Scott's REIT reaches goal of doubling its asset base also reports first
quarter 2010 results
Announces an acquisition of a newly developed property in Canada's second fastest growing community and closes its milestone sale leaseback agreement with Shoppers Drug Mart
TORONTO, May 12 /CNW/ - Scott's Real Estate Investment Trust (TSX: SRQ.UN) ("Scott's REIT" or the "REIT"), Canada's leading owner of small-box retail properties, today reported its financial results for the first quarter ended March 31, 2010. The REIT also announced its 54th consecutive monthly cash distribution for the month of May 2010.
Scott's REIT also announced the acquisition of a new 24,500 square foot property in Okotoks Alberta from JBM Properties Inc. Okotoks is located less than 18 kilometres south of Calgary and is the second fastest growing community in Canada. The property has eight tenants in total, including major national brands such as Western Financial Bank, Tim Hortons, KFC/Taco Bell and Subway, in addition to local tenants. The REIT financed the acquisition with cash on hand.
First Quarter 2010 Financial Highlights
Three months ended March 31, 2010 vs. Three months ended March 31, 2009
- Revenue increased by 3.6 per cent to $5 million
- Net operating income* increased by 3.4 per cent to $4.1 million
- Payout ratio* increased to 117.6 per cent from 90.3 per cent
- Completed a $15 million equity offering of 1,974,000 Class A Units to
the public
- Closed a sale leaseback transaction for 12 properties tenanted by
Shoppers Drug Mart
*See section entitled Non-GAAP measures.
"Following quickly on the heels of our acquisition of 12 Shoppers Drug Mart retail locations, we recently acquired a large property in Okotoks," said Evelyn Sutherland, Chief Financial Officer of Scott's REIT. "We continue to make progress diversifying our revenue base and mitigating our risk profile. We believe that Scott's REIT offers a good opportunity for investors who are looking for an investment that offers a consistent monthly income as well as growth potential."
Regarding the REIT's $65 million mortgage that will mature in October 2010, Ms. Sutherland said, "We have commenced the refinancing process and have received indicative terms and discussion sheets for an amount well in excess of our $65 million mortgage. We believe that the significant value of the underlying portfolio relative to the loan value is very attractive. While there is a possibility that we may seek an extension of our existing facility, we are looking at other lenders and also exploring other options.
Financial Performance
Scott's REIT reported revenue of $5 million for the three-month period ended March 31, 2010, an increase of 3.6 per cent over the first quarter of 2009. The primary reason for the increase in the quarter was a result of the acquisition of 12 properties leased to Shoppers Drug Mart which closed in early March 2010. Operating expenses for the three-month period were $0.84 million, an increase of $36,000 over the first quarter of 2009. The increase in property expense was a result of timing differences from property carrying costs as a result of one time invoices to tenants which are fully collectible by Scott's REIT.
The REIT's net operating income for the first quarter of 2010 was $4.1 million, an increase of 3.4 per cent over the prior year quarter.
During the first three months of 2010, distributable income amounted to $1.5 million, a decrease of 15 per cent over the first quarter of 2009. Although there was a decline in distributable income, and an increase in the payout ratio, this was caused by the recent equity offering and the timing of closing the acquisition of 12 properties tenanted by Shoppers Drug Mart. Scott's REIT anticipates that this is temporary, and expects that as Scott's collects the rental revenue from the Shoppers Drug Mart property acquisition and it deploys its cash from the equity raised in February 2010 on income producing initiatives, the payout ratio will decline and the distributable income will increase over the next twelve months.
Equity Offering
On February 24, 2010, Scott's REIT closed an offering of 1,974,000 Units at a price of $7.60 per Unit with approximate net proceeds to the REIT of $14 million. Of the proceeds, an estimated $7 million will be used for land intensification projects, approximately $5 million will be used to fund future acquisitions and the balance will be used for working capital purposes.
Property Acquisition from Shoppers Drug Mart
On March 5, 2010, the REIT closed its previously announced sale leaseback transaction with Shoppers Drug Mart for 12 properties located in Alberta, Manitoba, Ontario, Quebec and Nova Scotia. The aggregate purchase price for the properties was $30.2 million. The average remaining lease term is 11.5 years and all leases have rental escalations of seven per cent every five years. The REIT financed the acquisition with a one year secured bridge loan facility for $20 million on favourable terms and the balance with cash generated from the convertible debenture offering completed in the fourth quarter of 2009. This bridge loan was done to maximize the benefits to the Unitholders of the REIT as it pursues various financing alternatives in the capital markets.
Upon close of this acquisition, Scott's REIT has successfully diversified its tenant base by increasing the gross leasable area occupied by national pharmacies to 26 per cent from 12 per cent pre-acquisition.
