Lanesborough REIT Reports 2020 Results
WINNIPEG, MB, March 26, 2021 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSXV: LRT.UN) today reported its operating results for the year ended December 31, 2020. 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 year ended December 31, 2020, which may be obtained from the SEDAR website at www.sedar.com.
2020 has been a year of hardship as the novel coronavirus COVID-19 ("COVID-19") has impacted economies and lives throughout the world.
Lanesborough Real Estate Investment Trust offers its sincere condolences to all of its tenants, residents and stakeholders who have been impacted by COVID-19 and in particular to the families who lost a loved one during the coronavirus outbreak at Chateau St. Michael's, the Trust's seniors' housing and care home in Moose Jaw, Saskatchewan.
On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. In many countries, including Canada, businesses were and are continuing to be forced to cease or limit operations for indefinite periods of time. The measures which have been taken to contain the spread of the virus, including travel bans, quarantines, social distancing, and closures of nonessential services, have triggered significant disruptions to businesses worldwide, resulting in an economic slowdown.
According to the IEA Oil Market Report – January 2021, the demand for oil, which is a significant driver of the economy in Fort McMurray, sustained an unprecedented collapse of 8.8 million barrels per day in 2020. The decrease in demand, combined with an oversupply of oil, largely driven by geopolitical conflict among major oil producing nations, created the perfect storm in the oil market with prices reaching record lows in April 2020. Although there is reason for optimism as oil prices have increased from the April 2020 lows and vaccination programs against COVID-19 are underway in many countries around the globe, renewed lockdowns in a number of countries and new variants of the virus continue to threaten the global economic outlook.
In addition to the challenges posed by the historically low oil prices and COVID-19, an ice jam on the Athabasca River caused extensive flooding to occur in downtown Fort McMurray in April 2020. It is estimated that approximately 1,230 structures were impacted by the flood, including six of the residential properties owned by LREIT. Of the six downtown properties, three sustained extensive damages due to the flood. As of the date of this press release, two of the properties that were damaged have been fully restored and have commenced operations with the third property expected to be cleared for occupancy during the second quarter of 2021. It is anticipated that the insurance coverage of LREIT will be sufficient to cover the restoration costs and loss of rental income which has resulted from the flood; however, there is the risk that the proceeds of insurance may be inadequate to fully compensate LREIT for all of the losses associated with the flood.
Throughout 2020, LREIT continued to face liquidity challenges and required $15.6 million of advances, made at the sole discretion of 2668921 Manitoba Ltd., under the revolving loan facility to fund the cash shortfall from operating activities, as well as mortgage loan principal payments, transaction costs for debt financing, and capital expenditures.
The revolving loan was renewed with amended terms, effective January 1, 2020, and matures December 31, 2021. Pursuant to the terms of the renewed loan, the interest rate applicable to the first $30.0 million of funds which are advanced under the facility was increased from 5% to 7% per annum. The terms of the loan were further amended, effective January 1, 2021, to reduce the interest rate from 7% to 2% per annum.
As of the date of this press release, the maximum available balance remaining on the revolving loan facility is $10.3 million.
In an effort to meet ongoing funding obligations and sustain operations, LREIT has continued to pursue new and/or renew existing debt restructuring arrangements with certain of its lenders, including debt service payment deferrals obtained during 2020 of $5.7 million to address uncertainties created by the COVID-19 pandemic and the Fort McMurray flood, and has relied on favourable financing arrangements and other support from Shelter and its parent company, 2668921 Manitoba Ltd.
As of the date of this press release, the Trust has renewed, refinanced, or obtained forbearance agreements for all mortgage loan debt, except for the mortgage loan that is secured by Woodland Park, the property classified as held for sale, which had an estimated principal balance outstanding of $27.8 million as of December 31, 2020. On February 28, 2019, a Receivership Order was granted by the Court, placing the lender's appointed Receiver in control of the property. As outlined in its reports to the Court, the Receiver intends to sell the property. Any deficit between the sales proceeds obtained by the Receiver and the future balance outstanding on the mortgage loan relating to such property could result in a claim against the Trust by the lender pursuant to the mortgage guarantee provided by the Trust at the time of the original execution of the mortgage loan. Such a claim would be unsecured and subordinate to the Trust's existing secured debt, inclusive of any amounts outstanding with respect to the revolving loan facility from 2668921 Manitoba Ltd.; any amounts advanced by 2668921 Manitoba Ltd. or its affiliates, including Shelter, and any amounts outstanding with respect to the Series G Debentures.
