Smart Real Estate Investment Trust
TSX : SRU.UN

August 06, 2015 19:11 ET

Smart Real Estate Investment Trust Releases Second Quarter 2015 Results and Announces Distribution Increase

TORONTO, ONTARIO--(Marketwired - Aug. 6, 2015) - Smart Real Estate Investment Trust ("SmartREIT" or "the Trust") (TSX:SRU.UN) is pleased to report strong results for the second quarter ended June 30, 2015.

Highlights for the quarter:

  • On May 28, 2015, SmartREIT completed a transformative transaction involving a very significant portfolio of real estate and the SmartCentres' platform (now referred to as the "Platform" - see the "Transaction" below), transforming SmartREIT into a fully integrated REIT, with a full suite of capabilities from origination of development opportunities to construction, leasing and operations
  • Funds from operations ("FFO")(1) increased by 11.8% to $74.1 million and 6.1% to $0.518 on a per Unit basis compared to the same period in 2014
  • Maintained high level occupancy of 98.6%. The Trust had two Target store locations in the Trust's portfolio. As a result of Target's decision to leave these locations, the Trust has identified both locations for redevelopment. Had these two sites not been identified for redevelopment, the occupancy level would have been 98.0%
  • Completed Developments and Earnouts of 137,644 square feet of leasable area for $34.2 million, providing an unleveraged yield of 6.4%
  • Repaid $65.0 million of secured term debt at an average interest rate of 5.44%, and issued new term debt totalling $177.1 million with an average term of 10.0 years and an average interest rate of 3.52%
  • Repaid $48.2 million of secured construction debt at a variable cost of banker's acceptance rate plus 1.15% and issued new term debt of $85.0 million with a term of 7.0 years and an interest rate of 3.13%
  • On May 27, 2015, the Trust issued notice of redemption of the 5.75% convertible debentures with an aggregate principal amount outstanding of $55.6 million, to be redeemed on June 30, 2015. The debenture holders had options until June 29, 2015 to convert their debentures into Trust Units at a conversion price of $25.75 per Unit. On June 30, 2015, the Trust redeemed the balance of the 5.75% convertible debentures for $3.3 million in cash

Subsequent to quarter-end:

  • On July 30, 2015, the Trust completed the acquisition of an enclosed shopping centre totalling 227,000 square feet in Maple Ridge, British Columbia, for a total purchase price of $58.0 million, which was funded by existing cash and credit facilities
  • On August 6, 2015, the Board of Trustees approved a 3.1% increase in annual distributions to $1.65 per Unit effective October 2015

Huw Thomas, President & CEO of SmartREIT, said, "I am pleased with our positive second quarter results despite challenging market conditions for a number of our retail tenants, which had a modest impact on our occupancy. Our portfolio of 137 mostly Walmart-anchored retail centres continues to deliver reliable performance and steady growth. We have continued to grow our portfolio through both development and acquisitions. With respect to our emerging portfolio of growth initiatives, both the Montreal Premium Outlets and the Toronto Premium Outlets continue to exceed our expectations in terms of performance, which reflects our commitment to look for various avenues of growth and we continue to look for further sites to add to the portfolio. For the most significant longer term opportunity, construction is progressing well on the first tower in the VMC and we are now turning our attention to the next possible development on the site. As to the Transaction we closed on May 28, 2015, I am extremely pleased at the very positive market reaction and excited about the multitude of growth opportunities it can deliver over many years," added Thomas.

The following table summarizes SmartREIT's portfolio information:

June 30, 2015 December 31, 2014 Change
Fair value of real estate portfolio (in millions of dollars) (2) $ 7,992.3 $ 6,801.4 $ 1,190.9
Weighted average stabilized capitalization rate 5.96% 5.98% (0.02 )%
Built gross leasable area 30.5 million square feet
Future estimated development area 4.7 million square feet
Lands under Mezzanine Financing 0.7 million square feet
Number of retail properties 137
Number of development properties 10
(1) Excludes yield maintenance fees on redemption of unsecured debentures and related write-off of unamortized financing costs
(2) Includes the Trust's share of investments in associates

Developments completed during the quarter are as follows:

Leasable area 137,644 square feet
Cost $34.2 million
Yield 6.4%

Quarterly Results

On May 28, 2015, SmartREIT completed a transaction to acquire the Platform from Mitchell Goldhar for a total of $55.1 million and a group of freehold interests in 21 properties and a leasehold interest in another property from Mr. Goldhar and other vendors for a total of $1.1 billion. The combined purchase price totalled $1.17 billion, adjusted for costs of acquisition and working capital amounts. The purchase price was satisfied by the assumption of existing mortgages and development loans of $636.8 million, the issuance of 8,015,500 subscription receipts at a price of $28.70 totalling $230.0 million, the issuance of 6,068,698 Class B and D LP units with a value of $174.2 million to Penguin and other vendors at a unit price of $28.70, the issuance of 1,170,000 new Earnout options to Penguin and other vendors, and the balance in cash, adjusted for other working capital amounts. See the "Transaction" below for further details.

