Partners Real Estate Investment Trust Announces Closing of Ontario Property Acquisition

BARRIE, ONTARIO--(Marketwired - April 23, 2014) - Partners Real Estate Investment Trust (TSX:PAR.UN) ("Partners" or the "REIT") is pleased to announce that it has closed its acquisition of three retail centres (the "Properties") under the terms described in the REIT's press release dated April 2, 2014. The REIT purchased three Ontario Properties which include the mixed use urban Hamilton City Centre in Hamilton, the multi-tenanted retail Crossroads Centre in London, and a multi-tenanted retail property in Kemptville. The REIT has purchased only the stabilized in-place Net Operating Income ("NOI") of the Properties.

"This acquisition is one of many of the initiatives that the REIT has undertaken in the last 60 days. We are thrilled to complete this acquisition. These assets serve to enhance our internalization objectives within the Ontario marketplace," stated Ron McCowan, Partners' interim CEO. "Ontario is a geography where Partners now boasts a strong operational infrastructure. This acquisition also greatly improves the size of our property portfolio, increasing our gross leasable area by approximately 22%. We look forward to working with Holyrood Holdings Limited as they pursue at their sole cost new leasing for the REIT which focuses on national retailers. In addition the vendor, again at their sole cost, will execute significant investments which cover the development activities and capital expenditures the Properties."

Acquisition Terms

As previously disclosed, Partners has paid Holyrood Holdings Limited (the "Vendor") an immediate consideration of approximately $90,100,000. This amount includes $83,200,000 to satisfy the purchase of the Properties, with the balance of $6,900,000 as a promissory note receivable generating annualized interest of 5.4%. This consideration has been satisfied by (i) the assumption of debt secured by the Properties, (ii) the issuance of 1,188,188 units of the REIT ("REIT Units"), issued at an effective price of $5.80 per REIT Unit, and (iii) the issuance of 4,813,517 class B units (the "Class B Units") of a limited partnership formed by the REIT for the purposes of completing the acquisition, at an effective price of $5.80 per Class B Unit. The Class B Units are exchangeable for REIT Units on a one-for-one basis and the economic equivalent of REIT Units and carry the right to vote at the REIT level. Given the effect to the issuance of the REIT Units and Class B Units, the Vendor is expected to hold approximately 18.7% of the REIT's outstanding Units, calculated on a fully diluted basis.

The Properties consist of a total of approximately 612,000 square feet of gross leasable area. The REIT has acquired 462,027 square feet of fully leased premises for the previously noted acquisition cost of $82,300,000 which is expected to generate $5.4 million in annualized NOI. The purchase price paid for the Properties relates only to fully leased units and six head leases. As a result of this transaction, Partners effective portfolio's occupancy will increase by 0.5 percentage points to 96.9%, compared to 96.4% as at December 31, 2013.

Pursuant to the transaction, Partners has entered into a development agreement with the Vendor for a term of 3 years, subject to limited extension rights. At its sole cost and expense, the Vendor will serve as the developer and is obligated to perform specific leasing, marketing, and development activities including major tenant improvement investments. This agreement is specific to detailed vacant or undeveloped space located on the Properties. Upon receipt and approval by Partners of qualified leases, the REIT has agreed to pay the Vendor (i) up to $25,000,000 (the "Contingent Deferred Payment") on a total of 149,483 square feet of gross leasable area, and (ii) an earn-out in respect of certain undeveloped space (the "Earn-Out Payments) that would result in the REIT acquiring an additional 69,000 square feet of gross leasable area over and above the 611,510 square feet already acquired.

The NOI (on a 12 month basis) generated from the qualified leases under the development agreement will be calculated using a capitalization rate of 6.6% for both the Contingent Deferred Payments and Earn-Out Payments. These payments may be satisfied by any of the following in the REIT's discretion as follows: (i) in cash, (ii) by offsetting of certain debt of the Vendor, (iii) by issuance of up to 506,634 Class B Units at an effective price of $5.95, (iv) by requiring the Vendor to provide a vendor take-back mortgage for 60% of the amount payable, or (v) a combination thereof.

Pursuant to the transaction, the REIT has entered into a head lease agreement with the Vendor in which the Vendor guarantees to make rental payments in respect of a total gross leasable area of 105,239 square feet at London Crossroads Centre and Hamilton City Centre. The majority of the replacement leases have been approved by the REIT and are executed. The Vendor has commenced with the specific improvements required under replacement tenants' leases. The term of each head lease will expire once the REIT approved replacement tenant is in occupation and paying rent.

