Lanesborough REIT Reports 2020 Second Quarter Results

WINNIPEG, MB, Aug. 27, 2020 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSXV: LRT.UN) today reported its operating results for the quarter ended June 30, 2020. The following comments in regard to the financial position and operating results of LREIT should be read in conjunction with interim management's discussion & analysis – quarterly highlights and the interim financial statements for the quarter ended June 30, 2020, which may be obtained from the SEDAR website at www.sedar.com.

ANALYSIS OF OPERATING RESULTS

Analysis of Loss and Comprehensive Loss
		Three Months Ended June 30											Six Months Ended June 30
								Increase (Decrease) in Income
		2020			2019			Amount			%		2020			2019
Rentals from investment properties	$	4,469,614			$	4,150,157		$	319,457		8%		$	8,800,319		$	8,106,467
Property operating costs		(2,842,135)			(2,653,472)			(188,663)			(7)%		(6,067,176)			(5,554,769)
Net operating income(NOI)		1,627,479			1,496,685			130,794			9%		2,733,143			2,551,698
Interest income		44,300			62,571			(18,271)			(29)%		92,766			112,135
Interest expense		(4,548,894)			(4,033,439)			(515,455)			(13)%		(9,012,585)			(7,950,487)
Trust expense		(340,182)			(304,374)			(35,808)			(12)%		(699,178)			(892,654)
Loss before the following		(3,217,297)			(2,778,557)			(438,740)			(16)%		(6,885,854)			(6,179,308)
Gain on sale of investments and investment property		-			347,500			(347,500)			(100)%		-			347,500
Fair value adjustments		(868,611)			(5,981,417)			5,112,806			85%		(3,831,873)			(7,854,022)
Loss before discontinued operations		(4,085,908)			(8,412,474)			4,326,566			51%		(10,717,727)			(13,685,830)
Loss from discontinued operations		(735,783)			(514,592)			(221,191)			(43)%		(1,207,047)			(836,376)
Loss and comprehensive loss	$	(4,821,691)			$	(8,927,066)		$	4,105,375		46%		$	(11,924,774)		$	(14,522,206)

Overall Results

LREIT completed Q2-2020 with a loss and comprehensive loss of $4.8 million, compared to a loss and comprehensive loss of $8.9 during the same quarter of 2019. The decrease in the extent of the loss and comprehensive loss mainly reflects a decrease in the loss relating to fair value adjustments as well as an increase in net operating income ("NOI"), partially offset by an increase in interest expense, a decrease in gain on sale of investments and investment property, and an increase in the loss from discontinued operations.

Unfavourable fair value adjustments recognized during Q2-2020 primarily reflect a reduction in the carrying value of the Fort McMurray properties due to a decrease in the forecasted level of net operating income deemed to be achievable in the Fort McMurray rental market. 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. The loss related to fair value adjustments recognized in 2019 was mainly due to reduced revenue expectations of the Fort McMurray property portfolio that resulted from the prolonged low–level of oil sands development activity.

The increase in NOI is due to an increase in rental revenue, partially offset by an increase in property operating costs. The increase in rental revenue is the result of a 7% increase in the average occupancy level of the Fort McMurray properties segment, which increased from 72% during Q2-2019 to 79% during Q2-2020, and is partially offset by a decrease in the average monthly rental rate of $66 or 4%.

The increase in interest expense during Q2-2020 of $0.5 million mainly reflects an increase in interest on the revolving loan from 2668921 Manitoba Ltd. ("revolving loan") of $0.5 million. The increase in the interest on the revolving loan is the result of an increase in the average outstanding balance of the revolving loan as well as an increase in the interest rate of the revolving loan that is applicable to the first $30 million of advances, which was amended from 5% to 7% as part of the January 1, 2020 renewal of the revolving loan.

The decrease in gain on sale of investments and investment property of $0.3 million was due to a gain on the sale of a minority interest in a residential property investment during Q2-2019. The Trust did not sell any investments during Q2-2020.

