Primaris Retail REIT
TSX : PMZ.UN

Primaris Retail REIT

November 02, 2006 16:52 ET

Primaris Retail REIT Announces Third Quarter Financial Results

TORONTO, ONTARIO--(CCNMatthews - Nov. 2, 2006) - Primaris Retail REIT (TSX:PMZ.UN) is pleased to report a 35.6% increase in net operating income for the third quarter of 2006, as compared to the third quarter of 2005.

President and CEO, Michael Latimer, commented "this quarter was very productive for Primaris, with four new properties on stream for the full quarter and all three redevelopment projects progressing well. On top of these significant activities the existing portfolio continues to perform strongly. A credit rating agency recently increased the Stability rating on our distributions by one notch to "STA-4 (high)".This rating increase was based on "Primaris's significantly improved size and scale as well as solid performance of its shopping centres and reasonable payout ratio all of which enhance the stability of distributions."

Highlights

Funds From Operations

- Funds from operations for the third quarter ended September 30, 2006 was $17.4 million or $0.336 per unit fully diluted, up 18.1% from the $14.7 million, or $0.347 reported for the third quarter of 2005.

Net Operating Income

- Net operating income for the third quarter ended September 30, 2006, was $28.2 million, substantially higher than the $23.5 million recorded in the third quarter of 2005. The large increase was driven by acquisitions.

Same Property - Net Operating Income

- Net operating income for the third quarter ended September 30, 2006, on a same property basis, decreased 0.03% over the comparative three-month period. Excluding the net positive effect in 2005 of lease termination fees and allowing for decreased revenues in 2006 from anchor tenants at projects under redevelopment and an accounting adjustment, the increase in same-property NOI would have been 3.4%.

Distributable Income

- Distributable income for the third quarter ended September 30, 2006 was $16.2 million, or $0.313 per unit fully diluted, as compared to $13.7 million, or $0.323 per unit fully diluted, reported for the third quarter of 2005.

Operations

- The REIT renewed or leased 179,865 square feet of space during the third quarter. The weighted average new rent in these leases, on a cash basis, represented a 6.9% increase over the previous rent paid.

- Overall occupancy was 97.2% at September 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 nine properties owned during all of the twelve months ended August 31, 2006 increased 4.5% to $483 per square foot as compared to the previous 12 months.

- The third quarter results included seasonal revenues of $1.9 million as compared to $1.2 million recorded in the third quarter of 2005.

Financial Results

Funds from operations for the three months ended September 30, 2006 was $17.4 million or $0.338 per unit basic ($0.336 fully diluted). This compares to funds from operations of $14.7 million or $0.355 per unit basic ($0.347 fully diluted) earned during the three months ended September 30, 2005.

Net income for the three months ended September 30, 2006 was $2.3 million or $0.04 per unit (basic and fully diluted). This compares to net income of $4.9 million or $0.12 per unit (basic and fully diluted) earned during the three months ended September 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 $16.2 million for the quarter ended September 30, 2006, or $0.315 per unit basic ($0.313 fully diluted). This compares to distributable income of $13.7 million or $0.330 per unit basic ($0.323 fully diluted) earned during the three months ended September 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 September 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 $2.1 million of net operating income to the third quarter of 2006 but made no contribution to results for the comparative period.

The distribution payout ratio for the third quarter of 2006, expressed on a per unit basis as distributions paid divided by fully diluted funds from operations was 84.8% as compared to a 82.2% payout ratio for the third 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 increasing the payout ratio until the new capital is invested in income producing properties.

The distribution payout ratio for the third quarter of 2006, expressed on a per unit basis as distributions paid divided by fully diluted distributable income was 91.1% as compared to 88.2% for the third quarter of 2005.

At September 30, 2006, the REIT's total enterprise value was approximately $1.65 billion (based on the market closing price of Primaris' units on September 30, 2006, plus total debt outstanding). At September 30, 2006 the REIT had $716.0 million of outstanding debt equating to a debt to total enterprise value ratio of 43.3%. The REIT's debt consisted of $705.4 million of fixed-rate senior debt with a weighted average interest rate of 5.6% and a weighted average term to maturity of 9.1 years, and $10.7 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 51.7%. During the three months ended September 30, 2006, the REIT had an interest coverage ratio of 2.8 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.



Operating Results
Net Operating Income - Same Properties

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

Operating revenue $ 37,807 $ 37,078 $ 729
Operating expenses 15,972 15,236 (736)
----------------------------------------------------
Net operating income $ 21,835 $ 21,842 $ (7)
----------------------------------------------------


The same property comparison includes only thirteen properties that were owned throughout both the current and comparative three-month periods. Net operating income, on a same property basis, was $7 less than the comparative three-month period.

Net operating income, on a same property basis, would have increased 3.4% 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 4.5% to $483 in the 12 months ended August 31, 2006. Total tenant volume has also increased when comparing sales for the same properties.



