Primaris Retail REIT
TSX : PMZ.UN

Primaris Retail REIT

August 03, 2006 16:31 ET

Primaris Retail REIT Announces Strong Second Quarter Financial Results

TORONTO, ONTARIO--(CCNMatthews - Aug. 3, 2006) - Primaris Retail REIT (TSX:PMZ.UN) is pleased to report a 40% increase in net operating income for the second quarter of 2006, as compared to the second quarter of 2005.

President and CEO, Michael Latimer, commented "this quarter was very productive for Primaris, with four new properties acquired and all three redevelopment projects progressing well. On top of these significant activities the existing portfolio continues to perform strongly."

Highlights

Funds From Operations

- Funds from operations for the second quarter ended June 30, 2006 was $16.7 million or $0.324 per unit fully diluted, up 41.3% from the $11.8 million, or $0.331 reported for the second quarter of 2005.

Net Income

- Net income for the three months ended June 30, 2006 was $2.3 million or $0.05 cents per unit (basic and fully diluted) as compared to net income of $6.0 million or $0.17 cents per unit (basic and fully diluted) earned in the second quarter of 2005.

Net Operating Income

- Net operating income for the second quarter ended June 30, 2006, was $26.1 million, substantially higher than the $18.7 million recorded in the second quarter of 2005. The large increase was driven by acquisitions.

Same Property - Net Operating Income

- Net operating income for the second quarter ended June 30, 2006, on a same property basis, decreased 3.6% over the comparative three-month period. Excluding the net positive effect in 2005 of lease termination fees, lost revenues in 2006 from anchor tenants at projects under redevelopment and an accounting adjustment, the increase in same-property NOI would have been 1.7%.

Distributable Income

- Distributable income for the second quarter ended June 30, 2006 was $15.7 million, or $0.306 per unit fully diluted, as compared to $11.3 million, or $0.316 per unit fully diluted, reported for the second quarter of 2005.

Acquisitions

- The REIT acquired four properties on June 14, 2006 at a cost of $112.7 million. The acquisition was financed by a combination of $55 million of debt and $57.7 million of cash on hand.

Refinancing

- The REIT borrowed $126.8 million on May 1, 2006 by way of a new loan secured by Orchard Park Shopping Centre. Proceeds were used to repay the existing loan of $66.2 million, to fund redevelopment costs at Orchard Park, and for general trust purposes. The new loan has a 15 year term and an effective interest rate of 5.23%.

Operations

- The REIT renewed or leased 260,698 square feet of space during the second quarter. The weighted average new rent in these leases, on a cash basis, represented an 11.9% increase over the previous rent paid.

- Overall occupancy was 96.8% at June 30, 2006 as compared to 97.5% at December 31, 2005. The occupancy rate has decreased from December 31, 2005 due to two anchor tenants' spaces that have vacated in preparation for redevelopment activity.

- Same-tenant sales, for the seven properties owned during all of the twelve months ended May 31, 2006 increased 3.6% to $487 per square foot as compared to the previous 12 months.

- The second quarter results included seasonal revenues of $1.3 million as compared to $1.0 million recorded in the second quarter of 2005.

Financial Results

Funds from operations for the three months ended June 30, 2006 was $16.7 million or $0.327 per unit basic ($0.324 fully diluted). This compares to funds from operations of $11.8 million or $0.345 per unit basic ($0.331 fully diluted) earned during the three months ended June 30, 2005.

Net income for the three months ended June 30, 2006 was $2.3 million or $0.05 per unit (basic and fully diluted). This compares to net income of $6.0 million or $0.17 per unit (basic and fully diluted) earned during the three months ended June 30, 2005. The change in net income reflects the positive impact of acquisitions and operations, offset by the negative impact of accounting policies for the depreciation of acquired assets.

Distributable income was $15.7 million for the quarter ended June 30, 2006, or $0.308 per unit basic ($0.306 fully diluted). This compares to distributable income of $11.3 million or $0.329 per unit basic ($0.316 fully diluted) earned during the three months ended June 30, 2005.

The REIT acquired four properties in June 2005 and acquired a fifth property in July 2005. In addition, the REIT acquired a property on October 17, 2005 and another on December 1, 2005. These properties contributed significantly to operations throughout the three months ended June 30, 2006. These acquisitions and the related debt and equity financings explain a significant amount of the difference between the results for the current period and the comparative period. In addition the REIT acquired four properties on June 14, 2006. These four assets contributed $0.4 million of net operating income to the second quarter of 2006.

