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TORONTO, Sept. 18, 2017 /CNW/ – Agellan Commercial Real Estate Investment Trust (the “REIT” or “Agellan”) (TSX: ACR.UN) announced today that its board of trustees (the “Board”) has received, considered and rejected a demand from Sandpiper Group (“Sandpiper”) that the REIT undertake, among other things, a substantial reorganization of the Board, including majority control by Sandpiper’s hand-picked nominees.
Background to Dissident’s Questionable Approach
Sandpiper’s proposal was delivered via e-mail to the REIT’s Chief Executive Officer, Mr. Frank Camenzuli, on the evening of Tuesday, September 12, 2017. The proposal included an ultimatum from Sandpiper that if a response was not received from Mr. Camenzuli by 5:00 p.m. on Wednesday, September 13, 2017, Sandpiper would evaluate its options to effect change, including the threat of requisitioning a unitholder meeting. Sandpiper’s ultimatum also required the Board to be in agreement with Sandpiper’s demands by the end of the day on Friday, September 15, 2017 and for finalized documents to be negotiated and agreed to before the opening of markets on Monday, September 18, 2017.
Following receipt of the proposal, the REIT convened a special committee of the Board to determine how to respond to Sandpiper’s demands. While the REIT is committed to engaging with its unitholders and considering proposals to enhance unitholder value, the Board has determined that Sandpiper’s demands, and the unexplained urgent timing related thereto, are NOT in the best interests of the REIT.
In its demand letter, Sandpiper advised Mr. Camenzuli that it holds slightly less than 10% (the threshold at which legal disclosure is required) of the outstanding units of the REIT. Subsequently, on September 14, 2017, Sandpiper publicly announced that it had increased its ownership in the REIT to 10%.
Agellan’s Strategy on the Right Path. Dissident’s Demands Opportunistic and Redundant.
As has been previously announced, the REIT intends to continue to implement its strategy of focusing on core industrial real estate in the United States. The REIT has also previously announced that it is exploring a sale of Parkway Place. Put simply, the majority of the value enhancing proposals of Sandpiper are already being implemented by the REIT. Accordingly, the Board sees no value to unitholders in replacing four of its independent trustees who have been elected by unitholders with Sandpiper’s four hand-picked nominees, particularly by the unexplained urgent deadlines threatened by Sandpiper.
The REIT is confident in the strength and diversity of its current Board. Each of the REIT’s trustees was recently elected at the annual meeting of unitholders of the REIT held on June 12, 2017 (the “Meeting”) with each individual receiving more than 93% of the unitholder votes cast at the Meeting. In addition, increased depth was added to the Board with three new independent trustees being elected at the Meeting.
Management believes that Sandpiper’s ultimatum, rather than improving the REIT’s business and delivering value to unitholders, is an attempt to temporarily divert their attention away from operations and the achievement of the REIT’s objectives. As Sandpiper concedes in its demand letter, “any protracted negotiations or, in the worst case scenario, a proxy fight, will only mean huge costs on both sides and major distractions for the REIT, ACPI and unitholders”. While the REIT has rejected Sandpiper’s initial proposal, it remains open to considering suggestions and concerns from its unitholders, including Sandpiper, to achieve outcomes that are in the best interests of ALL unitholders of the REIT.
REIT Performance Highlights
Since the completion of its initial public offering on January 25, 2013 (the “IPO”), Agellan has successfully executed a strategy that has driven significant gains for its investors. The REIT has generated a total cumulative return to unitholders of approximately 14.1% in 2017, compared to approximately 3.0% for the S&P/TSX Capped REIT Total Return Index. The REIT has generated a total cumulative return of approximately 69.1% since the IPO, compared to a total cumulative return of approximately 19.5% for the S&P/TSX Capped REIT Total Return Index over the same time period.
In addition, the REIT is pleased to announce the following achievements:
- The REIT’s portfolio of properties has scored in the top quartile for the first half of 2017 according to a recent MSCI Benchmark Report, with the income return for the REIT’s U.S. assets exceeding the benchmark by 3.9% and the income return for the REIT’s Canadian assets exceeding the benchmark by 3.0%;
- The growth in the value of the REIT’s investment properties has increased by approximately 95% over the last 5 years;
- The REIT has reduced portfolio risk by lowering the REIT’s debt to Gross Book Value and Payout Ratio significantly since the IPO, as well as expanding the REIT’s geographic and tenant diversification through accretive acquisitions;
- Tenant survey results indicate a very high level of satisfaction with the REIT’s buildings, management and services provided;
- The REIT has had continuous success with its leasing program and as at July 1, 2017 the REIT has a portfolio occupancy rate of 95.4%.
