WINNIPEG, May 11, 2018 /CNW/ - Lanesborough Real Estate
Investment Trust ("LREIT") (TSX: LRT.UN) today reported its
operating results for the quarter ended March 31, 2018. 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 quarter ended March 31, 2018, which may be obtained from the
LREIT website at www.lreit.com or the SEDAR website at
www.sedar.com.
2018 First Quarter Report
After enduring one of the worst recessions in decades,
Alberta experienced a strong
rebound in economic activity in 2017. According to a recent
economic outlook report by the Alberta Treasury Board and Finance,
Alberta's economy is expected to
move closer to full recovery in 2018, as it emerges from the impact
of the "steepest and most prolonged oil price shock in Canadian
history".
Notwithstanding the overall rebound in Alberta's economic activity, rental market
conditions remained very competitive in Fort McMurray during Q1-2018.
Accordingly, LREIT continues to face significant headwinds and has
been unable to generate positive cash flow from its operating
activities. LREIT remains dependent on additional sources of cash
to fund its operations, regular mortgage loan principal payments,
deficits upon loan refinancing, transaction costs for debt
financing, and capital expenditures.
Operating Results
LREIT completed Q1-2018 with negative funds from operations
("FFO") of $2.4 million, compared to
negative FFO of $1.8 million during
Q1-2017, representing a decrease in FFO of $0.6 million. The decrease in FFO mainly reflects
a decrease in the net operating income ("NOI") of $0.6 million.
The decrease in NOI is mainly due to a $0.4 million increase in property operating costs
and a $0.2 million decrease in rental
revenue. The increase in property operating costs is primarily due
to an increase in insurance claim costs, as well as an increase in
utility costs. The overall decrease in rental revenue is primarily
due to a decrease in the revenue of the held for sale and/or sold
property segment, as a result of reduced occupancy at Woodland
Park; partially offset by a modest increase in the rental revenue
of LREIT's investment properties segment.
LREIT completed Q1-2018 with a loss and comprehensive loss of
$17.5 million, compared to a loss and
comprehensive loss of $4.6 million
during Q1-2017. The increase in the loss is primarily due to an
unfavourable variance in the fair value adjustments of the
investment properties and the investment property classified as
held for sale.
Losses related to fair value adjustments during Q1-2018 were
primarily driven by reduced revenue expectations associated with
the extent of the impact of the rebuilding efforts in Fort McMurray on the rental market, as well as
increased uncertainty as to the timing and/or extent of a rental
market recovery associated with the prolonged nature of the
depressed level of oil sands development activity.
Liquidity and Capital Resources
During Q1-2018, cash used in operations, prior to working
capital adjustments, amounted to $1.2
million (2017 ‑ $0.6 million)
and the cash shortfall, after accounting for working capital
adjustments, regular mortgage principal payments, capital
expenditures, and transactions costs was $2.6 million (2017 ‑ $2.3
million).
The increase in cash used in operations primarily reflects a
decrease in net operating income, partially offset by a decrease in
interest paid. The increase in the cash shortfall is mainly due to
an increase in cash used in operations and an increase in
expenditures on transactions costs in conjunction with the renewals
of three mortgage loans in the aggregate principal amount of
$73.1 million. The increase in the
cash shortfall was partially offset by the change in working
capital adjustments.
LREIT continues to require additional sources of cash to fund
the cash shortfall from operating activities, as well as mortgage
loan principal payments, transactions costs for debt financing, and
capital expenditures. LREIT also requires additional capital to
fund the repayment of mortgage loans at maturity and/or
refinancing, to the extent that there is a deficit between the
repayment amount and the amount of new mortgage loan proceeds. The
cash shortfall during Q1-2018 was funded by unsecured loan advances
from Shelter Canadian Properties Limited.
As of March 31, 2018, LREIT was in
default of one mortgage loan with a principal balance of
$28.0 million, as the lender of the
mortgage loan has indicated that there are service fees outstanding
with respect to a previous loan default and that until such fees
are paid the loan will remain in default. LREIT continues to meet
the debt service obligations of the loan and the lender has taken
no action to demand repayment or enforce its security under the
loan.