Sales Per
Square Foot Variance Tenant Sales Volume Variance
2006 2005 $ % 2006 2005 $ %
--------------------- ----------------------------------------------

Aberdeen
Mall 449 426 23 5.4% 44,679,143 42,374,070 2,305,073 5.4%
Cornwall
Centre 434 408 26 6.3% 54,557,581 51,335,738 3,221,843 6.3%
Dufferin
Mall 505 507 (2)-0.3% 64,368,986 64,560,183 (191,197)-0.3%
Edinburgh
Market
Place 410 390 20 5.1% 6,163,646 5,865,289 298,357 5.1%
Northland
Village 421 390 31 7.9% 33,885,710 31,397,467 2,488,243 7.9%
Midtown
Village 473 444 30 6.7% 84,012,996 78,745,885 5,267,111 6.7%
Orchard
Park 550 527 22 4.2% 102,249,486 98,129,290 4,120,196 4.2%
Park
Place
Mall 451 416 34 8.3% 58,838,701 54,344,136 4,494,565 8.3%
Stone
Road
Mall 531 528 3 0.6% 72,911,161 72,448,594 462,567 0.6%
--------------------- ----------------------------------------------
$ 483 $ 462 $ 21 4.5% $ 521,667,410 $ 499,200,652 $22,466,758 4.5%
--------------------- ----------------------------------------------


The REIT's increase in sales per square foot of 4.5% is less favourable than the 6.0% national average tenant sales increase for the same period, as reported by the International Council of Shopping Centres for the 12 months ended August 31, 2006. The REIT's sales productivity of $483 is lower than the ICSC average of $512, largely because the ICSC includes sales from super regional malls which have the highest sales per square foot in the country.

Leasing activity

Primaris Retail REIT's property portfolio remains well leased.

The portfolio occupancy rate decreased during the third quarter to 97.2% at September 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 179,865 square feet of space during the third quarter. This represents 80 leases of generally smaller stores. Approximately 61% of these were renewals of existing tenants with weighted average new rents, on a cash basis, representing a 6.9% increase over the previous rent paid. The renewal rate on leasing would have been 72% 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. As at September 30, 2006 approximately $14.3 million of costs have been incurred. 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 94% at September 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. As at September 30, 2006 approximately $15.1 million of costs have been incurred. Pre-leasing stood at 74% at September 30, 2006. Some tenants in the new space are expected to open for business in early November 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. As at September 30, 2006 $4.2 million of costs have been incurred. The combination of the capital project and the arrival of H&M, which opened in September 2006, 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

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

Revenue
Base rent $ 31,117 $ 25,639 $ 5,478
Recoveries from
tenants 16,438 12,556 3,882
Percentage rent 483 345 138
Parking 1,104 1,013 91
Interest and other
income 560 526 34
------------------- ------------------ -------------
49,702 40,079 9,623

Expenses
Operating 20,943 16,152 (4,791)
Interest 9,419 7,532 (1,887)
Depreciation and
amortization 14,976 10,091 (4,885)
Ground rent 291 294 3
------------------- ------------------ -------------
45,629 34,069 (11,560)
------------------- ------------------ -------------
Income from
operations 4,073 6,010 (1,937)
General and
administrative 1,775 1,148 (627)
------------------- ------------------ -------------
Net income 2,298 4,862 (2,564)

Depreciation of
income-producing
properties 14,277 9,670 4,607
Amortization of
acquired deferred
recoverable costs 564 - 564
Amortization of
leasing costs 515 273 242
Accretion of
convertible
debentures (8) 5 (13)
Amortization of
above and below
market rents, net (280) (101) (179)
------------------- ------------------ -------------
Funds from
operations $ 17,366 $ 14,709 $ 2,657
------------------- ------------------ -------------

Funds from
operations per
unit - basic $ 0.338 $ 0.355 $ (0.017)
Funds from
operations per
unit - fully diluted $ 0.336 $ 0.347 $ (0.011)
Funds from
operations
- payout ratio 84.8% 82.2% 2.6%
Distributable
income per unit
- basic $ 0.315 $ 0.330 $ (0.015)
Distributable
income per unit
- fully diluted $ 0.313 $ 0.323 $ (0.010)
Distributable
income per unit
- payout ratio 91.1% 88.2% 2.9%
Distributions
per unit $ 0.285 $ 0.285 $ -
Weighted average
units outstanding
- basic 51,305,745 41,483,523 9,822,222
Weighted average
units outstanding
- fully diluted 52,274,797 43,835,469 8,439,328
Units outstanding,
end of period 51,418,783 44,391,559 7,027,224

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 September 30, 2006 was $2.7 million ($0.011 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 September 30, 2006 are available on the REIT's website at www.primarisreit.com.

Forward-Looking Information

The MD&A contains forward-looking information based on management's best estimates and the current operating environment. These forward-looking statements are related to, but not limited to, the REIT's operations, anticipated financial performance, business prospects and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed, projected or implied by such forward-looking statements.

Examples of such information include, but are not limited to, factors relating to the business, financial position of the REIT, operations and redevelopments including volatility of capital markets, consumer spending, retail leasing demand, strength of the retail sector, price volatility of construction costs, availability of construction labour and timing of regulatory and contractual approvals for developments.

