Partners Real Estate Investment Trust
TSX : PAR.UN

Partners Real Estate Investment Trust

March 26, 2015 20:47 ET

Partners REIT Announces Results for the Fourth Quarter and Full Year 2014

BARRIE, ONTARIO--(Marketwired - March 26, 2015) - Partners Real Estate Investment Trust (the "REIT," or "Partners") (TSX:PAR.UN) today announced its results for the three and twelve month periods ended December 31, 2014 (the "fourth quarter" and "full year 2014," respectively).

FOURTH QUARTER 2014 HIGHLIGHTS

  • Revenues of $14.9 million, a 1% increase when compared to the fourth quarter of 2013.
  • Same property NOI of $8.1 million, a 5% decrease when compared to the fourth quarter of 2013.
  • FFO and AFFO decreased by 55% and 58%, respectively, when compared to the fourth quarter of 2013.
  • AFFO cash payout ratio of 114%, an increase from 106% during the fourth quarter of 2013.
  • On October 2, 2014, the REIT successfully completed the rescission of its purchase of three retail centres from Holyrood Holdings ("the Holyrood Transaction").
  • On November 3, 2014, the REIT announced that it had fully repaid a $15 million loan outstanding which carried a 10.0% interest rate at the time of its repayment.
  • On November 10, 2014, the REIT announced the refinancing of first mortgages at five properties for $51.0 million at a weighted average interest rate of 3.73%. These proceeds were primarily deployed towards the repayment of the REIT's credit facility and other existing mortgages.
  • Subsequent to the conclusion of the quarter, on February 17, 2015, the REIT completed the refinancing of first mortgages at three properties for $5.6 million at a weighted average interest rate of 2.88%.
As at and for the three months ended As at and for the year ended
Dec 31,
2014
Dec 31,
2013
Dec 31,
2014
Dec 31,
2013
Revenues from income producing properties $ 14,935,452 $ 14,774,322 $ 59,821,021 $ 56,567,180
Net income (loss) (3,011,691 ) (9,184,881 ) (27,083,600 ) 4,195,221
Net income (loss) per unit - basic (0.11 ) (0.36 ) (1.03 ) 0.16
NOI (1) 8,039,612 9,004,796 35,959,362 35,267,384
NOI - same property (1) 8,072,182 8,480,303 27,582,458 28,314,657
FFO(1)(9) 1,091,535 2,400,027 9,539,662 12,546,438
FFO per unit(1)(9) 0.04 0.09 0.36 0.48
AFFO(1) 1,274,371 3,034,378 9,818,612 12,958,348
AFFO per unit(1) 0.05 0.12 0.37 0.50
Distributions(2) 1,658,029 3,561,211 10,413,443 15,979,558
Distributions per unit(2) 0.06 0.14 0.40 0.62
Distribution payout ratio(3) 152% / 130 % 148% / 117 % 109% / 106 % 127% / 123 %
Cash distributions(4) 1,453,401 3,229,261 9,943,968 14,783,011
Cash distributions per unit(4) 0.08 0.12 0.38 0.57
Cash distribution payout ratio(5) 133% / 114 % 135% / 106 % 104% / 101 % 118% / 114 %
As at Dec 31,
2014
Dec 31,
2013
Total assets $ 542,551,040 $ 595,628,037
Total debt(6) 381,967,023 398,612,885
Total equity 149,036,368 184,878,657
Weighted average units outstanding - basic 26,206,391 25,731,319
Debt-to-gross book value including debentures(6) 69.9 % 66.4 %
Debt-to-gross book value excluding debentures(6) 54.2 % 52.2 %
Interest coverage ratio(7) 1.84 2.10
Debt service coverage ratio(7) 1.24 1.43
Weighted average interest rate(8) 4.43 % 4.34 %
Portfolio occupancy 94.3 % 96.4 %
  1. NOI, NOI - same property, 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. Prior year balances have been reclassified to conform with current year presentation. NOI - same property includes only those properties which have been owned by the REIT for a full current and prior year period.
  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.

