Lanesborough REIT Reports 2018 Operating Results

WINNIPEG, March 20, 2019 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSXV: LRT.UN) today reported its operating results for the year ended December 31, 2018. The following comments in regard to the financial position and operating results of LREIT should be read in conjunction with management's discussion & analysis and the financial statements for the year ended December 31, 2018, which may be obtained from the LREIT website at www.lreit.com or the SEDAR website at www.sedar.com.

Since 2014, low oil prices and reduced oil sands development activity in Alberta have resulted in weak rental market conditions in Fort McMurray, significantly impacting the rental rates and occupancy levels of LREIT's Fort McMurray property portfolio. The demand for rental accommodations that resulted from the entry into the rental market of residents displaced by the May 2016 wildfire and the migration of workers involved in the restoration and post-fire rebuilding efforts dissipated during 2018, with leases turning over at rental rates that closely reflect the market conditions that existed prior to the wildfire. The reduction in rental rates and average occupancy levels experienced during 2018 were most pronounced during Q4-2018. 

Throughout 2018, LREIT has continued to face significant financing challenges, requiring secondary sources of cash to fund the cash outflow from operating activities, regular mortgage loan principal payments, special mortgage loan pay-downs, deficits incurred upon loan refinancing, transaction costs for debt financing, and capital expenditures.

Operating Results

LREIT completed 2018 with negative funds from operations ("FFO") of $11 million, compared to negative FFO of $6.4 million in 2017, representing a decrease of $4.6 million. The decrease is mainly due to the following:

• A $3.2 million decrease in net operating income ("NOI") which mainly reflects a decrease in the rental revenues and an increase in the operating costs of the Fort McMurray property portfolio, including Woodland Park, which is classified as held for sale. The decrease in rental revenue is due to the combined impact of lower average rental rates and decreased occupancy levels. The increase in property operating costs is mainly due to an increase in utility costs, an increase in insurance related costs, and the capital replacement reserve component of the common element fees paid to the condominium corporation, established as part of the Woodland Park condominium sales program.
  
  
• A $1 million increase in interest expense mainly due to an increase in the average outstanding balance of the revolving loan facility, as well as the application of the increased interest rate of 7%, which applies to amounts advanced on the revolving loan that are in excess of $30 million. An increase in the weighted average interest rate on the Trust's mortgage loan debt from 5.5% in 2017 to 5.8% in 2018 was offset by a $9.7 million reduction in the outstanding balance of mortgage loan debt during 2018. 
  
  
• A $0.5 million increase in loss from discontinued operations mainly due to increased property operating costs, which were primarily the result of a coordinated effort to enhance the revenue-generating potential of the seniors' housing complex and its attractiveness to potential buyers. The increase in the property operating costs of the seniors' housing complex mainly reflects an increase in professional fees, as a result of an in‑depth review performed on the operations of the seniors' housing complex; an increase in advertising costs, incurred to promote the facility; and, an increase in wages, resulting from the expanded level of care and services being provided by the facility.

Overall, LREIT completed 2018 with a loss and comprehensive loss of $46.5 million, compared to a loss of $32 million in 2017. The increase in the loss is primarily due to the unfavourable variance in the fair value adjustments of the investment properties, which were reduced to reflect the increased uncertainty regarding the extent and timing of future oil sands development activity and its corresponding impact on the recovery of the Fort McMurray rental market.

Liquidity and Capital Resources

LREIT continues to require additional sources of cash to fund the cash shortfall from operating activities, as well as mortgage loan principal payments, transaction costs for debt financing, and capital expenditures. LREIT also requires additional capital to fund the repayment of mortgage loans at maturity, lump‑sum principal repayments required by existing mortgage loans and/or for refinancing to the extent that there is a deficit between the repayment amount and the amount of new mortgage loan proceeds. The cash shortfalls during 2018 were funded by additional advances under the revolving loan facility from 2668921 Manitoba Ltd. and by unsecured loan advances from Shelter.

Effective July 1, 2018, the revolving loan facility with 2668921 Manitoba Ltd. was renewed and amended to increase the limit on the maximum amount that may be advanced under the facility from $30 million to $100 million and to extend the maturity date to December 31, 2019. As of the date of this report, the maximum available balance remaining on the revolving loan facility is $43,600,000.

