NOT FOR DISSEMINATION IN THE U.S. OR THROUGH U.S. NEWSWIRES
Sereno Capital Corporation ("Sereno" or the "Company") (TSX VENTURE:SZZ.H) is
pleased to announce that it has entered into a letter of intent (the "LOI")
dated May 24, 2013 with an arm's length party, Delavaco Properties Inc.
("Delavaco"), a company incorporated under the laws of Ontario, to effect a
business combination and acquire all of the issued and outstanding shares of
Delavaco by way of a court approved plan of arrangement (the "Proposed
Transaction"). As consideration for the issued and outstanding shares of
Delavaco, Sereno will issue: (i) common shares in the capital of Sereno in
exchange for outstanding common shares of Delavaco in an aggregate amount
determined by formula, and (ii) convertible securities of Sereno in exchange for
outstanding convertible securities of Delavaco with appropriate adjustments.
As part of the Proposed Transaction, Sereno will convert into a new real estate
investment trust to be named "Delavaco Residential Properties Trust" (the
"Resulting Issuer"). The LOI will be superseded by a definitive agreement (the
"Definitive Agreement") to be entered into between Sereno and Delavaco. The
Company is a capital pool company listed on the NEX market of the TSX Venture
Exchange (the "Exchange") and the Proposed Transaction would constitute the
Company's qualifying transaction under the Exchange's Policy 2.4 - Capital Pool
Companies.
None of the insiders of the Company, or their associates and affiliates, have
any interest in the Proposed Transaction or are otherwise an insider of, or have
any relationship with, Delavaco or its direct and indirect shareholders, and the
transaction is not a Non-Arm's Length Qualifying Transaction as defined under
the Exchange policies (as such terms are defined by the Exchange).
The Company and Delavaco anticipate settling and entering into the Definitive
Agreement by June 30, 2013. Completion of the Proposed Transaction is subject to
approval by the Company's shareholders. The Company anticipates filing a
management information circular detailing the Qualifying Transaction and related
matters in the near future.
Trading in the common shares of the Company will be halted pending the release
of further disclosure regarding the Proposed Transaction, the satisfaction of
the initial filing requirements of the Exchange and a preliminary review by the
Exchange.
About Delavaco
Delavaco was incorporated on January 27, 2011 and since that time has been
investing in single-family homes and multi-family properties. Delavaco invests
in single-family homes and multi-family properties at prices below replacement
costs located in major markets in the United Sates that were hard-hit by the
housing correction but which Delavaco believes now offer substantial upside to
the housing recovery and that exhibit favourable demographics, positive economic
growth and solid rental demand. In particular, Delavaco seeks to grow a stable,
cash generating portfolio of single-family and multi-family properties in the
Southeast United States and Texas with the following characteristics:
-- With respect to single-family homes:
-- distressed, foreclosed or undervalued single-family homes, duplexes,
triplexes or quadplexes with purchase prices of approximately
US$45,000 - US$95,000 per unit;
-- rentable square footage of 1,000 - 2,000 square feet;
-- properties requiring cosmetic renovations of less than US$15,000 on
average and possessing no structural deficiencies;
-- located in robust, working class neighbourhoods either in, or in
close proximity to, major metropolitan areas with populations in
excess of 500,000;
-- property level cap rate between 10% - 14%, occasionally higher; and
-- priced 30-50% below estimated replacement cost (with little to no
value placed on land) and 60% below peak prices providing potential
for meaningful long-term property value appreciation.
-- With respect to multi-family properties:
-- class B buildings in attractive infill locations;
-- limited new land for development nearby, with the expectation that
any new projects will be class A (due to the cost of the land) and
thus not direct competitors;
-- building exteriors in excellent shape but interiors require
renovation (target internal rate of return of 15% or more on
renovations);
-- strong historical occupancy and low turnover; and
-- located within good school districts.
As of the date hereof, Delavaco owns 461 single-family homes in Florida and 171
single-family homes in Georgia and 65 residential units across four multi-family
buildings in Florida (collectively, the "Existing Portfolio"). The Existing
Portfolio was acquired by Delavaco in several independent transactions between
January 2011 and May 2013. The Existing Portfolio occupancy is 84.5% and will be
vended to the Company for US$45.1 million at a blended cap rate of 11.25% on a
current run rate annual net operating income of US$5.07 million or a price per
residential unit of US$64,677. As the Existing Portfolio's occupancy continues
to increase each month, the projected occupancy from new acquisitions upon
completion of the Offering (as defined below) is estimated by Delavaco to be
approximately 91% given Delavaco's focus on acquiring occupied single-family
homes. In addition, Delavaco has an in-house platform with 40 employees and
consultants, which provides Delavaco with the ability to perform all aspects of
acquisition (which includes adhering to a stringent due diligence process),
renovation and maintenance.
