SOURCE: Timbercreek Mortgage Investment Corporation

Timbercreek Mortgage Investment Corporation logo

SOURCE: Timbercreek Senior Mortgage Investment Corporation

Timbercreek Senior Mortgage Investment Corporation logo

May 06, 2016 07:45 ET

Timbercreek MIC and Timbercreek Senior MIC Announce Merger

TORONTO, ON--(Marketwired - May 06, 2016) -

  • Creating a leading non-bank commercial real estate lender and Canada's largest publicly traded mortgage investment corporation
  • $350 million revolving credit facility established for the merged entity to facilitate strong risk-adjusted returns for shareholders

Toronto Stock Exchange: TMC and MTG

Timbercreek Mortgage Investment Corporation (TSX: TMC) ("TMIC") and Timbercreek Senior Mortgage Investment Corporation (TSX: MTG) ("TSMIC") announced they have entered into an arrangement agreement (the "Arrangement Agreement") to combine and create a leading non-bank commercial real estate lender with a book value of approximately $650 million, to be named Timbercreek Financial Corp. ("Timbercreek Financial").

In addition, TMIC and TSMIC have also executed an amended and restated credit agreement for a $350 million revolving credit facility with a syndicate of lenders with The Toronto-Dominion Bank as sole lead arranger, sole book-runner and administration agent (the "New Credit Agreement"). The New Credit Agreement will take effect immediately after the effective time of the Arrangement, and upon satisfaction of the conditions precedent set forth in the New Credit Agreement.

Andrew Jones, Chief Executive Officer of TMIC and TSMIC, commented: "This is a transformational strategic transaction for shareholders of both companies. Combining the companies will create a leading non-bank commercial real estate lender with a diversified portfolio of approximately $1 billion focused on income-producing properties. We believe the synergies and scale of Timbercreek Financial will deliver a larger float and better share liquidity, improved prospects for earnings and dividend growth, superior diversification and cost savings. Simply put, we believe it will create significant long-term value for all shareholders."

Transaction Benefits to TMIC and TSMIC Shareholders

  • Enhanced Capital Markets Profile - Timbercreek Financial will have a book value of approximately $650 million, more than double the size of any other publicly traded MIC. Greater market capitalization, float and liquidity are key factors in attracting investors (particularly institutions), acquisition opportunities and research coverage.
  • Book Value and Earnings Per Share Accretion - Timbercreek Financial is targeting to distribute 95% of annual earnings, reinvesting the remainder in the business to grow book value and earnings. As a result of the improved access to credit and reduction in costs due to lower overall management fees and administrative costs, Timbercreek Financial is targeting an EPS of approximately $0.721 on a stabilized basis over the next 12 months, which will be an improvement from the EPS generated by both companies in 2015.
  • Superior Diversified Portfolio Delivering a Strong Risk-Adjusted Yield - Timbercreek Financial's portfolio of approximately $1 billion will provide substantially better diversification for investors. The combined portfolio, along with the improved credit facility, will reduce the overall cost of capital for Timbercreek Financial's customized financing solutions, as well as increase access to higher quality investment opportunities resulting in further improvements to the credit quality of the portfolio.
  • Reduced Management Fees and Improved Alignment of Interests - The elimination of TMIC's performance fee and the reduction of its management fee from 1.2% to 0.85% of gross assets are positive improvements for TMIC shareholders. In return for the long-term fee reduction, TMIC will issue 782,830 shares (at book value) to TAMI, substantially increasing its ownership of the company and alignment with all shareholders.
  • Simplified Structure with Cost Synergies - The combination creates a single entity, reducing market confusion between the different portfolios and the relative merits of the respective strategies. Adjustments to the investment criteria will permit Timbercreek Financial to monetize on investment opportunities, creating benefits in addition to the operational synergies that are expected.

Transaction Details

The combination will be effected through a plan of arrangement under the Business Corporation Act (Ontario) ("OBCA") pursuant to which TMIC and TSMIC will amalgamate to become Timbercreek Financial Corp (the "Arrangement"). The Arrangement Agreement also contemplates that immediately before the effective time of the Arrangement, TMIC and TSMIC will terminate their current respective management agreements with Timbercreek Asset Management Inc. ("TAMI"), and immediately following the effective time, a new management agreement between TAMI and Timbercreek Financial will take effect (together the "Management Agreement Transactions"). In connection with the Arrangement, TSMIC will continue (the "Continuance") into the OBCA from the Canada Business Corporations Act.

