NOT FOR DISSEMINATION IN THE UNITED STATES OR DISTRIBUTION THROUGH UNITED STATESNEWS OR WIRE SERVICES.
PRO Real Estate Investment Trust (“PROREIT” or the “REIT”) (TSXV: PRV.UN) is pleased to report financial and operating results for the three-months (or “first quarter”) ended March 31, 2018. PROREIT is reporting strong gains in net assets, property revenue, net operating income (“NOI”)(1) and adjusted funds from operations (“AFFO”)(1). The REIT also reports solid operating results, including increases in the occupancy rate of the portfolio and weighted average lease term to maturity, and expansion in gross leasable area (“GLA”).
“Following an active year during which we made 27 acquisitions, the first quarter of 2018 was one focused on integration of our new properties and, we believe, setting up for excellent new opportunities during the balance of the year. During the last two months we have aggressively pursued new acquisition opportunities in several regions of the country,” noted James W. Beckerleg, President and Chief Executive Officer. “We have seen several opportunities to acquire good quality real estate that fits our strategy well and could contribute to building the quality of our portfolio, while providing above average returns. We expect to announce new acquisitions in the second quarter. We are also seeing good leasing activities at existing properties which will positively impact future quarters.”
“The first quarter was also highlighted by a successful equity raise of $29 million.”
FINANCIAL AND OPERATIONAL HIGHLIGHTS
|(CAD $ thousands except per unit amounts and |
unless otherwise stated)
|Net operating income (NOI) (1)||$||5,891||$||4,533|
|Debt to gross book value (1)||55.42%||58.72%|
|Interest coverage ratio (1)||2.6x||2.8x|
|Debt service coverage ratio (1)||1.6x||1.7x|
|Weighted average interest rate on mortgage debt||3.73%||3.70%|
|Net cash flows provided from operating activities||$||2,446||$||1,987|
|Funds from Operations (FFO) (1)||$||2,470||$||2,542|
|Basic FFO per unit (1) (2)||$||0.0354||$||0.0534|
|Diluted FFO per unit (1) (2)||$||0.0347||$||0.0521|
|Adjusted Funds from Operations (AFFO) (2)||$||3,200||$||2,567|
|Basic AFFO per unit (1) (2)||$||0.0459||$||0.0539|
|Diluted AFFO per unit (1) (2)||$||0.0450||$||0.0526|
|AFFO payout ratio – Basic (1)||114.4%||97.3%|
|AFFO payout ratio – Diluted (1)||116.7%||99.8%|
|(1)||Non-IFRS measure. See “Non-IFRS and Operational Key Performance Indicators”.|
|(2)||Total units consist of trust units of the REIT and Class B limited partnership units of PRO REIT Limited Partnership.|
The REIT’s first quarter financial results improved on most key measures, due primarily to the successful integration of new properties into the portfolio, compared to the first quarter in 2017. The REIT reported significant year-over-year growth in property revenues, NOI(1) and AFFO(1) compared to the first quarter in 2017.
As of March 31, 2018, total assets increased 39.3% to $366.6 million, compared to $263.2 million at March 31, 2017.
For the three months ended March 31, 2018, property revenues increased 25.7% to $9.40 million, compared to $7.48 million in the first quarter of 2017. The increase in property revenues for the three-month period is due to the incremental revenues from the 26 property acquisitions completed in the twelve months ended March 31, 2018 and the completion of two pad developments in the fourth quarter of 2017, offset in part by the sale of two properties during the course of the 2017 fiscal year.
NOI(1) grew 30.0% to $5.89 million in the first quarter, compared to $4.53 million for the same quarter in 2017.
The substantial portfolio expansion achieved over the last year means that only 37 of the REIT’s 66 properties were owned during the first quarter of 2017. Same property NOI(1) for these 37 properties during the first quarter declined modestly to $3.72 million compared to $3.93 million for the first quarter of last year.
As discussed last quarter, net same property NOI(1) included significant positive leasing and renewals but these were somewhat offset by vacancies at a retail and two industrial properties. In each case however, PROREIT sees the opportunity for strengthening of tenant profiles in improving markets at these properties. This proactive strengthening is well underway and should show positive financial results in the second half of 2018. This is in part reflected in the 58,108 square feet of space which is now committed upon, as discussed below.
