Melcor REIT Announces $80.875 million of Property Acquisitions From Melcor Developments Ltd., $15 million Subscription Receipt Offering and $20 million Extendible Convertible Debenture Offering

EDMONTON, ALBERTA–(Marketwired – Dec. 4, 2017) –

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 five commercial properties (the “Melcor Acquisition Properties”) for an aggregate purchase price of $80.875 million (excluding closing and transaction costs) from Melcor Developments Ltd. (“Melcor”), the REIT’s external asset manager and property manager. Four of the Melcor Acquisition Properties are additional phases of projects in which the REIT currently owns income generating properties.

Highlights

• The Melcor Acquisition Properties comprise five recently constructed commercial properties containing a total of approximately 172,629 square feet of owned gross leasable area (“GLA”)
• The Melcor Acquisition will increase the GLA in the REIT’s portfolio by approximately 6.4%
• The Melcor Acquisition is expected to be immediately accretive to the AFFO per trust unit of the REIT (the “Unit”)
• The acquisition price of $80.875 million represents a discount to appraised value
• The REIT will partially finance the Melcor Acquisition through the sale, on a bought deal basis, of approximately $15 million of subscription receipts (the “Subscription Receipts”) at $8.50 per Subscription Receipt and $20 million aggregate principal amount of 5.25% extendible convertible unsecured subordinated debentures (the “Debentures”) with a Final Maturity Date (as defined below) of December 31, 2022 and a conversion price at the option of the holder, into Units at $11.50 per Unit
• Melcor to subscribe for $2.5 million of Class B LP Units at $8.82 per Unit, resulting in a pro forma effective ownership in the REIT of 53.6%
• The REIT’s independent trustees unanimously recommend that unitholders vote in favour of the Melcor Acquisition

The purchase price of approximately $80.875 million implies a blended capitalization rate of approximately 6.2% and 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 and Class C LP Units to Melcor. The REIT’s debt to gross book value is expected to be approximately 49.7% (57.2% including convertible debentures) following the completion of the Melcor Acquisition.

Andy Melton, Chief Executive Officer of the REIT, commented:

“This acquisition again demonstrates the advantage of our exclusive Melcor property pipeline to execute on our growth strategy. This latest acquisition increases our portfolio gross leasable area by 6.4% and is expected to be immediately accretive to AFFO per Unit. The properties were all recently developed and are fully leased with a complementary mix of tenants.

“Four of the five acquired properties are additional phases in properties that the REIT already owns and we are confident that these new phases will continue to deliver value to the REIT and will lead to increases in operating efficiency. These acquisitions are an important step in building value for Unitholders and demonstrate the strong accretive growth potential and the advantage of our unique development pipeline.”

Description of the Melcor Acquisition Properties

The Melcor Acquisition Properties consist of five recently constructed commercial properties, with approximately 172,629 square feet of owned GLA which are 100% leased.

Property	Location	Type	Sq. Ft.	Occupancy
Kingsview Market Centre Phases Two & Four(1)	Airdrie, Alberta	Retail	52,469	100%
Telford Industrial Phase Four(1)	Leduc, Alberta	Industrial	44,328	100%
Chestermere Station Phase Seven (1,2)	Chestermere, Alberta	Retail	10,531	100%
The District at North Deerfoot Phase One	Calgary, Alberta	Retail	23,159	100%
West Henday Promenade Phase Two(1)	Edmonton, Alberta	Retail	42,142	100%
Total			172,629	100%

(1) The REIT currently owns other phases of these properties.
(2) Melcor owns, and upon Melcor Acquisition Closing the REIT will own, a 50% interest in Chestermere Station Phase Seven.

The Offering

In connection with the Melcor Acquisition, the REIT also announced today that it has entered into an agreement with a syndicate of underwriters (the “Underwriters”) co-led by CIBC Capital Markets and RBC Capital Markets (the “Lead Underwriters”), to sell on a bought deal basis: (i) 1,770,000 Subscription Receipts of the REIT at a price of $8.50 per Subscription Receipt for gross proceeds of approximately $15 million; and (ii) $20 million aggregate principal amount of Debentures (collectively, the “Offering”). The Offering is expected to close on or about December 21, 2017. The REIT has also granted the Underwriters an option (the “Over-Allotment Option”) to cover over-allotments, if any, and for market stabilization purposes, 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 (as defined below), and entitles the Underwriters to purchase up to an additional 15% of the Offering.

