WINNIPEG, March 13, 2017 /CNW/ - Lanesborough Real
Estate Investment Trust ("LREIT") (TSX: LRT.UN) today reported its
operating results for the year ended December 31, 2016. The following comments in
regard to the financial position and operating results of LREIT
should be read in conjunction with Management's Discussion &
Analysis and the financial statements for the year ended
December 31, 2016, which may be
obtained from the LREIT website at www.lreit.com or the SEDAR
website at www.sedar.com.
This past year proved to be very challenging for both LREIT and
its primary market, Fort McMurray. In May 2016, a devastating wildfire ripped through
the City of Fort McMurray, adding
to existing challenges facing the community, which have resulted
from the prolonged downturn in the Canadian oil sands
sector.
Given the strong headwinds that LREIT continues to confront,
management has maintained its focus on two primary initiatives:
debt restructuring and the divestiture program. In addition, LREIT
has been responding to the operational repercussions of the
Fort McMurray wildfire, initially
focussing on the clean‑up and restoration of all its Fort McMurray properties and, subsequently, on
the renovation and conversion of select apartment units into fully
furnished suites in order to improve the marketability of LREIT's
properties and better meet tenant needs in the post‑fire rental
market environment.
As evidenced by the discussion of operating results that
follows, the entry of homeowners displaced by the wildfire into the
rental market and commencement of the post‑fire rebuild have
resulted in increased economic activity and increased demand for
rental accommodations in Fort
McMurray. While these factors alone are unlikely to
alleviate the cash deficiency facing LREIT, management anticipates
that they will, in the short term, serve to mitigate some of the
strain caused by the sustained low‑level of oil sands development
activity.
Operating Results
LREIT completed 2016 with negative funds from operations ("FFO")
of $12.5 million, compared to
negative FFO of $8.4 million in 2015.
The decrease in FFO mainly reflects a decrease in net operating
income ("NOI"), partially offset by a decrease in interest expense.
NOI decreased primarily as a result of the divestiture activities,
as well as the decreased operating performance of the Fort McMurray property portfolio. Consistent
with the divestiture and debt restructuring initiatives undertaken
during 2016, the decrease in interest expense was primarily due to
the decrease in the total mortgage loan debt.
Within the context of the Fort
McMurray property portfolio, the entry of homeowners
displaced by the wildfire into the rental market and the
commencement of the post‑fire rebuild during the third quarter of
2016 have resulted in increased economic activity and demand for
rental accommodations in the region.
The average occupancy level of the Fort McMurray properties increased to 76% and
72% during the third and fourth quarters of 2016, respectively,
compared to 66% and 54% during the third and fourth quarters of
2015. Notwithstanding the improvement in the average occupancy
level during the second half of 2016, overall, the average
occupancy level of the Fort
McMurray properties decreased from 67% to 65% and the
average monthly rental rate of the Fort
McMurray properties decreased by $419 or 20% during 2016, compared to 2015.
LREIT completed 2016 with a loss and comprehensive loss of
$1.7 million, compared to a loss and
comprehensive loss of $98.8 million
in 2015. The decrease in the loss and comprehensive loss was
primarily due to a favourable variance in the fair value
adjustments of the investment properties. Specifically, the
favourable variance is the result of having experienced significant
reductions in the carrying value of the Fort McMurray properties during 2015, due to
the impact of the sustained low‑level of oil sands development
activity, followed by increases in the carrying value of the
Fort McMurray properties during
2016, as revenue expectations were adjusted to reflect the
improvement in rental market conditions anticipated during the
post‑wildfire rebuild effort.
Liquidity and Capital Resources
During 2016, cash used in operating activities amounted to
$3.3 million and the cash shortfall,
after accounting for regular mortgage principal repayments, capital
expenditures, and transaction costs, was $10.6 million, compared to cash used in operating
activities of $6.5 million and a cash
shortfall of $17.9 million in
2015. The cash shortfall was primarily funded by advances
under the revolving loan facility from 2668921 Manitoba Ltd.,
partially offset by the net proceeds from the sales of Beck Court,
Willowdale Gardens, and Elgin
Lodge.
Restructuring LREIT's mortgage debt was a key priority during
2016. As previously reported, during the first quarter of 2016,
LREIT defaulted on the debt service requirements of 12 mortgage
loans, with an aggregate principal balance of $194.0 million, associated with all 13 properties
in the Fort McMurray portfolio.
