Partners Real Estate Investment Trust
TSX : PAR.UN

Partners Real Estate Investment Trust

August 14, 2014 23:35 ET

Partners REIT Announces Results for the Second Quarter of 2014

BARRIE, ONTARIO--(Marketwired - Aug. 14, 2014) - Partners Real Estate Investment Trust (the "REIT," or "Partners") (TSX:PAR.UN) today announced its results for the three-month period ended June 30, 2014 (the "second quarter").

CONSOLIDATED QUARTERLY RESULTS AND MAJOR DEVELOPMENTS

  • Revenues and NOI increased by 17% and 9%, respectively, when compared to the second quarter of 2013.
  • FFO and AFFO decreased by 30% and 26%, respectively, when compared to the second quarter of 2013.
  • AFFO cash payout ratio of 111%, an increase from 104% during the second quarter of 2013.
  • In June 2014, Partners entered into a Rescission Agreement with Holyrood Holdings
    ("Holyrood") to unwind the REIT's purchase of three retail centres and a promissory note for total investment of $90.1 million ("the Holyrood Transaction").
  • Today, August 14, 2014, subsequent to the conclusion of the quarter, Partners announced two steps intended to secure the REIT's financial position: (a) the reduction of the REIT's monthly distribution from $0.04166 to $0.02083; and, (b) a conditional agreement to sell a small portfolio of properties for net cash consideration of approximately $14 million.
  • The REIT's second quarter results were impacted by $2.5 million of one-time costs associated with the proxy battle with Orange Capital, the REIT's attempts to unwind the Holyrood Transaction, and the strategic review.
As at and for the three months ended As at and for the six months ended
Jun 30, 2014 Jun 30, 2013 Jun 30, 2014 Jun 30, 2013
Revenues from income producing properties $ 16,432,960 $ 14,078,122 $ 31,600,856 $ 27,259,686
Net income (loss) (4,499,171 ) 2,402,571 (5,811,357 ) 10,500,236
Net income (loss) per unit - basic (0.17 ) 0.09 (0.22 ) 0.41
NOI (1) 10,128,848 9,267,739 19,688,342 17,422,751
NOI - same property (1) 8,255,954 8,418,087 15,681,421 16,041,849
FFO(1) 2,571,438 3,659,044 6,084,334 7,245,369
FFO per unit(1) 0.08 0.14 0.21 0.28
AFFO(1) 2,754,102 3,718,747 6,403,117 7,501,089
AFFO per unit(1) 0.09 0.14 0.22 0.29
Distributions(2) 3,441,958 4,140,261 6,705,171 8,263,281
Distributions per unit(2) 0.13 0.16 0.25 0.32
Distribution payout ratio(3) 134% / 125 % 113% / 111 % 110% / 105 % 114% / 110 %
Cash distributions(4) 3,052,841 3,858,402 6,035,307 7,747,299
Cash distributions per unit(4) 0.11 0.15 0.23 0.30
Cash distribution payout ratio(5) 119% / 111 % 105% / 104 % 99% / 94 % 107% / 103 %
As at Jun 30, 2014 Dec 31, 2013 Jun 30, 2013
Total assets $ 686,132,048 $ 595,628,037 $ 589,261,829
Total debt(6) 466,478,102 398,612,885 377,996,817
Total equity 180,519,609 184,878,657 198,001,004
Weighted average units outstanding - basic 26,562,998 25,731,319 25,564,016
Debt-to-gross book value including debentures(6) 66.7 % 66.7 % 65.9 %
Debt-to-gross book value excluding debentures(6) 54.5 % 52.4 % 51.1 %
Interest coverage ratio(7) 1.94 2.10 2.65
Debt service coverage ratio(7) 1.29 1.43 1.67
Weighted average interest rate(8) 4.83 % 4.34 % 4.31 %
Portfolio occupancy(9) 96.8 % 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 II - Results of Operations".
(8) Represents the weighted average effective interest rate for secured debt excluding debentures and credit facilities.
(9) Occupancy excludes three Ontario properties from the Holyrood Acquisition.
(10) Certain comparative figures have been reclassified to conform with the current year's presentation.

"In order to position Partners to realize our assets' potential, it is vital that we improve our financial flexibility. This position has been constrained by a variety of factors, including our recent proxy battle, near-term cash requirements, and the need to make critical investments in our property portfolio. Furthermore, the uncertainty regarding the outcome of our attempts to unwind the Holyrood acquisition has limited our ability to access traditional sources of capital. As a result, we have elected to reduce our monthly distribution and sell a small portfolio of our Ontario assets. These decisions were not made lightly. However, improving our liquidity and financial flexibility is necessary for our future."