It is expected that prior to the closing of the Proposed Transaction, Delavaco
will acquire all of the issued limited partnership units in certain partnerships
which are related parties of Delavaco and that directly own four multi-family
properties (collectively comprising 627 residential units with current occupancy
of 95.6%), including the Park Colony Apartment Homes in Hollywood, Florida (316
residential units); Summerfield Apartment Homes in Sunrise, Florida (153
residential units); The Enclave in Austin, Texas (90 residential units); and
South Congress Commons in Austin Texas (68 residential units) (the "Multi-Family
Properties"). Delavaco expects to acquire the Multi-Family Properties for
US$75.6 million based on a blended cap rate on current run rate annual net
operating income of 5.74% or a price per residential unit of US$120,577.
Delavaco's single-family properties segment is expected to generate stable cash
flow by renting homes at cap rates of 10% to 14% with a substantial portion of
credit risk (currently approximately 60%) transferred to the U.S. Government
through the "Section 8" program, while its multi-family properties segment will
represent a broad platform for future growth.
Mr. Andrew DeFrancesco, Chief Executive Officer and Chairman of the Board of
Trustees has taken the initiative in founding and organizing Delavaco. Upon
completion of the Proposed Transaction, Mr. DeFrancesco is expected to own or
control, directly or indirectly, approximately 17.2% of the outstanding units of
the Resulting Issuer. In addition, Dynamic Power Hedge Fund, PowerOne Capital
Corp. and Mardis Group are expected to own or control, directly or indirectly,
approximately 13.8%, 13.0% and 11.4%, respectively, of the outstanding units of
the Resulting Issuer. Mr. DeFrancesco is a resident of United States. Each of
the other foregoing investors is resident in the Province of Ontario. There are
currently 35 shareholders of Delavaco.
Management of Delavaco has agreed with Dundee Securities Ltd. (the lead agent
for the Offering, as defined below) to lock-up their shares for 36 months with a
third of the total released annually on the anniversary date. In addition, the
Board of Trustees of Delavaco has agreed to lock-up 100% of their shares for 6
months.
The principal registered and head office of Delavaco is located at 1 Richmond
Street West, Suite 500, Toronto, Ontario, M5H 3W4. Financial information on
Delavaco will be disclosed in a subsequent news release.
Transaction Terms
Acquisition of Shares of Delavaco
Pursuant to the terms of the Proposed Transaction, Sereno will: (i) acquire all
of the issued and outstanding securities of Delavaco, and as consideration,
Sereno will issue 414,313,618 common shares in the capital of Sereno (the
"Consideration Shares") in exchange for the outstanding common shares of
Delavaco in an aggregate amount as determined by formula; and (ii) issue
convertible securities of Sereno in exchange for outstanding convertible
securities of Delavaco with like terms and appropriate adjustments (the
"Replacement Convertible Securities").
As part of the Proposed Transaction, the issued and outstanding common shares of
Sereno (including the Consideration Shares) will be consolidated on an 8 to 1
basis, such that the total number of issued and outstanding units of the
Resulting Issuer following the completion of the Proposed Transaction will be
52,376,702 (on a non-diluted basis). In addition, the exercise terms of the
convertible securities (including the Replacement Convertible Securities) will
also be adjusted to reflect the 8 to 1 consolidation.
The table below outlines the number and terms of the convertible securities of
the Resulting Issuer after giving effect to the 8 to 1 consolidation.
