Mr. Shant Poladian reports
REBEL CAPITAL INC. ANNOUNCES DEFINITIVE AGREEMENT FOR PROPOSED QUALIFYING TRANSACTION AND LAUNCH OF $35 MILLION EQUITY FINANCING
Rebel Capital Inc. has provided an update with respect to its previously announced proposed acquisition of a property, located in Pittsburgh, Pa., containing a 91,790-square-foot data centre with a three-storey connected 43,800-square-foot office property on an approximately 7.65-acre site and related financing activities, including: (i) the execution of a definitive purchase and sale agreement in respect of the proposed transaction; (ii) the completion of a non-brokered financing to finance the deposit payable under the terms of the letter of intent in respect of the proposed transaction; and (iii) the launch by Springhurst Capital Holdings Inc. (a company to be amalgamated with a wholly owned subsidiary of Rebel in connection with the closing of the proposed transaction) (SCHI) of a brokered private placement offering of subscription receipts of SCHI, a portion of the proceeds of which will be used to finance the purchase price (as defined herein) for the property.
The proposed transaction is intended to constitute Rebel's qualifying transaction in accordance with TSX Venture Exchange Policy 2.4 (Capital Pool Companies).
Entry into definitive agreement in respect of proposed transaction
On July 11, 2019, DLC Pittsburgh Data Center 1 LLC, a wholly owned subsidiary of Rebel, entered into a definitive purchase and sale agreement with Chief Commercial Construction LP, a Pennsylvania limited partnership, to acquire the property for a total cash purchase price of $32-million (U.S.), subject to customary adjustments and standard real estate acquisition terms. Closing of the proposed transaction is subject to the approval of the TSX-V and the completion of the concurrent financing (as defined herein), as well as additional customary closing conditions. The definitive agreement supersedes and replaces the letter of intent.
It is intended that, in connection with the closing of the proposed transaction, SCHI will amalgamate with a wholly owned subsidiary of Rebel (Rebel Subco). The amalgamation will be structured as a three-cornered amalgamation. Pursuant to the amalgamation, the common shares of SCHI will be exchanged for resulting issuer common shares (as defined herein) based on an exchange ratio to be agreed upon by Rebel and SCHI and in accordance with the terms of the amalgamation agreement to be entered into by SCHI, Rebel and Rebel Subco.
Contemplated continuance of Rebel to Ontario and name change to Digital Lease Capital Inc.
Subject to shareholder and regulatory approval: (i) immediately prior to the amalgamation, it is intended that Rebel will continue into Ontario; and (ii) immediately following the amalgamation, it is intended that Rebel will complete a name change to Digital Lease Capital Inc. For the purposes of this press release, the terms Digital Lease Capital and resulting issuer are used to describe the corporation following the completion of the continuance, the amalgamation and the name change.
The proposed transaction will not be a non-arm's-length qualifying transaction (as that term is defined under the TSX-V policies), and as a result, the approval of the shareholders of Rebel of the proposed transaction will not be required. Shareholders of Rebel will, however, be asked to approve the continuance and the name change at a special meeting of Rebel shareholders to be held for such purpose. Shareholders of Rebel will also be asked to elect several new directors, including T. Richard Turner and Andrew Oppenheim. See the changes to the proposed management and directors and insiders of the resulting issuer section herein for a description of the anticipated board of directors and management team of the resulting issuer.
Launch of concurrent financing
SCHI has launched a best effort brokered private placement on an agency basis of 140 million subscription receipts at a price per subscription receipt of 25 cents for gross proceeds of $35-million. The net proceeds of the concurrent financing will be used primarily to finance the purchase price for the property, as well as to pay the expenses of the concurrent financing and for general working capital purposes. SCHI has granted the agents (as defined herein) an option to arrange for the sale, on a best effort basis, of an additional 21 million subscription receipts at the issue price. Such option is exercisable at any time up to 48 hours prior to the closing date of the concurrent financing.
Canaccord Genuity Corp. and Echelon Wealth Partners Inc. will act as co-lead agents in connection with the concurrent financing. In connection with the concurrent financing, the agents will be paid a cash commission equal to 6.0 per cent of the gross proceeds of the concurrent financing (including the gross proceeds pursuant to any exercise of the agent option) and, subject to regulatory approval, compensation options exercisable at any time up to 18 months following the date of the satisfaction of the escrow release conditions (as defined herein) to purchase up to that number of common shares as is equal to 6.0 per cent of the number of subscription receipts sold pursuant to the concurrent financing, at an exercise price equal to the issue price.
On the closing date, the gross proceeds of the offering less certain costs and expenses of the agents will be deposited with a subscription receipt agent mutually acceptable to the co-lead agents, Rebel and SCHI and invested in an interest-bearing account pursuant to the terms of a subscription receipt agreement to be entered into by and among the subscription receipt agent, SCHI, Rebel and the co-lead agents.
