Scott's REIT announces financial results for the first quarter ended March 31, 2012

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Scott's Real Estate Investment Trust

May 09, 2012, 17:01 ET

Revenue up 10 per cent
Committed occupancy back up to over 97 per cent
Secures net incremental financing of $6.8M year-to-date

TORONTO, May 9, 2012 /CNW/ - Scott's Real Estate Investment Trust (TSX: SRQ.UN) ("Scott's REIT" or the "REIT") today reported its financial results for the first quarter ended March 31, 2012.

First Quarter 2012 Financial Highlights

  • Revenues of $6.4 million, a 10.4 per cent increase versus same quarter last year
  • Net operating income* of $5.2 million, a 7.3 per cent increase versus same quarter last year
  • Adjusted Funds From Operations ("AFFO")* per Unit of $0.151
  • AFFO payout ratio* of 139.0 per cent, adjusted for non-recurring Priszm-related legal fees

*See section entitled Non-IFRS measures.

Operational and Financial Summary

  • Net operating income ("NOI") for Q1 2012 was $5.2 million, an increase of $0.4 million as compared to NOI for the same period of 2011. NOI decreased by 9.9 per cent on a same asset basis as compared to last year as a result of the Priszm disclaimed leases representing mostly a temporary suspension of rent until committed leasing becomes effective and new tenants are found for the remaining vacant properties. NOI from acquisitions increased to $0.8 million in the first quarter as a result of the acquisition of nine Shoppers Drug Mart properties effective September 23, 2011.
  • AFFO for Q1 2012 totaled $1.4 million ($0.15 per unit, basic and diluted) as compared to $1.8 million ($0.19 per unit basic and $0.18 per unit diluted) for Q1 2011. The decrease in AFFO is a result of:
    • incremental NOI of $0.8 million driven by the 2011 Shoppers Drug Mart acquisition;
    • the temporary reduction in same asset NOI of $0.5 million referenced above;
    • an increase in mortgage interest expense of $0.4 million mostly due to new permanent and short-term mortgages placed in 2011, including the refinancing of 70 Ontario properties with higher cost debt that the REIT expects to refinance in the near term at a more favourable interest rate;
    • interest expense related to the $12 million convertible debentures of $0.2 million that closed in September 2011, related to the 2011 Shoppers Drug Mart acquisition; and
    • interest expense of $0.1 million recognized on the three land leases acquired with the 2011 Shoppers Drug Mart acquisition and accounted for as finance leases.
  • The portfolio occupancy rate as at March, 2012 was 93.3 per cent versus the prior year at 98.8 per cent. Pro-forma occupancy including all leases disclaimed since March 31, 2012 and all committed leases due to re-leasing efforts, reaches 97.1 per cent.
  • The REIT's average cost of mortgage debt was 5.35 per cent at the end of Q1 2012, as compared to 5.44 per cent at the end of Q1 2011. The REIT's leverage ratio at December 31, 2011 was 53.6 per cent excluding convertible debentures and 70.5 per cent including convertible debentures, versus 49.0 per cent and 64.0 per cent, respectively, as at March 31, 2011. The increase in the leverage ratio including convertible debentures is a result of the issuance of $12 million convertible debentures that closed in September 2011, proceeds of which were used to complete the acquisition of nine properties tenanted by Shoppers Drug Mart during the same month.
  • During first quarter of 2012 and year-to-date, Scott's REIT secured incremental net new financing of $6.8 million through the following previously announced financing transactions:
    • On February 1, 2012, received a further one-year extension for its IPO mortgage with a balance owing at that time of $32 million, to February 1, 2013. The extension had been granted using the same terms as the original loan; 4.9 per cent interest only, payable monthly, and the mortgage is open for payment at any time during the one-year extension period. Subsequently on March 20, 2012, Scott's REIT paid down $8.4 million of the IPO mortgage from proceeds of the refinancing of its Atlantic Canada portfolio. The current balance owing on the IPO mortgage is $23.6 million.
    • On February 27, 2012, completed the refinancing of its first mortgage with Alberta Treasury Branches ("ATB"), secured by property in Okotoks, Alberta. The mortgage has been increased to $7.1 million and the mortgage term has been extended to ten years. The mortgage bears a fixed interest rate of 4.69 per cent, and is amortized over a 24-year period.
    • On March 20, 2012, entered into a first mortgage with First National Financial LP in the amount of $8.5 million secured by 19 properties located in New Brunswick and Nova Scotia. The mortgage has a term of five years, is amortized over a 25-year period, and bears an interest rate of 4.95 per cent. The proceeds were used to pay down a portion of the IPO mortgage (referenced above).
    • On April 5, 2012, completed an amendment to its Firm Capital first and second mortgages ("Firm Capital Loan"), increasing the amount available under the loan by $5 million. The additional $5 million may be drawn in $1 million increments to a maximum loan amount of $38 million. If fully drawn, the weighted average interest rate of the Firm Capital Loan increases to 7.1 per cent, from 7.0 per cent, up to March 7, 2013, and to 7.38 per cent, from 7.25 per cent, for the last six month period of the loan's thirty month term ending September 7, 2013. A standby fee of 0.5 per cent is payable on any undrawn portion of the increased $38 million loan. The Firm Capital Loan remains open for repayment at any time up to its maturity date of September 7, 2013.
  • At March 31, 2012, Scott's REIT had $4.4 million of cash and cash equivalents compared to $3.3 million as at December 31, 2011. As of today's date, Scott's REIT has approximately $8.2 million of liquidity, including the $5 million undrawn component of the Ontario Firm Capital Loan.

