Melcor REIT Announces $138.25 Million of Acquisitions From Melcor and $30 Million Bought Deal of Extendible Convertible Debentures

EDMONTON, ALBERTA--(Marketwired - Nov. 12, 2014) -

NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES

Melcor Real Estate Investment Trust (TSX:MR.UN) (the "REIT") announced today that it has agreed to acquire (the "Melcor Acquisition") a portfolio of six commercial properties (the "Melcor Acquisition Properties") for an aggregate purchase price of $138.25 million (excluding transaction costs) from Melcor Developments Ltd. ("Melcor"), the REIT's external asset manager and property manager. Expanding on the REIT's recent announcement, it has entered into an agreement to acquire (the "Third Party Edmonton Acquisition") (together with the Melcor Acquisition, the "Acquisitions") an office and retail complex in Edmonton, Alberta (the "Third Party Edmonton Complex") from a third party vendor for a purchase price of approximately $31.38 million (excluding transaction costs). Closing of the Third Party Edmonton Acquisition is expected to be in Q4 2014.

Highlights

• The REIT agrees to acquire: (i) from Melcor, a portfolio of six new or redeveloped commercial properties; and (ii) from a third party vendor, the Third Party Edmonton Complex. The Melcor Acquisition Properties and the Third Party Edmonton Complex (collectively, the "Acquisition Properties") comprise a total of approximately 896,400 square feet of gross leasable area ("GLA")
• The acquisition price of the Melcor Acquisition Properties is $8.25 million below appraised value
• Six of the seven Acquisition Properties are located in Alberta with the remaining property located in Saskatchewan
• The Acquisitions will increase the GLA in the REIT's portfolio by approximately 49%
• The Acquisitions are expected to be accretive to AFFO per Unit
• The REIT will partially finance the Melcor Acquisitions through the sale, on a bought deal basis, of approximately $30 million aggregate principal amount of 5.50% extendible convertible unsecured subordinated debentures (the "Convertible Debentures")
• Melcor to subscribe for $45 million of Class B LP Units at $10.25 per unit (a 1.5% premium to the $10.10 closing price of Melcor REIT units on November 11, 2014), increasing its effective ownership in the REIT from 47.6% to 56.5%
• The REIT's trustees unanimously recommend that unitholders vote in favour of the Melcor Acquisition

The purchase price of approximately $169.63 million for the Acquisitions implies a blended capitalization rate of approximately 6.93%. The purchase price of the Melcor Acquisition Properties is expected to be satisfied by a combination of cash partially generated from the net proceeds of the offering, assumed mortgages, and the issuance of Class B LP Units. The purchase price of the Third Party Edmonton Acquisition is expected to be satisfied through an assumed mortgage and cash drawn from the REIT's revolving credit facility. The REIT's debt to gross book value is expected to be approximately 49.6% (54.4% including the Convertible Debentures) following the completion of the Acquisitions.

Darin Rayburn, Chief Executive Officer of the REIT, commented:

"We continue to execute on our growth strategy. These latest acquisitions increase our portfolio gross leasable area by 49% and are expected to be immediately accretive to AFFO per unit. The properties acquired include both innovative new mixed-use developments that are unique in the marketplace, and properties that have been improved through redevelopment over the past few years. Together, the acquisitions bring us closer to our diversification targets by increasing our retail portfolio to 41% and our industrial portfolio to 8% of total gross leasable area. These acquisitions again demonstrate the advantage of our exclusive Melcor property pipeline and our ability to find and complete third party acquisitions to drive growth."

