Scott's REIT reports second quarter 2010 results

Acquisitions contribute to double-digit revenue growth

TORONTO, Aug. 11 /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 second quarter ended June 30, 2010. The REIT also announced its 57th consecutive monthly cash distribution for the month of August 2010.

    
    Second Quarter 2010 Financial Highlights
    Three months ended June 30, 2010 vs. Three months ended June 30, 2009
    -   Revenue increased by 14.2 per cent to $5.8 million
    -   Net operating income* increased by 12.3 per cent to $4.8 million
    -   Payout ratio* increased to 99.8 per cent from 77.6 per cent but
        decreased significantly from the first quarter of 2010.
    

*See section entitled Non-GAAP measures.

"Scott's REIT is off to a strong start in 2010," said Evelyn Sutherland, Chief Financial Officer of Scott's REIT. "The 13 properties that we acquired earlier this year are already contributing solidly to our bottom line and the fundamentals of our business remain robust, which will be beneficial as we look to refinance our existing mortgage this fall."

Financial Performance

Scott's REIT reported revenue of $5.8 million for the three-month period ended June 30, 2010, an increase of 14.2 per cent over the second quarter of 2009. The primary reason for the increase in the quarter was a result of the acquisition of 12 properties leased to Shoppers Drug Mart, which closed in early March 2010, and the acquisition of the property located in Okotoks, Alberta, which closed in early May 2010.

Operating expenses for the three-month period were $1 million, an increase of $0.2 million over the second quarter of 2009. The increase in operating expenses was a result of timing differences from property carrying costs primarily as a result of higher property tax expenses. All expenses are recoverable from the tenants.

In the second quarter, distributable income was slightly higher than distributions paid, resulting in a payout ratio of 99.8 per cent. The REIT's year-to-date payout ratio remains above 100 per cent due to the recent equity offering in February 2010 - of which the cash proceeds have not been completely deployed into income producing initiatives - as well as the delayed closing of the acquisition of 12 properties tenanted by Shoppers Drug Mart. However, based upon the positive results realized in the second quarter, this trend is starting to reverse. The REIT believes that the larger than normal payout ratio is temporary and anticipates that once the cash from the equity offering is deployed into income producing initiatives such as land intensification or future acquisitions, the ratio will once again return to below 100 per cent.

Liquidity

At June 30, 2010, Scott's REIT had $7.1 million in cash and cash equivalents (compared to $16 million as at December 31, 2009). Part of the REIT's cash balance at year ended December 31, 2009 was used to close the acquisition of the 12 properties tenanted by Shoppers Drug Mart in March 2010, along with the $20 million bridge loan facility raised in March 2010. The remainder will be used for, among other things, general corporate purposes. The REIT raised an additional $14 million in cash proceeds from the equity raised in February 2010. Of the proceeds, $7 million was estimated to be used for land intensification projects, while the remaining $5 million was estimated to be used to fund future acquisitions and the balance will be used for working capital purposes. The REIT used approximately $10.5 million of the cash for an acquisition in Okotoks, Alberta and anticipates placing a first mortgage on the property concurrently when it refinances its current $65 million debt which is maturing on October 1, 2010. The proceeds which will be obtained from this mortgage will be used to finance future acquisitions and also land intensification projects.

Monthly Distribution for August 2010

Scott's REIT announced a cash distribution for the month of August 2010 of $0.0708 per unit payable on September 15, 2010 to Unitholders of record on August 31, 2010.

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 August 31, 2010. This distribution marks the 57th consecutive cash distribution declared since Scott's REIT began operations on October 6, 2005.

Non-GAAP Measures

Distributable income

Distributable Income is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Distributable Income is presented in this MD&A because management of Scott's REIT believes this non-GAAP 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 income before non-controlling interest of Scott's REIT on a consolidated basis as determined in accordance with GAAP, plus amortization expense, income taxes, stock compensation, less the straight-line revenue accrual, deferred financing costs, deferred amortization costs, below market rents and interest accretion.

Net Operating Income ("NOI")

NOI is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. NOI is presented in this MD&A because the management of Scott's REIT believes that this non-GAAP 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.

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 June 30, 2010 and 2009, 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 cash provided by
operating activities to distributable income:

    -------------------------------------------------------------------------
                                         Three months ended  Six months ended
                                                June 30,          June 30,
    -------------------------------------------------------------------------
                                             2010     2009     2010     2009
    -------------------------------------------------------------------------
    Cash provided by operating activities  $1,154   $1,741   $2,691   $3,335
    Net change in non-cash working capital    812      244      727      360
    -------------------------------------------------------------------------
    Distributable income                    1,966    1,985    3,418    3,695
    Distributions declared                  1,962    1,540    3,780    3,081
    -------------------------------------------------------------------------
    Distributable income per Unit           0.213    0.274    0.396    0.509
    Distributions per Unit                  0.213    0.213    0.425    0.425
    -------------------------------------------------------------------------
    Distributable Income Payout Ratio       99.8%    77.6%   107.4%    83.5%
    -------------------------------------------------------------------------
    Note
    (1) Distributable income payout ratio is calculated by taking
        distributable income divided 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.



    CONSOLIDATED BALANCE SHEETS
    (in thousands of dollars)

                                                        June 30, December 31,
                                                           2010         2009
                                                              $            $
    Assets

    Income-producing properties                         206,388      167,525

    Intangible assets                                    10,252        7,743

    Cash and cash equivalents                             7,137       16,004

    Accounts receivable                                     685          247

    Prepaid expenses and other assets                       880          795

    Due from related companies                               58          101

    Straight-line rent receivable                         2,563        2,446
                                                      -----------------------

                                                        227,963      194,861
                                                      -----------------------
                                                      -----------------------

    Liabilities and Unitholders' Equity

    Mortgages payable                                   131,001      111,600

    Convertible debentures                               37,417       37,074

    Accounts payable and accrued liabilities              1,880        1,284

    Due to related companies                                 45          117

    Distributions payable to Unitholders                    654          513

    Other liabilities                                     4,055          151
                                                      -----------------------

                                                        175,052      150,739
                                                      -----------------------

    Class B Exchangeable Units                           12,960       14,334
                                                      -----------------------

    Unitholders' Equity
    Contributed surplus                                   2,588        2,588
    Class A Units of Scott's REIT                        58,818       44,676
    Convertible debentures                                1,265        1,265
    Cumulative losses                                    (1,339)        (183)
    Cumulative distributions declared on Class A Units  (21,381)     (18,558)
                                                      -----------------------

                                                         39,951       29,788
                                                      -----------------------

                                                        227,963      194,861
                                                      -----------------------
                                                      -----------------------



    CONSOLIDATED STATEMENTS OF OPERATIONS AND CUMULATIVE EARNINGS
    (in thousands of dollars, except per Unit amounts)

                                    Three months ended      Six months ended
                                           June 30,              June 30,
                                       2010       2009       2010       2009
    REVENUE
    Rental revenue                  $ 5,723    $ 5,049   $ 10,655    $ 9,784
    Amortization of (above)
     below-market rentals                41        (23)        35         (4)
    Straight-line revenue accrual        68         79        117        127
                                 --------------------------------------------
                                      5,832      5,105     10,807      9,907
                                 --------------------------------------------
    EXPENSES
    Amortization                      2,400      1,985      4,449      4,051
    Operating                         1,042        841      1,884      1,647
    Interest                          2,703      1,990      5,183      3,967
    General and administrative          452        575        864        955
                                 --------------------------------------------
                                      6,597      5,391     12,380     10,620
                                 --------------------------------------------
    Loss before non
     -controlling interest             (765)      (286)    (1,573)      (713)
    Non-controlling interest of
     Class B Exchangeable Units         187         89        417        222
                                 --------------------------------------------
    Net loss for the period            (578)      (197)    (1,156)      (491)
    Cumulative earnings (loss)
     - Beginning of period             (761)       983       (183)     1,277
                                 --------------------------------------------
    Cumulative earnings (loss)
     - End of period                 (1,339)       786     (1,339)       786
                                 --------------------------------------------
                                 --------------------------------------------
    Basic and diluted loss per
     Unit                            (0.083)    (0.039)    (0.181)    (0.098)
                                 --------------------------------------------
                                 --------------------------------------------
    Class A Units outstanding     6,982,036  4,993,964  6,982,036  4,993,964
                                 --------------------------------------------
                                 --------------------------------------------
    Class B Exchangeable Units
     outstanding                  2,254,909  2,254,909  2,254,909  2,254,909
                                 --------------------------------------------
                                 --------------------------------------------



    CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
    (in thousands of dollars)

    For the years ended June 30,
                                    Three months ended      Six months ended
                                           June 30,              June 30,
                                       2010       2009       2010       2009

    Net loss for the period          $ (578)    $ (197)  $ (1,156)    $ (491)
    Other comprehensive income            -          -          -          -
                                 --------------------------------------------
    Comprehensive loss for the
     period                            (578)      (197)    (1,156)      (491)
                                 --------------------------------------------
                                 --------------------------------------------



    CONSOLIDATED STATEMENTS OF CASH FLOWS
    (in thousands of dollars)

    For the years ended June 30, 2010 and 2009

                                    Three months ended      Six months ended
                                           June 30,              June 30,
                                       2010       2009       2010       2009

    CASH PROVIDED BY (USED IN)
    Operating activities
    Net loss for the period           $(578)     $(197)   $(1,156)     $(491)
    Add (deduct)
      Non-controlling interest
       of Class B Exchangeable
       Units                           (187)       (89)      (417)      (222)
      Amortization of income-
       producing properties           2,115      1,728      3,918      3,456
      Amortization of intangible
       assets                           245        280        495        599
      Amortization of deferred
       financing charges                269        118        453        236
      Amortization of tenant
       inducements and leasing
       fees/commissions                  12          4         23         10
      Acquisition-in-progress
       cost written off                   -        206          -        206
      Interest accretion                 59         14        118         28
      Straight-line revenue accrual     (68)       (79)      (117)      (127)
      Stock-based compensation          100          -        100          -
                                 --------------------------------------------
                                      1,966      1,985      3,418      3,695
    Change in other non-cash
     operating items
      Accounts receivable              (404)       184       (438)       338
      Prepaid expenses and
       other assets                    (167)         3       (478)      (245)
      Accounts payable and
       accrued liabilities             (223)      (389)       218       (509)
      Due to/from related
       companies                        (18)       (42)       (29)        56
                                 --------------------------------------------
                                      1,154      1,741      2,691      3,335
                                 --------------------------------------------
    Investing activities
    Acquisition of income-
     producing properties           (10,568)        (9)   (40,940)        (7)
    Tenant inducements and
     leasing commissions                (39)       (17)       (99)       (17)
    Construction-in-progress            (38)       (14)       (67)       (14)
    Additions to income-
     producing properties               (95)         -        (95)         -
    Acquisitions-in-progress              -          -          -          1
                                 --------------------------------------------
                                    (10,740)       (40)   (41,201)       (37)
                                 --------------------------------------------
    Financing activities
    Class A shares issued                 -          -     15,002          -
    Buy back of Class A Units             -          -          -       (300)
    Demand loan                           -          -          -      1,300
    Proceeds from mortgage
     payable                              -          -     20,000          -
    Mortgage financing fees            (125)         -       (339)        (4)
    Principal repayments on
     mortgages payable                 (251)      (215)      (497)      (399)
    Distributions paid               (1,961)    (1,540)    (3,639)    (3,086)
    Issuance costs                       33          -       (884)         -
                                 --------------------------------------------
                                     (2,304)    (1,755)    29,643     (2,489)
                                 --------------------------------------------
    Increase (decrease) in cash
     and short-term investments
     during the period              (11,890)       (54)    (8,867)       809
    Cash - Beginning of period       19,027        965     16,004        102
                                 --------------------------------------------
    Cash - End of period              7,137        911      7,137        911
                                 --------------------------------------------
                                 --------------------------------------------
    Supplemental cash flow
     disclosure
    Interest paid                     2,385      2,213      4,583      3,703
    Accrued cost relating to
     acquisition of income-
     producing properties               430          -        430          -
    Accrued cost relating
     to issuance of Units                12          -         12          -
    Deposits made on income-
     producing properties in
     prior periods                      100          -        350          -
    

%SEDAR: 00022537E

SOURCE KEYreit

For further information: For further information: For investor information, please contact: Trish Moran, 416-624-5133, trish.moran@scottsreit.com; For media information, please contact: Wilcox Group, 604-488-1100, scottsreit@wilcoxgroup.com

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