Arrangement

On May 5, 2016, TMIC, TSMIC and TAMI entered into the Arrangement Agreement, pursuant to which the parties agreed that, subject to the terms and conditions set forth in the Arrangement Agreement, TMIC and TSMIC will amalgamate to form a single entity, with each TMIC Shareholder receiving 1 common share of Timbercreek Financial ("TF Share") for each TMIC share held, and each TSMIC Shareholder receiving 1.035 TF Shares for each TSMIC share held.

TMIC and TSMIC each formed a special committee of directors to review and consider the proposed transactions with advice from separate legal and financial advisors. The special committee of TMIC comprises of Messrs. W. Glenn Shyba, Zelick L. Altman and Derek J. Watchorn (the "TMIC Special Committee") and the special committee of TSMIC comprises of Messrs. Robert Douglas, Steven Scott and Edward Boomer (the "TSMIC Special Committee"). The terms of the Arrangement Agreement are the result of arm's length negotiations conducted among TMIC, TSMIC and representatives of the TMIC Special Committee and the TSMIC Special Committee and their respective advisors. Each of TMIC and TSMIC has agreed to, among other things, call a meeting of their respective shareholders to seek approval of the Arrangement, the Management Agreement Transactions and, in the case of TSMIC, the Continuance ("TMIC Meeting" and "TSMIC Meeting" respectively) and, if such resolutions are approved, jointly apply to the Court for the final order to approve the Arrangement.

To be effective, the Arrangement must be approved by at least 66 2/3% of the votes cast by each of the TMIC shareholders present in person or represented by proxy and entitled to vote at the TMIC Meeting, and the TSMIC shareholders present in person or represented by proxy and entitled to vote at the TSMIC Meeting, as well as a majority of the votes cast by TMIC shareholders and TSMIC shareholders present in person or represented by proxy and entitled to vote at the TMIC Meeting and TSMIC Meeting respectively, excluding for this purpose votes attached to any shares held by persons whose votes are required to be excluded in accordance with the policies of the TSX and MI 61-101, being TAMI and its affiliates.

The Management Agreement Transactions

Concurrently with the Arrangement Agreement, TMIC, TSMIC and TAMI entered into a contribution and termination agreement (the "Contribution and Termination Agreement"), pursuant to which the parties agreed that, subject to the terms and conditions set forth in the Contribution and Termination Agreement and the related escrow agreement (including, without limitation, that the Arrangement shall have been approved by the TMIC shareholders and the TSMIC shareholders and that all other conditions precedent to the completion of the Arrangement shall have been satisfied or waived): (i) at the escrow release time which is just before the effective time of the Arrangement ("Escrow Release Time"), the current TSMIC management agreement will be terminated; (ii) at the Escrow Release Time, TAMI will transfer its right, title and interest in the current TMIC management agreement to TMIC, in consideration for $6,997,048 (the "TMIC Consideration") plus applicable HST where the Consideration will be satisfied by TMIC issuing TMIC shares to TAMI at book value of such shares at the end of the last quarter immediately preceding the date hereof (which is 6% higher than the closing price of TMIC shares as of May 5, 2016) and such shares issued to TAMI will be subject to an 18 month contractual lock-up with 1/3 of such shares being released to TAMI every 6 months thereafter; and (iii) following the completion of the Arrangement, the New Management Agreement will be released from escrow and will be a valid and binding agreement as between Timbercreek Financial and TAMI.

Under the New Management Agreement, Timbercreek Financial will pay TAMI an annual management fee of 0.85% of the gross assets of Timbercreek Financial (the same management fee that is currently paid by TSMIC), calculated and paid monthly in arrears, plus applicable taxes. TAMI will also receive a servicing fee equal to 0.10% of the amount of any senior tranche that it syndicates to a third party. The term of the New Management Agreement will be for a period of 10 years commencing on the effective date of the Arrangement (expected to be June 30, 2016), and will be automatically renewed for successive five-year terms thereafter, unless terminated by Timbercreek Financial or by TAMI in accordance with the terms of the New Management Agreement. TAMI will not receive a performance fee under the New Management Agreement.