On closing of the Melcor Acquisition: (i) one Unit will be automatically issued in exchange for each Subscription Receipt (subject to customary anti-dilution protection), without payment of additional consideration or further action by the holder thereof, (ii) an amount per Subscription Receipt equal to the amount per Unit of any cash distributions made by the REIT for which record dates have occurred during the period that the Subscription Receipts are outstanding, net of any applicable withholding taxes, will become payable in respect of each Subscription Receipt, and (iii) the net proceeds from the sale of the Subscription Receipts will be released from escrow to the REIT.

The Debentures will bear an interest rate of 5.25% per annum, payable semi-annually in arrears on June 30 and December 31 in each year commencing June 30, 2018. The Debentures will be convertible at the option of the holder into Units at a conversion rate of 86.9565 Units per $1,000 principal amount of Debentures, which is equal to a conversion price of $11.50 per Unit. The maturity date for the Debentures will initially be the date upon which a Termination Event (as defined below) occurs (the “Initial Maturity Date”). Upon closing of the Melcor Acquisition, the maturity date of the Debentures will be automatically extended from the Initial Maturity Date to December 31, 2022 (the “Final Maturity Date”).

The net proceeds from the Offering will be used to fund the Melcor Acquisition and if the Over-Allotment Option is exercised, in whole or in part, to repay other indebtedness, for future acquisitions and for general trust purposes.

In the event that the Melcor Acquisition closing does not occur on or prior to the occurrence of a Termination Event (as defined below), or the Melcor Acquisition is terminated at an earlier time, the gross proceeds of the Offering, pro rata entitlement to interest earned or deemed to be earned on the Debentures and/or distributions on the Subscription Receipts, net of any applicable withholding taxes, will be paid to holders of the Debentures and the Subscription Receipts and the Debentures and the Subscription Receipts will be cancelled.

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 March 31, 2018; (ii) the REIT delivering notice to the Lead Underwriters that the Melcor Acquisition Agreement (as defined below) 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 Subscription Receipts and 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 and Class C LP Units in connection therewith by a majority vote by unitholders unrelated to Melcor (“Minority Unitholder Approval”) and TSX approval. Upon closing of the Melcor Acquisition, it is expected that Melcor will hold an approximate 53.6% effective interest in the REIT through ownership of 14,899,325 Class B LP Units of the limited partnership (prior to any issuance of Units on the conversion, redemption or maturity of the Debentures).

Each of the Melcor Acquisition and the issuances of Class B LP Units and Class C LP Units in connection therewith constitute 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 and a formal valuation of the Class C LP Units. 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 January 10, 2018 (the “Unitholder Meeting”). The information circular and proxy in respect of the Unitholder Meeting is expected to be filed on SEDAR by December 12, 2017 and distributed to unitholders by December 20, 2017. The REIT will apply to the Alberta 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. Closing of the Melcor Acquisition is expected to occur on or before January 12, 2018.

The assumed mortgages, combined with the Class C LP Units have an expected weighted average interest rate of approximately 3.22% and an expected weighted average term to maturity of approximately 7.39 years. This will result in the pro forma weighted average interest rate and term to maturity of the REIT’s debt being approximately 3.64% and 3.88 years, respectively.

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 Melcor Acquisition Properties. The Special Committee also retained Trimaven Capital Advisors to both act as an independent financial advisor, 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, and to provide a formal valuation of the Class C LP Units being issued to Melcor as partial satisfaction of the purchase price (the “Formal Valuation”). The Fairness Opinion and the Formal Valuation, are 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, 2017, was approximately $82.4 million (accounting for a 50% interest in Chestermere Station Phase Seven) versus the $80.875 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 (with interested trustees abstaining) to recommend that unitholders vote in favour of the Melcor Acquisition at the Unitholder Meeting.

About the REIT

The REIT is an unincorporated, open-ended real estate investment trust. The REIT owns, acquires, manages and leases quality retail, office and industrial income-generating properties. Its portfolio is currently made up of interests in 37 properties representing approximately 2.71 million square feet of gross leasable area located across Alberta, 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 Melcor Acquisition and the expected terms and closing dates thereof; the REIT’s features and terms of the Melcor Acquisition Properties including in connection with tenancy, Retained Debt and anticipated capital expenditure; intended use of proceeds of the Offering; the issuance of Class B LP Units and Class C LP Units to Melcor; expectations regarding accretion to the REIT’s AFFO and the impact of the Melcor Acquisition 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.

Non-IFRS Measures

AFFO is a non-IFRS measure. Refer to the Non-Standard Measures section in the Q3 Management’s Discussion & Analysis and the Non-IFRS Measures section in the forthcoming prospectus, both of which are available on SEDAR at www.sedar.com.