Scott's REIT first quarter 2011 financial results remain strong

New acquisitions drive continued revenue growth

REIT continues to diversify tenant base

TORONTO, June 13, 2011 /CNW/ - Scott's Real Estate Investment Trust (TSX: SRQ.UN) ("Scott's REIT" or the "REIT"), Canada's leading owner of small box retail properties, today reported its financial results for the first quarter ended March 31, 2011 and its monthly cash distribution for June 2011.

First Quarter 2011 Highlights
Three months ended March 31, 2011 versus three months ended March 31, 2010

  • Increased revenue by 16.5 per cent to $5.8 million
  • Net operating income* increased 17.6 per cent to $4.9 million
  • Payout ratio* of 104.9 per cent
  • Successfully refinanced $33 million of the REIT's original $65 million first mortgage

*See section entitled Non-IFRS measures.

"The REIT has started off the year on solid footing," said John Bitove, Chief Executive Officer of Scott's REIT. "Our continued year-over-year revenue growth and 67 months of uninterrupted cash distributions is testament to the success of our strategy - which focuses on high return acquisitions,and continued diversification in our tenant base and property locations - is great for long-term unitholder value. Our successful acquisitions with Shoppers Drug Mart and the mall in Okotoks Alberta have really helped our bottom line."

Financial Performance

Scott's REIT reported revenue of $5.8 million for the three-month period ended March 31, 2011, an increase of $0.8 million, or 16.5 per cent, over the same three-month period in 2010.

The REIT's net operating income was $4.9 million for the first quarter of 2011 versus $4.1 million for the same quarter in 2010, an increase of $0.7 million, or 17.6 per cent.

Operating expenses for the first quarter were $0.9 compared to $0.8 million for the same time period in 2010. The increased revenue and operating expenses related to the properties acquired during fiscal 2010, including the 12 properties tenanted by Shopper's Drug Mart and the property located in Okotoks, Alberta.

Distributable income for the first quarter was $1.8 million compared to $1.5 million for the first quarter 2010. The increase in the Distributable Income from last year's first quarter was due to the two accretive acquisitions made during the first and second quarters of 2010, including 12 properties tenanted by Shopper's Drug Mart and one property located in Okotoks, Alberta, respectively.

Monthly Distribution

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

Scott's REIT also announced today a monthly cash distribution of $0.0708 per unit to Unitholders of record of Class B Limited Partnership Units in Scott's Real Estate LP on June 30, 2011.

Mortgage Refinancing

On March 7, 2011, the REIT entered into a first and second mortgage with Firm Capital Corporation for $33 million in proceeds, secured by 70 properties located in Ontario. These properties had been part of a $64 million loan that matured on July 1, 2011. The majority of the proceeds were used to pay down the $64 million loan, which has resulted in a remaining balance owing of $32 million. The new loan bears interest at the greater of 6.25 per cent or prime plus 2 per cent in the first 12 months and increasing each year thereafter. The loan is open for payment at any time during the 2.5-year term. Financing fees paid were 1 per cent of the loan balance. The REIT also received a further extension for its remaining loan balance of $32 million until February 1, 2012.

On April 20, 2011 Scott's REIT entered into a two-year variable rate loan facility for $5.5 million bearing interest at prime rate plus 0.5 per cent. The facility is amortized over a 25-year period.  The facility is open for repayment at any time after the first six months of the term and is secured against the recently acquired property in Okotoks, Alberta.

Shoppers Drug Mart Acquisition Refinancing

On February 17, 2011, the REIT's $20 million facility used to acquire the original 12 properties with Shoppers Drug Mart, which was scheduled to mature on March 4, 2011, was extended until June 30, 2011. This extension was granted on the same terms as the original loan, with the exception of the interest rate, which was reduced to Bankers' Acceptances ("BA") plus 325 basis points until June 15, 2011. For the last two weeks of the extension, from June 16, 2011 through to June 30, 2011, the interest rate will increase to BA plus 500 basis points.

Scott's has entered into a conditional commitment agreement for a 5-year $20 million mortgage bond at 2.35 per cent over Government of Canada Bonds. The REIT anticipates that the refinancing will be secured on or before June 30, 2011, however, the facility holders have communicated that a short extension would be possible if necessary.