Subsequent Events
On May 10, 2010, the REIT closed an acquisition for a 24,543 square foot property in Okotoks Alberta for a purchase price of $10.2 million plus closing costs. The property was acquired from JBM Properties Inc., a related party. The REIT financed the acquisition with cash on hand. The REIT has a first right of refusal on any properties that are available for sale from JBM Properties. The Trustees of Scott's REIT assessed the acquisition independent of management. As part of the analysis on the offer, the REIT obtained an independent third party appraisal for the property. In addition, the REIT had evaluated several other bids from third parties which included bids that were higher than the purchase price paid. The average remaining lease term on the tenants is 11.5 years. There are eight tenants in total including, Western Financial Bank, Tim Horton's, KFC/Taco Bell, Subway and local tenants.
Okotoks is less than 18 km south of Calgary, Alberta. The town's population has grown by 47 per cent in the last five years, making it the second fastest growing community in Canada. The property is located on the main thoroughfare directly across from a Wal-Mart, Canadian Tire and Sobey's anchored power centre.
Liquidity
At March 31, 2010, Scott's REIT had $19 million of cash and short-term investments. Approximately $12 million of REIT's cash balance was used to close the acquisition of the properties from Shoppers Drug Mart in March 2010 with the balance to be used for, among other things, general corporate purposes.
In the first quarter, distributable income was lower than distributions paid. Although there was a decline in distributable income, the REIT anticipates that this is temporary due to the timing of the closing of the acquisition of 12 properties from Shoppers Drug Mart and the timing on the deployment of cash after the raise of equity in February 2010. The acquisition of the additional revenue producing asset in Okotoks should offset some of this deficiency. In addition, the REIT will also be deploying capital on land intensification initiatives over the next six to 12 months, which is expected to have a positive effect on distributable income.
Monthly Distribution for May 2010
Scott's REIT announced a cash distribution for the month of May 2010 of $0.0708 per unit payable on June 15, 2010 to Unitholders of record on May 31, 2010.
Scott's REIT also announced today a monthly cash distribution of $0.0708 per unit to Unitholders of record of Class B Limited Partnership Units in Scott's Real Estate LP on May 31, 2010. This distribution marks the 54th consecutive cash distribution declared since Scott's REIT began operations on October 6, 2005.
Non-GAAP Measures
Distributable income
Distributable Income is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. Distributable Income is presented in this MD&A because management of Scott's REIT believes this non-GAAP measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash returns to Unitholders. Distributable Income as computed by Scott's REIT may differ from similar computations as reported by other similar organizations and, accordingly, may not be comparable. Distributable Income in this MD&A represents income before non-controlling interest of Scott's REIT on a consolidated basis as determined in accordance with GAAP, plus amortization expense, income taxes, stock compensation, less the straight-line revenue accrual, deferred financing costs, deferred amortization costs, below market rents and interest accretion.
Net Operating Income ("NOI")
NOI is not a measure recognized under GAAP and does not have a standardized meaning prescribed by GAAP. NOI is presented in this MD&A because the management of Scott's REIT believes that this non-GAAP 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.
About Scott's Real Estate Investment Trust
Scott's REIT (TSX: SRQ.UN) is Canada's premier small-box retail property owner with 219 properties in seven 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. The REIT has approximately 75.6 per cent interest in Scott's Real Estate LP. To find out more about Scott's Real Estate Investment Trust (TSX: SRQ.UN), visit our website at http://www.scottsreit.com.
Forward-Looking Statements
This document contains certain information that may constitute forward-looking information within the meaning of securities laws. 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. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding future growth opportunities and potential and expected cash distributions or cash distribution levels. In particular, information regarding the REIT's monthly cash distributions and information relating to the impact of the REIT's recent acquisitions on annual revenues and interest expense is forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, occupancy rates, property expense and capital expenditures. While the REIT considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what is currently expected. Such factors include risks relating to the REIT's reliance on Priszm LP, the REIT's largest tenant, risks associated with investment in real property, competition, reliance on key personnel, financing and refinancing risks, environmental matters, tenant risks, risks related to current economic conditions and other risk factors more particularly described in the REIT's Annual Information Form for the year ended December 31, 2009. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Other than as required by applicable Canadian securities law, the REIT does not undertake to update this information at any particular time. Additional information identifying risks and uncertainties is contained in Scott's REIT filings with the Canadian securities regulators, available at www.sedar.com.
The following selected financial information, with the exception of the Reconciliation of Distributable Income, has been derived from and should be read in conjunction with the historical audited financial statements of Scott's REIT for the quarter ended March 31, 2010 and 2009, and the notes thereto included in Scott's REIT's annual filings at www.sedar.com.
