Minto -- summary under Domestic REITs

Overview

On July 3, 2018, the REIT completed an initial public offering in which unitholders are investing in a portfolio of rental properties formerly held by Minto Properties (MPI). This is being accomplished first by MPI transferring the portfolio (appraised at $1.179 billion) to a newly-formed wholly-owned LP (the Partnership) in consideration for cash, the assumption of a portion of the related secured debt, the issuance of two promissory notes and for a partnership interest that then will be converted into “common” Class A units, exchangeable Class B units and “preferred” Class C units, with MPI then selling its Class A units to the REIT for a note that is repaid out of the IPO proceeds. The Class C units (valued at $233 million) are intended to service the secured debt that was retained by MPI. This approach to deal with excess boot issues was also used in the Melcor and CT REIT IPOs.

The REIT and Initial Properties

The REIT has been formed as an Ontario unit trust to own and operate, through an Ontario limited partnership (the ‘‘Partnership’’), a portfolio of income-producing multi-residential rental properties located in urban markets in Canada.

Initial Properties

The REIT will initially indirectly acquire a portfolio of 22 multi-residential rental properties, comprising an aggregate of 4,279 suites, located in Toronto, Ottawa, Calgary and Edmonton (collectively, the ‘‘Initial Properties’’). Altus Group Limited has estimated the aggregate market value of the Initial Properties on a portfolio basis to be $1.179 billion, including a portfolio premium of 5%.

Minto

The Initial Properties are currently owned and operated by Minto Properties Inc. (‘‘MPI’’) which is part of the Minto Group of companies (collectively, ‘‘Minto’’), Since its inception in 1955, Minto has built more than 85,000 new homes, and it currently manages over 13,000 residential suites and a commercial portfolio of more than 2.5 million square feet of office and retail space; and it has more than 1,100 full-time employees in Canada and the U.S.. Minto also has a current development pipeline of approximately $800 million and approximately 1,500 residential rental suites.

Retained Interest Holder

Minto Partnership B LPO, an Ontario LP wholly-owned by MPI.

Management

The REIT will, through the Partnership, employ an experienced executive and operational team of real estate professionals, comprised of former Minto employees and employees who will be dually employed by the REIT and Minto.

Distributions

The REIT intends to pay predictable and sustainable monthly cash distributions at an initial estimated annual amount of $0.41 per Unit, which will provide Unitholders with an approximate cash distribution yield ranging from approximately 2.83% and a payout ratio of approximately 65% of forecast AFFO of the REIT for the Forecasted Period.

Further acquisitions of Minto properties

Pursuant to the Strategic Alliance Agreement, the REIT will have a right of first opportunity (the ‘‘ROFO’’) on multi-residential acquisition and investment opportunities identified by Minto (other than Excluded Opportunities) as well as on any after-acquired opportunity of Minto declined by the REIT pursuant to the ROFO (each, a ‘‘Subsequently Owned Property’’) that is wholly owned directly or indirectly by Minto and that Minto desires to sell, as it is Minto’s intention to have the REIT be the sole vehicle for all of its Canadian income producing multi-residential holdings over time, pursuant to the Strategic Alliance Agreement Minto will endeavour to facilitate an acquisition by the REIT of the Existing Interests or any Subsequently Owned Property that is not subject to a ROFO (collectively, the ‘‘Minto Interests’’). In addition, given Minto’s long-standing relationship with its institutional partners, the REIT also may have a competitive advantage in acquiring the interests of Minto’s institutional partners in co-owned and partnership assets in the future as third party institutional investors periodically review their liquidity alternatives.

Retained Debt and matching Class C Units

MPI will retain a portion of the debt in an approximate amount of $229.8 million (the ‘‘Retained Debt’’). The Retained Debt is secured by a charge on certain of the Initial Properties. The Retained Debt will not be assumed by the Partnership and will remain as indebtedness of MPI. In respect of the Retained Debt, an entity wholly-owned and controlled by MPI will hold Class C Units of the Partnership on which it will receive priority distributions. The Class C Units have been designed to provide MPI with an indirect interest in the Partnership that will entitle the holder of the Class C Units to distributions, in priority to distributions to holders of the Class A Units, Class B Units or GP Interest in an amount, if paid, expected to be sufficient (without any additional amounts) to permit MPI to satisfy amounts payable in respect of principal, interest or any other amount owing under the Retained Debt. As additional security for the Retained Debt, the holder of the Class C Units may pledge the Class C Units to the lenders of the Retained Debt.

