Summit Industrial Income REIT Announces Proposed Internalization of Asset and Property Management

TORONTO, March 25, 2019 /CNW/ - Summit Industrial Income REIT ("Summit" or the "REIT") (TSX: SMU.UN) announced today that it has entered into an agreement (the "Purchase Agreement"), to internalize the REIT's asset and property management functions (the "Internalization"). As a result of the Internalization, the annual asset management fee, property management fee, acquisition fee, incentive fee, and other fees payable by the REIT to its external manager, Sigma Asset Management Limited (the "Manager") will be eliminated. The Internalization is expected to close on or about May 17, 2019, subject to unitholder approval and other customary conditions set forth in the Purchase Agreement.

Upon closing of the Internalization, the REIT will acquire all of the issued and outstanding shares of the Manager for total consideration of $95.0 million (the "Purchase Price"). $20.0 million of the consideration will be satisfied with cash, expected to be funded from the REIT's revolving operating facility, and $75.0 million of the consideration will be satisfied with 6,666,666 units of the REIT, based on the 30-day volume weighted average trading price of the REIT's units on all exchanges on which there was trading, up to and including March 20, 2019 of $11.25 per unit. The units issued as consideration will be subject to contractual lock-up periods, and the listing of such units will be subject to the approval of the Toronto Stock Exchange.

The terms of the Internalization were negotiated and unanimously recommended for approval by a committee composed of all of the independent trustees of the REIT (the "Special Committee"). The Special Committee has received a fairness opinion from Scotia Capital Inc. to the effect that, as of March 25, 2019 subject to the assumptions and qualifications contained in such opinion, the consideration payable by the REIT pursuant to the Internalization is fair, from a financial point of view, to the REIT.

The Purchase Price was determined in the context of the value derived by the discounted cash flows of fees that would otherwise have been expected to be payable to the Manager under the current management agreement, less the expected incremental costs to the REIT of internalized management (based upon certain assumptions considered by Scotia Capital Inc. and the Special Committee to be reasonable).

Strategic Rationale for Internalization

The Special Committee considered a number of factors in recommending approval of the Internalization, including the key reasons below:

• Results in the elimination of the annual asset management fee based on the gross value of assets managed, the property management fee, the acquisition fee, the incentive fee and other fees payable by the REIT to the Manager, which were established when the REIT was smaller and these expenses were considerably lower.
  
• The REIT will continue to benefit from the expertise, platform (including third party management fees), and industry relationships of the Manager's key employees who will continue on with the REIT after closing.
  
• Improved net operating income ("NOI")¹ of $3.5 million on an annualized basis, as a result of reduced property operating expenses and the addition of contractual third party fee revenue.
  
• Reduces the REIT's ongoing general and administrative expenses and increases the REIT's funds from operations ("FFO") ² and adjusted funds from operations ("AFFO")³ per unit. The REIT expects to incur approximately $5.1 million of total general and administrative expenses on an annualized basis, which results in a low general and administrative expenses' ratio against total assets of 0.26%.
  
• Immediately accretive to the REIT's AFFO per unit by approximately 2.8%.
  
• A significant portion (~79%) of the consideration for the Internalization is being satisfied with units of the REIT, all of which are subject to contractual hold periods, which increases alignment of interest between the REIT and its senior management team.
  
• Responds to the capital markets' preference for internally managed REITs.

"Since Summit's inception, Sigma Asset Management has established a successful track record of managing the REIT, demonstrated through significant unitholder value creation and asset growth. As Summit undertakes its next phase of growth, we believe it is the appropriate time to internalize management to provide better alignment of interests with investors and position Summit for long-term growth and robust unitholder value creation. The Board of Trustees, after consultation with its financial and legal advisors, have unanimously determined that the Internalization is in the best interests of Summit and its unitholders and recommends that unitholders vote in favour of the Internalization," said Jim Tadeson, Lead Trustee of Summit.

"As Summit continues to evolve and pursue growth opportunities, along with a deepening focus on enhanced unitholder value through increasing FFO and distributions, we believe that this revised management structure better aligns the REIT with the wishes of our Board of Trustees, unitholders and the investment community," said Paul Dykeman, Chief Executive Officer of the REIT.

Details

The Internalization is subject to several terms and covenants in favour of the REIT, including:

• Lock-Up Agreements: The units of the REIT issued as consideration for the Internalization will be subject to two lock-up periods. Two-thirds of such units will be subject to a lock-up period (with 25% of those units being released after four years and the balance being released after five years), and the remaining one-third of such units will be subject to a lock-up period of three years (with an equal amount of those units released each year). At closing, the senior management team of the REIT will own approximately 9.7 million units, or approximately 9% of the outstanding units, creating strong alignment with the REIT's unitholders.
  
