CT/Canadian Tire

Overview

Offering to the public of 26.35M units by the REIT at $10 per unit (30.302M units with over-allotment). The REIT, an Ontario unit trust and s. 108(2)(b) closed end fund, will indirectly acquire the beneficial ownership of a Canadian real estate portfolio (43.3% in Ontario) by investing in a newly-formed Ontario limited partnership (the "Partnership") formed by three Canadian subsidiaries of Canadian Tire Corporation, Limited ("CT"), namely, Canadian Tire Real Estate Limited ("CTREL") and two LPs (such three subsidiaries, collectively "CTC"). The portfolio transferred by CTC to the Partnership (the "Initial Properties") will consist of 255 Canadian retail properties and one distribution centre, whose aggregate purchase price will be $3.53B and has been independently appraised at between $3.745B and $3.818B (corresponding to cap rates of 6.20% to 6.08%). CTC will hold (exchangeable) Class B LP Units and (preferred) Class C LP Units of the Partnership, as well as units of the REIT.

Canadian Tire

CT, which is TSX-listed, has a market cap of $7.6B. The Initial Properties represent approximately 72% (by square footage) of the real estate of CT.

CT-group tenants will generate 95.7% of rents. CTREL (and CT re the distribution centre) will enter into leases with the Partnership with staggered initial terms of 10 to 21 years (and with multiple options to extend the terms), and weighted average escalations of 1.5% p.a. At closing, the REIT will enter into a right of first offer agreement, and development agreement, with CT.

Structure

CT will hold an approximate 83.1% effective interest (assuming exercise of the over-allotment option) in the REIT, directly, and through the holding by CTC of Class B LP Units of the Partnership (and a matching number of special voting units of the REIT with nominal economic attributes), with CTC also holding Class C LP Units (see below). The Class B LP Units will be exchangeable on a one-for-one basis for REIT units, whose economics they will track. The REIT will hold Class A LP Units of the Partnership, together with the GP thereof, which will have a 0.001% profits interest.

Class C LP Units

The (non-voting) Class C LP Units of the Partnership will consist of nine series, each with a par value of $200M and with an aggregate par value of $1.8B and with distribution rates during their initial fixed rate period ranging from 3.5% (for the Series 1 and 2 maturing on 31 May 2015 and 2016) to 5.0% for the Series 6 to 9 (maturing between 31 May 2031 and 2038). The distribution entitlements are cumulative and have priority over the other classes of units. After each initial fixed rate period and every five year period thereafter, the holder of the series may elect a fixed rate (based on 5-year Canadian government yields plus a spread) or floating rate (a T-Bill yield plus 1/12 of the foregoing spread). At the end of each 5-year period the Class C LP Units are redeemable and retractable for their redemption amount (i.e., par value plus any unpaid distributions) and are also redeemable by the Partnership at any time after January 1, 2019 at the "Canada Call Price" (i) out of property sales proceeds, provided that the Series 1 shares are redeemed first (or that right is waived), or (ii) on a specified REIT change-of-control event. Such redemptions of Class C LP Units (other than upon a change of control at the REIT) can be settled at the option of the Partnership, in cash or an equivalent number of Class B LP Units.

Closing transactions

At closing:

• CTC will transfer its beneficial interest in the Initial Properties to the Partnership in exchange for (i) $263.5M, $597.1M, $409.4 and $200M of Class A LP Notes, Class B1 LP Notes, Class B2 LP Notes and Class C LP Notes, respectively, (ii) 48.6M Class B LP Units (accompanied by an equivalent number of Special Voting Units of the REIT) and (iii) 1.6M Class C LP Units
• The Partnership will repay (in sequence) its Class C LP Notes, Class B2 LP Notes and Class B1 LP Notes by issuing 0.2M Class C LP Units (resulting in 1,800,000 Class C LP Units being outstanding), 40.9M Class B LP Units with an equivalent number of Special Voting Units (resulting in $895.598M of Class B LP Units being outstanding) and 86.1M Class A LP Units to CTC, respectively
• CTC will then transfer its 86.1M Class A LP units to the REIT in exchange for a promissory note
• The REIT will issue 26.35M units under the offering for gross proceeds of approximately $263.5B units (reduced by costs estimated at $22.3M); (the underwriters have agreed that no units will be offered in the U.S. except under Rule 144A)
• The REIT will use $241.2M of the offering proceeds and issue 59.7M units in order to repay the promissory note owing to CTC (see two steps above), with the prospectus also qualifying such units

The Partnership will not own the shares of four nominee companies holding title to Initial Properties in Quebec.

Distributions

Monthly, of $0.054167 per unit ($0.65 per annum), estimated to be 90% of AFFO. Estimated tax deferred percentage of 23% for 2014 (per preliminary prospectus). DRIP with 3% bonus distribution. Upon conversion of the request of Class B LP unitholders, the Partnership will adopt a similar DRIP for them (and they also may elect to receive distributions on the Class B LP Units in the form of REIT units).

Management

The REIT will have internal management. It will receive CTC services on a cost recovery basis, and CTREL will be the property manager.

Canadian tax disclosure

SIFT status. Management believes that the REIT will satisfy the REIT exception (per p.142), "throughout 2013 and beyond". The Partnership is expected to qualify as an excluded subsidiary entity. Management intends to ensure that the REIT satisfies the s. 108(2)(b) tests (p. 142).

Preferred units

In the event the REIT wishes to issue preferred units, it will seek a CRA ruling (p. 100).

Reduced UCC under s. 97(2)

Certain of the Initial Properties will be acquired on a rollover basis.