Ewing Morris Releases Open Letter to Fellow First Capital REIT Unitholders: Restore the Value

TORONTO, Oct. 6, 2022 /CNW/ -

Ewing Morris & Co. Boutique (CNW Group/Ewing Morris & Co. Investment Partners Ltd.)
Ewing Morris & Co. Boutique (CNW Group/Ewing Morris & Co. Investment Partners Ltd.)
  • First Capital REIT has significantly underperformed its peers despite owning the premier grocery anchored real estate portfolio in Canada.

  • This disconnect between asset value and performance can no longer be tolerated.

  • Appoint Kelly Marshall and Darcy Morris to the FCR Board of Trustees to help restore FCR's value.

Ewing Morris issues the following letter to the unitholders of First Capital REIT ("FCR") after its brief meeting with two members of the Board of Trustees (the "Board") on October 4th (the full content and relevant sources of the letter can be accessed here). This meeting was rescheduled by FCR from the original date of September 22nd.  During the 12-day delay, the Board was fully aware of both our business concerns and proposed Trustee changes.  However, the meeting was perfunctory, and did not address these issues nor provide us with confidence the Board was willing to engage constructively.

We are releasing this letter publicly to halt value destructive capital allocation and appeal directly to unitholders for change.

To our Fellow Unitholders:

Ewing Morris & Co. Investment Partners Ltd. ("Ewing Morris") is a value-driven firm that invests in a limited number of carefully chosen, undervalued public companies in North America. It is our customary practice to engage actively with the stewards of companies where we have a meaningful ownership position.  In many circumstances, management has a defined plan that we support. In other instances, we believe in a company's assets but lack confidence in leadership and may seek to effect change to unlock value.  First Capital REIT ("FCR") represents the latter.

We draw fellow unitholders' attention to the following five facts about FCR:

Fact #1 – Current FCR Leadership has Consistently Underperformed

Since February 2015, when a change in leadership occurred, FCR has significantly underperformed the S&P/TSX Capped REIT Index and today, more than seven years later, FCR units are trading more than 25% lower.

Prior to February 2015, FCR regularly traded at a premium to IFRS NAV. The NAV premium gradually eroded during the CEO's first four years of leadership.

Fact #2 – FCR is the Worst Performing Retail REIT in Canada Since 2017

On a one, three and five-year basis, FCR is the worst performing REIT in Canada and has consistently under-performed both the REIT index and its peer group. Today, FCR trades at the widest discount to NAV of any of its peers.

Fact #3– FCR's Underperformance has Been Rewarded

Despite chronic underperformance and a shrinking overall business, FCR's executive compensation continues to grow. Since 2017:

  • Funds From Operations ("FFO") declined more than 10%

  • FCR unit price declined more than 25%

  • CEO total compensation increased by 37%

  • Named Executive Officer compensation increased by 34%

Bewilderingly, the compensation committee continues to praise the CEO, Adam Paul's leadership:

  • "The Compensation Committee was of the view that Mr. Paul demonstrated exceptional leadership and his performance could be characterized as having achieved in excess of his individual objective targets."

  • "The Compensation Committee was of the view that Mr. Paul demonstrated exceptional leadership in 2021, leading to the achievement of many corporate stretch goals."

If Mr. Paul is demonstrating "exceptional leadership" and achieving his targets while the stock price underperforms, perhaps the Board should set new targets.

Fact #4 – FCR's Strategy is Incoherent

We suspect that, like us, many investors are struggling to follow FCR's ever-evolving strategy.

We were told the strategy was "fully integrating retail with other uses to create thriving neighborhoods" and "concentrating capital in dense, high growth neighbourhoods" like Liberty Village. The recent sale of 1100 King Street West (below replacement cost) directly contradicts the stated strategy.

We were told FCR was "comfortable with its current debt to assets ratio" and "not focused on deleveraging beyond present levels". The recent decision to "manage net debt to EBITDA to below 10x" and "manage total net debt to less than $4B" directly contradicts the stated strategy.

We were told that "repurchasing FCR units provides the best risk-adjusted opportunity that we have available to us". The recent decision to double the monthly distribution directly contradicts the stated strategy.

These disjointed, contradictory messages do not seem to be coming from a position of strength and confidence in a well thought out strategy on the part of FCR's leadership. Furthermore, these reversals are logically inconsistent:

  • Skilled capital allocators normally seek to be "greedy when others are fearful". Why commit to asset sales, including deadlines and price expectations, amid significant market turmoil?

  • If debt reduction is the priority, why increase the distribution ahead of schedule?

  • If repurchases are the best opportunity, why increase the distribution ahead of schedule?

