Lanesborough REIT reports 2012 second quarter results

WINNIPEG, Aug. 14, 2012 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its operating results for the quarter ended June 30, 2012. 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 quarter ended June 30, 2012, which may be obtained from the LREIT website at www.lreit.com or the SEDAR website at www.sedar.com.

OPERATING RESULTS

Income from Operations

Continuing Operations

Excluding the $23.3 million fair value gain related to the increase in the carrying value of Parsons Landing (as discussed in further detail below), LREIT completed Q2-2012 with net income of $7.4 million from continuing operations, representing an increase in income of $3.2 Million, compared to Q2- 2011. The increase in income from continuing operations (excluding the Parsons Landing fair value gain) mainly reflects an increase in income recovery on Parsons Landing, a decrease in interest expense and a gain on sale of investment properties.

Including the $23.3 million gain related to the increase in the carrying value of Parsons Landing, LREIT completed Q2-2012 with income from continuing operations of $30.7 million, compared to $4.2 million during Q2-2011.

Discontinued Operations

Income from discontinued operations increased by $0.9 million or 126% during Q2-2012, compared to Q2-2011. The increase reflects a $2 million profit on the sale of the Clarington Seniors' Residence, an increase in net operating income of $0.3 million and a decrease in income tax of $0.6 million, largely offset by a $2 million increase in interest expense. The increase in interest expense includes early prepayment fees of approximately $1.3 million in regard to refinancing of the mortgage loan debt for Riverside Terrace.

Comprehensive Income

LREIT completed Q2-2012 with comprehensive income from total operations of $32.3 million, compared to comprehensive income of $4.9 million during Q2-2011.

Cash Flow from Operating Activities

During Q2-2012, cash outflow from operating activities, excluding working capital adjustments, amounted to $0.09 million compared to a cash outflow of $2.23 million during Q2-2011, representing a decrease in cash outflow of $2.14 million. The decrease was mainly due to an increase in net operating income, on a cash basis, largely offset by an increase in the cash component of interest expense. Including working capital adjustments, cash outflow from operating activities increased by $3.35 million during Q2-2012, compared to Q2-2011. After including regular payments of mortgage loan principal and capital expenditures, the cash "shortfall" amounted to $8.67 million, which was mainly funded by the net proceeds from property sales.

Reconstruction of Parsons Landing

In June 2012, agreements were finalized under which the builder has agreed to complete the reconstruction of the Parsons Landing and attend to the recovery of the insurance claim for property in a manner which is expected to result in the cost of reconstruction being fully funded from insurance proceeds. The builder has also agreed to extend the closing date of the acquisition to a date which is 90 days after the final occupancy permit is obtained. In addition, the builder has agreed to forgive any shortfall between the insurance proceeds for revenue losses and required monthly interest payment of $300,000 until the occupancy of the property recommences. Thereafter, interest in excess of the required monthly interest payment of $300,000 will continue to be forgiven, provided LREIT completes the acquisition of the property on the closing date, as extended.

As a result of the commitment by the builder to reconstruct the property and pursue recovery of all construction costs from the insurer, the carrying value of Parsons Landing increased by $23.3 million to $43.3 million during Q2-2012, representing the estimated fair value of the reconstructed property, discounted for the estimated time period of reconstruction. A corresponding amount was also recorded as income in Q2-2012 under the line title "fair value adjustment of Parsons Landing".

In Q1-2012, in the absence of an agreement with the builder to reconstruct the property in a coordinated manner with the insurer, a fair value adjustment loss of $27.8 million was recorded for Parsons Landing to account for the decrease in the fair value of the property due to the fire. The fair value adjustment gain, recorded in Q2-2012, and additional fair value gains to be recorded in the future as reconstruction progresses, will offset the first quarter fair value loss.

Completion of Property Sales

During Q2-2012, LREIT completed the sale of the Siena Apartments and the Clarington Seniors' Residence with the sales closing on May 1, 2012 and May 9, 2012, respectively. The combined sale price and net proceeds after repayment of mortgage financing were $54.5 million and $13.4 million, respectively.

