First Capital founder escalates dispute with REIT management • RENX • Real Estate News Exchange
The founder and former chief executive of First Capital REIT joined investor Ewing Morris and Co. in publicly criticizing the trust’s management and, in an open letter published Thursday, Dori Segal calls for resignation or removal of the current CEO of First Capital and its Chairman of the Board.
Segal’s letter joins investor Ewing Morris and Co. in questioning the REIT’s (FCR-UN-T) strategy and financial performance over the past few years. First Capital’s investors and management have been embroiled in an increasingly public and heated dispute for several months.
Segal’s latest decision reiterates and expands on a series of criticisms, before calling for the removal of CEO Adam Paul and Chairman of the Board Bernie McDonell.
“As unitholders, we deserve leadership that is aligned and able to lead with integrity, trust, credibility and entrepreneurship,” Segal wrote. “I demand the immediate removal or resignation of Mr. Paul and Mr. McDonell.
“Furthermore, a special independent committee of the board should be formed immediately to explore strategic alternatives that may be available to FCR and bring the business to its full potential.”
First Capital and the critics
First Capital REIT management has vigorously defended itself against the allegations and, in its own October 11 press release, claimed that the two dissident shareholders “are untrustworthy” and offer “a selfish short-term agenda. to place two of their own nominees on the firm’s board.
The trust holds interests in a Canadian portfolio of 145 properties totaling 22.2 million square feet of GLA and valued at $9.8 billion as of September 30, 2022.
Segal’s letter says he raised “my serious concerns” privately with the FCR board and at the REIT’s 2022 AGM.
He also commented in a Globe and Mail article on the dispute in October, publicly declaring his support for Ewing Morris’ initiative.
“Since early 2019, FCR’s activity has contracted, its reputation and credibility have declined, its development deliveries have declined, its multiple premium has evaporated, its financial flexibility has disappeared, its scale of indebtedness has shrunk. ‘has shrunk and its market capitalization has fallen from $5.5 billion to $3.6 billion,’ Segal wrote in Thursday’s letter.
“Part of the significant underperformance is also attributable to the fact that FCR’s peer group has become much more disciplined, particularly in growth initiatives and development activities, and has impressive strength at the top and sponsorship .”
Segal founded First Capital in 1997 and led it through its transition to a public company before stepping down from the board in 2021. Paul was named CEO in 2015.
Segal’s family continues to own approximately 1.5% of the outstanding shares of First Capital REIT, making them one of its largest individual shareholders.
Among its specific complaints is the REIT’s performance over the past five years.
“In the five-year period leading up to my active concerns raised at FCR’s Annual General Meeting on June 21, 2022, FCR was the worst performing Canadian retail REIT,” he wrote.
“While its Canadian-listed peers generated an average total return of +35% over this five-year period, FCR’s stock performance was negative -13%.”
He is also critical of the recent decision to divest FCR’s stake in the King High Line property in Toronto. Segal says the “generational core asset” is being liquidated at below replacement cost.
FCR has reached an agreement to sell its remaining 50% interest in the residential component of the three-tower building located at 1100 King St. W. in Toronto for $149 million.
The transaction does not include the 160,000 square foot commercial portion of the project, nor the commercial parking component.
First Capital will retain 100% ownership of such portions of the property.
The leadership of the FCR defends itself
In its defence, FCR’s management says it is focusing on a long-term strategy that is already showing benefits for unitholders.
“As a Canadian REIT with one of the largest pipelines of high-quality development assets, First Capital’s cutting-edge portfolio has substantial intrinsic value,” management wrote in the Oct. 11 response.
“First Capital is executing within a clearly defined strategy to unlock this value and drive near to mid-term growth in funds from operations (FFO) per unit, while continuing to undertake initiatives to grow net asset value per unit and maintain a significant long-term – term development pipeline.
The REIT also discussed the effects of the COVID pandemic.
“Prior to the onset of the COVID-19 pandemic, the REIT’s unit price, as well as its FFO, AFFO and NAV growth rates per unit, significantly exceeded the average for retail REITs,” management wrote.
“Although FCR’s well-regarded urban real estate portfolio has performed well operationally throughout the pandemic, the impact of COVID-19 has been perceived to be greater at urban sites, resulting by an impact on the unit price performance of the REIT.
“As the impact of COVID-19 has faded, First Capital has once again been a frontrunner.”
The REIT also restored distributions to the pre-pandemic level of $0.86 per year.
Finally, management noted that the REIT’s total return since increasing the distribution, announcing a capital allocation and portfolio optimization plan in September and executing its public offering outperforms the REIT index.
First Capital says the total return was 1%, while the retail REIT average was -12% and the REIT index was -16% (as of October 11).