Lanesborough REIT Reports 2011 Operating Results

WINNIPEG, March 26, 2012 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its operating results for the year ended December 31, 2011.  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, 2011, which may be obtained from the LREIT website at www.lreit.com or the SEDAR website at www.sedar.com.

OPERATING RESULTS

LREIT completed 2011 with net income of $5.04 million, compared to a loss of $9.32 million during 2010. The increase in net income mainly reflects a $13.2 million increase in "fair value" gains on investment properties under International Financial Reporting Standards ("IFRS").

In addition to fair value gains, the increase in net income in 2011 reflects the following components:

• Net operating income: Overall increase of $2.37 million or 10.1%, compared to 2010, comprised of a $3.13 million increase from the Fort McMurray portfolio and a $0.76 million decrease from other investment properties. During 2011, the average monthly occupancy level for the Fort McMurray property portfolio increased to 84%, compared to 68% in 2010, while the average monthly rental rate decreased by $121 or 5.1%. During the third and fourth quarters of 2011, the average occupancy level for the Fort McMurray property portfolio was 94%.
  
  
• Interest expense: Increased by $0.50 million or 2%, compared to 2010, comprised of an increase in the cash component of interest expense of $1.65 million, largely offset by a decrease in the non-cash component of $1.15 million.
  
  
• Profit on sale of investment property: Amounted to $0.49 million, compared to $1.95 million in 2010. The gain in 2011 pertains to the sale of four condominium units at Lakewood Townhomes in the fourth quarter of 2011. The gain in 2010 pertains to the sale of five properties.
  
  
• Income from discontinued operations: Increased by $1.04 million or 62%, compared to 2010. The increase mainly reflects an increase of approximately $1.5 million in the net operating income of the four seniors' housing complexes in discontinued operations, partially offset by an increase in interest expense of approximately $0.5 million.

During 2011, cash outflow from operating activities, excluding working capital adjustments, amounted to $2.63 million, compared to a cash outflow of $4.12 million in 2010, representing a decrease in the operating cash outflow of $1.49 million. The improvement is mainly due to an increase in net operating income, offset by an increase in the cash component of interest expense.  Including working capital adjustments, the cash outflow from operating activities decreased by $1.18 million, compared to 2010. After including regular payments of mortgage loan principal and capital expenditures, the cash "shortfall" amounted to $12.25 million.  The cash shortfall was funded by the upward refinancing of mortgage loan debt and by additional advances on the revolving loan from 2668921 Manitoba Ltd.

Key Accomplishments in 2011

Pending a full recovery of rental market conditions in Fort McMurray and the completion of additional property sales, LREIT successfully managed issues pertaining to covenant breaches on mortgage loan debt, convertible debenture debt maturities, the deferred acquisition of Parsons Landing and the funding of operating cash shortfalls. Other key accomplishments in 2011 include the implementation of a comprehensive refurbishment program for the six apartment properties in downtown Fort McMurray and the conversion to International Financial Reporting Standards ("IFRS"), including the adoption of the "fair value" valuation method for investment properties.

Mortgage Loan Debt

New mortgage loans

During 2011, proceeds from additional mortgage loan financings, net of mortgage loans repaid on refinancing, amounted to approximately $18.5 million, including $16.4 million from the upward refinancing of Riverside Terrace. The proceeds from upward refinancing combined with additional advances on the revolving loan from 2668921 Manitoba Ltd., enabled LREIT to meet all of its ongoing funding commitments during the year.

Covenant breaches

During 2011, LREIT remained focused on working with lenders to address mortgage loan covenant breaches pertaining to debt service coverage requirements for properties in Fort McMurray. Throughout 2011, approximately $156 million of mortgage loan debt for twelve properties in Fort McMurray was in breach of debt service coverage requirements.  All required payments of interest and principal were made on the mortgage loans in 2011 and the covenant breaches were addressed on an ongoing basis through forbearance agreements, waivers or modified loan terms. As of December 31, 2011, restricted cash deposits include $8.2 million in regard to covenant breaches.