Internalization of Asset Management
Despite the unreasonable private and public threats and ultimatums made by Sandpiper over the last several days, the REIT has remained focused on executing its strategic business initiatives. Accordingly, the REIT is pleased to announce that after completing a thorough due diligence process, it has entered into an agreement with its external asset manager, Agellan Capital Partners Inc. (the “External Manager”), to internalize the REIT’s asset management function (the “Internalization” or the “Transaction”). Closing of the Transaction is expected to occur during the fourth quarter of 2017, and is subject to satisfaction of customary closing conditions for a transaction of this type. Upon closing of the Internalization, the REIT will no longer be required to pay the External Manager an annual management fee or any applicable incentive or unit price performance fees.
The terms of the Transaction were negotiated over a number of months by a special committee comprised exclusively of independent trustees of the REIT (the “Special Committee”). Upon closing of the Transaction, a Canadian operating limited partnership of the REIT (“Management LP”) will acquire all requisite assets of the External Manager to internalize the asset management function, and all executives and other employees of the External Manager are expected to become employees of the REIT or its subsidiaries.
The aggregate consideration payable to the Manager on closing of the Transaction will be C$15.0 million, comprised of C$3.0 million in cash with the remainder to be satisfied by the issuance of 1,045,296 exchangeable Class B LP Units of Management LP (“Class B LP Units”) which would represent an approximate 3% voting interest in the REIT as at the date hereof (on a fully exchanged basis). The number of Class B LP Units to be issued was determined using the volume weighted average trading price of the units of the REIT on the TSX for the five trading day period prior to the date of the Transaction. The Class B LP Units are intended to provide the holder with substantially the same voting and economic rights as a holder of trust units of the REIT. Such Class B LP Units will be exchangeable on a one-for-one basis for trust units of the REIT and will be subject to prescribed contractual hold periods. The Transaction will not entitle the External Manager to receive any registration rights, pre-emptive rights or piggy-back rights in respect of the REIT. The External Manager will also not be entitled to any contractual nomination rights in respect of positions on the Board.
The Special Committee has received a fairness opinion from Ernst & Young LLP to the effect that, subject to the assumptions and qualifications contained in such opinion, the consideration to be paid by the REIT in connection with the Internalization is fair, from a financial point of view, to the REIT’s unitholders.
Key Reasons for Internalization
The Special Committee considered a number of factors in deciding to proceed with the Internalization, including:
- The elimination of asset management fees and any applicable incentive or unit price performance fees, which were originally 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;
- Allowing the REIT to operate under a more efficient and streamlined cost structure;
- The Transaction is expected to be immediately accretive to the REIT’s adjusted funds from operations (“AFFO”);
- The consideration for the Transaction is being satisfied primarily with exchangeable equity securities, which increases the alignment of interests between the REIT and its management team;
- The Transaction responds to the market’s general preference for internally managed REITs; and
- The Transaction will allow the REIT to seamlessly continue to benefit from the expertise, vision, platform and relationships of the management team.
Although the REIT has entered into a definitive asset purchase agreement to internalize management, there can be no assurance that all conditions to closing will ultimately be satisfied or waived.
The Exchangeable Limited Partnership Units
The Class B LP Units will carry an entitlement to distributions equal to the distributions paid on the trust units of the REIT. In order to provide the External Manager with a voting entitlement approximately equal to the trust units of the REIT, the REIT will also issue to the External Manager one special voting unit of the REIT (which are transferrable only together with the accompanying Class B LP Unit) for each Class B LP Unit issued to the External Manager. The special voting units will entitle the Manager to one vote per special voting unit at meetings of the unitholders of the REIT. The Class B LP Units, or the trust units of the REIT into which they are exchangeable, issued to the External Manager will generally be subject to a three year holding period, with one-third released after one year, one-third released after two years and one-third released after three years, subject to early release in the event of certain prescribed events, including a termination of employment of certain executives or certain “change of control” transactions affecting the REIT.