Comment on Priszm Limited Partnership ("Priszm")

Priszm, the REIT's largest tenant, and operator of 190 KFC locations owned by the REIT, issued several news releases during the first quarter of 2011. On January 31, 2011, the REIT received notice and a request from Priszm to assign eight master leases affecting 79 properties owned by the REIT as part of a proposed sale of Priszm's British Columbia and Ontario operations to Soul Restaurants Canada Ltd. Scott's REIT asserted a claim on the proceeds with respect to the 63 Scott's REIT properties that are the subject of this transaction. The court appointed monitor for Priszm agreed to set aside $12.2 million until this claim could be heard in the courts.

On June 1, 2011, Priszm announced that it had successfully completed the sale of 204 restaurants to Soul Restaurants, affecting the 63 properties mentioned above. Officially 32 stores have been assigned to Soul Restaurants as a result of the nature of their lease. Soul Restaurants is now paying the rent on these properties.

The remaining 31 leases still require Scott's REIT's consent to be assigned to Soul Restaurants. Although Scott's REIT provided Priszm with the consent agreement to assign the leases on March 30, 2011, it has not yet been executed by Priszm and Soul Restaurants. Soul Restaurants is operating these restaurants, while Priszm continues to pay the rent until the consent agreement is fully executed.

"We are pleased with the recent sale of 63 KFC properties by our largest tenant; it plays right into the heart of our growth strategy and continued focus on diversification," said Evelyn Sutherland, CFO of Scott's REIT. "We expect the remaining Priszm stores to be sold soon and we can then put this issue behind us and continue to focus on growing Scotts REIT with a strong stable tenant base across Canada."

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 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 depreciation and amortization expense of tenant inducements, commission and leasing fees, stock based compensation, interest expense on the class b exchangeable units less the straight-line revenue accrual, acquisition write-offs, fair value adjustments on investment properties, convertible debentures and Class B units.

Net Operating Income ("NOI")

Net Operating Income ("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 Scott's REIT's ability to earn and distribute cash to Unitholders. NOI as computed by Scott's REIT may differ from similar computations reported by other similar organizations and, accordingly, may not be comparable.

About Scott's Real Estate Investment Trust

Scott's REIT (TSX: SRQ.UN) is Canada's premier small-box retail property owner with 220 properties in seven 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. The REIT has approximately 75.6 per cent interest in Scott's Real Estate LP. To find out more about Scott's Real Estate Investment Trust (TSX: SRQ.UN), visit our website at http://www.scottsreit.com.

Forward-Looking Statements

This document contains certain information that may constitute forward-looking information within the meaning of securities laws. 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. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding future growth opportunities and potential and expected cash distributions or cash distribution levels. In particular, information regarding the REIT's monthly cash distributions and information relating to the impact of the REIT's recent acquisitions on annual revenues and interest expense is forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, occupancy rates, property expense and capital expenditures. While the REIT considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what is currently expected. Such factors include risks relating to the REIT's reliance on Priszm LP, the REIT's largest tenant, risks associated with investment in real property, competition, reliance on key personnel, financing and refinancing risks, environmental matters, tenant risks, risks related to current economic conditions and other risk factors more particularly described in the REIT's Annual Information Form for the year ended December 31, 2009.You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Other than as required by applicable Canadian securities law, the REIT does not undertake to update this information at any particular time. Additional information identifying risks and uncertainties is contained in Scott's REIT filings with the Canadian securities regulators, available at www.sedar.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 historical audited financial statements of Scott's REIT for the quarters ended March 31, 2011 and 2010, as well as 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:

Reconciliation of Distributable Income to Cash Provided by Operating Activities

  Three-months ended
March 31,
  2011 2010
Cash provided by (used in) operating activities
Net change in non-cash working capital
Tenant allowances and leasing commissions
Interest expense Class B exchangeable units
$1,991
(727)
19
479
$1,000
(86)
60
478
Distributable Income
Distributions declared
1,762
1,963
1,452
1,818
Distributable Income per Unit
Distributions per Unit
0.191
0.213
0.181
0.213
Distributable Income Payout Ratio(1) 111.4% 117.6%

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 actual distributions per Unit made during the period.
(3)      Adjusted distributable income payout ratio is calculated by dividing Distributable Income (adjusted for $110 of one-time legal expenses related to the Priszm) 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 actual distributions per Unit made during the period.