During the quarter, the Trust repaid $65.0 million of secured term debt at an average interest rate of 5.44%, and issued new term debt totalling $177.1 million with an average term of 10.0 years and an average interest rate of 3.52%. The Trust also repaid $48.2 million of secured construction debt at a variable cost of banker's acceptance rate plus 1.15% and issued new term debt of $85.0 million with a term of 7.0 years and an interest rate of 3.13%.

In addition, on May 27, 2015, the Trust issued notice of redemption of its 5.75% convertible debentures with an aggregate principal amount outstanding of $55.6 million, to be redeemed on June 30, 2015. The debenture holders had options until June 29, 2015 to convert their debentures into Trust Units at a conversion price of $25.75 per Unit. On June 30, 2015, the Trust redeemed the balance of the 5.75% convertible debentures for $3.3 million in cash. As a result, at June 30, 2015, $nil of the face value of the 5.75% convertible debentures was outstanding (December 31, 2014 - $59.8 million).

The following table summarizes SmartREIT's key financial highlights for the quarters ended June 30(2):

(in millions of dollars, except per Unit information) Three Months Ended June 30, 2015 Three Months Ended June 30, 2014 Change % Change
Net income excluding fair value adjustments (2) $70.9 $60.1 $10.8 18.0%
Rental revenue (2) $160.7 $150.0 $10.7 7.1%
Net operating income (2) $105.9 $98.8 $7.1 7.2%
Cash flow as measured by FFO $74.1 $66.3 $7.8 11.8%
Per Unit Information
FFO per Unit (fully diluted)(1) $0.518 $0.488 $0.030 6.1%
AFFO per Unit (fully diluted)(1) $0.487 $0.459 $0.028 6.1%
Quarterly distribution $0.400 $0.387 $0.013 3.4%
Payout ratio (to AFFO) 82.1% 84.3% (2.2)%
(1) Excludes yield maintenance fees on redemption of unsecured debentures and related write-off of unamortized financing costs
(2) Includes the Trust's share of investments in associates

Excluding the effect of adjustments, for the three months ended June 30, 2015, FFO increased by 11.8% to $74.1 million and by 6.1% to $0.518 on a per Unit basis compared to the same quarter of 2014 (three months ended June 30, 2014 - $66.3 million). In comparison to the same period in 2014, FFO increased by $7.8 million primarily due to an increase in NOI net of tenant incentive amortization of $7.4 million, a decrease in interest expense net of yield maintenance on redemption of unsecured debentures and related write-off of unamortized financing costs of $0.3 million, an increase in interest income of $0.6 million, an increase in indirect interest in respect of development portion of investment in associates of $0.2 million, and an increase in service and other revenues of $0.8 million, partially offset by an increase in general and administrative expenses of $1.6 million due principally to higher incentive compensation expense.

SmartREIT's debt to gross book value was 53.0% at June 30, 2015 (December 31, 2014 - 50.5%), which is below SmartREIT's target range, and the debt to aggregate assets ratio was 45.4% (December 31, 2014 - 42.8%). The increases in the debt to gross book value and debt to aggregate asset ratios are primarily due to the assumption of term mortgages and developments loans totalling $636.8 million in connection with the Transaction.

The high occupancy level of 98.6%, as well as SmartREIT's acquisition and development program, generated rental revenue of $160.7 million during the quarter. NOI of $105.9 million increased by $7.1 million compared to the same period in 2014, including a 1.1% or $1.0 million increase on a same properties basis, which is primarily due to net lease-up of vacant space, rent increases in renewing tenants and step-ups in existing leases offset by higher bad debt expense.

Subsequent to quarter end, the Trust announced an increase in distribution from the current annual distribution of $1.60 to $1.65 effective October 2015, which represents a 3.1% increase on an annualized basis.

The Transaction

On May 28, 2015, the Trust completed the previously announced acquisition (the "Transaction") of the SmartCentres platform from Mitchell Goldhar as part of a $1,171.2 million transaction that transformed the Trust into a fully integrated real estate developer and operator by adding the SmartCentres' platform of development, leasing, planning, engineering, architecture, and construction capabilities (the "Platform"). The Transaction also included the acquisition of interests in a portfolio of 22 properties (the "Properties") located principally in Ontario and Quebec, including 20 open format Walmart Supercentre anchored or shadow-anchored shopping centres owned by Mitchell Goldhar and joint venture partners, including Wal-Mart Canada Realty Inc., for $1,116.0 million. Following closing of the Transaction (the "Closing") and to reflect its enhanced capabilities and the considerable brand recognition of SmartCentres and its trademark Penguins, the Trust changed its name to Smart Real Estate Investment Trust (or, in short form, SmartREIT) and the ticker symbol for the Units on the Toronto Stock Exchange to SRU.UN, previously CWT.UN.