The REIT will apply to the Toronto Stock Exchange (“TSX”) for approval to list the trust units of the REIT issuable upon exchange of the Class B LP Units. Accordingly, the listing application will be subject to the satisfaction of all applicable listing requirements of the TSX.
Internal Asset Management Team
Upon closing of the Transaction, Frank Camenzuli and other personnel of the External Manager will be employed by the REIT or a subsidiary thereof. In conjunction therewith, Frank Camenzuli, among others, will enter into a non-competition and non-solicit agreement with the REIT.
Multilateral Instrument 61-101
The Internalization constitutes a “related party transaction” under Multilateral Instrument 61-101 â Protection of Minority Security Holdings in Special Transactions (“MI 61-101”). However, the Internalization is not subject to the formal valuation and minority approval requirements of MI 61-101 as the fair market value of the Transaction will be not more than 25% of the REIT’s market capitalization.
Agellan has retained Laurel Hill Advisory Group (“Laurel Hill”) as its strategic advisor. Unitholders may contact Laurel Hill toll free at 1-877-452-7184 (416-304-0211 collect outside North America), or by email at firstname.lastname@example.org.
This news release contains forward-looking information within the meaning of applicable securities legislation. Forward-looking information can be identified by words or expressions including, but not limited to, “plans”, “expects”, “scheduled”, “estimates”, “intends”, “anticipates”, “predicts”, “projects”, “believes”, or variations of such words and phrases or statements to the effect that certain actions, events or results “may”, “will”, “could”, “would”, “should”, “might”, “occur”, “be achieved” or “continue” or similar expressions. Forward-looking information is necessarily based on a number of estimates and assumptions that are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond the REIT’s control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. As such, management can give no assurance that actual results will be consistent with the forward-looking information. While such assumptions are considered reasonable by management of the REIT based on the information currently available, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking information based on those assumptions could be incorrect. These risks and uncertainties include, but are not limited to: not closing the Transaction; the REIT’s future growth potential; results of operations; future prospects for additional investment opportunities in Canada and the U.S., including access to debt and equity capital at acceptable costs, the ability to obtain necessary approvals and to minimize any unexpected costs or liabilities, environmental or otherwise, relating to any acquisitions or dispositions; demographic and industry trends remaining unchanged, including occupancy levels, lease renewals, the exercise of any early termination rights, rental increases and retailer competition; future levels of the REIT’s indebtedness remaining at acceptable levels, including its credit rating; tax laws as currently in effect remaining unchanged, including applicable specified investment flow-through rules; and current economic conditions remaining unchanged, including interest rates and applicable foreign exchange rates. Readers, therefore, should not place undue reliance on any such forward-looking statements, as forward-looking information involves significant risks and uncertainties and should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not the times at or by which such performance or results will be achieved. All forward-looking information in this news release speaks only as of the date of this news release. The REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by applicable securities laws. All forward-looking statements in this news release are qualified by these cautionary statements. Additional information about these assumptions and risks and uncertainties is contained in the REIT’s filings with securities regulators, including its current annual information form and MD&A.
Non-IFRS Supplemental Measures
Certain terms used in this news release are not recognized under International Financial Reporting Standards (“IFRS”) and therefore these terms should not be construed as alternatives to IFRS measures, such as net income or cash flow from operating activities nor are these terms necessarily comparable to similar measures presented by other reporting issuers. These terms are used by management to measure, compare and explain the operating results and financial performance of the REIT. Management believes that these terms are relevant measures in comparing the REIT’s performance to industry data and the REIT’s ability to earn and distribute cash to the REIT’s unitholders. These non-IFRS measures, including AFFO, Payout Ratio and Gross Book Value are defined, and AFFO is reconciled to net income, in the REIT’s management’s discussion and analysis for the three and six month periods ended June 30, 2017, which should be read in conjunction with this news release.
About Agellan Commercial Real Estate Investment Trust
The REIT is an unincorporated, open-ended real estate investment trust established pursuant to a declaration of trust under the laws of the Province of Ontario. The REIT has been created for the purpose of acquiring and owning industrial, office and retail properties in select target markets in the United States and Canada.
The REIT’s 44 properties contain 7.0 million square feet of gross leasable area, with the REIT’s ownership interest at 6.7 million square feet. The properties are located in major urban markets in the United States and Canada.
SOURCE Agellan Commercial Real Estate Investment Trust
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