Agellan Commercial Real Estate Investment Trust Releases Third Quarter 2018 Results

NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES

TORONTO--(BUSINESS WIRE)--Agellan Commercial Real Estate Investment Trust (the “REIT”) (TSX:ACR.UN) is pleased to report its financial results for the three and nine month periods ended September 30, 2018. All dollar amounts (except per Unit amounts) are in thousands of Canadian dollars, unless otherwise stated.

HIGHLIGHTS

• Subsequent to quarter end the REIT entered into an arrangement agreement pursuant to which Elad Genesis Limited Partnership (“El-Ad”) has agreed to acquire all of the outstanding trust units of the REIT for $14.25 in cash per unit, other than Units already owned by El-Ad or its affiliates. This transaction values the REIT at approximately $680 million, including the REIT’s net debt.
• The REIT acquired two industrial properties located in Newnan, Georgia and Austin, Texas for an aggregate purchase price of US$34.85 million (before closing costs and other adjustments) in respect of the REIT’s ownership interest.
• Significant leasing was completed at the REIT’s Naperville office property improving the property profile and solidifying future cash flows.
• The REIT disposed of its Charlotte, North Carolina office property for $22.65 million (before closing costs and other adjustments).

FINANCIAL AND OPERATIONAL HIGHLIGHTS	September 30, 2018	December 31, 2017
Summary of Operational Information
Number of Properties	45	44
Gross Leasable Area ("GLA") (in 000's)	6,921	6,652
Occupancy % (at period end)	93.7%	96.2%
Average lease term to maturity (years)	5.3	4.0
Summary of Financial Information
Gross Book Value^(1)	$724,549	$832,768
Debt (face value)	$235,389	$392,507
Debt to Gross Book Value^(1)	32%	47%
Interest Coverage Ratio (annual)^(1)	3.4x	2.3x
Weighted average interest rate	4.3%	4.2%

	For the three month period ended		For the year to date period ended
	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017
Total Revenue	$19,983	$26,270	$70,810	$75,149
Net Operating Income ("NOI")^(1)	$12,019	$15,439	$42,600	$44,297
Net Income	$5,704	$18,412	$56,541	$36,290
Funds From Operations ("FFO")^(1)	$7,473	$9,848	$27,036	$28,176
Adjusted Funds From Operations ("AFFO")^(1)	$7,122	$8,364	$24,572	$23,039
Adjusted Cash Flow From Operations ("ACFO")^(1)	$4,929	$4,493	$21,708	$9,326
Basic and Diluted FFO per Unit^(1)	$0.221	$0.300	$0.799	$0.885
Basic and Diluted AFFO per Unit^(1)	$0.210	$0.255	$0.726	$0.724
Distributions Declared	$6,851	$6,363	$20,534	$18,756
Distributions per Unit	$0.202	$0.194	$0.607	$0.589
Payout Ratio^(1)	139%	142%	95%	201%
Units Outstanding at Period-end	33,845,879	32,847,481	33,845,879	32,847,481
Weighted Average Units Outstanding (Basic and Diluted)	33,857,029	32,863,965	33,835,749	31,823,875

⁽¹⁾ This is a non-IFRS financial measures. Please see “Non-IFRS supplemental measures” below.

Summary of Significant Events:

Financial Highlights

• For the three month period ended September 30, 2018, the REIT achieved net income of $5,704, compared to net income of $18,412 for the three month period ended September 30, 2017. This represents a decrease in net income of $0.392 per Unit.
• For the three month period ended September 30, 2018, the REIT achieved FFO per Unit of $0.221, compared to $0.300 for the three month period ended September 30, 2017.
• For the three month period ended September 30, 2018, the REIT achieved AFFO per Unit of $0.210, compared to $0.255 for the three month period ended September 30, 2017.
• Although both FFO and AFFO for the three month period ended September 30, 2018 were negatively impacted due to the timing of recent office asset sales and the deployment of funds into industrial acquisitions consistent with the REIT’s previously disclosed strategy, the REIT’s Debt to Gross Book Value ratio was significantly below historical averages and was 32% as of September 30, 2018.
• For the three month period ended September 30, 2018, the REIT’s ACFO was $4,929 and its Payout Ratio was 139%.
• For the nine month period ended September 30, 2018, the REIT achieved net income of $56,541, compared to net income of $36,290 for the nine month period ended September 30, 2017. This represents an increase in net income of $0.531 per Unit.
• For the nine month period ended September 30, 2018, the REIT achieved FFO per Unit of $0.799, compared to $0.885 for the nine month period ended September 30, 2017.
• For the nine month period ended September 30, 2018, the REIT achieved AFFO per Unit of $0.726, compared to $0.724 for the nine month period ended September 30, 2017.
• Although both FFO and AFFO for the nine month period ended September 30, 2018 were negatively impacted due to the timing of recent office asset sales and the deployment of funds into industrial acquisitions consistent with the REIT’s previously disclosed strategy, the REIT’s Debt to Gross Book Value ratio was significantly below historical averages and was 32% as of September 30, 2018.
• For the nine month period ended September 30, 2018, the REIT’s ACFO was $21,708 and its Payout Ratio was 95%.

