Lanesborough REIT Reports 2012 Third Quarter Results

WINNIPEG, Nov. 14, 2012 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its operating results for the quarter ended September 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 September 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

LREIT completed Q3-2012 with a comprehensive loss of $2.3 million, compared to comprehensive income of $2.3 million during Q3-2011. The decrease in comprehensive income of approximately $4.6 million is mainly due to the following factors:

  • Fair value gains/adjustments: Valuation gains/adjustments related to the fair market value of investment properties, including Parsons Landing, decreased by approximately $2.6 million during Q3-2012, compared to Q3-2011.

  • Interest expense: Interest expense increased by approximately $2 million or 25% during Q3-2012, compared to Q3-2011. The increase mainly reflects mortgage loan prepayment fees, partially offset by a reduction in other interest charges for mortgage loan and debenture debt.  The reduction in other interest charges for mortgage loan debt reflects the impact of the principal pay downs and debt refinancings which have occurred in 2011 and 2012, and the retirement of the mortgage debt for the Siena Apartments upon the sale of the property, partially offset by the additional mortgage loan debt which has been encumbered against investment properties in 2012, including the replacement debt for Riverside Terrace in June 2012.

  • Net operating income combined with income recovery on Parsons Landing: Net operating income, combined with the income recovery on Parsons Landing, decreased by approximately $0.9 million or 12% during Q3-2012, compared to Q3-2011. The decrease in the combined income is mainly due to a decrease in the net operating income of the Siena Apartments as a result of the sale of the property effective May 1, 2012.

Factors, which served to offset the extent of the decrease in comprehensive income, include an increase in interest income of $0.2 million, a decrease in trust expense of $0.2 million, a decrease in income taxes of $0.5 million and insurance proceeds of $0.4 million.

Cash Flow from Operating Activities

During Q3-2012, cash flow from operating activities, excluding working capital adjustments, amounted to $1.1 million compared to a cash flow of $1.0 million during Q3-2011, representing an increase in operating cash flow of $0.1 million. The modest increase in the operating cash flow, excluding working capital adjustments, mainly reflects a decrease in interest "paid" and trust expense, largely offset by a decrease in net operating income, on a cash basis, net of the income recovery on Parsons Landing.

The variance between the income/loss results and the cash flow results mainly reflects the exclusion of mortgage loan prepayment fees in the determination of operating cash flow.

Including working capital adjustments, LREIT completed Q3-2012 with a cash flow from operating activities of $0.5 million, compared to a cash outflow from operating activities of $2.6 million during the Q3-2011.

Mortgage Refinancing

In September 2012, LREIT completed the first phase of restructuring the mortgage loan debt of Colony Square by obtaining a new interim first mortgage loan for the property. As a result of the new financing, the existing first mortgage was discharged and the mortgage loan covenant breach was eliminated. The interim first mortgage loan is expected to be replaced with a longer-term $45 million first mortgage loan, at a lower interest rate, in Q4-2012.

During Q3-2012, LREIT also eliminated the covenant breach on the mortgage loan debt of the six apartment properties in downtown Fort McMurray. The covenant breach was eliminated as a result of replacement first mortgage loan financing. LREIT also repaid two second mortgage loans in the combined amount of $2.9 million during Q3-2012.

Status of Mortgage Loan Covenant Breaches

During the nine month period ended September 30, 2012, LREIT has eliminated covenant breaches on $67.2 million of mortgage loan debt, encumbered against eight properties, including seven properties in Fort McMurray, Alberta.

Mortgage loans with covenant breaches have been reduced to three mortgage loans and one swap mortgage loan as of September 30, 3012. Two mortgage loans have a combined principal balance of approximately $70 million and are encumbered against three properties in Fort McMurray. The covenant breaches are expected to be eliminated through refinancing. The covenant breach on the first mortgage loan for Lakewood Townhomes will be eliminated upon the completion of the condominium sales program. The swap mortgage loan of $16.5 million is encumbered against one property in Fort McMurray and is expected to be eliminated through modified loan terms.

The elimination of covenant breaches on $67.2 million of mortgage loan debt during the nine month period ended September 30, 2012, combined with lump-sum mortgage pay downs, has served to reduce the overall level of financing risk. Going forward, it is expected that mortgage debt refinancing/renewal will reduce the current cost of mortgage debt.

Reconstruction of Parsons Landing

The reconstruction of Parsons Landing commenced during Q3-2012 with completion expected to occur late next year. As previously reported, agreements were finalized in June 2012 under which the builder has agreed to complete the reconstruction of the property and attend to the recovery of the insurance claim in a manner which is expected to result in the cost of reconstruction being fully funded from insurance proceeds. An initial cash payment of $0.4 million was also received by LREIT during Q3-12, under a separate insurance claim in regard to furniture and equipment losses.

