TORONTO, March 3, 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), commented today on the Company's press release dated February 18, 2016.
We remain very concerned by the sequence of events to date and the actions taken by the Board of Directors (the "Board") and the Special Committee of Trez Capital since the strategic review process began five months ago. The Special Committee's recent announcement of its "decision" to pursue a monetization option, made only after our Concerned Shareholder Group formally requisitioned a special meeting, raises serious questions about the previous direction of the strategic review process including questions regarding the influence of the external manager over the process.
We believe the recently announced monetization process faces a number of significant challenges which will make it difficult to achieve an acceptable outcome for shareholders when compared to the wind-up alternative put forward by the Concerned Shareholder Group;
- The likely requirement to pay Trez Capital's external manager a large termination fee upon a change-of-control or other type of monetization transaction
- The potential misalignment between shareholders and the Company's advisors, who are typically economically incented to recommend a change-of-control or corporate level transaction
- The typical requirement to pay a break fee in a sale or change-of-control transaction will be highly coercive
- Potential conflicts of interest at the Special Committee level will make it difficult for shareholders to accept any Board recommendation
We believe that these issues have not been clearly articulated to the investment community and require careful consideration.
The Recently Announced Monetization Process
The Concerned Shareholder Group is of the view that the monetization process now being pursued is flawed and not in shareholders best interests. We point to the following observations:
- Under the terms of the external management contract with Trez Capital Fund Management Limited Partnership (the "Manager"), the Manager is entitled to a 3x trailing fees payment on a change-of-control of the Company and termination of its contract. Based on fees paid to the Manager for the 12 months up to September 2015, this would equate to approximately $9.1MM or $0.47 per share. We understand that the Manager may possibly make the argument that the contract cannot be terminated until the end of 2018, thus entitling the Manager to all potential fees through 2018, plus a 3x termination payment – this would result in a payment closer to $0.90 per share. To put this in perspective, if shareholders assume a buyer would pay the equivalent of the Company's own stated fair value assessment of the portfolio at $9.28 per share, the net proceeds to shareholders after paying the termination fee in a change-of-control transaction could be less than $8.40 per share before other transaction costs, a grossly inadequate result that would be voted down by shareholders.
This analysis would be altered significantly in the event the Manager is willing to waive all fees related to its removal as part of a monetization transaction. The Concerned Shareholder Group would welcome such an announcement. If shareholders approve a wind-up resolution at the upcoming meeting of shareholders, no termination fees will be owed to the Manager.
- While we have no direct knowledge of the terms of the Company's engagement with its advisor, we are concerned that the advisor may be financially incented to see a change-of-control or other corporate transaction occur regardless of whether shareholder value is better maximized in an orderly wind-up of the Company. We have considerable experience working with advisors to sell businesses, and personal knowledge of market based advisory agreements used in similar contexts. It is often the case that the highest payout to an advisor occurs if the subject company is "successfully" sold. In this unique case, similar market based terms of engagement may actually create a conflict that poses a threat to shareholders. We encourage the public release of the terms of the Company's engagement with its advisor to bring clarity to this matter.
- Transaction costs are part of every public company sale transaction. The analysis outlined in #1 above does not include the impact of cash fees paid to the Company's advisor, nor does it include any potential administrative or employee severance costs that the Manager may try to charge to shareholders. These costs will further reduce the proceeds available to shareholders on a change-of-control transaction.
- While shareholders will ultimately be able to vote on whatever transaction is recommended to them by the Board, the common requirement for a break-fee in a change-of-control transaction (payable to the acquiring party in the event the transaction gets voted down) will be another cost shareholders may be asked to bear if they decide the best course of action is the wind-up alternative being recommended by the Concerned Shareholder Group. Given that a wind-up transaction clearly maximizes proceeds to shareholders, any requirement to pay a break fee would be highly coercive and contrary to the best interests of the Company. We would welcome the Company's announcement that it will refuse to offer a break-fee to any potential buyer.