The Offering

In order to finance a portion of the cash component of the purchase price of the Melcor Acquisition and costs related to the Melcor Acquisition, to repay other indebtedness, to finance future acquisitions and for general trust purposes, the REIT has entered into an agreement to sell to a syndicate of underwriters co-led by RBC Capital Markets and CIBC, on a bought deal basis, $30,000,000 aggregate principal amount of 5.50% extendible convertible unsecured subordinated debentures (the "Offering"). The maturity date for the Convertible Debentures will initially be the date upon which a Termination Event (as defined below) occurs (the "Initial Maturity Date"). Upon the Melcor Acquisition Closing, the Maturity Date of the Convertible Debentures will be automatically extended from the Initial Maturity Date to December 31, 2019 (the "Final Maturity Date"). In the event that the Melcor Acquisition Closing does not occur on or prior to the occurrence of a Termination Event, the Convertible Debentures will mature on the Initial Maturity Date and each Convertible Debenture will entitle the holder thereof to receive an amount equal to the offering price thereof and accrued and unpaid interest thereon. The "Termination Event" means the earliest to occur of any of: (i) the completion of the Melcor Acquisition not occurring on or before the Deadline of January 15, 2015; (ii) the REIT delivering notice to the Lead Underwriters that the Melcor Acquisition Agreement has been terminated or that the REIT will not be proceeding with the Melcor Acquisition; or (iii) the REIT formally announcing to the public by way of a press release that it does not intend to proceed with the Melcor Acquisition. 

The Convertible Debentures are convertible at the option of the holder, into trust units of the REIT at $12.65 per trust unit. The REIT has also granted the underwriters an option (the "Over-Allotment Option"), exercisable in whole or in part, at any time not later than the earlier of (i) the 30th day following closing of the Offering and (ii) the occurrence of a Termination Event, and entitles the underwriters to purchase up to an additional $4,500,000 aggregate principal amount of Convertible Debentures (being approximately 15% of the aggregate principal amount of Convertible Debentures offered) to cover over-allotments, if any, and for market stabilization purposes. The Offering is expected to close on or about December 3, 2014. 

The Convertible Debentures will be offered in Canada pursuant to a short form prospectus to be filed with the securities commissions and other similar regulatory authorities in each of the provinces and territories of Canada, pursuant to National Instrument 44-101 - Short Form Prospectus Distributions, and will be eligible for sale in the United States by way of private placement.

The Offering is also subject to certain conditions, including, but not limited to, receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange ("TSX").

The Melcor Acquisition will be conditional upon the satisfaction of certain conditions including lender consents, completion of the Offering, approval of the Melcor Acquisition and the issuance of Class B LP Units in connection therewith by a majority vote of Units held by unitholders unrelated to Melcor ("Minority Unitholder Approval"), Competition Act (Canada) approval and TSX approval. 

Each of the Melcor Acquisition and the issuance of Class B LP Units in connection therewith constitutes a "related party transaction" under Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ("MI 61-101"). Pursuant to MI 61-101, the REIT was required to obtain independent appraisals of the Melcor Acquisition Properties. The REIT is also required, pursuant to MI 61-101, to obtain Minority Unitholder Approval, at a special meeting that is expected to be held on December 17, 2014 (the "Unitholder Meeting"). The information circular and proxy in respect of the Unitholder Meeting is expected to be filed on SEDAR by November 20, 2014 and distributed to Unitholders by November 26, 2014. The REIT will apply to the Ontario Securities Commission for exemptive relief from the requirement under MI 61-101 to obtain a formal valuation of the Class B LP Units issuable to Melcor in partial satisfaction of the purchase price of the Melcor Acquisition Properties.

The Melcor Acquisition

The Melcor Acquisition will be completed pursuant to an acquisition agreement (the "Melcor Acquisition Agreement"). The Melcor Acquisition Agreement contains customary provisions for transactions of this nature, including conditions, representations, warranties, covenants and indemnities of the parties. A copy of the Melcor Acquisition Agreement will be filed by the REIT on www.sedar.com. The Melcor Acquisition Closing is expected to occur on or before December 18, 2014.