At December 31, 2020 and 2019, the Trust was in breach of a debt service coverage ratio requirement of a $2.1 million first mortgage loan secured by Chateau St. Michael's, the property classified as discontinued operations. The lender has acknowledged the breach in covenant and, subsequent to December 31, 2020, the Trust and lender agreed to amended mortgage loan terms, which extended the maturity date of the loan from December 31, 2023 to December 31, 2025 subject to annual reviews by the lender, with the first review scheduled for April 30, 2021. All payments of principal and interest have been made as scheduled.
ANALYSIS OF OPERATING RESULTS
Analysis of Loss and Comprehensive Less | ||||||||||
Year Ended December 31 | Increase (Decrease) | |||||||||
2020 | 2019 | Amount | % | |||||||
Rentals from investment properties | $ | 17,540,289 | $ | 16,528,486 | $ | 1,011,803 | 6% | |||
Property operating costs | (12,207,778) | (12,894,540) | 686,762 | 5% | ||||||
Net operating income (NOI) | 5,332,511 | 3,633,946 | 1,698,565 | 47% | ||||||
Interest income | 181,092 | 216,723 | (35,631) | (16)% | ||||||
Interest expense | (18,102,440) | (16,652,167) | (1,450,273) | (9)% | ||||||
Trust expense | (1,320,296) | (1,486,659) | 166,363 | 11% | ||||||
Loss before the following | (13,909,133) | (14,288,157) | 379,024 | 3% | ||||||
Gain on sale of investments and investment property | - | 347,500 | (347,500) | (100)% | ||||||
Fair value adjustments | (30,700,377) | (15,466,450) | (15,233,927) | (98)% | ||||||
Loss before discontinued operations | (44,609,510) | (29,407,107) | (15,202,403) | (52)% | ||||||
Loss from discontinued operations | (3,464,159) | (4,673,252) | 1,209,093 | 26% | ||||||
Loss and comprehensive loss | $ | (48,073,669) | $ | (34,080,359) | $ | (13,993,310) | (41)% | |||
Overall Results
LREIT completed 2020 with a loss and comprehensive loss of $48.1 million, compared to a loss and comprehensive loss of $34.1 million in 2019. The increase in the extent of the loss and comprehensive loss is mainly due to an increase in the loss relating to fair value adjustments and an increase in interest expense, partially offset by an increase in net operating income ("NOI") and a decrease in loss from discontinued operations.
The fair value adjustments recognized during 2020 of $30.7 million (2019 – $15.5 million) mainly reflect a decrease in the carrying value of the Fort McMurray properties as a result of changes made to a number of key valuation assumptions to incorporate new information derived from external appraisals and market reports for the Fort McMurray rental market.
The increase in interest expense during 2020 mainly reflects a $2.1 million increase in interest on the revolving loan from 2668921 Manitoba Ltd. ("revolving loan"), partially offset by a $0.6 million decrease in mortgage loan interest. The increase in the interest on the revolving loan is due to the increase in the average outstanding balance of the revolving loan, as well as the increase to the interest rate applicable to the first $30.0 million of advances under the loan, which was amended from 5% to 7% in conjunction with the January 1, 2020 renewal of the loan. The decrease in mortgage loan interest mainly reflects the impact of decreases in the prime lending rate on the interest rates applicable to the Trust's variable rate mortgages.
The increase in NOI during 2020 mainly reflects an increase in rental revenue and a decrease in property operating costs from investment properties and investment properties held for sale, compared to 2019. The increase in rental revenue is mainly due to an increase in average occupancy of the Fort McMurray properties which increased from 72% during 2019 to 77% during 2020. The decrease in property operating costs mainly reflects a decrease in the condominium corporation fees, which were comparatively high during 2019 due primarily to special assessment fees charged during the year with respect to electrical repairs at Woodland Park, a decrease in salaries primarily due to the Canada Emergency Wage Subsidy and a decrease in property taxes, partially offset by an increase in insurance premiums.
The decrease in the loss from discontinued operations of $1.2 million mainly reflects a decrease in loss from impairment adjustments, which were comparatively high in 2019 due to the identification of extensive capital expenditures that are required to sustain the operations of the seniors' home classified as discontinued operations. The decrease in loss from discontinued operations was partially offset by an increase in property operating costs mainly due to an increase in wages as part of the coordinated effort to expand the facility's intermediate care offerings and to enhance the level of care and services provided.
