Lanesborough Real Estate Investment Trust : REIT Reports 2019 Results
March 26, 2020 at 05:01 pm
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WINNIPEG, March 26, 2020 /CNW/ - Lanesborough Real Estate Investment Trust ("LREIT") (TSXV: LRT.UN) today reported its operating results for the year ended December 31, 2019. The following comments in regard to the financial position and operating results of LREIT should be read in conjunction with management's discussion & analysis, the annual report and the financial statements for the year ended December 31, 2019, which may be obtained from the SEDAR website at www.sedar.com.
ANALYSIS OF OPERATING RESULTS
Analysis of Loss and Comprehensive Loss
Year Ended December 31
Increase (Decrease)
in Income
2019
2018
Amount
%
Rentals from investment properties
$
16,528,486
$
17,063,264
$
(534,778)
(3)%
Property operating costs
(12,894,540)
(11,439,451)
(1,455,089)
(13)%
Net operating income(NOI)
3,633,946
5,623,813
(1,989,867)
(35)%
Interest income
216,723
206,506
10,217
5%
Interest expense
(16,652,167)
(14,916,720)
(1,735,447)
(12)%
Trust expense
(1,486,659)
(1,255,190)
(231,469)
(18)%
Loss before the following
(14,288,157)
(10,341,591)
(3,946,566)
(38)%
Gain (loss) on sale of investments and investment property
347,500
(161,848)
509,348
315%
Fair value adjustments
(15,466,450)
(35,313,425)
19,846,975
56%
Loss before discontinued operations
(29,407,107)
(45,816,864)
16,409,757
36%
Loss from discontinued operations
(4,673,252)
(686,837)
(3,986,415)
(580)%
Loss and comprehensive loss
$
(34,080,359)
$
(46,503,701)
$
12,423,342
27%
Overall Results
LREIT completed 2019 with a loss and comprehensive loss of $34.1 million, compared to a loss and comprehensive loss of $46.5 million in 2018. The decrease in the extent of the loss and comprehensive loss is mainly due to a decrease in the loss relating to fair value adjustments, partially offset by an increase in the loss from discontinued operations, a decrease in NOI and an increase in interest expense.
Unfavourable fair value adjustments recognized during 2019 were $15.5 million compared to unfavourable fair value adjustments recognized during 2018 of $35.3 million as the decline in demand in the Fort McMurray rental accommodation market appears to be stabilizing.
The increase in the loss from discontinued operations of $4.0 million is mainly due to an increase in loss from impairment adjustments of $2.6 million and an increase in property operating costs of $1.4 million. The impairment adjustment recognized during 2019 of $2.6 million reflects a reduction in the carrying value of Chateau St. Michael's, the property classified as property and equipment under discontinued operations. The impairment adjustment was required as the carrying value of the property was determined to be in excess of the estimated recoverable amount, primarily as a result of capital expenditures identified as being required to sustain the operations of the facility. The increase in property operating costs mainly reflects an increase in wages as part of the coordinated effort to expand the facility's intermediate care offerings and to enhance the level of care and services provided.
The decrease in NOI of $2.0 million mainly reflects an increase in property operating costs of $1.5 million or 13% and a decrease in rental revenue of $0.5 million. The increase in property operating costs is mainly due to the accrual of condominium corporation special assessment fees associated with electrical repairs at Woodland Park, the property classified as held for sale, and an increase in insurance premiums in the Fort McMurray property segment, partially offset by a decrease in costs related to insurance claims and a decrease in property taxes in the Fort McMurray property segment. The decrease in rental revenue mainly reflects a decrease in the average monthly rental rate of the Fort McMurray property portfolio as the prolonged low‑level of oil sands development activity continues to negatively impact the demand for rental accommodations in Fort McMurray.
The increase in interest expense during 2019 of $1.7 million mainly reflects an increase in interest on the revolving loan from 2668921 Manitoba Ltd. of $1.8 million as a result of an increase in the average outstanding balance of the revolving loan.
