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Huntingdon REIT and IAT Air Cargo Facilities Agree to Merge

^{Published on 2009-08-18 04:52:20, Last Modified on 2009-08-18 04:52:32 - Market Wire}
 

 WINNIPEG and RICHMOND, BC, Aug. 18 /CNW/ - Huntingdon Real Estate Investment Trust ("Huntingdon REIT" or "HREIT") (TSX: HNT.UN) and IAT Air Cargo Facilities Income Fund ("IAT") (TSX: ACF.UN) announced today that they have agreed to merge. The combined entity will have an enterprise value of approximately $370 million based on current unit trading prices, will own, lease and operate 88 properties across Canada, with a total rentable area in excess of 5.8 million square feet, and will benefit from a diversified tenant base comprising approximately 670 tenants. The combined entity will have a presence in Manitoba, British Columbia, Ontario, Saskatchewan, Alberta and the Northwest Territories. Under the terms of the combination agreement, the proposed merger involves a unit-for-unit exchange through which IAT unitholders will receive 11.75 units of Huntingdon REIT for each IAT unit held. On completion of the proposed transaction, IAT's existing unitholders will own approximately 53% of the combined entity and Huntingdon REIT's existing unitholders will own approximately 47%. The combination of HREIT and IAT will meaningfully reduce HREIT's leverage ratios and result in an improved financial position. Based on the book values reported for HREIT on its June 30, 2009 balance sheet, HREIT's Debt to Gross Book Value Ratio ("D/GBV") is approximately 63%. The D/GBV, calculated using the aggregated book values reported for both HREIT and IAT on their respective June 30, 2009 balance sheets, declines to approximately 53%, which is in-line with many large capitalization Canadian REITs. Furthermore, the combination will provide HREIT with significant incremental cash flow to fund ongoing capital expenditures and mortgage principal payments without the need for additional asset sales or high-cost debt financing. In addition to the estimated $5 million of annual AFFO (Adjusted Funds From Operations) to be contributed by IAT, the combined entity will benefit from internalizing Huntingdon REIT's asset management function and is expected to derive approximately $1.5 million of additional cost savings through the elimination of duplicate public company costs and other reductions in G&A (general & administrative) expenses. These initial synergies do not take into account any future leasing of vacant space, new accretive acquisitions, other operating synergies or the potential benefit of restructuring or internalizing property management of Huntingdon REIT's assets and reducing leasing and construction fees paid in the future, which could provide approximately $750,000 of additional savings. Huntingdon REIT has previously announced plans to divest certain assets and to reduce debt, and such plans will continue in the combined entity, with additional property sales currently under conditional contracts of sale. The combination of Huntingdon REIT and IAT will result in increased scale and diversification for IAT and cash flow stability for HREIT. Together, this is expected to result in a lower cost of capital for the combined entity than is currently available to either Huntingdon REIT or IAT. In addition, IAT has a number of unencumbered assets that will provide the combined entity with additional borrowing capacity in the event additional capital is required in the future. "We are very excited about the combination of these two entities. It will bring considerable benefits to unitholders of both HREIT and IAT by creating a larger, more efficient and competitive REIT in terms of size, scope and portfolio diversification," said Zachary George, who is President and CEO of IAT and who will assume the same role with the combined entity. "Through a combination of synergies and the internalization of asset management, we are targeting a pro forma reduction of our combined expenses of approximately $1.5 million. Our strategic plan includes the conservative management of our capital structure, reducing the risk of future dilution and the repurchase of our units if deemed to be an optimal use of capital. In addition, while the combined entity will not declare or pay distributions for a period of time post closing, the new management team's strategic plan contemplates reinstating a regular cash distribution at the appropriate time." Gary Goodman, Chairman of the Special Committee of Huntingdon REIT's Board of Trustees, added, "The combination of Huntingdon REIT and IAT will meaningfully reduce HREIT's leverage while increasing its annual free cash flow and will create a larger and stronger player in the Canadian commercial real estate market. With the integration of our combined assets, operations and people, we are confident that an internalized approach to asset management will add value for all unitholders. The principals and senior officers of IAT, who will have an approximate 26% indirect equity stake in the combined entity, will be dedicated to the management of the combined entity and will not be providing management services to any other real estate entities. In addition to the elimination