Mortgage Financing

In June 2012, LREIT obtained a new 4.95% first mortgage loan for Riverside Terrace in the amount of $31.5 million (maturing in 2022) resulting in net proceeds of approximately $2 million, after the repayment of the previous 6.19% first mortgage loan. The net proceeds were used for working capital purposes

Resolution of Covenant Breaches

In July 2012, LREIT discharged mortgage loan debt of approximately $22.3 million, which was encumbered against the six apartment properties in downtown Fort McMurray. The debt restructuring served to eliminate the covenant breach in regard to the discharged debt.

Also in July 2012, LREIT paid-down the swap mortgage loan on Millennium Village by $5.0 million from the proceeds of a new mortgage loan of $3 million, the application of collateral deposits of $1.7 Million and working capital. The pay down is expected to remedy the covenant breach on the mortgage loan.

It is expected that LREIT will receive a commitment for a new first mortgage loan of $22.7 million secured by the Colony Square property in Winnipeg. The loan is expected to be advanced in the third quarter of 2012 and repay the existing first mortgage loan.  The refinancing will extinguish the covenant breach.

After considering the above noted debt restructuring, LREIT will have three mortgage loans totaling $82.3 million, which are in breach of mortgage loan covenants, compared to seven mortgage loans as of December 31, 2011. A forbearance extension to September 30, 2012 has been received for the three mortgage loans. The covenant breach for one of the three remaining mortgages (Lakewood Townhomes) will be eliminated when the existing first mortgage loan is fully discharged from condominium sale proceeds

Outlook

For the remainder of 2012, LREIT will continue to pursue property sales under its divestiture program. LREIT will also remain focused on improving NOI results and arranging additional debt refinancing with the objective of reducing interest costs and eliminating the remaining covenant breaches.

The combination of future property sale proceeds and the $15 million revolving loan commitment from 2668921 Manitoba Ltd. is expected to enable LREIT to continue to improve its financial position.

FINANCIAL AND OPERATING SUMMARY

      June 30 December 31
            2012        2011 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION      
  Total assets     $ 510,987,122  $ 555,220,070
  Total long-term financial liabilities (1)     $ 364,480,889  $ 399,176,274
         
  Three Months Ended
      June 30 
Six Months Ended
      June 30 
        2012        2011        2012        2011 
KEY FINANCIAL PERFORMANCE INDICATORS        
Operating Results        
  Rentals from investment properties $ 9,387,902  $ 10,363,052  $ 19,771,822  $ 19,513,569 
  Net operating income $ 5,820,776  $ 6,319,962  $ 11,779,490  $ 11,442,969 
  Income (loss) from continuing operations, before taxes $ 30,876,865  $ 4,103,543  $ 4,458,734  $ (484,305) 
  Income and comprehensive income $ 32,297,230  $ 4,900,921  $ 6,211,335  $ 1,154,313 
         
Cash Flows        
  Cash flow from operating activities $ (4,644,859)  $ (1,296,849)  $ (5,599,772)  $ (525,729) 
  Funds from Operations (FFO) $ (838,841)  $ (2,187,543)  $ (2,170,139)  $ (5,698,433) 
  Adjusted Funds from Operations (AFFO) $ (1,444,448)  $ (2,733,837)  $ (2,915,588)  $ (6,180,187) 
  Distributable loss $ (843,529)  $ (2,749,471)  $ (332,878)  $ (4,371,224) 

(1)  Long-term financial liabilities consist of mortgage loans, swap mortgage loans, convertible debentures and mortgage bonds, at face value
   

PER UNIT AMOUNTS         

Net operating income                  
- basic $0.314      $0.343      $0.635    $0.622 
- diluted $0.312      $0.343      $0.632    $0.622 
Income (loss) from continuing operations, before
 income tax
                 