The purchase price of $138.25 million for the Melcor Acquisition Properties implies a capitalization rate of approximately 7.1%. The REIT intends to satisfy: (i) approximately $45.0 million of the purchase price by the issuance of 4,390,244 Class B LP Units to Melcor at an issue price of $10.25 per Class B LP Unit; (ii) $78.4 million of the purchase price by the assumption of mortgages; and (iii) approximately $14.8 million of the purchase price by the net proceeds of the Offering. In addition, the REIT intends to use the balance of the net proceeds of the Offering of approximately $15.2 million (or approximately $19.7 million if the Over-Allotment Option is exercised in full) to repay other indebtedness, for future acquisitions and for general trust purposes.

Upon the Melcor Acquisition Closing, it is expected that Melcor will hold an approximate 56.5% effective interest in the REIT through ownership of 14,615,878 Class B LP Units of the limited partnership (prior to any issuance of Units in connection with the Convertible Debentures).

The assumed mortgages have an expected weighted average interest rate of approximately 3.45% and an expected weighted average term to maturity of approximately 6.35 years. This will result in the pro forma weighted average interest rate and term to maturity of the REIT's debt being approximately 3.85% and 4.38 years, respectively. The Melcor Acquisition Properties have an occupancy rate of approximately 93%, inclusive of the bridge leases and head leases described below.

Concurrent with the Melcor Acquisition Closing, Melcor will enter into bridge leases with respect to an aggregate of 26,231 square feet of GLA in four CRUs located at three of the Melcor Acquisition Properties that are subject to in-place and binding third party leases that have not yet commenced but it is expected that such premises will be occupied, with the tenants paying rent, by the end of Q2 2015. The bridge leases require Melcor to pay minimum rent at the same rate to be paid by the third party tenant for the applicable property, and its proportionate share of operating expenses and taxes until the rent commencement date under the third party lease. Furthermore, Melcor will enter into head leases with respect to an aggregate of 10,190 square feet of GLA in two CRUs located at two of the newly developed Melcor Acquisition Properties. The head leases will have terms of five years and will provide that Melcor will pay minimum rent in an amount equal to $20.00 per square foot per annum and its proportionate share of operating expenses and taxes.

The board of trustees of the REIT (the "Board") appointed a "Special Committee" of independent elected Trustees consisting of Larry Pollock (Chair), Brian Hunt, Patrick Kirby and Donald Lowry for the purposes of, among other things, considering the Melcor Acquisition, supervising the process to be carried out by the REIT and its professional advisors in connection with the Melcor Acquisition, determining whether the Melcor Acquisition is in the best interests of the REIT and, as the Special Committee may determine to be necessary or advisable, report and make recommendations to the Board with respect to the Melcor Acquisition. The Special Committee retained Altus Group Limited ("Altus Group") to prepare independent appraisals of each of the Acquisition Properties. The Special Committee also retained Trimaven Capital Advisors Inc. to both act as an independent financial advisor and to provide a fairness opinion (the "Fairness Opinion"), which stated that the consideration payable by the REIT pursuant to the Melcor Acquisition is fair, from a financial point of view, to the Unitholders, other than Melcor and certain of its associates and affiliates. The Fairness Opinion was provided on November 12, 2014, is subject to a number of assumptions and limitations, and will be included in the materials provided to Unitholders in connection with the Unitholder Meeting.

The independent appraisals prepared by Altus Group indicate that the estimated aggregate value of the Melcor Acquisition Properties as of September 30, 2014, was approximately $146.50 million (versus the $138.25 million purchase price for the Melcor Acquisition Properties). The independent appraisals state that the appraisals and analyses were performed in accordance with standards of the Appraisal Institute of Canada and are subject to a number of assumptions and limitations. The independent appraisals will be posted by the REIT on www.sedar.com in conjunction with the filing of its preliminary short form prospectus.

The Special Committee has advised the Board that, based on a number of factors, the Melcor Acquisition is in the best interests of the REIT. As a result, the Special Committee has unanimously recommended to the Board that it recommend that Unitholders vote in favour of the Melcor Acquisition at the Unitholder Meeting. The Board has unanimously resolved to recommend that Unitholders vote in favour of the Melcor Acquisition at the Unitholder Meeting.