The distribution payout ratio for the second quarter of 2006, expressed on a per unit basis as distributions paid divided by fully diluted funds from operations was 87.9% as compared to a 81.6% payout ratio for the second quarter of 2005. The payout ratios are sensitive to both seasonal operating results and financial leverage. A reduction in financial leverage, as a result of the issue of equity in December 2005, had the effect of temporarily increasing the payout ratio until the new capital is invested in income producing properties.

The distribution payout ratio for the second quarter of 2006, expressed on a per unit basis as distributions paid divided by fully diluted distributable income was 93.1% as compared to 85.4% for the second quarter of 2005.

At June 30, 2006, the REIT's total enterprise value was approximately $1.55 billion (based on the market closing price of Primaris' units on June 30, 2006, plus total debt outstanding). At June 30, 2006 the REIT had $721.6 million of outstanding debt equating to a debt to total enterprise value ratio of 46.4%. The REIT's debt consisted of $708.9 million of fixed-rate senior debt with a weighted average interest rate of 5.6% and a weighted average term to maturity of 9.3 years, and $12.7 million of 6.75% fixed-rate convertible debentures. The REIT had a debt to gross book value ratio, as defined under the Declaration of Trust, of 51.9%. During the three months ended June 30, 2006, the REIT had an interest coverage ratio of 2.9 times as expressed by EBITDA divided by net interest expensed. The REIT defines EBITDA as net income increased by depreciation, amortization, interest expense and, if applicable, income tax expense. EBITDA is a non-GAAP measure and may not be comparable to similar measures used by other Trusts.

Acquisition

The REIT acquired four properties on June 14, 2006 at a cost of $112.7 million. The acquisition was financed by a combination of $55 million of debt and $57.7 million of cash on hand. Three of the four properties are unenclosed shopping centres located in south western Ontario. The fourth property is an enclosed mall located in New Brunswick. The leases have an average term to maturity of approximately 7.5 years. The portfolio has a smooth lease expiry profile with no more than 19% of total area expiring in any one year.

The acquisition will further diversify Primaris' holdings in the Ontario market as well as make an initial investment in a new market: New Brunswick. Furthermore, the potential for future acquisitions of similar property types will be facilitated by the management team applied to this investment.

The $55 million of debt is a combination of the assumption of an existing loan as well as the refinancing of some existing loans. The debt has a weighted average interest rate of 5.6% and an average term to maturity of 9.5 years.

Refinancing

The REIT borrowed $126.8 million on May 1 2006. Proceeds were used to repay the existing loan in the amount of $66.2 million, to fund redevelopment costs at Orchard Park Shopping Centre expected to amount to $23.0 million, and for general trust purposes.

The new loan has a 15 year term. Monthly payments will be interest-only for the first five years and will be blended payments of principal and interest thereafter, based on a 25 year amortization period.

In anticipation of this new loan the REIT entered into a series of interest rate hedge contracts beginning in June 2005. The REIT earned a total gain of $3.0 million on settlement of these contracts between June 2005 and April 2006. The REIT will apply hedge accounting treatment to these gains and will defer and amortize them over the 15 year term of the loan. These gains will not be included in distributable income.

The face interest rate on the new loan is 5.48%. The effective rate, after accounting for the gains on hedge contracts, will be 5.23%.

Operating Results

Net Operating Income - Same Properties



Variance to
Quarter Ended Quarter Ended Comparative Period
favourable/
June 30, 2006 June 30, 2005 (unfavourable)

Operating
revenue $ 31,298 $ 31,477 $ (179)
Operating
expenses 13,505 13,027 (478)
--------------------------------------------------
Net operating
income $ 17,793 $ 18,450 $ (657)
--------------------------------------------------


The same property comparison includes only nine properties that were owned throughout both the current and comparative three-month periods. Net operating income, on a same property basis, decreased 3.6% compared to the comparative three-month period.

Net operating income, on a same property basis, would have increased 1.7% if one allowed for the loss of net operating income due to redevelopment activity at Stone Road Mall, Orchard Park and Dufferin Mall, an accounting adjustment and for the net change in lease termination income between the two periods.

Tenant sales

Tenant sales per square foot, on a same-tenant basis, have increased 3.6% to $487 in the 12 months ended May 31, 2006. Total tenant volume has also increased when comparing sales for the same properties.