Most troubling, the most recent announcements, taken together, amount to funding increased distributions with asset sales. This strategy is both reckless and financially unsustainable.

Fact #5 – FCR's Leadership has no "skin in the game"

We believe that companies perform best when there is an ownership voice on the Board. Even including trustee fees earned as Deferred Trust Units, the Board collectively owns less than 0.3% of FCR. While we applaud public market purchases in 2022 by several trustees, the absence of insider buying from both the Chairman, Bernard McDonell ("McDonell"), and the CEO speaks volumes about their own confidence in FCR's ever-evolving strategy. McDonell currently owns roughly $40,000 (outside of earned Deferred Trust Units) of units and he has been a trustee for over 15 years.

Ewing Morris' Request For Change

Based on persistent underperformance we believe change is needed. Our fundamental objective is to help restore FCR's premium valuation consistent with its superior asset portfolio.  We are publicly requesting two immediate changes to FCR's Board.

Request #1: Immediate appointment of Kelly Marshall to succeed McDonell as independent Chair.

While we acknowledge ongoing board refreshment at FCR, we believe the tone comes from the top. McDonell has been a trustee for more than 15 years, the majority in a lead role.  His extended tenure, de minimis ownership and lackluster track record (which includes oversight of another public company into Chapter 11/CCAA restructuring), necessitate his prompt retirement from the Board.

Since the Board has no apparent succession plan, Ewing Morris proposes the immediate appointment of Kelly Marshall ("Marshall"). Marshall represents a significant upgrade to McDonell. Marshall has over 25 years of finance and real estate experience including senior roles at Brookfield, OMERS, Citibank, Fortress Investment Group and Lonestar.

Marshall is currently Chair of Granite REIT ("Granite"), a position he assumed amidst unitholder turmoil in 2017. At Granite, Marshall helped a fragmented Board coalesce around a common strategy then helped lead the strategy's execution. Since Marshall became Chair, Granite has outperformed its benchmark by almost 4x.

Request #2: Immediate appointment of Darcy Morris to FCR Board.

We believe that companies perform best when Boards include an ownership voice. As described above, FCR's Board lacks meaningful personal ownership. The appointment of Darcy Morris ("Morris") would restore an ownership voice to FCR's Board.

Darcy Morris is the co-founder and CEO of Ewing Morris. He would bring an ownership perspective, extensive public company experience and a track record of value creation. Most recently he was a trustee of Cedar Realty Trust ("Cedar"), another grocery-anchored retail REIT. Cedar's stock price increased by 80% during his 16-month tenure which ended when Cedar was sold.

Request #3: Suspend all asset sales.

We believe the Board should immediately suspend all asset sales until the Board transition is complete.  Following Board transition, selective asset sales can be evaluated within the framework of a thoughtful, long-term capital allocation strategy.

What Happens Next? That's up to the FCR Board

The release of a public letter creates an unfortunate distraction.  To date FCR has responded to our concerns with erroneous claims and attacks on Ewing Morris rather than responding to the fundamental business issues.  We expect FCR will now respond to all unitholders in a productive manner and cease deflecting to issues that do not pertain to value creation.  Our proposed changes are reasonable: the appointment of two highly qualified trustees and the retirement of an over-tenured Chairman with a lackluster track record. Surely squandering corporate resources in defense of one individual is not in the best interests of FCR.  We implore upon FCR to stop its reactionary strategy and failed attempts at value creation.  Unitholders have a collective interest in demanding FCR restore its premium valuation.


John Ewing                                                                    Darcy Morris

Co-Founder & CIO                                                        Co-Founder & CEO


McCarthy Tétrault LLP is acting as legal counsel to Ewing Morris.

Additional Information

The information contained in this public letter does not and is not meant to constitute a solicitation of a proxy within the meaning of applicable corporate and securities laws. While Ewing Morris may take additional steps in the future, which may include requisitioning a meeting of unitholders of FCR, soliciting proxies of unitholders, filing a dissident information circular and/or other actions or steps, no such decision has yet been made, nor has any requisition of a meeting been submitted to FCR. There is currently no record date or meeting that has been called and unitholders are not being asked to execute or not execute a proxy with respect to any matter (including any potential nominees of Ewing Morris).

About Ewing Morris:

Ewing Morris & Co. Investment Partners Ltd. is a value driven Canadian investment firm established in September 2011 by John Ewing and Darcy Morris. Our aim is to achieve preservation and growth of capital for our Limited Partners by focusing on inefficient markets. We do this by relying on fundamental analysis, high conviction and the use of flexible capital. We manage strategies with a focus on small and mid-cap companies. We manage investments for individuals as well as charitable organizations, institutions and corporations.

SOURCE Ewing Morris & Co. Investment Partners Ltd.


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