Calloway Real Estate Investment Trust Releases First Quarter 2015 Results

TORONTO, ONTARIO–(Marketwired – May 6, 2015) – Calloway Real Estate Investment Trust (TSX:CWT.UN) is pleased to report positive results for the first quarter ended March 31, 2015.

Highlights for the quarter:

• Funds from operations (“FFO”)⁽¹⁾ increased by 7.2% to $71.1 million and 5.5% to $0.517 on a per Unit basis compared to the same period in 2014
• Maintained high level occupancy of 98.6%
• Issued $160.0 million of 3.556% Series N senior unsecured debentures due on February 6, 2025
• Redeemed $150.0 million aggregate principal amount of 5.37% Series B senior unsecured debentures
• Completed $189.0 million of development financing for the VMC, of which the Trust’s share is 50%, at a fixed effective interest rate of 2.88% maturing on January 16, 2020
• Obtained eight new mortgages totalling $173.5 million with an average term of 10.0 years and a weighted average interest rate of 3.13%, and repaid five matured mortgages of $80.4 million with a weighted average interest rate of 5.81%
• Subsequent to the end of the quarter, the Trust announced a $1.16 billion transformative acquisition involving a very significant portfolio of real estate and the SmartCentres’ platform (see the “Proposed Transaction” below)

Huw Thomas, President & CEO of Calloway Real Estate Investment Trust (the “Trust”), said, “I am pleased with our positive first quarter results despite challenging market conditions for a number of our retail tenants, which had a modest impact on our occupancy. Our portfolio of 121 mostly Walmart-anchored retail centres continues to deliver reliable performance and steady growth. We have continued to grow our portfolio through development and modest acquisitions. With respect to our emerging portfolio of growth initiatives, both the Montreal Premium Outlets and the Toronto Premium Outlets continue to exceed our expectations in terms of performance, which reflects our commitment to look for various avenues of growth and we continue to look for further sites to add to the portfolio. For the most significant longer term opportunity, construction is progressing well on the first tower in the VMC and we are now turning our attention to the next possible development on the site. As to the Proposed Transaction announced on April 16, I am extremely pleased at the very positive market reaction and excited about the multitude of growth opportunities it can deliver”, added Thomas.

The following table summarizes the Trust’s portfolio information:

^* Excluded from office properties is Ottawa (Laurentian Place) which is a mixed use centre that includes a 100,000 square feet office complex (50% is Calloway’s share).

Developments completed during the quarter are as follows:

Quarterly Results

The Trust acquired an income property totalling 104,909 square feet. The total purchase price of this acquisition was $25.3 million, which included $18.7 million paid in cash, the assumption of a ground lease accounted for as a finance lease obligation with a net present value of $6.4 million, adjusted for costs of acquisition and other working capital amounts.

The Trust issued $160.0 million (net proceeds including issuance costs – $158.8 million) of 3.556% Series N senior unsecured debentures due on February 6, 2025, with semi-annual payments due on February 6 and August 6 each year. The proceeds were used to redeem the outstanding principal on the 5.37% Series B senior unsecured debentures totalling $150.0 million.

The Trust redeemed $150.0 million aggregate principal amount of 5.37% Series B senior unsecured debentures. In addition to paying accrued interest of $3.3 million, the Trust paid a yield maintenance fee of $10.8 million in connection with the redemption of the 5.37% Series B senior unsecured debentures and wrote off unamortized financing costs of $0.2 million.

On January 19 2015, the Trust completed development financing for the first phase of VMC of approximately $189.0 million, of which the Trust’s share is 50%, which bears an interest rate of banker’s acceptance rates plus 1.40%, is secured by a first charge over the property and matures on January 16, 2019. On February 27, 2015, the Trust entered into an agreement to fix the banker’s acceptance rate at 1.48%, which resulted in a fixed effective interest rate of 2.88% and extended the loan maturity date to January 16, 2020.

The Trust obtained eight new mortgages totalling $173.5 million with an average term of 10.0 years and a weighted average interest rate of 3.13%. The Trust also repaid five matured mortgages of $80.4 million with a weighted average interest rate of 5.81%.

The following table summarizes the Trust’s key financial highlights for the quarters ended March 31⁽²⁾:

Excluding the effect of adjustments, for the three months ended March 31, 2015, FFO increased by 7.2% to $71.1 million and by 5.5% to $0.517 on a per Unit basis compared to the same quarter of 2014. In comparison to the same period in 2014, FFO increased by $4.7 million primarily due to an increase in NOI net of tenant incentive amortization of $1.7 million, a decrease in interest expense net of yield maintenance on redemption of unsecured debentures and related write-off of unamortized financing costs of $3.3 million, an increase in interest income of $0.1 million, and an increase in indirect interest in respect of development portion of investment in associates of $0.3 million, offset by an increase in general and administrative expenses of $0.5 million.