The increase in the loss from discontinued operations of $0.2 mainly reflects an increase in property operating costs 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
	Three Months Ended June 30										Six Months Ended June 30
							Increase (Decrease)
	2020			2019			Amount			%		2020			2019
Fort McMurray properties	$	3,624,485		$	3,374,178		$	250,307		7%		$	7,062,231		$	6,458,803
Other investment properties	429,518			421,816			7,702			2%		863,628			829,347
Sub–total	4,054,003			3,795,994			258,009			7%		7,925,859			7,288,150
Held for sale and/or sold properties	415,611			354,163			61,448			17%		874,460			818,317
Total	$	4,469,614		$	4,150,157		$	319,457		8%		$	8,800,319		$	8,106,467

Average Occupancy Level, by Quarter
	2019					2020
	Q1	Q2	Q3	Q4	12 Month Average	Q1	Q2
Fort McMurray properties	65%	72%	75%	75%	72%	76%	79%
Other investment properties	75%	76%	72%	71%	73%	73%	74%
Total	66%	72%	75%	74%	72%	75%	79%
Held for sale and/or sold properties (1)	76%	n/a	n/a	n/a	n/a	n/a	n/a

Average Monthly Rents, by Quarter
	2019					2020
	Q1	Q2	Q3	Q4	12 Month Average	Q1	Q2
Fort McMurray properties	$1,539	$1,522	$1,499	$1,466	$1,507	$1,454	$1,456
Other investment properties	$919	$939	$952	$952	$940	$955	$958
Total	$1,435	$1,424	$1,407	$1,379	$1,411	$1,370	$1,372
Held for sale and/or sold properties (1)	$1,853	n/a	n/a	n/a	n/a	n/a	n/a

(1)	The information required to reasonably estimate average occupancy levels and average monthly rents for Woodland Park has not been available to the Trust subsequent to the first quarter of 2019 when the Receiver assumed control of the property

During Q2-2020, total investment property revenue increased by $0.3 million or 8%, compared to Q2-2019. The increase is mainly due to a 7% increase in average occupancy of the Fort McMurray properties, which increased from 72% during Q2- 2019 to 79% during Q2-2020, despite $0.2 million of vacancy loss being recorded during Q2-2020 with respect to the April 27, 2020 flood in downtown Fort McMurray. The increase in average occupancy 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 $1,522 during Q2-2019 to $1,456 during Q2-2020, representing a decrease of $66 or 4%.

Property Operating Costs

Analysis of Property Operating Costs
			Three Months Ended June 30								Six Month Ended June 30
							Increase (Decrease)
	2020			2019			Amount			%		2020			2019
Fort McMurray properties	$	2,124,232		$	1,990,787		$	133,445		7%		$	4,417,597		$	4,214,705
Other investment properties	368,686			369,111			(425)			- %		754,494			725,056
Sub–total	2,492,918			2,359,898			133,020			6%		5,172,091			4,939,761
Held for sale and/or sold properties (1)	349,217			293,574			55,643			19%		895,085			615,008
Total	$	2,842,135		$	2,653,472		$	188,663		7%		$	6,067,176		$	5,554,769

(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 Q2-2020, property operating costs increased by $0.2 million or 7%, compared to Q2- 2019. The increase in property operating costs is mainly due to an increase in utility costs and an increase in insurance premiums.

Net Operating Income and Operating Margin

Analysis of Net Operating Income
	Net Operating Income
	Three Months Ended June 30						Increase (Decrease)					Percent of Total				Operating Margin *
		2020		2019			Amount			%		2020		2019		2020		2019
Fort McMurray properties	$	1,500,253		$	1,383,391		$	116,862		8%		92%		92%		41%		41%
Other investment properties		60,832		52,705			8,127			15%		4%		4%		14%		12%
Sub–total		1,561,085		1,436,096			124,989			9%		96%		96%		39%		38%
Held for sale and/or sold properties (1)		66,394		60,589			5,805			10%		4%		4%		16%		17%
Total	$	1,627,479		$	1,496,685		$	130,794		9%		100%		100%		36%		36%

(1)	Includes revenues and 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 Q2- 2020, the NOI of the investment properties portfolio increased by $0.1 million or 9%, compared to Q2-2019. The increase in NOI is primarily due to the increase in rental revenue of the Fort McMurray properties segment as described in the "Revenues" section of this report, partially offset by the increase in property operating costs of the Fort McMurray properties segment as described in the "Property Operating Costs" section of this press release.

