Morguard Real Estate Investment Trust Announces 2020 First Quarter Results, Provides Operational Update Related to COVID-19 and Announces Distribution Decrease

MISSISSAUGA, ON, April 30, 2020 /CNW/ - Morguard Real Estate Investment Trust ("the Trust") (TSX: MRT.UN) today is pleased to announce its financial results for the three month period ending March 31, 2020. These results have been prepared in accordance with International Financial Reporting Standards ("IFRS").  Also included is a brief operational and liquidity update as we continue to focus on managing through the COVID-19 pandemic.

K. Rai Sahi, Chief Executive Officer of Morguard REIT commented:

"The unprecedented COVID-19 global event has demonstrated our strength and resilience as an organization. By activating our Crisis Management Team and allocating appropriate resources, we have coordinated efforts across our portfolios and taken definitive action to ensure the health and well-being of those around us. At this unique time, we celebrate our employees and service partners who continue to provide exceptional service to Morguard communities across North America by upholding our core values." 

Financial Highlights

In thousands of dollars, except per-unit amounts	Three Months Ended March 31
	2020	2019
Revenue from real estate properties	$66,373	$70,454
Net operating income	34,828	37,860
Fair value losses on real estate properties	(121,117)	(5,680)
Net (loss)/income	(102,555)	16,915
Funds from operations	19,958	23,086
Adjusted funds from operations	13,731	16,859
Amounts presented on a per unit basis
Net (loss)/income – basic	($1.69)	$0.28
Net (loss)/income – diluted	($1.69)	$0.25
Funds from operations – basic	$0.33	$0.38
Funds from operations – diluted	$0.32	$0.36
Adjusted funds from operations – basic	$0.23	$0.28
Adjusted funds from operations – diluted	$0.23	$0.27
Cash distributions per unit	$0.24	$0.24

Revenue from real estate properties includes contracted rent from tenants along with recoveries of property expenses (including property taxes). Revenue for the three months ended March 31, 2020, decreased 5.8% to $66.4 million from $70.5 million for the same period in 2019. This decrease is primarily due to reduced recoveries of operating costs and the rent relief granted to Obsidian Energy Limited ("Obsidian").

Property operating expenses for the three months ended March 31, 2020, decreased 3.5% to $16.8 million from $17.4 million for the same period in 2019. This decrease is primarily due to lower repair and maintenance expenses compared to the same period in 2019.

Net operating income for the three months ended March 31, 2020, declined 8.0% as compared to 2019. This decline was due to the enclosed mall segment and the decline in income for Penn West Plaza.

Interest expense for the three months ended March 31, 2020, increased 1.1% to $14.6 million from $14.4 million for the same period in 2019.

On March 30, 2020, the Trust announced the conclusion of its discussions with Obsidian regarding its tenancy in Penn West Plaza which is summarized as follows:

• Obsidian was originally scheduled to pay $28.6 million in rent and recoveries for February to December 2020;
• Presently, Penn West Plaza is approximately 65% subleased to various subtenants by Obsidian. The sublease income for 2020 is estimated to be $12.8M for February to December 2020;
• Obsidian will now receive a rent abatement which adjusts their obligation to $10.0M annually or $9.2M for 2020 on a pro-rated basis, net of sublease income which will now be to the account of the Trust;
• The amount of estimated sublease income for the years 2021 and beyond is estimated to be approximately $14.5-$15.0 million.
• It is estimated that this abatement will represent an annual reduction in the Trust's net operating income in the range of $6.5-$7.0 million.
• The two largest sublease tenants include Athabasca Oil Corp. ($7.0 million gross annual estimate) and Western Energy Service Corp. ($2.4 million gross annual estimate).
• Presently, approximately 20% of the building is not utilized by either Obsidian or the subtenants.

The Trust records its income producing properties at fair value in accordance with IFRS. In accordance with this policy, the following fair value adjustments by segment have been recorded:

All amounts in $000's
For the three months ended March 31,	2020	2019
Retail	($97,748)	$1,767
Office	(23,552)	(7,760)
Industrial	183	313
	($121,117)	($5,680)

The retail fair value decline is attributed to an average 25 basis point increase in cap rates for the enclosed mall assets along with income adjustments. The office fair value decline is due to the decline in Penn West Plaza arising from the discussions and resulting rent reduction granted to Obsidian.

Reported net loss for three months ended March 31, 2020, was $102.6 million as compared to net income of $16.9 million in 2019. This change was attributed to the fair value losses recorded in 2020.

COVID-19 UPDATE

During March 2020, the outbreak of the novel strain of coronavirus ("COVID-19") has resulted in governments enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, self-imposed quarantine periods and social distancing, have caused an economic slowdown and material disruption to business. Government has reacted with interventions intended to stabilize economic conditions. The duration and impact of the COVID-19 outbreak is unknown at this time. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial performance and financial position of the Trust in future periods.

The Trust recognizes the impact of COVID-19 on many of its tenants and its stakeholders and is committed to taking measures to protect the health of its employees, tenants and communities. In March, the Trust initiated its crisis managment plan with a team mandated to maintain a safe environment for its tenants, employees and stakeholders, coordinating efforts across its portfolio, standardizing communications and responding as circumstances demand.

