TORONTO, April 14, 2014 /CNW/ - WPT Industrial Real Estate Investment Trust (the "REIT") (WIR-U.TO) announced today that it has entered into an agreement to indirectly acquire an industrial property located near Louisville, Kentucky (the "Louisville Property") for a purchase price of approximately US$45.4 million (exclusive of closing and transaction costs), representing an initial capitalization rate of approximately 6.35%. The REIT, through WPT Industrial, LP (the "Partnership") (the REIT's operating subsidiary), will indirectly acquire the Louisville Property from Welsh Property Trust, LLC ("Welsh"), the external asset and property manager of the REIT.
The Louisville Property, located in Shepherdsville, Kentucky, is a multi-tenant distribution building, totaling 936,000 square feet of gross leasable area. The Louisville Property is currently 100% leased to two tenants, Clorox Co. and a major online retailer, with leases expiring in July 2018 and July 2019, respectively. The leases in place for the Louisville Property are triple net and contain aggregate annual rental assessment escalations of approximately 3%. Based on the findings of the building condition report for the Louisville Property prepared for the REIT by an independent third party consultant, the REIT anticipates a five-year average capital expenditure for the Louisville Property of US$0.02 per square foot annually. Additionally, based on the leasing profile of the Louisville Property, management of the REIT has assumed a reserve of US$0.15 per square foot annually for leasing costs (including tenant improvement costs and leasing commissions). The year-two stabilized capitalization rate for the Louisville Property is expected to increase to approximately 6.68% once rent concessions have expired and contractual increases in rent take effect.
"We are pleased to announce the proposed acquisition of the Louisville Property. When Welsh originally acquired this property, two-thirds of the building was vacant. After Welsh stabilized the property with two new leases to high-quality tenants, we are now able to acquire this property through our right of first opportunity to acquire assets from Welsh. In addition to being our fourth announced acquisition since the completion of our initial public offering in April 2013, the proposed acquisition is a direct example of the benefits of our relationship with Welsh. The acquisition of this property is also anticipated to be immediately accretive to the REIT's AFFO per unit and is expected to lower the REIT's payout ratio," commented Scott Frederiksen, Chief Executive Officer.
The Louisville Property is being acquired pursuant to the terms of a contribution agreement dated April 14, 2014 (the "Contribution Agreement") among the REIT, the Partnership, WPT Industrial, Inc. (the general partner of the Partnership) and Welsh. The purchase price for the Louisville Property (exclusive of closing and transaction costs) will be satisfied by: (i) the issuance of approximately US$20.4 million Class B partnership units of the Partnership ("Class B Units") (being 2,165,605 Class B Units) to Welsh; and (ii) US$25 million in cash, to be funded by new, fixed rate term mortgage financing to be placed on the Louisville Property at closing of the acquisition. No acquisition fee is payable to Welsh in connection with the acquisition of the Louisville Property pursuant to the terms of the asset management agreement dated April 26, 2013 among the REIT, the Partnership and Welsh.
The acquisition is expected to close in June 2014 and is subject to certain closing conditions, including the REIT receiving TSX conditional listing approval in respect of the Units underlying the Class B Units to be issued to Welsh pursuant to the Contribution Agreement, the REIT receiving unitholder approval on a disinterested basis, as required by the Toronto Stock Exchange (the "TSX"), in respect of certain aspects of the acquisition (as described below), the receipt of due diligence results satisfactory to the independent members of the REIT's board of trustees (the "Independent Trustees") and the REIT closing mortgage financing for the Louisville Property on terms satisfactory to the Independent Trustees. There can be no assurance that these closing conditions will be satisfied, or that the acquisition will be completed on its present terms or at all. A copy of the Contribution Agreement will be filed by the REIT under its profile on the SEDAR website at www.sedar.com.
Pursuant to the TSX Company Manual, the REIT is required to obtain unitholder approval, on a disinterested basis, for the issuance of the Class B Units to Welsh and the Units issuable upon redemption of such Class B Units in accordance with the terms and conditions of the agreement of limited partnership governing the Partnership. The REIT will seek this unitholder approval at the annual and special meeting of unitholders to be held on May 15, 2014 (the "Annual Meeting"). The REIT intends to mail an information circular providing further details on the business of the Annual Meeting, including the acquisition, to the REIT's unitholders in the second half of April 2014.