Interest Expense

During Q2-2020, interest expense increased by $0.5 million or 13%, compared to Q2-2019. The increase mainly reflects an increase in revolving loan interest of $0.5million due to the higher average outstanding balance of the revolving loan during Q2- 2020 as well as an increase in the interest rate of the revolving loan that is applicable to the first $30 million of advances, which was amended from 5% to 7% as part of the January 1, 2020 renewal of the revolving loan.

The weighted average interest rate on the Trust's mortgage loan debt was 5.7% as at June 30, 2020, compared to 5.8% as at June 30, 2019.  The decrease in the weighted average interest rate was primarily due to the Trust's variable rate mortgages and reductions in the prime rate of interest, which decreased from 3.95% as at June 30, 2019 to 2.45% as at June 30, 2020. The decrease in the weighted average interest rate was partially offset by an increase in the average interest rate of the Trust's fixed rate mortgages which increased from 4.9% as at June 30, 2019 to 5.1% as at June 30, 2020.

The weighted average interest rate on the Trust's total debt, inclusive of the revolving loan and debentures, was 6.0% as at June 30, 2020, compared to 5.8% as at June 30, 2019. The increase in the weighted average interest rate was primarily due to an increase in the weighting given to the revolving loan, which carries an interest rate of 7%, due to the increase in the average outstanding balance of the revolving loan as well as an increase in the interest rate of the revolving loan that is applicable to the first $30 million of advances as described above.

Fair Value Adjustments

During Q2-2020, LREIT recorded a loss related to fair value adjustments on its investment properties and investment properties held for sale of $0.9 million, compared to a loss related to fair value adjustments of $6.0 million during Q2-2019, representing a favourable variance of $5.1 million.

Unfavourable fair value adjustments recognized during Q2-2020 primarily reflect a reduction in the carrying value of the Fort McMurray properties due to a decrease in the forecasted level of net operating income deemed to be achievable in the Fort McMurray rental market. 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. The loss related to fair value adjustments recognized in 2019 was mainly due to reduced revenue expectations of the Fort McMurray property portfolio that resulted from the prolonged low–level of oil sands development activity.

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 $0.6 million during Q2-2020.

Coronavirus (COVID-19)

Since December 31, 2019, the spread of novel coronavirus COVID–19 ("COVID–19") has impacted economies around the globe. On March 11, 2020, the World Health Organization ("WHO") declared the outbreak of COVID–19 as a pandemic. In many countries, including Canada, businesses have been forced to cease or limit operations for indefinite periods of time. Measures, which have been taken to contain the spread of the virus, including travel bans, quarantines, social distancing, and closures of non–essential services, have triggered significant disruptions to businesses worldwide, resulting in an economic slowdown. Consequently, the demand for oil, which is a significant driver of the economy in the Trust's primary market of Fort McMurray, began to decline. The decreased demand for oil combined with significant oversupply, caused by geopolitical conflict among major oil producing nations, created the perfect storm in the oil market with oil prices reaching record lows in April 2020.

There is the risk that the economic slowdown will negatively affect the ability of tenants to pay rent, which would have a negative impact on the future financial position, operating results and liquidity of the Trust.  Governments and central banks have been responding with monetary and fiscal interventions in an effort to stabilize economic conditions.  The extent and duration of the economic slowdown and the ability and level of success of jurisdictions around the world in restarting and maintaining economies is uncertain.

As COVID–19 appears to pose greater risks to older adults, the Trust is currently subject to additional risks with respect to its ownership of Chateau St. Michael's, the seniors' housing complex. The Trust has implemented a variety of control measures at Chateau St. Michael's in order to mitigate the risk of an outbreak as well as to reduce the potential length and impact should an outbreak occur.

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: [phone], Fax: [phone], Email: [email protected]

Related Links

http://www.lreit.com