Scott's REIT announces financial results for third quarter ended September 30, 2011

Canada's leading owner of small-box retail properties acquires nine Shoppers Drug Mart™ properties; announces 72nd consecutive monthly cash distribution

TORONTO, Nov. 9, 2011 /CNW/ - Scott's Real Estate Investment Trust (TSX: SRQ.UN) ("Scott's REIT" or the "REIT") today reported its financial results for the third quarter ended September 30, 2011. The REIT also announced its monthly cash distribution for November 2011 as well as the exchange of Class B Exchangeable Units for REIT Units.

Third Quarter 2011 Financial Highlights
Three months ended September 30, 2011 vs. Three months ended September 30, 2010

  • Revenue of $5.6 million
  • Net operating income* of $4.6 million
  • Payout ratio* of 145.1 per cent, 142.2 per cent excluding non-recurring Priszm-related legal fees

*See section entitled Non-IFRS measures.

"Scott's REIT continues to deliver on its long-term growth strategy as evidenced by our latest acquisition of properties tenanted by Shoppers Drug Mart," said John Bitove, Chief Executive Officer. "We are also making strong progress re-leasing the disclaimed sites previously tenanted by Priszm's KFC restaurants and are confident we will be able to successfully address any potential challenges that may surface over the next few quarters. Until such time, as we re-lease the balance of the remaining Priszm KFC sites, our payout ratio will temporarily exceed our preferred ratio level. However, Scotts REIT is taking a long-term view with respect to our distributions, assets and portfolio management".

Financial Performance

Scott's REIT reported revenue of $5.6 million for the three-month period ended September 30, 2011, a decrease of $0.3 million over the same three-month period in 2010.

The REIT's net operating income was $4.6 million for the third quarter of 2011, a decrease of $0.4 million compared to the third quarter of 2010.

Direct operating expenses of $1.0 million for the third quarter were $0.1 million higher than during the same quarter of 2010.

Distributable income for the third quarter of 2011 was $1.4 million compared to $2.1 million for the third quarter of 2010. The year-over-year decrease in distributable income was due to lower cash net operating income realized as a result of the Priszm disclaimed leases since June 2011 of $0.3 million, increased interest expense on refinanced and new debt of $0.4 million, and the increase of one time expenses related to the Priszm litigation and the REIT`s claims on Priszm`s proceeds of $0.02 million (see "Comment on Priszm" below).

Third Quarter 2011 Operating Highlights

Shoppers Drug Mart Financings and Acquisitions

On July 28, 2011, Scott's REIT entered into a five-year $20 million mortgage bond at an interest rate of 4.47 per cent, which amortizes over 20 years and matures on July 28, 2016. The mortgage bond is secured by the 12 properties leased to Shoppers Drug Mart Corporation (TSX: SC) ("SDM") acquired by the REIT in March 2010. The proceeds from the mortgage bond were used to repay a $20-million facility originally used to acquire the properties.

Effective September 23, 2011, Scott's REIT acquired nine retail properties ("the Properties") from certain wholly owned subsidiaries of SDM in a sale and leaseback transaction. The purchase price for the transaction totalled $33.05 million excluding transaction costs of $1.0 million. Eight of the properties are located in Ontario and one in Saskatchewan, totalling approximately 146,093 square feet of predominantly single-tenant retail space. Five of the nine locations are newly built and three properties are on long-term land leases.

The Properties are leased to SDM and are tenanted by Shoppers Drug Mart stores with a remaining average lease term of almost 16 years. Scott's REIT entered into five-year first mortgages secured by the Properties totalling $22.6 million, bearing an interest rate of 4.5 per cent and amortized over 25 years for the freehold properties, and the lesser of 20 years or the term of the land lease less six months for the land lease properties. Scott's REIT now owns 23 properties in which SDM is a tenant. "Shoppers Drug Mart is now our biggest tenant as they represent over 32 per cent of Scott`s REIT`s Gross Leasable Area, and we look forward to growing the relationship further", stated Bitove.

Corporate Financing

On September 20, 2011, the REIT completed an offering of $12-million convertible unsecured subordinated debentures due December 31, 2016 (the "2011 Convertible Debentures"). The 2011 Convertible Debentures pay interest at a rate of 8.00 per cent per annum calculated semi-annually in arrears on December 31 and June 30, with the initial interest payment due on December 31, 2011. The Debentures are convertible into fully paid and non-assessable Units of Scott's REIT at a conversion price of $9.00 per unit, subject to adjustment upon the occurrence of certain events, at the holders' option at any time prior to the close of business on the earlier of December 31, 2016 and the business day immediately preceding the date fixed for redemption. The conversion price of $9.00 per Unit is equivalent to a ratio of approximately 111.1111 units per $1,000 principal amount of Debentures.

Scott's REIT Completes Exchange of Units

Scott's REIT completed an exchange of units whereby Scott's REIT issued 2,254,909 units to PBI Enterprises Inc. (formerly Obelysk Inc.) ("PBI") in exchange for 2,254,909 class B units of Scott's Real Estate LP owned by PBI.  The exchange was made pursuant to exchange rights granted to PBI as part of Scott's REIT's initial public offering.

Prior to this transaction, PBI held an indirect interest in Scott's REIT through Class B Exchangeable units of Scott's Real Estate Limited Partnership and special voting units of Scott's REIT granted to PBI.  With this exchange, PBI now has a direct interest in Scott's REIT. PBI's economic interest of approximately 24.4 per cent in the Scott's entities remains unchanged. As a result of the exchange, 2,254,909 special voting units associated with the Class B Exchangeable Units were also cancelled.

Monthly Distribution

Scott's REIT announced a cash distribution for the month of November 2011 of $0.0708 per unit payable on December 15, 2011 to Unitholders of record on November 30, 2011.

Liquidity

At September 30, 2011, Scott's REIT had $5.9 million of cash and cash equivalents (compared to $4.8 million as at December 31, 2010).

Comment on Priszm Limited Partnership ("Priszm")

New Developments in the Third Quarter 2011

To date, Priszm has disclaimed a total of 30 leases of which the REIT has re-leased approximately 53 per cent of the disclaimed sites and continues to aggressively market the balance of vacant properties representing only 28,016 square feet of GLA. The REIT anticipates that it will re-lease all remaining sites within the next six to twelve months.

"We believe the sale of Priszm's KFC restaurants will contribute towards the REIT's focus on tenant diversification. We expect the remaining 79 Priszm stores located in Quebec, Manitoba and Alberta to be sold soon and look forward to putting this issue behind us so that we can continue to focus on growing Scott's REIT with a strong and stable tenant base across Canada," said Teresa Neto, Chief Financial Officer.

On September 14, 2011, the court approved a motion from the secured creditors of Priszm to appoint RSM Richter Inc. as receiver of all of the assets, undertakings and property of Priszm. The REIT believes that the change in Priszm's status to a receivership from a restructuring under the CCAA is not likely to have an adverse effect on the REIT. The Receiver is required to uphold all previous orders issued by the court and to uphold all previously determined operating arrangements.

Effective September 19, 2011, FMI Atlantic Inc. (FMI), a New Brunswick based company that owns approximately 70 Pizza Hut restaurants in New Brunswick, Nova Scotia, Ontario and Manitoba, purchased 43 KFC restaurants in Nova Scotia and New Brunswick from Priszm. Of the 43 restaurants sold, Scott's REIT is the landlord of 19 of these locations. Of the 19 locations, the REIT has provided the consent agreement to assign 16 of the leases, however it has not been executed by Priszm. As such, FMI Atlantic Inc. will be operating the 16 sites and is responsible for paying rent to Priszm who is required to immediately forward the rent to the REIT. This is similar to the 31 leases yet to be assigned under the Soul Restaurants transaction earlier in the year. The remaining 3 leases were simultaneously disclaimed by Priszm and released by FMI, however 5 other leases were not part of the sale.

From the Priszm assets sold to date, the court has set aside $13.4 million of the proceeds, of which Scott's REIT may pursue in its claim under the leases it has with Priszm. We expect the final resolution of the REIT's claim on Priszm's sales proceeds will be heard and settled by the court. There can be no assurance as to the outcome of any litigation involving this claim.

Non-IFRS Measures

Distributable income
Distributable income is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. Distributable income is presented in this MD&A because management of Scott's REIT believes this non-IFRS measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash returns to Unitholders. Distributable income as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable. Distributable income in this MD&A represents net income and comprehensive income of Scott's REIT, plus amortization of intangible assets, amortization expense relating to tenant allowances, amortization of deferred financing fees, stock based compensation, interest expense on the Class B Exchangeable Units, and acquisition write-offs, less, the straight-line rent revenue accrual, fair value adjustments on investment properties and convertible debentures, and the change in amortized cost of the Class B Exchangeable Units.

Net Operating Income ("NOI")
NOI is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. NOI is presented in this MD&A because the management of Scott's REIT believes that this non-IFRS measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash to Unitholders. NOI as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable.

Forward-Looking Statements

This MD&A contains certain information or statements that may constitute forward-looking information within the meaning of securities laws, which reflect the current view of Scott's REIT with respect to the REIT's objectives, plans, goals, strategies, future growth, results of financial performance, financial and operating performance and business prospectus and opportunities. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. In particular, forward-looking information included in this MD&A includes, but is not limited to, statements with respect to the REIT's ability to lease vacant property units, collect minimum rents, diversify its tenant base, undertake land intensification projects, refinance loans and mortgages at their maturity, complete accretive acquisitions, and maintain or grow monthly cash distribution levels, and also with respect to the timing of such events. Forward-looking information should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All of the statements and information in this MD&A containing forward-looking information are qualified by these cautionary statements.

Forward-looking statements are based on information available at the time they are made, underlying estimates and assumptions made by management and management's good faith belief with respect to future events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally which could cause actual results to differ materially from what is currently expected. Such risks and uncertainties include, but are not limited to the REIT's reliance on Priszm Limited Partnership "Priszm", the REIT's largest tenant in terms of rental revenue, risks associated with investment in real property, competition, reliance on key personnel, financing and refinancing risks, distributions, environmental matters, tenant risks, risks related to current economic conditions and other risk factors more particularly described in the REIT's most recent Annual Information Form available on SEDAR at www.sedar.com. Additional risks and uncertainties not presently known to the REIT or that the REIT currently believes to be less significant may also adversely affect the REIT.

Scott's REIT cautions readers that the list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by the REIT will be realized or, even if substantially realized, that they will have the expected consequences to, or effect on, the REIT. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. The REIT disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required under applicable securities laws.

About Scott's Real Estate Investment Trust
Scott's REIT (TSX: SRQ.UN) is Canada's premier small-box retail property owner with 229 properties in eight provinces across Canada. Scott's REIT's properties are well located and geographically diverse across Canada with the majority of all properties containing long-term quadruple net leases. To find out more about Scott's Real Estate Investment Trust (TSX: SRQ.UN), visit our website at http://www.scottsreit.com.

The following selected financial information, with the exception of the Reconciliation of Distributable Income, has been derived from and should be read in conjunction with the unaudited consolidated interim financial statements of Scott's REIT for the three and nine months ended September 30, 2011 and 2010, and the notes thereto included in Scott's REIT's annual filings at www.sedar.com.

RECONCILIATION OF DISTRIBUTABLE INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES (UNAUDITED)
(in thousands of dollars except per Unit amounts)  

The following table outlines the reconciliation of distributable income to cash provided by operating activities:

         
(in thousands of dollars, except per Unit amounts) Three months ended
September 30,
Nine months ended
September 30,
2011 2010 2011 2010
Cash provided by (used in) operating activities $1,599 $2,952 $4,633 $6,366
Net change in non-cash working capital (1,344) (894) (1,047) (1,099)
Tenant allowances and leasing commissions paid       13 - 123 218
Adjustment to convertible debentures - - - (9)
Transaction costs on convertible debentures 1,084 - 1,084 -
Distributable Income 1,352 2,058 4,793 5,476
Distributions declared 1,962 1,961 5,889 5,742
Distributable Income per Unit(1) 0.146 0.223 0.519 0.620
Distributions per Unit 0.213 0.213 0.638 0.638
Distributable Income Payout Ratio(2) 145.1% 95.3% 122.8% 102.9%
Adjusted Distributable Income Payout Ratio(3) 142.2% 95.3% 112.7% 102.9%