AFFO(1) increased 24.5% to $3.20 million for the quarter ended March 31, 2018 compared to $2.57 million for the comparable three months in 2017. AFFO per basic unit(1) was $0.0459 for the first quarter of 2018, compared to $0.0539 for the same three months in 2017. The decline is the result of the timing of the successful January 29, 2018 equity financing, the majority of the proceeds of which was principally used to repay credit facilities and has not yet been redeployed to fund acquisitions or other REIT purposes.
Similarly to AFFO(1), the AFFO payout ratio per basic unit(1) was 114.4% for the first quarter, compared to 97.3% for the first quarter of 2017. Again, the elevated payout ratio is the result of the January 29, 2018equity financing, the majority of the proceeds of which has not yet been redeployed as mentioned above.
The redeployment of liquidity from the equity raise will expand NOI(1), FFO(1) and corresponding AFFO(1). The portfolio is stable and is generating expected cash flows.
Distributions to unitholders totaling $0.0525 per unit were declared during the three-months ended March 31, 2018.
Total debt to gross book value(1) stood at 55.42% at March 31, 2018, compared to 58.72% on the same date in 2017. The weighted average interest rate on mortgage debt was 3.73% at the end of the first quarter, up slightly from 3.70% at December 31, 2017.
First Quarter 2018 Operating Results
|March 31 |
|Number of properties||66||40|
|Gross leasable area (“GLA”) (square feet)||2,684,653||2,090,214|
|Occupancy rate (1)||96.0%||95.2%|
|Weighted average lease term to maturity (years)||6.7||6.4|
|(1)||Occupancy rate includes lease contracts for future occupancy of currently vacant space of 58,108 square feet.|
PROREIT recorded a very strong first quarter on a year-over-year basis.
At March 31, 2018, the PROREIT portfolio was comprised of 66 properties, compared to 40 on the same date in 2017.
Gross leasable area increased 28.4% to 2,684,653 square feet at March 31, 2018 compared to 2,090,214 square feet at the end of the first quarter in 2017. The weighted average lease term increased to 6.7 years, compared to 6.4 years twelve months earlier. The increase is a result of successful lease renewals and acquisitions with long average lease terms.
PROREIT continues its success at maintaining high occupancy rates throughout its portfolio. At March 31, 2018, its occupancy rate increased to 96.0%, from 95.2% a year earlier. The REIT continues to achieve a high rate of success renewing lease maturities. At March 31, 2018, Management has renewed or is in advanced discussions to renew 79% of 2018 expiries.
It should be noted however that this occupancy rate reflects 58,108 square feet of committed space, the revenues of which are not yet contributing to cash flows. Those revenues will begin to contribute mostly in the fourth quarter of 2018 and create an annualized amount that will be in excess of $0.8 million.
Significant Events in the First Quarter
Strong equity markets in the first weeks of January 2018 provided an opportunity for PROREIT to announce and close a bought deal equity financing of trust units at attractive prices for unitholders. The REIT issued, at closing of the offering on January 29, 2018, a total of 12,500,500 units at a price of $2.30 per unit for total gross proceeds of $28.8 million including 1,630,500 units issued pursuant to the full exercise of an over‑allotment option. The REIT used the net proceeds from the offering to repay certain indebtedness, a significant portion of which should be subsequently redrawn as needed to fund future acquisitions or other REIT purposes.
Strategy and Outlook
The timing of January 29, 2018 bought deal transaction mentioned above was fortuitous and should serve the REIT well going forward. As a result of the financing, our current cash position and related liquidity put PROREIT in excellent position to complete new acquisitions.
As mentioned in PROREIT’s year-end message to unitholders, commercial real estate markets in Canada continue to be very strong and pricing is competitive. Management continues to be very focused on finding the right opportunities in this environment.
PROREIT has only a modest level of debt maturing in the coming year and does not currently expect a significant negative impact on the REIT from increases in interest rates, should that occur. Currently, the average term of the REIT’s mortgage debt outstanding is over five years. Also, the Bank of Canada has now indicated that interest rates are expected to remain stable for the foreseeable future.
PROREIT’s newest acquisitions are now integrated and are contributing to our solid financial and operating results. For the balance of 2018, Management expects strong growth and improved operating results for our unitholders.