InStorage REIT to Internalize Property Development Company, Announces Debt Refinancing and Reduction in Monthly Cash Distributions: Financial News

InStorage REIT to Internalize Property Development Company, Announces Debt Refinancing and Reduction in Monthly Cash Distributions
Wednesday October 8, 2008 9:03 am ET

TORONTO, ONTARIO--(MARKET WIRE)--Oct 8, 2008 -- InStorage Real Estate Investment Trust ("InStorage" or the "REIT")(Toronto:IS-UN.TO - News) announced today that it has reached an agreement to acquire InScotia Developments Limited Partnership ("InScotia"), the REIT's third-party development partner. InScotia's portfolio consists of interests in eight high quality self-storage properties that are currently in their lease-up phase and a land parcel zoned to permit construction of a 93,300 square foot self storage facility. Two additional land parcels are included in the sale but are slated to be sold. The current average occupancy of the properties to be acquired is approximately 50%, providing the REIT with significant upside after a stabilized occupancy rate in the low to mid 80% range is reached. Stabilized Net Operating Income ("NOI") from the properties to be acquired is estimated to be in the range of $5.5 million on an annualized basis. It is anticipated this transaction will close in late October 2008, subject to receiving all required consents.

 

Summary of InScotia Properties
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                                                  Estimated
Property                    Location     Status   GLA @ 100%    Occupancy
                                                   (Sq. Ft.)
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1330 East 66th
 Avenue(1)             Vancouver, BC   Lease-up      83,343             8%
1111 42nd Avenue
 SE(1)                   Calgary, AB   Lease-up      83,675            14%
4015 2nd Avenue
 South                Lethbridge, AB   Lease-up      42,105            81%
345 Portage Avenue     Saskatoon, SK   Lease-up      61,775            89%
221 Todd Baylis
 Boulevard               Toronto, ON   Lease-up      71,537            66%
947 Warden Avenue        Toronto, ON   Lease-up      68,172            79%
1020 Wonderland
 Road South               London, ON   Lease-up      54,268            67%
151 MacDonald
 Road(1)             Collingwood, ON   Lease-up      55,310            26%

Sharp Lands
 (Pasqua)(2)             Regina, SK        Land         n/a           n/a
2510 Walkley
 Road(2)                 Ottawa, ON        Land         n/a           n/a
Yorkland(1)             Toronto, ON        Land      93,300           n/a
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                                                    613,485            50%
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(1) InScotia has a 50% joint venture interest in property
(2) To be sold

Given the difficult borrowing environment and the fact that four of the eight InScotia properties were already slated to be acquired by InStorage over the next 15 months, management and the Board were of the view that it is a prudent time to internalize its development capabilities and that this is the next logical step in the REIT's evolution. Acquiring InScotia today in an entity level transaction using a vendor-takeback structure also allows InStorage to eliminate the uncertainty around its ability to acquire these first-class assets on a one-off basis over the next six to 36 months given the uncertain capital markets environment and its current Unit price.

InStorage will pay approximately $68 million for InScotia, financed with the issuance of $14.3 million of convertible debentures that will bear no interest and have a three-year term to the InScotia vendors, the assumption of $33.6 million of first mortgage and construction loans, and the repayment of $20.2 million in mezzanine loans to the REIT. The convertible debentures being issued to the vendors can be converted into Trust Units of InStorage, subject to certain conditions, after January 1, 2011 at a price of $5.00 per Unit. The zero percent coupon ensures that the REIT gets the benefit of all cash flow from the acquired properties during the lease up phase and prior to stabilization. The mortgages and construction loans assumed by the REIT bear a weighted average interest rate of about 6.9% and have a weighted average term to maturity of approximately 2.4 years.

"This transaction brings a number of benefits to InStorage and its Unitholders. We will be acquiring a high quality portfolio of income producing properties with considerable upside, internalizing our property development activities in order to capitalize on future growth opportunities, and fully aligning all aspects of our business with our Unitholders," commented T. James Tadeson, Chief Executive Officer. "We are also very pleased with the vote of confidence InScotia's partners have made in our future."

"Most of InScotia's partners are already unitholders of the REIT," stated Jack Winberg, a representative of InScotia. "We are pleased to be participating in this manner in the future of InStorage and we have confidence in the strength of its underlying business."

Approximately $6.1 million in mezzanine loans to InScotia's joint venture partner bearing a weighted average interest rate of 9.4% will remain outstanding.

Debt Refinancing

InStorage also announced today that it has refinanced certain floating rate mortgages on four of its properties that mature in November and December 2008. The new financing consists of a $25 million interest-only three-year bridge loan that bears interest at 9.65% and is repayable after eighteen months. The balance of the $29.25 million of the maturing mortgages will be repaid through cash on hand and drawings on existing credit facilities.