Revenues
Analysis of Rental Revenue | ||||||||||||||
Year Ended December 31 | Increase (Decrease) | % of Total | ||||||||||||
2020 | 2019 | Amount | % | 2020 | 2019 | |||||||||
Fort McMurray properties | $ | 14,005,323 | $ | 13,376,545 | $ | 628,778 | 5% | 80% | 81% | |||||
Other investment properties | 1,740,814 | 1,644,747 | 96,067 | 6% | 10% | 10% | ||||||||
Sub-total | 15,746,137 | 15,021,292 | 724,845 | 5% | 90% | 91% | ||||||||
Held for sale and/or sold properties | 1,794,152 | 1,507,194 | 286,958 | 19% | 10% | 9% | ||||||||
Total | $ | 17,540,289 | $ | 16,528,486 | $ | 1,011,803 | 6% | 100% | 100% | |||||
Average Occupancy Level, by Quarter (1) | ||||||
2020 | ||||||
Q1 | Q2 | Q3 | Q4 | 12 Month Average | ||
Fort McMurray properties | 76% | 79% | 78% | 76% | 77% | |
Other investment properties | 73% | 74% | 75% | 76% | 74% | |
Total | 75% | 79% | 77% | 76% | 77% | |
Held for sale and/or sold properties (2) | n/a | n/a | n/a | n/a | n/a | |
Average Occupancy Level, by Quarter (1) | ||||||
2019 | ||||||
Q1 | Q2 | Q3 | Q4 | 12 Month Average | ||
Fort McMurray properties | 65% | 72% | 75% | 75% | 72% | |
Other investment properties | 75% | 76% | 72% | 71% | 73% | |
Total | 66% | 72% | 75% | 74% | 72% | |
Held for sale and/or sold properties (2) | 76% | n/a | n/a | n/a | n/a | |
Average Monthly Rents, by Quarter | ||||||
2020 | ||||||
Q1 | Q2 | Q3 | Q4 | 12 Month Average | ||
Fort McMurray properties | $1,454 | $1,456 | $1,455 | $1,433 | $1,466 | |
Other investment properties | $955 | $958 | $964 | $968 | $961 | |
Total | $1,370 | $1,372 | $1,372 | $1,355 | $1,380 | |
Held for sale and/or sold properties (2) | n/a | n/a | n/a | n/a | n/a | |
Average Monthly Rents, by Quarter | ||||||
2019 | ||||||
Q1 | Q2 | Q3 | Q4 | 12 Month Average | ||
Fort McMurray properties | $1,539 | $1,522 | $1,499 | $1,466 | $1,507 | |
Other investment properties | $919 | $939 | $952 | $952 | $940 | |
Total | $1,435 | $1,424 | $1,407 | $1,379 | $1,411 | |
Held for sale and/or sold properties (2) | $1,853 | n/a | n/a | n/a | n/a | |
(1) | The average occupancy level represents the portion of potential revenue that was achieved during the quarter. | |
(2) | The information required to reasonably estimate average occupancy levels and average monthly rents for Woodland Park, the property classified as held for sale, was not available to the Trust subsequent to the first quarter of 2019 when the Receiver assumed control of the property. |
During 2020, total investment property revenue, excluding held for sale and/or sold properties increased by $0.7 million or 5%, compared to 2019. The increase is mainly due to a 5% increase in average occupancy of the Fort McMurray properties, which increased from 72% during 2019 to 77% during 2020, notwithstanding $0.5 million of vacancy loss being recorded during 2020 with respect to the April 27, 2020 flood in downtown Fort McMurray. The increase in investment property revenue was partially offset by a decrease in the average monthly rental rate of the Fort McMurray properties, as the prolonged low level of oil sands development activity continued to negatively impact the demand for rental accommodations in Fort McMurray. The average monthly rental rate of the Fort McMurray property portfolio decreased from $1,507 during 2019 to $1,466 during 2020, representing a decrease of $41 or 3%.
After accounting for held for sale and/or sold properties, revenue increased by $1.0 million or 6% during 2020, compared to 2019.
Property Operating Costs
Analysis of Property Operating Costs | ||||||||||
Year Ended December 31 | Increase (Decrease) | |||||||||
2020 | 2019 | Amount | % | |||||||
Fort McMurray properties | $ | 9,217,427 | $ | 9,039,291 | $ | 178,136 | 2% | |||
Other investment properties | 1,448,474 | 1,499,136 | (50,662) | (3)% | ||||||
Sub-total | 10,665,901 | 10,538,427 | 127,474 | 1% | ||||||
Held for sale and/or sold properties (1) | 1,541,877 | 2,356,113 | (814,236) | (35)% | ||||||
Total | $ | 12,207,778 | $ | 12,894,540 | $ | (686,762) | (5)% | |||
(1) | Includes operating costs from Woodland Park. The held for sale figures are based on management's estimates and information provided by the Receiver who assumed control of the property on February 28, 2019. |
During 2020, property operating costs decreased by $0.7 million or 5%, compared to 2019. The decrease in property operating costs is mainly due to a decrease in condominium corporation fees, which were comparatively high during 2019 primarily as a result of special assessment fees charged during the year with respect to electrical repairs at Woodland Park, a decrease in salaries primarily due to the Canada Emergency Wage Subsidy and a decrease in property taxes, partially offset by an increase in insurance premiums.