Pursuant to the transaction, Partners has entered into a works agreement with the Vendor in which the Vendor at its sole cost and expense undertakes the repair and replacement of non-recoverable capital expenditures at London Crossroads Centre and Hamilton City Centre. Such investments are material in nature and are in addition to any expenditure related to the cost of leasing transactions and development activities.

At close the REIT assumed $55.2 million in mortgages at a weighted average interest rate of 4.8%. All assumed mortgages mature within one year of the transaction's closing. The Vendor will pay interest rate normalization adjustments of $521,000 over a one year period. The REIT anticipates that these mortgages can be renewed at a savings to the REIT.

Management expects that the acquisition of the Properties will result in $0.0142 of accretion to the REIT's 2013 AFFO per Unit, after giving effect to the issuance of all Class B Units and REIT Units. Future savings/NOI may be generated through economies of scale in terms of property management and leasing synergies.

Transaction Review Process

The transaction was reviewed and approved by the Trustees of the REIT. The review process included extensive due diligence conducted over three months by former management of the REIT and management retained on internalization as well as numerous independent consultants. The Trustees commissioned and obtained independent appraisals of the Properties prepared by a recognized national real estate appraisal firm, environmental audits prepared by independent environmental consultants and property condition reports prepared by independent structural engineers. In particular, two of the Independent Trustees, Mr. Marc Charlebois and Mr. Joseph Feldman, formed a committee for the purpose of intensively reviewing and assisting in the negotiation of the transaction.

In all of the REIT's current financial and operating circumstances, and considering the terms of the transaction, the Trustees concluded that the acquisition of the Properties was in the best interests of the REIT given:

The Trustees also appreciated that the transaction involved financial assistance to the REIT by the Vendor in the context of securing the consent of lenders. All required third party approvals were received including, without limitation, from applicable lenders. The Toronto Stock Exchange has conditionally approved the listing of the issued securities subject to customary listing conditions.

Property Descriptions

• Hamilton City Centre, a multi-tenant mixed-use centre located at the heart of Hamilton's business district. Originally built in 1990, Hamilton City Centre comprises approximately 424,800 square feet of gross leasable area. The property has been well maintained, and its more than 50 tenants include Hart Stores, Thunder Alley Entertainment, a call centre, and the City of Hamilton. Current occupancy is 75% for the property as a whole. However, the purchase price at closing reflects payment only for fully leased units of the property. There are initiatives underway to improve the property's appearance and increase occupancy.
• Crossroads Centre, a multi-building, multi-tenant retail centre located just north of Highway 401 in London, Ontario. Originally built in 1990, Crossroads Centre comprises approximately 160,000 square feet of gross leasable area. The property will be aesthetically enhanced with new facades and its tenants include Winners, Living Lighting, and OK Tire. Current occupancy is 73% for the property as a whole. The centre's gross leasable area now reflects the removal of a building, which will allow for the construction of three or four additional out-parcels. The removal of the building and aesthetic enhancements are included in the major capital project noted above, which is to be funded by the Vendor.
• A multi-tenant retail property in Kemptville, Ontario, which is approximately 55km south of Ottawa and the largest community in North Grenville. Built in 1998, the property comprises approximately 26,700 square feet of gross leasable area, and its tenants include Dollar Tree and Giant Tiger. The property is fully occupied.

The Properties have an average remaining lease maturity of 3.9 years.

Relationship between Management of the REIT and the Vendor

The REIT is aware that a number of media articles exist which erroneously attribute the ownership of the Properties to McCowan & Associates Ltd. ("McCowan"). The Vendor was the sole owner of the Properties. The sole shareholder of the Vendor, Laura Philps, is engaged in the business of healthcare facilities, commercial real estate development and ownership and has been a business colleague of McCowan for many years.

About Partners REIT

Partners REIT is a growth-oriented real estate investment trust, which currently owns (directly or indirectly) 42 retail properties, well-located in British Columbia, Alberta, Manitoba, Ontario, and Quebec, aggregating approximately 3.2 million square feet of leasable space. Partners REIT focuses on expanding and managing a portfolio of retail and mixed-use community and neighborhood shopping centres located in both primary and secondary markets across Canada.

Disclaimer

Certain statements included in this press release constitute forward-looking statements, including, but not limited to, those identified by the expressions "expect," "will" and similar expressions to the extent they relate to Partners REIT. The forward-looking statements are not historical facts but reflect Partners REIT's current expectations regarding future results or events. These forward looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the timing of the offering, success of the offering, listing of the units, use of proceeds of the Offering, access to capital, regulatory approvals, intended acquisitions and general economic and industry conditions. Although Partners REIT believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein.