Lanesborough REIT reports 2014 second quarter results

WINNIPEG, Aug. 14, 2014 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its operating results for the quarter ended June 30, 2014.  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, 2014, which may be obtained from the LREIT website at www.lreit.com or the SEDAR website at www.sedar.com.

Results of Operations

Overview

LREIT completed Q2-2014 with a loss before discontinued operations, fair value adjustments and gain on sale of investment properties of $0.21 million, compared to a loss of $0.24 million in Q2-2013. After including discontinued operations, fair value adjustments and gain on sale of investment properties, LREIT completed Q2-2014 with a comprehensive loss of $0.74 million, compared to comprehensive income of $3.34 million during Q2-2013, representing a variance of approximately $4.1 Million. The variance mainly reflects a decrease in fair value adjustments of approximately $3.7 million.

Net Operating Income and Income Recoveries

During Q2-2014, net operating income ("NOI") decreased by $0.16 million, compared to Q2-2013. Excluding properties sold and Parsons Landing, NOI decreased by $0.42 million of which $0.35 million or 85% was attributable to the Fort McMurray properties. Notwithstanding the decrease, the NOI results for Q2-2014 reflect a significant recovery in revenues and occupancy levels for the Fort McMurray property portfolio, compared to Q1-2014. The average occupancy level of the Fort McMurray property portfolio for Q2-2014 improved to 90%, compared to 80% in Q1-2014, while the average monthly rental rate decreased by $28 or 2%.

The NOI for Parsons Landing in Q2-2014 was positive after considering the multiple factors which affect the comparability of results from quarter-to-quarter, including the extent of insurance recoveries and the impact of the lease-up program for re-constructed units. During Q2-2014, NOI from Parsons Landing amounted to $0.82 million, compared to combined NOI and insurance recoveries of $0.8 million during Q2-2013. The lease-up program for Parsons Landing was effectively completed in May 2014 when the property achieved an occupancy level of 94%.

NOI for Q2-2014 is reflective of the rental market conditions which exist in Fort McMurray, notwithstanding the quarterly fluctuations in demand and periodic changes in rental supply. As of August 1, 2014, the overall occupancy level of all the Fort McMurray properties, including Parsons Landing, is 89%.

Cash Flow Results

Cash inflow from operating activities, excluding working capital adjustments, amounted to $0.16 million during Q2-2014, compared to a cash outflow of $0.5 million during Q2-2013. Including working capital adjustments, LREIT completed Q2-2014 with a cash outflow from operating activities of $0.26 million, compared to a cash outflow of $0.21 million during Q2- 2013.

Key Events - Q2-2014

  • In June 2014, LREIT received full repayment of the two mortgage loans receivable which were provided on the sale of the Clarington Seniors' Residence in 2012. The total payment received, including accrued interest, was $8.99 million.

  • On June 16, 2014, the holders of the Series G debentures approved an extension of the maturity date of the debentures from February 28, 2015 to June 30, 2018.

  • In May 2014, the upward refinancing of one mortgage loan resulted in net proceeds of approximately $1.6 Million.

Covenant Breach

LREIT has received a loan commitment to refinance a $16 million loan that has been subject to a covenant breach.  Upon the anticipated funding of the new loan in Q3-2014, LREIT will have successfully removed the one remaining loan covenant breach.  The loan commitment provides for the new loan to bear interest at approximately 4.5% for a ten-year term, compared to the 5.82% rate on the existing loan.

Outlook

The collection of mortgage loans receivable, combined with the extension of the Series G debenture maturity date, has improved the stability and financial position of LREIT. For the remainder of 2014, LREIT will continue to focus on improving operational efficiencies while continuing to pursue mortgage refinancing at lower rates and divestiture opportunities.  Proceeds from the anticipated exercise of warrants in 2015 are expected to increase equity capital which will be used to reduce debt.

Based on the expectation that rental market conditions in Fort McMurray will stabilize at seasonal norms, the outlook is for similar operating results during the balance of the year.

FINANCIAL AND OPERATING SUMMARY

                June 30   December 31
                2014   2013   2012
STATEMENT OF FINANCIAL POSITION                              
  Total assets               $ 458,387,209   $ 468,072,319   $ 481,552,578
  Total long-term financial liabilities               $ 329,631,914   $ 301,147,731   $ 323,026,417
  Weighted average interest rate                              
   - Mortgage loan debt               5.7%   5.4%   7.1%
   - Total debt               6.2%   5.9%   7.4%
                               