Outlook
The demand for rental accommodations in Fort McMurray is heavily influenced by the
level of oil sands development activity in the region, which in
turn is driven by oil prices. At present, Alberta heavy oil prices are trading at a
large discount, compared to global oil prices, largely due to
pipeline bottlenecks and lacking market access. In view of the
present issues facing the Alberta
oil sands, management anticipates that LREIT will continue to face
challenging rental market conditions throughout 2018.
The ability of LREIT to remain a going concern in the near‑term
is largely contingent upon financial support from Shelter and its
parent company, 2668921 Manitoba Ltd., as well as LREIT's capacity
to continue to renew and/or refinance its mortgage loan debts as
they become due. Addressing LREIT's liquidity concerns continues to
be the top priority in 2018.
|
|
March 31
|
|
December
31
|
|
|
2018
|
|
2017
|
|
2016
|
STATEMENT OF
FINANCIAL POSITION
|
|
|
|
|
|
|
Total
assets
|
|
$
205,927,655
|
|
$
222,128,456
|
|
$
245,402,329
|
Total long‑term
financial liabilities (1)
|
|
$
242,106,645
|
|
$
245,533,159
|
|
$
243,501,308
|
Weighted average
interest rate
|
|
|
|
|
|
|
|
- Mortgage loan
debt
|
|
5.7%
|
|
5.5%
|
|
5.8%
|
|
- Total
debt
|
|
5.5%
|
|
5.4%
|
|
5.6%
|
|
|
Three Months Ended
March 31
|
|
|
2018
|
|
2017
|
|
2016
|
KEY FINANCIAL
PERFORMANCE INDICATORS
|
|
|
|
|
|
|
Operating
Results
|
|
|
|
|
|
|
|
Rentals from
investment properties
|
$
|
4,467,503
|
|
$
|
4,644,515
|
$
|
4,451,462
|
|
Net operating
income
|
$
|
1,648,933
|
|
$
|
2,232,113
|
$
|
1,659,357
|
|
Loss before
discontinued operations
|
$
|
(17,468,874)
|
|
$
|
(4,691,809)
|
$
|
(7,640,229)
|
|
Loss and
comprehensive loss
|
$
|
(17,494,728)
|
|
$
|
(4,645,719)
|
$
|
(7,599,297)
|
|
Funds from Operations
(FFO)
|
$
|
(2,354,103)
|
|
$
|
(1,777,917)
|
$
|
(4,280,574)
|
|
|
|
|
|
|
|
|
Cash
Flows
|
|
|
|
|
|
|
|
|
Cash used in
operating activities
|
$
|
(1,181,842)
|
|
$
|
(1,218,817)
|
$
|
(1,412,372)
|
|
Adjusted Funds from
Operations (AFFO)
|
$
|
(2,541,890)
|
|
$
|
(1,885,179)
|
$
|
(4,603,418)
|
(1)
|
Long‑term financial
liabilities consist of mortgage loans, debentures and the revolving
loan from 2668921 Manitoba Ltd.
|
ANALYSIS OF OPERATING RESULTS
|
Analysis of
Loss
|
|
Three Months Ended
March 31
|
Increase
(Decrease)
in Income
|
|
2018
|
2017
|
Amount
|
%
|
Rentals from
investment properties
|
$
|
4,467,503
|
$
|
4,644,515
|
$
|
(177,012)
|
(4)%
|
Property operating
costs
|
(2,818,570)
|
(2,412,402)
|
(406,168)
|
(17)%
|
Net operating
income
|
1,648,933
|
2,232,113
|
(583,180)
|
(26)%
|
Interest
income
|
49,826
|
45,612
|
4,214
|
9%
|
Interest
expense
|
(3,646,134)
|
(3,686,254)
|
40,120
|
1%
|
Trust
expense
|
(380,874)
|
(415,478)
|
34,604
|
8%
|
Loss before the
following
|
(2,328,249)
|
(1,824,007)
|
(504,242)
|
(28)%
|
Gain (loss) on sale
of investment property
|
(34,882)
|
58,377
|
(93,259)
|
(160)%
|
Fair value
adjustments ‑ Investment properties
|
(15,105,743)
|
(2,926,179)
|
(12,179,564)
|
(416)%
|
Loss before
discontinued operations
|
(17,468,874)
|
(4,691,809)
|
(12,777,065)
|
(272)%
|
Income (loss) from
discontinued operations
|
(25,854)
|
46,090
|
(71,944)
|
(156)%
|
Loss and
comprehensive loss
|
$
|
(17,494,728)
|
$
|
(4,645,719)
|
$
|
(12,849,009)
|
(277)%
|
LREIT completed Q1-2018 with a loss and comprehensive loss of
$17.5 million, compared to a loss and
comprehensive loss of $4.6 million
during Q1-2017. The increase in the loss mainly reflects an
unfavourable variance in the fair value adjustments and a decrease
in net operating income.
