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Scott';s REIT reports second quarter 2011 financial results and August distribution

^{Published on 2011-08-04 14:36:58 - Market Wire}
 

TORONTO, Aug. 4, 2011 /CNW/ - Scott's Real Estate Investment Trust (TSX: SRQ.UN) ("Scott's REIT" or the "REIT"), Canada's leading owner of small box retail properties, today reported its financial results for the second quarter ended June 30, 2011 and its monthly cash distribution for August 2011.

Second Quarter 2011 Highlights
Three months ended June 30, 2011

• Revenue of $5.7 million
• Net operating income* of $4.8 million
• Net income and comprehensive income for the period of $1.3 million
• Adjusted distributable income payout ratio** of 99.8 per cent

*See section entitled Non-IFRS measures.

**Adjusted distributable income payout ratio is calculated by dividing Distributable Income, adjusted for $292 (year-to-date $402) of one-time legal expenses related to the Priszm litigation - See "Comment on Priszm", by the weighted average number of Units outstanding assuming full conversion of all Class B Units during the relevant period end, divided by the actual distributions per Unit made during the period.

On July 15, 2011, Scott's REIT announced that it signed a purchase agreement with certain wholly owned subsidiaries of Shoppers Drug Mart Corporation (TSX:SC) ("Shoppers Drug Mart") to acquire nine retail properties as part of a $33-million sale and leaseback transaction.

"Scott's REIT continues to deliver on its promise of stability, reliability and prudent growth," said John I. Bitove, Chief Executive Officer of Scott's REIT. "Not only did we deliver a solid balance sheet despite a challenging quarter, we continue to demonstrate the financial flexibility required to pursue strategic acquisitions with high-profile national retailers like Shoppers Drug Mart. Our goal of significantly diversifying our tenant base since our IPO is near completion and will set us in a stronger direction."

Subject to satisfactory completion of due diligence and other customary closing conditions, the second sale and leaseback transaction with Shoppers Drug Mart is scheduled to be completed in the third quarter of 2011.

Financial Performance

Scott's REIT reported revenue of $5.7 million for the three-month period ended June 30, 2011, a decrease of $0.09 million over the same three-month period in 2010.

The REIT's net operating income was $4.8 million for the second quarter of 2011, an increase of $0.05 million compared to the second quarter of 2010.

Direct operating expenses of $0.9 million for the second quarter were $0.1 million lower than during the same quarter of 2010. The decrease in operating expenses from the second quarter 2011 versus 2010 is a result of a timing difference in one-time charges for common area expenses.

Distributable income for the second quarter was $1.7 million compared to $2.0 million for the second quarter 2010. The decrease in distributable income from last year's second quarter was due to increased legal expenses related to the Priszm litigation (see "Comment on Priszm" below).

Monthly Distribution

Scott's REIT announced a cash distribution for the month of August 2011 of $0.0708 per unit payable on September 15, 2011 to Unitholders of record on August 31, 2011.

Scott's REIT also announced today a monthly cash distribution of $0.0708 per unit to Unitholders of record of Class B Limited Partnership Units in Scott's Real Estate LP on August 31, 2011.

Shoppers Drug Mart Acquisition #1 Financing

On February 17, 2011, the REIT announced that it would be extending the term of the $20-million facility that it used to acquire 12 Shoppers Drug Mart stores in March of 2010 (the "SDM Facility") until June 30, 2011. The SDM Facility was originally scheduled to mature on March 4, 2011. This extension was granted on the same terms as the original loan, with the exception of the interest rate, which was reduced to Bankers' Acceptances ("BA") plus 325 basis points until June 15, 2011. For the last two weeks of the extension, from June 16, 2011 through to June 30, 2011, the interest rate was increased to BA plus 500 basis points. On June 30, 2011, Scott's REIT obtained an additional one month extension until July 30, 2011. The interest rate was the prime lending rate plus 3.75 per cent. No extension fee was paid.

On July 28, 2011, Scott's entered into a five-year $20-million mortgage bond at an interest rate of 4.47 per cent, which amortizes over 20 years. The proceeds were used to refinance the SDM Facility in its entirety.

Shoppers Drug Mart Acquisition #2

On July 15, 2011, Scott's REIT announced that it signed a purchase agreement with certain wholly owned subsidiaries of Shoppers Drug Mart Corporation (TSX:SC) ("Shoppers Drug Mart") to acquire nine retail properties as part of a $33-million sale and leaseback transaction.  Eight of the properties are located in Ontario and one is in Saskatchewan. Five of the nine locations to be acquired are newly built and three properties are on long-term land leases. The properties will be leased long-term to Shoppers Realty Inc. and are tenanted by Shoppers Drug Mart stores. This transaction is expected to close during the third quarter.

Scott's REIT previously acquired 12 properties from Shoppers Drug Mart as part of a $30-million sale and leaseback transaction in March 2010.

Comment on Priszm Limited Partnership ("Priszm")

Priszm continues to sell its restaurant operations to new operators. On January 31, 2011, the REIT received notice and a request from Priszm - the REIT's largest tenant - to assign eight master leases affecting 79 properties owned by the REIT as part of a proposed sale of Priszm's British Columbia and Ontario restaurant operations to Soul Restaurants Canada Ltd. ("Soul Restaurants").

On May 18, 2011, Priszm announced that it had amended its purchase and sale agreement with Soul Restaurants, which reduced the number of operating restaurants in properties owned by the REIT to 63 from 79.

