Nexus Real Estate Investment Trust
TSX VENTURE : NXR.UN

Nexus Real Estate Investment Trust

June 05, 2017 15:56 ET

Nexus REIT Announces $147 Million Strategic Acquisition, $55 Million Bought Deal Equity Offering and $15 Million Private Placement

TORONTO, ONTARIO and MONTREAL, QUEBEC--(Marketwired - June 5, 2017) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES

Nexus Real Estate Investment Trust (TSX VENTURE:NXR.UN) ("Nexus" or the "REIT") announced today that it has waived diligence and certain other conditions in its agreements to acquire a portfolio of assets located throughout the Greater Montreal Area ("GMA"), the Greater Quebec City Area ("GQCA"), and New Brunswick (the "Sandalwood Portfolio") from vending entities (the "Sandalwood Sellers") associated with and/or related to Sandalwood Management Inc. ("Sandalwood"), a private real estate firm dually headquartered in Austin, Texas and Montreal, Quebec. The acquisition will be partially financed by (i) a $55 million bought deal equity financing, and (ii) a $15 million private placement with RFA Capital Partners Inc. ("RFA Capital").

Sandalwood Acquisition

Nexus has waived diligence and certain other conditions in agreements in respect of 26 properties, pursuant to which the REIT will acquire a 100% interest in 2 properties and a 50% interest in 24 properties in the Sandalwood Portfolio comprising a total of 1,531,588 sq. ft. of gross leasable area (at Nexus' ownership interests) for a purchase price of approximately $147 million (the "Purchase Price"), representing a blended going-in capitalization rate of approximately 7.3%. Nexus will provide asset management services for the Sandalwood Portfolio and the REIT will be paid an asset management fee of 50 bps on the gross book value of the Sandalwood Sellers' 50% retained interest in the co-owned properties. Property management of the assets will continue to be performed by Sandalwood, for as long as the Sandalwood Sellers are a 50% owner in the portfolio. The acquisition is expected to close on or around July 4, 2017.

Key Highlights of the Sandalwood Acquisition

  • Ownership interests in a portfolio of 25 retail, office and industrial properties in Quebec and 1 office property in New Brunswick acquired through Sandalwood, a reputable North American real estate owner and operator
    • Adds 1.5 million sq. ft. of GLA (at Nexus' ownership interests)
    • Provides direct access to acquire the 1 million sq. ft. of GLA retained by the Sandalwood Sellers, pursuant to a right of first offer ("ROFO") granted by the Sandalwood Sellers
    • Nexus to receive a fee for asset management services provided in respect of the Sandalwood Sellers' retained interest in the Sandalwood Portfolio
  • Significantly enhances Nexus' position as a leading diversified REIT
    • 78% increase in owned GLA (to 3.5 million sq. ft.)
    • ~50% increase in gross book value (to ~$450 million)
    • Increased presence in the stable GMA and GQCA markets; complementary to existing Quebec assets
  • Attractive valuation metrics
    • The REIT's proportionate interest in the Sandalwood Portfolio is being purchased at an attractive blended going-in cap rate of 7.3%
  • Immediate accretion of 4-5% to adjusted funds from Operations (AFFO) per unit;
  • Strong tenant roster with many investment grade credit-rated tenants; enhances cash flow quality
    • Includes large national tenants such as Canadian Tire, Metro, Dollarama, Provigo, Staples, IBM, Xerox, BMO and National Bank
  • Cash flow growth opportunities through contractual rental increases, near-term opportunities to increase occupancy, and the addition of complementary retail pads
  • Partnership with Sandalwood provides access to a proprietary pipeline of potential future acquisitions (above and beyond the ROFO)

Commenting on the acquisition, Kelly Hanczyk, Co-CEO of Nexus, added: "This acquisition further highlights the deep relationships our major unitholder, RFA Capital, has in the Canadian market place. This proprietary, accretive transaction was sourced through our relationship with RFA Capital and demonstrates their commitment to playing an active role in the evolution of Nexus. This acquisition enhances the overall quality of our portfolio and takes us to over $200 million in market capitalization. The properties we are acquiring are well located, with strong anchor tenants and we believe this transaction lays the foundation for our future growth strategy and brings us one step closer to becoming the next blue-chip quality diversified Canadian REIT. We look forward to integrating these assets and building upon the excellent work Sandalwood has done in creating, growing and managing this portfolio."

