InterRent REIT Announces Internalization of Property Management
Ottawa, Ontario (February 6, 2018) – InterRent Real Estate Investment Trust (TSX-IIP.UN) (“InterRent” or the “REIT”) announced today that it has entered into an agreement (the “Asset Purchase Agreement”) with CLV Group Inc., the REIT’s external property manager (“CLV Group” or the “Property Manager”), to internalize the REIT’s property management function (the “Internalization” or the “Transaction”). As a result of the Internalization, the property, asset and project management fees payable by the REIT under its existing property management agreement will be eliminated. The Transaction is expected to close on or about February 15, 2018, subject to the satisfaction of customary closing conditions for a transaction of this type.
“InterRent’s property management was externalized in September 2009 in conjunction with a change of control of the REIT. Having been on the Board of Trustees since the REIT was formed in 2007 and being a strong proponent of the selection of CLV Group in 2009, I am very pleased with the change that has occurred over the past eight years and the value that has been created for our unitholders over that time. CLV Group was chosen due to: 1) the REIT being familiar with its operating performance, as it had been managing the Ottawa portfolio for the REIT and that portfolio was significantly outperforming the rest of the REIT’s internally managed properties; and 2) its proven track record, expertise and reputation as being one of the best operators in the business. Since that time, the REIT has grown from 4,033 suites to over 8,600 suites, with a property value in excess of $1.5 billion and has posted industry leading growth across most operating metrics. While the external property management structure has served the REIT exceptionally well, the independent members of InterRent’s Board of Trustees believe that bringing the property management team in-house at this time will be a transformational event for the REIT. This will better align the interests of management of the REIT and positions InterRent extremely well for continued long-term success,” said Victor Stone, Chair of the Board of Trustees.
Upon closing of the Transaction, a subsidiary limited partnership of the REIT (the “Purchaser”) will purchase from the Property Manager all of the property, assets and rights of the Property Manager relating to the management of the REIT’s properties. The aggregate consideration payable to the Property Manager on closing of the Transaction will be satisfied by a combination of 3,224,516 Class B limited partnership units of the Purchaser (the “Class B LP Units”) and $7,591,000 in cash. Based on the Toronto Stock Exchange (“TSX”) 30-day volume weighted average price of the REIT’s units (the “REIT Units”) ended February 5, 2018 of approximately $9.42, the aggregate consideration payable to the Property Manager will be $37,955,000. The Class B LP Units will be exchangeable on a one-for-one basis for REIT Units and will be subject to prescribed contractual lock-up periods. The REIT Units issuable upon the exchange of the Class B LP Units represent approximately 3.8% of the issued and outstanding REIT Units (on a pre-Transaction, non-diluted basis). The REIT will also issue to the Property Manager one special voting unit of the REIT for each Class B LP Unit issued, which will entitle the Property Manager to one vote per special voting unit at meetings of the REIT unitholders.
The terms of the Transaction were negotiated and unanimously recommended for approval by a special committee of independent trustees of the REIT (the “Special Committee”), comprised of Paul Amirault, Ronald Leslie (Chair) and Victor Stone. The Special Committee has received a fairness opinion from National Bank Financial Inc. to the effect that, as of February 6, 2018, subject to the assumptions and qualifications contained in such opinion, the consideration paid by the REIT in connection with the Internalization is fair, from a financial point of view, to the REIT.
“We are pleased to be able to respond to the wishes of unitholders and the investment community for internal management and to be able to do so accretively. This is an important step in the evolution of InterRent. I fully support the decision reached by the Special Committee and the other members of the Board of Trustees to internalize the operating function at a time when appropriate economies of scale exist. Having its own operating platform will provide the REIT with many opportunities to partner with others, such as we have done with our first mixed-use development at 900 Albert Street in Ottawa, which is at the gateway to LeBreton Flats and the intersection of the North/South and East/West LRT, and create significant returns for REIT unitholders,” said Mike McGahan, Chief Executive Officer of the REIT.
Reasons for Internalization
The Special Committee considered the following non-exhaustive list of factors in deciding to recommend that the REIT proceed with the Internalization:
· The cost-effective elimination of fees payable under the existing property management agreement with the Property Manager, which were negotiated at a time when the REIT was significantly smaller and the fixed costs of management relative to the size of the REIT’s balance sheet were higher, is in the best interest of the REIT;
· A significant portion of the consideration for the Transaction is being satisfied with Class B LP Units, all of which the Property Manager has agreed to hold for specified time periods, which increases the alignment of interest between the REIT and its management team;
· The REIT will continue to benefit from the expertise, platform and industry relationships of the Property Manager’s key employees who will become employees of the REIT in connection with the Transaction;
· As the industry continues to transition to a more “service first” model, having the Property Manager’s operating platform within the REIT will provide InterRent with the ability to attract, retain and develop industry leading talent;
· The Transaction is immediately accretive to the REIT with an expected increase in AFFO per Unit exceeding 4%, based on 2018 expectations;
· The restrictive covenants contained in the Asset Purchase Agreement will benefit the REIT and the continued development of its business (see “Restrictive Covenants in favour of the REIT”); and
· The capital markets’ general preference for internally managed REITs may positively impact the trading price of the REIT Units.