Revenues
Analysis of Rental Revenue
Year Ended December 31
Increase (Decrease)
% of Total
2019
2018
Amount
%
2019
2018
Fort McMurray properties
$
13,376,545
$
13,983,159
$
(606,614)
(4)%
81%
82%
Other investment properties
1,644,747
1,521,070
123,677
8%
10%
9%
Sub‑total
15,021,292
15,504,229
(482,937)
(3)%
91%
91%
Held for sale and/or sold
properties (1)
1,507,194
1,559,035
(51,841)
(3)%
9%
9%
Total
$
16,528,486
$
17,063,264
$
(534,778)
(3)%
100%
100%
Average Occupancy Level, by Quarter
2019
Q1
Q2
Q3
Q4
12 Month
Average
Fort McMurray properties
65%
72%
75%
75%
72%
Other investment properties
75%
76%
72%
71%
73%
Total
66%
72%
75%
74%
72%
Held for sale and/or sold properties (1)
76%
n/a
n/a
n/a
n/a
Average Occupancy Level, by Quarter
2018
Q1
Q2
Q3
Q4
12 Month
Average
Fort McMurray properties
69%
72%
71%
65%
69%
Other investment properties
77%
68%
68%
70%
71%
Total
70%
71%
70%
66%
69%
Held for sale and/or sold properties (1)
46%
51%
53%
62%
52%
Average Monthly Rents, by Quarter
2019
Q1
Q2
Q3
Q4
12 Month
Average
Fort McMurray properties
$1,539
$1,522
$1,499
$1,466
$1,507
Other investment properties
$919
$939
$952
$952
$940
Total
$1,435
$1,424
$1,407
$1,379
$1,411
Held for sale and/or sold properties (1)
$1,853
n/a
n/a
n/a
n/a
Average Monthly Rents, by Quarter
2018
Q1
Q2
Q3
Q4
12 Month Average
Fort McMurray properties
$1,685
$1,650
$1,618
$1,527
$1,620
Other investment properties
$907
$909
$909
$885
$902
Total
$1,554
$1,525
$1,499
$1,419
$1,499
Held for sale and/or sold properties (1)
$2,484
$2,258
$2,201
$1,899
$2,214
(1)
The information required to reasonably estimate average occupancy levels and average monthly rents for Woodland Park, the property classified as held for sale, was not available to the Trust subsequent to the first quarter of 2019 when the Receiver assumed control of the property.
During 2019, total investment property revenue decreased by $0.5 million or 3%, compared to 2018. The decrease mainly reflects a decrease in the average monthly rental rate of the Fort McMurray property portfolio as the prolonged low‑level of oil sands development activity continues to negatively impact the demand for rental accommodations in Fort McMurray. The average monthly rental rate of the Fort McMurray property portfolio decreased from $1,620 during 2018 to $1,507 during 2019, representing a decrease of $113 or 7%. The decline in rental rates is partially offset by a 3% increase in average occupancy from 69% during 2018 to 72% during 2019.
Property Operating Costs
Analysis of Property Operating Costs
Year Ended December 31
Increase (Decrease)
2019
2018
Amount
%
Fort McMurray properties
$
9,039,291
$
8,832,893
$
206,398
2%
Other investment properties
1,499,136
1,380,779
118,357
9%
Sub‑total
10,538,427
10,213,672
324,755
3%
Held for sale and/or sold properties (1)
2,356,113
1,225,779
1,130,334
92%
Total
$
12,894,540
$
11,439,451
$
1,455,089
13%
(1)
Includes operating costs from Woodland Park, the property classified as held for sale. The 2019 held for sale figures are based on management's estimates and information provided by the Receiver who assumed control of the property on February 28, 2019.
During 2019, property operating costs increased by $1.5 million or 13%, compared to 2018. The increase in property operating costs is mainly due to the accrual of condominium corporation special assessment fees associated with electrical repairs at Woodland Park, the property classified as held for sale. Also contributing to the increase in property operating costs is an increase in insurance premiums in the Fort McMurray property segment as the Canadian real estate insurance market has been experiencing increased loss ratios and, as a result, sector wide premium increases; partially offset by a decrease in costs related to insurance claims and a decrease in property taxes in the Fort McMurray property segment.
Net Operating Income and Operating Margin
Analysis of Net Operating Income
Net Operating Income
Year Ended December 31
Increase (Decrease)
Percent of Total
Operating Margin *
2019
2018
Amount
%
2019
2018
2019
2018
Fort McMurray properties
$
4,337,254
$
5,150,266
$
(813,012)
(16)%
119%
92%
32%
37%
Other investment properties
145,611
140,291
5,320
4%
4%
2%
9%
9%
Sub‑total
4,482,865
5,290,557
(807,692)
(15)%
123%
94%
30%
34%
Held for sale and/or sold
properties (1)
(848,919)
333,256
(1,182,175)
(355)%
(23)%
6%
(56)%
21%
Total
$
3,633,946
$
5,623,813
$
(1,989,867)
(35)%
100%
100%
22%
33%
(1)
Includes revenues and operating costs from Woodland Park, the property classified as held for sale. The 2019 held for sale figures are based on management's estimates and information provided by the Receiver who assumed control of the property on February 28, 2019.