Outlook

Interest expense was comparatively high in Q3-2012 due to non-recurring lump-sum mortgage loan prepayment fees. A reduction in interest expense in Q4-2012, combined with an anticipated improvement in the occupancy level of the property portfolio, is expected to result in an improvement in bottom-line results.

The refinancing/restructuring of mortgage loan debt will remain a high priority, with the objective of reducing interest costs and eliminating the remaining covenant breaches on mortgage loans.

The revolving loan commitment from 2668921 Manitoba Ltd. is expected to continue to be sufficient to enable LREIT to meet all of its projected funding commitments. The completion of additional property sales and lower interest cost mortgage refinancings will improve the overall liquidity position of LREIT next year.

FINANCIAL AND OPERATING SUMMARY

            September 30   December 31
          2012    2011 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION              
  Total assets         $  506,873,246    $  555,220,070
  Total long-term financial liabilities (1)         $  356,848,126    $  399,176,274
               
  Three Months Ended
September 30 
  Nine Months Ended
September 30 
  2012    2011    2012    2011 
KEY FINANCIAL PERFORMANCE INDICATORS              
Operating Results              
  Rentals from investment properties $  9,206,783    $  11,142,567    $  28,978,605    $  30,656,136 
  Net operating income $  5,355,272    $  7,103,623    $  17,134,762    $  18,546,592 
  Income (loss), before taxes and discontinued operations $ (3,078,641)    $  1,594,954    $  1,380,093    $  1,110,649 
  Income (loss) and comprehensive income (loss) $ (2,298,800)    $  2,275,638    $  3,912,535    $  3,429,951 
               
Cash Flows              
  Cash flow from operating activities $  488,083    $  (2,575,907)    $  (5,111,689)    $  (3,101,636) 
  Funds from Operations $  (2,919,690)    $  (876,000)    $ (5,089,829)    $  (6,574,430) 
  Adjusted Funds from Operations $  (3,615,882)    $  (1,282,891)    $ (6,531,470)    $  (7,463,075) 
  Distributable income (loss) $ 733,513    $ 191,066    $  400,635    $  (4,180,155) 
(1) Long-term financial liabilities consist of mortgage loans, swap mortgage loans, debentures, defeased liability and mortgage bonds. 
The swap mortgage loans and mortgage bonds are included at face value.

Q3-2012 COMPARED TO Q3-2011

Analysis of Income (Loss)
  Three Months Ended    Nine Months Ended
  September 30   September 30
        2012    2011    2012    2011 
Rentals from investment properties $ 9,206,783    $  11,142,567    $  28,978,605    30,656,136 
Property operating costs 3,851,511    4,038,944    11,843,843    12,109,544 
Net operating income 5,355,272    7,103,623    17,134,762    18,546,592 
Interest income 281,209    40,298    614,962    165,309 
Forgiveness of debt     859,561   
Interest expense (10,116,020)    (8,085,179)    (24,474,974)    (25,453,004) 
Trust expense (407,263)    (617,710)    (1,572,022)     (2,050,625) 
Income recovery on Parsons Landing 869,547      2,393,658   
Insurance proceeds 400,000      400,000   
Loss before the following (3,617,255)    (1,558,968)    (4,644,053)    (8,791,728) 
Profit on sale of investment properties     1,045,307   
Fair value gains 38,614    3,153,922    8,978,839    9,902,377 
Fair value adjustment of Parsons Landing 500,000      (4,000,000)   
Income (loss) before taxes and discontinued operations (3,078,641)    1,594,954    1,380,093    1,110,649 
Deferred income tax expense (recovery) (181,339)    298,704      91,922 
Income (loss) before discontinued operations (2,897,302)    1,296,250    1,380,093     1,018,727 
Income from discontinued operations 598,502    979,388    2,532,442     2,411,224 
Income (loss) and comprehensive income (loss) $  (2,298,800)    $  2,275,638    $ 3,912,535    $ 3,429,951 

Analysis of Total Rental Revenue
  Three Months Ended September 30   Nine Months Ended September 30
  2012   2011   Increase
(Decrease)
  2012   2011   Increase
(Decrease)
                       
Fort McMurray $  5,686,706    $  5,731,942   $      (45,236)   $  17,093,994   $  15,103,956   $  1,990,038
Other investment properties 3,520,077   3,523,595   (3,518)   10,693,323   10,498,954   194,369
Sub-total 9,206,783    9,255,537    (48,754)   27,787,317   25,602,910   2,184,407
Properties sold   800,413    (800,413)   796,861   2,136,640   (1,339,779)
Impaired property   1,086,617    (1,086,617)   394,427   2,916,586   (2,522,159)
Total $  9,206,783    $  11,142,567   $  (1,935,784)   $  28,978,605   $  30,656,136   $  (1,677,531)

