Lanesborough REIT Reports 2013 Operating Results

WINNIPEG, March 13, 2014 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its operating results for the year ended December 31, 2013.  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, 2013, which may be obtained from the LREIT website at www.lreit.com or the SEDAR website at www.sedar.com.

HIGHLIGHTS

During 2013, LREIT made significant progress toward improving its overall financial and liquidity position as a result of a number of key accomplishments.

  • Elimination of debt covenant breaches: During 2013, LREIT resolved debt covenant breaches on three mortgage loans with a combined principal balance of approximately $80.8 million. The resolution of the debt covenant breaches has eliminated a major risk factor and will enable LREIT to move forward with additional debt restructuring initiatives. As of December 31, 2013, all debt covenant breaches have been eliminated with the exception of one swap mortgage loan which is in breach of net operating income achievement requirements.
  • Property divestitures: During 2013, LREIT sold two additional properties under its divestiture program, including the sale of Nova Court on December 31, 2013. The two sales resulted in net proceeds of $14.5 million after accounting for selling costs and the discharge/assumption of the existing mortgage loan debt. Subsequent to December 31, 2013, LREIT redeemed $10 million of the 9% mortgage bonds (TSX: LRT.NT.A) which were, in part, secured against the Nova Court property.
  • NOI gains for Fort McMurray properties: During 2013, the net operating income of the Fort McMurray property portfolio, excluding Parsons Landing, increased by $1.5 million or 11%, compared to 2012. The increase in operating income reflects the continued strengthening of economic conditions in Fort McMurray and the completion of income-enhancing capital expenditures for the six apartment properties which are located in the downtown area of the City.
  • Debt reduction: After accounting for regular and lump-sum mortgage loan principal payments and debt discharged/assumed on the sale of properties, the total long-term debt decreased by $21.0 million during 2013. As at December 31, 2013, the weighted average interest rate of the total debt including the revolving loan was 5.9%, compared to 7.4% as at December 31, 2012.  As at December 31, 2013, the total debt, including the revolving loan, was equal to 76% of the carrying value of the total property portfolio, excluding Parsons Landing
  • Parsons Landing - Reconstruction and completion of acquisition: On June 1, 2013, approximately 16 months after the property was destroyed by a fire, 84 of the 160 units at Parsons Landing returned to active rental operations. On October 3, 2013, the reconstruction of the remaining 76 units was completed and the entire project became fully operational.  On March 6, 2014, the purchase of Parsons Landing was completed.  The acquisition was funded by $39.29 million of net proceeds from a 7.95%, $40 million first mortgage loan maturing on April 30, 2015, an advance under the revolving loan and the balance in cash.

INCOME RESULTS

During 2013, LREIT achieved an increase in income from investment properties of $14.1 million, mainly due to the following factors:

  • Despite a reduction in the number of income-producing properties, net operating income, combined with income recoveries on Parsons Landing, increased by $1.1 million or 4% during 2013, mainly due to the NOI increase for the Fort McMurray property portfolio. During 2013, the average monthly rental rate of the Fort McMurray property portfolio increased by 5% and the overall occupancy level improved from 90% in 2012 to 91% in 2013.
  • Total interest expense decreased by $6.0 million or 18% during 2013, due to the reduction in mortgage loan debt, the decrease in the weighted average interest rate of debt and the elimination of mortgage prepayment charges.
  • As a result of the continued appreciation of property values and the return of Parsons Landing to rental operations, fair value gains/adjustments contributed $15.9 million to income.

During 2013, income from discontinued operations decreased by $18.7 million, compared to 2012. The decrease in income from discontinued operations is attributable to the sale of two of the seniors' housing complexes in 2012 and the associated gain of $15 million which was recorded on the sale of the two properties.

Overall, LREIT completed 2013 with comprehensive income of $15.5 million, compared to comprehensive income of $20.1 million in 2012.

CASH FLOW RESULTS

During 2013, cash inflow from operating activities, excluding working capital adjustments, amounted to $2.0 million, compared to a cash outflow of $2.1 million during 2012. Including working capital adjustments, LREIT completed 2013 with a cash inflow from operating activities of $1.6 million, compared to a cash outflow of $4.5 million during 2012.