"2014 was the most difficult year in Partners' history," stated Jane Domenico, the REIT's acting CEO. "Our property portfolio - Partners' greatest strength - required not only operational attention, but also capital investment. Our balance sheet had become stretched, impairing our financial flexibility. In response to these challenges, we both overhauled the REIT's leadership and implemented a comprehensive review of our business and our strategic options. Additionally, we felt it prudent to revisit the REIT's historical bad debt, recovery, and valuation practices. Our financial and operational resources were further strained by Orange Capital's unsuccessful attempt at a proxy contest this past summer."

"Ultimately, we were forced to make multiple difficult decisions in order to secure Partners' future, strengthen our balance sheet, and generate the capital necessary to rejuvenate our property portfolio. We halved our distribution, creating annual cash savings of approximately $6 million; we sold a selection of properties, providing us with total proceeds of approximately $15 million; and, we refinanced nine of our properties through first mortgages that have amounted to a total of approximately $74 million. In combination, these actions have served to fortify Partners' financial position and allowed us to focus upon our future."

"Our plan for the future is simple - we will revitalize our property portfolio. We will pursue this revitalization through both capital improvements and by placing a renewed priority upon our tenant relationships. Our strategic review is ongoing, and through that review we continue to explore potential options for providing value to our unitholders. Yet the most immediate tactic towards creating this value is simply to focus on the properties we currently own, placing the best possible tenants within those properties, and providing those tenants with the best possible service. With the challenges of 2014 behind us, I look forward to delivering upon these objectives."

Financial Results

Partners' revenue from income producing properties increased for the fourth quarter and full year 2014 by $0.2 million (1%) and $3.3 million (6%), respectively, when compared to the same periods in 2013. The quarterly increase was primarily as a consequence of recognizing an additional $0.4 million in realty tax recoveries to revenues, an amount that was equally offset by an increase to realty tax expenses. As a result, this increase did not generate incremental NOI, but did affect quarterly gross revenue. This adjustment related to certain tenants who paid realty taxes directly on behalf of the REIT. The full year 2014 revenue increase was due to a full period of contributions in 2014 from the six properties acquired during 2013, and was partially offset by the sale of three Ontario properties in September 2014.

The net loss for the fourth quarter decreased by $6.2 million when compared to the same period in 2013. This decrease was primarily due to lower fair value losses year-over-year. Net income for the full year 2014 decreased by $31.3 million when compared to the prior year. This decrease was primarily the result of two non-operational matters, an increase in fair value losses of $23.7 million and an increase to other corporate transaction costs of $5.5 million.

During 2014 management obtained 23 external appraisals, representing 66% of the REIT's portfolio value. These appraisals combined with significant management review of the stabilized NOI, capitalization rates and present value of lease up costs has resulted in the material adjustment to the values of the REIT's income producing properties. For the year ended December 31, 2014, the REIT recognized $28.3 million in fair value losses across its property portfolio. These fair value losses consists of $17.8 million related to six properties acquired during 2013 (which were previously valued at the purchase price plus closing costs), $8.1 million at one of the REIT's properties in Ontario (which requires extensive capital upgrades and recently lost an anchor tenant) and $2.4 million across the remaining properties (resulting from new appraisals received and from management adjusting capitalization rates based on comparable market transactions). Management is confident that after recognizing $28.3 million in fair value losses during fiscal 2014, combined with the $10.7 million in fair value losses recognized by current management for the fourth quarter of 2013, that barring a general market change to capitalization rates or a material adverse change to tenancies, that there should be less volatility to the future values of the REIT's income producing properties. Furthermore, when also considering the 13 external appraisals done for the December 31, 2013 yearend - since the end of 2013 the REIT now has appraisals covering 28 of 36 properties covering 78% of the value December 31, 2014's income producing properties.