The number of Class B Units to be issued to Welsh has been determined by applying a price of US$9.42 per Class B Unit, which is the 20-trading day volume-weighted average price for the Units for the period immediately prior to today's date. The closing price of the Units on the TSX on April 11, 2014 (the last trading day before this press release) was US$9.60.
Following completion of the acquisition, it is expected that Welsh will own, directly and indirectly, 752,700 Units and 15,225,314 Class B Units, representing an approximate 54.3% effective interest in the REIT as of the closing of the acquisition (assuming all Class B Units are redeemed for Units, but otherwise on a non-diluted basis); provided, however, that the Class B Units issued to an affiliate of Welsh in connection with the acquisition of an industrial property in Pontoon Beach, Illinois on July 15, 2013 (the "Illinois Property Class B Units") may not be redeemed for Units until the REIT has satisfied all of the conditions of TSX for issuance of the Illinois Property Class B Units and the listing of the underlying Units as described in the REIT's annual information form for the year ended December 31, 2013.
Since the acquisition constitutes a "related party transaction" under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61-101"), the acquisition was examined, reviewed and considered by the Independent Trustees. As part of their review and consideration of the transaction, the Independent Trustees retained, on behalf of the REIT, independent Canadian and U.S. legal counsel and an independent appraiser to conduct an appraisal of the Louisville Property. Based upon, among other things, a number of factors, the recommendations of, and discussions with management of the REIT, discussions with management of Welsh, considering the advice of its legal advisors and its own review and consideration of the independent appraisal, the acquisition and related agreements, the Independent Trustees determined the acquisition to be on commercially reasonable terms and in the best interests of the REIT and the REIT's unitholders, unanimously approved the acquisition and unanimously recommended that unitholders of the REIT vote in favour of the approvals related to the acquisition at the Annual Meeting.
MI 61-101 provides a number of circumstances in which a transaction between an issuer and a related party may be subject to valuation and minority approval requirements. An exemption from such requirements is available when the fair market value of the transaction is not more than 25% of the market capitalization of the issuer. The REIT has been granted exemptive relief from the requirements of MI 61-101 that, subject to certain conditions, permits it to be exempt from the minority approval and valuation requirements for transactions that would have a value of less than 25% of the REIT's market capitalization if the Class B Units (other than the Illinois Property Class B Units, unless and until the REIT has satisfied all conditions of the TSX in respect of the issuance of the Illinois Property Class B Units and the listing on the TSX of the underlying Units) held by Welsh and any of its permitted transferees (as set out in section 11.3A(1) of the agreement of limited partnership dated April 26, 2013 governing the Partnership) (the "Permitted Transferees") are included in the calculation of the REIT's market capitalization. As a result, the 25% threshold, above which the minority approval and valuation requirements would apply, is increased to include the approximately 50.3% indirect effective interest held by Welsh and its Permitted Transferees in the REIT in the form of Class B Units as of the date hereof (assuming all Class B Units, other than the Illinois Property Class B Units, are redeemed for Units, but otherwise on a non-diluted basis). Accordingly, the 25% threshold for the purposes of MI 61-101 is approximately US$51.4 million. Consequently, the acquisition is not subject to the valuation and minority approval requirements under MI 61-101.
About WPT Industrial Real Estate Investment Trust
WPT Industrial Real Estate Investment Trust 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 formed to own and operate an institutional-quality portfolio of primarily industrial properties located in the United States, with a particular focus on warehouse and distribution industrial real estate. WPT Industrial, LP (the REIT's operating subsidiary) indirectly owns a portfolio of properties consisting of approximately 10.2 million square feet of gross leasable area comprised of 37 industrial properties and two office properties located in 12 states within the United States.