        Three Months Ended
June 30
  Six Months Ended
June 30
        2014   2013   2014   2013
KEY FINANCIAL PERFORMANCE INDICATORS                              
Operating Results                              
  Rentals from investment properties       $   9,975,172   $ 10,026,210   $ 18,883,897   $ 19,795,098
  Net operating income       $   5,924,651   $ 6,086,722   $ 10,428,718   $ 11,780,290
  Income (loss) before discontinued operations       $   (898,369)   $ 2,979,923   $ (3,414,317)   $ 1,935,601
  Income (loss) and comprehensive income (loss)       $   (742,668)   $ 3,335,654   $ (3,146,681)   $ 2,523,426
                               
Cash Flows                              
  Cash provided by (used in) operating activities       $   (260,667)   $ (213,186)   $ 457,974   $ (89,191)
  Funds from Operations (FFO)       $   (58,076)   $ (72,790)   $ (2,533,324)   $ (1,244,281)
  Adjusted Funds from Operations (AFFO)       $   (959,791)   $ (872,523)   $ (3,067,659)   $ (2,427,839)
  Distributable income (loss)       $   (664,710)   $ (1,562,692)   $ (1,308,670)   $ (1,547,625)

Q2-2014 COMPARED TO Q2-2013

Analysis of Income (Loss)
        Three Months Ended
June 30
  Six Months Ended
June 30
        2014   2013   2014   2013
                                 
Rentals from investment properties       $   9,975,172   $   10,026,210   $ 18,883,897   $ 19,795,098
Property operating costs           4,050,521       3,939,488     8,455,179     8,014,808
Net operating income           5,924,651       6,086,722     10,428,718     11,780,290
Interest income           206,779       329,946     591,997     628,247
Interest expense           (5,745,943)       (6,609,966)     (12,700,225)     (14,451,844)
Trust expense           (599,264)       (790,635)     (1,219,949)     (1,321,932)
Income recovery on Parsons Landing           -       742,500     98,499     1,641,630
Loss before the following           (213,777)       (241,433)     (2,800,960)     (1,723,609)
Gain on sale of investment properties           -       164,928     71,235     164,928
Fair value adjustments           (684,592)       1,286,668     (684,592)     1,424,522
Fair value adjustment of Parsons Landing           -       1,769,760     -     2,069,760
Income (loss) before discontinued operations           (898,369)       2,979,923     (3,414,317)     1,935,601
Income from discontinued operations           155,701       355,731     267,636     587,825
Income (loss) and comprehensive income (loss)       $   (742,668)   $   3,335,654   $ (3,146,681)   $ 2,523,426
                                 

Analysis of Rental Revenue
              Three Months Ended June 30   Six Months Ended June 30
              2014   2013   Increase
(Decrease)
  2014   2013   Increase
(Decrease)
                                                     
Fort McMurray             $   5,989,170   $ 6,285,528   $     (296,358)   $ 11,338,831   $ 12,440,283   $ (1,101,452)
Other investment properties                 2,745,656     2,734,087         11,569     5,360,870     5,467,840     (106,970)
Sub-total                 8,734,826     9,019,615         (284,789)     16,699,701     17,908,123     (1,208,422)
Properties sold (1)                 -     875,847         (875,847)     1,065     1,756,227     (1,755,162)
Parsons Landing (2)                 1,240,346     130,748         1,109,598     2,183,131     130,748     2,052,383
Total             $   9,975,172   $ 10,026,210   $     (51,038)   $ 18,883,897   $ 19,795,098   $ (911,201)

1.   Represents revenue from the Purolator Building and Nova Court.
2.   For the first six months of 2013, the rental revenue for Parsons Landing consists solely of the revenue from 84 reconstructed
suites for a period of 30 days, commencing June 1, 2013.

As disclosed in the chart above, total revenue from the investment properties, excluding properties sold and Parsons Landing, decreased by $0.24 million in Q2-2014, compared to Q2-2013. The decrease is comprised of a decrease in revenue from investment properties in Fort McMurray of $0.30 million, partially offset by an increase in revenue from the Other investment properties of $0.01 million.

The decrease in revenue from the Fort McMurray property portfolio reflects a decrease in the average occupancy level, partially offset by an increase in the average rental rate. As disclosed in the charts below, the average occupancy level for the Fort McMurray portfolio decreased from 95% during Q2-2013 to 90% during Q2-2014, while the average monthly rental rate increased by $34 or 1.5%.

The 90% average occupancy rate of the Fort McMurray portfolio during Q2-2014 represents a significant improvement in comparison to the average occupancy rate during Q1-2014 of 80%. As previously reported, the occupancy rate of the Fort McMurray property portfolio decreased to 80% in Q1-2014, compared to 93% in Q1-2013, as a result of a more competitive rental market due to an increase in the supply of available rental units, increased competition from temporary housing units and abnormal variations in seasonal demand due to a delay in the commencement of municipal and oil sands infrastructure projects.  Although the occupancy rate improved during Q2-2014, the competitive market factors affected the extent of the improvement in the occupancy rate in Q2-2014, relative Q2-2013.