The Trust’s debt to gross book value was 50.9% at March 31, 2015 (December 31, 2014 – 50.5%), which is below the Trust’s target range, and the debt to aggregate assets ratio was 43.1% (December 31, 2014 – 42.8%). The marginal increases in the debt to gross book value and debt to aggregate asset ratios are primarily due to the increase in secured debt net of repayments of $80.7 million. In addition, maturing mortgages for 2015 and into 2016 continue to present significant potential FFO benefits when refinanced due to the substantial rate differential between maturing and current available rates.

The high occupancy level of 98.6%, as well as the Trust’s acquisition and development program, generated rental revenue of $159.3 million during the quarter. NOI of $101.7 million increased by $1.5 million compared to the same period in 2014, including a 1.1% or $1.0 million increase on a same properties basis, which is primarily due to net lease-up of vacant space, rent increases in renewing tenants and step-ups in existing leases offset by higher bad debt expense.

The Proposed Transaction

Subsequent to quarter end, on April 16, 2015, the Trust announced the proposed acquisition of the SmartCentres platform from Mitchell Goldhar as part of a $1.16 billion transformational transaction that will make the Trust a fully integrated real estate developer and operator by adding SmartCentres’ platform of development, leasing, planning, engineering, architecture, and construction capabilities (the “Platform”). The transaction also includes interests in a $1.1 billion portfolio of 24 properties located principally in Ontario and Quebec, including 20 open format Walmart Supercentre anchored or shadow-anchored shopping centres owned by Mitchell Goldhar and joint venture partners, principally Wal-Mart Canada Realty Inc., (the “Properties”), collectively with the Platform (the “Proposed Transaction”). On completion of the Proposed Transaction, the Trust intends to change its operating name to SmartREIT to reflect its enhanced capabilities and the considerable brand recognition of SmartCentres and its iconic trademark Penguins.

SmartCentres is Canada’s largest developer of retail real estate and the platform that the Trust will acquire has developed a network of over 50 million square feet of retail space over the last 20 years, including more than 170 Walmart stores. It is currently providing its development, leasing and other property services to the Trust and other shopping centre clients.

More recently, SmartCentres has been increasing its focus on mixed use development through its SmartUrban brand. While after the Proposed Transaction the Trust will continue to own and operate a large portfolio of open format shopping centres, in addition, the Trust can now pursue new opportunities to develop and intensify various sites as well as continue the development of major opportunities such as its 50% interest in the VMC project as part of approximately 7 million square feet (net of JV partners’ interests) of potential mixed use space already owned by Calloway.

Readers are encouraged to visit both the Trust’s website at www.callowayreit.com and Sedar (www.sedar.com) for further details and supplemental information pertaining to the Proposed Transaction. Among other benefits, the Proposed Transaction:

• Provides the Trust with a large, high quality real estate portfolio – Interests in 24 properties, including 22 shopping centres and two development properties. Of the shopping centres, 20 are anchored or shadow-anchored by Walmart, together with a mix of high quality national tenants consistent with Calloway’s existing tenant mix.

• Creates a fully integrated retail real estate platform – Allowing the Trust to integrate all aspects of real estate development, leasing and operations into one business by acquiring the SmartCentres’ Platform of intellectual property, contracts, and development and leasing expertise for $55 million. The Proposed Transaction will also enhance the Trust’s existing strategic relationship with Walmart Canada, building upon the 20 year relationship between Walmart Canada and SmartCentres.

• Enhances growth-oriented opportunities – The Properties include retail development potential of approximately 1.9 million square feet of gross leasable area, and internal capabilities acquired through the Platform that will allow the Trust to pursue a range of opportunities including greenfield developments and site intensification.

• Results in an accretive transaction – The Proposed Transaction is expected to be accretive to FFO per unit and AFFO per unit excluding one-time transaction and integration costs.

• Provides the Trust with in place requisite funding – Arrangements are in place to fund the Proposed Transaction through a combination of assumed debt, the issuance of Class B LP units to SmartCentres and associated vendors, a $230.0 million recently completed bought-deal subscription receipt financing, cash on hand and by drawing on existing credit facilities.

• Permits the Trust to propose a new name for Calloway – To reflect its enhanced capabilities and the considerable brand recognition of SmartCentres and its trademark Penguins, the Trust intends to change its operating name to SmartREIT and its ticker symbol to SRU.UN.

Following closing, on a pro forma basis, the Trust’s portfolio will include 107 Walmart anchored or shadow anchored locations with 93 sites owned, representing 13.1 million square feet, further enhancing Calloway’s position as Walmart Canada’s most significant landlord.