In January 2012 the first mortgage loan for Lakewood Apartments was refinanced with a new lender which resulted in the elimination of one of the mortgage loans with a covenant breach. The covenant breach for the first mortgage loan for Lakewood Townhomes is expected to be addressed as the loan is gradually repaid from condominium sale proceeds. The expectation is that the covenant breaches for the remaining mortgage loans for Fort McMurray properties will continue to be addressed in 2012 through improved operations, modified loan agreements, debt repayment or refinancing.

The debt covenant breach for a property in Moose Jaw was satisfied during 2011 through improved operations and the debt covenant breach for a secondary mortgage registration on a property in Winnipeg is expected to be addressed through loan repayment or sale of the property.

Convertible Debenture Debt

At the beginning of 2011, convertible debenture debt amounted to approximately $39.2 million, comprised of approximately $13.6 million of 7.5% Series F debentures with a maturity date of March 11, 2011 and approximately $25.6 million of 7.5% Series G debentures with a maturity date of December 31, 2011.

The Series F convertible debentures were repaid in full at maturity. In October 2011, the debenture holders of the Series G convertible debentures agreed to amend the terms of the debentures to extend the maturity date to February 28, 2015.  Other amendments included an increase in the interest rate to 9.5%, the elimination of the conversion privilege and the granting of underlying security to include a security interest in all of the assets and property of LREIT, subject to senior debt and permitted encumbrances, and a requirement by LREIT to apply the net proceeds from property sales to the repayment of the Series G debentures prior to maturity. In the absence of the amendments, it would likely have been necessary for LREIT to repay the Series G debentures through the issuance of additional trust units at a discount to the then current market price of the trust units which would have significantly diluted the value of the existing trust units.

Acquisition of Parsons Landing

During 2011, LREIT remitted monthly interest payments of $300,000 in order to extend the closing date for the Parsons Landing apartment complex in Fort McMurray to September 30, 2012.

In February 2012, a fire occurred at Parsons Landing, which destroyed one wing of the property and resulted in substantial damage to the two other wings. Fortunately, all of the tenants were safely evacuated and there were no serious injuries.

The time frame for reconstruction of the property is estimated to be more than one year, and there will likely not be any occupancy permitted until the reconstruction has been completed. Property and revenue losses resulting from the fire are expected to be covered by insurance.

Management expects that the closing date for Parsons Landing, and the final payment, will be deferred until 2013 pending the reconstruction and occupancy of the property and that the $2 million payment, which was due on February 17, 2012, will also be deferred pending the resolution of the insurance claim. Management also expects that interest payments of $300,000 per month will be deferred pending the receipt of revenue loss insurance proceeds.

FINANCIAL AND OPERATING SUMMARY

		December 31
			2011			2010
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
	Total assets	$	554,720,070		$	547,829,176
	Total long-term financial liabilities (1)	$	339,023,477		$	354,981,731
		Year Ended December 31
			2011			2010
KEY FINANCIAL PERFORMANCE INDICATORS
Operating Results
	Rentals from investment properties	$	41,852,726		$	39,902,688
	Net operating income	$	25,729,391		$	23,361,318
	Income (loss) from continuing operations, before taxes	$	2,382,662		$	(11,496,252)
	Income (loss) and comprehensive income (loss)	$	5,035,231		$	(9,323,543)
Cash Flows
	Cash flow from operating activities	$	(383,188)		$	(1,565,119)
	Funds from Operations (FFO)	$	(6,993,506)		$	(10,333,671)
	Adjusted Funds from Operations (AFFO)	$	(8,483,052)		$	(9,670,113)
	Distributable income (loss)	$	(5,002,715)		$	(5,652,477)
PER UNIT AMOUNTS
Net operating income
-basic		$	1.394		$	1.279
-diluted		$	1.391		$	1.279
Income (loss) from continuing operations, before taxes
-basic		$	0.129		$	(0.629)
-diluted		$	0.129		$	(0.629)
Income (loss) and comprehensive income (loss)
-basic		$	0.273		$	(0.510)
-diluted		$	0.272		$	(0.510)
Cash flow from operating activities
-basic		$	(0.021)		$	(0.086)
-diluted		$	(0.021)		$	(0.086)
Funds from Operations (FFO)
-basic		$	(0.379)		$	(0.566)
-diluted		$	(0.379)		$	(0.566)
Adjusted Funds from Operations (AFFO)
-basic		$	(0.460)		$	(0.529)
-diluted		$	(0.460)		$	(0.529)
Distributable income (loss)
-basic		$	(0.271)		$	(0.309)
-diluted		$	(0.271)		$	(0.309)