Notes:

(1)      Distributable Income Per Unit is calculated by dividing Distributable Income by the weighted average number of Units outstanding assuming full conversion of the Class B Exchangeable Units during the relevant period end.
(2)      Distributable Income Payout Ratio is calculated by dividing Distributable Income by the weighted average number of Units outstanding assuming full conversion of the Class B Exchangeable Units during the relevant period end divided by the distributions per Unit paid during the period.
(3)      Adjusted Distributable Income Payout Ratio is calculated by dividing Distributable Income, adjusted for $27 (year-to-date $429) of one-time legal expenses related to the Priszm litigation - See "2011 - Third Quarter Highlights - Priszm", by the weighted average number of Units outstanding assuming full conversion of the Class B Exchangeable Units during the relevant period divided by the distributions per Unit paid during the period.

Scott's Real Estate Investment Trust
Consolidated Interim Statements of Financial Position
(Unaudited)
(in thousands of Canadian dollars)

Assets   September 30,
2011
$
  December 31,
2010
$
  January 1,
2010
$
             
Current assets            
Cash and cash equivalents   5,861   4,846   16,004
Accounts receivable   213   62   247
Due from related parties   15   100   101
Other assets   1,439   1,716   766
             
Current assets   7,528   6,724   17,118
             
Non-current assets            
Investment properties   296,418   254,249   201,175
Intangible assets   25   22   52
Other assets   2,680   2,915   2,862
             
Non-current assets   299,123   257,186   204,056
             
Total assets   306,651   263,910   221,174
             
Liabilities            
             
Current liabilities            
Accounts payable and accrued liabilities   2,953   1,348   1,393
Due to related parties   8   -   117
Distributions payable to unitholders   495   494   354
Land lease liability   99        
Current portion of mortgages payable and term debt   32,998   86,004   66,137
Current liabilities   36,553   87,846   68,001
             
Non-current liabilities            
Mortgages payable and term debt   122,873   44,753   45,463
Convertible debentures   48,554   41,150   39,698
Class B Exchangeable Units   13,236   17,859   17,025
Amounts payable   123   129   50
Land lease liability   5,583   -   -
Non-current liabilities   190,369   103,891   102,236
             
Total liabilities   226,922   191,737   170,237
             
Unitholders' equity            
Class A units   58,928   58,830   44,676
Contributed surplus   2,588   2,588   2,588
Retained earnings   18,213   10,755   3,673
             
Total equity   79,729   72,173   50,937
             
Total liabilities and equity   306,651   263,910   221,174
             

Scott's Real Estate Investment Trust
Consolidated Interim Statements of Net Income and Comprehensive Income
(Unaudited)
(in thousands of Canadian dollars)

  Three months ended Nine months ended
  September 30, September 30,
  2011 2010 2011 2010
Income        
Revenue from investment properties $ 5,581 $ 5,888 $ 17,066 $ 16,646
Operating income (expenses)        
Direct operating (1,026) (890) (2,856) (2,774)
General and administrative (1,758) (458) (3,157) (1,299)
Depreciation on intangible assets (7) (13) (22) (39)
Fair value adjustment on investment properties (2,904) 4,549 1,316 9,030
Income (loss) from operations (114) 9,076 12,347 21,564
Other income (expenses)        
Interest income 15 12 46 52
Interest expense (3,455) (3,028) (9,699) (8,874)
Fair value adjustment on convertible debentures 4,556 96 4,596 (497)
Adjustment on Class B Exchangeable Units 4,442 (947) 4,623 294
  5,558 (3,867) (434) (9,025)
Net income and comprehensive income for the period 5,444 5,209 11,913 12,539

 

 

 

 

SOURCE Scott's Real Estate Investment Trust

For further information:

Teresa Neto
Chief Financial Officer
teresa.neto@scottsreit.com
416-361-9953

For media information, please contact:

Trevor Boudreau
604-564-8209
trevor.boudreau@scottsreit.com

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Scott's Real Estate Investment Trust

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