RECONCILIATION OF DISTRIBUTABLE INCOME TO CASH PROVIDED BY OPERATING
ACTIVITIES (UNAUDITED)
(in thousands of dollars except per Unit amounts)
The following table outlines the reconciliation of distributable income
to cash provided by operating activities:
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Three months ended
March 31,
-------------------------------------------------------------------------
2010 2009
-------------------------------------------------------------------------
Cash provided by operating activities $1,537 $1,594
Net change in non-cash working capital (85) 116
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Distributable income 1,452 1,710
Distributions declared 1,819 1,541
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Excess/(deficiency) (367) 169
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Distributable income per Unit 0.18 0.24
Distributions per Unit 0.21 0.21
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Distributable income Payout Ratio(1) 117.6% 90.3%
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Note
(1) Distributable income payout ratio is calculated by taking
distributable income divided by the weighted average number of units
outstanding assuming full conversion of the class B exchangeable
units during the relevant period end.
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
As of March 31, 2010 and 2009
Assets 2010 2009
$ $
Income-producing properties 197,986 167,525
Intangible assets 9,789 7,743
Cash and cash equivalents 19,027 16,004
Accounts receivable 281 247
Prepaid expenses and other assets 905 795
Due from related companies 46 101
Straight-line rent receivable 2,495 2,446
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230,529 194,861
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Liabilities and Unitholders' Equity
Mortgages payable 131,216 111,600
Convertible debentures 37,241 37,074
Accounts payable and accrued liabilities 2,317 1,284
Due to related companies 51 117
Distributions payable to unitholders 653 513
Other liabilities 3,546 151
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175,024 150,739
------------------------------
Class B Exchangeable Units 13,626 14,334
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Unitholders' Equity
Contributed surplus 2,588 2,588
Class A Units of Scott's REIT 58,685 44,676
Convertible debentures 1,265 1,265
Cumulative earnings (losses) (761) (183)
Cumulative distributions declared on
Class A Units (19,898) (18,558)
------------------------------
41,879 29,788
------------------------------
230,529 194,861
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------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS AND CUMULATIVE EARNINGS
(in thousands of dollars, except per Unit amounts)
For the three months ended March 31, 2010 and 2009
2010 2009
$ $
Revenue
Rental revenue 4,932 4,735
Amortization of (above) below market rentals (6) 19
Straight-line rent 49 48
------------------------------
4,975 4,802
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Expenses
Depreciation and amortization 2,049 2,066
Operating expenses 842 806
Interest expense, net 2,480 1,977
General and administrative 412 380
------------------------------
5,783 5,229
------------------------------
Loss before non-controlling interest (808) (427)
Non-controlling interest of Class B
Exchangeable Units (203) (133)
------------------------------
Net loss for the year (578) (294)
Cumulative earnings - Beginning of year (183) 1,277
------------------------------
Cumulative earnings (losses) - End of year (761) 983
------------------------------
------------------------------
Basic and diluted loss per Unit (0.100) (0.059)
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Class A Units outstanding 6,967,964 4,993,964
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Class B Exchangeable Units outstanding 2,254,909 2,254,909
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands of dollars)
For the years ended March 31, 2010 and 2009
2010 2009
$ $
Net loss for the year (578) (294)
Other comprehensive income - -
------------------------------
Comprehensive loss (578) (294)
------------------------------
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
For the years ended March 31, 2010 and 2009
2010 2009
$ $
Cash provided by (used in)
Operating activities
Net loss for the year (578) (294)
Add (deduct)
Non-controlling interest of Class B
Exchangeable units (230) (133)
Amortization of income-producing properties 1,804 1,728
Amortization of intangible assets and other
liabilities 251 319
Amortization of deferred financing charges 184 118
Amortization of deferred costs 11 6
Interest accretion 59 14
Straight-line revenue accrual (49) (48)
------------------------------
Change in other non-cash operating items
Accounts receivable (34) 154
Prepaid expenses and other assets (311) (248)
Accounts payable and accrued liabilities 441 (120)
Due to/ from related companies (11) 98
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1,537 1,594
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Investing activities
Tenant inducements and leasing commissions (60) -
Construction-in-progress (29) -
Acquisitions-in-progress - 1
Acquisitions of income producing properties (30,372) 2
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(30,461) 3
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Financing activities
Class A units issued 15,002 -
Proceeds from mortgage payable 20,000 -
Issuance Costs (917) -
Buyback of Class A units - (300)
Demand loan - 1,300
Mortgage financing fees (214) (4)
Principal repayment on mortgages payable (246) (184)
Distributions Paid (1,678) (1,546)
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31,947 (734)
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Increase (decrease) in cash and cash
equivalents during the year 3,023 863
Cash and cash equivalents - Beginning of year 16,004 102
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Cash and cash equivalents - End of year 19,027 965
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Cash and cash equivalents consist of
Cash 4,693 565
Cash equivalents 14,334 400
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19,027 965
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Supplemental Disclosure
Interest paid 1,459 1,493
Accrued costs relating to acquisition
of income producing properties 516 -
Accrued costs relating to issuance of Units 76 -
For further information: For investor information, please contact: Trish Moran, (416) 624-5133, [email protected]; For media information, please contact: Wilcox Group, (416) 203-6666, [email protected]
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