- basic $1.664      $0.223      $0.240    $(0.026) 
- diluted $1.655      $0.223      $0.239    $(0.026) 
Income and comprehensive income                  
- basic $1.741      $0.266      $0.335    $0.063 
- diluted $1.731      $0.266      $0.333    $0.063 
Cash flow from operating activities                  
- basic $(0.250)      $(0.070)      $(0.302)    $(0.029) 
- diluted $(0.250)      $(0.070)      $(0.302)    $(0.029) 
Funds from Operations (FFO)                  
- basic $(0.045)      $(0.119)      $(0.117)    $(0.310) 
- diluted $(0.045)      $(0.119)      $(0.117)    $(0.310) 
Adjusted Funds from Operations (AFFO)                  
- basic $(0.078)      $(0.148)      $(0.157)    $(0.336) 
- diluted $(0.078)      $(0.148)      $(0.157)    $(0.336) 
Distributable loss                  
- basic $(0.045)      $(0.149)      $(0.018)    $(0.237) 
- diluted $(0.045)      $(0.149)      $(0.018)    $(0.237) 
                   

Q2-2012 COMPARED TO Q2-2011
Analysis of Income
        Three Months Ended  Six Months Ended
  June 30 June 30
        2012        2011        2012        2011 
         
Rentals from investment properties $ 9,387,902  $ 10,363,052  $ 19,771,822  $ 19,513,569 
Property operating costs       3,567,126        4,043,090        7,992,332        8,070,600 
Net operating income       5,820,776        6,319,962        11,779,490        11,442,969 
Interest income       259,186        47,344        333,753        125,011 
Forgiveness of debt       -        -        859,561        - 
Interest expense       (7,241,022)        (8,651,755)        (14,358,954)        (17,367,825) 
Trust expense       (585,876)        (661,170)        (1,164,759)        (1,432,915) 
Income recovery on Parsons Landing         1,524,111                      -         1,524,111                    -
         
Loss before the following       (222,825)        (2,945,619)        (1,026,798)        (7,232,760) 
Profit on sale of investment properties       721,082        -        1,045,307        - 
Fair value gains       7,078,608        7,049,162        8,940,225        6,748,455 
Fair value adjustment of Parsons Landing       23,300,000        -        (4,500,000)        - 
         
Income (loss) before taxes and
 discontinued operations
      30,876,865        4,103,543        4,458,734        (484,305) 
Deferred income tax expense (recovery)       181,339        (89,123)        181,339        (206,782) 
         
Income (loss) before discontinued
 operations
      30,695,526        4,192,666        4,277,395        (277,523) 
         
Income from discontinued operations       1,601,704        708,255        1,933,940        1,431,836 
         
Income and comprehensive income $ 32,297,230  $ 4,900,921  $ 6,211,335  $ 1,154,313 

Analysis of Total Rental Revenue

  Three Months Ended June 30 Six Months Ended June 30
  2012 2011 Increase
(Decrease)
2012 2011 Increase
(Decrease)
             
Fort McMurray $ 5,715,755  $ 5,128,116 $ 587,639  $ 11,407,288 $ 9,372,014 $ 2,035,274
Other investment properties          3,545,890           3,493,538       52,352            7,173,246          6,975,359       197,887
Sub-total          9,261,645           8,621,654       639,991          18,580,534        16,347,373         2,233,161
Properties sold             126,257              667,831       (541,574)         796,861     1,336,227         (539,366)
Impaired property     -           1,073,567       (1,073,567)              394,427          1,829,969 (1,435,542)
             
Total $ 9,387,902 $ 10,363,052 $ (975,150)  $19,771,822 $ 19,513,569 $   258,253
             

As disclosed in the chart above, total revenue from the investment properties, excluding properties sold and the impaired property, increased by $0.64 million during Q2-2012 compared to Q2-2011, comprised of an increase in revenue from investment properties in Fort McMurray of $0.59 million and an increase in revenue from the other investment properties of $0.05 million. The increase in revenue from the Fort McMurray property portfolio reflects a decrease in vacancy, partially offset by a decrease in the average rental rate. As disclosed in the charts below, the vacancy for the Fort McMurray portfolio decreased from 21% during Q2-2011, to 10% in Q2-2012, while the average monthly rental rate decreased by $20 or 1.0%.

Revenue for "properties sold" decreased by $0.54 million in Q2-2012 due to the sale of Siena Apartments. Revenue from the "Impaired property" decreased by $1.07 million due to the requirement under IFRS to record the recovery of insurance proceeds for revenue losses as a separate income category after the calculation of net operating income.