(1) Long-term financial liabilities consist of mortgage loans, swap mortgage loans, convertible debentures and mortgage bonds, at face value

2011 COMPARED TO 2010

Analysis of Income (Loss)
	Year Ended December 31						Increase (Decrease)
		2011			2010			Amount		%
Rentals from investment properties	$	41,852,726		$	39,902,688		$	1,950,038		4.9%
Property operating costs		16,123,335			16,541,370			(418,035)		(2.5)%
Net operating income		25,729,391			23,361,318			2,368,073		10.1%
Interest income		328,145			482,274			(154,129)		(32.0)%
Interest expense		(33,162,993)			(32,665,284)			(497,709)		(1.5)%
Trust expense		(2,611,313)			(3,035,583)			424,270		14.0%
Loss before the following		(9,716,770)			(11,857,275)			2,140,505		18.1%
Profit (loss) on sale of investment properties		487,095			1,947,913			(1,460,818)		(75.0)%
Fair value gains (losses)		11,612,337			(1,586,890)			13,199,227		831.8%
Income (loss) before taxes and discontinued operations		2,382,662			(11,496,252)			13,878,914		120.7%
Income tax expense (recovery)		91,922			(470,623)			562,545		119.5%
Income (loss) before discontinued operations		2,290,740			(11,025,629)			13,316,369		120.8%
Income from discontinued operations		2,744,491			1,702,086			1,042,405		61.2%
Income (loss) and comprehensive income (loss)	$	5,035,231		$	(9,323,543)		$	14,358,774		154.0%

Loss, before fair value gains/losses, profit on property sales, income taxes and discontinued operations decreased by $2.14 million compared to 2010.  The decrease in the loss is mainly due to a $2.37 million increase in net operating income and a $0.42 million decrease in trust expense, partially offset by a $0.50 million increase in interest expense and a $0.15 million decrease in interest income.

After accounting for fair value gains/losses, profit on property sales, income taxes and discontinued operations, LREIT completed 2011 with comprehensive income of $5.04 million compared to a comprehensive loss of $9.32 million during 2010.

Fair Value Gains (Losses)

The valuation gain of $11.61 million for 2011 represents a net increase in the fair value of investment properties during the year. Combined with capital expenditures of $2.29 million, the carrying value of investment properties increased by $13.88 million during 2011.

Appraisals for 10 properties were obtained in 2011 with an aggregate appraised value of $327.1 million representing 72% of the total carrying value. The appraisals support fair value increases for seven properties and a fair value decrease for one property.  In addition, the appraisals plus market information supported fair value increases for two other properties.  Capital expenditures at 12 other properties have also served to support an increase in the carrying value of investment properties.

Appraisals were obtained in 2010 for three properties having an aggregate appraised value of $61.8 million representing 14% of the total carrying value of investment properties and in 2009 for one property having an appraised value of $8.4 million representing 2% of the total carrying value of investment properties.

Market Conditions

Accounting for approximately 55% of the residential suites in the portfolio of investment properties, the fourteen properties in Fort McMurray represent the most significant revenue component in LREIT's overall operations. Given the significant increase in activity in the oil sand industry, occupancy levels in Fort McMurray improved substantially during 2011, while rental rates are expected to rise gradually as the demand for rental housing in Fort McMurray continues to grow.