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

Assets   March 31,
2011
$
  December 31,
2010
$
  January 1,
2010
$
             
Current assets
Cash and cash equivalents
Accounts receivables
Due from related parties
Other assets
 
 
 
 
 
 
3,422
338
3
1,808
 
 
 
 
 
 
4,846
62
100
1,741
 
 
 
 
 
 
16,004
247
101
777
             
Current assets   5,571   6,749   17,129
             
Non-current assets
Investment properties
Intangible assets
Other assets
 
 
 
 
 
255,725
16
3,076
 
 
 
 
 
254,249
22
2,979
 
 
 
 
 
201,175
52
2,862
             
Non-current assets   258,817   257,250   204,089
             
Total assets   264,388   263,999   221,218
             
Liabilities            
             
Current liabilities
Accounts payable and accrued liabilities
Due to related parties
Distributions payable to unitholders
Current portion of mortgages payable and term debt
 
 
 
 
 
 
2,499
22
495
52,451
 
 
 
 
 
 
1,348
-
494
86,004
 
 
 
 
 
 
1,393
117
354
66,137
             
Current liabilities   55,467   87,846   68,001
             
Non-current liabilities
Mortgages payable and term debt
Convertible debentures
Class B Exchangeable Units
Amounts payable
 
 
 
 
 
 
76,886
39,755
16,123
137
 
 
 
 
 
 
44,753
41,150
17,859
129
 
 
 
 
 
 
45,463
39,698
17,025
50
             
Non-current liabilities   132,901   103,891   102,236
             
Total liabilities   188,368   191,737   170,237
             
Unitholders' Equity
Class A units
Contributed surplus
Retained earnings
 
 
 
 
 
58,830
2,588
14,602
 
 
 
 
 
58,830
2,588
10,844
 
 
 
 
 
44,676
2,588
3,717
             
Total equity   76,020   72,262   50,981
             
Total liabilities and equity   264,388   263,999   221,218
             

Consolidated Interim Statements of Net Income and Comprehensive Income
(Unaudited)
For the three months ended March 31, 2011 and 2010
(in thousands of dollars)

    2011
$
  2010
$
         
Income
Revenue from investment properties
 
 
 
5,793
 
 
 
4,974
         
Operating income (expenses)
Direct operating
General and administrative
Depreciation on intangible assets
Fair value adjustment on investment properties
 
 
 
 
 
 
(933)
(618)
(8)
941
 
 
 
 
 
 
(842)
(405)
(13)
4,675
         
Income from operations   5,175   8,389
         
Other income (expenses)
Interest income
Interest expense
Fair value adjustment on convertible debentures
Fair value adjustment on Class B Exchangeable Units
 
 
 
 
 
 
8
(3,072)
1,395
1,736
 
 
 
 
 
 
23
(2,814)
(127)
676
         
    67   (2,242)
         
Net income and comprehensive income for the period   5,242   6,147
         

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

       

    Class A
units
$
      Contributed
surplus
$
      Retained
earnings
$
      Total
$
                             
Balance - January 1, 2011   58,830       2,588       10,844       72,262
            -                
Comprehensive income for the period
Distributions
 
 
-
-
 
    -
-
     
 
5,242
(1,484)
 
    5,242
(1,484)
                             
Balance - March 31, 2011   58,830       2,588       14,602       76,020
                             
                             
Balance - January 1, 2010   44,676       2,588       3,717       50,981
                               
Issuance of equity
Comprehensive income for the period
Distributions
 
 
 
14,009
-
-
 
 
    -
-
-
 
   
 
-
6,147
(1,340)
 
 
    14,009
6,147
(1,340)
                             
Balance - March 31, 2010   58,685       2,588       8,524       69,797              


 

 

 

 

 

 

 

SOURCE Scott's Real Estate Investment Trust

For further information:

For investor information, please contact:

Trish Moran
416-624-5133
trish.moran@scottsreit.com

For media information, please contact:

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

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