of asset management fees, an anticipated reduction in third party property management fees and other overhead costs could potentially generate additional meaningful returns for unitholders of the combined entity over the long-term." The Boards of Trustees of Huntingdon REIT and IAT believe the combination will provide substantial benefits to both entities' unitholders, including: - Enhanced Market Position: The combined entity will own, lease and operate 88 properties across Canada with a total rentable area in excess of 5.8 million square feet. The number of properties of Huntingdon REIT will increase by approximately 26% (a 24% increase in GLA) as a result of the merger while IAT unitholders will benefit from participating in a more diversified pool of 88 properties versus its current 18-property portfolio. In addition, current Huntingdon REIT unitholders will benefit from the increased exposure to the historically stable industrial sector. - Broadened Geographic Diversification: The merger will improve tenant, geographic and asset mix diversification through the combination of these portfolios. The combined entity will have 43% of its portfolio by square footage in Manitoba, 26% in Ontario, 14% in British Columbia and 9% in Alberta with the balance of the portfolio located in Saskatchewan and the Northwest Territories. The merger of the two entities reduces each entity's reliance on any one particular market or tenant. Specifically, HREIT's concentration in Winnipeg will be reduced from 47% to 38%, and IAT's concentration in the Vancouver Airport market will be reduced from 65% to 13%. - Exposure to Vancouver Airport Industrial Market: Vancouver is the "Gateway to Asia" and, when combined with recent infrastructure improvements to Vancouver International Airport, demand for industrial space is expected to remain strong. - Enhanced Financial Position: The merger will produce a larger entity, a stronger balance sheet and, most importantly, increased cash flow which will provide Huntingdon REIT with improved financial stability. The larger platform and anticipated reduction in the combined entity's cost of capital should better position the combined entity to make accretive acquisitions and increase equity value over time. The combined entity's near term objectives will be to reduce costs and improve cash flow, aggressively manage the portfolio and debt maturities and to use free cash flow to delever, all towards a view of generating higher equity value and a potential reinstatement of a regular cash distribution at the appropriate time. The improved cash flow and balance sheet are anticipated to result in an improvement in the valuation of the combined entity's units and shrink the multiple discount at which HREIT currently trades compared to its REIT/REOC peers. - Better Alignment of Interests: The proposed new CEO will indirectly (as a principal of FrontFour Capital Group LLC ("FrontFour"), which has existing ownership positions in HREIT and IAT) control approximately 26% of the combined entity after completion of the merger and will have primary responsibility for overseeing the asset management of the combined entity going forward. Asset management will be internalized as soon as practicable after closing and it is contemplated as part of the proposed new management team's strategic plan to consider the qualitative and financial benefits of internalizing property management in the future as well. The post-merger ownership structure is expected to produce a superior alignment of interests compared to the current Huntingdon REIT structure and the combined entity will be the only real estate entity managed by the new leadership team. - Cost Savings: The combined entity is expected to benefit from significant cost savings estimated at $1.5 million per year resulting from G&A reductions and the internalization of the asset management function. There is also the potential for approximately $750,000 or more of additional cost savings through the internalization or restructuring of existing third party property management arrangements in the future. - Improved Operational Capabilities: With an effective marketing strategy, a renewed focus on managing existing tenant relationships, an understanding of existing tenants' strategic plans and the early renewal of tenant leases, the proposed new management team of the combined entity believes that meaningful operational improvements will likely also result from the merger. Early in 2009, IAT completed an internalization of its property and asset management at nominal cost to the IAT unitholders and IAT management has been successful driving incremental cash flow to the bottom line through their proactive approach to property and asset management. - Improved Liquidity: IAT's free cash flow contribution and its unencumbered assets are expected to improve the combined entity's liquidity position and mitigate any debt refinancing risks in the combined portfolio. Unitholders are also expected to benefit from increased trading liquidity as a result of the increase in the market float resulting from a combination of HREIT and IAT. Based on HREIT's closing price on August 17, 2009 of $0.395 per unit, the combined entity will have a