During 2019, the NOI of the investment properties portfolio decreased by $2.0 million or 35% and the operating margin decreased from 33% to 22%, compared to 2018. The decreases in NOI and operating margin are primarily due to the increase in the property operating costs of the held for sale and/or sold properties segment as described in the "Property Operating Costs" section of this report and the decrease in rental revenue of the Fort McMurray property portfolio as described in the "Revenues" section of this report.
Interest Expense
During 2019, interest expense increased by $1.7 million or 12%, compared to 2018. The increase mainly reflects an increase in revolving loan interest of $1.8 million and an increase in amortization of transaction costs of $0.3 million, partially offset by a reduction in the Shelter loan interest of $0.3 million, which was due to the full repayment of the loan on July 1, 2018.
The increase in revolving loan interest is due to an increase in the average outstanding balance of the loan during 2019, compared to 2018. The increase in amortization of transaction costs mainly reflects an increase in the amortization of professional fees charged by the Receiver in control of Woodland Park.
The weighted average interest rate on the Trust's total debt, inclusive of the revolving loan and debentures, was 5.9% as at December 31, 2019, compared to 5.7% as at December 31, 2018.
Fair Value Adjustments
During 2019, LREIT recorded a loss related to fair value adjustments on its investment properties and investment properties held for sale of $15.5 million, compared to a loss related to fair value adjustments of $35.3 million during 2018, representing a variance of $19.8 million.
The fair value adjustments recognized during 2019 primarily reflect a reduction in the carrying value of the properties located in Fort McMurray due to a reduction in the level of rent potential considered to be achievable in the Fort McMurray rental accommodation market, which appears to be stabilizing around a lower level of demand. The demand for rental accommodations in the region has been negatively impacted by the reduced level of development and investment in the Alberta oil sands industry as a result of the depressed price of oil, delays in oil transportation infrastructure development and political pressures around climate change. The loss related to fair value adjustments recognized during 2018 was mainly due to reduced revenue expectations of the Fort McMurray property portfolio that resulted from the prolonged low‑level of oil sands development activity and increased uncertainty as to the timing and/or extent of a recovery of the Fort McMurray rental market.
After accounting for fair value adjustments, dispositions, and capital expenditures, the carrying value of investment properties and investment properties held for sale decreased by an aggregate of $14.4 million during 2019.
Subsequent Events
Since December 31, 2019, the spread of COVID-19 has severely impacted many local economies around the globe. In many countries, including Canada, businesses are being forced to cease or limit operations for long or indefinite periods of time. Measures taken to contain the spread of the virus, including travel bans, quarantines, social distancing, and closures of non-essential services have triggered significant disruptions to businesses worldwide, resulting in an economic slowdown. Governments and central banks have responded with monetary and fiscal interventions to stabilize economic conditions. COVID-19 along with recent geopolitical disputes among the world's major oil producers have negatively impacted global oil prices which have fallen approximately 50% during 2020 with the price of Western Canadian Select heavy crude oil hitting all-time lows in March 2020. The price of oil is a significant determinant of the state of the economy in Fort McMurray, the Trust's primary market. The Trust anticipates that these events may impact its ability to collect future rental revenues from tenants and may negatively impact the future fair value of its properties.
The Trust has determined that these events are non-adjusting subsequent events. Accordingly, the financial position and results of operations as of and for the year ended December 31, 2019 have not been adjusted to reflect their impact. The duration and impact of the COVID-19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time. It is not possible to reliably estimate the duration and severity of these consequences, as well as their impact on the financial position and results of the Trust for future periods.
ABOUT LREIT LREIT is a real estate investment trust, which is listed on the TSX Venture Exchange under the symbols LRT.UN (Trust Units) and LRT.DB.G (Series G Debentures). For further information on LREIT, please visit our website at www.lreit.com.
This press release contains certain statements that could be considered as forward-looking information. The forward-looking information is subject to certain risks and uncertainties, which could result in actual results differing materially from the forward-looking statements.
Neither the TSX Venture Exchange nor its Regulation Services Provider (as the term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.
Lanesborough Real Estate Investment Trust (The Trust) is a Canada-based closed-end real estate investment trust. The investment properties of the Trust operate through three segments: Fort McMurray Properties, Other Investment Properties, and Held for Sale and/or Sold Properties. Its Fort McMurray Properties include 10 properties. Its Other Investment Properties includes three properties. Itâs Held for Sale and/or Sold Properties includes four properties. The Trust's property portfolio consists of 13 rental properties, encompassing 12 multi-unit residential properties, including the unsold condominium units at Lakewood Townhomes.
LANESBOROUGH REAL ESTATE INVESTMENT TRUST 