Sales Per Square Foot Variance
2006 2005 $ %
-----------------------------------------
Aberdeen Mall 442 419 23 5.6%
Dufferin Mall 525 522 3 0.5%
Edinburgh Market Place 403 388 15 3.9%
Northland Village 407 384 23 6.1%
Orchard Park 535 521 15 2.9%
Park Place Mall 440 405 36 8.8%
Stone Road Mall 518 511 7 1.3%
-----------------------------------------
$ 487 $ 470 $ 17 3.6%
-----------------------------------------
-----------------------------------------


Tenant Sales Volume Variance
2006 2005 $ %
----------------------------------------------
Aberdeen Mall 42,901,963 40,643,598 2,258,365 5.6%
Dufferin Mall 65,692,267 65,356,893 335,374 0.5%
Edinburgh Market Place 6,058,353 5,831,562 226,791 3.9%
Northland Village 32,647,433 30,772,084 1,875,349 6.1%
Orchard Park 98,549,754 95,813,729 2,736,025 2.9%
Park Place Mall 57,336,839 52,682,849 4,653,990 8.8%
Stone Road Mall 71,754,780 70,809,409 945,371 1.3%
----------------------------------------------
$ 374,941,389 $ 361,910,124 $ 13,031,265 3.6%
----------------------------------------------
----------------------------------------------


The REIT's increase in sales per square foot of 3.6% is less favourable than the 4.6% national average tenant sales increase for the same period, as reported by the International Council of Shopping Centres for the 12 months ended May 31, 2006. The REIT's sales productivity of $487 is lower than the ICSC average of $502, largely because the ICSC includes sales from super regional malls which have the highest sales per square foot in the country. The ICSC has recently expanded its data base of reporting shopping centres, creating a difference between the current benchmark and prior data.

Leasing activity

Primaris Retail REIT's property portfolio remains well leased.

The portfolio occupancy rate decreased during the second quarter to 96.8% at June 30, 2006, versus 97.5% at December 31, 2005. This decrease is the result of the early termination of two anchor store leases in preparation for redevelopment activity. These percentages include space for which signed leases are in place but where the tenant may not yet be in occupancy.

The REIT leased 260,698 square feet of space during the second quarter. This represents 114 leases of generally smaller stores. Approximately 38% of these were renewals of existing tenants with weighted average new rents, on a cash basis, representing a 11.9% increase over the previous rent paid. The renewal rate on leasing would have been 65% if the leasing activity related to the redevelopments at Orchard Park and Stone Road Mall were excluded.

Development Activity

The REIT's three significant redevelopment projects are all underway and are progressing on time and on budget.

Primaris has committed to spend approximately $30.0 million on a redevelopment project at Stone Road Mall in Guelph, Ontario. The 83,000 square foot Zellers store has been demolished and is in the process of being redemised and leased to a 34,000 square foot Home Outfitters Store and a number of new, smaller shops. The Home Outfitters space was delivered to the tenant on August 1 for their interior finishing work. In addition, the redevelopment includes the conversion of a theatre location into retail space. This phase of the project began in early 2006 and will be completed before year end. The Zellers lease was terminated in January 2006 to allow work to commence. The food court will be relocated to improve customer flow and certain other small shops will be redeveloped in the food court's current location. Finally, in 2007 the common area of the balance of the mall will be renovated including floors, ceilings, lighting and energy management systems. Construction is progressing on time and on budget. Pre-leasing of the redeveloped space was at 93% at June 30, 2006. The REIT expects that it will earn an accretive return on the expenditure of this capital.

The Board of Trustees approved a $23.0 million redevelopment of Orchard Park Shopping Centre in Kelowna, B.C, involving a 30,000 square foot addition to the building and the redemise of a former 100,000 square foot Wal-Mart store. There will be no significant change in total rentable area as new common area within the former store will offset the expansion of the building. The total amount of leaseable area in this project is 142,000 square feet as certain tenants will be relocated within the mall and their vacated premises will be re-leased. Such relocations are a normal part of right-sizing tenant operations when opportunity permits. The REIT negotiated the early termination of the Wal-Mart lease, effective March 2006, to allow for work to begin immediately. Pre-leasing stood at 67% at June 30, 2006. Some tenants in the new space are expected to open for business in time for the 2006 Christmas season while others will not open until 2007.

Early in the second quarter of 2006 the REIT began an $11 million capital program at Dufferin Mall, located in Toronto, Ontario. The scope of work includes landscaping, new entrances, interior flooring, ceilings, lighting, and improved communications and electrical distribution. This work will be completed in conjunction with the arrival of a new 16,000 square foot H&M store. The combination of the capital project and the arrival of H&M will reposition the mall within its market and should continue the positive trend in tenant sales growth demonstrated over the past few years.