Although the forward-looking statements contained in this document are based on what management of the REIT believes are reasonable assumptions, forward-looking statements involve significant risks and uncertainties. They should not be read as guarantees of future performance or results and will not necessarily be an accurate indicator of whether or not such results will be achieved. Readers are cautioned not to place undue reliance on forward-looking statements as a number of factors could cause actual future results to differ from targets, expectations or estimates expressed in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, economic, competitive and commercial real estate conditions, unplanned compliance-related expenses, uninsured property losses and tenant-related risks.

Non-GAAP Measures

Funds from operations ("FFO"), distributable income ("DI") and earnings before interest, taxes, depreciation and amortization ("EBITDA") are widely used supplemental measures of a Canadian real estate investment trust's performance and are not defined under Canadian generally accepted accounting principles ("GAAP"). Management uses these measures when comparing itself to industry data or others in the marketplace. The MD&A describes FFO, DI and EBITDA and provides a reconciliation to net income as defined under GAAP. FFO, DI and EBITDA should not be considered alternatives to net income or other measures that have been calculated in accordance with GAAP and may not be comparable to measures presented by other issuers.

Conference Call

Primaris invites you to participate in the conference call that will be held on Friday, November 3 at 9:00 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 November 10, 2006. The replay will be accessible by dialing 416-695-5800 or 1-800-408-3053 and using the pass code 3200522#.

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 October 31, 2006, the REIT had 51,483,794 units issued and outstanding.



PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST

Interim Consolidated Balance Sheets
(In thousands of dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
September 30, December 31,
2006 2005
(Unaudited)
---------------------------------------------------------------------------

Assets

Income-producing properties $ 1,198,296 $ 1,093,424
Deferred costs 26,918 20,050
Rents receivable 4,023 3,195
Other assets and receivables 45,950 14,346
Cash and cash equivalents - 62,872

---------------------------------------------------------------------------
$ 1,275,187 $ 1,193,887
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Liabilities:
Mortgages payable $ 705,383 $ 600,022
Convertible debentures 10,443 20,866
Bank indebtedness 57 -
Accounts payable and other liabilities 43,864 34,985
Distribution payable 4,890 4,791
---------------------------------------------------------------------------
764,637 660,664

Unitholders' equity 520,550 533,223

---------------------------------------------------------------------------
$ 1,275,187 $ 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
September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
(Unaudited) (Unaudited)

Revenue:
Base rent $ 31,117 $ 25,639 $ 88,600 $ 63,786
Recoveries from tenants 16,438 12,556 49,586 34,971
Percentage rent 483 345 1,316 704
Parking 1,104 1,013 3,483 3,217
Interest and other 560 526 2,620 1,439
--------------------------------------------------------------------------
49,702 40,079 145,605 104,117

Expenses:
Property operating 12,131 9,100 35,568 24,985
Property taxes 8,812 7,052 26,518 17,893
Depreciation 14,277 9,670 41,242 20,972
Amortization 699 421 1,955 1,136
Interest 9,419 7,532 26,677 19,442
Ground rent 291 294 903 883
General and administrative 1,775 1,148 4,624 3,132
--------------------------------------------------------------------------
47,404 35,217 137,487 88,443

---------------------------------------------------------------------------
Net income $ 2,298 $ 4,862 $ 8,118 $ 15,674
---------------------------------------------------------------------------
---------------------------------------------------------------------------


Basic and fully-diluted
net income per unit $ 0.04 $ 0.12 $ 0.16 $ 0.43
---------------------------------------------------------------------------
---------------------------------------------------------------------------



PRIMARIS RETAIL REAL ESTATE
INVESTMENT TRUST
Reconciliation of Net Income to Funds from Operations
(In thousands of dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three Months Ended Three Months Ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------

Net income $ 2,298 $ 4,862
Depreciation of income
producing properties 14,277 9,670
Amortization of acquired
deferred recoverable costs 564 -
Amortization of leasing costs 515 273
Accretion of convertible
debentures (8) 5
Above and below market leases (280) (101)
------------------- ------------------
Funds from operations $ 17,366 $ 14,709
------------------- ------------------

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 Ended Three Months Ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------

Net income $ 2,298 $ 4,862
Straight line rent (458) (504)
Depreciation of income
producing properties 14,277 9,670
Amortization of acquired
deferred recoverable costs 564 -
Accretion of convertible
debentures (8) 5
Above and below market leases (280) (101)
Amortization of debt premiums (179) (262)
Amortization of hedge gain (63) -
------------------- ------------------
Distributable income $ 16,151 $ 13,370
------------------- ------------------

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 Ended Three Months Ended
September 30, 2006 September 30, 2005
---------------------------------------------------------------------------

Revenue $49,702 $ 40,079
Less: Corporate interest
and other income (280) (117)
Property operating
expenses (12,131) (9,100)
Property tax expense (8,812) (7,052)
Ground rent (290) (294)
------------------- ------------------
Net operating income $ 28,189 $ 23,516
------------------- ------------------



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
    Website: www.primarisreit.com