R&R REIT Announces US$35.0 Million Portfolio Acquisition

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

MISSISSAUGA, ON, May 2, 2017 /CNW/ - R&R Real Estate Investment Trust (the "REIT") (TSXV: RRR.UN) today announced that it has, through certain of its subsidiaries, entered into an agreement to purchase nine properties (the "Acquisition Properties") for an aggregate purchase price of US$35.0 million (the "Acquisition") from entities (the "Vendors") controlled by Majid Mangalji, Executive Chairman and Trustee of the REIT and the largest beneficial unitholder of the REIT (on a fully diluted basis), and Michael Klingher, President and Chief Executive Officer of the REIT.

Highlights

  • The REIT agrees to acquire a portfolio of nine economy extended-stay hotels located in the United States and comprising a total of 1,020 rooms for an aggregate purchase price of US$35.0 million

  • The Acquisition will significantly increase the number of rooms in the REIT's portfolio from 132 at one property to 1,152 across ten properties, furthering the REIT's strategy of providing investors with the opportunity to indirectly acquire and own US hotel properties while also providing exposure to the US dollar

  • The acquisition price of US$35.0 million is below the aggregate appraised value of the Acquisition Properties

  • The Acquisition is expected to be immediately accretive to the funds from operations ("FFO") and adjusted funds from operations ("AFFO") per unit of the REIT

  • As partial consideration, the Vendors will receive approximately US$9.7 million of Class B limited partnership units ("Class B LP Units") of newly-formed limited partnerships that will hold the Acquisition Properties at closing (economically equivalent to and exchangeable for units of the REIT), at a price of C$0.20 per Class B LP Unit, and attached special voting units in the REIT, which will increase the Vendors' and their affiliates' effective aggregate interest in the REIT, assuming conversion of all Class B LP Units, from approximately 69.9% up to a maximum of 83.1%.

  • The Acquisition must be approved by the affirmative vote of a majority of the minority REIT unitholders (excluding units held by Mr. Mangalji, Mr. Klingher and their respective affiliates)

  • A special committee of independent REIT trustees (the "Special Committee") was established to consider the Acquisition and received independent appraisals of the Acquisition Properties from Cushman & Wakefield, Inc. and a fairness opinion on the Acquisition from Raymond James Ltd.

  • The independent trustees of the REIT unanimously recommend that unitholders vote in favor of the Acquisition

Description of the Acquisition Properties

The Acquisition Properties consist of nine economy extended-stay hotels located in the United States that are currently owned and operated by the Vendors, comprising an aggregate of 1,020 rooms. Five of the Acquisition Properties operate under the HomeTowne Studios brand and the remaining four Acquisition Properties operate under the HomeTowne Suites brand. The following table highlights certain key characteristics of the Acquisition Properties:

Brand

Location

Year Built

Rooms

HomeTowne Studios

Louisville, KY

1996

141

HomeTowne Studios

Covington, GA

2001

139

HomeTowne Studios

Gautier, MS

1999

127

HomeTowne Suites

Bentonville, AR

2008

118

HomeTowne Studios

Alexandria, LA

2005

113

HomeTowne Studios

Gainesville, GA

1999

110

HomeTowne Suites

Montgomery, AL

1998

95

HomeTowne Suites

O'Fallon, IL

2008

89

HomeTowne Suites

Columbia, SC

1999

88

 

Following the closing of the Acquisition, the REIT's portfolio will be comprised of 10 hotels located in nine states across the United States, representing an aggregate of 1,152 rooms.

Acquisition Funding

The total cost of approximately US$35.1 million (including closing costs net of operating/capital expense credits) will be satisfied by a combination of: (i) the assumption of approximately US$15.1 million aggregate principal amount of existing mortgage debt relating to the Acquisition Properties; (ii) the issuance to the Vendors of approximately US$9.7 million of Class B LP Units, at a price of C$0.20 per Class B LP Unit, and attached special voting units in the REIT; (iii) a US$8.0 million vendor-take back (the "VTB") loan provided by the Vendors; and (iv) approximately US$2.3 million in cash. The REIT has the option to issue fewer Class B LP Units and fund up to an additional US$0.6 million in cash.

The VTB loan will have an initial two year term, with two one-year extension options. The VTB will bear interest at a rate of 5.0% for year one, 5.5% for year two and 6.0% per year thereafter.

Following closing of the Acquisition, it is expected that the REIT will have leverage of 48.9% net debt/assets (being the difference between total debt and cash, divided by the sum of the appraised value of the REIT's existing property and the acquisition value of the Acquisition Properties), lowering the REIT's weighted average cost of capital and moving the REIT closer in-line with comparable industry peers.

Acquisition Details

The Acquisition will be completed pursuant to a purchase and sale agreement among the REIT and the Vendors (the "Purchase Agreement") and will be conditional upon the satisfaction of certain conditions including lender consents, the approval of the unitholders of the REIT, and TSX Venture Exchange approval, as well as other customary conditions for such a transaction. The Purchase Agreement also contains customary provisions for transactions of this nature, including representations, warranties, covenants and indemnities of the parties. A copy of the Purchase Agreement will be filed by the REIT under its profile on www.sedar.com.

Assuming all conditions to the completion of the Acquisition are satisfied or waived, the Acquisition is expected to occur in June 2017.