Comparison to Prior Period Financial Results



Three Three Variance to
Months Months Comparative
Ended Ended Period
June 30, June 30, favourable/
2006 2005 (unfavourable)

Revenue
Base rent $ 28,872 $ 19,366 $ 9,506
Recoveries from tenants 16,091 10,740 5,351
Percentage rent 202 221 (19)
Parking 1,242 1,115 127
Interest and other income 969 649 320
-------------------------------------
47,376 32,091 15,285
Expenses
Operating 20,176 12,825 (7,351)
Interest 8,749 5,866 (2,883)
Depreciation and amortization 14,215 6,052 (8,163)
Ground rent 303 294 (9)
-------------------------------------
43,443 25,037 (18,406)
-------------------------------------
Income from operations 3,933 7,054 (3,121)
General and administrative 1,622 1,070 (552)
-------------------------------------
Net income 2,311 5,984 (3,673)

Depreciation of
income-producing properties 13,553 5,697 7,856
Amortization of acquired
deferred recoverable costs 477 - 477
Amortization of leasing
costs 435 191 244
Accretion of convertible
debentures (5) (32) 27
Amortization of above and
below market rents, net (68) (19) (49)
-------------------------------------
Funds from operations $ 16,703 $ 11,821 $ 4,882
-------------------------------------

Funds from operations per
unit - basic $ 0.327 $ 0.345 $ (0.018)
Funds from operations per
unit - fully diluted $ 0.324 $ 0.331 $ (0.007)
Funds from operations
- payout ratio 87.9% 81.6% 6.3%
Distributable income per
unit- basic $ 0.308 $ 0.329 $ (0.021)
Distributable income per
unit- fully diluted $ 0.306 $ 0.316 $ (0.010)
Distributable income per
unit- payout ratio 93.1% 85.4% 7.7%
Distributions per unit $ 0.285 $ 0.270 $ 0.015
Weighted average units
outstanding - basic 51,070,057 34,276,516 16,793,541
Weighted average units
outstanding - fully
diluted 52,243,714 37,998,055 14,245,659
Units outstanding, end
of period 51,218,839 35,442,822 15,776,017


Notes:

(1) Funds from Operations, which is not a defined term within Canadian generally accepted accounting principles, has been calculated by management, using Canadian generally accepted accounting principles, in accordance with REALPac's White Paper on Funds from Operations. The White Paper defines Funds from Operations as net income adjusted for depreciation and amortization of assets purchased, including the net impact of above and below market leases, amortization of leasing costs and accretion of convertible debentures. Funds from Operations may not be comparable to similar measures used by other entities.

(2) A reconciliation from GAAP net income to Distributable Income is contained in the appendices.

Funds from operations for the quarter ended June 30, 2006 was $4.9 million ($0.007 less per unit, fully diluted) greater than the comparative period. The increase was driven by acquisitions.

Supplemental Information

The REIT's consolidated financial statements and Management's Discussion and Analysis for the quarter ended June 30, 2006 are available on the REIT's website at www.primarisreit.com.

Conference Call

Primaris invites you to participate in the conference call that will be held on Friday, August 4 at 10:00 am EST to discuss these results. Senior management will speak to the results and provide a brief corporate update. The telephone numbers for the conference call are: 416-641-6114 (within Toronto), and 1-866-542-4238 (within North America).

Audio replays of the conference call will be available immediately following the completion of the conference call, and will remain active until August 11, 2006. The replay will be accessible by dialing 416-695-5800 or 1-800-408-3053 and using the pass code 3190290#.

The REIT is a TSX listed real estate investment trust (TSX:PMZ.UN). The REIT owns 20 income-producing properties comprising approximately 7.85 million square feet located in Canada. As of July 31, 2006, the REIT had 51,300,787, units issued and outstanding.



PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST

Interim Consolidated Balance Sheets
(In thousands of dollars)
-------------------------------------------------------------------
-------------------------------------------------------------------
June 30, December 31,
2006 2005
-------------------------------------------------------------------
(Unaudited)
Assets

Income-producing properties $ 1,191,755 $ 1,093,424
Deferred costs 24,155 20,050
Rents receivable 5,366 3,195
Other assets and receivables 46,080 14,346
Cash and cash equivalents 22,700 62,872
-------------------------------------------------------------------
$ 1,290,056 $ 1,193,887
-------------------------------------------------------------------
-------------------------------------------------------------------

Liabilities and Unitholders' Equity

Liabilities:
Mortgages payable $ 708,848 $ 600,022
Convertible debentures 12,478 20,866
Accounts payable and other liabilities 43,423 34,985
Distribution payable 4,866 4,791
-------------------------------------------------------------------
769,615 660,664