"Scott's REIT continues to focus on two critical objectives this year; firstly, to lease the remainder of its vacant properties formerly leased by Priszm as KFC restaurants, which the REIT is near achieving as committed leasing has driven occupancy back to historical levels above 97 per cent; and secondly, to refinance debt maturing over the next twelve months with longer-term, lower-cost capital," said Teresa Neto, Chief Financial Officer of the REIT. "We are confident that these two objectives will be achieved once Priszm completes the sales of its remaining KFC restaurants in Alberta, Manitoba and Quebec."

Re-leasing Update

During the first quarter of 2012 and year-to-date, Scott's REIT completed twenty new leases for sites disclaimed and previously leased by Priszm as KFC restaurants, including one in British Columbia, two sites in Manitoba, nine sites in Ontario, six in Quebec and two in Nova Scotia. Eleven sites (1 British Columbia, 2 Manitoba, and 8 Ontario) have been leased to Dixie Lee Chicken, each for a 10-year term. The remaining nine sites have been leased to various tenants including Starbucks, Subway, regional Quebec chicken QSR operators and local restaurants. Subsequent to the quarter-end, effective April 19, 2012 Priszm's receiver disclaimed one additional lease in Nova Scotia increasing the total number of disclaimed leases to 44, and the REIT leased one additional site in New Brunswick. Currently, 34 of 44 disclaimed sites have been re-leased representing approximately 77 per cent of total GLA disclaimed.

Also in the first quarter of 2012, the REIT extended six leases in New Brunswick with FMI Atlantic Inc. operating as KFC restaurants, extending the terms by five years to now expire in 2023.

"We anticipate that the remaining ten vacant properties formerly leased by Priszm will be either re-leased or sold within the next six to twelve months," said Kevin Salsberg, Chief Operating Officer of Scott's REIT. "The majority of the re-leased sites will become rent-producing during the second and third quarter of this year, thus stabilizing net operating income going into 2013."

Financial Highlights

The following selected financial information, has been derived from and should be read in conjunction with the unaudited consolidated interim financial statements of Scott's REIT for the three months ended March 31, 2012 and 2011, and the notes thereto included in Scott's REIT's quarterly filings at www.sedar.com.