An annual and special unitholder meeting (the "Meeting") will be called by the REIT to approve, among other things, matters relating to the Acquisition. As the Acquisition and VTB loan constitute "related party transactions" under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61-101"), they must be approved by a majority of the minority unitholders of the REIT (excluding units held by Mr. Mangalji, Mr. Klingher and their respective affiliates). The REIT currently expects the Meeting to be held in June, and an information circular containing additional details regarding the business of the annual and special meeting will be mailed to unitholders in advance of the Meeting.

A special committee of independent trustees consisting of Derek Dermott and Graham Blyth was established by the REIT for the purposes of considering the Acquisition and related matters. The Special Committee received independent appraisals of the Acquisition Properties from Cushman & Wakefield, Inc., which concluded that the estimated aggregate market value of the Acquisition Properties as at February 1, 2017 was US$40.7 million (or US$42.9 if considered as a portfolio of properties). The Special Committee also received an opinion from Raymond James Ltd. that the consideration to be paid by the REIT in connection with the Acquisition is fair, from a financial point of view, to unitholders of the REIT (other than Mr. Mangalji, Mr. Klingher and their respective affiliates). The Special Committee has advised the board of trustees of the REIT that the Special Committee is of the view that, based on a variety of factors, the Acquisition is in the best interests of the REIT and the Special Committee has unanimously recommended to the board that the board recommend that REIT unitholders vote in favour of the transactions. The board has, in turn, unanimously resolved (with the exception of Mr. Mangalji, who declared his interest and recused himself from voting) to recommend that REIT unitholders vote in favour of the transactions.

Advisors

Blake, Cassels & Graydon LLP and Greenberg Traurig, LLP acted as legal counsel to the REIT. Raymond James Ltd. acted as financial advisor to the Special Committee.

Forward Looking Statements

Certain statements contained in this press release constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking statements are provided for the purposes of assisting the reader in understanding the REIT's financial performance, financial position and cash flows as at and for the periods ended on certain dates and to present information about management's current expectations and plans relating to the future, and readers are cautioned such statements may not be appropriate for other purposes. Forward-looking information may relate to future results, performance, achievements, events, prospects or opportunities for the REIT or the real estate industry and may include statements regarding the completion of the Acquisition, including receipt of all necessary unitholder, regulatory and other approvals required in connection therewith. In some cases, forward-looking information can be identified by such terms such as "may", "will", "should", "occur", "expect", "plan", "intend", "estimate", "potential", "schedule", or the negative thereof or other similar expressions concerning matters are not historical facts.

Forward-looking statements necessarily involve known and unknown risks and uncertainties, that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, assumptions may not be correct and objectives, strategic goals and priorities will not be achieved. A variety of factors, many of which are beyond the REIT's control, affect the operations, performance and results of the REIT and its business, and could cause actual results to differ materially from current expectations of estimated or anticipated events or results. These factors include, but are not limited to, the risks discussed in the REIT's materials filed with Canadian securities regulatory authorities from time to time on www.sedar.com, risks related to the Acquisition, risks related to the units and risks related to the REIT and its business. The reader is cautioned to consider these and other factors, uncertainties and potential events carefully and not to put undue reliance on forward-looking statements as there can be no assurance actual results will be consistent with such forward-looking statements.

Information contained in forward-looking statements is based upon certain material assumptions that were applied in drawing a conclusion, including management's perceptions of historical trends, current conditions and expected future developments, including the closing of the Acquisition, as well as other considerations that are believed to be appropriate in the circumstances, including the following: the Canadian economy will remain stable over the next 12 months; inflation will remain relatively low; interest rates will remain stable; conditions within the real estate market, including competition for acquisitions, will be consistent with the current climate; the Canadian capital markets will provide the REIT with access to equity and/or debt at reasonable rates when required; and that the risks referenced above, collectively, will not have a material impact on the REIT. While management considers these assumptions to be reasonable based on currently available information, they may prove to be incorrect. The forward-looking statements made in this press release are dated, and relate only to events or information, as of the date of this press release. Except as specifically required by law, the REIT undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

Non-IFRS Measures

FFO and AFFO are not measures defined under IFRS as prescribed by the International Accounting Standards Board, do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to profit/loss, cash flow from operating activities or other measures of financial performance calculated in accordance with IFRS. FFO and AFFO as computed by the REIT are unlikely to be comparable to similar measures as reported by other trusts or companies in similar or different industries.

FFO assumes that the value of real estate investments does not decrease on a systematic basis over time and it adjusts for items included in net income and comprehensive income that do not necessarily provide the best indicator of operating performance, such as gains or losses on the sale of assets, provisions for impairment (and impairment reversals) of assets as well as changes in the fair value of certain equity-based financial instruments classified as financial liabilities. FFO is used by industry analysts and investors in the determination of the REIT's valuation, its ability to fund distributions and investors' investment return requirements. As a result, management believes FFO is a useful supplemental measure of its operating performance for investors.

AFFO is calculated as FFO subject to certain adjustments. AFFO is an important measure for management as a guideline through which operating and financial decisions are made and is an integral part of the investment decision for investors and potential investors.

For a reconciliation of FFO and AFFO to the most directly comparable measures calculated in accordance with IFRS, see the REIT's management's discussion and analysis for the year ended December 31, 2016, which can be found under the REIT's profile on www.sedar.com.

About R&R REIT

R&R REIT is an open-ended real estate investment trust focused on increasing unitholder value through the acquisition and ownership of hotel properties located in the United States.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE R&R Real Estate Investment Trust

For further information: please contact Bob Choo, Chief Financial Officer, R&R Real Estate Investment Trust, at 905-206-7102 or e-mail bob.choo@whg.com.


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