For the six months period ended June 30, 2014, total revenue from investment properties, excluding properties sold and Parsons Landing, decreased by $1.21 million, compared to the first six months of 2013.  The variance in the six month comparatives is mainly due to the unfavourable variance in revenue results during Q1-2014.

Occupancy Level, by Quarter
                                  2014
                                  Q1       Q2     6 Month
Average
Fort McMurray                                 80%       90%     85%
Other investment properties                                 89%       92%     91%
Total                                 82%       91%     86%
Properties sold                                 n/a       n/a     n/a
Parsons Landing                                 69%       89%     79%
                                                 
            2013
            Q1       Q2     6 Month
Average
      Q3       Q4     12 Month
Average
Fort McMurray           93%       95%     94%       92%       84%     91%
Other investment properties           95%       94%     94%       92%       90%     93%
Total           94%       94%     94%       92%       85%     91%
Properties sold           100%       100%     100%       100%       99%     100%
Parsons Landing           n/a       n/a     n/a       n/a       n/a     n/a

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

Average Monthly Rents, by Quarter
                                  2014
                                  Q1       Q2     6 Month
Average
Fort McMurray                                 $2,337       $2,309     $2,325
Other investment properties                                 $933       $927     $930
Total                                 $1,672       $1,654     $1,664
Properties sold                                 n/a       n/a     n/a
Parsons Landing                                 $2,744       $2,742     $2,743
                                                 
            2013
            Q1       Q2     6 Month
Average
      Q3       Q4     12 Month
Average
Fort McMurray           $2,259       $2,275     $2,267       $2,318       $2,387     $2,329
Other investment properties           $922       $929     $925       $931       $934     $929
Total           $1,627       $1,638     $1,632       $1,661       $1,699     $1,666
Properties sold           $2,550       $2,546     $2,548       $2,692       $2,299     $2,521
Parsons Landing           n/a       n/a     n/a       n/a       n/a     n/a
                                                 

Analysis of Property Operating Costs
              Three Months Ended June 30   Six Months Ended June 30
              2014   2013   Increase
(Decrease)
  2014   2013   Increase
(Decrease)
                                                   
Fort McMurray             $ 2,253,339   $ 2,196,215   $   57,124   $ 4,789,272   $ 4,461,449   $   327,823
Other investment properties               1,351,118     1,277,203       73,915     2,714,361     2,667,206       47,155
Sub-total               3,604,457     3,473,418       131,039     7,503,633     7,128,655       374,978
Properties sold               21,339     393,484       (372,145)     103,437     813,567       (710,130)
Parsons Landing               424,725     72,586       352,139     848,109     72,586       775,523
Total             $ 4,050,521   $ 3,939,488   $   111,033   $ 8,455,179   $ 8,014,808   $   440,371

During Q2-2014, property operating costs for the portfolio of investment properties, excluding properties sold and Parsons Landing, increased by $0.13 million, compared to Q2-2013. The increase is comprised of an increase of $0.06 million in the operating costs of the Fort McMurray portfolio and an increase of $0.07 million in the Other investment properties portfolio.

For the six months ended June 30, 2014, property operating costs for the portfolio of investment properties, excluding properties sold and Parsons Landing, increased by $0.37 million or 5%, compared to the first six months of 2013.  The increase is comprised of an increase of $0.33 million in the operating costs of the Fort McMurray portfolio and a $0.05 million increase in the Other investment properties portfolio.

The increase in the operating costs of the Fort McMurray portfolio for both the first quarter and six months comparatives is mainly due to an increase in repair costs related to water damage, net of insurance recoveries, and to additional snow removal costs.

Analysis of Net Operating Income
            Net Operating Income
            Three Months Ended June 30   Six Months Ended June 30
            2014   2013   Increase
(Decrease)
  2014   2013   Increase
(Decrease)
                                               
Fort McMurray           $ 3,735,831   $ 4,089,313   $   (353,482)   $ 6,549,559   $ 7,978,834   $ (1,429,275)
Other investment properties             1,394,538     1,456,884       (62,346)     2,646,509     2,800,634     (154,125)
Sub-total             5,130,369     5,546,197       (415,828)     9,196,068     10,779,468     (1,583,400)
Properties sold             (21,339)     482,363       (503,702)     (102,372)     942,660     (1,045,032)
Parsons Landing             815,621     58,162       757,459     1,335,022     58,162     1,276,860
Total           $ 5,924,651   $ 6,086,722   $   (162,071)   $ 10,428,718   $ 11,780,290   $ (1,351,572)

After considering the decrease in rental revenue and the increase in 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, decreased by $0.42 million or 7% during Q2-2014, compared to Q2-2013. Net operating income for the Fort McMurray portfolio decreased by $0.35 million while net operating income for the Other investment properties portfolio decreased by $0.06 million.