"We believe that we will soon have greater clarity regarding the unwinding of the Holyrood acquisition," concluded Ms. Domenico. "Regardless of the outcome, we will then be in a position to articulate a more comprehensive strategic plan for Partners' future. Over the last twelve months, Partners' progress has been plagued by a variety of headwinds. Only by establishing a track record of consistent performance can we prove that this challenging period is behind us. Today's decisions place us in a better position to pursue this goal."

Financial Results

Partners' revenue from income producing properties for the second quarter increased by $2.4 million, or 17%, when compared to the second quarter of 2013. This increase was primarily due to the contributions of properties acquired over the prior twelve months.

All property NOI for the first quarter increased by $0.9 million, or 9%, when compared to the second quarter of 2013. This improvement was primarily due to the REIT's acquisition activity. Same property NOI for the second quarter decreased by 2% when compared to the second quarter of 2013. This decline can be attributed to the application of lower recovery rates for accruals at the conclusion of the second quarter, when compared to accruals performed at the conclusion of the second quarter of 2013.

FFO for the second quarter decreased by 30%, when compared to FFO for the second quarter of 2013, due to increases in both financing and general and administrative costs. AFFO for the second quarter decreased by 26%, when compared to the second quarter of 2013. The AFFO decline was driven by the same factors as the FFO decline, and was partially offset by the recognition of lower straight line rents during 2014. The AFFO cash payout ratio for the second quarter was 111%, compared to 104% in the second quarter of 2013.

Partners' total assets as at June 30, 2014 increased by $90.5 million, or 15%, when compared to the balance as at December 31, 2014. This increase was a result of both the Holyrood Transaction and increases to the REIT's working capital, and was partially offset by fair value losses recognized on the REIT's property portfolio.

Partners' total debt as at June 30, 2014 increased by $67.9 million, or 17%, when compared to the balance at December 31, 2013. This increase can be attributed to three new mortgages obtained with the Holyrood Acquisition that total $55.2 million, a new $15.0 million second mortgage secured by six of the REIT's single tenant properties, and $2.0 million in net draws on the REIT's Credit Facility. These factors were partially offset by monthly principal repayments on the REIT's mortgages.

Partners' interest coverage ratio as at June 30, 2014 was 1.94, a decrease from 2.10 as at December 31, 2013. The REIT's debt service coverage ratio as at June 30, 2014 was 1.29, a decrease from 1.43 as at December 31, 2014. These declines can be attributed to new and assumed mortgages, a convertible debenture offering, and draws on the REIT's credit facility. The impact of these factors was partially offset by earnings contributions from newly acquired properties.

Partners' debt-to-gross book value as at June 30, 2014 was 66.7%, or 54.5% when excluding the impact of debentures. These metrics stood at 66.7% and 52.4%, respectively, as at December 31, 2013.

Net asset value is a measure of Partners' total assets less the REIT's liabilities, and is represented on the balance sheet as Unitholders' Equity. As at June 30, 2014, the REIT's net asset value was $6.58 per unit, a decrease of $0.53 per unit when compared to its level at December 31, 2013. The decrease in the net asset value per unit can primarily be attributed to fair value losses recognized on the valuation of the REIT's property portfolio.

OPERATIONAL PERFORMANCE

Partners' occupancy, excluding the Holyrood Acquisition, as at June 30, 2014 was 96.8%, an increase from 96.4% at December 31, 2013. This increase is a result of the REIT's ongoing leasing activities.

Of the leases that are set to expire during 2014, 279,977 square feet have been renewed or replaced with new leases with a further 102,885 square feet currently in the process of being renewed or committed to lease. The balance of 20,212 square feet, comprising eight premises, will require new prospects.

OUTLOOK

As at June 30, 2014, Partners expected 1.9% 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 the CRU space. As a result, these expiries provide the REIT with a near-term opportunity to potentially increase revenues.

As at June 30, 2014, Partners had $127.8 million, or 36.7%, of mortgages maturing over the remainder of 2014 and 2015. 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.

SECOND QUARTER AND SUBSEQUENT DEVELOPMENTS

A more comprehensive description of all the items listed below is available in a separate press release issued today, entitled "Partners REIT announces strategic steps to improve financial position," as well as in the REIT's Management's Discussion & Analysis for the second quarter of 2014.

Sale of Assets

The REIT has entered into a conditional agreement to sell a small portfolio of properties, all located in Ontario, for aggregate net proceeds (after deducting mortgage debt assumed by the purchaser and transaction expenses) of approximately $14 million.