"With the very challenging conditions in today's credit markets, we have re-financed maturing CMBS debt using a medium-term bridge loan to transition us through this difficult period. We will look to replace this loan with more conventional financing once stability returns to the credit markets." Mr. Tadeson continued.

Cash Distributions

Effective with the October 2008 payment, InStorage will be reducing its monthly cash distributions to $0.021 per Unit or $0.252 on an annualized basis. This new distribution level reduces InStorage's payout ratio to below 100% of the REIT's expected proforma AFFO after incorporating the acquisition of InScotia, the reduction in the REIT's mezzanine loan revenue resulting from the InScotia acquisition and the refinancing of the maturing CMBS debt . InStorage expects its payout ratio to further improve as the newly acquired InScotia assets together with its existing properties in lease up reach stabilization, while the entire portfolio benefits from the rebranding, marketing and yield management initiatives already underway.

"While this decision has been very difficult for management and the Board, we believe it is prudent given the current liquidity challenges in the financial and capital markets, and the resulting constraints this situation places on our continued external growth. While the operating performance of our existing portfolio continues to improve and the underlying fundamentals of our business remain sound, we believe that it is in the best interests of Unitholders to ensure distributions can be funded through current operations until stability returns to the capital markets," commented Lou Maroun, Chairman of the Board of Trustees. "Looking ahead, we are confident that FFO and AFFO will grow over the long term as the lease up of the REIT's assets, including those recently acquired from InScotia, accelerates and our other value-enhancing activities, including our successful re-branding initiative, generate improved operating performance across the entire portfolio. This program has the full support of the board and all board members remain both professionally and financially committed to the future growth and success of InStorage. The board will work closely with management to ensure that this new direction is positively executed for the benefit of all of our unit holders."

Conference Call

A conference call will be held with InStorage's senior management today, October 8, 2008 at 11:00 a.m. ET. The dial-in numbers for the call are (416) (416) 849-2698 or North American toll-free at (866) 400-2270. The call will also be webcast on the InStorage web site at www.instoragereit.ca, and will be archived on the web site following the completion of the call.

InStorage Real Estate Investment Trust

The REIT is an unincorporated open-ended real estate investment trust that invests primarily in self-storage properties throughout Canada. The REIT is the largest owner operator of self-storage facilities in Canada and is the country's leading self-storage industry consolidator, with a current portfolio of 52 owned self-storage properties located in Alberta, Saskatchewan, Ontario and Quebec.

Additional information concerning the REIT may be obtained on the REIT's website, www.instoragereit.ca, and on the SEDAR website at www.sedar.com, under the REIT's profile.

Non-GAAP Measures

NOI, FFO and AFFO are widely used as supplemental measures of a Canadian real estate investment trust's performance and are not defined under Canadian generally accepted accounting principles ("GAAP"). InStorage uses these measures to assess the operating performance of its income-producing properties. NOI, FFO and AFFO should not be considered alternatives to net income or other measures that have been calculated in accordance with GAAP and may not be comparable to similar measures presented by other issuers. Readers are directed to the REIT's Management's Discussion and Analysis for the three and six months ended June 30, 2008 for a description of these Non-GAAP measures and a reconciliation of FFO and AFFO to net loss.

Forward-Looking Information

This press release contains forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the REIT to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Examples of such statements include: the intention to continue to build the REIT's presence as the leading consolidator in the Canadian self-storage business; the intention to roll out the InStorage brand across the REIT's properties during the year; anticipated demand for the REIT's services; expectations regarding average rental and occupancy rates; and the REIT's intention to focus on integrating recent acquisitions. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this press release. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect, including, but not limited to: the availability of acquisition opportunities; interest rate levels and the impact thereof on the REIT's debt servicing obligations; the ability of the REIT to successfully integrate newly acquired properties or portfolios into its operations and realise the anticipated benefits of same; the level of activity in the underlying self-storage business of InStorage, the self-storage industry and in the economy generally; consumer interest in the services and products of InStorage's subsidiaries; competition; and anticipated and unanticipated costs. While the REIT anticipates that subsequent events and developments may cause its views to change, it specifically disclaims any obligation to update these forward-looking statements. These forward-looking statements should not be relied upon as representing the REIT's views as of any date subsequent to the date of this press release. Although the REIT has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements.

The factors identified above are not intended to represent a complete list of the factors that could affect the REIT. Additional factors are noted under "Risk and Uncertainties" in the REIT's Management's Discussion and Analysis included in the REIT's 2007 Annual Report and other regulatory filings available on the REIT's web site and at www.sedar.com.