FAM REIT announces Q3 2014 results

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FAM Real Estate Investment Trust

Nov 05, 2014, 19:46 ET

TORONTO, Nov. 5, 2014 /CNW/ - FAM Real Estate Investment Trust ("FAM REIT", or the "REIT") (TSX: F.UN) (TSX: F.WT) announced today its financial results for the three months and nine months ended September 30, 2014.

KEY HIGHLIGHTS

  • Same-property occupancy of 95.1% as at September 30, 2014, lower than occupancy of 97.8% on a sequential basis as at June 30, 2014, and 98.2% on a year-over-year basis as at September 30, 2013.
  • Overall portfolio occupancy of 94.8% as at September 30, 2014, compared to 97.8% on sequential basis as at June 30, 2014 and 97.1% on a year-over-year basis as at September 30, 2013.
  • FFO – As Reported per unit of $0.17 for the current quarter, compared to $0.23 for the same period last year.  FFO – As Reported per unit of $0.43 for the nine months ended September 30, 2014, compared to $0.86 for the same period last year.  
  • FFO – Core per unit of $0.19 for the current quarter, compared to $0.24 for the same prior period. FFO – Core per unit of $0.63 for the nine months ended September 30, 2014, compared to $0.73 for the same prior period.
  • Strong financial position with a 47.2% indebtedness ratio at September 30, 2014 compared to 53.5% at September 30, 2013; Approximately $20 million of liquidity consisting of cash and unused revolver capacity at September 30, 2014.
  • Construction of the MTS Data Centre development is progressing well, and is slated for substantial completion in May 2015 with rent commencement in June 2015. In October 2014, the REIT and its partner locked in the 15 year term mortgage at 4.38%.

Shant Poladian, Chief Executive Officer of FAM REIT, commented, "FAM REIT's operating performance during the three months ended September 30, 2014 was negatively impacted by four vacancies, three of which are expected to be temporary in nature. We are aggressively focused on improving the quality and reliability of our cash flow, and the occupancy issues we faced during the third quarter serve as important reminders of our need to remain disciplined about managing our risk profile. Our strong financial position and liquidity allow us to navigate short term issues while remaining focused on long term value creation."

Financial Highlights and Key Performance Indicators 

($000s unless otherwise

 noted and except per unit amounts)

Three months ended

 September 30, 2014

Three months ended

 June 30, 2014

Three months ended

 September 30, 2013

Revenue from investment properties

$                  7,991

$                   7,972

$                   7,568

Net operating income(1)

4,843

4,927

4,720

Same-property net operating income, cash basis

3,304

3,221

3,441

Net income (loss)  and comprehensive income (loss)

4,652

(1,872)

1,228






Funds from operations – As Reported(1)

2,587

2,074

2,418

Funds from operations – Core(1)

2,940

2,930

2,519

FFO per unit (basic and diluted) – As Reported(1)

$                     0.17

$                     0.15

$                     0.23

FFO per unit (basic and diluted) – Core(1)

$                     0.19

$                     0.22

$                     0.24






Adjusted funds from operations – As Reported(1)

2,357

2,029

1,529

Adjusted funds from operations – Core(1)

2,541

2,249

1,529

AFFO per unit (basic and diluted) – As Reported(1)

$                     0.16

$                     0.15

$                     0.15

AFFO per unit (basic and diluted) – Core(1)

$                     0.17

$                     0.17

$                     0.15






Distributions per unit – basic and diluted(2)


$                     0.19

$                     0.19

$                     0.19

AFFO – Core pay-out ratio(3)

112%

112%

127%

Cash distributions per unit – basic and diluted(2)


$                     0.12

$                     0.13

$                     0.15

AFFO – Core pay-out ratio, net of DRIP(3)