Description of the Melcor Acquisition Properties

The Melcor Acquisition Properties consist of six commercial properties, with approximately 738,080 square feet of GLA. The following is a description of the Melcor Acquisition Properties:

Lethbridge Centre, 200 4^th Avenue South, Lethbridge, Alberta

Lethbridge Centre is a mixed use complex situated on a 10.61-acre site, containing 446,272 square feet of GLA, and which has surface parking for 860 vehicles (1.93 stalls per 1,000 square feet of GLA). The first storey of the mixed use complex and the office building were constructed in 1975, with the second story of the mixed use complex completed in 1988. The property was substantially redeveloped by Melcor from 2011 to 2014. As at November 1, 2014, the property was 90% leased, and was occupied by 43 tenants. Pursuant to the Acquisition Agreement, Melcor will, with respect to Lethbridge Centre, complete, at its own cost and expense, outstanding tenant improvements, construction projects, capital improvements and landlord's work, and pay certain outstanding leasing commissions, expected to total approximately $3.96 million in the aggregate.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
Hudson's Bay		133,043		29.8%		June 2023
Alberta Health Services		85,013		19.0%		September 2015(1)
						February 2025(1)
Ministry of Infrastructure		63,962		14.3%		September 2015(2)
						November 2018(2)
						September 2019(2)
						May 2025(2)

Notes:

	1.	Tenant is subject to multiple leases: 8,772 sq. ft. expiring in September 2015 and 76,241 sq. ft. expiring in May 2025.
	2.	Tenant is subject to multiple leases: 11,370 sq. ft. expiring in November 2018, 9,375 sq. ft. expiring in September 2019 and 43,217 sq. ft. expiring in May 2025.

Telford Industrial, 65^th Avenue, Leduc, Alberta

Telford Industrial, a property developed by Melcor with construction completed in 2013, is a single tenant industrial building situated on an 8.35-acre site, containing 88,699 square feet of GLA. Pursuant to the Melcor Acquisition Agreement, Melcor will, with respect to Telford Industrial, complete, at its own cost and expense outstanding construction projects expected to total approximately $42,000 in the aggregate.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
Baskin Tek		88,699		100%		February 2024

Leduc Common Phase Four, Queen Elizabeth II Highway & 50^th Avenue, Leduc, Alberta

Leduc Common Phase Four, a property developed by Melcor with full construction expected to be completed in 2015, is a multi-tenant retail complex situated on a 6.57-acre site, containing 69,605 square feet of GLA (24,686 square feet of which is under construction), and which has surface parking for 355 vehicles (5.10 stalls per 1,000 square feet). This is an additional phase of Leduc Common, a multi-building open retail power centre containing 213,966 square feet of GLA, purchased by the REIT at the time of the IPO. As at November 1, 2014, Leduc Common Phase Four was 90% leased excluding the head lease described below (97% leased including such head lease), and was occupied by three tenants. Concurrent with the Melcor Acquisition Closing, Melcor will enter into a bridge lease for one premises totaling 17,456 square feet. This premises, while under lease with a third party tenant, is currently under construction and will not be occupied by such third party tenant until construction is complete. It is expected that construction will be completed, with the third party tenant occupying the premises and paying rent in Q1 2015. The bridge lease will provide that Melcor will pay minimum rent at the same rate to be paid by the third party tenant and its proportionate share of operating expenses and taxes until the rent commencement date under the third party lease. Further, concurrent with the Melcor Acquisition Closing, Melcor will also enter into a head lease with respect to 5,000 square feet of a 7,230 square foot CRU located at Leduc Common Phase Four. The head lease will have a term of five years and will provide that Melcor will pay minimum rent in an amount equal to $20.00 per square foot per annum and its proportionate share of operating expenses and taxes. Pursuant to the Melcor Acquisition Agreement, Melcor will, with respect to Leduc Common Phase Four, complete, at its own cost and expense, outstanding tenant improvements and construction projects, and pay certain outstanding leasing commissions, expected to total approximately $1.62 million in the aggregate.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
Winners		20,277		29.1%		January 2023
Sport Check		18,185		26.1%		January 2023
Michaels(1)		17,456		25.1%		February 2025

Notes:

1.