----------------------------------------------------------------------------
Conversion Expiration /
Type of Security Number Price Description
----------------------------------------------------------------------------
Warrants
----------------------------------------------------------------------------
Delavaco class A warrants 200,000 $1.00 July 27, 2014
----------------------------------------------------------------------------
Delavaco class B warrants 632,000 $1.25 July 27, 2014
----------------------------------------------------------------------------
Delavaco class C warrants 3,850,000 $1.18 June 3, 2017
----------------------------------------------------------------------------
Delavaco class D warrants 358,432 $1.25 Expiry 5 years
following the
closing of the
transaction
----------------------------------------------------------------------------
Options
----------------------------------------------------------------------------
Delavaco options 2,500,000 $0.10 33.3% vested
December 31, 2012
and the balance
vesting equally on
December 31, 2013
and 2014
----------------------------------------------------------------------------
Sereno options 32,813 $2.00 May 16, 2016
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Private Placement
It is expected that Delavaco will complete a private placement of 5-year, 6.0%
secured debentures (the "Debentures"), convertible into common shares (or units
of the Resulting Issuer) at US$1.35 per share for aggregate gross proceeds of
approximately US$30 million (the "Offering"). The Debentures will be issued at
par. Assuming the completion of an offering for proceeds of US$30 million, the
conversion of all of the Debentures would result in the issuance of
approximately 22,222,222 units of the Resulting Issuer. The Offering is expected
to be completed prior to completion of the Proposed Transaction. A portion of
the proceeds of the Offering will be released to Delavaco upon completion of the
Offering and the remaining portion of the proceeds will be released upon
completion of the Proposed Transaction. The proceeds of the Offering will be
used in part to acquire additional single-family homes. The Debentures will be
secured by, among other things, the single-family homes to be acquired with the
proceeds of the Offering, as well as unencumbered single-family homes currently
within the Existing Portfolio. The terms of the Offering will include a 3 month
cash interest holiday from closing to allow for the proceeds to be deployed.
Upon closing of the Offering, Management of Delavaco will be issued 4,800,000
common shares for past services under an existing agreement (which will be
converted into 600,000 units of the Resulting Issuer after giving effect to the
Proposed Transaction).
Delavaco has entered into an engagement letter dated May 15, 2013, with Dundee
Securities Ltd., as lead agent for the Offering. Dundee Securities Ltd. will be
paid customary compensation for such agency services.
Delavaco also intends to enter into a consulting services agreement with
PowerOne Capital Markets Limited ("PowerOne"), pursuant to which PowerOne will
provide certain consulting and advisory services to Delavaco regarding its
business. PowerOne will be paid customary compensation for such consulting
services.
Concurrent Debt Conversion
In conjunction with the Offering, US$15.25 million of secured debt due August,
31, 2013 incurred in connection with the Multi-Family Properties and US$10
million of unsecured debt due December 20, 2014 will convert to units of the
Resulting Issuer at a price of US$1.15 and US$1.06 per unit, respectively. In
addition US$1,000,000 of the debt on the Park Colony Apartment Homes in
Hollywood, Florida will be converted to units at US$1.25 per unit.
Canadian Subsidiary
Sereno will, if requested by Delavaco to facilitate the Proposed Transaction,
prior to the completion of the Proposed Transaction, establish a special purpose
subsidiary under the laws of the Province of Ontario.
Conversion to a Real Estate Investment Trust
As part of the Proposed Transaction, Sereno, Delavaco and their respective
shareholders will effectively convert Sereno into a new real estate investment
trust to be named "Delavaco Residential Properties Trust".
Management and Board of Trustees
Subject to Exchange approval, on completion of the Proposed Transaction, the
management team and the board of trustees of the Resulting Issuer will include
the persons identified below:
Andrew DeFrancesco - Chief Executive Officer and Chairman of the Board of Trustees
Andrew DeFrancesco, a graduate of University of Western Ontario, is the
Co-Founder, Chairman & Chief Executive Officer of Delavaco. His capital raising
experience includes having funded, jointly funded, or arranged funding in excess
of $1.1 billion. He carries over 18 years of capital markets experience through
various roles, including as head equity trader at C.M. Oliver Inc., an
independent investment bank and President of Apollo Capital, a private fund
specializing in hedge fund and private equity investments. Mr. DeFrancesco
carries a breadth of corporate experience, having been an executive for numerous
companies. He is the Chairman and Chief Executive Officer of the Delavaco Group,
a private equity firm with a focus on real estate, retail and certain natural
resource investments. Mr DeFrancesco was the founder, Chairman and Chief
Executive Officer of Delavaco Energy Inc., a Canadian Oil and Gas company that
sold for $102 million which is now part of Pacific Rubiales. He was also founder
and Chief Executive Officer of Dalradian Resources Inc., an Irish mineral
exploration company that trades on the TSX. Mr. DeFrancesco was Co-Founder and
former Chairman of APO Energy and P1 Energy Corp - two oil and gas companies
that merged for $447 million. In 2011, Mr. DeFrancesco sold Colcan Energy, a
company he founded and acted as Chairman to Sintana Energy, a publicly traded
oil and gas company with operations in Colombia in partnership with Exxon
Mobile. Mr. DeFrancesco sits on the boards of Santa Maria Petroleum, Tolima Gold
and North America's Favorite Brands. Along with being a strategic investor, Mr.