Class B Units

The Retained Interest Holder will own, in the aggregate, approximately 22.9 million Class B Units, representing an aggregate approximate 62.4% ownership interest in the REIT or approximately 56.8% if the Over-Allotment Option is exercised in full (in each case, determined as if all Class B Units are exchanged for Units). The Class B Units will be economically equivalent to and exchangeable for Units of the REIT (on a one-for-one basis subject to customary anti-dilution adjustments). The REIT will issue Special Voting Units in connection with the issuance of the Class B Units, each of which will carry one vote per Special Voting Unit. The Retained Interest Holder will therefore be entitled to nominate three of the seven Trustees of the REIT. For so long as Michael Waters is the Chief Executive Officer of the REIT, he will comprise one of the Retained Interest Holder’s nominees.

Capitalization

Immediately following Closing, the Debt to Gross Book Value Ratio of the REIT is expected to be as follows:

Assumed Debt . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239,145

Class C Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233,282

Unsecured promissory note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,797

Principal amounts outstanding under the Credit Facility . . . . . . . . . . . . . . . .. . . . . 28,458

Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 526,682

Gross Book Value . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,128,955

Debt to Gross Book Value Ratio (inclusive of mark-to-market) . . . . . . . . . . . . . . . . 46.7%

Transaction steps

Prior to Closing

1. MPI formed a number of wholly-owned entities, including Minto Apartment GP Inc. (the ‘‘General Partner’’), pursuant to the laws of Ontario, and the Partnership.
2. MPI will transfer its beneficial interest in the Initial Properties to the Partnership in consideration for the Partnership assuming certain existing debt on the Initial Properties (but not the Retained Debt), paying cash of approximately $65.5 million (which the Partnership will obtain from refinancing certain of the Initial Properties), issuing two promissory notes in favour of MPI in the principal amount of $28.5 million and $25.7 million, respectively, and crediting the capital account of MPI’s limited partner interest.
3. The General Partner will acquire legal title to the Initial Properties, either directly or indirectly through the acquisition of shares of a title nominee.
4. MPI will complete the refinancing of the Retained Debt.
5. The REIT’s initial declaration of trust will be amended and restated. The capital of the REIT will be comprised of Units and Special Voting Units (which Special Voting Units will be issued to the holder of Class B Units of the Partnership on a one-to-one basis).
6. The limited partnership agreement of the Partnership will be amended and restated pursuant to which the limited partner capital of the Partnership will be restated to consist of Class A Units, Class B Units and Class C Units.
7. In connection with the amendment and restatement of the Partnership limited partnership agreement), MPI will exchange its limited partner interest in the Partnership for Class A Units, Class B Units and Class C Units. Special Voting Units will be issued by the REIT to MPI in connection with the issuance of the Class B Units. MPI will transfer all of its Class B Units and Class C Units to entities wholly-owned and controlled by MPI.
8. On the day prior to Closing, MPI will sell all of its Class A Units in the Partnership and the shares of the General Partner to the REIT for a non-interest bearing promissory note (the ‘‘Acquisition Note’’), and a further non-interest-bearing promissory note whose amount is equal to the purchase price for some of the Initial Properties that have not yet been leased up of $8.356.000, subject to downward adjustment based on the appraisal-based capitalization of the income generated on lease-up.

The Offering

9. The REIT will complete the Offering.
10. The REIT will use the net proceeds from the Offering to repay the Acquisition Note in full.
11. The two Units held by the initial Unitholder of the REIT will be redeemed for $20.
12. The Partnership will draw on the Credit Facility to pay the $28.5 million note issued in ii.

Exchange Agreement

In connection with Closing, the REIT, the Partnership and the Retained Interest Holder will enter into the pursuant to which the Retained Interest Holder will be granted the right to require the REIT to exchange each Class B Unit held by the Retained Interest Holder for one Unit, subject to customary anti-dilution adjustments. Upon an exchange, the corresponding number of Special Voting Units will be cancelled.

Unit redemption rights

Upon receipt of the Redemption Notice by the REIT, all rights to and under the Units tendered for redemption shall be surrendered and the holder thereof will be entitled to receive a price per Unit (the ‘‘Redemption Price’’) equal to the lesser of:

(a) 90% of the ‘‘Market Price’’ of a Unit calculated as of the date on which the Units were surrendered for redemption (the ‘‘Redemption Date’’); and

(b) 100% of the ‘‘Closing Market Price’’ on the Redemption Date.

Cash payable on redemptions will be paid pro rata to all Unitholders tendering Units for redemption in any month. To the extent a Unitholder is not entitled to receive cash upon the redemption of Units as a result of any of the foregoing limitations, then the balance of the Redemption Price for such Units will, subject to any applicable regulatory approvals, be paid and satisfied by way of a distribution in specie to such Unitholder of Redemption Notes or securities of a REIT subsidiary or other property of the REIT, as determined by the Trustees in their sole discretion.

Canadian tax consequences

An executive officer of the REIT has advised counsel that the REIT expects to qualify for the REIT Exception in 2018 and future years. The Partnership is expected to qualify as an “excluded subsidiary entity” at all relevant times.