Partners Real Estate Investment Trust

TSX : PAR.UN


Partners Real Estate Investment Trust

May 15, 2014 23:42 ET

Partners Reit Announces Results for the First Quarter of 2014

BARRIE, ONTARIO--(Marketwired - May 15, 2014) - Partners Real Estate Investment Trust (the "REIT", or "Partners") (TSX:PAR.UN) announces its results for the three month period ended March 31, 2014 (the "first quarter").

QUARTERLY FINANCIAL HIGHLIGHTS

  • Revenues and NOI increased by 15% and 17%, respectively, when compared to the first quarter of 2013.
  • FFO and AFFO decreased by 2% and 4%, respectively, when compared to the first quarter of 2013.
  • AFFO payout ratio decreased to 89% from 109% when compared to the first quarter of 2013 and 117% for the three months ended December 31, 2013.

"We are encouraged by the trajectory of Partners' recent performance," stated Jane Domenico, the REIT's acting Chief Executive Officer. "In particular, we are pleased to see the REIT's AFFO payout ratio at a level that is comfortably below 100%. Going forward, this is a more sustainable payout ratio which should allow us to both reinvest in Partners' properties and improve our balance sheet over the longer-term."

"The REIT holds attractive assets across Canada which provide steady cash flow. While there have been recent changes to the Board and management teams, we are committed to keeping our focus on what matters - moving Partners forward and creating value for unitholders."

Results Summary Table
Mar 31, 2014 Mar 31, 2013
Revenues from income producing properties $ 15,167,896 $ 13,181,564
Net income (loss) (1,312,186 ) 8,097,665
Net income (loss) per unit - basic (0.05 ) 0.32
NOI (1) 9,559,494 8,155,011
NOI - same property (1) 7,647,967 8,099,544
FFO(1) 3,512,896 3,586,325
FFO per unit(1) 0.13 0.14
AFFO(1) 3,649,015 3,782,343
AFFO per unit(1) 0.14 0.15
Distributions(2) 3,263,213 4,123,020
Distributions per unit(2) 0.13 0.16
Distribution payout ratio(3) 93% / 89 % 115% / 109 %
Cash distributions(4) 2,982,466 3,888,897
Cash distributions per unit(4) 0.11 0.15
Cash distribution payout ratio(5) 85% / 82 % 108% / 103 %
As at Mar 31, 2014 Dec 31, 2013 Mar 31, 2013
Total assets $ 595,864,465 $ 595,628,037 $ 517,822,077
Total debt(6) 401,783,410 398,612,885 307,835,802
Total equity 180,635,579 184,878,657 198,806,723
Weighted average units outstanding - basic 26,023,936 25,731,319 25,352,436
Debt-to-gross book value including debentures(6) 66.9 % 66.7 % 60.9 %
Debt-to-gross book value excluding debentures(6) 52.7 % 52.4 % 44.1 %
Interest coverage ratio(7) 2.01 2.10 2.49
Debt service coverage ratio(7) 1.34 1.43 1.63
Weighted average interest rate(8) 4.34 % 4.34 % 4.48 %
Portfolio occupancy 96.4 % 96.4 % 96.0 %
(1) NOI, FFO and AFFO are non-IFRS financial measures widely used in the real estate industry. See "Part II - Performance Measurement" for further details and advisories.
(2) Represents distributions to unitholders on an accrual basis. Distributions are payable as at the end of the period in which they are declared by the Board of Trustees, and are paid on or around the 15th day of the following month. Distributions per unit exclude the 5% bonus units given to participants in the Distribution Reinvestment and Optional Unit Purchase Plan.
(3) Total distributions as a percentage of FFO/AFFO.
(4) Represents distributions on a cash basis, and as such, excludes the non-cash distributions of units issued under the Distribution Reinvestment and Optional Unit Purchase Plan.
(5) Cash distributions as a percentage of FFO/AFFO.
(6) See calculation under "Debt-to-Gross Book Value" in "Part IV - Results of Operations".
(7) Calculated on a rolling four-quarter basis. See definition under "Mortgages and Other Financing" in "Part IV - Results of Operations".
(8) Represents the weighted average effective interest rate for secured debt excluding debentures and credit facilities.
(9) Certain comparative figures have been reclassified to conform with the current year's presentation.

FINANCIAL RESULTS

Partners REIT's revenue from income producing properties for the first quarter increased by $2.0 million, or 15%, when compared to the first quarter of 2013. This improvement was primarily due to the acquisition of six properties across British Columbia, Alberta, and Québec during 2013.