Net Operating Income and Operating Margin
Analysis of Net Operating Income | ||||||||||||||||||
Net Operating Income | ||||||||||||||||||
Year Ended December 31 | Increase (Decrease) | Percent of Total | Operating Margin | |||||||||||||||
2020 | 2019 | Amount | % | 2020 | 2019 | 2020 | 2019 | |||||||||||
Fort McMurray properties | $ | 4,787,896 | $ | 4,337,254 | $ | 450,642 | 10% | 90% | 119% | 34% | 32% | |||||||
Other investment properties | 292,340 | 145,611 | 146,729 | 101% | 5% | 4% | 17% | 9% | ||||||||||
Sub-total | 5,080,236 | 4,482,865 | 597,371 | 13% | 95% | 123% | 32% | 30% | ||||||||||
Held for sale and/or sold properties (1) | 252,275 | (848,919) | 1,101,194 | 130% | 5% | (23)% | 14% | (56%) | ||||||||||
Total | $ | 5,332,511 | $ | 3,633,946 | $ | 1,698,565 | 47% | 100% | 100% | 30% | 22% | |||||||
(1) | Includes operating costs from Woodland Park. The held for sale figures are based on management's estimates and information provided by the Receiver who assumed control of the property on February 28, 2019. |
During 2020, the NOI of the investment properties portfolio increased by $1.7 million or 47%, compared to 2019. The increase in NOI is due to an increase in rental revenue and a decrease in property operating costs as described in the preceding "Property Operating Costs" and "Revenues" sections of this press release.
Interest Expense
During 2020, interest expense increased by $1.5 million or 9%, compared to 2019. The increase mainly reflects an increase in revolving loan interest of $2.1 million, partially offset by a decrease in mortgage loan interest of $0.6 million.
The increase in revolving loan interest of $2.1 million is due to the increase in the average outstanding balance of the revolving loan during 2020, as well as the increase to the interest rate applicable to the first $30.0 million of advances under the loan, which was amended from 5% to 7% in conjunction with the January 1, 2020 renewal of the loan.
The reduction in mortgage loan interest was primarily due to the decrease in the weighted average interest rate on the Trust's mortgage loan debt, which decreased from 6% as at December 31, 2019 to 5.7% as at December 31, 2020. The decrease in the weighted average interest rate was primarily due to the impact of reductions in the prime rate of interest, which decreased from 3.95% as at December 31, 2019 to 2.45% as at December 31, 2020, on the interest rate applicable to the variable rate mortgages of the Trust.
The weighted average interest rate on the Trust's total debt, inclusive of the revolving loan and debentures, was 6.0% as at December 31, 2020 (December 31, 2019 – 6.0%).
Fair Value Adjustments
During 2020, LREIT recorded a loss related to fair value adjustments on its investment properties and investment properties held for sale of $30.7 million, compared to a loss related to fair value adjustments of $15.5 million during 2019, representing a variance of $15.2 million.
The fair value adjustments recognized during 2020 mainly reflect a decrease in the carrying value of the Fort McMurray properties as a result of changes made to a number of key valuation assumptions to incorporate new information derived from external appraisals and market reports for the Fort McMurray rental market. The capitalization rate, normalized vacancy loss, and insurance premium cost assumptions were all increased during 2020, which negatively impacted the carrying values of the properties which are derived by the capitalized net operating income valuation method, which include the majority of the properties in the Trust's primary market of Fort McMurray.
The fair value adjustments recognized during 2019 primarily reflected a reduction in the carrying value of the properties located in Fort McMurray due to a reduction in the level of rent potential considered to be achievable in the Fort McMurray rental market, which appeared to be stabilizing around a lower level of demand.
The demand for rental accommodations in the region continues to be negatively impacted by the low level of development and investment activity in the Alberta oil sands industry, which continues to be driven by the depressed price of oil, delays in oil transportation infrastructure development and political pressures with respect to climate change.
After accounting for fair value adjustments, dispositions, and capital expenditures, the carrying value of investment properties and investment properties held for sale decreased by an aggregate of $29.7 million during 2020.
ABOUT LREIT
LREIT is a real estate investment trust, which is listed on the TSX Venture Exchange under the symbols LRT.UN (Trust Units) and LRT.DB.G (Series G Debentures). 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.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as the term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
SOURCE Lanesborough Real Estate Investment Trust
Gino Romagnoli, Chief Executive Officer, or Arni Thorsteinson, Vice-Chair, Tel: (204) 475-9090, Fax: (204) 452-5505, Email: [email protected]
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