Analysis of Total Rental Revenue
		Year Ended December 31
						Increase (Decrease)			% of Total
		2011		2010		Amount		%		2011		2010
Fort McMurray		$27,768,479		$24,129,908		$3,638,571		15%		66%		60%
Other		14,084,247		15,772,780		(1,688,533)		(11)%		34%		40%
Total		$41,852,726		$39,902,688		$1,950,038		5%		100%		100%

Total revenue from investment properties increased by $1.95 million during 2011 compared to 2010.  The increase is comprised of an increase in revenue from the Fort McMurray properties of $3.64 million, partially offset by a decrease in revenue from the other properties of $1.69 million. The increase in revenue from the Fort McMurray property portfolio reflects a decrease in the vacancy, partially offset by a decrease in the average rental rate.  As disclosed in the charts below, the vacancy for the Fort McMurray portfolio decreased from 34% during the first quarter of 2011, to 6% in the third and fourth quarters of 2011, while the average monthly rental rate decreased by $121 or 5.1%.

The decrease in revenue for the "Other" property portfolio is mainly due to a reduction in the number of revenue-generating investment properties.  LREIT commenced fiscal 2010 with 28 investment properties and five properties were sold during the year. 2011 reflects operating for 23 properties throughout the entire year.

Vacancy, by Quarter
		2011
		Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray		34%	16%	6%	6%	16%
Other		2%	2%	2%	1%	2%
Sub-total		25%	13%	5%	5%	12%
Sold properties		N/A	N/A	N/A	N/A	N/A
Total		25%	13%	5%	5%	12%
		2010
		Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray		30%	30%	33%	33%	32%
Other		6%	5%	4%	3%	5%
Subtotal		24%	23%	25%	24%	24%
Sold properties		5%	2%	2%	2%	3%
Total		23%	22%	24%	24%	23%

Average Monthly Rents, by Quarter
		2011
		Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray		$2,323	$2,290	$2,246	$2,199	$2,261
Other		$1,034	$1,065	$1,050	$1,064	$1,050
Sub-total		$1,790	$1,792	$1,759	$1,743	$1,767
Sold properties		N/A	N/A	N/A	N/A	N/A
Total		$1,790	$1,792	$1,759	$1,743	$1,767
		2010
		Q1	Q2	Q3	Q4	12 Month Average
Fort McMurray		$2,495	$2,315	$2,380	$2,338	$2,382
Other		$1,037	$1,031	$1,037	$1,025	$1,033
Sub-total		$1,895	$1,743	$1,781	$1,753	$1,793
Sold properties		$1,060	$1,004	$904	$978	$986
Total		$1,767	$1,683	$1,711	$1,735	$1,724

Analysis of Property Operating Costs
		Year Ended December 31			Increase (Decrease)
		2011		2010		Amount		%
Fort McMurray		$  9,922,897		$  9,411,740		$  511,157		5%
Other		6,200,438		7,129,630		(929,192)		(13)%
Total		$16,123,335		$16,541,370		$(418,035)		(3)%

During 2011, property operating costs decreased by $0.42 million or 3%, compared to 2010.  The decrease is comprised of a $0.51 million increase in the operating costs of the Fort McMurray portfolio partially offset by a decrease of $0.93 million in the operating costs of the "Other" property portfolio.  The increase in for the Fort McMurray portfolio is mainly due to an increase in advertising expenses and on-site salary costs.  The decrease in operating costs for the "Other" property portfolio is mainly due to the reduction in the number of properties in the portfolio.

Analysis of Net Operating Income
		Net Operating Income
		Year Ended December 31				Increase (Decrease)				Percent of Total				Operating Margin
		2011		2010		Amount		%		2011		2010		2011		2010
Fort McMurray		$17,845,582		$14,718,168		$3,127,414		21%		69%		63%		64%		61%
Other		7,883,809		8,643,150		(759,341)		(9)%		31%		37%		56%		55%
Total		$25,729,391		$23,361,318		$2,368,073		10%		100%		100%		61%		59%