All property NOI for the first quarter increased by $1.4 million, or 17%, when compared to the first quarter of 2013. This improvement was primarily due to the REIT's acquisition activity. Same property NOI for the first quarter decreased by 6% when compared to the first quarter of 2013. This decline can be attributed to the application of lower recovery rates for accruals at the conclusion of the first quarter, when compared to accruals performed at the conclusion of the first quarter of 2013.

FFO for the first quarter decreased modestly when compared to FFO for the first quarter of 2013, as higher overhead and financing costs were almost fully offset by the increase in the REIT's all property NOI. AFFO for the first quarter decreased by 4% when compared to the first quarter of 2013. The AFFO decline was driven by the same factors as the FFO decline, as well as an increase in maintenance related capital expenditures.

The AFFO cash payout ratio for the first quarter was 82%, compared to 103% for the first quarter of 2013. This decline was primarily due to a decrease in cash distributions as a result of the reduction in the REIT's monthly distribution. This decrease took effect in November of 2013 and was partially offset by lower AFFO.

Partners' total assets as at March 31, 2014 grew slightly from the balance as at December 31, 2014. This increase was a result of an increase in working capital, and was partially offset by losses recognized on the REIT's property portfolio.

Partners' total debt as at March 31, 2014 increased by $3.2 million, or 1%, from the balance at December 31, 2013. This increase was primarily due to draws on the REIT's credit facility, which exceeded regular monthly repayments on the REIT's mortgages.

OPERATIONAL PERFORMANCE

Partners' occupancy as at March 31, 2014 was 96.4%, unchanged from its level as at December 31, 2013. Of the leases that are set to expire during 2014, 75,991 square feet have been renewed or replaced with new leases with a further 9,166 square feet currently in the process of being renewed or committed to lease. The balance of 3,340 square feet, comprising one tenancy, will require new prospects.

OUTLOOK

As at March 31, 2014, Partners' expected 8.4% and 10.1% of its leases to expire in fiscal 2014 and 2015, respectively. The REIT anticipates that there will be strong demand for the majority of this space, and as a result, these expiries provide the REIT with a near-term opportunity to potentially increase revenues.

As at March 31, 2014, Partners had $57.1 million, or 20.1%, in mortgages maturing over the next two years. These maturities provide the REIT with an opportunity to refinance this portion of its debt at current market rates. Management expects these financings to result in a slight reduction to the REIT's financing costs.

As a result of the expected performance of Partners REIT's existing portfolio, as well as the reduction of the REIT's distribution per unit in November, 2013, management anticipates that the REIT's AFFO payout ratio will remain below 100% during the 2014 year.

FIRST QUARTER DEVELOPMENTS

Amendments to the Proposed Acquisition of Four Ontario Properties

On December 18, 2013, Partners entered into an agreement (the "Ontario Purchase and Sale Agreement") to acquire four retail centers in Ontario (the "Ontario Properties") for a purchase price of approximately $109 million (the "Ontario Acquisition"). On February 6, 2014, the REIT amended and restated the Ontario Purchase and Sale Agreement (the "Amended Agreement"), pursuant to which the vendor thereunder, Holyrood Holdings Limited ("the Vendor"), guaranteed $7,240,000 of the Ontario Properties' annualized NOI until such time as this amount has been achieved for a full calendar quarter of operations. Additionally, the Vendor agreed to fund certain non-recoverable capital improvement projects that are expected to materially reduce the REIT's anticipated capital expenditures on the Ontario Properties in the future.

Subsequent to the entering into of the Amended Agreement, the REIT's ongoing due diligence process identified certain matters that required further review. As a result, the Amended Agreement was terminated and a new agreement was entered into in respect of three of the four Ontario Properties on April 2, 2014 (the "April Agreement"). The material terms of the April Agreement and additional developments relating to this transaction are presented in the "Events Subsequent to the First Quarter" section of this press release.

Changes to Senior Management and Board of Trustees

On February 11, 2014, Partners announced the appointments of Ron McCowan as Interim Chief Executive Officer and Derrick West as Chief Financial Officer. In conjunction with these appointments, the REIT also announced the departure of Patrick Miniutti, the REIT's former Chief Executive Officer. On March 23, 2014, Mr. Miniutti resigned from the REIT's Board of Trustees.