71%

76%

100%






Net operating income by asset class




Industrial

$                  1,315

$                  1,387

$                  1,445

Office

3,204

3,226

2,858

Retail

324

314

417



$                  4,843

$                  4,927

$                  4,720






Net operating income by geographic location




Manitoba


$                  1,940

$                  1,822

$                  1,851

Ontario

2,276

2,383

1,876

Saskatchewan

154

148

380

Alberta

339

443

491

Northwest Territories

134

131

122



$                  4,843

$                  4,927

$                  4,720






Interest coverage ratio (times)(4)

3.0x

2.8x

2.8x

Debt to EBITDA leverage ratio (times)(5)

7.8x

8.2x

8.4x

Net Debt to EBITDA leverage ratio (times)(5)

7.4x

7.8x

8.2x

Debt service coverage ratio (times)(6)

1.8x

1.7x

1.7x

Indebtedness ratio (%) – period end(7)

47.2%

47.6%

53.5%

Weighted average mortgage interest rate – period end

4.7%

4.7%

4.7%

Same-property occupancy – period end

95.1%

97.8%

98.2%

Occupancy – period end




Industrial

96.3%

100.0%

100.0%

Office

94.0%

95.8%

96.0%

Retail

90.7%

100.0%

90.9%



94.8%

97.8%

97.1%






Leased square footage (sq. ft.) – period end

1,734,368

1,789,026

1,849,875

Rentable square footage (sq. ft.) – period end

1,829,103

1,829,096

1,905,036

















FINANCIAL

  • Funds From Operations ("FFO"): FFO – As Reported for the three months ended September 30, 2014 was $0.17 per unit. After adjusting for $0.01 per unit non-cash fair value loss on the interest rate swaps and $0.01 per unit Special Committee related expenses, FFO – Core was $0.19 per unit. The decrease in FFO – Core of $0.05 per unit on a year-over-year basis was primarily due to:
    1. The dilutive impact of the April 2014 equity issue of $0.02 per unit to fund development of the MTS Data Centre which is not generating any FFO contribution during the construction period. On an annualized basis, the incremental year one contribution will be approximately $2.4 million, or $0.16 per unit upon rent commencement, which is slated for June 2015 ($0.12 per unit after taking into account the issuance of 2,794,363 trust units and 2,316,748 Class B limited partnership units of a FAM REIT limited partnership in the proposed acquisition of office properties described herein);
    2. The dilutive impact of lower leverage arising from the April 2014 equity issue that was used to pay outstanding amounts on the revolving credit facility of $0.02 per unit;
    3. The decline in same-property NOI of $0.02 per unit ($0.3 million); and
    4. The decline in NOI related to the sale of Humboldt Mall of $0.01 per unit ($0.1 million).

    These factors were slightly offset by the FFO generated from the Promontory of $0.02 per unit ($0.3 million) which is reflected for a full quarter in the current period as opposed to a stub period in the comparative period.

  • Adjusted Funds From Operations ("AFFO"): AFFO – As Reported for the three months ended September 30, 2014 was $0.16 per unit. After adjusting for $0.01 per unit Special Committee related expenses, AFFO – Core was $0.17 per unit. The increase of $0.02 per unit on a year-over-year basis was primarily attributed to lower capital expenditures and leasing costs. 