Consequently, management pursued debt restructuring arrangements
with the affected lenders and successfully obtained renewal
agreements and a forbearance agreement for five mortgage loans in
the aggregate principal amount of $105.1
million, inclusive of terms which allow for the partial
deferral of interest. As of December
31, 2016, LREIT was current with respect to all debt service
payments; however, the lender of five mortgage loans with an
aggregate principal balance of $65.1
million, associated with eight of the properties in the
Fort McMurray portfolio, maintains
that there are servicing fees outstanding which were triggered by
the initial mortgage loan defaults and that until such fees are
paid the loans will continue to remain in default. As of the date
of this report, LREIT continues to meet the debt service
obligations of the five affected mortgage loans and the lender has
not taken any further actions to enforce the security of the
loans.
LREIT continued to make progress with respect to the divestiture
program during 2016, completing the sales of Beck Court, Willowdale
Gardens, Elgin Lodge, and one
condominium unit under the Lakewood Townhomes condominium sales
program. The combined net cash proceeds from the sales, after
repayment or assumption by the purchaser of the existing mortgage
loans, selling costs, and standard closing adjustments, amounted to
$13.7 million and were used to repay
a $5.4 million second mortgage loan,
which was secured with a second charge over Willowdale Gardens, and
to pay down the revolving loan from 2668921 Manitoba Ltd. by
$8.3 million.
Outlook
Having already experienced the first signs of improvement in the
Fort McMurray rental market, and
in view of recent pipeline approvals, it is anticipated that the
rental market conditions in Fort
McMurray will continue to gradually improve in 2017,
resulting in a positive impact on operating results. According to
the Government of Alberta Board, GDP
growth is forecasted at 2.3% in 2017, compared to the negative GDP
growth experienced during the previous two years. Notwithstanding
the anticipated improvements, the extent and duration of any
positive impact is subject to various risks and uncertainties and
the longer‑term prospects for the region will continue to be
closely related to oil sands development activity.
Effective January 1, 2017, Mr.
Gino Romagnoli assumed the position
of Chief Executive Officer in the place of Mr. Arni Thorsteinson. Mr. Romagnoli has served as a
senior officer of LREIT since inception in 2002. Mr. Thorsteinson
will continue to serve LREIT as vice-chair and trustee, providing
valuable guidance and direction as LREIT continues to focus on its
primary initiatives of debt restructuring, the divestiture program,
and the post‑fire operational initiatives.
The trustees and management wish to thank Mr. Thorsteinson for
the significant and invaluable contributions he has made to LREIT
over the past fourteen years. We look forward to his continued
support and guidance as he continues to serve vice‑chair and
trustee of LREIT.
FINANCIAL SUMMARY
|
December
31
|
|
2016
|
|
2015
|
|
2014
|
STATEMENT OF
FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
Total
assets
|
$
|
245,402,329
|
|
$
|
278,524,804
|
|
$
|
442,773,600
|
|
|
|
|
|
|
|
|
|
|
|
Total long‑term
financial liabilities (1)
|
$
|
243,501,308
|
|
$
|
279,529,237
|
|
$
|
327,980,499
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
interest rate
|
|
|
|
|
|
|
|
|
|
‑ Mortgage loan
debt
|
5.8%
|
|
6.0%
|
|
5.7%
|
|
‑ Total
debt
|
5.6%
|
|
6.4%
|
|
6.3%
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
2016
|
|
2015
|
|
2014
|
KEY FINANCIAL
PERFORMANCE INDICATORS
|
|
|
|
|
|
|
|
|
Operating
Results
|
|
|
|
|
|
|
|
|
|
Rentals from
investment properties
|
$
|
18,328,212
|
|
$
|
30,215,224
|
|
$
|
38,291,698
|
|
Net operating
income
|
$
|
7,814,287
|
|
$
|
16,151,866
|
|
$
|
21,775,464
|
|
Loss before
discontinued operations
|
$
|
(1,264,483)
|
|
$
|
(96,394,897)
|
|
$
|
(20,878,092)
|
|
Loss and
comprehensive loss
|
$
|
(1,730,124)
|
|
$
|
(98,765,643)
|
|
$
|
(22,238,581)
|
|
Funds from
Operations
|
$
|
(12,463,056)
|
|
$
|
(8,426,367)
|
|
$
|
(4,047,931)
|
|
|
|
|
|
|
|
|
|
Cash
Flows
|
|
|
|
|
|
|
|
|
|
Cash used in
operating activities
|
$
|
(3,254,380)
|
|
$
|
(6,492,224)
|
|
$
|
(806,632)
|
|
Adjusted Funds from
Operations
|
$
|
(14,090,280)
|
|
$
|
(8,728,029)
|
|
$
|
(5,335,938)
|
(1)
|
Long‑term financial
liabilities consist of mortgage loans, debentures, defeased
liability, revolving loan from 2668921 Manitoba Ltd., an interest
rate swap liability and mortgage bonds. The mortgage bonds are
included at face value.