On February 14, 2014, Partners announced the appointments of Jane Domenico as Chief Operating Officer and Marc Charlebois as an independent Trustee of the REIT.

Internalization

On February 15, 2014, Partners completed the internalization of its management. As a result of the internalization, the REIT's head office moved to Barrie, Ontario. The REIT continues to maintain an office in Victoria, British Columbia.

EVENTS SUBSEQUENT TO THE FIRST QUARTER

Amendment and Closing of Ontario Property Acquisition

On April 2, 2014, the REIT provided an update on its previously announced acquisition of three retail centres in Ontario. As per the April Agreement with Holyrood Holdings Limited (the "Vendor"), the REIT agreed to pay an immediate consideration of approximately $90,100,000 for three properties located in Ontario (the "Holyrood Properties"). This amount included $83,200,000 to satisfy the purchase of the Properties, with the balance of $6,900,000 as a promissory note bearing annualized interest at 5.4%. The purchase price was satisfied by (i) new loans secured by the Holyrood Properties as described below, (ii) the issuance of 1,188,188 units of the REIT ("REIT Units"), issued at an effective price of $5.80 per REIT Unit, and (iii) the issuance of 4,813,517 class B units (the "Class B Units") of a limited partnership to be formed by the REIT for the purposes of completing the acquisition, at an effective price of $5.80 per Class B Unit. The Class B Units are exchangeable for REIT Units on a one-for-one basis and are the economic equivalent of REIT Units and carry the right to vote at the REIT level. The Holyrood Properties consist of a total of approximately 612,000 square feet of gross leasable area of which 462,027 square feet are currently leased. The purchase price paid for the Holyrood Properties relates only to fully leased units and six head leases.

Pursuant to the April Agreement, the REIT and the Vendor agreed to enter into a development agreement pursuant to which the Vendor, as developer, was granted the right to perform development and leasing activities in respect of certain vacant space and undeveloped space located on the Holyrood Properties. The REIT agreed to pay the Vendor (i) $25,000,000, as a deferred purchase price which is fully contingent on the Vendor entering into qualified leases in respect of certain vacant space located on the Holyrood Properties (the "Contingent Deferred Payment"), and (ii) earn-out payments contingent on the Vendor entering into qualified leases in respect of certain undeveloped space located on the Holyrood Properties (the "Earn-Out Payments"). Both the Contingent Deferred Payments and Earn-Out Payments will be calculated by dividing the amount that the qualified lease increases the REIT's net operating income (on a 12 month basis) by a capitalization rate of 6.6%. The REIT has discretion to make payment of any Contingent Deferred Payment or Earn-Out Payment by way of (i) cash, (ii) the offsetting of certain debt of the Vendor, (iii) the issuance of up to 506,634 Class B Units at an effective price of $5.95, (iv) requiring the Vendor to provide a vendor take-back mortgage for 60% of the amount payable, or (v) a combination thereof.

On April 22, 2014 the REIT closed its acquisition of the Holyrood Properties under the terms described above. Immediately following the close of the acquisition, given the effect to the issuance of the REIT Units and Class B Units, the Vendor held approximately 18.7% of the REIT's outstanding units, calculated on a fully diluted basis.

Pursuant to the transaction, the REIT entered into a head lease agreement with the Vendor in which the Vendor guarantees to make rental payments in respect of a total gross leasable area of 105,239 square feet at London Crossroads Centre and Hamilton City Centre. The majority of the replacement leases have been approved by the REIT and are executed. The Vendor has commenced with the specific improvements required under replacement tenants' leases. The term of each head lease will expire once the REIT approved replacement tenant is in occupation and paying rent.

Pursuant to the transaction, Partners entered into a works agreement with the Vendor in which the Vendor at its sole cost and expense undertakes the repair and replacement of non-recoverable capital expenditures at London Crossroads Centre and Hamilton City Centre. Such investments are material in nature and are in addition to any expenditure related to the cost of leasing transactions and development activities.

At closing the REIT received $55.2 million in mortgages at a weighted average interest rate of 4.8%. All mortgages mature within one year of the transaction's closing. The Vendor will pay interest rate normalization adjustments of $524,000 over a one year period. The REIT anticipates that these mortgages can be renewed at a savings to the REIT.

On May 4, 2014 the REIT announced that the Board of Trustees had engaged independent legal counsel and initiated an investigation into certain matters related to the acquisition of the Holyrood Properties. The Board has since obtained material new information that persuaded the Board that Mr. Ron McCowan, the former interim Chief Executive Officer of the REIT, has a close business relationship with Ms. Laura Philp, the owner of the Vendor, sufficient that they should be considered as acting together under applicable regulation.