Total net operating income decreased by $0.16 million during Q2-2014, compared to Q2-2013 after accounting for the decrease in net operating income related to properties sold and the net operating income attributable to Parsons Landing. For the first six months period ended June 30, 2014, net operating income decreased by $1.35 million.

During the six months ended June 30, 2014, net operating income from Parsons Landing combined with the income recovery on Parsons Landing amounted to $1.43 million, compared to $1.70 million during the six months ended June 30, 2013, representing a decrease of $0.27 million or 16%. The decrease is attributable to the change in the operational status of the property.  During the first six months of 2013, revenue losses from unleased or unreconstructed suites were fully covered by insurance proceeds, whereas, at the beginning of 2014, the property was in the lease-up phase and insurance recoveries ended on February 5, 2014.  The lease-up phase was essentially completed in May 2014 when the property achieved an occupancy level of 94%.

Overall, the operating margin for the property portfolio, excluding properties sold and Parsons Landing, decreased from 61% in Q2-2013, to 59% in Q2-2014. For the six months ended June 30, 2014, the operating margin was 55% compared to 60% for the six months ended June 30, 2013.  The decrease in the operating margin for the six months ended June 30, 2014 is mainly due to the unfavourable variance in revenue results for the Fort McMurray property portfolio in Q1-2014.

Interest Expense

Total interest expense for investment properties decreased by $0.86 million or 13% during Q2-2014, compared to Q2-2013. The decrease is mainly due to a decrease in interest on the acquisition payable of $0.9 million and a decrease in mortgage bond interest of $0.23 million, partially offset by a increase in mortgage loan interest of $0.17 million and a net increase in total amortization charges for transaction costs of $0.16 million.

Total interest expense for discontinued operations decreased by $0.06 million or 30% during Q2-2014, compared to Q2-2013.

COMPARISON TO PREVIOUS QUARTER

Analysis of Loss
            Three Months Ended     Increase (Decrease) In
Income
            June 30, 2014     March 31, 2014     Amount     %
Rentals from investment properties           $ 9,975,172     $ 8,908,725     $   1,066,447         12.0%
Property operating costs             4,050,521       4,404,658         354,137         8.0%
Net operating income             5,924,651       4,504,067         1,420,584         31.5%
Interest income             206,779       385,218         (178,439)         (46.3)%
Interest expense             (5,745,943)       (6,954,282)         1,208,339         17.4%
Trust expense             (599,264)       (620,685)         21,421         3.5%
Income recovery on Parsons Landing             -       98,499         (98,499)         (100.0)%
Loss before the following             (213,777)       (2,587,183)         2,373,406         91.7%
Gain on sale of investment properties             -       71,235         (71,235)         (100.0)%
Fair value adjustments             (684,592)       -         (684,592)         n/a
Loss for the period before discontinued
operations
            (898,369)       (2,515,948)         1,617,579         64.3%
Income from discontinued operations             155,701       111,935         43,766         39.1%
Comprehensive loss           $ (742,668)     $ (2,404,013)     $   1,661,345         69.1%

Comparison to Q1-2014

During Q2-2014, LREIT incurred a loss of $0.21 million, before profit on sale of investment properties, fair value gains, fair value adjustment of Parsons Landing, income taxes and discontinued operations, compared to a loss of $2.59 million during Q1-2014. The variance in quarterly results mainly reflects an increase in net operating income of $1.42 million and a decrease in interest expense of $1.21 million, partially offset by a decrease in interest income of $0.18 million and a decrease in income recovery on Parsons Landing of $0.1 million. The increase in operating income is mainly due to an improvement in the overall occupancy level of the portfolio of investment properties, including the lease-up of additional suites at Parsons Landing. The decrease in income recovery from Parsons Landing reflects the expiry of insurance coverage for revenue losses on February 5, 2014.  During Q1-2014, NOI from Parsons Landing, combined with the income recovery amounted to $0.62 million, compared to NOI of $0.82 million in Q2-2014.

After accounting for the variance in fair value losses and fair value adjustment in the amount of $0.68 million and a decrease in gain on sale of investment properties of $0.07 million, the loss before discontinued operations increased by $1.62 million during Q2-2014, compared to Q1-2014.

Income from discontinued operations decreased by $0.04 million in Q2-2014 compared to Q1-2014.

After accounting for discontinued operations, LREIT completed Q2- 2014 with a comprehensive loss of $0.74 million, compared to a comprehensive loss of $2.40 million during Q1-2014.

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