Unfavourable fair value adjustments were relatively higher
during Q1-2018 compared to Q1-2017. During Q1-2017, the
unfavourable fair value adjustments were mainly due to reduced
revenue expectations as a result of perceived delays in the
Fort McMurray rebuilding process.
During Q1-2018, the carrying values of the Fort McMurray properties were further reduced
to reflect the combined impact of lower than anticipated demand for
rental accommodations associated with the rebuilding efforts as
well as to reflect increased uncertainty with respect to a
longer-term rental market recovery as a result of the prolonged
low-level of oil sands development activity.
The decrease in net operating income mainly reflects an increase
in operating costs of $0.4 million or
17% and a decrease in rental revenue of $0.2
million or 4%. The increase in property operating costs is
primarily due to an increase in insurance claim costs and an
increase in utility costs, as a result of an increase in the
proportion of all inclusive leases. The decrease in rental revenue
is primarily due to the decreased revenue of the held for sale
and/or sold property segment, primarily as a result of reduced
occupancy at Woodland Park (the property classified as
held‑for‑sale); partially offset by an increase in rental revenue
for the investment properties.
Analysis of Rental
Revenue
|
|
Three Months Ended
March 31
|
|
|
|
Increase
(Decrease)
|
% of Total
|
|
2018
|
2017
|
Amount
|
%
|
2018
|
2017
|
Fort McMurray
properties
|
$
3,656,080
|
$
3,570,087
|
$
85,993
|
2%
|
82%
|
77%
|
Other investment
properties
|
418,148
|
383,193
|
34,955
|
9%
|
9%
|
8%
|
Sub‑total
|
4,074,228
|
3,953,280
|
120,948
|
3%
|
91%
|
85%
|
Held for sale and/or
sold properties
|
393,275
|
691,235
|
(297,960)
|
(43)%
|
9%
|
15%
|
Total
|
$
4,467,503
|
$
4,644,515
|
$
(177,012)
|
(4)%
|
100%
|
100%
|
Occupancy Level,
by Quarter
|
|
2017
|
2018
|
|
Q1
|
Q2
|
Q3
|
Q4
|
12 Month
Average
|
Q1
|
Fort McMurray
properties
|
68%
|
71%
|
73%
|
72%
|
71%
|
69%
|
Other investment
properties
|
71%
|
73%
|
73%
|
75%
|
73%
|
77%
|
Total
|
68%
|
72%
|
73%
|
72%
|
71%
|
70%
|
Held for sale and/or
sold properties
|
79%
|
79%
|
69%
|
61%
|
72%
|
46%
|
Average Monthly
Rents, by Quarter
|
|
2017
|
2018
|
|
Q1
|
Q2
|
Q3
|
Q4
|
12 Month
Average
|
Q1
|
Fort McMurray
properties
|
$1,684
|
$1,707
|
$1,711
|
$1,697
|
$1,700
|
$1,685
|
Other investment
properties
|
$909
|
$909
|
$903
|
$905
|
$907
|
$907
|
Total
|
$1,554
|
$1,573
|
$1,575
|
$1,563
|
$1,566
|
$1,554
|
Held for sale and/or
sold properties
|
$2,593
|
$2,611
|
$2,597
|
$2,549
|
$2,588
|
$2,484
|
During Q1-2018, total investment property revenue, excluding
held for sale and/or sold properties, increased by $0.1 million or 3%, compared to Q1-2017. The
increase mainly reflects an increase in the average occupancy level
from 68% during Q1-2017 to 70% during Q1-2018, which is largely due
to two corporate tenants that transferred from the Woodland Park
property, classified as held for sale, to other LREIT properties in
Fort McMurray that offered lower
rental rates or were closer to urban amenities.