The Purchase Price will be satisfied through a combination of the net proceeds of the $55 million bought deal financing, proceeds from the $15 million RFA Capital private placement, a $2 million VTB of REIT units issued to the Sandalwood Sellers as purchase consideration, assumed debt of approximately $75.7 million, and new debt to be placed on the New Brunswick property.

Impact of the Sandalwood Portfolio to Current Portfolio

Following the completion of the Sandalwood Portfolio, the REIT will own a portfolio of 62 properties totaling 3.5 million sq. ft. of total GLA.

Metric Nexus (Current) Sandalwood Portfolio Nexus (Pro Forma)
Number of Properties 36 26 62
Gross Leasable Area (Millions Sq. Ft.) 2.0 1.5 3.5 (4.6 managed )
Occupancy * 98.3 % 90.7 % 95.0 %
* 2045 Rue Stanley not included (undergoing redevelopment)

Pro Forma Geographic Mix (NOI): http://media3.marketwire.com/docs/1096571_fig1.jpg

Pro Forma Asset Class Mix (NOI): http://media3.marketwire.com/docs/1096571_fig2.jpg

Description of the Sandalwood Portfolio

The Sandalwood Portfolio consists of 26 properties (17 retail, 8 class I office and 1 industrial) comprising an aggregate gross leasable area of approximately 2.5 million sq. ft. (1.5 million sq. ft. at Nexus' ownership interests) located in attractive markets within Quebec and New Brunswick. The Sandalwood Sellers will retain a 50% interest in 24 properties and will continue to provide property management services. Established in 1985, and dually headquartered in Austin, Texas and Montreal, Quebec, Sandalwood has an experienced team of professionals that owns and manages more than 80 properties across North America, with holdings of 6 million square feet of retail and office space and more than 6,000 multi-family residential units.

The following table highlights certain information about the Sandalwood Portfolio:

Property City Nexus Ownership GLA
(Sq. Ft.)
GLA
(Sq. Ft.)
At REIT Ownership
Asset
Class
Year Built / Renovated Major Tenant(s) Credit Rating*
LE Centre de Victoriaville Greater Quebec City Area 100.0 % 375,788 375,788 Retail 1975/2011 Canadian Tire BBB+
Place 400 St. John, NB 100.0 % 159,927 159,927 Office 1977 IBM A+
Les Halles d'Anjou Greater Montreal Area 50.0 % 105,397 52,699 Retail 1981/2015 National Bank A
Place L'Ormière Greater Quebec City Area 50.0 % 114,396 57,198 Retail 1972/1995 National Bank A
Place Liray Greater Quebec City Area 50.0 % 44,619 22,310 Retail 1967/1986 Metro BBB
LE Centre Nicolet Greater Montreal Area 50.0 % 88,383 44,192 Retail 1979/2011 Canadian Tire BBB+
Place Sorel Greater Montreal Area 50.0 % 116,348 58,174 Retail 1968/2001 Metro BBB
LE Centre Sherbrooke Greater Montreal Area 50.0 % 170,953 85,477 Retail 1966/2011 Metro BBB
Place Orleans Greater Quebec City Area 50.0 % 32,412 16,206 Retail 1969/2011 Dollarama BBB
Galeries Orford Greater Montreal Area 50.0 % 133,720 66,860 Retail 1978/1987 Staples BBB-
Galeries de L'Érable Greater Quebec City Area 50.0 % 99,611 49,806 Retail 1980/2003 IGA / Sobeys BB+
Place Mont-Marie Greater Quebec City Area 50.0 % 43,276 21,638 Retail 1970/2011 Provigo BBB
LE Centre Ste-Anne Greater Quebec City Area 50.0 % 88,625 44,313 Retail 1977/2011 Metro BBB
Place de la Côte Joyeuse Greater Quebec City Area 50.0 % 64,461 32,231 Retail 1979/1995 Metro BBB
LE Centre la Pocatière Greater Quebec City Area 50.0 % 208,800 104,400 Retail 1976/2003 Walmart AA
LE Centre Forestville Forestville, QC 50.0 % 55,962 27,981 Retail 1981 Provigo BBB
Les Galeries Taschereau Greater Montreal Area 50.0 % 213,982 106,991 Retail 1974/2002 Value Village n/a
LE Centre Brossard Greater Montreal Area 50.0 % 43,350 21,675 Retail 1987 BMO A+
329 de la Commune Greater Montreal Area 50.0 % 21,126 10,563 Class I Office 1873/1984 N/A N/A
353 St. Nicolas Greater Montreal Area 50.0 % 35,632 17,816 Class I Office 1840/2004 N/A N/A
410 St. Nicolas Greater Montreal Area 50.0 % 154,932 77,466 Class I Office 1902/2004 N/A N/A
360 Notre Dame Greater Montreal Area 50.0 % 29,900 14,950 Class I Office 1875/1995 N/A N/A
63 des Brésoles Greater Montreal Area 50.0 % 39,678 19,839 Class I Office 1873/1990 Expedia N/A
321 de la Commune Greater Montreal Area 50.0 % 11,502 5,751 Class I Office 1854/1984 N/A N/A
127, 137 & 145 St. Pierre Greater Montreal Area 50.0 % 33,678 16,839 Class I Office 1871/1984 N/A N/A
425 Rue Guy Greater Montreal Area 50.0 % 40,968 20,484 Industrial 1930/1994 N/A N/A
Total 2,527,426 1,531,574
*Source: S&P Global Ratings and DBRS Limited