Approval of the Management Agreement Transactions, which will, in the case of TSMIC, include the cancellation of its existing management agreements and the execution of the New Management Agreement on substantially the same terms as the existing management agreement, and in the case of TMIC, includes the cancellation of its existing management agreement, the issuance to TAMI of shares of TMIC in consideration therefor, and the execution of the New Management Agreement, will require the affirmative vote of at least 66 2/3% of the votes cast by TMIC shareholders and TSMIC shareholders present in person or represented by proxy and entitled to vote at the TMIC Meeting and the TSMIC Meeting respectively, as well as a majority of the votes cast by TMIC shareholders and TSMIC shareholders present in person or represented by proxy and entitled to vote at the TMIC Meeting and the TSMIC Meeting respectively, excluding for this purpose votes attached to any shares held by persons whose votes are required to be excluded in accordance with the policies of the TSX and MI 61-101, being TAMI and its affiliates.

Continuance

Approval of the Continuance will require the affirmative vote of at least 66 2/3% of the votes cast by TSMIC shareholders present in person or represented by proxy and entitled to vote at the TSMIC Meeting.

New Credit Agreement

In connection with the Arrangement, each of TMIC's and TSMIC's existing credit facilities will be amended and restated in their entirety under the New Credit Agreement, and the New Credit Agreement will become effective upon satisfaction of the conditions precedent set forth in the New Credit Agreement, including shareholder approval of the Arrangement.

Under the terms of the New Credit Agreement, Timbercreek Financial will be permitted to borrow up to $350 million on a revolving basis, subject to its borrowing base as set out in the New Credit Agreement. The commitments of the lenders under the New Credit Agreement may be increased by $50 million by way of an accordion feature, subject to satisfaction of certain conditions set forth in the New Credit Agreement. The term of the New Credit Agreement will mature on May6, 2018.

Board Recommendations

Based upon the unanimous recommendation of the TMIC Special Committee, the TMIC Board has unanimously determined (with R. Blair Tamblyn, Ugo Bizzarri and Andrew Jones declaring their interest in the transaction and abstaining from voting) that the Arrangement and the Management Agreement Transactions are in the best interests of TMIC, and recommends that TMIC Shareholders vote their TMIC Shares in favour of the resolutions approving the Arrangement and the Management Agreement Transactions. The TMIC Special Committee has received a favourable fairness opinion from TD Securities Inc. in respect of the Arrangement and the Management Agreement Transactions as a whole.

Based upon the unanimous recommendation of the TSMIC Special Committee, the TSMIC Board has unanimously determined (with R. Blair Tamblyn, Ugo Bizzarri and Andrew Jones declaring their interest in the transactions and abstaining from voting) that the Arrangement, the Continuance and the Management Agreement Transactions are in the best interests of TSMIC, and recommends that TSMIC Shareholders vote their TSMIC Shares in favour of the resolutions approving the Continuance, the Arrangement and the Management Agreement Transactions. The TSMIC Special Committee has received a fairness opinion from National Bank Financial that the consideration to be received by TSMIC shareholders pursuant to the Arrangement is fair, from a financial point of view, to TSMIC shareholders, other than TAMI and its affiliates.

Advisors and Counsel

TD Securities Inc. is acting as financial advisor and McCarthy Tétrault LLP is acting as legal counsel to TMIC and the TMIC Special Committee. National Bank Financial is acting as financial advisor and Goodmans LLP is acting as legal counsel to TMIC and the TSMIC Special Committee.

Investor Conference Call Details

A live conference call to review the details of the transaction will take place at 11:00 a.m. (EST) on Friday May 6, 2016, which will be followed by a question and answer period. An investor presentation to accompany management's comments during the conference call will be available an hour before the call. Please visit one of the links below:

  • Speakers: Andrew Jones, Chief Executive Officer and David Melo, Chief Financial Officer of the Company
  • Dial-in-number(s): 1-(855) 223-7310
  • Event Conference ID: 5454331

The playback of the conference call will be available on the links provided above.