As of the date of this release, LREIT has renewed, refinanced or obtained forbearance agreements for all mortgage loan debt, except for one mortgage loan, secured by the property classified as held for sale, with a principal balance of $24.4 million. The forbearance agreement for the mortgage loan expired on December 31, 2018 and LREIT was unable to repay the outstanding balance of the loan. Subsequent to the fiscal year ended December 31, 2018, a "Receivership Order" was granted by the Court, placing the lender's appointed Receiver in control of the property, effective February 28, 2019. Management of the property is in the process of being transitioned to the lender's appointed Receiver. It is management's expectation that the Receiver will continue efforts to sell the property. Any deficit between the sales proceeds obtained and the future balance outstanding on the loan could result in a claim by the lender against the mortgage guarantee provided by LREIT on the original execution of the mortgage loan. Such a claim would be unsecured and subordinate to the LREIT's existing secured debt, inclusive of any amounts outstanding with respect to the revolving loan facility from 2668921 Manitoba Ltd.; any amounts advanced by 2668921 Manitoba Ltd. or its affiliates, including Shelter, and any amounts outstanding with respect to the Series G Debentures.

Outlook

A variety of sources indicate that global oil sands investment fell by more than 45% between 2014 and 2018, with capital spending dropping below $10 billion in 2017 for the first time since 2004. The price differential between Western Canadian Select and Western Texas Intermediate crude oil also reached a new high of US $50 per barrel during the fall of 2018, prompting the Alberta Provincial Government to take action to curtail oil production. The price differential has since decreased to approximately US $11.40 as of the date of this release, March 20, 2019. Insufficient pipeline infrastructure and other oil transportation bottlenecks prevent Alberta's crude oil from efficiently reaching refining markets and are expected to continue to negatively impact the price differential between Canadian and foreign crude oil once the production cuts are lifted. 

Although management expects oil sands development activity to eventually increase once oil prices recover and Canada addresses its oil transportation issues., there can be no assurance that this will occur within a timeframe that allows LREIT to remain a going concern.  In the near term, LREIT remains dependent on favourable interim financing arrangements and support from Shelter and its parent company, 2668921 Manitoba Ltd., as well as its ability to continue to renew and/or refinance its mortgage loan debts as they become due.

Divestitures and debt restructuring will continue to be the top priorities of LREIT during 2019

ANALYSIS OF OPERATING RESULTS

Analysis of Loss
		Year Ended December 31						Increase (Decrease) in Income
		2018			2017			Amount			%
Rentals from investment properties		$	17,063,264		$	19,052,202		$	(1,988,938)		(10)%
Property operating costs		(11,439,451)				(10,248,700)			(1,190,751)		(12)%
Net operating income		5,623,813				8,803,502			(3,179,689)		(36)%
Interest income		206,506				189,425			17,081		9%
Interest expense		(14,916,720)				(13,930,662)			(986,058)		(7)%
Trust expense		(1,255,190)				(1,463,535)			208,345		14%
Loss before the following		(10,341,591)				(6,401,270)			(3,940,321)		(62)%
Gain (loss) on sale of investment property		(161,848)				55,070			(216,918)		(394)%
Fair value adjustments		(35,313,425)				(25,530,987)			(9,782,438)		(38)%
Loss before discontinued operations		(45,816,864)				(31,877,187)			(13,939,677)		(44)%
Loss from discontinued operations		(686,837)				(159,495)			(527,342)		(331)%
Loss and comprehensive loss		$	(46,503,701)		$	(32,036,682)		$	(14,467,019)		(45)%

Overall Operating Results

LREIT completed 2018 with a loss and comprehensive loss of $46.5 million, compared to a loss and comprehensive loss of $32.0 million in 2017. The increase in the loss mainly reflects unfavourable variances in the fair value adjustments of the investment properties and the investment property classified as held for sale in the combined amount of $9.8 million, a decrease in net operating income of $3.2 million, an increase in interest expense of $1.0 million and an increase in the loss from discontinued operations of $0.5 million.