As disclosed in the chart above, total revenue from the investment properties, excluding properties sold and the impaired property, increased by $0.05 million during Q3-2012 compared to Q3-2011, comprised primarily of a decrease in revenue from investment properties in Fort McMurray. The decrease in revenue from the Fort McMurray property portfolio reflects an increase in vacancy, partially offset by an increase in the average rental rate.  As disclosed in the charts below, the vacancy for the Fort McMurray portfolio increased from 6% during Q3-2011, to 13% in Q3-2012, while the average monthly rental rate increased by $71 or 3.3%.

Revenue for "properties sold" decreased by $0.8 million in Q3-2012 due to the sale of Siena Apartments effective May 1, 2012. Revenue from the "Impaired property" decreased by $1.1 as the property is under reconstruction following the fire in February 2012. The recovery of insurance proceeds for revenue losses is recorded as a separate income category after the calculation of net operating income.

During the nine month period ended September 30, 2012, total revenue from investment properties, excluding properties sold and the impaired property, increased by $2.2 million, compared to the nine month period ended September 30, 2011. The increase in total revenue for the nine month period is comprised of a $1.6 million increase in Q1-2012, a $0.6 million increase in Q2-2012 and a $0.05 million decrease in Q3-2012. The change in quarterly comparative results mainly reflects the year-to-year quarterly change in vacancy loss for the Fort McMurray property portfolio.

Vacancy, by Quarter
  2012  
  Q1   Q2   Q3   9 Month
Average
 
Fort McMurray       8%          10%          13%          10%   
Other investment properties       2%          3%          3%          3%   
Properties sold       n/a           n/a          n/a          n/a   
Impaired property       n/a          n/a          n/a          n/a   
Total       5%          8%          9%          7%   
 
Vacancy, by Quarter
  2011
  Q1   Q2   Q3   9 Month
Average
  Q4   12 Month
Average
Fort McMurray       36%      21%    6%    21%    7%         18% 
Other investment properties       2%        2%    2%    2%    1%          2% 
Properties sold           n/a       n/a   n/a   n/a   n/a            n/a
Impaired property       37%       9%    6%    17%      3%        14% 
Total       25%      13%    5%    14%      5%          12% 
Vacancy represents the revenue potential of vacant suites.
 
Average Monthly Rents, by Quarter
  2012  
  Q1   Q2   Q3   9 Month
Average
 
Fort McMurray $ 2,124   $ 2,191   $ 2,251   $ 2,187  
Other investment properties $ 1,075   $ 1,069   $ 1,048   $ 1,064  
Properties sold $ 3,100   n/a   n/a   n/a  
Impaired property n/a   n/a   n/a   n/a  
Total $ 1,704   $ 1,684   $ 1,704   $ 1,697  
 
Average Monthly Rents, by Quarter
  2011
  Q1   Q2   Q3   9 Month
Average
  Q4   12 Month
Average
Fort McMurray $ 2,260   $ 2,211   $ 2,180   $ 2,217   $ 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   $ 2,282   $ 2,324   $ 2,241   $ 2,303
Total $ 1,790   $ 1,784   $ 1,759   $ 1,778   $ 1,743   $ 1,767
 
Analysis of Property Operating Costs
  Three Months Ended September 30   Nine Months Ended September 30
  2012   2011   Increase
(Decrease)
  2012   2011   Increase
(Decrease)
                       
Fort McMurray $  2,122,286    $ 1,964,003   $  158,283    $  6,358,508    $    6,011,022   $ 347,486
Other investment properties 1,729,225    1,515,828    213,397    5,091,443    4,605,782   485,661
Sub-total 3,851,511    3,479,831          371,680      11,449,951        10,616,804        833,147
Properties sold   183,721        (183,721)          99,509            290,708      (191,199)
Impaired property   375,392    (375,392)          294,383         1,202,032      (907,649)
Total $  3,851,511    $  4,038,944   $  (187,433)   $ 11,843,843   $  12,109,544   $  (265,701)
 
Analysis of Property Operating Costs
  Three Months Ended September 30 Nine Months Ended September 30
  2012   2011   Increase
(Decrease)
  2012   2011   Increase
(Decrease)
                       