All property NOI for the fourth quarter decreased by $1.0 million (11%) when compared to the same period in 2013. This decrease was due to both the sale of three Ontario properties in September 2014 and the recognition of a $0.2 million bad debt provision. All property NOI for the full year 2014 increased by $0.7 million (2%) when compared to the same period in 2013. This increase was due to a full period of contributions in 2014 from the six properties acquired during 2013, and was partially offset by both the sale of three Ontario properties in September 2014 and increased property operating costs mostly from $0.7 million in bad debt provision. Same property NOI, which removes the effect of the REIT's acquisitions and dispositions, decreased by 5% and 3%, respectively, for the fourth quarter and full year 2014. These decreases were due to both the aforementioned bad debt provisions and costs associated with new external property management agreements.

FFO for the fourth quarter decreased by $1.3 million (55%) when compared to the same period in 2013. This decrease was due a $0.5 million one-time mortgage penalty cost incurred by the early repayment of a second mortgage that was undergoing a refinancing, the $0.6 million loss of income from the sale of three Ontario properties in September 2014, and $0.3 million in increased general and administrative expenses. FFO for the full year 2014 decreased by $3.0 million (23%) when compared to the same period in 2013. This decrease was primarily due to a $0.7 million receivable provision, $1.0 million in increased general and administrative expenses, and increased financing costs as a result of a higher average loan balance outstanding during the year.

AFFO for the fourth quarter and full year 2014 decreased by $1.8 million (58%) and $3.1 million (24%), respectively, when compared to the same periods in 2013. These factors were driven by the same factors as the FFO declines, and further compounded by increased maintenance related spending on the REIT's property portfolio. During 2014 the REIT recognized that $2.0 million of the $4.8 million in capital expenditures related to non-revenue enhancing capital (ie - sustaining capital), whereas for 2013 the REIT recognized only $0.2 million of $7.7 million of capital spending as sustaining capital. This $1.8 million increase in 2014's sustaining capital, results in an incremental deduction in 2014's AFFO (a $0.07/unit effect), as compared to the year ending December 31, 2013.

The AFFO cash payout ratio for fourth quarter and full year 2014 was 114% and 101%, respectively, compared to 106% and 114%, respectively, for the same periods in 2013. Based on the 26.4 million units outstanding as at December 31, 2014, the ongoing annual distribution is $6.6 million or 67% of 2014's AFFO.

Partners' total assets as at December 31, 2014, decreased by $53.1 million, or 9%, when compared to the balance as at December 31, 2013. This decrease was a result of the sale of the three Ontario properties and fair value losses recognized on the REIT's property portfolio. These factors were partially offset by an increase in the REIT's working capital.

Partners' total debt as at December 31, 2014, decreased by $16.6 million, or 4%, when compared to the balance at December 31, 2013. This decrease was the result of a disposal of a total of $19.3 million in mortgages as a part of the sale of three Ontario properties, $32.4 million in loan maturities, $8.6 in monthly principal repayments on the REIT's mortgages, and the repayment of $31.0 million on the REIT's matured credit facility. These factors were partially offset by both $74.3 million in new mortgages and $2.2 million in regular amortization of deferred financing costs.

Partners' interest coverage ratio as at December 31, 2014 was 1.84, a decrease from 2.10 as at December 31, 2013. The REIT's debt service coverage ratio as at December 31, 2014 was 1.24, a decrease from 1.43 as at December 31, 2013. These declines can be attributed to new mortgages, a convertible debenture offering (during 2013), and draws on the REIT's credit facility. These factors were partially offset by net income contributions from newly acquired properties.

Partners' debt-to-gross book value as at December 31, 2014, was 66.9%, or 54.2% when excluding the impact of debentures. These metrics stood at 66.4% and 52.2%, respectively, as at December 31, 2013.

Net asset value is a measure of the Partners' total assets less the REIT's liabilities, and is represented on the balance sheet as Unitholders' Equity. As at December 31, 2014, the REIT's net asset value was $5.65 per unit, a decrease of $1.46 per unit when compared to its level at December 31, 2013. This decrease is mainly as a result of $28.3 million ($1.07 unit) in property fair value write-downs and $8.8 million ($0.33/unit) in other transactions costs.