Losses related to fair value adjustments during both periods were mainly due to reduced revenue expectations for LREIT's properties located in Fort McMurray as a result of reductions in the anticipated positive impact of the post‑wildfire rebuilding efforts and increased uncertainty surrounding a recovery of the Fort McMurray rental market resulting from the prolonged nature of the downturn in oil sands development activity.

The decrease in net operating income is mainly due to a decrease in rental revenue of $2.0 million and an increase in operating costs of $1.2 million. The decrease in rental revenue mainly reflects a decrease in the average rental rates as well as a decrease in occupancy experienced by the Fort McMurray properties, including Woodland Park, which is classified as held for sale. The increase in property operating costs is mainly due to an increase in utility costs and an increase in insurance related costs. Also contributing to the increase in property operating costs is an increase in the property operating costs for the held for sale and/or sold properties primarily as a result of the capital replacement reserve component of the common element fees paid to the condominium corporation established as part of the Woodland Park condominium sales program. 

The increase in loss from discontinued operations is primarily due to an increase in property operating costs of $0.6 million primarily due to an increase in wages, advertising and professional fees, all of which are associated with a review of operations and change in strategy of the seniors' housing complex.

The increase in interest expense mainly reflects an increase in revolving loan interest, due to an increase in the average outstanding balance of the revolving loan and the higher rate of interest that applies to revolving loan advances in excess of $30 million.

Revenues

Analysis of Rental Revenue
		Year Ended December 31						Increase (Decrease)				% of Total
		2018			2017			Amount		%		2018		2017
Fort McMurray properties	$	13,983,159		$	14,983,563		$	(1,000,404)		(7)%		82%		79%
Other investment properties		1,521,070			1,568,568			(47,498)		(3)%		9%		8%
Sub‑total		15,504,229			16,552,131			(1,047,902)		(6)%		91%		87%
Held for sale and/or sold properties		1,559,035			2,500,071			(941,036)		(38)%		9%		13%
Total	$	17,063,264		$	19,052,202		$	(1,988,938)		(10)%		100%		100%

Average Occupancy Level, by Quarter
	2018
	Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray properties	69%	72%	71%	65%	69%
Other investment properties	77%	68%	68%	70%	71%
Total	70%	71%	70%	66%	69%
Held for sale and/or sold properties	46%	51%	53%	62%	52%
	2017
	Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray properties	68%	71%	73%	72%	71%
Other investment properties	71%	73%	73%	75%	73%
Total	68%	72%	73%	72%	71%
Held for sale and/or sold properties	79%	79%	69%	61%	72%
Average Monthly Rents, by Quarter
	2018
	Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray properties	$1,685	$1,650	$1,618	$1,527	$1,620
Other investment properties	$907	$909	$909	$885	$902
Total	$1,554	$1,525	$1,499	$1,419	$1,499
Held for sale and/or sold properties	$2,484	$2,258	$2,201	$1,899	$2,214
	2017
	Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray properties	$1,684	$1,707	$1,711	$1,697	$1,700
Other investment properties	$909	$909	$903	$905	$907
Total	$1,554	$1,573	$1,575	$1,563	$1,566
Held for sale and/or sold properties	$2,593	$2,611	$2,597	$2,549	$2,588

During 2018, total investment property revenue, excluding held for sale and/or sold properties, decreased by $1.0 million or 6%, compared to 2017. The decrease mainly reflects a decrease in the average monthly rental rate of the Fort McMurray property portfolio of $80 or 4.7%, due largely to the turnover of leases that had commenced shortly after the May 2016 wildfire when higher rental rates were achievable. The Fort McMurray property portfolio also experienced reduced occupancy as the average occupancy declined from 71% during 2017 to 69% during 2018.

During 2018, revenue from the held for sale and/or sold properties decreased by $0.9 million or 38%, compared to 2017. The decrease in revenue from held for sale and/or sold properties was due to a decrease in the average occupancy level from 72% to 52% and the average monthly rental rate of $374 or 14.5% at Woodland Park, the property classified as held for sale.

The decrease in the average occupancy level of Woodland Park is mainly due to the transfer of two corporate tenants to other LREIT properties that offered lower rental rates or were closer to urban amenities, and due to the departure of tenants that were awaiting the reconstruction of their homes following the May 2016 wildfire. The Woodland Park property had a relatively high proportion of tenants awaiting the reconstruction of their homes as a result of the property's townhome offering and proximity to an area of Fort McMurray where a substantial number of homes were damaged or destroyed by the wildfire.