This premises to be the subject of a bridge lease with Melcor.

Village at Blackmud Creek Phase One, 103^th A Street & Ellerslie Road, Edmonton, Alberta

Village at Blackmud Creek Phase One, a property developed by Melcor with construction completed in the spring of 2014, is an office and retail complex situated on a 4.05-acre site, containing 57,364 square feet of GLA (48,335 square foot three storey office building and a 9,029 square foot CRU), and which has surface parking for 311 vehicles (5.42 stalls per 1,000 square feet of GLA). As at November 1, 2014, the property was 89% leased, excluding the head lease described below (98% leased including such head lease), and was occupied by five tenants. Concurrent with the Melcor Acquisition Closing, Melcor will enter into a bridge lease for one premises totaling 2,195 square feet. This premises, while under lease with a third party tenant, is currently under construction. It is expected that construction will be completed, with the third party tenant occupying the premises and paying rent in Q2 2015. The bridge lease will provide that Melcor will pay minimum rent at the same rate to be paid by the third party tenant and its proportionate share of operating expenses and taxes until the rent commencement date under the third party lease. Further, concurrent with the Melcor Acquisition Closing, Melcor will also enter into a head lease with respect to one premises in the office building at Village at Blackmud Creek Phase One totaling 5,190 square feet. The head lease will have a term of five years and will provide that Melcor will pay minimum rent in an amount equal to $20.00 per square foot per annum and its proportionate share of operating expenses and taxes. Pursuant to the Melcor Acquisition Agreement, Melcor will, with respect to Village at Blackmud Creek Phase One, complete, at its own cost and expense, outstanding tenant improvements and construction projects, and pay certain outstanding leasing commissions, expected to total approximately $656,000 in the aggregate.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
Fountain Tire		31,134		54.7%		February 2029
Kids & Company		9,817		17.1%		March 2029
Amazing Wok Restaurant		2,688		4.7%		February 2029

University Park Shopping Centre, 166 University Park Drive, Regina, Saskatchewan

University Park Shopping Centre is a retail community strip centre situated on a 3.41-acre site, containing 41,238 square feet of GLA and surface parking for 222 vehicles (5.38 stalls per 1,000 square feet). The building was constructed in 1981 and expanded in 1986. As at November 1, 2014, the property was 100% leased, and was occupied by 18 tenants.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
WP Garden Centre		6,000		14.5%		June 2018
First Tee Indoor Golf Centre		5,480		13.3%		October 2019
ReMax Realty		4,900		11.9%		February 2018

West Henday Promenade Phase One, 199^th Street & 87^th Avenue, Edmonton, Alberta

West Henday Promenade Phase One, a property developed by Melcor with full construction expected to be completed in the spring of 2015, is a 34,902 square foot multi-tenant retail complex (7,847 square feet of which is under construction), situated on a 3.68-acre site, and which has surface parking for 139 vehicles (4.04 stalls per 1,000 square feet of GLA). As at November 1, 2014, the property was 96% leased, and was occupied by three tenants. Concurrent with the Melcor Acquisition Closing, Melcor will enter into bridge leases for two premises totaling 6,580 square feet. These premises, while under lease, are currently under construction and will not be occupied by such third party tenant until construction is complete. It is expected that construction will be completed in Q1 2015, with the tenants occupying these premises and paying rent in Q2 2015. The bridge leases will provide that Melcor will pay minimum rent at the same rate to be paid by the third party tenants and its proportionate share of operating expenses and taxes until the rent commencement date under the third party leases. Pursuant to the Melcor Acquisition Agreement, Melcor will, with respect to West Henday Promenade Phase One, complete, at its own cost and expense, outstanding tenant improvements and construction projects, and pay certain outstanding leasing commissions, expected to total approximately $1.10 million in the aggregate.