During Q1-2018, revenue from the held for sale and/or sold
properties decreased by $0.3 million
or 43% compared to Q1-2017. The decrease was primarily due to a
decrease in average occupancy level of Woodland Park (the property
classified as held for sale) from 79% in Q1-2017 to 46% during
Q1-2018. The decrease in average occupancy is primarily due to the
transfer of two corporate tenants to other LREIT properties, as
discussed above, and the departure of tenants that were awaiting
the reconstruction of their homes. The Woodland Park property had a
relatively high proportion of tenants awaiting the reconstruction
of their homes as a result of the property's townhome offering and
their proximity to the area of Fort
McMurray where the majority of the homes were lost to the
wildfire.
The revenue results of the Fort
McMurray property portfolio continue to reflect the
challenging rental market conditions in Fort McMurray.
The reduced level of rental revenue, together with the uncertain
timing and/or extent of future oil sands development activity and
rental market recovery, are key factors that continue to cast
significant doubt as to the ability of LREIT to sustain operations
into the foreseeable future.
|
|
Analysis of
Property Operating Costs
|
|
|
Three Months Ended
March 31
|
|
2018
|
|
2017
|
|
Increase
(Decrease)
|
|
%
|
Fort McMurray
properties
|
$
2,207,518
|
|
$
1,859,837
|
|
$ 347,681
|
|
19%
|
Other investment
properties
|
356,282
|
|
304,732
|
|
51,550
|
|
17%
|
Sub‑total
|
2,563,800
|
|
2,164,569
|
|
399,231
|
|
18%
|
Held for sale and/or
sold properties
|
254,770
|
|
247,833
|
|
6,937
|
|
3%
|
Total
|
$
2,818,570
|
|
$
2,412,402
|
|
$ 406,168
|
|
17%
|
During Q1-2018, property operating costs, excluding the held for
sale and/or sold properties, increased by $0.4 million or 18%, compared to Q1-2017. The
increase was mainly due to an increase in insurance claim costs, as
well as an increase in utility costs, as a result of an increase in
the proportion of all inclusive leases. After accounting for held
for sale and/or sold properties, the total increase in property
operating costs was also $0.4
million.
Analysis of Net
Operating Income
|
|
|
|
|
Net Operating
Income
|
|
|
|
|
|
Three Months
Ended
March 31
|
Increase
(Decrease)
|
Percent of
Total
|
Operating
Margin
|
|
2018
|
|
2017
|
|
Amount
|
|
%
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fort McMurray
properties
|
$
1,448,562
|
|
$
1,710,250
|
|
$
(261,688)
|
|
(15)%
|
|
88%
|
|
77%
|
|
40%
|
|
48%
|
|
Other investment
properties
|
61,866
|
|
78,461
|
|
(16,595)
|
|
(21)%
|
|
4%
|
|
4%
|
|
15%
|
|
20%
|
|
Sub‑total
|
1,510,428
|
|
1,788,711
|
|
(278,283)
|
|
(16)%
|
|
92%
|
|
81%
|
|
37%
|
|
45%
|
|
Held for sale and/or
sold
properties
|
138,505
|
|
443,402
|
|
(304,897)
|
|
(69)%
|
|
8%
|
|
19%
|
|
35%
|
|
64%
|
|
Total
|
$
1,648,933
|
|
$
2,232,113
|
|
$
(583,180)
|
|
(26)%
|
|
100%
|
|
100%
|
|
37%
|
|
48%
|
|
During Q1-2018, the net operating income of the investment
properties portfolio, excluding held for sale and/or sold
properties, decreased by $0.3 million
or 16%, compared to Q1- 2017. The operating margin, excluding held
for sale and/or sold properties, decreased from 45% during Q1-2017
to 37% during Q1-2018. The decreases
in net operating income and operating margin, excluding held for
sale and/or sold properties, are primarily due to the increase in
the property operating costs of the Fort
McMurray property portfolio, as discussed above.
The decrease in net operating income from held for sale and/or
sold properties of $0.3 million is
primarily due to a decrease in the revenue of Woodland Park (the
Fort McMurray property which is
classified as held for sale). Including the held for sale and/or
sold properties, the total net operating income decreased by
$0.6 million or 26% during Q1-2018,
compared to Q1-2017.
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