   
(in thousands of dollars, except Unit and per Unit amounts) Three-month period ended      
March 31,
Financial Information 2012 2011
Revenue $6,395 $5,793
Net operating income (1)                    5,216                  4,860
Net income (loss) (2)                   2,454                   5,236
FFO(3)                       947                   1,673
FFO per Unit(4)                    0.102                   0.181
FFO per Unit - Fully Diluted(4)                    0.102                   0.176
FFO, Adjusted (5)                       947                   1,673
FFO per Unit, Adjusted                    0.102                   0.181
FFO per Unit, Adjusted  - Fully Diluted                    0.102                   0.176
AFFO(6)                    1,395                   1,766
AFFO per Unit (7)                    0.151                   0.191
AFFO per Unit  - Fully Diluted (7)                    0.151                   0.184
AFFO, Adjusted (8)                    1,414                   1,766
AFFO per Unit, Adjusted                     0.153                   0.191
AFFO per Unit, Adjusted  - Fully Diluted                    0.153                   0.184
Total Units (9)            9,249,607           9,236,945
Weighted Average Number of Units (10)            9,249,607           9,236,945
Weighted Average Number of Units - Fully Diluted - for FFO(10)           9,249,607         11,724,507
Weighted Average Number of Units - Fully Diluted - for AFFO(10)            9,249,607         13,629,269
Total distributions declared to Unitholders (11)                 1,966                1,962
Total distributions to Unitholders, cash basis(12)                    1,966                   1,962
Total distributions per Unit                   0.213                   0.213
Payout ratio(13) 140.9% 111.1%
Adjusted payout ratio (14) 139.0% 111.1%
   
(in thousands of dollars, except Unit and per Unit amounts) Three-month period ended
March 31,
Financial Metrics 2012 2011
Total assets as at period end $302,330 $264,292
Debt, excluding convertible debentures as at period end (15)                162,137               129,474
Debt to gross book value (16) 53.63% 48.99%
Interest coverage ratio (17)                      1.47                     1.73
Weighted average mortgage contract interest rate 5.35% 5.44%
     
 
  Three month period ended
March 31,
Operational Information 2012 2011
Portfolio Occupancy 93.28% 98.84%
Gross Leasable Area            1,103,156               955,537
Number of Properties                       229                      220
Notes:
(1)      A non-IFRS measurement, calculated by the REIT as rental revenue (net rents, property tax and operating cost recoveries, as well as other miscellaneous income from tenants) less operating expenses from rental properties and property management fees.
(2)      Refer to this MD&A for a discussion and analysis of the first quarter results compared to the corresponding periods in the previous year.
(3)      A non-IFRS measure for which a reconciliation to net income can be found in this MD&A in the discussion under "Funds from Operations ("FFO") and Adjusted Funds From Operations ("AFFO")".
(4)      FFO per Unit is calculated using the weighted average number of Units outstanding including the Class B Exchangeable Units of Scott's LP while they were outstanding for the period.
(5)      FFO is adjusted for the transaction costs incurred on the issuance of convertible debentures if applicable.
(6)      A non-IFRS measure for which a reconciliation to net income can be found in this MD&A in the discussion under "Funds From Operations and Adjusted Funds from Operations".
(7)      AFFO per Unit is calculated using the weighted average number of Units outstanding including the Class B Exchangeable Units of Scott's LP while they were outstanding for the period.
(8)      AFFO is adjusted for the legal expenses related to the claim on proceeds from Priszm (see "2012 - First Quarter Highlights - Priszm").
(9)      Calculated using the number of Units outstanding including the Class B Exchangeable Units of Scott's LP while they were outstanding during the period.
(10)      For the first quarter 2011, fully diluted units assume the conversion of the 2009 Convertible Debentures for the FFO per unit calculation, and assume the conversion of the 2007 Convertible Debentures and the 2009 Convertible Debentures for the AFFO per unit calculation. For the first quarter 2012, the convertible debentures are anti-dilutive.
(11)      Distributions declared include the distributions declared on the Class B Exchangeable Units of Scott's LP while they were outstanding during the period.
(12)      Distributions on a cash basis include the distributions paid on the Class B Exchangeable Units of Scott's LP while they were outstanding during the period.
(13)      A non-IFRS measure calculated by dividing distributions paid to Unitholders, including the Class B Exchangeable Units of Scott's LP while they were outstanding during the period, by AFFO as defined in this MD&A.
(14)      A non-IFRS measure calculated by dividing distributions paid to Unitholders, including the Class B Exchangeable Units of Scott's LP while they were outstanding during the period by AFFO, adjusted, as defined in this MD&A.
(15)      Debt is defined as mortgages payable, term debt and land lease liability.
(16)      A non-IFRS measurement defined in the REIT's Declaration of Trust.
(17)      Interest coverage ratio is calculated as IFRS net income, plus interest expense (including the distribution on the Class B Exchangeable Units and deferred financing amortization expense), plus transaction costs incurred on the issuance of convertible debentures, plus amortization, and adjusted for unrealized gains/losses on financial instruments and investment properties measured at fair value, divided by the total interest expense (excluding the distribution on the Class B Exchangeable Units of Scott's LP and the deferred financing amortization expense).