The Sandalwood Sellers agreed to enter into head leases on five of the fifteen GMA assets representing 17,697 sq. ft. and ~4.6% of acquired NOI ($511,275), at a weighted average gross rental rate of $28.88 per sq. ft. The term of the head leases will be two years commencing on closing, with the Sandalwood Sellers to pay for any leasing costs to replace head leases with permanent tenant leases. As of the date of this announcement, 9,307 sq. ft. (53%) of the head lease space has been leased or is the subject of late stage leasing negotiations at rental rates equal to or greater than head lease rates.

Commitment to Previously Stated Asset Mix

Nexus' growth strategy will continue to be primarily focused on industrial properties. The Sandalwood Portfolio was an off-market opportunity and gives the REIT size and scale in some of its pre-existing geographic markets. While the Sandalwood Portfolio increases the overall retail exposure to approximately 26%, the REIT's management team remains committed to the industrial sector with 51% of the REIT's pro-forma net operating income being derived from industrial assets. Going forward, industrial will continue to be the dominant asset class in the portfolio.

Kelly Hanczyk, Co-CEO of Nexus, stated "Our portfolio composition will allow us to be defensive in nature by continuing to pursue industrial assets with long-term leases and minimal capital expenditure requirements. We will opportunistically target office properties that have strong urban locations and that provide long-term upside potential for the REIT. Within the retail portfolio, the REIT will continue to target urban based, grocery-anchored properties that primarily consist of necessity-based retailers."

$55 Million Bought Deal Financing and $15 Million Private Placement

The REIT also announced today that it has entered into an agreement to sell to a syndicate of underwriters co-led by Desjardins Securities Inc. and National Bank Financial Inc., on a bought deal basis, 26,200,000 Units of the REIT (the "Units") at a price of $2.10 per Unit (the "Offering Price") for gross proceeds to the REIT of approximately $55 million (the "Public Offering"). The REIT has granted the underwriters an option (the "Over-Allotment Option"), exercisable for a period of 30 days following the closing of the Public Offering, to purchase up to an additional 3,930,000 Units to cover over-allotments, if any.

Concurrent with the Public Offering, RFA Capital, a leading, Canadian real estate investment and asset management firm and the largest unitholder of the REIT, will maintain its existing pro-rata ownership in the REIT and will acquire 7,150,000 Units at the Offering Price for gross proceeds of approximately $15 million (the "Private Placement"), representing 21.4% of the aggregate gross proceeds of the Public Offering and Private Placement. It is the long-term intention of RFA Capital to maintain a meaningful equity ownership interest in the REIT.