|
ANALYSIS OF OPERATING RESULTS
Analysis of Income
(Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
Increase
(Decrease)
in Income
|
|
2016
|
|
2015
|
|
Amount
|
|
%
|
Rentals from
investment properties
|
$
|
18,328,212
|
|
$
|
30,215,224
|
|
$
|
(11,887,012)
|
|
(39)%
|
Property operating
costs
|
|
10,513,925
|
|
|
14,063,358
|
|
|
3,549,433
|
|
25%
|
Net operating
income
|
|
7,814,287
|
|
|
16,151,866
|
|
|
(8,337,579)
|
|
(52)%
|
Interest
income
|
|
149,576
|
|
|
86,998
|
|
|
62,578
|
|
72%
|
Interest
expense
|
|
(19,076,586)
|
|
|
(23,272,205)
|
|
|
4,195,619
|
|
18%
|
Trust
expense
|
|
(1,883,331)
|
|
|
(1,816,996)
|
|
|
(66,335)
|
|
(4)%
|
Loss before the
following
|
|
(12,996,054)
|
|
|
(8,850,337)
|
|
|
(4,145,717)
|
|
(47)%
|
Gain (loss) on sale
of investment property
|
|
86,167
|
|
|
(100,711)
|
|
|
186,878
|
|
n/a
|
Fair value
adjustments ‑ Investment properties
|
|
11,645,404
|
|
|
(87,443,849)
|
|
|
99,089,253
|
|
n/a
|
Loss before
discontinued operations
|
|
(1,264,483)
|
|
|
(96,394,897)
|
|
|
95,130,414
|
|
99%
|
Loss from
discontinued operations
|
|
(465,641)
|
|
|
(2,370,746)
|
|
|
1,905,105
|
|
80%
|
Loss and
comprehensive loss
|
$
|
(1,730,124)
|
|
$
|
(98,765,643)
|
|
$
|
97,035,519
|
|
98%
|
LREIT completed 2016 with a loss and comprehensive loss of
$1.7 million, compared to a loss and
comprehensive loss of $98.8 million
during 2015. The decrease in the loss mainly reflects a favourable
variance in the fair value adjustments of the investment
properties, as well as a reduction in interest expense, partially
offset by a decrease in the net operating income.
The favourable variance in fair value adjustments mainly
reflects the net effect of having experienced significant
reductions in the carrying value of the Fort McMurray properties during 2015 and a
subsequent increase in the carrying value of the Fort McMurray properties during 2016. As
previously reported, the carrying value of the Fort McMurray properties was reduced in 2015
to reflect an anticipated decline in operating results and the
increased uncertainty as to the extent and/or timing of a recovery
in the Fort McMurray rental
market, resulting from the prolonged low‑level of oil sands
development activity. During the second quarter of 2016, the
carrying value of the Fort
McMurray properties increased as revenue expectations were
revised to account for the anticipated improvement in rental market
conditions associated with the post‑wildfire rebuild and the
migration of displaced homeowners into the rental market.
The decrease in interest expense is mainly due to a reduction in
mortgage loan interest as a result of the sale of Colony Square in
November, 2015 and the sales of Beck Court and Willowdale Gardens
in May, 2016, as well as lump‑sum payments made on mortgage loans
during the third and fourth quarters of 2015 and the full repayment
of two second mortgage loans during 2016. Also contributing to the
decrease in interest expense were interest rate reductions for both
the revolving loan from 2668921 Manitoba Ltd. and the Series G
debentures.
The decrease in net operating income mainly reflects the sale of
Colony Square in November 2015 and
the sales of Beck Court and Willowdale Gardens in May, 2016, as
well as a decrease in the net operating income of the Fort McMurray properties.
The decline in the net operating income of the Fort McMurray portfolio is primarily the
result of the sustained low‑level of oil sands development
activity, which continues to exert downward pressure on the general
economic and rental market conditions in Fort McMurray. The
entry of homeowners displaced by the wildfire into the rental
market and the commencement of the post‑fire rebuild are factors
that are currently moderating the downward pressure, as evidenced
by the increase in the average occupancy level from 58% during
Q2-2016 to 76% during Q3-2016 and to 72% during Q4-2016. The extent
and duration of the impact of these moderating factors on future
operating results is uncertain and the long‑term prospects of the
Fort McMurray rental market remain
dependent on the level of future oil‑sands development
activity.