In the May 4, 2013 press release, the Board of Trustees indicated that had it been aware of the extent of the dealings between Mr. McCowan and Ms. Philp, it would have required that the transaction with the Vendor be submitted to the unitholders for their approval.

In the circumstances, Partners REIT has asked the Vendor to agree to unwind the purchase of the Holyrood Properties. The REIT intends to return the Holyrood Properties and the Vendor's approximately 18.7% interest in the REIT would be cancelled. Completion of this reversal is subject to the parties executing definitive documentation, the receipt of third party consents and applicable regulatory approval.

Changes to Senior Management

On May 4, 2014 the REIT announced that Ron McCowan had tendered his resignation as interim Chief Executive Officer. The Board of Trustees appointed Jane Domenico, the REIT's current Chief Operating Officer, as acting Chief Executive Officer while the Board continues its previously announced search for a permanent Chief Executive Officer.

Changes to the REIT's Board of Trustees

On April 3, 2014, Partners announced the appointment of both Lindsay Adam Weiss and Kevin VanAmburg to the REIT's Board of Trustees. In conjunction with these appointments, the REIT also announced that Allen Weinberg had resigned from its Board of Trustees. On May 2, 2014 the REIT announced that Mr. Lindsay Adam Weiss resigned from the Board of Trustees on April 30, 2014.

New Financing Commitment

On April 30, 2014, Partners announced that it had received and accepted a financing commitment from Firm Capital Corporation ("Firm Capital") to secure $15 million of financing as a second mortgage loan on certain properties of the REIT located in Manitoba and Quebec.

The loan has a term of one year, with interest payable at the greater of 10% per annum, or prime rate of interest plus 6% per annum. The loan is repayable without penalty on short notice. The REIT intends to use the proceeds of the loan for general corporate purposes.

On May 13, the REIT announced that it had closed the financing commitment with Firm Capital. Firm Capital is licensed by the Financial Services Commission of Ontario, completed $665 million in new mortgage financings in 2013, and is independent of the REIT, its Board and management team.

The REIT is in discussions with other lenders, including a Canadian chartered bank, regarding alternative funding arrangements that may be available later in 2014 at potentially more attractive interest rates.

Announcement of Strategic Review Process

On May 6, 2014 the REIT announced that it had commenced a process to review strategic alternatives to maximize value for unitholders. There are many potential outcomes of the strategic review process and there can be no guarantee that a transaction will take place.

On May 13, 2014, the REIT announced that it had engaged National Bank Financial to serve as an independent financial advisor to the Board of Trustees in connection with the process.

The REIT will provide unitholders with updates regarding the strategic review process as developments warrant.

Extension of Unitholder Rights Plan

On May 6, 2014, Partners announced that it had extended its Unitholder Rights Plan, which would otherwise have expired this month, to its annual general meeting at which point unitholders will vote to extend or discontinue the Plan. As previously announced, the Toronto Stock Exchange ("TSX") has deferred approval of the Unitholder Rights Plan.

Annual General Meeting

The REIT has requested that the TSX consider a request for an extension of its annual general meeting date to July 31, 2014. The REIT will provide a further update once the TSX has had an opportunity to consider the request.

Conference Call Details

Partners will also host a conference call at 10:00 AM Eastern on Friday, May, 16, at which time management will review the financial results and discuss the REIT's strategic outlook.

Dial-In Details
Toll Free (North America): 855-223-7309
Local: 647-788-4929
Instant Replay Details (Available until May 30, 2014)
Toll Free (North America): 855-859-2056
Passcode: 43358608

A recording of the conference call will also be available via Partners' website.

About Partners REIT

Partners REIT is a growth-oriented real estate investment trust, which currently owns (directly or indirectly) 42 retail properties, located in British Columbia, Alberta, Manitoba, Ontario, and Quebec, aggregating approximately 3.2 million square feet of leasable space. Partners REIT focuses on expanding and managing a portfolio of retail and mixed-use community and neighbourhood shopping centres located in both primary and secondary markets across Canada.

Disclaimer

Certain statements included in this press release constitute forward-looking statements, including, but not limited to, those identified by the expressions "expect", "will" and similar expressions to the extent they relate to Partners REIT. The forward- looking statements are not historical facts but reflect Partners REIT's current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although Partners REIT believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein.

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