Cottonwood Communities to Merge with Affiliates to Create $1.5 Billion Multifamily REIT

Cottonwood Communities Inc., a publicly registered non-traded real estate investment trust, has entered into merger agreements to acquire affiliates Cottonwood Multifamily REIT I Inc., Cottonwood Multifamily REIT II Inc. and Cottonwood Residential II Inc., along with its and operating partnership Cottonwood Residential O.P.

Cottonwood Communities Inc., a publicly registered non-traded real estate investment trust, has entered into merger agreements to acquire affiliates Cottonwood Multifamily REIT I Inc., Cottonwood Multifamily REIT II Inc., Cottonwood Residential II Inc., along with its and operating partnership Cottonwood Residential O.P. 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 stockholders and unitholders, the transactions are expected to create a single $1.5 billion REIT focused solely on the multifamily sector.

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 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.

Each share of Cottonwood Residential II will be converted into the right to receive 2.015 shares of Class A common stock of Cottonwood Communities. Each unitholder of Cottonwood Residential O.P., as the surviving operating partnership, will hold the economic equivalent to 2.015 shares of common stock of Cottonwood Communities.

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 of the 5 million shares of its common stock by April 2017. Cottonwood Multifamily REIT II fully subscribed its $50 million offering in August 2018.

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