Milestone Apartments REIT Announces Internalization of Asset Management

– Immediately accretive to the REIT's AFFO per unit and results in greater alignment of interest between the REIT and senior management –

TORONTO, July 26, 2016 /CNW/ - Milestone Apartments Real Estate Investment Trust (TSX: MST.UN) ("Milestone" or the "REIT") today announced that it has entered into an agreement to internalize the REIT's asset management function (the "Internalization" or the "Transaction"). Closing of the Transaction is expected to occur on September 30, 2016, subject to unitholder approval and other customary conditions. As a result of the Internalization, the annual management fee and incentive fee expenses will be eliminated. All dollar amounts are in U.S. currency unless otherwise noted.

Upon closing of the Transaction, the REIT's operating partnership will acquire TMG Partners L.P., the REIT's external asset manager (the "Asset Manager") for $25.0 million in cash, which is expected to be funded with a drawdown on the REIT's revolving line of credit, and 5.3 million class B limited partnership units of the REIT's operating partnership ("Class B Units"), which are redeemable on a one-for-one basis for trust units of the REIT and subject to a hold period. The aggregate consideration is approximately $106.5 million and is based on the Toronto Stock Exchange 10-day volume weighted average price of the REIT's units ended July 25, 2016 of C$20.20 and a US$ to C$ exchange rate of US$1 to C$1.3225 based on the Bank of Canada's noon U.S. dollar exchange rate as at July 25, 2016.

The terms of the Transaction were negotiated and unanimously recommended for approval by the independent trustees of the REIT (the "Independent Trustees"). The Independent Trustees have received a fairness opinion from National Bank Financial Inc. to the effect that, as of July 26, 2016, subject to the assumptions and qualifications contained in such opinion, the consideration paid by the REIT in connection with the Internalization is fair, from a financial point of view, to the REIT's unitholders (other than affiliates of the Asset Manager).

In light of the REIT's significant growth over the last several years, including the completion of the Landmark transaction earlier this year, the Independent Trustees and the Asset Manager have been evaluating the Internalization of the REIT's asset management function, and believe that the Internalization will create value for the benefit of the REIT and its unitholders. The consideration being paid by the REIT closely approximates the discounted management fees that would otherwise have been payable to the Asset Manager under the current asset management agreement, which is expected to expire in March 2023, net of the expected costs to the REIT of internalized management (based upon certain assumptions considered by National Bank Financial Inc. and the Independent Trustees to be reasonable).

Strategic Rationale

The Independent Trustees considered a number of factors in recommending approval of the Internalization, including the key reasons set forth below:

• Results in the elimination of the asset management fee and the annual incentive fee, which were both established at the time of the REIT's initial public offering, when the REIT was smaller and these expenses were considerably lower;
• Immediately accretive to the REIT's adjusted funds from operations ("AFFO") per unit by approximately 4%;
• The consideration is being satisfied predominantly in equity, which creates greater alignment of interest between the REIT and its senior management team;
• Reduces the REIT's ongoing G&A expenses and increases the REIT's FFO and AFFO per unit. The REIT will save fees previously payable to the Asset Manager of approximately $12.5 million on an annualized basis. The REIT expects to incur approximately $3.0 million annually of additional salaries and overhead as a result of the Internalization;
• Results in the REIT continuing to benefit from the Asset Manager's expertise, platform and industry relationships while operating under a more efficient cost structure; and
• Reflects the capital markets' preference for internal asset management.

"The Independent Trustees have undertaken an extensive evaluation of the merits of internalization, after consultation with its financial and legal advisors, have unanimously determined that it is in the best interests of Milestone and its unitholders to fully internalize the REIT's asset management function" said Michael Young, Chair of Milestone. "The Board of Trustees recommends that unitholders vote in favor of the Transaction."

Alignment

The Asset Manager is owned by Robert P. Landin and Jeffrey L. Goldberg.  76.5% of the consideration for the Transaction will be paid in Class B Units. Approximately 1.3 million of the Class B Units will be subject to a two year holding period and the balance of the Class B Units will be subject to a five year holding period. Robert P. Landin has agreed to hold all Class B Units, or trust units into which they are redeemable, that are received in the Transaction for a period of at least five years, subject to early release in the event of a termination of employment or a change of control of the REIT. At the close of the Transaction, the Milestone senior management team will own approximately 10.9 million Class B Units, or 13.4% of the outstanding REIT units (on an as-converted basis).