DeFrancesco has spearheaded, with fellow trustee Michael Serruya, the funding
and turnaround of a number of companies in the retail and consumer product
sectors including Jamba Juice, American Apparel, Swisher Hygiene and most
recently Crumbs Bake Shops, all of which are companies listed on the NASDAQ
stock market. Mr. DeFrancesco is active in a number of charities including
Sunnybrook Hospitals' Natal Unit.
Marc Muzzo - Trustee
Marc Muzzo, a graduate from the University of Toronto with a B.A. in Economics,
is a principal in the Muzzo Group of Companies, which encompasses but is not
limited to Marel Contractors, Canada's largest drywall contractor and The
Pemberton Group, one of Canada's leading condominium developers. Mr. Muzzo is
also Director & Vice President of Consolidated HCI Holdings Corporation, a
publicly traded real estate company based in Ontario, Canada. The Muzzo Group of
Companies are also affiliates of numerous privately owned corporations. Mr.
Muzzo's philanthropic contributions include chairing the Muzzo Family Charitable
Foundation and serving as Vice Chair of the G.U./Prostate cancer team at the
Princess Margaret Hospital Foundation. In addition, Mr. Muzzo is a member of the
board of directors for the Toronto General and Western Hospital Foundation.
Keith L. Ray - Trustee
Keith L. Ray carries a breadth of experience in various real estate companies,
including both private and public REITs. Mr. Ray served for 27 years as a
partner at KPMG and its predecessor firm. As an audit partner at KPMG, he helped
oversee the first initial public offering of a REIT in Canada. He carried the
role of audit partner and relationship partner for H&R REIT until his retirement
in 2007. In addition, Mr. Ray was an audit partner for Firm Capital, an income
trust, which operated as a mortgage lender primarily in Ontario. Throughout his
professional career, Mr. Ray has acted as a consultant for large, private,
family-owned business - primarily with real estate operations. Mr. Ray's
community involvement includes involvement with the audit committees of Mount
Sinai Hospital and the UJA Federations. Mr. Ray's educational experience
includes a B. Comm from the University of Toronto and a Chartered Accountant
(C.A.) designation.
Michael Serruya - Trustee
Michael Serruya co-founded Coolbrands International Inc. in 1986 and served as
its President and Chief Executive Officer from November 17, 2006 to November
2010. Mr. Serruya served as President and Chief Executive Officer of Yogen Fruz
from 1995 to February 2000. He served as Chairman of Coolbrands International
Inc. until 2010. He served as Chairman of Yogen Fruz from 1995 to February 2000.
He has been Director of Response Genetics, Inc. since March 2000. He was a
Director of Jamba Inc. from 2009 to 2011, and has been a Director of Swisher
Hygience Inc. since 2010. Mr. Serruya has served as a Director of Coolbrands
International Inc. from September 1994 to 2010. He has also served as Member of
the Board of Ontario Jobs and Investment.
Kelly Hanczyk - Trustee
Kelly Hanczyk currently serves as Chief Executive Officer at Edgefront Realty
Corp. His past experience includes Chief Executive Officer at TransGlobe
Apartment Real Estate Investment Trust from October 2007 until June 2012, when
it was sold for approximately $1 billion. Mr. Hanczyk also served as Vice
President of Whiterock Real Estate Investment Trust from September 2006 to
October 2007. Mr. Hanczyk carries a Bachelor of Business Administration in
Finance from Acadia University.
Dallas Wharton - Chief Operating Officer
Dallas Wharton is the co-founder and current Chief Operating Officer of Dalland
Properties LP, and has over 15 years of experience in the real estate,
construction and property management industries in both Toronto, Ontario and
Florida. Having obtained a degree from the University of Florida, Mr. Wharton
was involved in the development and management of a real estate portfolio
comprised of over two million square feet of industrial, commercial and
automotive dealership assets located in Toronto, Ontario. In 2007, Mr. Wharton
established a private management company focusing on the foreclosure property
management business, for which he maintained and managed bank-owned properties
scheduled for eventual disposition. Mr. Wharton has also developed, managed and
sold numerous residential projects throughout southern Florida and has secured
many third-party management contracts ranging from apartment buildings to
single-family residences.
Michael Galloro - Chief Financial Officer
Michael Galloro is a member of the Institute of Chartered Accountants with over
18 years of experience having earned his designation while working for KPMG LLP.
While engaged as Vice President of Finance for a public company that was listed
on the Toronto Stock Exchange, Mr. Galloro gained experience in finance and
capital markets, corporate governance, human resources and administration. Mr.