FINANCIAL AND OPERATING SUMMARY

  December 31
    2013         2012         2011 
STATEMENT OF FINANCIAL POSITION            
   Total assets $  468,072,319 $ 481,552,578 $ 555,220,070
   Total long-term financial liabilities (1) $ 301,147,731 $ 323,026,417 $ 399,176,274
   Weighted average interest rate            
  - Mortgage loan debt        5.4%        7.2%        6.9%
  - Total debt        5.9%        7.4%        7.2%
  Year Ended December 31
    2013         2012      2011 
KEY FINANCIAL PERFORMANCE INDICATORS            
Operating Results            
   Rentals from investment properties $ 40,328,764 $ 38,410,992 $ 41,852,726
   Net operating income $ 24,208,769 $ 22,429,229 $ 25,729,391
   Income before taxes and discontinued operations $ 14,689,374 $ 601,545 $ 2,382,662
   Income and comprehensive income $ 15,519,586 $ 20,098,308 $ 5,035,231
             
Cash Flows            
   Cash provided by (used in) operating activities $ 1,625,477 $ (4,538,612) $ (1,566,188)
   Funds from Operations (FFO) $ (887,528) $ (7,138,217) $ (6,993,506)
   Adjusted Funds from Operations (AFFO) $ (3,863,140) $  (10,207,994) $ (8,483,052)
   Distributable loss $ (1,501,299) $  (5,091,215) $  (5,002,715)

(1) Long-term financial liabilities consist of mortgage loans, a swap mortgage loan, debentures, defeased liability and mortgage bonds.  The swap mortgage loan and mortgage bonds are included at face value.

2013 COMPARED TO 2012

Analysis of Income (Loss)
  Year Ended December 31   Increase (Decrease)
in income
          2013         2012    Amount   %
Rentals from investment properties   $ 40,328,764   $ 38,410,992   1,917,772         5.0%
Property operating costs           16,119,995          15,981,763          (138,232)         (0.9)%
Net operating income          24,208,769          22,429,229          1,779,540         7.9%
Interest income          1,272,740          969,607          303,133         31.3%
Forgiveness of debt                         -                 859,561               (859,561)         (100.0)%
Interest expense          (27,223,579)          (33,261,469)          6,037,890         18.2%
Trust expense          (2,312,565)          (2,323,979)          11,414         0.5%
Income recovery on Parsons Landing          2,622,629          3,278,987          (656,358)         (20.0)%
Insurance proceeds                       -             925,355               (925,355)         (100.0)%
Income (loss) before the following          (1,432,006)          (7,122,709)          5,690,703         79.9%
Profit on sale of investment properties          221,642          915,531          (693,889)         (75.8)%
Fair value gains          6,970,031          10,308,723          (3,338,692)         (32.4)%
Fair value adjustment of Parsons Landing          8,929,707          (3,500,000)             12,429,707         355.1%
Income (loss) before taxes and discontinued
 operations
         14,689,374           601,545          14,087,829         - 
Current income tax expense                     -                  49,763                  49,763            100.0%
Income (loss) before discontinued operations          14,689,374          551,782          14,137,592         -
Income from discontinued operations            830,212           19,546,526          (18,716,314)         (95.8)%
Income (loss) and comprehensive income (loss)   $ 15,519,586   $  20,098,308   (4,578,722)         (22.8)%

Analysis of Rental Revenue
  Year Ended December 31
                Increase (Decrease)     % of Total
      2013     2012     Amount     %     2013     2012
                                     
Fort McMurray   $ 24,422,889   $ 22,965,656   $ 1,457,233           6%           61%           60%
Other investment properties     10,892,024     10,939,943      (47,919)           - %           27%           28%
Sub-total      35,314,913     33,905,599     1,409,314           4%           88%           88%
Properties sold      3,425,499     4,110,966     (685,467)           (17)%           8%           11%
Parsons Landing      1,588,352     394,427     1,193,925        303%           4%           1%
                                     
Total   $ 40,328,764   $ 38,410,992   $ 1,917,772           5%           100%           100%

As disclosed in the chart above, total revenue from the investment properties, excluding properties sold and Parsons Landing, increased by $1.41 million in 2013, compared to 2012. The increase is comprised of an increase in revenue from investment properties in Fort McMurray of $1.46 million, partially offset by a decrease in revenue from the Other investment properties of $47,919.

The increase in revenue from the Fort McMurray property portfolio reflects an increase in the average occupancy level, as well as an increase in the average rental rate.  As disclosed in the charts below, the average occupancy level for the Fort McMurray portfolio increased from 90% during 2012 to 91% in 2013, while the average monthly rental rate increased by $111 or 5.0%. The decrease in the occupancy rate of the Fort McMurray property portfolio during Q4-2013 is largely attributable to the tightening of market conditions in certain areas of Fort McMurray, as well as seasonal factors that tend to reduce demand for suites during the winter months.