• Management Team: Upon closing, Paul Dykeman will continue as the Chief Executive Officer of the REIT pursuant to a 5 year agreement. All other Manager personnel providing asset and/or property management services to the REIT will become employees of the REIT or one of its affiliates.
  
• Non-Competition and Non-Solicitation: Upon closing, Paul Dykeman and Lou Maroun will each enter into a non-competition and non-solicitation agreement with the REIT, while they are an officer or trustee of the REIT (and in the case of Paul Dykeman, for a one-year period thereafter).

Unitholder Approval

While not required under the REIT's declaration of trust, applicable securities law or the Toronto Stock Exchange rules, the Special Committee has determined that the Internalization should be subject to the approval of the REIT's disinterested unitholders. As a result, the Board of Trustees will be seeking the approval, on an advisory basis, of the Internalization, such that it is a condition in the Purchase Agreement that if the Internalization is not approved by a majority of the votes cast by disinterested unitholders represented in person or by proxy at a meeting of the REIT's unitholders (the "Meeting"), the Purchase Agreement will be terminated and the REIT will not proceed with the Internalization (the "Advisory Vote Condition").

The previously announced annual general meeting of the REIT to be held on May 8, 2019 will become an annual general and special meeting of the REIT and an information circular regarding the annual general meeting matters, and the Internalization, is expected to be mailed to the REIT's unitholders shortly.

Fairness Opinion and Recommendation of the Special Committee

The Special Committee received an opinion from Scotia Capital Inc. to the effect that, as of March 25, 2019, subject to the assumptions and qualifications contained in such opinion, the consideration payable by the REIT pursuant to the Internalization is fair, from a financial point of view, to the REIT.

The Special Committee, considering the results of the review process conducted by its advisors and other relevant matters, have unanimously determined that the Internalization is in the best interests of the REIT and its unitholders and unanimously recommend that the REIT's unitholders vote in favour of the Internalization.

Advisors

Scotia Capital Inc. served as financial advisor to the Special Committee.

Bennett Jones LLP and McCarthy Tétrault LLP served as legal counsel to the Special Committee and the REIT, respectively.

Graham Gow served as legal counsel to the 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 exempt from the formal valuation and minority approval requirements of MI 61-101 as at the time the Internalization was agreed to, neither the fair market value of the subject-matter of, nor the fair market value of the consideration for, the Internalization exceeded 25% of the REIT's market capitalization as determined in accordance with MI 61-101. Notwithstanding the foregoing, the Special Committee has determined that the Internalization should be subject to the approval of the REIT's disinterested unitholders, and so the Advisory Vote Condition has been included as an irrevocable condition in the Purchase Agreement.

About Summit

Summit Industrial Income REIT is an unincorporated open-end trust focused on growing and managing a portfolio of light industrial properties across Canada. Summit's units are listed on the TSX and trade under the symbol SMU.UN. For more information, please visit our web site at www.summitIIreit.com.

Caution Regarding Forward Looking Information

This news release contains forward-looking statements and forward-looking information within the meaning of applicable securities laws. The use of any of the words "expect", "anticipate", "continue", "estimate", "objective", "ongoing", "may", "will", "project", "should", "believe", "plans", "intends", "goal" and similar expressions are intended to identify forward-looking information or statements. More particularly and without limitation, this news release contains forward looking statements and information concerning: the anticipated benefits of the Internalization; the expected closing date of the Internalization; and the financing of the consideration for the Internalization. Although Summit believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward looking statements and information because Summit can give no assurance that they will prove to be correct. By its nature, such forward-looking information is subject to various risks and uncertainties, which could cause the actual results and expectations to differ materially from the anticipated results or expectations expressed, including, but not limited to, the risk that the Internalization may not close. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof, and to not use such forward looking information for anything other than its intended purpose. Summit undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

Non-IFRS (Non-GAAP) Financial Measures

Readers are cautioned that certain terms used in this press release, such as NOI, FFO and AFFO, and any related per unit amounts used by management of the REIT to measure, compare and explain the operating results and financial performance of the REIT do not have any standardized meaning prescribed under IFRS generally accepted accounting principles ("GAAP") and, therefore, should not be considered as alternatives to net income or cash flow from operating activities calculated in accordance with IFRS. Such terms do not have a standardized meaning prescribed by IFRS and the computation of these non-GAAP performance measures may not be comparable to similarly titled measures presented by other publicly traded entities.

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¹ Refer to Non-IFRS (Non-GAAP) Financial Measures below.

² Refer to Non-IFRS (Non-GAAP) Financial Measures below.

³ Refer to Non-IFRS (Non-GAAP) Financial Measures below.

SOURCE Summit Industrial Income REIT

Paul Dykeman, CEO at [phone], [email protected]; Jim Tadeson, Lead Trustee at: [phone], [email protected]

Related Links

www.summitiireit.com