Operational Highlights

• As at October 1, 2018, the overall occupancy rate of the REIT’s portfolio was 93.7%, representing a decrease from the July 1, 2018 occupancy rate of 96.8%. This decrease was primarily the result of the acquisition of a large distribution facility located at 60 Herring Road, in Newnan, Georgia, which was acquired on September 28, 2018, and the decrease in occupancy at the REIT’s Naperville office property due to the timing of the commencement of new leases, as further described below.
• During the three months ended September 30, 2018, the REIT announced that it entered into a lease with Aldi Inc. (“Aldi”) with respect approximately 113,000 square feet at the REIT’s Naperville office property. Aldi will occupy approximately 80% of the approximately 141,000 square feet of space that the REIT previously announced would be surrendered by Health Care Service Corporation (“HCSC”). Aldi’s lease will commence on January 1, 2019 and will have a term of 10 years.
• Also during the three months ended September 30, 2018, the REIT announced it had entered into a lease amendment agreement with HCSC whereby HCSC will extend its current lease with respect to approximately 25,000 square feet of space at the REIT’s Naperville office property that HCSC previously advised would be surrendered. The amended lease will be coterminous with the lease for the remainder of the spaced leased to HCSC at the Naperville office property and will expire in November 2025. HCSC will expand its presence at the REIT’s Naperville office property by leasing approximately 32,000 square feet of additional space commencing December 1, 2018, which lease will also be coterminous with the rest of HCSC’s leased space.
• After the aforementioned leasing at the REIT’s Naperville office property takes effect, the property’s expected occupancy will be 95% and it will have a weighted average occupancy of approximately 7.6 years.
• On July 13, 2018, the REIT completed the sale of its approximately 118,500 square foot, five story multi-tenant office building located at 10130 Perimeter Parkway in Charlotte, North Carolina. The sale price for this non-core asset was approximately US$22.65 million (before closing costs) and represented an in-place capitalization rate of 7.46%.
• On September 13, 2018, the REIT confirmed that a review process to explore strategic alternatives, which may include a sale of all or substantially all of the assets of the REIT or the Units, is ongoing and that its board of trustees has engaged RBC Capital Markets and Wells Fargo Securities, LLC as financial advisors.
• On September 28, 2018, the REIT completed the acquisition of a 50% interest in an industrial distribution centre in the I-85 submarket of Atlanta, Georgia. The property comprises approximately 1.9 million square feet of GLA and was acquired for an aggregate purchase price of approximately US$53 million (before closing costs), representing a going-in capitalization rate of approximately 5.5% and a stabilized capitalization rate of approximately 7.25%. The property is currently 87% occupied and has a weighted average lease term of 16.4 years.

Subsequent Events

• On October 1, 2018 the REIT completed the acquisition of an industrial property located in Austin, Texas. The property is comprised of four suites that are all currently leased to a single tenant with approximately three years of lease term remaining. The property was purchased for approximately US$8.35 million (before closing costs), representing a going-in capitalization rate of approximately 7.59%.
• On October 5, 2018 the REIT amended the terms of its credit facility. Subject to certain covenants, the maximum amount available to the REIT under its credit facility was reduced to US$75 million. The credit facility is now secured by a charge on the REIT’s Naperville office property, however, no draws have been made on the facility. The maturity date of the credit facility is unchanged, being January 25, 2020.
• On October 20, 2018, the REIT declared a monthly distribution for the month ended October 31, 2018 of $0.0675 per Unit, consistent with an annual distribution rate of $0.81 per Unit.
• On November 13, 2018, the REIT entered into an arrangement agreement (the “Arrangement Agreement”) pursuant to which El-Ad has agreed to acquire all of the outstanding Units of the REIT for $14.25 in cash per unit (the “Transaction”), other than units already owned by El-Ad or its affiliates. The Transaction values the REIT at approximately $680 million, including the REIT’s net debt. The Transaction is structured as a statutory plan of arrangement under the Business Corporations Act (Ontario) and the Trustee Act (Ontario). The Transaction requires approval of at least 66 2/3% of the votes cast by unitholders, as well as the approval by a simple majority of votes cast by disinterested unitholders, excluding El-Ad and its affiliates and any other unitholders required to be excluded under Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions. The Transaction is also subject to approval of the Ontario Superior Court of Justice. The Arrangement Agreement provides for, among other things, customary representations, warranties and covenants, including customary non-solicitation covenants from the REIT and a “fiduciary out” that allows the Board to accept a superior proposal in certain circumstances subject to a “right to match” in favour of El-Ad and payment by the REIT of a $16 million termination fee to El-Ad. A management information circular of the REIT will be prepared in connection with a special meeting of Unitholders anticipated to be held in January 2019 to consider and vote on the Transaction. The REIT will send the circular and certain related documents to Unitholders and copies will be filed under the REIT’s profile on SEDAR at www.sedar.com.