Unitholders' equity 520,441 533,223

-------------------------------------------------------------------
$ 1,290,056 $ 1,193,887
-------------------------------------------------------------------
-------------------------------------------------------------------



PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST

Interim Consolidated Statements of Income
(In thousands of dollars, except per unit amounts)

-----------------------------------------------------------------
-----------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
-----------------------------------------------------------------
(Unaudited) (Unaudited)
Revenue:
Base rent $ 28,872 $ 19,366 $ 57,483 $ 38,147
Recoveries from tenants 16,091 10,740 33,148 22,415
Percentage rent 202 221 833 359
Parking 1,242 1,115 2,379 2,204
Interest and other 969 649 2,060 913
----------------------------------------------------------------
47,376 32,091 95,903 64,038

Expenses:
Property operating 11,616 7,706 23,437 15,885
Property taxes 8,560 5,119 17,706 10,841
Depreciation 13,553 5,697 26,965 11,302
Amortization 662 355 1,256 715
Interest 8,749 5,866 17,258 11,910
Ground rent 303 294 612 589
General and
administrative 1,622 1,070 2,849 1,984
----------------------------------------------------------------
45,065 26,107 90,083 53,226
-----------------------------------------------------------------
Net income $ 2,311 $ 5,984 $ 5,820 $ 10,812
-----------------------------------------------------------------
-----------------------------------------------------------------
Basic and fully-diluted
net income per unit $ 0.05 $ 0.17 $ 0.11 $ 0.32
-----------------------------------------------------------------
-----------------------------------------------------------------



PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST

Reconciliation of Net Income to Funds from Operations
(In thousands of dollars)

-------------------------------------------------------------------
-------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, June 30,
2006 2005
-------------------------------------------------------------------
Net income $ 2,311 $ 5,984
Depreciation of income producing
properties 13,553 5,697
Amortization of acquired deferred
recoverable 477 -
costs
Amortization of leasing costs 435 191
Accretion of convertible debentures (5) (32)
Above and below market leases (68) (19)
--------------------------
Funds from operations $ 17,703 $ 11,821
--------------------------


Funds from Operations, which is not a defined term within Canadian generally accepted accounting principles, has been calculated by management, using Canadian generally accepted accounting principles, in accordance with REALPac's White Paper on Funds from Operations. The White Paper defines Funds from Operations as net income adjusted for depreciation and amortization of assets purchased, including the net impact of above and below market leases, amortization of leasing costs and accretion of convertible debentures. Funds from Operations may not be comparable to similar measures used by other entities.



Reconciliation of Net Income to Distributable Income
(In thousands of dollars)

-----------------------------------------------------------------
-----------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, June 30,
2006 2005
-----------------------------------------------------------------
Net income $ 2,311 $ 5,984
Straight line rent (335) (369)
Depreciation of income producing
properties 13,553 5,697
Amortization of acquired deferred
recoverable 477 -
costs
Accretion of convertible debentures (5) (32)
Above and below market leases (68) (19)
Amortization of debt premiums (160) -
Amortization of hedge gain (54) -
---------------------------
Distributable income $ 15,719 $ 11,261
---------------------------


Distributable income, which is not a defined term within Canadian generally accepted accounting principles, has been calculated in accordance with the terms of the Declaration of Trust. Distributable income may not be comparable to similar measures used by other companies. The REIT defines distributable as net income less straight-line rent adjustment, plus depreciation and amortization of acquired leasing costs and debt premiums, plus accretion of convertible debentures, less amortization of above and below market rents and any other adjustments the Trustees deem necessary. Other adjustments may be applicable in future years if, for example, the REIT were to incur gains or losses on sale of assets, or future income taxes.



Calculation of Net Operating Income
(In thousands of dollars)

------------------------------------------------------------------
------------------------------------------------------------------
Three Months Three Months
Ended Ended
June 30, 2006 June 30, 2005
------------------------------------------------------------------
Revenue $ 47,376 $ 32,091
Less: Corporate interest and
other income (803) (280)
Property operating expenses (11,616) (7,706)
Property tax expense (8,560) (5,119)
Ground rent (303) (294)
--------------------------------
Net operating income $ 26,094 $ 18,692
--------------------------------


Contact Information

  • Primaris Retail REIT
    R. Michael Latimer
    Chief Executive Officer
    (416) 865-5353
    or
    Primaris Retail REIT
    Louis M. Forbes
    Senior Vice President, Chief Financial Officer
    (416) 865-5360