Key Tenants		Area Leased (sq. ft.)		Percentage of Total GLA		Lease Expiry Date
Shoppers Drug Mart		17,502		50.2%		November 2028
Pure Orthodontics		5,540		15.9%		March 2024
Sobeys Western Cellars		4,013		11.5%		November 2023

Assumed Mortgages

Approximately $78,444,000 of the purchase price for the Melcor Acquisition Properties will be satisfied by the assumption of the Assumed Mortgages. The following table summarizes, for each of the Melcor Acquisition Properties, the expected outstanding principal amount of the debt secured by the Assumed Mortgages on closing of the Melcor Acquisition, the interest rate applicable to such debt and the maturity date of such debt.

Melcor Acquisition Property		Loan Balance  (in thousands)		Interest Rate		Maturity Date
Lethbridge Centre		$28,519		3.383%		June 2019
Telford Industrial		$8,780		4.199%		May 2024
Leduc Common Phase Four		$14,690		3.100%		October 2019
Village at Blackmud Creek Phase One		$16,055		3.640%		October 2024
West Henday Promenade Phase One		$10,400		3.110%		October 2019

The Third Party Edmonton Acquisition

The Third Party Edmonton Complex is located in Edmonton, Alberta. It is an office and retail complex containing approximately 158,320 square feet of GLA. Utilizing its revolving credit facility, the REIT has made certain cash deposits in respect of the Third Party Edmonton Acquisition and the balance of the purchase price is to be satisfied by: (i) the assumption of an existing mortgage (the "Third Party Edmonton Mortgage") in an anticipated principal amount of $15.1 million, which such mortgage has been securitized; and (ii) the balance in cash funded by an additional draw on the REIT's revolving credit facility. All conditions, other than customary closing conditions, with respect to the acquisition of the Third Party Edmonton Complex have been satisfied or waived other than obtaining the mortgagee's consent to the assignment and assumption of the Third Party Edmonton Mortgage. Subject to obtaining such consent, closing of the Third Party Edmonton Acquisition is expected to be in Q4 2014. Neither the closing of the Offering nor the Melcor Acquisition is conditional on the closing of the Third Party Edmonton Acquisition.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of, the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. The Convertible Debentures have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements.

About Melcor REIT

Melcor REIT is an unincorporated, open-ended real estate investment trust. Melcor REIT owns, acquires, manages and leases quality retail, office and industrial income-generating properties with exposure to high growth Canadian markets. Its portfolio is currently made up of interests in 32 properties representing approximately 1.84 million square feet of gross leasable area located across Alberta and in Regina, Saskatchewan and Kelowna, British Columbia. For more information, please visit www.melcorREIT.ca.

Forward-Looking Statements

This press release contains "forward-looking information" as defined under applicable Canadian securities law ("forward-looking information" or "forward-looking statements") which reflect management's expectations regarding objectives, plans, goals, strategies, future growth, results of operations, performance, business prospects and opportunities of the REIT. Statements other than statements of historical fact contained in this press release may be forward-looking information. Some of the specific forward-looking statements in this press release include, but are not limited to, statements with respect to: the closing of the Offering and the Acquisitions and the expected terms and closing dates thereof; the REIT's intended use of proceeds of the Offering; the issuance of Class B LP Units to Melcor; the impact of the Acquisitions on the REIT's business, operations and financial performance; and expectations, projections or other characterizations of future events or circumstances and the future economic performance of the REIT. The REIT has based these forward-looking statements on its current expectations and assumptions about future events, which may prove to be incorrect.

When relying on forward looking statements to make decisions, readers are cautioned not to place undue reliance on these statements, as forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and do not take into account the effect of transactions or other items announced or occurring after the statements are made. All forward-looking information in this press release speaks as of the date of this press release. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. The REIT does not undertake any obligation to update any such forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law.