Adventus Realty Trust Provides General Business and Market Update and Results of the Strategic Transaction Review

November 21, 2022

Adventus Realty Trust by its Trustee, Adventus Realty Services Inc. (the “Trust” or “Adventus”) is today providing a general business and market update, along with the results of its strategic transaction review.

General Business and Market Update

As has been previously noted, Covid-19 has caused significant economic and social disruptions which continue to have an impact on the financial performance of the Trust. Notwithstanding strong rental collections (~99%) throughout the pandemic, new tenant leasing activity (as opposed to renewal leasing of existing tenants) in 2020 and 2021 was nominal, reducing our portfolio occupancy to 83% (September 2022) from 90% (December 2019), resulting in lower net operating income and available funds from operations in 2022.

Also, as previously disclosed, we expected 2022 to be a productive leasing year with the cash flow benefits of the expected leasing activity to be realized in 2023 and 2024. The Trust did experience an increase in leasing activity to start 2022, however new tenant leasing activity has not been sufficient to improve occupancy levels and portfolio occupancy has remained at approximately 83% throughout the first 9 months of 2022. As such, a recovery in net operating income and funds from operations will not be realized until significant occupancy improvement from new tenant leasing is achieved.

From a macroeconomic perspective, global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering Covid-19 pandemic all weigh heavily on the economic outlook.[1]

Highly attentive to inflation risks, the US Federal Reserve has now hiked rates at six straight meetings, bringing the benchmark interest rate up to a target range of 3.75% to 4.00% percent, the highest since early 2008. These monetary policy actions have resulted in increased borrowing costs and concerns of a recession have caused credit spreads to widen, significantly hampering lending activity. Debt markets remain highly illiquid, in particular for the suburban office market, as evidenced by the issues previously disclosed in our News Release regarding our recent efforts to refinance the Highland Landmark V property.

The rapid increase in interest rates has had a significant negative impact on the Trust’s cash flows and liquidity. As previously disclosed in our Report to Unitholders for the six months ended June 30, 2022, the Trust has approximately $386 million in variable rate debt, representing approximately 64% of its total debt outstanding, which is exposed to changes in the 30-day London Inter-Bank Offered Rate (LIBOR). LIBOR has been increasing significantly in recent months. For example, LIBOR was 0.10% on July 1, 2021 when $350 million of the Trust’s variable rate debt was issued. On April 1, 2022, LIBOR was 0.44% and has increased to 3.90% as of November 16, 2022. While the Trust does have certain interest rate hedges in place, this large increase in interest rates still resulted in a significant increase in our cost of debt. The incremental annualized interest cost on the $350 million of variable rate debt, when comparing LIBOR at its origination (0.10%) to the current rate cap (3.0%), is $10.2 million or $0.53 per unit.

The culmination of the above factors has led to reduced occupancy, lower net operating income and an increase in debt servicing costs, which in turn has eliminated sufficient cash available for distribution, resulting in our recently announced suspension of Trust distributions. We are working diligently to manage the business during continuing difficult times, as 2022 is proving to be another challenging year for Adventus, including instituting several prudent cost-cutting measures. We will nonetheless continue to seek to maximize value for the assets that the Trust owns. The Management team and Board are in regular close communication during this continued period of economic uncertainty.

Strategic Transaction Review

The strategic transaction review was overseen by a special committee of independent members of the Board of the Trustee (the “Special Committee”), with assistance from independent financial and legal advisors.

As previously announced on June 2, 2022, the Trust engaged Lazard Freres & Co. LLC (“Lazard”), a global investment banking firm, to advise the Trust and to establish a process to solicit and evaluate interest in a potential strategic transaction involving a merger, sale or recapitalization of the Trust. Lazard embarked on a broad outreach process to solicit interest in a corporate transaction with the Trust.

The outreach targeted at least 50 potential strategic and financial investors who are active investors in suburban office properties. Potential counterparties spanned a wide range of fund mandates and investor types, including publicly-traded REITs, private owner/operators, pension funds, sovereign wealth funds, and insurance companies, amongst others. The Trust engaged with a number of counterparties but suitable terms could not be reached.

Given current market conditions, the Board and Management have decided to suspend the strategic transaction review process. In the interim, the Board and Management will continue to review its existing business plans and consider all potential liquidity alternatives.

Additional information regarding the strategic transaction review and outlook will be included in our Third Quarter 2022 Report to Unitholders, expected to be disseminated later this month, followed by a unitholder conference call (date to be announced).

 

About Adventus

Adventus is a Canadian based private Real Estate Investment Trust (REIT) and is focused on US income producing commercial real estate, in the suburban office markets of Chicago, Illinois and Atlanta, Georgia. For more information on Adventus, including our team, corporate strategy, photo gallery, details of our portfolio and press releases, we invite you to visit our website at www.adventusrealty.com.

Cautionary Statements Regarding Forward-Looking Statements

This press release may contain forward-looking statements with respect to the REIT and its operations, strategy, financial performance and financial condition, as well as with respect to the previously disclosed acquisitions and future acquisitions of properties. These statements generally can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “plan”, “forecast”, “expect”, “intend”, “would”, “could”, “if”, “may” and similar expressions. The actual results and performance of the REIT and the acquisitions discussed herein could differ materially from those expressed or implied by such statements. Accordingly, readers should not place undue reliance on forward-looking statements. These cautionary statements qualify all forward-looking statements attributable to the REIT and persons acting on its behalf. Such statements are qualified in their entirety by the inherent risks and uncertainties surrounding future expectations. Some important factors that could cause actual results to differ materially from expectations include, among other things, general economic and market factors, changes in interest rates, competition and changes in securities or other laws or regulations or the application thereof. The cautionary statements qualify all forward-looking statements attributable to the REIT and persons acting on its behalf.

Unless otherwise stated, all forward-looking statements speak only as of the date of this press release. Except as required by applicable law, the REIT specifically disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

 

ADVENTUS REALTY TRUST    
By its Trustee: ADVENTUS REALTY SERVICES INC.

Per: Rodney B. Johnston, FCPA, FCA   
President and Chief Executive Officer

 

[1] International Monetary Fund – World Economic Outlook – October 2022

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