Galloro pursued a consulting career working on various projects in securities
legislation compliance, valuations, mergers and acquisitions and initial public
offerings. His experience stems internationally having been exposed to various
global markets. He has been an officer and/or director of both private and
publicly-listed companies operating domestically and in emerging markets.
Resulting Issuer
The following table sets forth the pro forma capitalization of the Resulting
Issuer after giving effect to the Proposed Transaction (including the proposed
consolidation) but before giving effect to the Offering.
Equity
Units held by Delavaco shareholders 25,075,000
Units held by current Sereno shareholders 587,500
Units to be issued with respect to Multi-Family Properties 2,641,568
Units to be issued with respect to US$15.25 million concurrent
debt conversion 13,260,870
Units to be issued with respect to US$1 million concurrent debt
conversion 800,000
Units to be issued with respect to Delavaco convertible
debenture 9,411,765
Units to be issued for executive services rendered 600,000
Units underlying warrants 5,040,432
Units underlying options 2,532,813
Total (fully-diluted) 59,949,947
Debt
Secured debt due 2016 US$25,000,000
Multi-Family mortgages US$47,050,000
Secured debt due 2014 US$9,000,000
Conditions of Completion
The Proposed Transaction is subject to a number of terms and conditions,
including but not limited to, the entering into by the parties of the Definitive
Agreement (such agreement to include representations, warranties, conditions and
covenants typical for a transaction of this nature), the completion of
satisfactory due diligence investigations by Sereno, the approvals from each of
the board of directors of Sereno and Delavaco and the approval and acceptance of
the Exchange.
Sponsorship
Sponsorship of a Qualifying Transaction of a capital pool company is required by
the Exchange, unless an exemption from the sponsorship requirement is available.
Sereno intends to apply to the Exchange for an exemption from the sponsorship
requirement. There is no assurance that the Company will be able to obtain such
an exemption.
Information contained herein pertaining to Delavaco and the proposed members of
Management and the Board of Trustees of the Resulting Issuer has been furnished
to Sereno by Delavaco.
Completion of the transaction is subject to a number of conditions, including
but not limited to, Exchange acceptance and if applicable pursuant to Exchange
Requirements, majority of the minority shareholder approval. Where applicable,
the transaction cannot close until the required shareholder approval is
obtained. There can be no assurance that the transaction will be completed as
proposed or at all.
Investors are cautioned that, except as disclosed in the management information
circular or filing statement to be prepared in connection with the transaction,
any information released or received with respect to the transaction may not be
accurate or complete and should not be relied upon. Trading in the securities of
a capital pool company should be considered highly speculative.
Certain information in this news release constitutes forward-looking statements
under applicable securities law. Any statements that are contained in this news
release that are not statements of historical fact may be deemed to be
forward-looking statements. Forward-looking statements are often identified by
terms such as "may", "should", "anticipate", "expect", "intend" and similar
expressions. Forward-looking statements in this news release include, but are
not limited to, statements with respect to the closing or completion of the
Qualifying Transaction. Forward-looking statements necessarily involve known and
unknown risks, including, without limitation, risks that closing of the Proposed
Transaction may not occur; risks related to the receipt of approval by the
Exchange, the completion of the Qualifying Transaction; risks associated with
general economic conditions; adverse industry events; marketing costs; loss of
markets; volatility of real estate prices; inability to access sufficient
capital from internal and external sources, and/or inability to access
sufficient capital on favourable terms; industry and government regulation;
changes in legislation, income tax and regulatory matters; the ability of the
Resulting Issuer to implement its business strategies; competition; currency and
interest rate fluctuations; and other risks. Readers are cautioned that the
foregoing list is not exhaustive.
Readers are further cautioned not to place undue reliance on forward-looking
statements as there can be no assurance that the plans, intentions or
expectations upon which they are placed will occur. Such information, although
considered reasonable by management at the time of preparation, may prove to be
incorrect and actual results may differ materially from those anticipated.
Forward-looking statements contained in this news release are expressly
qualified by this cautionary statement.
The forward-looking statements contained in this news release represent the
expectations of the Company and Delavaco as of the date of this news release,
and, accordingly, are subject to change after such date. Neither the Company nor
Delavaco undertakes any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
except as expressly required by applicable securities law.
The Exchange has in no way passed upon the merits of the proposed transaction
and has neither approved nor disapproved the contents of this press release.
FOR FURTHER INFORMATION PLEASE CONTACT:
Sereno Capital Corporation
Brandon Gordon
Director
416-214-9672
Delavaco Residential Capital Corporation (TSXV:SZZ.H)
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