TORONTO--(BUSINESS WIRE)--Inovalis Real Estate Investment Trust (the “REIT”) (TSX:INO.UN) today announced its intention to pursue a strategy that includes new “core and core+” investments in its current and new European markets and special cash distributions to unitholders attributable to its asset recycling plan, following the completion of its strategic review process. It has also set July 13, 2021 for the annual meeting of unitholders (the “Meeting”) to consider, among other things, the election of new independent trustees nominated as part of the REIT’s board renewal process.
“On behalf of the Trustees who will be leaving the Board following the Meeting, it has been our pleasure to serve the REIT and its unitholders”
Strategic Review
The strategic review process, first announced on October 28, 2020, was overseen by a special committee of independent members of the Board of Trustees (the “Special Committee”), with assistance from independent financial and legal advisors.
The Special Committee’s mandate was deliberately broad in order to enable it to consider a wide range of strategic alternatives available to the REIT. During its review process, the Special Committee considered and agreed to a renewed two-year extension to the REIT’s management agreement with Inovalis S.A., and considered and evaluated a number of expressions of interest relating to some or all of the assets of the REIT.
The Special Committee ultimately determined that it was in the best interest of the REIT and its unitholders to pursue a strategy as more particularly described below that it had developed in conjunction with management during its review process (the “Strategic Plan”).
Strategic Plan
The REIT intends to pursue the following investment strategy:
Cash Deployment
- Invest in “core and core+” assets that meet the REIT’s investment criteria and that are accretive to AFFO/unit on a normalized leverage neutral basis of 50% primarily in France and Germany
- Consider investing up to 15% of total assets in other continental European markets such as Spain, where the manager currently has operations and expertise
The REIT is expected to deploy the majority of its cash on hand in furtherance of such strategy. The manager has currently identified 120 million Euros of potential acquisitions in its current markets which fit within such strategy, and that could close in 2021. However the REIT has not yet entered into any agreements in connection with such acquisitions and there is no certainty any such acquisitions will be completed.
Structure
- By the end of 2022, the manager intends to, either acquire or dispose of current joint ventures in accordance with their respective agreements in an attempt to simplify its corporate structure and governance.
- The REIT’s preference will be to acquire new properties as wholly-owned assets.
Participatory Distribution and Asset Recycling Plan
The strategic review assisted in identifying the manager’s strong track record of crystallizing value in mature assets in the REIT’s portfolio. Expressions of interest on individual assets of the REIT also assisted in identifying attractive value opportunities yet to be realized.
The REIT intends to continue to sell mature assets where it believes value can be maximized and utilize the new capital to invest in higher return AFFO accretive opportunities.
As part of the strategic review process, the REIT has quantified the portion of its current balance sheet cash attributable to profitable asset monetization over IFRS fair market value as approximately $20 million generated by the sale of the Vanves and Rueil properties. In order to allow the REIT unitholders to participate in these profitable sales, the REIT intends to implement a supplementary “participatory” distribution program to provide unitholders with 50% of the incremental profit generated from any such sales.
The Board of Trustees announced it will begin the “participatory” distribution program with a special distribution of $10 million to be paid with the regular June distribution on July 15, 2021. This is based on 50% of the current cash attributable to sales over IFRS fair market value on the Vanves and Rueil properties, and represents $0.307 per unit.
The REIT expects additional properties, including Jeuneurs, to be included in the Asset Recycling Plan, in which case not less than half of after-tax realized cash would be distributed. In all instances, remaining proceeds will be deployed in AFFO accretive acquisition opportunities in accordance with the above-noted investment strategy.
Regular Monthly Distribution
The Special Committee also performed a review of the sustainability of the REIT’s current regular monthly distribution, taking into consideration current cash flow stability and deployment of the capital on its balance sheet for accretive acquisitions. It concluded that the current regular monthly distribution level should remain in place at $0.06875 per unit ($0.825 per annum) for the foreseeable future.
Renewal of Management Agreement
As previously announced and discussed in its Q1 MD&A, further to the Special Committee’s review, the Board of Trustees approved an extension of the Management Agreement with Inovalis S.A. by way of entry into an amended and restated Management Agreement, effective April 1, 2021, with a term ending March 31, 2023, subject to an additional one-year extension.
The Board of Trustees and Inovalis SA also agreed that given its relative size, the REIT will aim to internalize the finance functions on, or before, April 1, 2022.