Occupancy Level, by Quarter
  2013
  Q1 Q2 Q3 Q4 12 Month
Average
Fort McMurray       93%       95%       92%       84% 91%
Other investment properties       95%       94%       92%       90% 93%
Properties sold       100%       100%       100%       99% 100%
Parsons Landing       n/a       n/a       n/a       n/a n/a
Total       94%       95%       93%       86% 92%
             
  2012
  Q1 Q2 Q3 Q4 12 Month
Average
Fort McMurray       92%       90%       87%       88% 90%
Other investment properties       98%       96%       96%       97% 97%
Properties sold       100%       100%       99%       100% 100%
Parsons Landing       n/a       n/a       n/a       n/a n/a
Total       95%       92%       91%       92% 92%

The occupancy level represents the portion of potential revenue that was achieved

Average Monthly Rents, by Quarter          
  2013
  Q1 Q2 Q3 Q4 12 Month
Average
Fort McMurray      $2,259      $2,275      $2,318     $2,387   $2,329
Other investment properties $922 $929 $931 $934 $929
Properties sold $2,550 $2,546 $2,692 $2,299 $2,521
Parsons Landing n/a n/a n/a n/a n/a
Total $1,739 $1,749 $1,780 $1,786 $1,773
           
  2012
  Q1 Q2 Q3 Q4 12 Month
Average
Fort McMurray $2,124 $2,191 $2,251 $2,293 $2,218
Other investment properties $891 $898 $902 $919 $903
Properties sold $2,729 $2,379 $2,174 $2,295 $2,438
Parsons Landing n/a n/a n/a n/a n/a
Total $1,704 $1,684 $1,704 $1,739 $1,709

Analysis of Property Operating Costs                      
      Year Ended December 31     Increase (Decrease)
      2013     2012     Amount   %
                       
Fort McMurray   $  8,707,915   $ 8,768,905   $ (60,990)         (1)%
Other investment properties     5,277,117     5,182,636      94,481         2%
Sub-total     13,985,032     13,951,541     33,491         - %
Properties sold     1,593,323     1,735,839      (142,516)         (8)%
Parsons Landing     541,640     294,383      247,257         84%
Total   $ 16,119,995   $ 15,981,763   $ 138,232         1%

During 2013, property operating costs for the portfolio of investment properties, excluding properties sold and Parsons Landing, increased by $33,491, compared to 2012. The increase is comprised of an increase of $94,481 in the operating costs of the Other investment properties portfolio, partially offset by a decrease of $60,990 in the Fort McMurray portfolio.

Analysis of Net Operating Income
  Net Operating Income  
      Year Ended December 31   Increase (Decrease)   Percent of Total   Operating Margin
      2013     2012     Amount     %     2013     2012     2013     2012
                                                 
Fort McMurray   $  15,714,974   $ 14,196,751   $ 1,518,223           11%           65%           63%            64%            62% 
Other investment properties           5,614,907           5,757,307           (142,400)           (2)%           23%           26%            52%            53% 
Sub-total           21,329,881           19,954,058           1,375,823           7%           88%           89%            60%            59% 
Properties sold           1,832,176           2,375,127           (542,951)           (23)%           8%           11%            53%            58% 
Parsons Landing           1,046,712           100,044           946,668           946%           4%           -            66%            25% 
Total   $ 24,208,769   $ 22,429,229   $ 1,779,540           8%           100%           100%            60%            58% 

After considering the increase in rental revenue and property operating costs, as analyzed in the preceding sections of this press release, net operating income for the portfolio of investment properties, excluding properties sold and Parsons Landing, increased by $1.38 million or 7% during 2013, compared to 2012. As disclosed in the table above, net operating income for the Fort McMurray portfolio increased by $1.52 million while net operating income for the Other investment properties portfolio decreased by $0.14 million.

Total net operating income increased by $1.78 million during 2013, compared to 2012 after accounting for the decrease in net operating income related to properties sold and the increase in net operating income attributable to Parsons Landing. During 2013, net operating income from Parsons Landing combined with the income recovery on Parsons Landing amounted to $3.67 million, compared to $3.38 million during 2012, representing an increase of $0.29 million. The income recovery consisted of the amount recovered under the insurance policy for revenue losses, less certain operating costs such as property taxes and insurance which were deducted from the gross insurance recovery through an "occupancy fee". In comparison, net operating income consists of total actual revenues less total actual operating costs.

Overall, the operating margin for the property portfolio, excluding properties sold and Parsons Landing, increased from 59% in 2012, to 60% in 2013.  The increase in the overall operating margin reflects an increase in the operating margin for the Fort McMurray property portfolio.

INTEREST EXPENSE

Total interest expense for investment properties decreased by $6.04 million or 18% during 2013, compared to 2012. The decrease is mainly due to the elimination of mortgage prepayment charges of $2.75 million, a decrease in mortgage loan and swap mortgage loan interest of $3.49 million and $0.52 million, respectively, and a decrease in amortization of transaction costs of $0.17 million, partially offset by a reduction in the gain related to the change in value of interest rate swaps of $0.74 million.

Total interest expense for discontinued operations decreased by $3.78 million or 83% during 2013, compared to 2012. The decrease is comprised of a decrease in mortgage loan interest of $1.95 million, the elimination of mortgage prepayment charges of $1.29 million, and a decrease in amortization of transaction costs of $0.54 million.