OPERATIONAL

  • Net Operating Income ("NOI"): The REIT achieved NOI of $4.8 million for the three months ended September 30, 2014 and $4.7 million for the three months ended September 30, 2013. The acquisitions of 4211 Yonge, The Promontory, and 1700 Ellice generated NOI of $1.5 million during the current quarter, compared to $1.0 million in the prior quarter. This increase was partially offset by the loss of NOI attributable to the sale of Humboldt Mall in December 2013, which contributed $0.1 million in NOI during the three months ended September 30, 2013. In addition, same property NOI was impacted by the early lease termination at Brooks, Alberta and the office space turnover at Saskatchewan Place resulting in lower NOI of $0.3 million for the current quarter.
  • Occupancy: Occupancy on a same-property basis was 95.1% as at September 30, 2014, lower than the occupancy rate of 97.8% as at June 30, 2014 and the occupancy rate of 98.2% as at September 30, 2013 due to an early lease termination at a single-tenant industrial property in Brooks, Alberta and a retail property in Cochrane, Alberta, and office space turnover at Saskatchewan Place. Overall portfolio occupancy was 94.8% as at September 30, 2014, which decreased from 97.8% on a sequential basis as at June 30, 2014 and from 97.1% on a year-over-year basis as at September 30, 2013. On a year-over-year basis, the overall portfolio occupancy loss was mainly due to the early lease terminations at Brooks and Cochrane, Alberta, as well as turnover at Saskatchewan Place and 4211 Yonge, which were partially offset by the acquisition of two fully leased properties (The Promontory and 1700 Ellice) and the sale of Humboldt Mall.
  • MTS Data Centre: Development is proceeding well with full construction permitting received and all key construction milestones on schedule. The building shell is expected to be complete in November 2014, and substantial completion is expected in May 2015. Building turnover to the tenant is slated for June 2015 upon commissioning. On October 24, 2014, FAM REIT and its partner took advantage of recent market volatility, which resulted in a significant decline in government bond yields, and notified the lender to execute an early lock on the $37 million loan. The fixed mortgage interest rate over the 15 year term has now been locked in at an attractive 4.38%.
  • Leasing Profile: Month-to-month and lease maturities were 149,000 sf during the three months ended September 30, 2014. The REIT has continuing month-to-month leases of 6,000 sf, completed lease renewals of 137,000 sf, and renewals in negotiations of 6,000 sf.
  • Debt Strategy: The REIT deleveraged to a 47.2% indebtedness ratio at September 30, 2014, and had approximately $20 million of available liquidity, which provides significant flexibility to fund growth and downside protection in the event of prolonged adverse capital market conditions. FAM REIT has $14.0 million of mortgage principal maturities to December 2015. These mortgage maturities can be discharged and added to the REIT's revolving credit line at higher loan-to-value ratios than their expiring maturities which would add to the overall liquidity of the REIT.

OUTLOOK

During the fourth quarter of 2014, we continued to work on further de-risking our leasing profile. In particular, we received a commitment for a 25-year lease renewal with the Province of Manitoba for 74,000 sf at our 114 Garry St, Winnipeg property, which is conditional on obtaining final approval from the provincial authority (expected before year end 2014).

This deal entails a significant redevelopment of the property over a two year period, and the new rental rate structure was negotiated to take into account the total capital requirement which we currently estimate to be in the range of approximately $10 million. Given the 25-year lease term and high credit quality covenant, we expect that there will be several attractive debt financing options to fund the capital investment.

On a pro-forma basis, the MTS Data Centre is expected to have a significant positive impact on FAM REIT's financial performance upon rent commencement in June 2015. On an annualized basis, the incremental year one contribution from the MTS Data Centre to AFFO – Core will be approximately $2.2 million, or $0.15 per unit upon rent commencement ($0.11 per unit after taking into account the issuance of 2,794,363 trust units and 2,316,748 Class B limited partnership units of a FAM REIT limited partnership in the proposed acquisition of properties, as described below).

On February 20, 2014, FAM REIT announced that it has formed a Special Committee comprised of its Independent Trustees, Chaired by Gary Samuel, FAM REIT's Lead Independent Trustee in response to Huntingdon's initiation of a Strategic Review as announced on February 19, 2014. The Special Committee's mandate is to evaluate the impact of the strategic review, and if advisable, to respond to such review.

On October 29, 2014, FAM REIT announced that it has entered into an agreement to acquire a portfolio of seven office properties with an aggregate gross leasable area of approximately 1.1 million sf (the "Acquisition Properties") from Slate GTA Suburban Office Inc. ("Slate GTA") for $190.0 million, before closing costs and subject to adjustments in accordance with the terms of the acquisition agreement. A special meeting of the holders of trust units and special voting units of FAM REIT will be held on December 5, 2014 to consider the approval of the purchase of the Acquisition Properties. Refer to the information circular dated October 29, 2014, filed on SEDAR for further details.