Reduced Distribution

Effective as of the August distribution, Partners will reduce its monthly distribution to $0.02083 per unit per month, or $0.25 per unit per annum. This reduction will result in annual cash savings of approximately $7.7 million, based on the unit count at the end of the second quarter.

Unwinding of the Holyrood Transaction

In April 2014, Partners purchased three retail centres and a obtained a promissory note from Holyrood Holdings for a total investment of $90.1 million. In June 2014, the REIT entered into a Rescission Agreement with Holyrood to unwind this transaction. The Rescission Agreement was subject to a number of material conditions. For the past several months, the parties have been working to satisfy those conditions. As of the date of this release, at least one material condition remains outstanding. The REIT's second quarter results assume that the Holyrood Transaction will not be unwound.

The table below presents the impact of the Holyrood Transaction on the REIT's condensed consolidated statement of financial position. The table is provided to show the pro forma impact on the REIT's financial position should the Holyrood Transaction be rescinded.




As at
Partners REIT
June 30, 2014
Adjustments
to Rescind
Holyrood Transaction
June 30, 2014
Partners REIT
Pro Forma (Post
Holyrood Rescission)
June 30, 2014
ASSETS
Non-current assets
Income producing properties $ 664,204,898 $ (84,312,646 ) $ 579,892,252
664,204,898 (84,312,646 ) 579,892,252
Current assets
Other assets 6,228,409 (37,205 ) 6,191,204
Notes receivable 7,484,161 (7,484,161 ) -
Accounts receivable 6,468,230 (430,272 ) 6,037,958
Cash 1,746,350 - 1,746,350
21,927,150 (7,951,638 ) 13,975,512
$ 686,132,048 $ (92,264,284 ) $ 593,867,764
LIABILITIES -
Non-current liabilities -
Mortgages payable $ 242,223,088 $ - $ 242,223,088
Convertible debentures 82,889,239 - 82,889,239
Credit facilities - - -
325,112,327 - 325,112,327
Current liabilities
Mortgages payable 107,271,247 (55,561,719 ) 51,709,528
Credit facilities 32,869,629 - 32,869,629
Accounts payable and other liabilities 15,192,259 (143,921 ) 15,048,338
Distributions payable 1,147,529 - 1,147,529
Bank indebtedness - - -
156,480,664 (55,705,640 ) 100,775,024
481,592,991 (55,705,640 ) 425,887,351
Exchangeable LP units 24,019,448 (24,019,448 ) -
505,612,439 (79,725,088 ) 425,887,351
UNITHOLDERS' EQUITY 180,519,609 (12,539,196 ) 167,980,413
$ 686,132,048 $ (92,264,284 ) $ 593,867,764

The table below presents the impact of the Holyrood Transaction on the REIT's condensed consolidated statement of comprehensive income (loss) for the six months ended June 30, 2014. The table is provided to show the pro forma impact on the REIT's financial position should the Holyrood Transaction be rescinded.

Six months ended June 30, Partners REIT
2014
Adjustments
to Rescind
Holyrood Transaction
2014
Partners REIT
Pro Forma (Post
Holyrood Rescission)
2014
Revenues from income producing properties $ 31,600,856 $ (1,223,175 ) $ 30,377,681
Property operating expenses (4,989,282 ) 466,939 (4,522,343 )
Realty taxes (6,737,924 ) 231,984 (6,505,940 )
Property management fees (541,178 ) - (541,178 )
19,332,472 (524,252 ) 18,808,220
Other expenses:
Financing costs 11,484,958 (1,049,496 ) 10,435,462
General and administrative expenses 2,757,128 - 2,757,128
Other transaction costs 5,263,003 2,422,534 7,685,537
19,505,089 1,373,038 20,878,127
Income before fair value gains (losses) (172,617 ) (1,897,290 ) (2,069,907 )
Fair value gains (losses) (5,638,740 ) (3,898,949 ) (9,537,689 )
-
Net income (loss) and comprehensive income (loss) $ (5,811,357 ) $ (5,796,239 ) $ (11,607,596 )
EARNINGS (LOSS) PER UNIT
Basic and diluted $ (0.22 ) $ (0.19 ) $ (0.39 )

Revenues from income producing properties exclude $383,219 in Head Lease payments due from Holyrood for the two months ended June 30, 2014. Under IFRS these amounts are not considered revenues from income producing properties.

Conference Call Details

Partners will host a conference call at 8:30 AM Eastern tomorrow, August 15, 2014, at which time management will review the REIT's second quarter financial results and discuss the REIT's strategic outlook.

Toll Free (North America): 866-225-0198
Local: 416-340-2218
Instant Replay Details (Available until August 29, 2014)
Toll Free (North America): 800-408-3053
Passcode: 9562542
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, 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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