Fort McMurray $  2,122,286    $  1,964,003   $   158,283   $  6,358,508   $   6,011,022   $ 347,486 
Other investment properties 1,729,225    1,515,828   213,397     5,091,443   4,605,782     485,661
Sub-total 3,851,511    3,479,831   371,680      11,449,951      10,616,804      833,147 
Properties sold   183,721   (183,721)            99,509          290,708   (191,199) 
Impaired property   375,392   (375,392)   294,383     1,202,032      (907,649) 
Total $  3,851,511    $  4,038,944   $  (187,433)   $  11,843,843   $  12,109,544   $  (265,701)

During Q3-2012, property operating costs for the portfolio of investment properties, excluding properties sold and the impaired property, increased by $0.4 million or 11%, compared to Q3-2011.  The increase is comprised of a $0.2 million increase in the Fort McMurray portfolio and an increase of $0.2 million in the operating costs of the other investment properties portfolio.

The increase in operating costs for the Fort McMurray portfolio mainly reflects an increase in variable costs such as maintenance costs associated with ongoing renovations. The increase in operating costs for the Other investment property portfolio reflects an increase in maintenance expense mostly associated with repairs to building exterior.

For the nine month period ended September 30, 2012, property operating costs for the portfolio of investment properties, excluding properties sold and the impaired property, increased by $0.8 million or 8% compared to 2011.

Analysis of Net Operating Income
                         
    Three Months Ended September 30   Nine Months Ended September 30
    2012   2011   Increase
(Decrease)
  2012   2011   Increase
(Decrease)
                         
Fort McMurray   $  3,564,420    $  3,767,939   (203,519)   $  10,735,486   $ 9,092,934   $ 1,642,552
Other investment properties   1,790,852    2,007,767   (216,915)   5,601,880   5,893,172   (291,292)
Sub-total   5,355,272    5,775,706    (420,434)   16,337,366   14,986,106   1,351,260
                         
Properties sold     616,692    (616,692)   697,352   1,845,932   (1,148,580)
Impaired property   -     711,225    (711,225)   100,044   1,714,554   (1,614,510)
                         
Total   $  5,355,272    $  7,103,623   $  (1,748,351)   $  17,134,762   $  18,546,592   $ (1,411,830)

COMPARISON TO PREVIOUS QUARTER

Analysis of Income (Loss)
    Three Months Ended   Increase (Decrease)
    September 30,
2012
  June 30, 2012   Amount   %
                 
Rentals from investment properties   9,206,783    9,387,902    (181,119)   (1.9)%
Property operating costs   3,851,511    3,567,126    (284,385)   8.0%
Net operating income   5,355,272    5,820,776    (465,504)   (8.0)%
Interest income   281,209    259,186    22,023   8.5%
Forgiveness of debt         - %
Interest expense   (10,116,020)    (7,241,022)    (2,874,998)   39.7%
Trust expense   (407,263)    (585,876)    178,613   (30.5)%
Income recovery on Parsons Landing   869,547    1,524,111    (654,564)   (42.9)%
Insurance proceeds   400,000      400,000   -%
Loss before the following   (3,617,255)    (222,825)    (3,394,430)   (1,523.4)%
Profit on sale of investment properties     721,082    (721,082)   (100.0)%
Fair value gains   38,614    7,078,608    (7,039,994)   (99.5)% 
Fair value adjustment of Parsons Landing   500,000    23,300,000    (22,800,000)   (97.9)% 
Income (loss) for the period before taxes and discontinued operations   (3,078,641)   30,876,865    (33,955,506)   (110.0)%
Deferred income tax expense (recovery)   (181,339)    181,339    (362,678)   200.0%
Income (loss) for the period before discontinued operations   (2,897,302)    30,695,526    (33,592,828)       109.4% 
Income from discontinued operations         598,502    1,601,704    (1,003,202)   (62.6)% 
Comprehensive income (loss)   $ (2,298,800)    $  32,297,230    $  (34,596,030)   (107.1)%

During Q3-2012, loss before profit on sale of investment properties, fair value gains, fair value adjustment of Parsons Landing, income taxes and discontinued operations, increased by $3.4 million compared to Q2-2012.  The increase in the loss mainly reflects a $2.9 million increase in interest expense, a $0.5 million decrease in net operating income and a $0.3 million reduction in net insurance recoveries/proceeds in regards to Parsons Landing. The increase in interest expense mainly reflects $2.8 million in mortgage prepayment fees and incremental interest on the net increase in mortgage loan 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 Q3-2012 with comprehensive loss of $2.3 million, compared to a comprehensive income of $32.3 million during Q2-2012. During Q2-2012, LREIT recorded a profit on sale of investment properties, fair value gains and fair value adjustment on Parsons Landing in the combined aggregate amount of $31.1 million compared to a combined aggregate amount of $0.5 million in Q3-2012.

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