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HALIFAX, May 30, 2007 (Canada NewsWire via COMTEX News Network) -- /NOT FOR DISTRIBUTION ON U.S. WIRE SERVICES/
Holloway Lodging Real Estate Investment Trust (TSXV: HLR.UN, HLR.DB) ("Holloway" or the "REIT") announced today that it has entered into a conditional purchase agreement to acquire ten hotel properties located in Alberta and British Columbia and a letter of intent to acquire a hotel property located in British Columbia (collectively, the "Acquired Properties") from two separate vendors for an aggregate purchase price of approximately $228 million. The Acquired Properties will be purchased at an overall average capitalization rate of 9.7%, after allowing for an appropriate reserve for furniture, fixtures, and equipment. Ten of the eleven properties are being acquired from the Pomeroy Group ("Pomeroy"), one of the largest hotel developers in western Canada. In connection with the transaction Pomeroy and Holloway will enter into various joint arrangements (see below) to expand their respective hotel portfolios.
Immediately Accretive to Distributable Income
The transaction is immediately accretive to distributable income and future benefits from property management and other operating synergies are expected to be realized.
As a result, Holloway also announced that its board of trustees has approved an increase in monthly distributions to unitholders from $0.0375 per month or $0.45 annually to $0.045 per month, or $0.54 annually upon completion of the acquisition of the Acquired Properties. This represents a 20% increase over the present distribution level. Notwithstanding this significant increase, the REIT's overall payout ratio is expected to decline from its current level owing to the accretion in distributable income. The distribution increase is expected to take effect beginning with the distribution in respect of the first full month following completion of Holloway's acquisition of the Acquired Properties.
Dominant Market Position in Western Canada
In connection with the properties to be acquired from Pomeroy, Holloway will enter into an agreement to participate with Pomeroy in hotel development opportunities in Western Canada. Holloway expects that in most cases Winport Developments ("Winport") will work with Pomeroy to develop properties using mezzanine financing provided by the REIT and that, consistent with its existing development relationship with Winport, Holloway will have the right to acquire the newly constructed hotels following stabilization. Holloway will also have a right of first opportunity to acquire at least eight other hotels in northern Alberta and British Columbia currently owned or under development by Pomeroy. Pomeroy is the premier hotel developer and owner in northern Alberta and British Columbia, with a current portfolio (including the Acquired Properties) of 18 hotels representing 1,736 rooms. In addition, Pomeroy has a significant pipeline of hotel developments and other land development projects across northern Alberta and British Columbia.
Upon completion of these transactions, Holloway's hotel portfolio will consist of 21 hotels located in Alberta (13), British Columbia (3), Nova Scotia (3), New Brunswick (1), and Northwest Territories (1), representing an aggregate of 2,310 rooms.
Pipeline for Future Growth
Upon closing on the acquisition of the Acquired Properties, Holloway believes that it will have, through Winport and others, a two-year pipeline of additional acquisition prospects representing approximately 2,500 rooms and suites at various stages of negotiation and under contract, not including the possibility of acquiring any major portfolios.
"We are tremendously excited by these acquisitions and the fact that they will allow us to prudently increase cash distributions to our unitholders by such a significant amount," said Mr. Glenn Squires, Chief Executive Officer of Holloway. "We are also extremely proud of our newly formed relationship with Bob Pomeroy, the premier developer of hotels in northern Alberta and British Columbia, which we believe will provide the REIT with access, through Winport, to a significant number of development opportunities. Immediately after completing these transactions, we will have increased Holloway's asset base by approximately 150%, established Holloway as a market leader in the rapidly growing northern Alberta market, and significantly expanded our future acquisition pipeline. Holloway remains committed to growing and diversifying its hotel income property portfolio for the benefit of its unitholders."
Mr. Robert Pomeroy, Chief Executive Officer of Pomeroy commented, "Teaming up with Holloway represents significant opportunities to combine our respective hotel development expertise and source future acquisitions. We look forward to growing with Holloway as we leverage our respective brands and relationships in the lodging sector."
Canaccord Adams has acted as Holloway's exclusive financial advisor in connection with the acquisition of the hotels to be acquired from Pomeroy.
The Acquired Properties
The REIT will acquire ten of the Acquired Properties (located in northern Alberta (8) and northeastern British Columbia (2)) from Pomeroy for a purchase price of approximately $215 million. These hotels were independently appraised by CB Richard Ellis with a total value that is directly in line with the purchase price of $215 million. The other Acquired Property, located in Kamloops, British Columbia, will be acquired from an unrelated vendor in a separate transaction for a purchase price of approximately $13 million. Holloway anticipates entering into a conditional purchase agreement with respect to this Acquired Property in June. The Acquired Properties, which comprise 1,159 rooms, are predominantly all newly constructed over the past seven years, and the hotels to be acquired from Pomeroy recorded an overall RevPar increase in 2006 of 21% to $113, and are expected to further increase RevPar in 2007. The Acquired Properties are leaders in their respective markets, have won many awards and support Holloway's strategy of operating properties that dominate their market segment via product quality, amenities and premiums on rate.
The combined purchase price for the Acquired Properties is payable in cash as to approximately $208 million and in units of the REIT as to $20 million. Holloway expects to fund the cash portion of the purchase price of the hotels with the proceeds from a mortgage financing and other external financing arrangements, including an expected public financing. The REIT does not expect that the acquisitions will have any material impact on its overall debt to gross book value ratio.