Analysis of Rental
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31
|
|
2016
|
|
2015
|
|
Increase
(Decrease)
|
|
% of Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort McMurray
properties
|
$
|
13,262,742
|
|
$
|
17,052,331
|
|
$
|
(3,789,589)
|
|
(22)%
|
|
72%
|
|
56%
|
Other investment
properties
|
|
1,631,872
|
|
|
1,935,784
|
|
|
(303,912)
|
|
(16)%
|
|
9%
|
|
6%
|
Sub‑total
|
|
14,894,614
|
|
|
18,988,115
|
|
|
(4,093,501)
|
|
(22)%
|
|
81%
|
|
63%
|
Held for sale and/or
sold properties
|
|
3,433,598
|
|
|
11,227,109
|
|
|
(7,793,511)
|
|
(69)%
|
|
19%
|
|
37%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
18,328,212
|
|
$
|
30,215,224
|
|
$
|
(11,887,012)
|
|
(39)%
|
|
100%
|
|
100%
|
Occupancy Level,
by Quarter
|
|
|
2016
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
12 Month
Average
|
Fort McMurray
properties
|
|
52%
|
|
58%
|
|
76%
|
|
72%
|
|
65%
|
Other investment
properties
|
|
72%
|
|
74%
|
|
69%
|
|
69%
|
|
71%
|
Total
|
|
54%
|
|
60%
|
|
75%
|
|
72%
|
|
65%
|
Held for sale and/or
sold properties
|
|
75%
|
|
64%
|
|
86%
|
|
82%
|
|
75%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
12 Month
Average
|
Fort McMurray
properties
|
|
76%
|
|
71%
|
|
66%
|
|
54%
|
|
67%
|
Other investment
properties
|
|
85%
|
|
86%
|
|
83%
|
|
79%
|
|
83%
|
Total
|
|
77%
|
|
73%
|
|
68%
|
|
56%
|
|
69%
|
Held for sale and/or
sold properties
|
|
89%
|
|
88%
|
|
87%
|
|
81%
|
|
87%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Monthly
Rents, by Quarter
|
|
|
2016
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
12 Month
Average
|
Fort McMurray
properties
|
|
$1,699
|
|
$1,599
|
|
$1,700
|
|
$1,669
|
|
$1,667
|
Other investment
properties
|
|
$969
|
|
$960
|
|
$945
|
|
$919
|
|
$948
|
Total
|
|
$1,576
|
|
$1,491
|
|
$1,573
|
|
$1,543
|
|
$1,546
|
Held for sale and/or
sold properties
|
|
$1,783
|
|
$2,036
|
|
$2,546
|
|
$2,581
|
|
$2,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
12 Month
Average
|
Fort McMurray
properties
|
|
$2,158
|
|
$2,127
|
|
$2,079
|
|
$1,980
|
|
$2,086
|
Other investment
properties
|
|
$949
|
|
$967
|
|
$973
|
|
$971
|
|
$965
|
Total
|
|
$1,954
|
|
$1,931
|
|
$1,892
|
|
$1,810
|
|
$1,897
|
Held for sale and/or
sold properties
|
|
$1,239
|
|
$1,220
|
|
$1,223
|
|
$1,219
|
|
$1,224
|
During 2016, total revenue from LREIT's investment properties,
excluding held for sale and/or sold properties, decreased by
$4.1 million, or 22%, as compared to
2015. The decrease in revenue is almost entirely due to the
unfavourable variance in revenue results for the Fort McMurray portfolio.
The revenue results of the Fort
McMurray property portfolio continue to reflect challenging
rental market conditions due to the depressed level of oil sands
development activity in the region, the impact of which was
tempered during the third and fourth quarters of 2016 by the entry
of homeowners displaced by the wildfire into the rental market and
the migration of workers involved in the rebuilding effort.
As a result, the average occupancy level for the Fort McMurray portfolio increased from 66%
during Q3-2015 to 76% during Q3-2016 and increased from 54% during
Q4-2015 to 72% during Q4-2016. Notwithstanding the
improvement in the average occupancy level during the second half
of 2016, overall, the average occupancy level for the Fort McMurray portfolio decreased from 67%
during 2015 to 65% during 2016, and the rental rates of the
Fort McMurray properties continued
to remain at reduced levels compared to 2015. In comparison to
2015, the average monthly rental rate decreased by $419 per suite, or 20%, during 2016. The
reduced rental rate level, together with the uncertainty with
respect to the extent and/or duration of the post‑fire rental
market recovery, are key factors that cast significant doubt as to
the ability of LREIT to sustain operations into the foreseeable
future.