Scott's REIT has asserted a claim on a portion of the sale proceeds associated with the 63 Scott's REIT properties that are subject to this transaction. The court appointed monitor for Priszm has agreed to set aside $12.2 million until this claim can be heard in the courts. The REIT believes that it will be entitled to the proceeds in future transactions in conjunction with this claim.

On June 1, 2011, Priszm announced that it had successfully completed the sale of 204 restaurants to Soul Restaurants, affecting the 63 properties mentioned above. Officially, 32 stores have been automatically assigned to Soul Restaurants in accordance with the terms of the applicable leases. Soul Restaurants is required to pay the rent on these properties.

The remaining 31 leases still require the REIT's consent to be assigned to Soul Restaurants. Although Scott's REIT provided Priszm with the consent agreement to assign these leases on March 30, 2011, it has not yet been executed by Priszm and Soul Restaurants. Soul Restaurants is operating these restaurants, while Priszm continues to pay the rent until the consent agreement is fully executed.

On August 2, 2011 Priszm announced that it intended to sell a number of its restaurants in New Brunswick and Nova Scotia to FMI Atlantic Inc., a related party to a YUM! franchisee. Scott's REIT is currently evaluating this new announcement to ascertain whether any of the restaurants named in the asset purchase agreement are located on properties owned by the REIT.

We believe the sale of Priszm's KFC restaurants on our properties plays right into the heart of our continued focus on diversification. We expect the remaining Priszm stores to be sold soon and look forward to putting this issue behind us so that we can continue to focus on growing Scott's REIT with a strong and stable tenant base across Canada.

Non-IFRS Measures

Distributable Income

Distributable Income is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. Distributable Income is presented in this MD&A because management of Scott's REIT believes this non-IFRS measure is a relevant measure of the ability of Scott's REIT to earn and distribute cash returns to Unitholders. Distributable Income as computed by Scott's REIT may differ from similar computations reported by other similar organizations and, accordingly, may not be comparable. Distributable Income in this MD&A represents net income and comprehensive income of Scott's REIT, plus depreciation and amortization expense of tenant inducements, commission and leasing fees, stock based compensation, interest expense on the Class B Exchangeable Units less the straight-line revenue accrual, acquisition write-offs, fair value adjustments on investment properties, convertible debentures and the change in amortized costs of the Class B Exchangeable Units.

Net Operating Income ("NOI")

Net Operating Income ("NOI") is not a measure recognized under IFRS and does not have a standardized meaning prescribed by IFRS. NOI is presented in this MD&A because the management of Scott's REIT believes that this non-IFRS measure is a relevant measure of Scott's REIT's ability to earn and distribute cash to Unitholders. NOI as computed by Scott's REIT may differ from similar computations reported by other similar organizations and, accordingly, may not be comparable.

About Scott's Real Estate Investment Trust

Scott's REIT (TSX: SRQ.UN) is Canada's premier small-box retail property owner with 220 properties in seven provinces across Canada. Scott's REIT's properties are well located and geographically diverse across Canada with the majority of all properties containing long-term quadruple net leases. The REIT has approximately 75.6 per cent interest in Scott's Real Estate LP. To find out more about Scott's Real Estate Investment Trust (TSX: SRQ.UN), visit our website at [ http://www.scottsreit.com ].

Forward-Looking Statements

This document contains certain information that may constitute forward-looking information within the meaning of securities laws. In some cases, forward-looking information can be identified by the use of terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking information may relate to management's future outlook and anticipated events or results, and may include statements or information regarding future growth opportunities and potential and expected cash distributions or cash distribution levels. In particular, information regarding the REIT's monthly cash distributions and information relating to the impact of the REIT's recent acquisitions on annual revenues and interest expense is forward-looking information. Forward-looking information is based on certain factors and assumptions regarding, among other things, occupancy rates, property expense and capital expenditures. While the REIT considers these assumptions to be reasonable based on information currently available to it, they may prove to be incorrect. Forward looking-information is subject to certain factors, including risks and uncertainties, which could cause actual results to differ materially from what is currently expected. Such factors include risks relating to the REIT's reliance on Priszm LP, the REIT's largest tenant, risks associated with investment in real property, competition, reliance on key personnel, financing and refinancing risks, environmental matters, tenant risks, risks related to current economic conditions and other risk factors more particularly described in the REIT's Annual Information Form for the year ended December 31, 2010. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Other than as required by applicable Canadian securities law, the REIT does not undertake to update this information at any particular time. Additional information identifying risks and uncertainties is contained in Scott's REIT filings with the Canadian securities regulators, available at [ www.sedar.com ].

The following selected financial information, with the exception of the Reconciliation of Distributable Income, has been derived from and should be read in conjunction with the financial statements of Scott's REIT for the quarters ended June 30, 2011 and 2010, as well as the notes thereto included in Scott's REIT's annual filings at [ www.sedar.com ].

The following table outlines the reconciliation of distributable income to cash provided by operating activities:

RECONCILIATION OF DISTRIBUTABLE INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES (UNAUDITED)
(in thousands of dollars except per Unit amounts)

Notes:

Scott's Real Estate Investment Trust
Consolidated Interim Statements of Financial Position
(Unaudited)
(in thousands of Canadian dollars)

Scott's Real Estate Investment Trust
Consolidated Interim Statements of Net Income and Comprehensive Income
(Unaudited)
(in thousands of Canadian dollars)

Scott's Real Estate Investment Trust
Consolidated Interim Statements of Unitholders' Equity (Unaudited)
(in thousands of Canadian dollars)