Description

This is nano-cap special situation with C$30k average daily trading volume – so likely of interest to small PAs only.

Trez Capital Mortgage is Canada based mortgage lender that is in the final stages of liquidation. More than 90% of portfolio has already been sold/matured with funds returned to shareholders through dividends, buybacks and tender offers. The single remaining loan matures in Q1 2019. Company has also received two offers to be acquired at NAV, which stands at C$0.65/share (based on Q2 2018 disclosures) and represents 30% upside to current market price of C$0.5/share.

I am expecting management to announce sale of the company or clarify regarding the ongoing negotiations together with Q3 results (in mid November) or before that.

Remaining Assets

After the end of Q2 TZZ was left with only two residential mortgages in its portfolio:

• C$5m performing loan due in Q1 2019, with 6%+ interest rate generating C$75k income per quarter.
• C$0.5m past due mortgage which was expected to be repaid by the end of August. The same borrower has already fully repaid another related mortgage and partially repaid this one (by C$0.86m) in June. Thus I am assuming that by this time full payment was received and the mortgage is out of the portfolio.

Additionally, there is C$2.9m in cash leftover after special dividend payment and C$0.85m in incentive fee provision (already taking into account full portfolio liquidation) resulting in total equity value of C$7.5m or C$0.65/share. Further net expenses/losses would need to exceed C$1.7m for investors to start losing money at current share price levels.

With only one mortgage left in the portfolio I would expect admin expenses to decline substantially. G&A amounted to C$130k in Q1 2018 and 440k in Q2 2018 (Q2 involved sale of collateralized real estate and negotiations of past-due loans, thus an outlier quarter). For Q3 management fees (1.25% of gross assets) will still be somewhat elevated (c. C$110k) as company carried large cash balance for almost full quarter before paying out C$2.4/share in dividends at the end of September. Net NAV impact in Q3 is likely to be in the range of negative C$0.1m-$0.15m and afterwards the company should be sold to one of the two interested buyers.

Bidders

On August 20th two groups expressed interest to acquire TZZ at NAV:

• Earlston Investments - merchant bank proving real estate mortgages with no publicly listed vehicles at the moment. Earlston had accumulated 16.5% stake in TZZ, with majority of shares acquired at C$2.99/share (or C$0.59/share adjusting for special dividend) after the share price spike following the announcement of favorable Q2 developments.
• FrontFour - hedge fund managed by one of TZZ directors. FrontFour owned 10.6% of outstanding shares at the time of announcement.

The bidders are likely interested in value of the public listing as well as the float of the funds that will agree to be transferred to the new owners.

Special committee of independent directors was formed to evaluate these offers and there has been radio silence since. From shareholder perspective, sale of the company at NAV is clearly superior to liquidation – faster and more cost effective. Independent directors should be indifferent as the board will be dissolved in any case. So it is really hard to see how the board could reject these offers. The silence so far potentially indicates that negotiations are ongoing and that there is a reasonable chance for eventual cash out at a slight premium to NAV.

Interestingly, after the proposals were made public both bidders continued to buy shares in the open market at premium to current prices (albeit in small amounts) and just below NAV.

Catalyst

Announcement of company sale

Q3 results and further clarification from management on developments (expected in mid November)