After accounting for the decrease in revenue from held for sale
and/or sold properties of $7.8
million during 2016, the total revenue decreased by
$11.9 million, or 39%, during 2016,
compared to 2015. The decrease in revenue from held for sale and/or
sold properties for 2016 was primarily due to the sale of Colony
Square on November 1, 2015 and the
sales of Beck Court and Willowdale Gardens on May 1, 2016, as well as a decrease in the revenue
of Woodland Park, the Fort
McMurray property, which is classified as
held‑for‑sale.
Property Operating Costs
Analysis of
Property Operating Costs
|
|
Year Ended December
31
|
|
2016
|
|
2015
|
|
Increase
(Decrease)
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Fort McMurray
properties
|
$
|
8,085,890
|
|
$
|
8,090,681
|
|
$
|
(4,791)
|
|
- %
|
Other investment
properties
|
|
1,067,768
|
|
|
1,119,567
|
|
|
(51,799)
|
|
(5)%
|
Sub‑total
|
|
9,153,658
|
|
|
9,210,248
|
|
|
(56,590)
|
|
(1)%
|
Held for sale and/or
sold
properties
|
|
1,360,267
|
|
|
4,853,110
|
|
|
(3,492,843)
|
|
(72)%
|
Total
|
$
|
10,513,925
|
|
$
|
14,063,358
|
|
$
|
(3,549,433)
|
|
(25)%
|
During 2016, property operating costs decreased by $3.5 million, or 25%, as compared to 2015.
The decreases mainly reflect a decrease in the property operating
costs of held for sale/or sold properties, primarily due to the
sale of Colony Square on November 1,
2015 and the sales of Beck Court and Willowdale Gardens on
May 1, 2016.
Excluding the held for sale and/or sold properties, property
operating costs decreased by approximately $57,000, or 1%, during 2016, compared to 2015.
The modest decrease is mainly comprised of decreases in property
taxes, utilities, and management fees, largely offset by an
increase in maintenance costs. The increase in maintenance costs
primarily reflects the cost associated with preparing suites in
Fort McMurray to accommodate the
post‑fire increase in demand for accommodation.
Net Operating Income and Operating Margin
Analysis of Net
Operating Income
|
|
Net Operating
Income
|
|
|
|
|
|
Year Ended December
31
|
|
Increase
(Decrease)
|
|
Percent of
Total
|
|
Operating
Margin
|
|
2016
|
|
2015
|
|
Amount
|
|
%
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort McMurray
properties
|
$
|
5,176,852
|
|
$
|
8,961,650
|
|
$
|
(3,784,798)
|
|
(42)%
|
|
66%
|
|
55%
|
|
39%
|
|
53%
|
Other investment
properties
|
|
564,104
|
|
|
816,217
|
|
|
(252,113)
|
|
(31)%
|
|
7%
|
|
5%
|
|
35%
|
|
42%
|
Sub‑total
|
|
5,740,956
|
|
|
9,777,867
|
|
|
(4,036,911)
|
|
(41)%
|
|
73%
|
|
60%
|
|
39%
|
|
51%
|
Held for sale and/or
sold
properties
|
|
2,073,331
|
|
|
6,373,999
|
|
|
(4,300,668)
|
|
(67)%
|
|
27%
|
|
40%
|
|
60%
|
|
57%
|
Total
|
$
|
7,814,287
|
|
$
|
16,151,866
|
|
$
|
(8,337,579)
|
|
(52)%
|
|
100%
|
|
100%
|
|
43%
|
|
53%
|
During 2016, the net operating income of the investment
properties portfolio, excluding held for sale and/or sold
properties, decreased by $4.0
million, or 41%, compared to 2015. The operating
margin, excluding held for sale and/or sold properties, decreased
from 51% during 2015 to 39% during 2016. The decrease in net
operating income and operating margin, excluding held for sale
and/or sold properties, is primarily due to the decreased revenue
results of the Fort McMurray
property portfolio.
After including held for sale and/or sold properties, the total
net operating income during 2016 decreased by $8.3 million, or 52%, compared to 2015. The
decrease in net operating income from held for sale and/or sold
properties is primarily due to the sale of Colony Square on
November 1, 2015 and the sales of
Beck Court and Willowdale Gardens on May
1, 2016. The decrease in net operating income from
held for sale and/or sold properties was also impacted by a
decrease in the revenue of Woodland Park, the Fort McMurray property, which is classified as
held‑for‑sale.
ABOUT LREIT
LREIT is a real estate investment trust,
which is listed on the Toronto Stock 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.
The Toronto Stock Exchange has not reviewed or approved the
contents of this press release and does not accept responsibility
for the adequacy or accuracy of this press release.
SOURCE Lanesborough Real Estate Investment Trust