Internal Asset Management Team

Upon closing of the Transaction, Robert P Landin and all other Asset Manager personnel providing asset management services to the REIT will become employees of a subsidiary of the REIT.

Non-Competition Agreement

Also on closing, Robert P. Landin and Jeffrey L. Goldberg will enter into an amended and restated non-competition agreement with the REIT pursuant to which they will be restricted from being involved in any aspects of the multifamily property sector, outside of activities related to the REIT and its affiliates, for a period of five years, subject to certain exceptions including for holding publicly traded securities and interests in certain pre-existing investment vehicles.

Unitholder Approval

While not required under the REIT's declaration of trust, applicable securities laws or TSX rules, the Independent Trustees have determined that the Transaction should be subject to the approval of a majority of the votes cast by Milestone unitholders (other than Unitholders affiliated with the Asset Manager) represented in person or by proxy at a special meeting of Milestone unitholders to be called to consider the Transaction (the "Meeting"). An information circular regarding the Transaction is expected to be mailed to REIT unitholders in the coming weeks, with the Meeting expected to take place in September 2016.

Fairness Opinion and Recommendation of the Independent Trustees

The Independent Trustees received an opinion from National Bank Financial Inc. to the effect that, as of July 26, 2016, subject to the assumptions and qualifications contained in such opinion, the consideration paid by the REIT in connection with the Internalization is fair, from a financial point of view, to the REIT's unitholders (other than affiliates of the Asset Manager).

The Independent Trustees, considering the results of the review process conducted by its advisors and other relevant matters, have unanimously determined that the Transaction is in the best interests of the REIT and its unitholders and unanimously recommend that the Milestone unitholders vote in favor of the Transaction.

Advisors

National Bank Financial Inc. served as financial advisor to the Independent Trustees and the REIT. 

Goodmans LLP, Ricketts Harris LLP and Shearman & Sterling LLP served as legal counsel to the Independent Trustees and the REIT.

Vinson & Elkins LLP served as legal counsel to the Asset Manager.

Multilateral Instrument 61-101

The Internalization constitutes a "related party transaction" under Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101"). However, the Internalization is not subject to the formal valuation and minority approval requirements of MI 61-101 as the fair market value of the Transaction was not more than 25% of the REIT's market capitalization. Notwithstanding the foregoing, the Independent Trustees have determined that the Transaction should be subject to the approval of the REIT's unitholders.

About Milestone

The REIT is an unincorporated, open-ended real estate investment trust that is governed by the laws of Ontario. The REIT's portfolio consists of 72 multifamily garden-style residential properties, comprising 22,546 apartment units that are located in 14 major metropolitan markets throughout the Southeast and Southwest United States. The REIT is the largest real estate investment trust listed on the TSX focused solely on the United States multifamily sector. The REIT operates its portfolio through its internal property management company, Milestone Management, LLC, which has approximately 1,500 employees and manages more than 50,000 apartment units across the United States. Based in Dallas, TX, TMG Partners, L.P., an affiliate of The Milestone Group, LLC, is the external asset manager of the REIT. For more information, please visit www.milestonereit.com.

Forward-Looking Information

This news release may contain forward-looking statements (within the meaning of applicable securities laws) relating to the business of the REIT and the environment in which it operates. Forward-looking statements are identified by words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions.  Some of the specific forward-looking statements in this news release include, but are not limited to, statements with respect to completion of the Transaction, the financing of the Transaction, the effects of the Transaction on the REIT (including the extent to which it will be accretive and its impact on AFFO) and anticipated general and administrative expenses. They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. 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 risk that the Transaction may not close, the REIT may not be able to achieve certain assumptions relating to financing, acquisitions and growth, as well as general factors affecting the U.S. multifamily industry as discussed under the heading "Risk Factors" in the REIT's annual information form available at www.sedar.com. The forward-looking statements in this news release are based on certain assumptions. There can be no assurance that forward-looking statements will prove to be accurate as actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, these forward-looking statements are made as of the date of this news 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.

Non-IFRS Measures

This press release contains certain non-IFRS financial measures, including AFFO. 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. Please refer to the REIT's most recent Management's Discussion and Analysis for a reconciliation of AFFO to standardized IFRS measures.

SOURCE Milestone Apartments REIT

Robert Debs, Investor Relations, Milestone Apartments REIT, Tel: [phone]; Bruce Wigle, Investor Relations, Bay Street Communications, Tel: [phone]