The decrease in the average rental rate of Woodland Park is mainly due to the continued turnover of a number of three‑bedroom units and townhome units, which had been rented shortly after the wildfire at rental rates that were higher than the current market rates.

Property Operating Costs

Analysis of Property Operating Costs
		Years Ended December 31					Increase (Decrease)
		2018			2017			Amount		%
Fort McMurray properties	$	8,832,893		$	8,086,147		$	746,746		9%
Other investment properties	1,380,779				1,230,211			150,568		12%
Sub‑total	10,213,672				9,316,358			897,314		10%
Held for sale and/or sold properties	1,225,779				932,342			293,437		31%
Total	$	11,439,451		$	10,248,700		$	1,190,751		12%

During 2018, property operating costs, excluding the held for sale and/or sold properties, increased by $0.9 million or 10%, compared to 2017. The increase is mainly due to an increase in utility costs, primarily due to an increase in the number of all-inclusive leases, an increase in insurance premiums, and an increase in insurance deductibles.

After accounting for held for sale and/or sold properties, property operating costs increased by $1.2 million or 12% during 2018, compared to 2017.  The increase in operating costs of the held for sale and/or sold properties of $293,437 or 31% is mainly due to the capital replacement reserve component of the common element fees paid by LREIT during 2018 for its portion of ownership of Woodland Park, the property held for sale. Capital replacement reserve fees are paid to address future capital expenditures that would have been capitalized when incurred prior to the establishment of the condominium sales program. Also contributing to the increase in operating costs of the held for sale and/or sold properties was an increase in maintenance costs, partially offset by a decrease in property management fees.

Net Operating Income and Operating Margin

Analysis of Net Operating Income
		Net Operating Income
		Year Ended December 31						Increase (Decrease)					Percent of Total				Operating Margin
			2018			2017			Amount		%		2018		2017		2018		2017
Fort McMurray properties		$	5,150,266		$	6,897,416		$	(1,747,150)		(25)%		92%		78%		37%		46%
Other investment properties		140,291			338,357			(198,066)			(59)%		2%		4%		9%		22%
Sub‑total		5,290,557			7,235,773			(1,945,216)			(27)%		94%		82%		34%		44%
Held for sale and/or sold properties		333,256			1,567,729			(1,234,473)			(79)%		6%		18%		21%		63%
Total		$	5,623,813		$	8,803,502		$	(3,179,689)		(36)%		100%		100%		33%		46%

During 2018, the net operating income for the investment properties portfolio, excluding held for sale and/or sold properties, decreased by $1.9 million or 27%, compared to 2017. The operating margin, excluding held for sale and/or sold properties, decreased from 44% during 2017 to 34% during 2018. The decreases in net operating income and operating margin, excluding held for sale and/or sold properties, are primarily due to the decrease in revenue and the increase in the property operating costs of the Fort McMurray property portfolio, as discussed in the preceding sections of the report.

The decrease in net operating income from held for sale and/or sold properties of $1.2 million is due to the decrease in revenue and the increase in operating costs of Woodland Park, as discussed in the preceding sections of the report. After accounting for held for sale and/or sold properties, the total net operating income of LREIT decreased by $3.2 million or 36% during 2018, compared to 2017.

ABOUT LREIT
LREIT is a real estate investment trust, which is listed on the TSX Venture Exchange under the symbols LRT.UN (Trust Units) and LRT.DB.G (Series G Debentures). For further information on LREIT, please visit our website at www.lreit.com.

This press release contains certain statements that could be considered as forward-looking information.  The forward-looking information is subject to certain risks and uncertainties, which could result in actual results differing materially from the forward-looking statements. 

Neither the TSX Venture Exchange nor its Regulation Services Provider (as the term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

SOURCE Lanesborough Real Estate Investment Trust

Gino Romagnoli, Chief Executive Officer, or Arni Thorsteinson, Vice-Chair, Tel: [phone], Fax: [phone], Email: [email protected]

Related Links

http://www.lreit.com