The Properties, at Calloway’s share collectively, will add 3.6 million square feet of leased retail area to its current 27.3 million square feet of largely open format shopping centre space, are 99.7% occupied, and have a weighted average lease term to maturity of 12.6 years. A further 1.9 million square feet is expected to be developed over time, 1.6 million square feet through on-balance sheet development and just under 0.3 million square feet through earnouts.

The Proposed Transaction will bring the Trust’s total assets to in excess of $8.3 billion, representing approximately 31 million square feet of retail area, and land on which 4.6 million square feet of retail area is proposed to be developed, along with the existing land for additional mixed use density already noted.

Following closing of the Proposed Transaction, the Trust plans to implement a new leadership structure reflecting the organization’s enhanced capabilities and integrated nature. Huw Thomas will continue to lead the REIT as CEO. Peter Forde, currently Chief Operating Officer of SmartCentres, and Mauro Pambianchi, currently Chief Development Officer of SmartCentres, will be joining the Trust’s existing senior executive team of Peter Sweeney as CFO and Rudy Gobin as EVP Asset Management, thus creating a very experienced and skilled executive team. In addition, the Trust will continue to benefit from Mitchell Goldhar’s unparalleled real estate and business knowledge as the new Chairman of the Trust’s Board of Trustees, its largest unitholder and a trusted advisor, particularly on mixed use development.

The vote on the Proposed Transaction is expected to take place at the Trust’s annual and special meeting of Unitholders on May 26, 2015. If approved, the Proposed Transaction is expected to close by the end of May, 2015. The Proposed Transaction also remains subject to TSX approval and Competition Act approval, among other customary closing requirements. There can be no assurance that regulatory approval will be obtained, closing conditions will be met or that the Proposed Transaction or a similar transaction will be consummated.

The non-IFRS measures used in this Press Release, including AFFO, FFO, NOI, debt to aggregate assets, debt to gross book value, payout ratio and interest coverage ratio do not have any standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and are therefore unlikely to be comparable to similar measures presented by other issuers. These non-IFRS measures are more fully defined and discussed in the management discussion and analysis of the Trust for the three months ended March 31, 2015, available on Sedar at www.sedar.com.

Full reports of the financial results of the Trust for the year ended December 31, 2014 are outlined in the audited financial statements and the related management discussion and analysis of the Trust, as well as the Trust’s Annual Information form, which are all available on Sedar at www.sedar.com. In addition, supplemental information is available on the Trust’s website at www.callowayreit.com.

The Trust will hold a conference call on Thursday May 7, 2015 at 9:00 a.m. (ET). Participating on the call will be members of Calloway’s senior management.

Investors are invited to access the call by dialing 1-800-505-9568. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available Thursday May 7, 2015 beginning at 12:00 p.m. (ET) through to 12:00 p.m. (ET) on Thursday May 14, 2015. To access the recording, please call 1-888-203-1112 and enter the Conference ID 7189262#.

Certain statements in this Press Release are “forward-looking statements” that reflect management’s expectations regarding the Trust’s future growth, results of operations, performance and business prospects and opportunities as outlined under the headings “Business Overview and Strategic Direction” and “Outlook”. More specifically, certain statements contained in this Press Release, including statements related to the Trust’s maintenance of productive capacity, estimated future development plans and costs, view of term mortgage renewals including rates and upfinancing amounts, timing of future payments of obligations, intentions to secure additional financing and potential financing sources, and vacancy and leasing assumptions, and statements that contain words such as “could”, “should”, “can”, “anticipate”, “expect”, “believe”, “will”, “may” and similar expressions and statements relating to matters that are not historical facts, constitute “forward-looking statements”. These forward-looking statements are presented for the purpose of assisting the Trust’s Unitholders and financial analysts in understanding the Trust’s operating environment, and may not be appropriate for other purposes. Such forward-looking statements reflect management’s current beliefs and are based on information currently available to management. However, such forward-looking statements involve significant risks and uncertainties, including those discussed under the heading “Risks and Uncertainties” and elsewhere in the Trust’s Management’s Discussion & Analysis for the year ended December 31, 2014 and under the heading “Risk Factors” in its Annual Information Form for the year ended December 31, 2014. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Although the forward-looking statements contained in this Press Release are based on what management believes to be reasonable assumptions, the Trust cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. These forward-looking statements are made as at the date of this Press Release and the Trust assumes no obligation to update or revise them to reflect new events or circumstances unless otherwise required by applicable securities legislation.

The Toronto Stock Exchange neither approves nor disapproves of the contents of this Press Release.