Non-IFRS Measures

Funds From Operations ("FFO") and FFO, Adjusted
FFO is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. FFO is presented in this MD&A because management of Scott's REIT believes this non-IFRS measure is a relevant measure of Scott's REIT operating performance. Scott's REIT calculates FFO according to the industry standard definition stated in the REALpac Whitepaper on FFO dated June 2010. FFO as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable. FFO in the MD&A represents net income of Scott's REIT, plus depreciation, amortization of intangible assets, amortization expense relating to tenant allowances, interest expense on the Class B Exchangeable Units; and fair value adjustments on investment properties, convertible debentures and the Class B Exchangeable Units. FFO, Adjusted represents FFO, as computed by Scott's REIT, less transaction costs expensed relating to the issuance of convertible debentures.

Adjusted Funds From Operations ("AFFO") and AFFO, Adjusted
AFFO is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. AFFO is presented in this MD&A because management of Scott's REIT believes this non-IFRS measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash returns to Unitholders. AFFO as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable. AFFO in the MD&A represents net income of Scott's REIT, plus depreciation, amortization of intangible assets, amortization expense relating to tenant allowances, amortization of deferred financing fees, stock based compensation, interest expense on the Class B Exchangeable Units, and acquisition write-offs, less, the straight-line rent revenue accrual, and fair value adjustments on investment properties, convertible debentures and the Class B Exchangeable Units. The amount of distributions paid in a period relative to the AFFO generated in the same period is referred to as the "payout ratio". AFFO, Adjusted represents AFFO, as computed by Scott's REIT, less legal costs expensed relating to the REIT's claim on Priszm's sales proceeds.

Net Operating Income ("NOI")
NOI is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. NOI is presented in this MD&A because management of Scott's REIT believes that this non-IFRS measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash to Unitholders. NOI as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable. NOI computed by Scott's REIT represents total rental revenue less property operating expenses.

Forward-Looking Statements

This MD&A contains certain information or statements that may constitute forward-looking information within the meaning of securities laws, which reflect the current view of Scott's REIT with respect to the REIT's objectives, plans, goals, strategies, future growth, results of financial performance, financial and operating performance and business prospectus and opportunities . In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. In particular, forward-looking information included in this MD&A includes, but is not limited to, statements with respect to the REIT's ability to lease vacant property units, collect minimum rents, diversify its tenant base, undertake land intensification projects, refinance loans and mortgages at their maturity, complete accretive acquisitions, and maintain or grow monthly cash distribution levels, and also with respect to the timing of such events. Forward-looking information should not be read as guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved. All of the statements and information in this MD&A containing forward-looking information are qualified by these cautionary statements.

Forward-looking statements are based on information available at the time they are made, underlying estimates and assumptions made by management and management's good faith belief with respect to future events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally which could cause actual results to differ materially from what is currently expected. Such risks and uncertainties include, but are not limited to the REIT's reliance on Priszm Limited Partnership "Priszm", the REIT's second largest tenant, risks associated with investment in real property, competition, reliance on key personnel, financing and refinancing risks, distributions, environmental matters, tenant risks, risks related to current economic conditions and other risk factors more particularly described in the REIT's most recent Annual Information Form available on SEDAR at www.sedar.com. Additional risks and uncertainties not presently known to the REIT or that the REIT currently believes to be less significant may also adversely affect the REIT.

Scott's REIT cautions readers that the list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by the REIT will be realized or, even if substantially realized, that they will have the expected consequences to, or effect on, the REIT. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. The REIT disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required under applicable securities laws.

About Scott's Real Estate Investment Trust
Scott's REIT (TSX: SRQ.UN) is Canada's premier small-box retail property owner with 229 properties in eight provinces across Canada. Scott's REIT's properties are well-located and geographically diverse across Canada with the majority of all properties containing long-term quadruple net leases. To find out more about Scott's Real Estate Investment Trust (TSX: SRQ.UN), visit our website at www.scottsreit.com.

Teresa Neto
Chief Financial Officer
[email protected]
416-361-9953

For media information, please contact:

Trevor Boudreau
604-564-8209
t[email protected]

Organization Profile

Scott's Real Estate Investment Trust