- We understand that a member of the Special Committee serves as a trustee on a number of the Manager's related private investment funds. Given the existence of co-mingled loans that appear to have been allocated on a non-arm's length basis among the many Manager affiliated entities, we view this as another conflict of interest. We question how someone with significant ties to the external Manager, who may rely on the relationship for personal income or access to capital qualifies as "independent" by any common sense definition for the purpose of sitting on the Special Committee and being in position to recommend a transaction that results in a significant payment to the Manager.
A Wind-Up of Trez Capital Maximizes Value For All Shareholders
The Concerned Shareholder Group, along with other vocal shareholders, believes that a wind-up of Trez Capital is the option that maximizes value for all shareholders. It provides shareholders with the highest total return and does not trigger a large termination payment to the Manager (which would effectively be paid directly out of shareholders' pockets). Our analysis and due diligence to date gives us comfort that that an orderly wind-up of the Company will net shareholders no less than $9.28 per share in cash. We also believe that there are other actionable steps that a newly constructed Board could take to enhance proceeds for shareholders who wish to remain invested in Trez Capital throughout the wind-up process. Once elected, our nominees will work constructively with the remaining independent board members to maximize value for all shareholders.
At this time, the members of the Concerned Shareholder Group will not support any transaction which enriches the Manager at the expense of shareholder value unless the transaction results in shareholders receiving net proceeds that approximate the current book value per share. We also call on the Board to immediately cease any further mortgage origination (including renewals) until the date of the Special Meeting of shareholders to be held on May 30, 2016.
Support From Institutions & Investment Advisors
Since our requisition of a Special Meeting in early February we have received very strong and vocal support for our recommended course of action. A very large Western-Canada based institution, which owns 4.7% of the Company's outstanding shares, has publicly stated its support for our plan. In addition, we have had a number of inbound calls from well-known investment advisors (that we understand collectively represent holders of over 15% of the Company's outstanding shares) who continue to express their displeasure with the Board and the immediate need for independent oversight.
The External Manager
The Company is managed by an affiliate of Trez Capital (the parent company), a large privately-owned alternative lender with multiple investment funds, both private and public. Between the two publicly-traded mortgage investment corporations, the Manager has collected close to $14 million in fees since 2012. Over that same period, shareholders have seen over $52 million of equity value disappear. We cannot in good conscience support an inferior transaction that would also result in the Manager receiving a further $10 to $20 million in fees.
We will continue to demonstrate leadership in the protection of our fellow shareholders and will continue to engage with the Board, Special Committee and its advisors in an attempt to reach the best possible outcome in an efficient manner. In the next 60 days you will receive an information circular from the Concerned Shareholder Group which provides more details on our board nominees and the wind-up resolution.
About FrontFour Capital Corp.:
FrontFour Capital Corp., located at 140 Yonge Street, Suite 305, Toronto, ON M5C 1X6, was formed in January 2011 and is incorporated in British Columbia. FrontFour Capital Corp. is registered with the Ontario Securities Commission as an Investment Fund Manager, Portfolio Manager and Exempt Market Dealer.
FrontFour Capital Group LLC:
FrontFour Capital Group LLC, located in the United States at 35 Mason Street, Greenwich, CT 06830, was formed in December 2006. FrontFour Capital Group 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 ncorporated under the laws of the Province of Ontario and is located at 28 Hazelton Ave., Suite #200, Toronto M5R 2E2.
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 requisitioned meeting of shareholders has been scheduled to take place on May 30, 2016 (the "Meeting"), shareholders are not being asked at this time to execute a proxy in favour of the Concerned Shareholder Group's director nominees (the "Concerned Shareholder Nominees") or the wind-up resolution 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 the Concerned Shareholder Group or any proxy advisor that the 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.
Additional information concerning the Concerned Shareholder Nominees is contained in the press release of the Concerned Shareholder Group dated February 8, 2016, a copy of which may be obtained on Trez Capital's SEDAR profile at www.sedar.com.
Trez Capital's principal business office is 1550-1185 West Georgia Street, Vancouver, British Columbia V6E 4E6.
SOURCE Concerned Shareholder Group of Trez Capital Mortgage Investment Corporation
For further information: contact Zachary George at FrontFour Capital Group LLC - (203) 274-9053.