The REIT intends to use the proceeds from the Public Offering and the Private Placement to partially fund the acquisition of the Sandalwood Portfolio and for general trust purposes.

The Units forming part of the Public Offering will be offered in Canada pursuant to a short form prospectus to be filed with the securities commissions and other similar regulatory authorities in each of the provinces of Canada, pursuant to National Instrument 44-101 - Short Form Prospectus Distributions. The Public Offering and the Private Placement are subject to the receipt of all necessary approvals, including the approval of the TSX Venture Exchange. Closing of the Public Offering and the Private Placement are expected to take place on or about June 30, 2017.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The Units have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.

Debt

Pursuant the terms of the purchase and sale agreements, Sandalwood Sellers will buy down the interest rates on debt outstanding on the Sandalwood Portfolio to 3.5%, consistent with current interest rates for debt with similar terms to maturity. The current weighted average term to maturity of the debt to be assumed is 2.4 years.

About Nexus Real Estate Investment Trust

Nexus is a growth oriented real estate investment trust focused on increasing unitholder value through the acquisition, ownership and management of industrial, office and retail properties located in primary and secondary markets in North America. The REIT currently owns a portfolio of 36 properties comprising approximately 2.0 million square feet of rentable area. Nexus REIT has approximately 53,451,275 units issued and outstanding. Additionally, there are approximately 6,034,565 Class B LP units of subsidiary limited partnerships of Nexus REIT issued and outstanding.

Non-IFRS Financial measures

This press release contains certain non-IFRS financial measures including adjusted funds from operations ("AFFO"), and related amounts to measure, compare and explain the operating results and financial performance of the REIT. These measures are commonly used by entities in the real estate industry as useful metrics for measuring performance. However, they do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other publicly traded entities. These measures should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS.

Forward-Looking Statements

Certain information in this press release contains forward-looking information within the meaning of applicable securities laws (also known as forward-looking statements) which reflect the REIT's current expectations and projections about future results, including statements made or implied relating to the REIT's objectives, strategies to achieve those objectives, the REIT's beliefs, plans, estimates, projections and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. Forward looking statements generally can be identified by words such as "outlook", "objective", "may", "will", "expect", "intend", "estimate", "anticipate", "believe", "should", "plans", "project", "budget" or "continue" or similar expressions suggesting future outcomes or events. Such forward looking statements reflect the REIT's current beliefs and are based on information currently available to management at the time such statements are made.

Examples of such statements in this press release include, but are not limited to, statements with respect to: the closing of the Offering and the expected closing date thereof; the REIT's pursuit of acquisition, development and investment opportunities; and the expected timing for the closing of the Sandalwood Portfolio acquisition. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release. Such forward-looking statements are based on a number of assumptions that may prove to be incorrect, including, but not limited to: the REIT's and each property's future growth potential, results of operations, future prospects and opportunities, the demographic and industry trends remaining unchanged, no change in legislative or regulatory matters, future levels of indebtedness, the tax laws as currently in effect remaining unchanged, the continual availability of capital, the current economic conditions remaining unchanged, continued positive net absorption and declining vacancy rates in the markets in which the REIT's properties are located, and, with respect to the Sandalwood Portfolio acquisition, reasonable assumptions concerning future tenancy, market rent rates, tenant improvements, leasing commissions, downtime, and costs of materials. While the REIT anticipates that subsequent events and developments may cause its views to change, the REIT specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the REIT's views as of any date subsequent to the date of this press release.

Although the REIT has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The factors identified above are not intended to represent a complete list of the factors that could affect the REIT. Additional factors are noted under "Financial Instruments and Risks and Uncertainties" in the management's discussion and analysis of the REIT for the year ended December 31, 2016 and the three months ended March 31, 2017.

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.

Contact Information

  • Kelly C. Hanczyk
    Co-CEO
    (416) 906-2379

    Jean Teasdale
    Co-CEO
    (514) 840-9339

    Rob Chiasson
    CFO
    (403) 817-9496