Halifax-based NexLiving Communities has entered an agreement with Gatineau, Que.'s Devcore to acquire a $224 million portfolio of 16 multifamily properties comprising 991 apartments, in a transaction to be financed via a share issuance and transfer, and assumption of mortgage debt.
The transaction would increase the size of NexLiving’s multifamily portfolio by 85 per cent in number of apartments, from 1,166 apartments to 2,157 housing units.
The portfolio also increases NexLiving's geographic diversity - it currently owns apartments in New Brunswick and Ontario.
The transaction will also see senior management of Devcore take a significant stake in NexLiving via the stock consideration, and will result in a retooling of NexLiving’s board of directors. Part of this process will be the ascension of Devcore co-owner and former Farm Boy retail CEO Jeff York to become chair of the NexLiving board.
"We are excited to announce this transformational combination and welcome Devcore as long-term partners,” Stavro Stathonikos, NexLiving’s president and CEO, said in Monday’s announcement “This acquisition immediately adds scale to the business, almost doubling the company's portfolio size, meaningfully reduces our G&A as a percentage of NOI, and yields significant accretion to FFO per share.
“We intend to use the significant free cash generation of the combined business to continue our successful high-growth, secondary market strategy and to de-lever the balance sheet over time.
“The commitment from a successful multifamily group like Devcore to take 100 per cent of the transaction consideration entirely in NexLiving shares, speaks to their confidence in the NexLiving portfolio and our free cash flow strategy. We are excited to execute on our shared vision to become a leader in Canada's high-growth secondary markets."
Devcore executives get stock, board positions
As consideration for the transaction, NexLiving will issue approximately 16.5 million shares to Devcore, representing a 49 per cent in the firm and valued at approximately $31.7 million based on the Jan. 19 closing price. NexLiving will also and will assume approximately $166 million of mortgage debt.
The transaction is subject to the approval of a majority of votes cast by NexLiving shareholders at a special meeting to be convened in the coming months, the receipt of applicable regulatory approvals, including Competition Act and CMHC approval, the approval of the TSX Venture Exchange, and other customary closing conditions.
On closing, York and Jean-Pierre Poulin, the principals of Devcore and their related entities, will enter into a standstill and investor rights agreement with NexLiving to nominate up to three members of the board. They will also agree to a three-year standstill during which they will be restricted from acquiring NexLiving shares; and to a two-year lock-up during which they will be restricted from transferring, selling or otherwise disposing of their NexLiving shares other than as per a schedule provided within the agreement.
NexLiving will continue to be managed by the current management team and the board is to consist of York (chairman), Rick Turner (vice-chairman), Stathonikos (CEO), Michael Anaka, Bill Hennessey, Poulin and Francis Pomerleau.
Dr. Brian Ramjattan, David Pappin, Drew Koivu and Andrea Morwick are to step down from the board.
"This transaction represents a pivotal moment for both NexLiving and Devcore,” York said in the announcement. “We see great value in NexLiving's Atlantic Canada portfolio and we believe that there is additional upside to unlock by scaling the platform.
“Prudent capital allocation with a view to acquiring undervalued, cash generating properties in Canada's high-growth secondary markets will put us in the position to de-lever the balance sheet, lower our cost of capital and have a platform primed for significant growth."
Attributes of the combined portfolio
The combined 2,157-unit portfolio would have an in-place net operating income of approximately $22 million, representing an increase of over 80 per cent to NexLiving's standalone in-place NOI. NexLiving’s in-place fully diluted FFO per share would also increase over 30 per cent to approximately $0.24 per share.
The transaction also accelerates a long-term goal of the company to achieve further geographic diversification, while maintaining a focus on high-growth secondary markets. Following closing of the deal, portfolio concentration would be 34 per cent Moncton, N.B. (currently 63 per cent), 29 per cent National Capital Region (Ottawa-Gatineau), 15 per cent Saint John, N.B., 18 per cent other Ontario and four per cent other Québec.
The acquisition properties bring a staggered maturity mortgage portfolio with a weighted average interest rate of approximately 2.7 per cent, resulting in a combined weighted average mortgage portfolio interest rate of 3.20 per cent - a 48 basis point decrease from NexLiving's current weighted average interest rate of 3.68 per cent.
For its part Devcore (founded in the Quebec city just across the Ottawa River from the city of Ottawa) is an active apartment developer focused on new ground-up construction and value-add buildings throughout Ontario and Québec.
Devcore will retain a portfolio of approximately 2,000 units following the completion of the transaction, which along with other existing and future projects, provides a complementary growth pipeline for NexLiving, the company states.