Upon the satisfaction certain escrow release conditions to be specified in the subscription receipt indenture (including, among other things: (i) the satisfaction or waiver of all conditions precedent to the proposed transaction (any waiver being subject to the consent of the co-lead agents, acting reasonably), other than the amalgamation and the payment of the purchase price, which shall be paid forthwith upon release of the escrowed funds, (ii) the satisfaction or waiver of all conditions precedent to the amalgamation (any waiver being subject to the consent of the co-lead agents, acting reasonably), (iii) receipt of all shareholder, regulatory and third party approvals required in connection with the amalgamation and the proposed transaction, and (iv) the common shares of the resulting issuer being conditionally approved for listing on the TSX-V) on or prior to the date that is no more than 120 days following the closing date, the agent commission will be released to the agents, and the balance of the escrowed funds will be released from escrow to or as directed by SCHI and each subscription receipt will be automatically exchanged (without any further action on the part of the holder thereof and without payment of additional consideration) immediately prior to the completion of the amalgamation and the proposed transaction for one SCHI common share (subject to adjustment in certain events). Each such SCHI common share will be exchanged for resulting issuer common shares promptly thereafter in accordance with the terms of the amalgamation agreement, and the compensation options shall be exchanged for economically equivalent broker warrants of the resulting issuer.
A portion of the purchase price is expected to be satisfied by a new conventional first mortgage to be secured against the property, to be arranged prior to the closing of the concurrent financing. SCHI has received indicative terms from three commercial banks to provide approximately $10-million (U.S.) of non-recourse financing.
Closing of the concurrent financing is expected to occur on or about Aug. 8, 2019.
Closing of non-brokered private placement financing and payment of earnest money deposit
SCHI completed a non-brokered private placement of SCHI common shares at a price of 10 cents per SCHI common share for gross proceeds of $1.14-million. A total of $640,000 (U.S.) of the proceeds from the non-brokered private placement financing was deposited as earnest money with the Chicago Title Insurance Company as required pursuant to the letter of intent. The SCHI common shares issued in the non-brokered private placement will be exchanged for resulting issuer common shares in accordance with the terms of the amalgamation agreement.
Investment highlights and growth strategy:
Unique vehicle in a high-growth sector: Following the completion of the proposed transaction, Digital Lease Capital will be the first and only pure play data-centre-focused investment vehicle to be publicly listed in Canada. Data centres have proliferated as an asset class in the United States, with six publicly traded peers having a combined market capitalization of approximately $89-billion (U.S.) (source: Bloomberg, Capital IQ as at July 9, 2019). Compared with traditional commercial real estate, data centres have been the fastest-growing asset class on a number of key metrics over the past five years, including revenue growth, AFFO (adjusted funds from operations) growth and share price performance.
Strong underlying industry fundamentals: Demand for data centre capacity has been driven by the convergence of a number of factors, including cloud computing, the Internet of things, big data, machine-to-machine learning, 5G, artificial intelligence, e-commerce and many more. As a result, global IT (information technology) workloads are expected to increase at a compounded annual growth rate (CAGR) of 7.3 per cent between 2018 and 2031 while actual data stored in data centres are expected to increase at a CAGR of 35.9 per cent between 2016 and 2021 (source: Cisco Global Cloud Index: Forecast and Methodology, 2016 to 2021 white paper).
Low-risk initial property: The property currently generates annual NOI (net operating income) of approximately $3.3-million (U.S.) (unaudited), which represents a going-in capitalization rate of approximately 10.3 per cent based on the purchase price. The property is 100 per cent occupied by Atos, a publicly traded investment-grade global information technology service company, pursuant to a triple-net lease on a five-year term with annual rent escalations and minimal landlord capital expenditure obligations. Management believes that the property is being acquired at a significant discount to replacement cost, and the in-place lease rate is at a significant discount to market rates for comparable properties.
Experienced and conflict-free management: Digital Lease Capital's management will be fully internalized from inception. The management team, to be led by Shant Poladian, and the anticipated board of directors have significant experience in data centre development, financing, acquisitions, leasing, operations, capital markets and corporate governance.
Platform for growth: Following the completion of the proposed transaction, Digital Lease Capital's external growth strategy will be to seek out additional data centre property acquisitions to build a larger and complementary portfolio of properties. To date, management has identified and is in discussions in respect of four further potential acquisitions of data centres in North Carolina, Ohio, Arizona and Minnesota, although there can be no assurance that such discussions will result in any such acquisitions being completed.