Background to the Internalization
The board of trustees of the REIT (the “Board”) regularly evaluates business and strategic opportunities and alternatives to increase the value of the REIT and the REIT Units. As part of such process, the Board determined that it was appropriate to consider and evaluate the property management structure of the REIT, including the desirability of amending, replacing or terminating its property management arrangements. In June 2017, the independent members of the Board resolved to form the Special Committee to consider and evaluate strategic alternatives available to the REIT to maximize value (including maintaining the status quo), as it related to the REIT’s property management arrangements.
The Special Committee was provided with a broad mandate which included, among other things, (i) to examine, review and evaluate the merits and risks of any strategic alternatives, (ii) to retain, oversee, and obtain advice and opinions from such financial and other advisors as the Special Committee deemed necessary with respect to all aspects of any strategic alternatives, (iii) to consider and advise the Board as to whether any potential strategic alternative is in the best interests of the REIT and its unitholders and whether such strategic alternative should be pursued by the REIT and (iv) to supervise and, where appropriate, conduct negotiations on behalf of the REIT of the terms of any strategic alternative.
As part of the Special Committee’s examination, review and evaluation of strategic alternatives, the Special Committee and the Property Manager discussed the possibility of acquiring all of the property, assets and rights of the Property Manager relating to the management of the REIT’s properties. To assist with such process, the Special Committee retained National Bank Financial Inc. as its independent financial advisor and Blake, Cassels & Graydon LLP as its independent legal counsel. Following the commencement of negotiations in regard to the Internalization with the Property Manager in November, the Special Committee, taking into consideration the other alternatives reviewed as part of its process, the advice of its advisors and all other matters it considered relevant, determined that the Internalization, on the terms set forth in the Asset Purchase Agreement, will create the most value for the REIT and its unitholders.
Upon closing of the Transaction, the current employees of the Property Manager who are providing property management services for the REIT’s properties are expected to become employees of the REIT or one of its affiliates. The REIT intends to offer an aggregate of approximately $3.1 million in retention bonuses to certain individuals who will become new employees of the REIT (other than Mike McGahan). Such bonuses will be payable in deferred units of the REIT, subject to and in accordance with the terms of the REIT’s existing Deferred Unit Plan.
The REIT and the Property Manager have agreed to use their commercially reasonable efforts to cooperate for a period of 24 months following the closing of the Transaction to, among other things, ensure the orderly transition of the REIT-related property management business and to minimize any disruption to either party. During such period, the REIT has agreed to provide the Property Manager with access to the purchased assets on a cost recovery basis. The Property Manager has also agreed to allow the REIT to use the Property Manager’s property management brand without cost for a period of 24 months following closing of the Transaction.
Restrictive Covenants in favour of the REIT
The Asset Purchase Agreement contains several restrictive covenants in favour of the REIT, including:
· Lock-Up: The Class B LP Units, or the REIT Units into which they are exchangeable, issued to the Property Manager will be subject to contractual lock-up periods, with 50% being release on the third anniversary of the closing of the Transaction and an additional 25% being released on each of the fourth and fifth anniversary of the closing of the Transaction, subject to early release for a change of control of the REIT. The lock-up arrangements are intended to increase alignment between CLV Group and the REIT unitholders and, post-closing of the Transaction, CLV Group and its affiliates will hold approximately 8.8% of the fully-diluted outstanding REIT units.
· Non-Competition: From the closing of the Transaction until the earlier of (1) five years following closing of the Transaction and (2) a change of control of the REIT (the “Restricted Period”), CLV Group, its shareholder (being Michael McGahan, a trustee and the REIT’s Chief Executive Officer) and their respective affiliates (the “Restricted Parties”) will be restricted from being involved in any aspects of managing multi-family residential properties in Canada, subject to certain exceptions.
· Non-Solicitation: For five years following the closing of the Transaction, the Restricted Parties will also be restricted from soliciting, or otherwise interfering in the relations with, the REIT and its affiliates’ employees, subject to certain exceptions.
Multilateral Instrument 61-101
The Property Manager is owned and controlled by Michael McGahan, a trustee and the Chief Executive Officer of the REIT. As such, the Internalization constitutes a “related party transaction” as defined under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions (“MI 61-101”). However, the Internalization is exempt from the formal valuation and minority approval requirements of MI 61-101 because the fair market value of the Transaction will be not more than 25% of the market capitalization of the REIT. The total consideration payable at closing is $37,955,000 to CLV Group and $3,097,500 in deferred units as retention bonuses to employees being transferred to InterRent, other than Mike McGahan (which grant of Deferred Units, for greater certainty, will be calculated and matched by the REIT and vest over a period of up to 5 years in accordance with the Deferred Unit Plan). The initial consideration payable on closing is approximately $42.1 million. The total consideration, including all future vesting of deferred units, is approximately $44.2 million, representing approximately 5.8% of the REIT’s market capitalization as of February 5, 2018.