These are unprecedented times. Everyone has been impacted by the global efforts to reduce the spread of COVID-19. With the guidance of public health authorities, and at the direction of various levels of government, the Trust has implemented measures to help reduce the spread of COVID-19 including:

• eliminating amenities deemed to be risky and ensuring the continuation of critical services;
  
  
• intensified cleaning, focusing staff efforts on cleaning high-touch point areas at all our properties using approved cleaning products;
  
  
• management offices are staffed but doors are locked;
  
  
• maintenance orders for non-emergency repairs have been deferred;
  
  
• added additional hand sanitizers to help tenants maintain recommended practices for hand washing; and
  
  
• posted health and safety best practice reminders to increase awareness of the most current guidelines.

The Trust is actively monitoring the ongoing developments with regards to COVID-19 and is committed to ensuring a healthy and safe environment, adjusting its service model as necessary.

Collections Update
Due to non-essential business closure orders issued by the various provinces in Canada, the majority of our retail tenants are closed as of the date of this report. The easing of these restrictions will likely vary by province and by industry. All of the Trust's enclosed malls are open.

There are tenants in all asset classes who did not pay their rent due on April 1, 2020 rent. As of April 29, 2020, the Trust has collected approximately 65% of April rent (or $0.2M) from its industrial tenants, approximately 91% of April rent (or $9.0M) from its office tenants and approximately 45% of April rent from its retail tenants (or $5.4M). In total the Trust has collected 65% of its April rent across all asset classes.

Operating staff are working with all tenants to review their situation and to consider rent deferrals as necessary, and are being especially supportive of small business retail tenants. Deferrals are being considered on a case-by-case basis. At this point, most retailers are waiting for the clarification on the extent of the economic crisis before settling to deferral terms. The federal government has also introduced legislation to assist landlords and small businesses with their rent obligations during the COVID-19 pandemic which the Trust is monitoring.

As of April 29, 2020, approximately 26% of the Trust's retail tenants were open for business, based on a percentage of retail revenue.

The Trust has a strong government presence in its office tenancy which helps mitigate the risk of non-payment of rent for this asset class. Approximately 26% of the Trust's office contracted gross revenue is attributable to government tenants.

Operational Update
In response to the decline in collections, there has been a deferral of discretionary capital spending. Also, available deferrals of sales taxes, payroll taxes, property taxes and utility payments offered by the various levels of government have been acted upon.

The amount of PCME spending for 2020 will be less than normal levels. Discretionary spending is being reviewed in order to consider deferrals to later periods. The Trust has narrowed the scope of its capital expenditure program to ensure the availability of resources. Leasing capital will still be spent as normal, although the amount of new leasing activity is expected to decline due to the economic crisis. Development projects for Pine Centre in Prince George and The Centre in Saskatoon are ongoing.

We are continuing to monitor developments in government relief programs for applicability to the Trust.

Overall, the Trust does expect a negative impact on both future cash flow and net operating income due to the enacting of emergency measures to contain the COVID-19 pandemic and the resulting economic impact.

The extent of the impact will vary depending on the duration of the closures and the general economic activity in Canada and the United States. The duration of the COVID-19 pandemic at the pace of recovery following the pandemic cannot be accurately predicted at this time. All of the forgoing could negatively impact the Trust's financial performance.

Financial Update
The Trust has available liquidity of $81.8 million as of March 31, 2020, and also has an unencumbered asset pool of $313.1 million in order to raise necessary capital, if applicable.

DISTRIBUTION UPDATE

Given the current economic outlook and the uncertainty around collections and cashflow in the short-term, the Board of Trustees, after prudent review of the Trust's distribution policy, has concluded that a decrease in the monthly cash distribution is appropriate. The Board of Trustee's has determined that it will  decrease the Trust's annualized distribution of 96 cents (or 8 cents per month) to 48 cents (or 4 cents per month). This decrease will be effective for the May 2020 distribution, payable in June, 2020.

The resulting retained cashflow will allow the Trust enhanced cashflow flexibility and put the Trust in a strong position to meet the cashflow needs of its continuing development program and other capital priorities that will improve the value and quality of its portfolio.

Net Operating Income, Funds from Operations

This press release and accompanying financial information make reference to net operating income and funds from operations on a total and per unit basis. Net operating income is defined as income from property operations after operating expenses have been deducted, but prior to deducting interest expense, general and administrative expenses and fair value gains/(losses). The Trust presents FFO in accordance with the Real Property Association of Canada white paper on funds from operations and adjusted funds from operations for IFRS. FFO is a non- GAAP measure that is widely accepted as a supplemental measure of financial performance for real estate entities. In accordance with such white paper, the Trust defines FFO as net income adjusted for fair value changes on real estate properties and gains/(losses) on the sale of real estate properties.

Financial Statements and Management's Discussion and Analysis

The Trust's Q1 2020 Consolidated Financial Statements and Management's Discussion and Analysis will be made available on the Trust's website at www.morguard.com and have been filed with SEDAR at www.sedar.com.

Conference Call Details:

Date: Friday May 1, 2020 4:00 p.m. (ET)
Conference Call #: 416-764-8688 or 1-888-0546
Conference ID #: 19701891

About Morguard Real Estate Investment Trust

The Trust is a closed-end real estate investment trust, which owns a diversified portfolio of 48 retail, office and industrial income producing properties in Canada with a book value of $2.8 billion and approximately 8.4 million square feet of leasable space.

SOURCE Morguard Real Estate Investment Trust

Morguard Real Estate Investment Trust, K. Rai Sahi, President and Chief Executive Officer, T 905-281-4800; Andrew Tamlin, Chief Financial Officer, T 905-281-4800

Related Links

http://www.morguardreit.com