Compelling financial metrics: Following the completion of the proposed transaction, Digital Lease Capital is expected to have a strong balance sheet with low leverage (approximately 30-per-cent debt to gross book value) and a conservative payout ratio (below 60 per cent of AFFO) providing financial flexibility for growth. Following the closing of the proposed acquisition, Digital Lease Capital intends to initiate a quarterly dividend, with a target yield of approximately 3.5 per cent based on the issue price.
As of the date hereof, on a non-diluted basis, Rebel has: (i) 4.66 million common shares in the capital of Rebel issued and outstanding, (ii) 200,000 stock options exercisable for Rebel shares at an exercise price of 10 cents per Rebel share, and (iii) 200,000 common share purchase warrants exercisable into Rebel shares at an exercise price of 10 cents per Rebel share.
Immediately following the completion of the amalgamation and the closing of the proposed transaction, it is anticipated that existing holders of Rebel shares will hold approximately 3.0 per cent of the resulting issuer common shares, existing holders of SCHI common shares will hold approximately 7.3 per cent of the resulting issuer common shares and investors in the concurrent financing will hold approximately 89.7 per cent of the resulting issuer common shares.
Changes to proposed management and directors of the resulting issuer
On completion of the proposed transaction, it is currently anticipated that the board of directors of the resulting issuer will be composed of four directors. Subject to approval of the TSX-V, it is anticipated that the composition of the board of directors and the management team of the resulting issuer will be as follows (which reflects a change from the information provided in Rebel's press release dated June 1, 2019).
Shant Poladian, director and chief executive officer
Mr. Poladian has over 20 years of experience in real estate and capital markets, including as the founding chief executive officer of FAM REIT, which developed, leased and financed a three-megawatt 64,000-square-foot mission-critical data centre in Winnipeg, Man., for Bell MTS. In addition, Mr. Poladian has acted as a director of Amica Mature Lifestyles Inc., equity research analyst at Canaccord Genuity and managing director of investment banking at Eight Capital.
Wilbur Wong, chief investment officer and interim chief financial officer
Mr. Wong has over 10 years of experience in real estate and capital markets, including vice-president of investments for FAM REIT. Mr. Wong is a former vice-president of investment banking at Eight Capital, director of asset management at KEYreit, asset manager for Great West Life, and real estate analyst for Delta Hotels and Blackwood Partners.
Scott Metcalfe, chief development officer and head of global sales and marketing
Mr. Metcalfe has a 20-plus-year record of data centre industry success, having worked with Colliers International, Rogers Communications, Ehvert Mission Critical, JLL Data Center Solutions, Telus, Ainsworth Electric and 151 Front Street West (Canada's carrier hotel). Most recently, Mr. Metcalfe worked with Ascent Corp. LLC, Alcatel Lucent, Nokia, Ehvert, Cologix, Cara and Wind Mobile -- assisting with data centre and wireless site acquisition and development programs. Mr. Metcalfe has specialized CMO-level experience, particularly in the burgeoning edge computing and 5G space.
T. Richard Turner, independent director
Mr. Turner currently serves as board chair of ViveRE Communities Inc. He has acted as chair and/or director of many public real estate companies/real estate investment trusts, including Pure Industrial Real Estate Trust, Invesque Inc., HealthLease Properties Real Estate Trust, IAT Air Cargo Income Fund and Sunrise Senior Living Real Estate Trust.
Andrew Oppenheim, independent director
Mr. Oppenheim is a partner and corporate lawyer at Gowlings WLG and has acted as the lead independent director of Amica Mature Lifestyles.
Anish Chopra, independent director
Mr. Chopra is a managing director and portfolio manager at Portfolio Management Corp. Mr. Chopra has acted as a managing director and head of the innovative solutions group at TD Asset Management.
Each of the anticipated directors and members of management of the resulting issuer listed herein would be an insider of the resulting issuer for purposes of the policies of the TSX-V. Further details regarding the anticipated insiders of the resulting issuer will be disclosed in a further press release.
Filing statement and information circular
In connection with the proposed transaction and pursuant to the requirements of the TSX-V, Rebel will file a filing statement on its issuer profile on SEDAR, which will contain details regarding the proposed transaction, the concurrent financing and the property.
The parties will be seeking a waiver of any requirement for a sponsor, but in the event a waiver is not available, the parties will update the markets accordingly.
Rebel shares are currently halted, and Rebel anticipates that trading will remain halted until the documentation required by the TSX-V for the proposed transaction can be provided to the TSX-V.
On closing of the proposed transaction, it is anticipated that the resulting issuer will be classified as a Tier 1 real estate issuer that will meet the TSX-V's initial listing requirements applicable therefor.
About Rebel Capital Inc.
Rebel is incorporated under the provisions of the Business Corporations Act (British Columbia) with its registered and head office in Vancouver, B.C. Rebel is a reporting issuer in the provinces of Ontario, British Columbia and Alberta.
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