The Transaction is expected to close on or about February 15, 2018, subject to the satisfaction of customary closing conditions for a transaction of this type (including receipt of TSX approval). Closing will occur at least five business days following the date hereof, but may occur less than 21 days following the REIT’s filing of a material change report in respect of the Transaction. The REIT believes the timing for closing is reasonable in the circumstances in that it will enable the REIT and the Property Manager to transition the property management services and employees on an expedited basis and avoid any potential loss of key personnel during an extended period between announcement of the Transaction and its closing. The Transaction is not expected to materially affect control of the REIT.
The REIT has applied to the TSX for approval of the Transaction, including approval to list the REIT Units issuable upon exchange of the Class B LP Units. The closing of the Transaction and the listing of the REIT Units issuable upon exchange of the Class B LP Units will be subject to the satisfaction of the applicable requirements of the TSX.
InterRent is a growth-oriented real estate investment trust engaged in increasing unitholder value and creating a growing and sustainable distribution through the acquisition and ownership of multi-residential properties.
InterRent’s strategy is to expand its portfolio primarily within markets that have exhibited stable market vacancies, sufficient suites available to attain the critical mass necessary to implement an efficient portfolio management structure and offer opportunities for accretive acquisitions.
InterRent’s primary objective is to use the proven industry experience of the trustees, management and operational team to: (i) provide unitholders with stable and growing cash distributions from investments in a diversified portfolio of multi-residential properties; (ii) enhance the value of the assets and maximize long-term REIT Unit value through the active management of such assets; and (iii) expand the asset base and increase distributable income through accretive acquisitions.
InterRent prepares and releases unaudited quarterly and audited consolidated annual financial statements prepared in accordance with IFRS (GAAP). In this press release, as a complement to results provided in accordance with GAAP, InterRent also discloses and discusses certain non-GAAP financial measures, including AFFO. These non-GAAP measures are further defined and discussed in the MD&A dated November 14, 2017, which should be read in conjunction with this press release. Since these non-GAAP financial measures (including AFFO) are not determined by GAAP, they may not be comparable to similar measures reported by other issuers. InterRent has presented such non-GAAP measures as management believes these measures are relevant measures of the ability of InterRent to earn and distribute cash returns to its unitholders and to evaluate InterRent’s performance. These non-GAAP measures should not be construed as alternatives to net income (loss) or cash flow from operating activities determined in accordance with GAAP as an indicator of InterRent’s performance.
The comments and highlights herein should be read in conjunction with InterRent’s filings with securities regulators, including its most recently filed annual information form as well as its consolidated financial statements and management’s discussion and analysis for the same period. InterRent’s publicly filed information is located atwww.sedar.com.
This news release contains “forward-looking statements” within the meaning applicable to Canadian securities legislation. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “anticipated”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Some of the specific forward-looking statements in this news release make, but are not limited to, statements with respect to the timing and completion of the Transaction, the anticipated benefits of the Transaction, including the extent to which it will be accretive and its impact on AFFO, the impact on the trading price of the REIT Units, the ability to partner with others and the creation of significant returns for REIT unitholders, the transition of the industry in which the Company operates to a “service first” model, the ability to attract, retain and develop industry leading talent and the REIT’s strategy and objectives. The forward-looking statements included herein (including the extent to which the Transaction will be accretive and its expected impact on AFFO) are not guarantees of future performance and are based on assumptions and expectations relating to the REIT’s business and industry that management of the REIT believes to be reasonable as of the date hereof. InterRent is subject to significant risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements contained in this release, including the risk that the Transaction may not close, the failure of the REIT to realize the anticipated benefits of the Internalization and the inability of the REIT to execute on its strategy and objectives. A full description of these risk factors can be found in InterRent’s most recently publicly filed information located atwww.sedar.com, including its current annual information form and MD&A. All forward-looking statements in this news release are qualified by these cautionary statements and are made as of today. InterRent cannot assure investors that actual results will be consistent with these forward looking statements and, except as required by applicable law, InterRent assumes no obligation to update or revise the forward looking statements contained in this release to reflect actual events or new circumstances.
The TSX does not accept responsibility for the adequacy or accuracy of this release.
For further information about InterRent please contact:
Mike McGahan Brad Cutsey, CFA Curt Millar, CPA, CA
Chief Executive Officer President Chief Financial Officer
Tel: (613) 569-5699 Ext 244 Tel: (613) 569-5699 Ext 226 Tel: (613) 569-5699 Ext 233
Fax: (613) 569-5698 Fax: (613) 569-5698 Fax: (613) 569-5698