The Trust financed the Transaction by the assumption of existing mortgages and development loans totalling $636.8 million, the issuance of 8,015,500 subscription receipts at a price of $28.70 totalling $230.0 million, the issuance of approximately $174.2 million in units of the Trust's subsidiary limited partnerships (exchangeable into Units on a one-for-one basis) to certain of the vendors at a price of $28.70 per limited partnership unit, being the price per subscription receipt sold under the offering described above, and the balance paid in cash adjusted for other working capital amounts.

Following Closing, the Trust's portfolio includes 107 Walmart anchored or shadow anchored locations with 93 sites owned, representing 13.1 million square feet, further enhancing the Trust's position as Walmart Canada's most significant landlord.

The Properties, at the Trust's share collectively and as of the date of the Transaction, added 3.4 million square feet of leased retail area to the Trust's previous 27.4 million square feet of largely open format shopping centre space, were 99.7% occupied, and had a weighted average lease term to maturity of 12.6 years. A further 1.8 million square feet is expected to be developed over time, represented by 1.6 million square feet through on-balance sheet development and just under 0.2 million square feet through earnouts.

The Transaction brought the Trust's total assets, as at the Closing, to in excess of $8.3 billion, representing approximately $30.5 million square feet of retail area, and land on which 4.6 million square feet of retail area is proposed to be developed, along with the existing land for additional mixed use density previously noted.

Mr. Goldhar also entered into a non-competition arrangement for a five-year period in relation to investing in, acquiring, developing or managing retail properties. The restrictions are subject to a number of exceptions, including exceptions to recognize Mr. Goldhar's retained real estate interests and the ability to participate with the Trust in two development opportunities and other customary exceptions to allow him to pursue investments, whether real estate or otherwise, that do not have a significant open format shopping centre or development services component. In connection with the Transaction, Penguin is providing master planning services under the direct supervision of Mr. Goldhar in respect of developments in which the Trust has an interest for a five-year period for a fee of $3.5 million per year, payable quarterly, plus certain limited consulting services with respect to specific mixed use tenants for a maximum estimated aggregate fee of $0.475 million.

The Transaction was approved by Unitholders (excluding those Unitholders who had an interest in the Transaction) at the Trust's annual general and special meeting of holders of Units and Special Voting Units on May 26, 2015.

The non-IFRS measures used in this Press Release, including AFFO, FFO, NOI, debt to aggregate assets, debt to gross book value, payout ratio and interest coverage ratio do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and are therefore unlikely to be comparable to similar measures presented by other issuers. These non-IFRS measures are more fully defined and discussed in the management discussion and analysis of the Trust for the three and six months ended June 30, 2015, available on SEDAR at www.sedar.com.

Full reports of the financial results of the Trust for the year ended December 31, 2014 are outlined in the audited financial statements and the related management discussion and analysis of the Trust, as well as the Trust's Annual Information form, which are all available on SEDAR at www.sedar.com. In addition, supplemental information is available on the Trust's website at www.smartreit.ca.

SmartREIT will hold a conference call on Friday, August 7, 2015 at 8:00 a.m. (ET). Participating on the call will be members of SmartREIT's senior management.

Investors are invited to access the call by dialing 1-800-524-8950. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available Friday, August 7, 2015 beginning at 11:00 a.m. (ET) through to 11:00 a.m. (ET) on Friday, August 14, 2015. To access the recording, please call 1-888-203-1112 and enter the Conference ID 9773190#.

Certain statements in this Press Release are "forward-looking statements" that reflect management's expectations regarding the Trust's future growth, results of operations, performance and business prospects and opportunities as outlined under the headings "Business Overview and Strategic Direction" and "Outlook". More specifically, certain statements contained in this Press Release, including statements related to the Trust's maintenance of productive capacity, estimated future development plans and costs, view of term mortgage renewals including rates and upfinancing amounts, timing of future payments of obligations, intentions to secure additional financing and potential financing sources, and vacancy and leasing assumptions, and statements that contain words such as "could", "should", "can", "anticipate", "expect", "believe", "will", "may" and similar expressions and statements relating to matters that are not historical facts, constitute "forward-looking statements". These forward-looking statements are presented for the purpose of assisting the Trust's Unitholders and financial analysts in understanding the Trust's operating environment, and may not be appropriate for other purposes. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management. However, such forward-looking statements involve significant risks and uncertainties, including those discussed under the heading "Risks and Uncertainties" and elsewhere in the Trust's Management's Discussion & Analysis for the year ended December 31, 2014 and under the heading "Risk Factors" in its Annual Information Form for the year ended December 31, 2014. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements. Although the forward-looking statements contained in this Press Release are based on what management believes to be reasonable assumptions, the Trust cannot assure investors that actual results will be consistent with these forward-looking statements. The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. These forward-looking statements are made as at the date of this Press Release and the Trust assumes no obligation to update or revise them to reflect new events or circumstances unless otherwise required by applicable securities legislation.

The Toronto Stock Exchange neither approves nor disapproves of the contents of this Press Release.

Contact Information

  • Huw Thomas
    President and Chief Executive Officer
    SmartREIT
    (905) 326-6400 ext. 7649

    Peter Sweeney
    Chief Financial Officer
    SmartREIT
    (905) 326-6400 ext. 7865