About TMIC and TSMIC

TMIC and TSMIC provide investors with an opportunity to invest in a diversified portfolio of mortgage and loan investments originated and underwritten by their manager, TAMI. TMIC and TSMIC focus on capital preservation and the generation of attractive, stable returns, allowing for the payment of monthly dividends to shareholders.

Disclaimers

This news release contains forward-looking statements about TMIC, TSMIC and the entity that will result from their combination. Forward-looking statements are typically identified by words such as "expect", "anticipate", "believe", "foresee", "could", "estimate", "goal", "intend", "plan", "seek", "strive", "will", "may", "potential" and "should" and similar expressions. Forward-looking statements reflect current estimates, beliefs and assumptions which are based on TMIC's and TSMIC's perception of historical trends, current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. TMIC's and TSMIC's estimates, beliefs and assumptions are inherently subject to significant business, economic, competitive and other uncertainties and contingencies regarding future events and, as such, are subject to change and may be outside the control of TMIC and TSMIC. TMIC and TSMIC can give no assurance that such estimates, beliefs and assumptions will prove to be correct.

Forward-looking statements in this news release contain those relating to: the extent to which the transaction is expected to be accretive to TMIC and TSMIC; the combined entity's financial position, portfolio, cash flow and growth prospects; certain strategic benefits, and capital markets, operational, competitive and cost synergies; management of the combined entity; the proposed timing of the transaction; the anticipated tax treatment of the transaction and TMIC's, TSMIC's and the combined entity's anticipated future results.

Numerous risks and uncertainties could cause actual results to differ materially from the estimates, beliefs and assumptions expressed or implied in the forward-looking statements, including, but not limited to: economic and market factors specific to the mortgage industry; general economic and market factors; local real estate and mortgage financing conditions; interest rates; the availability of equity and debt financing to the combined entity; efficiencies and operating costs; tax related matters; reliance on key personnel of TMIC, TSMIC, TAMI and the combined entity; the combined entity's future stability and growth prospects; the combined entity's future profitability and capital needs, currency risk; marketability; additional funding requirements; governmental regulations, licenses and permits; competition; contingent liabilities and litigation; directors; and officers' conflicts of interest; the failure to satisfy conditions precedent to the completion of the transaction; the ability of TMIC, TSMIC and the combined entity to continue to develop and grow and management of the combined entity's success in anticipating and managing the foregoing factors.

Readers are cautioned that the foregoing list of factors is not exhaustive. Other risks and uncertainties not presently known to TMIC, TSMIC and TAMI or that TMIC, TSMIC and TAMI presently believe are not material could also cause actual results or events to differ materially from those expressed in its forward-looking statements. Additional information on these and other factors that could affect the operations or financial results of TMIC or TSMIC are included in reports filed by TMIC and TSMIC with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

There can be no assurance that the proposed combination will occur or that the anticipated strategic benefits and operational, competitive and cost synergies will be realized. The proposed combination is subject to various regulatory approvals and the fulfillment of certain other conditions, including shareholder approvals, and there can be no assurance that any such approvals will be obtained and/or any such conditions will be met. The proposed combination could be modified, restructured or terminated.

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect TMIC's, TSMIC's and TAMI's expectations only as of the date of this press release. TMIC, TSMIC, TAMI and the combined entity disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

The information concerning each of TMIC and TSMIC contained in this press release has been provided by TMIC and TSMIC, as applicable. Although neither TMIC nor TSMIC has knowledge that would indicate that any of information about the other is untrue or incomplete, neither TMIC nor TSMIC assumes any responsibility for the accuracy or completeness of information about the other.

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

1 The EPS estimate assumes market fundamentals are consistent with those present at the time of this press release, and that targeted rates and fees are achieved and additional credit is deployed within 12 month of the effective date of the combination. The estimated EPS is approved by TAMI as of the date of the press release and it is for the purpose of showing potential accretion to the combined entity compared to pre-amalgamation entities. This information may not be appropriate and should not be used for other purposes. Please also see other assumptions and risk factors set out in the Disclaimer section.

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