Cottonwood Communities to Merge with Affiliates

February 3, 2021 | James Sprow | Blue Vault

On January 26, 2021, Cottonwood Communities, Inc. (“CCI”) entered into merger agreements to acquire each of Cottonwood Multifamily REIT I, Inc. (“CMRI”), Cottonwood Multifamily REIT II, Inc. (“CMRII”) and Cottonwood Residential II, Inc. (“CRII”) and together with its operating partnership, Cottonwood Residential O.P., LP (“CROP”). All of the mergers are stock-for-stock transactions whereby each of CMRI, CMRII, and CRII will be merged into a wholly-owned subsidiary of CCI. None of the mergers are contingent upon the closing of any of the other mergers; however, under certain circumstances, CMRI and CMRII may opt not to close if the CRII merger does not occur.

The transactions are expected to close in the second or third quarter of 2021.

Cottonwood Multifamily REIT I and Cottonwood Multifamily REIT II are Regulation A+ REITs, and Cottonwood Residential II is a Regulation D REIT with a total offering amount of $20 million.

If approved by the stockholders and the unitholders, as applicable, and the other closing conditions are met or waived, the mergers will combine four portfolios of multifamily apartment communities and other real estate-related investments located predominantly in growth markets across the United States and create a $1.5 billion multifamily REIT. The managers expect the combined company to benefit from improved scale and operating efficiencies, enhanced geographic diversification, and expanded access to capital to pursue potential accretive transactions.

Additionally, following the merger, Cottonwood Residential, which currently manages more than 13,000 units, including approximately 8,600 for Cottonwood affiliates, will become wholly owned by Cottonwood Communities.

The mergers will combine four portfolios of multifamily apartment communities and other real estate-related investments located across the United States. Cottonwood noted that the combined portfolio will consist of 34 multifamily investments across 12 states which have an average age of 18 years, weighted average effective rents of $1,377 per month, and 94.9 percent occupancy as of December 31, 2020.

Each share of CRII will be converted into the right to receive 2.015 shares of Class A common stock of CCI. Each unitholder of CROP, as the surviving operating partnership, will hold the economic equivalent to 2.015 shares of common stock of CCI.

In addition to the shares of CCI that holders of Cottonwood Residential will receive, it is anticipated that each CRII stockholder, along with CROP unitholders, will also receive a distribution from CROP of a note receivable that will be paid ratably over 10 years to the holders of Cottonwood Residential, subject to repayment rights.

Each share of Cottonwood Multifamily REIT I will be converted into the right to receive 1.175 shares of Class A common stock of Cottonwood Communities.

Each share of Cottonwood Multifamily REIT II will be converted into the right to receive 1.072 shares of Class A common stock of Cottonwood Communities.

Following the closing of all Mergers, continuing common stockholders of CCI, and former common stockholders of CRII, CMRI, and CMRII, and continuing holders of CROP common limited partner interests are expected to own approximately 22.5%, 0.8%, 10.6%, 9.6%, and 56.5%, respectively, of the common ownership interest in CROP, the surviving operating partnership for CCI. Additionally, former CRII preferred stockholders and current CCI preferred stockholders (through CCI’s preferred ownership in CROP) will remain as part of the capitalization of the combined companies.

In conjunction with the mergers, Cottonwood Communities expects to reclassify shares of its common stock and amend the plan of distribution for its current offering, the company said in a letter to shareholders. The board also expects to amend its share repurchase program to increase the number of shares that can be redeemed from an annual limit of 5 percent of shares outstanding in the prior calendar year to a quarterly limit of 5 percent of the net asset value of all outstanding shares in the prior calendar quarter.

The board also plans to create a repurchase pricing schedule for its new classes of shares that allows holders to be redeemed at NAV following a one-year hold period; and amend the repurchase pricing schedule for holders of Class A and Class T shares, which is currently structured so that shares are repurchased at an increased percentage of NAV from 85 percent to a maximum of 95 percent depending on the hold period of the shares to permit redemption at a maximum of 100 percent of NAV after a five-year hold period.

Cottonwood Communities expects to pay ordinary distributions at the current rates during the period between signing the merger agreements and closing the merger. On a post-merger basis, the REIT expects to continue distributions, which are currently $0.50 per share annually.

In addition, the operating agreement for Cottonwood Residential O.P. will be amended to allow for unitholders, after a one-year holding period post-merger, to exchange their units for shares of a class of Cottonwood Communities common stock that is expected to permit redemption under the SRP at 100 percent of NAV after a one-year hold period after the unit-for-share exchange. The existing redemption plan for Cottonwood Residential O.P. unitholders will also remain in place as currently structured.

Cottonwood Communities launched its $675 million offering in August 2018 and has raised $120.2 million as of December 2020.

Cottonwood Multifamily REIT I commenced its $50 million private offering in May 2016 and had sold all the 5 million shares of its common stock by April 2017. Cottonwood Multifamily REIT II fully subscribed its $50 million offering in August 2018.

Source:  SEC