COMPARISON TO Q3-2011 AND Q4-2010

Analysis of Income (Loss)
	2011					2010
	Q4		Q3		Increase (Decrease)		Q4		Increase (Decrease)
Rentals from investment properties	11,196,590		11,142,567		54,023		9,612,269		1,584,321
Property operating costs	4,013,791		4,038,944		(25,153)		3,917,464		96,327
Net operating income	7,182,799		7,103,623		79,176		5,694,805		1,487,994
Interest income	162,836		40,298		122,538		154,270		8,566
Interest expense	(7,709,989)		(8,085,179)		(375,190)		(11,398,028)		(3,688,039)
Trust expense	(560,688)		(617,710)		(57,022)		(723,855)		(163,167)
Loss before the following	(925,042)		(1,558,968)		633,926		(6,272,808)		5,347,766
Profit on sale of investment property	487,095		-		487,095		222,608		264,487
Fair value gains (losses)	1,709,960		3,153,922		(1,443,962)		(189,606)		1,899,566
Income (loss) for the period before taxes and discontinued operations	1,272,013		1,594,954		(322,941)		(6,239,806)		7,511,819
Income tax expense (recovery)	-		298,704		(298,704)		(243,103)		243,103
Income (loss) for the period before discontinued operations	1,272,013		1,296,250		(24,237)		(5,996,703)		7,268,716
Income from discontinued operations	333,267		979,388		(646,121)		200,631		132,636
Comprehensive income (loss)	$ 1,605,280		$ 2,275,638		$ (670,358)		$ (5,796,072)		$ 7,401,352

Comparison to Q3-2011

Loss, before profit on sale of investment property, fair value gains (losses), income taxes and discontinued operations, decreased by $0.63 million during Q4-2011 compared to Q3-2011. The decrease in the loss mainly reflects a decrease in interest expense of $0.38 million, which was mainly due to the fact that accretion charges were comparatively high during Q3-2011. After accounting for profit on sale of investment property, fair value gains, income tax expense and income from discontinued operations, LREIT completed the Q4-2011 with comprehensive income of $1.61 million, compared to comprehensive income of $2.28 million during Q3-2011

Comparison to Q4-2010

Loss, before profit on sale of investment property, fair value gains (losses), income taxes and discontinued operations, decreased by $5.35 million during Q4-2011 compared to Q4-2010. The decrease in the loss mainly reflects a decrease in interest expense of $3.69 million and an increase in net operating income of $1.49 million. The decrease in interest expense is mainly attributable to the high level of accretion and amortization of transaction cost charges expensed in Q4-2010 in association with the repayment of the March 2010 mortgage bond issue in December 2010, as well as the high level of amortization of transaction cost charges expensed in regard to mortgage loans with covenant breaches. The increase in net operating income mainly reflects an increase in the net operating income of the Fort McMurray property portfolio.  Net operating income of the Fort McMurray property portfolio increased by $1.81 million during Q4-2011, while the net operating income from the Other portfolio decreased by $0.33 million.

OUTLOOK

Refinancings

In February 2012, LREIT obtained additional mortgage loan financing of $12 million, maturing on March 1, 2013. The net proceeds from the loan were used to repay $1.5 million of interim mortgage debt and for working capital purposes.

In addition, the revolving loan commitment from 2668921 Manitoba Ltd. has been increased from $12 million to $15 million and matures on August 31, 2012.

During 2012, LREIT will continue mortgage financing activities and property sales. Pending the completion of additional property sales, LREIT will continue to utilize the increased revolving loan commitment from 2668921 Manitoba Ltd. and/or advances from Shelter Canadian Properties Limited.

Divestiture Program

Management expects to complete the sale of the four seniors' housing complexes and/or other properties in 2012. In addition, the condominium sales program for the Lakewood Townhomes is expected to be substantially completed in 2013.

The proceeds from property sales and mortgage refinancings, combined with an anticipated improvement in operating cash flow from the property portfolio are expected to enhance the financial position of LREIT this year.

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 Convertible 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.

Arni Thorsteinson, Chief Executive Officer, or Gino Romagnoli, Investor Relations
Tel: [phone], Fax: [phone], Email: [email protected]