market capitalization of approximately $61 million, compared to a current market capitalization of $29 million for HREIT and $26 million for IAT. - Rationalization of Portfolio: Pursuant to a strategy implemented by the Trustees of Huntingdon REIT earlier this year, HREIT has sold several properties already in 2009, generating cash proceeds that have been used to repay debt or fund principal repayments. Huntingdon REIT currently has several non-core assets under contract that are expected to generate additional cash proceeds. Any cash proceeds from dispositions will, depending on where the maximum return can be achieved, be (i) reinvested in core properties, (ii) used to repurchase units subject to regulatory approval, (iii) used for investment in real estate equities or for new accretive property acquisitions, (iv) applied against any remaining high-cost debt in the combined portfolio, or (v) used to fund upcoming convertible debenture maturities or repurchases. The combined entity's intention will be to continue to divest non-core assets, allowing management to focus its operational expertise on core income producing properties and those assets with value-added opportunities. - Chief Operating Officer: Upon successful completion of the proposed merger transaction, Mr. Patrick J. Kryczka, a real estate industry veteran with over 20 years of experience, has agreed to join the combined entity. Having a full-time dedicated COO is expected to be viewed positively by tenants and produce improved results in occupancy rates, cash flow and equity value. Mr. Kryczka previously held senior industry positions in organizations such as Realex Properties Corp., Redcliff Realty Group, Deloitte & Touche LLP, TrizecHahn Office Properties and Bramalea Limited. Both Boards of Trustees have received fairness opinions from their financial advisors, have determined that the proposed merger is in the best interests of their respective unitholders, and have recommended (in the case of Huntingdon REIT, upon the unanimous recommendation of the Special Committee) that their respective unitholders vote in favour of the merger at unitholder meetings that are expected to be held in October 2009. It is expected that a joint information circular will be sent to the unitholders of each trust in September 2009. The required unitholder approval of the proposed merger will be two-thirds of the votes cast by IAT unitholders and a simple majority of the votes cast by Huntingdon REIT unitholders other than FrontFour. FrontFour, IAT's largest unitholder owning approximately 45% of the IAT units outstanding, has entered into a voting agreement in support of the transaction. "We are very pleased that approximately 45% of IAT's unitholders have already expressed their support for the transaction," Mr. Goodman said. The merger is also subject to stock exchange approvals, certain required consents and other customary closing conditions. There are no Canadian tax consequences to a HREIT unitholder as a result of this transaction. For IAT unitholders, the transaction will trigger a taxable disposition such that an IAT unitholder generally will realize a capital gain or capital loss depending on their respective tax position. Upon completion of the transaction, the combined entity intends to take the necessary steps to qualify for the REIT exemption prior to January 1, 2011 under the SIFT legislation. The combination agreement provides that each party is subject to non-solicitation provisions and for payment of a fee of $2 million to either party in the event that the merger is not completed for certain reasons other than, among other things, failure to obtain unitholder approval. The combined entity's Board of Trustees is expected to comprise seven trustees consisting of three members from IAT's current board, three members from Huntingdon REIT's current board and Zachary George in his role as President and CEO. Gary Goodman will serve as Chairman of the new Board of Trustees. "We are very pleased that Zach George, who will have an approximate 26% indirect equity interest in the merged entity through his position as a portfolio manager at, and a minority shareholder of, FrontFour, will be leading the team as President and CEO," Mr. Goodman said. "Zach has demonstrated a passion for the real estate business and a track record of taking action for the benefit of all stakeholders as evidenced by his recent internalization of asset and property management services at IAT at a nominal cost, his hands-on approach to asset and property management, and his focus on maintaining and enhancing tenant, lender and airport authority relationships." "We look forward to working with IAT's Board of Trustees, Zach and his management team," Mr. Goodman concluded. RBC Capital Markets is acting as financial advisor to Huntingdon REIT in connection with the transaction and Dundee Securities is acting as financial advisor to IAT. Aikins, MacAulay & Thorvaldson LLP is acting as legal counsel to Huntingdon REIT, and Davies Ward Phillips & Vineberg LLP is counsel to the Special Committee of the Huntingdon REIT Board of Trustees. Clark Wilson LLP is acting as legal counsel to IAT. For further information regarding the proposed merger transaction