OPERATIONAL PERFORMANCE

Partners' occupancy as at December 31, 2014, was 94.3%, a decrease from 96.4% as at December 31, 2013. This decrease was primarily the result of single vacancy in excess of 40,000 square feet. The REIT is actively seeking a replacement tenant for this space.

Of the leases that were vacant or expired during 2014, 459,527 square feet have been renewed or replaced. The balance of 91,512 square feet, comprising twenty-two tenancies, will require new prospects.

OUTLOOK

Lease expiries in 2015 and 2016 are 7.1% and 14.7%, respectively, as at December 31, 2014. 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 December 31, 2014, Partners had $64.6 million, or 26.8%, in mortgages maturing during the period from January 1, 2015 to December 31, 2016. These maturities provide Partners with an opportunity to refinance this portion of its debt at current market rates, which should result in a slight reduction in the REIT's financing costs.

FOURTH QUARTER AND SUBSEQUENT DEVELOPMENTS

A more comprehensive description of all the items listed below, as well as less significant developments that took place during the relevant periods, is available in the REIT's Management's Discussion & Analysis for the fourth quarter of 2014.

Unwinding of the Holyrood Transaction

In April 2014, Partners purchased three retail centres from Holyrood Holdings ("Holyrood") for a purchase price of approximately $90.1 million. In June 2014, the REIT entered into a Rescission Agreement with Holyrood to unwind this transaction. On October 2, 2014 the REIT and Holyrood successfully satisfied all conditions of this Rescission Agreement and unwound the transaction. Total soft costs and break fees associated with the Holyrood Transaction and its rescission were $4.2 million.

Financing Activity

On November 10, 2014, Partners completed its refinancing of five properties. This refinancing consisted of first mortgages that amount to $51.0 million. Of this amount, $47.0 million was used to repay both the $35.0 million outstanding on the REIT's $40.0 million credit facility and other existing mortgages. The balance of $4.0 million will be allocated to high return on investment projects, improving the quality of the REIT's existing property portfolio. The first mortgages carry an average weighted interest rate of 3.74% and an average term to maturity of 6.9 years.

The refinancing also provided the REIT with access to a $10.0 million line of credit that is secured by second mortgages on a number of the refinanced properties. The $10.0 million line of credit will bear interest at a rate of prime plus 2.0% and has a term of two years.

On February 17, 2015, Partners completed its refinancing of three properties. This refinancing consisted of first mortgages that amount to $5.6 million, and provided the REIT with $4.1 million in additional liquidity to fund high return on investment projects. These first mortgages carry an average weighted interest rate of 2.88% and an average term to maturity of 5.5 years.

Declaration of Trust

On March 23, 2015, Partners' Board of Trustees approved changes to Appendix "A" of the REIT's Declaration of Trust to amend provisions setting out procedures that must be followed should anyone wish to nominate individuals for election as a Trustee of the REIT. The amended provisions follow similar "advance notice" by-laws adopted by many reporting issuers. Unitholders will be asked to confirm and ratify the amended and restated nomination provisions set out in Appendix "A" of the Declaration of Trust at the next annual meeting of unitholders. If the provisions are not confirmed at the annual unitholders' meeting by an ordinary resolution of the unitholders, such provisions will be of no further force and terminate. The revised form of the Declaration of Trust will be filed on www.sedar.com and will be available on the REIT's website.

Conference Call

Partners will also host a conference call at 8:30 AM Eastern tomorrow, March 27, at which time management will both review Partners' financial results and discuss the REIT's strategic outlook.

Dial-In Details

Toll Free (North America): 800-355-4959

Local: 416-340-8530

Instant Replay Details (Available until April 10, 2015)

Toll Free (North America): 800-408-3053

Passcode: 7778388

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 focused on the expansion and management of a portfolio of 36 retail and mixed-use community and neighbourhood shopping centres. These properties are located in both primary and secondary markets across British Columbia, Alberta, Manitoba, Ontario, and Quebec, and comprise a total of approximately 2.5 million square feet of leasable space.

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, including the timing of the offering, success of the offering, listing of the units, use of proceeds of the Offering, access to capital, regulatory approvals, intended acquisitions and general economic and industry conditions. 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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