COMPARISON TO PREVIOUS QUARTERS

Analysis of Income (Loss)
  2013 2012
      Q4     Q3     Increase
(Decrease) in
income
    Q4     Increase
(Decrease) in
income
Rentals from investment properties   $  10,115,906   $ 10,417,760   $ (301,854)   $ 9,432,387   $ 683,519
Property operating costs           4,092,631           4,012,556           (80,075)           4,137,920                      45,289
Net operating income           6,023,275           6,405,204           (381,929)           5,294,467                    728,808
Interest income           340,701           303,792           36,909           354,645                    (13,944)
Interest expense           (6,490,178)           (6,281,557)           (208,621)           (8,786,495)                 2,296,317
Trust expense           (550,238)           (440,395)           (109,843)           (751,957)                    201,719
Income recovery on Parsons Landing           350,295           630,704           (280,409)           885,329                  (535,034)
Insurance proceeds           -           -           -           525,355                  (525,355)
Income (loss) before the following           (326,145)           617,748           (943,893)           (2,478,656)                 2,152,511
Profit on sale of investment properties           56,714           -           56,714           (129,776)                    186,490
Fair value gains           (2,107,277)           7,652,786           (9,760,063)           1,329,884                (3,437,161)
Fair value adjustment of Parsons Landing           1,707,628           5,152,319           (3,444,691)           500,000                 1,207,628
Income (loss) for the period before taxes
 and discontinued operations
          (669,080)           13,422,853           (14,091,933)           (778,548)                    109,468
Current income tax expense           -           -           -           49,763                      (49,763)
Income (loss) for the period before
 discontinued operations
          (669,080)           13,422,853           (14,091,933)           (828,311)                    159,231
Income from discontinued operations           159,916           82,471           77,445           17,014,084              (16,854,168)
Comprehensive income (loss)   $ (509,164)   $ 13,505,324   $ (14,014,488)   $ 16,185,773    $ (16,694,937)

Comparison to Q3-2013

During Q4-2013, LREIT incurred a loss of $0.33 million, before profit on sale of investment properties, fair value gains, fair value adjustment of Parsons Landing, income taxes and discontinued operations, compared to income of $0.62 million during Q3-2013. The variance in quarterly results mainly reflects a decrease in net operating income of $0.38 million, a decrease in income recovery on Parsons Landing of $0.28 million, an increase in interest expense of $0.21 million and an increase in trust expense of $0.11 million.  Both the decrease in operating income and the decrease in income recovery are attributable to the reconstruction and return of the remaining 76 suites at Parsons Landing on October 3, 2013.  As Parsons Landing is incurring a vacancy loss during the lease-up period for reconstructed suites, the decrease in income recovery exceeded the increase in operating income. Another factor contributing to the decrease in operating income is the decrease in the occupancy rate of the Fort McMurray property portfolio during Q4-2013, which is largely attributable to the tightening of market conditions in certain areas of Fort McMurray as well as seasonal factors that tend to reduce demand for suites during the winter months.

After accounting for the decrease in fair value gains and fair value adjustment of Parsons Landing in the combined amount of $13.20 million and an increase in profit on sale of investment properties of $56,714, income before income taxes and discontinued operations decreased by $14.09 million during Q4-2013, compared to Q3-2013.

During Q4-2013, income from discontinued operations increased by $77,445 compared to Q3-2013. The increase in income from discontinued operations mainly reflects a decrease in interest expense.

After accounting for discontinued operations and income tax expense, LREIT completed Q4- 2013 with a comprehensive loss of $0.51 million, compared to comprehensive income of $13.51 million during Q3-2013.

Comparison to Q4-2012

During Q4-2013, loss before profit on sale of investment property, fair value gains, fair value adjustment of Parsons Landing, income taxes and discontinued operations, amounted to $0.33 million, compared to a loss of $2.48 million during Q4-2012, representing a decrease in the loss of $2.15 million. The decrease in the loss mainly reflects a decrease in interest expense and an increase in operating income, partially offset by a decrease in income recovery on Parsons Landing and a decrease in insurance proceeds.

The decrease in interest expense is mainly due to a decrease in the weighted average interest rate of mortgage loan debt. The increase in operating income is mainly due to the return of Parsons Landing to full rental operations and an increase in operating income for the Fort McMurray property portfolio.

During Q4-2013, income from discontinued operations decreased by $16.85 million compared to Q4-2012. The decrease in income from discontinued operations mainly reflects the sale of Riverside Terrace in December 2012.

After accounting for the variance in fair value gains/adjustments, profit on sale, income from discontinued operations and income tax expense, LREIT completed Q4-2013 with a comprehensive loss of $0.51 million, compared to comprehensive income of $16.19 million during Q4-2012.

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