please refer to the detailed investor presentation posted on both HREIT's ([ www.hreit.ca ]) and IAT's ([ www.iat-yvr.com ]) websites. Huntingdon REIT is a real estate investment trust, which is listed on the Toronto Stock Exchange under the symbols HNT.UN (Trust Units) and HNT.DB.C (Series C Convertible Debentures). Huntingdon REIT owns 70 income producing office, industrial, retail and standalone parking lot properties that have a total gross leaseable owned area of 4.7 million square feet; two land parcels held for development and other development and expansion opportunities within the existing portfolio. The properties are located in Manitoba, Ontario, Saskatchewan, Alberta, British Columbia and Northwest Territories. Huntingdon REIT also owns CRESI Inc., a third party property management business. More information about Huntingdon REIT can be found on its website at [ www.hreit.ca ]. IAT is an unincorporated, open-ended mutual fund trust under the laws of British Columbia, which is listed on the Toronto Stock Exchange under the symbol ACF.UN. IAT owns all of the shares of International Aviation Terminals Inc. ("IAT Inc.") and IAT Management Limited Partnership ("IAT Management LP"). IAT, IAT Inc. and IAT Management LP, specialize in the ownership, construction, management and marketing of aviation-related facilities. IAT currently owns, leases and manages approximately 1.1 million square feet of air cargo and aviation related facilities, on ground-leased land at five of Canada's leading international airports. Approximately 65% of IAT's holdings are located at Vancouver International Airport, Canada's second largest airport, with the balance of the facilities located in Calgary, Edmonton, Saskatoon and Winnipeg. IAT Management LP provides management, operation and administrative services to IAT. More information about IAT Air Cargo Facilities Income Fund can be found on its website [ www.iat-yvr.com ]. Forward-Looking Information: The forward-looking statements contained in this news release represent expectations as of the date hereof, and are subject to change after such date. HREIT, IAT and the new combined entity disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required under applicable securities regulations. This press release may contain forward-looking statements with respect to HREIT, IAT and the new combined entity and their respective operations, strategy, financial performance and condition. These statements generally can be identified by use of forward looking words such as "anticipate", "plan", "should", "may", "will", "expect", "estimate", "intends", "believe" or "continue" or the negative thereof or similar variations. The combined entity's actual results could differ materially from those anticipated in these forward-looking statements as a result of regulatory decisions, competitive factors in the industries in which the REIT operates, prevailing economic conditions, and other factors, many of which are beyond the control of the combined entity. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations, including that the transaction contemplated herein is completed. Important factors that could cause actual results to differ materially from expectations, or could in certain circumstances result in a termination of the combination agreement discussed herein, include, among other things, general economic and market factors, competition, changes in government regulation and the factors described under "Risk Factors" in the annual information forms of each of HREIT and IAT. The cautionary statements qualify all forward-looking statements attributable to HREIT, IAT and the new combined entity and persons acting on their behalf. Unless otherwise stated, all forward-looking statements speak only as of the date of this press release and the parties have no obligation to update such statements. This press release shall not constitute an offer to sell, or the solicitation of an offer to buy, any securities in any jurisdiction. The issuance of this press release is not an admission that any entity named in this press release owns or controls any units of HREIT or IAT or is a joint actor with any other entity. Adjusted Funds From Operation ("AFFO") is not a measure recognized under Canadian generally accepted accounting principles ("GAAP") and does not have a standardized meaning prescribed by GAAP. AFFO is referenced in this press release because the proposed new management team of the combined entity believes that this non-GAAP measure is a relevant measure of the combined entity's profitability. AFFO computed by HREIT, IAT or the new combined entity may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable to the AFFO reported by such organizations. The Toronto Stock Exchange has not reviewed or approved the contents of this press release and does not accept responsibility for the adequacy or accuracy of this press release. 

For further information: IAT Contact, Zachary R. George, President and Chief Executive Officer, Tel: (604) 249-5119, Fax: (604) 249-5101, Email [ zgeorge@iat-yvr.com ]; Huntingdon Contact, Gary Goodman, Trustee and Chairman of Special Committee, Tel: (416) 929-0108, Fax: (416) 646-2673, Email: [ ggoodman@ridc.com ]