUT CENTENNIAL GROUP LIMITED
Centennial Group Limited has developed, constructed and managed hotels as well as commercial and residential developments, across Canada for over 45 years. Centennial Group Limited is the owner of Centennial Hotels Limited, a Canadian hotel management company operating on a national basis that was listed on the TSX Venture Exchange until its privatization in 2001.
The following information is provided in accordance with Canadian corporate and securities laws applicable to public broadcast solicitations. Centennial is relying on the exemption under section 9.2(4) of National Instrument 51-102 – Continuous Disclosure Obligations ("NI 51-102") to make this public broadcast solicitation. This solicitation is being made by Centennial and is not by or on behalf of management of Temple. The registered office address of Temple is 360 Main Street, 30th Floor, Winnipeg, Manitoba R3C 4G1.
Centennial has filed this press release containing the information required by section 9.2(4)(c) of NI 51-102 and has filed a separate document containing the information required by Form 51-102F5 – Information Circular, in respect of Centennial's nominees for election to the board of directors of Temple at Temple's annual and special meeting of shareholders to be held on June 25, 2015, including any and all adjournments or postponements of such meeting, on Temple's company profile on SEDAR at www.sedar.com.
Centennial intends to solicit proxies in accordance with all applicable securities laws and corporate law requirements and in connection therewith intends to provide a form of proxy to shareholders of Temple that wish to support the election of Centennial's nominees. Proxies may be solicited by mail, telephone, e-mail or other electronic means and in person by directors, officers and employees of Centennial or by Centennial's nominees, who will not be specifically remunerated therefor. In addition, Centennial may solicit proxies in reliance upon the public broadcast exemption to the solicitation requirements under applicable Canadian securities laws and corporate law requirements, conveyed by way of public broadcast, including through press releases, speeches, advertisements or publications, and by any other manner permitted under applicable Canadian laws. Centennial has also retained Kingsdale Shareholder Services to assist in the solicitation of proxies. Centennial will pay Kingsdale solicitation fees estimated at up to approximately $50,000 plus per call fees, and will reimburse Kingsdale for its reasonable out-of-pocket expenses incurred in connection with the solicitation. The costs incurred in connection with the preparation of proxy solicitation materials and the solicitation will be borne by Centennial.
A registered shareholder of Temple that gives a proxy may revoke it: (a) by completing and signing a valid proxy bearing a later date and returning it in accordance with the instructions contained in the form of proxy; (b) by depositing an instrument in writing executed by the shareholder or by the shareholder's attorney authorized in writing, as the case may be: (i) at the registered office of Temple at any time up to and including the last business day preceding the day of the Meeting at which the proxy is to be used, or (ii) with the chairman of the annual and special shareholders meeting on the day of the meeting; or (c) in any other manner permitted by law. A non-registered holder of common shares of Temple will be entitled to revoke a form of proxy or voting instruction form given to an intermediary at any time by written notice to the intermediary in accordance with the instructions given to the non-registered holder by its intermediary.
To the knowledge of Centennial, neither Centennial, nor any of its directors or officers, or any associates or affiliates of the foregoing, nor any of the Centennial Nominees or their respective associates or affiliates, has: (i) any material interest, direct or indirect, in any transaction since the commencement of Temple's most recently completed financial year or in any proposed transaction which has materially affected or would materially affect Temple or any of its subsidiaries, other than the transactions described in Temple's business acquisition report dated March 1, 2013 and filed under Temple's profile on SEDAR at www.sedar.com; or (ii) any material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter currently known to be acted upon at the Meeting other than the election of directors.
All statements, other than statements of historical fact, included in this news release constitute "forward-looking information" as such term is defined in applicable Canadian securities legislation. Forward-looking information can generally be identified by the use of forward-looking language such as "will", "expect", "intend", "plan", "estimate", "anticipate", "believe" or "continue" (and grammatical variations and the negatives thereof) and include statements concerning support for Centennial's nominees, Centennial's intentions and strategies regarding Temple, the impact of Centennial's nominees, if elected, on the financial condition, operations, business, strategies and competitive position of Temple or its future management, and the impact on the financial condition, operation, business, strategies and competitive position of Temple and its future management if Centennial's nominees are not elected. Such forward-looking information is based on certain understandings, assumptions, beliefs, opinions and expectations of Centennial and its nominees, including, without limitation, Temple's future growth potential, results of operations, future cash flows, ability to monetize assets, the future performance and business prospects and opportunities of Temple and the regulatory environment and economic and market conditions that Temple faces. Shareholders should not place undue reliance on such forward-looking information, which is not a guarantee that any particular outcome, event, result, performance or other achievement will occur. Many risks, uncertainties and other factors could cause the actual outcomes, events, results, performance or achievements expressed or implied by such forward-looking information to vary materially from those described herein should any of those risks, uncertainties or other factors materialize. Such risks, uncertainties and other factors include, without limitation, the impact of legislative, regulatory, competitive and technological changes; the state of the economy; credit and equity markets; availability of credit and other financing; the financial markets in general; the possibility that the anticipated benefits from the election of Centennial's nominees cannot be fully realized or may take longer to realize than expected; the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers or other business partners following the election of Centennial's nominees; and all other risks and uncertainties detailed in Temple's' filings with applicable Canadian securities commissions, copies of which are available on SEDAR at www.sedar.com. Accordingly, readers of this news release are cautioned not to place undue reliance on any forward-looking information contained in this herein. All forward-looking information contained herein is expressly qualified in its entirety by this cautionary statement. All forward-looking information contained herein is made as of May 26, 2015 and Centennial undertakes no obligation to publicly update or revise any such forward-looking information, except as required by law.
SOURCE Centennial Group Limited
For further information: CONTACTS: Shareholders: Kingsdale Shareholder Services, 1-877-659-1824, E-mail: [email protected], Facsimile: 416-867-2271, Toll Free Facsimile: 1-866-545-5580, Outside North America, Banks and Brokers Call Collect: 416-867-2272; Media: Riyaz Lalani, Bayfield Strategy, Inc., 416-907-9365, [email protected], www.bayfieldstrategy.com