During the six month period ended June 30, 2012, total revenue from investment properties, excluding properties sold and the impaired property, increased by $2.23 million, compared to the six month period ended June 30, 2011. The increase in total revenue for the six month period is comprised of a $1.59 million increase in Q1-2012 and a $0.64 million increase in Q2-2012. The variance between the first and second quarter comparative results mainly reflects a proportionately lower variance in the revenue results for the Fort McMurray property portfolio in the second quarter of 2012.

 
Vacancy by Quarter
  2012
  Q1 Q2 6 Month
Average
Fort McMurray       8%        10%        9% 
Other investment properties       2%        3%        2% 
Properties sold       - %        n/a        n/a 
Impaired property       n/a        n/a        n/a 
Total       5%        8%        6% 

Vacancy by Quarter
  2011
  Q1 Q2 6 Month
Average
Q3 Q4 12 Month
Average
Fort McMurray       36%        21%        29%        6%        7%        18% 
Other investment properties       2%        2%        2%        2%        1%        2% 
Properties sold       - %        - %        - %        - %        - %        - % 
Impaired property       37%        9%        23%        6%        3%        14% 
Total       25%        13%        19%        5%        5%        12% 
             

Vacancy represents the revenue potential of vacant suites.

 
Average Monthly Rents by Quarter
  2012
  Q1 Q2 6 Month
Average
Fort McMurray $2,124 $2,191 $2,155
Other investment properties $1,075 $1,069 $1,071
Properties sold $3,100 n/a n/a
Impaired property n/a n/a n/a
Total $1,704 $1,684 $1,693

Average Monthly Rents by Quarter
  2011
  Q1 Q2 6 Month
Average
Q3 Q4 12 Month
Average
Fort McMurray $2,260 $2,211 $2,235 $2,180 $2,129 $2,195
Other investment properties $1,034 $1,065 $1,050 $1,050 $1,064 $1,050
Properties sold $3,100 $3,100 $3,100 $3,100 $3,100 $3,100
Impaired property $2,370 $2,319 $2,345 $2,282 $2,241 $2,303
Total $1,790 $1,784 $1,787 $1,759 $1,743 $1,767

Analysis of Property Operating Costs
  Three Months Ended June 30 Six Months Ended June 30
  2012 2011 Increase
(Decrease)
2012 2011 Increase
(Decrease)
             
Fort McMurray $ 1,957,239  $ 2,103,733 $ (146,494) $ 4,236,222  $ 4,047,020 $ 189,202 
Other investment properties       1,564,019          1,462,497       101,522        3,362,218          3,089,953       272,265 
Sub-total       3,521,258          3,566,230       (44,972)        7,598,440          7,136,973       461,467 
Properties sold       45,868               53,712       (7,844)        99,509             106,987       (7,478) 
Impaired property       -             423,148       (423,148)        294,383             826,640       (532,257) 
Total $ 3,567,126  $ 4,043,090 $ (475,964) $ 7,992,332  $ 8,070,600 $ (78,268) 
             

During Q2-2012, property operating costs for the portfolio of investment properties, excluding properties sold and the impaired property, decreased by $0.04 million or 1%, compared to Q2-2011. The decrease is comprised of a $0.14 million decrease in the Fort McMurray portfolio, partially offset by an increase of $0.10 million in the operating costs of the other investment properties portfolio.

The decrease in operating costs for the Fort McMurray portfolio mainly reflects a decrease in property tax expense, partially offset by an increase in variable costs such as maintenance, advertising and leasing, which increased in response to the improvement in occupancy. The increase in operating costs for the Other investment property portfolio reflects an increase in maintenance expense.