Other key features of the revised management agreement include:
- Strong incentive for the Manager to reduce G&A and outsourced services, including off-sets, scalable charges for G&A expenses in excess of budgeted amounts, and incentive payments to management where actual annual G&A expenses are significantly less than the budgeted expenses for that year;
- From January 1, 2021 until the completion of the internalization, the Manager will reimburse the REIT half of all costs for the finance function; and
- The asset management fee will be reduced by CAD$500,000 once the internalization of the finance function is completed and the REIT has an option to fully internalize management once a market capitalization of CDN $750 million is attained (based on the volume weighted average trading price of the REIT’s units on its primary stock exchange).
The revised management agreement provides the Board and Manager with flexibility to continue to assess strategic options for the REIT while ensuring continuity of a professional and aligned European manager. The Special Committee also believes that the revisions to the Management Agreement better aligns the Manager’s interests with those of the REIT and its unitholders, as the Strategic Plan is implemented.
Performance Goals
The REIT and the Manager have also agreed to certain goals and priorities for the REIT’s ongoing business operations, including:
- Reducing normalized AFFO distribution payout ratio <95% in 12 months and <85% within three years
- Exiting all existing joint ventures by the end of 2022
- Achieving three year average AFFO/unit growth of 2-3% per year
- Evaluating the Asset Recycling “participatory” distribution program over a three-year period with the goal of increasing the overall distribution payout by a minimum of 10% annualized
- Increasing the institutional shareholder base to 25% over three years
Investor communication and engagement
The REIT recognizes it would benefit from an increased investor presence in Canada. One of the REIT’s objectives is to become the preferred vehicle for investors to gain exposure to European Real Estate Assets in the Canadian REIT market. To achieve this, an active review and selection process for a Canadian-based investor relations group and on-ground presence is underway, with engagement expected by Q3. The REIT expects that a focused and consistent message in the marketplace relating to the unique asset selection and enhancement strategies of the manager will assist in improving its market presence. Going forward, the REIT also intends to compare its performance to a European REIT index in order to allow investors to better track its relative performance.
Three New Trustees to be Nominated as Part of Board Renewal Process
The REIT has undertaken a board renewal initiative, resulting in the nomination of three new independent Trustee Nominees and two incumbent Trustees for election to the Board of Trustees at the REIT’s upcoming annual unitholders’ meeting to be held on July 13, 2021. It has been determined for a REIT of this size it would be more efficient to reduce the number of trustees from eight to five.
To that end, Jean-Daniel Cohen and Marc Manasterski will stand for re-election as incumbent Trustees at the Meeting, ensuring continuity and the preservation of institutional knowledge at the REIT. Three new independent Trustee candidates – Mike Bonneveld, Laetitia Pacaud and Robert Waxman – will also stand for election to the Board of Trustees at the Meeting (together with Messrs. Cohen and Manasterski, the “Trustee Nominees”, each a “Trustee Nominee”). Each new independent Trustee Nominee is well qualified and will bring new energy and requisite skills and experience to the Board:
- Mike Bonneveld is Director of Acquisitions and VP Asset Management for The Skyline Group of Companies. In his role he leads the acquisition teams for each of Skyline Apartment REIT, Skyline Retail REIT, Skyline Commercial REIT and Skydev collectively which has AUM in excess of $5.5B CDN. He has 26+ years of Canadian Real Estate experience, with previous roles at BMO Capital Markets Inc. and Scotia Capital Inc in their real estate corporate finance groups, as well as Director of Acquisitions at Allied Properties REIT;
- Laetitia Pacaud is COO and CFO at Epic Investment Services, a fully integrated North American real estate platform which owns MDC Realty Advisors in the United States. She is part of the Executive Leadership Team driving EPIC’s strategic growth plan in addition to leading corporate services. Since joining Epic, Laetitia developed the fund management line of business launching two real estate funds within the last 18 months. Prior to joining EPIC she was The President of Strathallen Capital Corp; and
- Robert Waxman is CFO at Skyline Investments (no relation to Mike Bonneveld and Skyline Group of Companies), a business with an asset base of $740 million, over 2000 employees and operating in two countries and 9 US states. He has been involved in asset transactions and financings of over $600 million in the 3+ years he has been at Skyline Investments.
“On behalf of the Trustees who will be leaving the Board following the Meeting, it has been our pleasure to serve the REIT and its unitholders,” said Dan Argiros, Chair of the Board of Trustees. “The dedicated service of all Trustees, including Michael Lagopoulos, Jo-Ann Lempert, Marc Manasterski, Stphane Amine, Michael Missaghie, Jean-Daniel Cohen and Robert Picard has been particularly valuable during the strategic review and COVID-19 pandemic, as was everyone’s support for the Board renewal initiative. I believe the REIT has a bright future and look forward to following its evolution.”