This press release contains "forward-looking information" as defined under applicable Canadian securities law ("forward-looking information" or "forward-looking statements") which reflect management's expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance, business prospects and opportunities of the REIT. The words" plans", "expects", "does not expect", "scheduled", "estimates", "intends", "anticipates", "does not anticipate", "projects", "believes" or variations of such words and phrases or statements to the effect that certain actions, events or results "may", "will", "could", "would", "might", "occur", "be achieved" or "continue" and similar expressions identify forward-looking statements. Some of the specific forward-looking statements in this press release include, but are not limited to, statements with respect to: the closing of the acquisition of the Louisville Property and the expected closing date thereof; expectations regarding capital expenditures and leasing costs; expectations regarding accretion to the REIT's AFFO per Unit and the effect of the acquisition on the REIT's payout ratio; the expected future increase in the capitalization rate for the Louisville Property, the REIT's plans for financing the acquisition, including the REIT's intention to fund the cash portion of the purchase price with new, fixed rate term mortgage financing to be placed on the Louisville Property at closing of the acquisition; the REIT's intention to seek unitholder approval for certain aspects of the acquisition at the Annual Meeting; and Welsh's expected effective interest in the REIT following closing of the acquisition. Forward-looking statements are necessarily based on a number of estimates and assumptions that, while considered reasonable by management of the REIT as of the date of this press release, are inherently subject to significant business, economic and competitive uncertainties and contingencies. The REIT's estimates, beliefs and assumptions, which may prove to be incorrect, include the various assumptions set forth herein, including, but not limited to, the REIT's and the Louisville 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, and continued positive net absorption and declining vacancy rates in the markets in which the REIT's properties are located.
When relying on forward-looking statements to make decisions, the REIT cautions readers not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties, 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. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under "Risk Factors" in the REIT's annual information form for the year ended December 31, 2013, which is available under the REIT's profile on SEDAR at www.sedar.com. These forward-looking statements are made as of the date of this press release and, except as expressly required by applicable law, the REIT assumes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Funds from operations ("FFO"), adjusted funds from operations ("AFFO"), net operating income ("NOI"), capitalization rate and payout ratio are not measures recognized under International Financial Reporting Standards as issued by the International Accounting Standards Board and as adopted by the Canadian Institute of Chartered Accountants in Part I of The Canadian Institute of Chartered Accountants Handbook — Accounting, as amended from time to time ("IFRS") and do not have standardized meanings prescribed by IFRS. Management believes that these terms are supplemental measures of a Canadian real estate investment trust's performance and the REIT believes they are relevant measures of the ability of the REIT to earn and distribute cash returns to investors in the REIT's trust units and to evaluate the REIT's performance. The IFRS measurement most directly comparable to FFO, AFFO and NOI is net income.
"FFO" is defined as net income in accordance with IFRS, (i) plus or minus fair value adjustments on investment properties; (ii) plus or minus gains or losses from sales of investment properties; (iii) plus or minus other fair value adjustments; (iv) plus amortization of tenant incentives; (v) plus transaction costs expensed as a result of the purchase of a property being accounted for as a business combination; (vi) plus distributions on redeemable or exchangeable units treated as interest expense; (vii) plus or minus any negative goodwill or goodwill impairment; and (viii) plus deferred income tax expense, after adjustments for equity accounted entities and joint ventures calculated to reflect FFO on the same basis as consolidated properties. FFO has been prepared consistently with the definition presented in the White Paper on funds from operations prepared by the Real Property Association of Canada for all periods presented.
"AFFO" is defined as FFO subject to certain adjustments, including: (i) amortization of fair value mark-to-market adjustments on long-term debt and amortization of financing costs; (ii) adjusting for any differences resulting from recognizing property rental revenues or expenses on a straight-line basis; (iii) amortization of grant date fair value related to compensation incentive plans; (iv) adjusting for any non-cash compensation expense; and (v) deducting a reserve for normalized maintenance capital expenditures, tenant inducements and leasing commissions, as determined by the REIT. Other adjustments may be made to AFFO as determined by the trustees of the REIT in their sole discretion. FFO and AFFO should not be construed as alternatives to net income and comprehensive income determined in accordance with IFRS as indicators of the REIT's performance. The REIT's method of calculating FFO and AFFO may differ from other issuers' methods and accordingly may not be comparable to measures used by other issuers.
"NOI" is used by industry analysts, investors and management to measure operating performance of real estate investment trusts. NOI represents revenue from properties less property operating expenses as presented in the consolidated statements of net income and comprehensive income prepared in accordance with IFRS.
"capitalization rate" is defined as NOI divided by purchase price.
"payout ratio" is defined as distributions of the REIT (including distributions on the Class B Units) divided by AFFO.
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