On November 4, 2014, Slate Capital Corp., an affiliate of Slate Properties Inc. ("Slate") purchased all of the issued and outstanding shares of the REIT's manager, Huntingdon Capital Corp. (the "Huntingdon Transaction"). In accordance with an advisory agreement previously entered into by the Special Committee, upon completion of the Huntingdon Transaction, the REIT is committed to pay advisory fees of $1.2 million, reduced by work fees already accrued or paid of $0.2 million. In connection with the Huntingdon Transaction, Mr. Zachary George has resigned as Trustee from the Board.

Other information
Information appearing in this press release is a select summary of results. The consolidated financial statements and management's discussion and analysis for the REIT are available at www.sedar.com and our website at www.famreit.com.

Footnotes

(1)

Net operating income, FFO – As Reported, FFO – Core, AFFO – As Reported, AFFO – Core, and earnings before interest, taxes, depreciation and amortization ("EBITDA") are not measures defined under International Financial Reporting Standards ("IFRS"). Management believes that these are useful supplemental measures, but may not be comparable to other REITs. Please refer to the REIT's MD&A for a description of these measures.

(2)

The weighted average number of units outstanding used in the per unit calculations includes the weighted average of all REIT units and Class B LP units.

(3)

The AFFO – Core pay-out ratio is calculated as total distributions divided by AFFO – Core for the period. The AFFO – Core pay-out ratio, net of DRIP reflects the actual amount of cash paid or payable after taking into account unitholders who have elected to take their distributions in the form of trust units instead of cash.

(4)

The interest coverage ratio is calculated as EBITDA for the period divided by interest expensed during the period.

(5)

The debt to EBITDA leverage ratio is calculated as the average debt outstanding divided by annualized EBITDA. Debt consists of mortgages payable, vendor take-back loan, and the revolving credit facility at face value, excluding deferred transaction costs. The net debt to EBITDA ratio takes into consideration the cash on hand to decrease debt.

(6)

The debt service coverage ratio is calculated as EBITDA divided by the debt service requirements for the period. Debt service requirements reflects principal repayments and interest expensed during the period. Payments related to defeasance, prepayment penalties, or payments upon discharge of a mortgage are excluded from the calculation.

(7)

The indebtedness ratio is calculated as total debt divided by total assets at period end.

About FAM Real Estate Investment Trust
The REIT is presently a diversified commercial real estate investment trust currently focused on owning and acquiring strategically well-located office, industrial and retail real estate located primarily across Canada's large population centres.

Forward looking information

This press release contains forward-looking information within the meaning of applicable securities legislation, which reflects the REIT's current expectations regarding future events. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the REIT's control, that could cause actual results and events to differ materially from those that are disclosed in or implied by such forward-looking information. These risks and uncertainties include, but are not limited to, general and local economic and business conditions; the financial condition of tenants; our ability to refinance maturing debt; leasing risks, including those associated with the ability to lease vacant space; and interest rate fluctuations. Our objectives and forward-looking statements are based on certain assumptions, including that the general economy remains stable, interest rates remain stable, conditions within real estate market remain consistent, competition for acquisitions remains consistent with the current climate and that the capital markets continue to provide ready access to equity and/or debt. All forward-looking information in this press release speaks as of the date of this press release. The REIT does not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise. Additional information about these assumptions and risks and uncertainties is contained in the REIT's filings with securities regulators, including its latest annual information form and MD&A.

SOURCE: FAM Real Estate Investment Trust

FAM Real Estate Investment Trust, c/o Slate Asset Management LP, 200 Front St W, Suite 2400, Toronto, ON M5V 3K2, Telephone: (416) 644-4264

Organization Profile

FAM Real Estate Investment Trust