The REIT will hold a conference call to discuss the REIT’s financial performance for the three and nine month periods ended September 30, 2018 on Wednesday, November 14, 2018 at 2:00 p.m. (Toronto time). To access the call, please dial 1-416-641-6104 or 1-800-806-5484 and enter the participant pass code: 8420153. For operator assistance during the call, please press *0.

A replay of the conference call will be available from 5:00 p.m. (Toronto time) on November 14, 2018 until midnight (Toronto time) on December 14, 2018. To access the replay, please call 1-905-694-9451 or 1-800-408-3053 and enter participant pass code: 5088701.

Other information:

Information appearing in this news release is a select summary of results. The REIT’s consolidated financial statements along with management’s discussion and analysis for the three and nine month periods ended September 30, 2018 (“MD&A”) are available electronically on the REIT’s website at www.agellanreit.com and under the REIT’s issuer profile at www.sedar.com.

The REIT 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 created for the purpose of acquiring and owning industrial, office and retail properties in select major urban markets in the United States and Canada.

The REIT’s 46 properties contain 8.3 million square feet of gross leasable area, with the REIT’s ownership interest at 7.0 million square feet. The properties are primarily located in major urban markets in the United States.

Non-IFRS supplemental measures:

Certain terms used in this news release are not recognized under International Financial Reporting Standards (“IFRS”) and therefore these terms should not be construed as alternatives to IFRS measures, such as net income or cash flow from operating activities nor are these terms necessarily comparable to similar measures presented by other reporting issuers. These terms are used by management to measure, compare and explain the operating results and financial performance of the REIT. Management believes that these terms are relevant measures in comparing the REIT’s performance to industry data and the REIT’s ability to earn and distribute cash to holders of Units. These non-IFRS measures, including FFO, AFFO, ACFO, Payout Ratio, Gross Book Value, Interest Coverage Ratio, NOI, and related per Unit amounts are defined, FFO, is reconciled to net income, and AFFO and ACFO are reconciled to cash flows from (used in) operating activities in the REIT’s MD&A, which should be read in conjunction with this news release.

Forward-looking information:

This news release contains forward-looking information within the meaning of applicable securities legislation. Forward-looking information can be identified by words or expressions including, but not limited to, “plans”, “expects”, “scheduled”, “estimates”, “intends”, “anticipates”, “predicts”, ”projects”, “believes”, or variations of such words and phrases or statements to the effect that certain actions, events or results “may”, “will”, “could”, “would”, “should”, “might”, “occur”, “be achieved” or “continue” or similar expressions. Forward-looking information is necessarily based on a number of estimates and assumptions that are inherently subject to significant business, economic and competitive risks, uncertainties and contingencies, many of which are beyond the REIT’s control, which could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. As such, management can give no assurance that actual results will be consistent with the forward-looking information. While such assumptions are considered reasonable by management of the REIT based on the information currently available, any of these assumptions could prove to be inaccurate and, as a result, the forward-looking information based on those assumptions could be incorrect. These risks and uncertainties include, but are not limited to: the REIT’s future growth potential; results of operations; future prospects for additional investment opportunities in Canada and the US, including access to debt and equity capital at acceptable costs, the ability to obtain necessary approvals and to minimize any unexpected costs or liabilities, environmental or otherwise, relating to any acquisitions or dispositions; demographic and industry trends remaining unchanged, including occupancy levels, lease renewals, the exercise of any early termination rights, rental increases and retailer competition; future levels of the REIT’s indebtedness remaining at acceptable levels, including its credit rating; tax laws as currently in effect remaining unchanged, including applicable specified investment flow-through rules; and current economic conditions remaining unchanged, including interest rates and applicable foreign exchange rates. Readers, therefore, should not place undue reliance on any such forward-looking statements, as forward-looking information involves significant risks and uncertainties and 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. All forward-looking information in this news release speaks only as of the date of this news release. The REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required by applicable securities laws. All forward-looking statements in this news release are qualified by these cautionary statements. Additional information about these assumptions and risks and uncertainties is contained in the REIT’s filings with securities regulators, including its current annual information form and MD&A.