During the six month period ended June 30, 2012, property operating costs for the portfolio of investment properties, excluding properties sold and the impaired property, increased by $0.46 million, comprised of a $0.51 million increase in Q1-2012 and a $0.04 million decrease in Q2-2012. The variance from the first quarter to the second quarter of 2012 is mainly due to the reduction in operating costs for the Fort McMurray property portfolio during Q2-2012

 
Analysis of Net Operating Income
  Net Operating Income
  Three Months Ended June 30 Six Months Ended June 30
  2012 2011 Increase
(Decrease)
2012 2011 Increase
(Decrease)
Fort McMurray $ 3,758,516  $ 3,024,383 $ 734,133 $ 7,171,066 $ 5,324,994 $ 1,846,072
Other investment properties       1,981,871        2,031,041           (49,170)          3,811,028          3,885,406           (74,378)
Sub-total       5,740,387        5,055,424            684,963  10,982,094          9,210,400       1,771,694
Properties sold       80,389        614,119           (533,730)             697,352          1,229,240         (531,888)
Impaired property       -        650,419     (650,419)       100,044          1,003,329   (903,285)
             
Total $ 5,820,776  $ 6,319,962 $ (499,186) $ 11,779,490 $ 11,442,969 $ 336,521
             

COMPARISON TO PREVIOUS QUARTER
Analysis of Income (Loss)
  Three Months Ended Increase (Decrease)
  June 30, 2012 March 31, 2012 Amount %
         
Rentals from investment properties       9,387,902        10,383,920        713,716        (9.6)% 
Property operating costs       3,567,126        4,425,206        672,457        (19.4)% 
Net operating income       5,820,776        5,958,714        1,386,173        (2.3)% 
Interest income       259,186        74,567        184,619        247.6% 
Forgiveness of debt       -        859,561        (859,561)        - % 
Interest expense       (7,241,022)        (7,117,932)        (123,090)        1.7% 
Trust expense       (585,876)        (578,883)        (6,993)        1.2% 
Income recovery on Parsons Landing              1,524,111                         -    1 524 111            -%
Loss before the following       (222,825)        (803,973)        581,148        72.3% 
Profit on sale of investment properties       721,082        324,225        396,857        122.4% 
Fair value gains       7,078,608        1,861,617        5,216,991        280.2% 
Fair value adjustment of Parsons Landing       23,300,000        (27,800,000)        51,100,000        - % 
Income (loss) for the period before taxes and discontinued operations       30,876,865        (26,418,131)        57,294,996         (216.9)% 
Deferred income tax expense (recovery)       181,339        -        181,339             - % 
Income (loss) for the period before discontinued operations       30,695,526        (26,418,131)        57,113,657     216.2% 
Income from discontinued operations                    1,601,704                      332,236             1,269,468       382.1% 
Comprehensive income (loss) $          32,297,230 $      (26,085,895)   $ 58,383,125           (223.8)%
         

During Q2-2012, loss before profit on sale of investment properties, fair value gains, fair value adjustment of Parsons Landing, income taxes and discontinued operations, decreased by $0.58 million compared to Q1-2012. The decrease in the loss mainly reflects an income recovery on Parsons Landing of $1.52 million, partially offset by a $0.86 million non-recurring income transaction recorded in the first quarter in regard to forgiveness of debt. After accounting for profit on sale of investment properties, fair value gains, fair value adjustment of Parsons Landing, income tax expense and income from discontinued operations, LREIT completed Q2-2012 with comprehensive income of $32.3 million, compared to a comprehensive loss of $26.09 million during Q1-2012.

ABOUT LREIT
LREIT is a real estate investment trust, which is listed on the Toronto Stock Exchange under the symbols LRT.UN (Trust Units), LRT.DB.G (Series G Debentures), LRT.NT.A (Second Mortgage Bonds due December 24, 2015), LRT.WT (Warrants expiring March 9, 2015) and LRT.WT.A (Warrants expiring December 23, 2015). The objective of LREIT is to provide Unitholders with stable cash distributions from investment in a diversified portfolio of quality real estate properties. 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.

The Toronto Stock Exchange has not reviewed or approved the contents of this press release and does not accept responsibility for the adequacy or accuracy of this press release.

 

 

 

 

SOURCE: Lanesborough Real Estate Investment Trust

For further information:

Arni Thorsteinson, Chief Executive Officer, or Gino Romagnoli, Investor Relations
Tel: (204) 475-9090, Fax: (204) 452-5505, Email: info@lreit.com