Holloway has received a commitment letter from a lender with respect to the mortgage financing that provides for a mortgage loan on ten of the Acquired Properties in the aggregate principal amount of $100 million with an anticipated per annum interest rate equal to the greater of 6.0% and 215 basis points over the 10 year Government of Canada bond rate and a maturity date of June 2017. Further details regarding additional financing arrangements to satisfy the balance of the cash portion of the purchase price will be announced once such arrangements have been finalized.
On closing of Holloway's acquisition of the hotels to be acquired from Pomeroy, Holloway will enter into the following agreements with Pomeroy and/or certain of its affiliates:
<<
- a hotel management agreement providing for management of the hotels
by Pomeroy for a five year term;
- a franchise agreement for one of the hotels for a term of ten years;
and
- an agreement providing for (i) a right of first opportunity for
Holloway to purchase certain other hotels in which Pomeroy and its
affiliates have a controlling interest; (ii) restrictions on the
ability of Pomeroy to invest in, own, manage, operate, finance or
control certain lodging facilities within a 50 kilometre radius of
the hotels being acquired for a period of five years; and (iii) the
right of Holloway to invest in certain lodging facilities being
developed by Pomeroy.
>>
Holloway's obligation to complete the acquisition of the Acquired Properties is subject to a number of conditions precedent. A number of these conditions, including Holloway's due diligence condition, settlement of the forms of agreements described above and satisfactory arrangement of mortgage financing, have already been satisfied or waived. A number of other conditions, including conditions relating to Holloway's other financing arrangements and customary closing conditions, remain outstanding. If all of the outstanding conditions are satisfied or waived in accordance with their terms, Holloway currently expects that it will complete the acquisition in June 2007.
TSX Listing Application
Holloway has applied to graduate to the Toronto Stock Exchange from the TSX Venture Exchange effective following completion of its acquisition of the Acquired Properties. Listing will be subject to Holloway satisfying all of the original listing conditions of the TSX.
SIFT Tax
As explained in further detail below, Holloway expects to become subject to the pending income trust distribution tax in 2007 as a result of this transaction, but does not expect that it would be required to pay any distribution tax in 2007 or 2008.
Bill C-52, which received second reading in the House of Commons on May 15, 2007, implements proposals (the "Proposals") to amend the Income Tax Act (Canada) to change the taxation regime applicable to certain publicly traded income trusts and certain other publicly traded flow-through entities ("SIFTs") which were originally announced by the Minister of Finance (Canada) ("Minister") on October 31, 2006 and the growth guidelines for such entities announced by the Minister on December 15, 2006 (the "Growth Guidelines"). Under the Proposals, SIFTs will be subject to tax in respect of certain distributions at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. The Proposals are not applicable to real estate investment trusts that meet certain specified criteria relating to the nature of their income and investments (the "REIT Exception").
Holloway will be a SIFT for purposes of the Proposals as currently structured and will not qualify for the REIT Exception. Furthermore, Holloway expects that the financing arrangements that will be required in order for it to fund the cash portion of the purchase price for the Acquired Properties will result in Holloway exceeding the definition of "normal growth" under the Growth Guidelines. Therefore, Holloway expects to become subject to taxation in 2007 under the new proposed taxation regime if the Proposals are enacted in the form set out in Bill C-52.
The Proposals provide that distributions paid by a SIFT as returns of capital will generally not be subject to the tax. Such distributions are not currently taxable to unitholders but reduce the adjusted cost base of a unitholder's units. 100% of Holloway's distributions have been characterized as return of capital in 2006 and, after giving effect to the acquisition of the Acquired Properties and based on a number of assumptions regarding Holloway's asset base and operating results over the relevant periods, management currently believes that Holloway will not pay any distribution tax under the Proposals in 2007 or 2008.
About Holloway
Holloway Lodging REIT is a real estate investment trust listed as a Tier 2 issuer on the TSX Venture Exchange with the objective of acquiring and maintaining a growing portfolio of lodging properties with stable cash distributions.
This press release contains forward-looking information within the meaning of applicable securities laws. Forward-looking information may relate to the REIT's future outlook and anticipated events or results and may include statements regarding the future financial position, property acquisition strategies and opportunities, business strategy, financial results and plans and objectives of the REIT. Particularly, statements regarding the Trust's future operating results, property acquisition strategies and opportunities and economic performance are forward-looking statements. In some cases, forward-looking information can be identified by terms such as "may", "will", "should", "expect", "plan", "anticipate", "expect", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward looking-information is subject to certain factors, including risks and uncertainties, that could cause actual results to differ materially from what the REIT currently expects and there can be no assurance that such statements will prove to be accurate. Some of these risks and uncertainties are described under "Risk Factors" in the REIT's annual information form dated May 1, 2007. Other risks and uncertainties include the risk that the REIT may not be able to complete the proposed acquisition of the Acquired Properties on the terms described herein or at all, the actual level of the anticipated distribution increase may differ from the estimated increased distribution rate specified herein, the actual tax treatment of distributions may differ from the estimated tax treatment specified herein and the REIT may not be able to acquire some or all of the properties in its acquisition pipeline on terms that are economically viable or at all and the number of properties in the pipeline may be smaller than estimated above.
The TSX Venture Exchange does not accept responsibility for the adequacy
or accuracy of this press release.
SOURCE: Holloway Lodging Real Estate Investment Trust
Mr. Glenn Squires, Chief Executive Officer or Ms. Tracy Sherren, Chief Financial
Officer, (902) 457-1907
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