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Press release from CNW Group

NPR reports second quarter 2013 financial results

Tuesday, August 13, 2013

NPR reports second quarter 2013 financial results

20:51 EDT Tuesday, August 13, 2013

Announces 3.3% increase to annual distribution

CALGARY, Aug. 13, 2013 /CNW/ - Northern Property Real Estate Investment Trust (the "REIT") and NorSerCo Inc. (the REIT together with NorSerCo, "NPR") (NPR.UN - TSX) today announced financial results for the three months ended June 30, 2013. NPR reported second quarter funds from operations ("FFO") per unit of $0.57. On a continuing operations basis and excluding SIFT current income taxes, this represents an improvement of $0.04 or 7.5% from the second quarter of 2012.

President and COO Todd Cook commented, "We are pleased with our second quarter results as we are starting to see the 2012 acquisitions together with developments completed in 2013 contribute to the financial results while the existing properties continue to improve as same door net operating income was up 1.5%, excluding one-time items, for the quarter. While we are still seeing vacancy at higher than historical levels, we were pleased to see it level off compared to the first quarter.  Our operations team is very focused on vacancy through incentives in select markets, staffing and review of market rents where appropriate. These initiatives are starting to pay off as we are starting to see improvements as we head into the third quarter."

CEO Jim Britton added "NPR continues to focus on accretive FFO growth as we start new developments and acquire new properties. We will continue to purchase existing assets on a selective basis to ensure quality assets are acquired.  In recent months we have seen vendor pricing begin to become more reasonable.  This is evidenced by our acquisition of 229 units in Fort McMurray, AB, that will close in the next few days. The purchase price is $43.3 million representing a 7.1% cap rate.  In addition, the acquisition pipeline has improved with 153 multi-family units under conditional contract for an aggregate purchase price of approximately $13 million that are expected to close in the third quarter.

Mr. Britton continued "As a sign of our confidence in our business fundamentals, along with NPR having one of the healthiest balance sheets in the Canadian multi-family space, we are announcing an increase in our annual distribution of $0.05 or 3.3% to $1.58 per Stapled Unit, the seventh in NPR's history.  In addition, on July 29, 2013, we announced a Normal Course Issuer Bid in which we can purchase just over three million Stapled Units over the next twelve months. NPR's management believes that the recent interest rate driven pull back in unit trading price is much overdone and the units are undervalued."

Financial performance at a glance

   
(thousands of dollars, except per unit amounts) Three months ended June 30
  2013 2012
  Continuing Discontinued Total Continuing Discontinued Total
Total revenue 42,574 150   42,724 39,012 3,442 42,454
Net operating income 26,163 64 26,227 23,954 3,481 27,435
Income before income taxes 15,227 64 15,291 22,610 901 23,511
Income tax expense 73 - 73 177,635 10,249 187,884
Net and comprehensive income (loss) 15,154 64 15,218 (155,025) (9,348) (164,373)
Net income (loss) per Stapled Unit, diluted $0.47 - $0.47 $(4.89) $(0.29) $(5.18)
Excluding SIFT current income tax            
FFO 18,141 64 18,205 16,628 2,255 18,883
FFO per Stapled Unit, diluted $0.57 - $0.57 $0.53 $0.07 $0.60
FFO payout ratio     67.2%     64.0%
Distributions declared     12,236     12,094
Distributions per Unit     $0.38     $0.38

   
(thousands of dollars, except per unit amounts) Six months ended June 30
  2013 2012
  Continuing Discontinued Total Continuing Discontinued Total
Total revenue 84,336 299   84,635 77,277 7,978 85,255
Net operating income 49,513 142 49,655 45,725 8,186 53,911
Income before income taxes 32,506 130 32,636 36,477 6,344 42,821
Income tax expense 77 - 77 177,649 (10,249) (187,898)
Net and comprehensive income (loss) 32,429 130 32,559 (141,172) (3,905) (145,077)
Net income (loss) per Stapled Unit, diluted $1.01 - $1.01 $(4.60) $(0.13) $(4.73)
Excluding SIFT current income tax            
FFO 33,952 130 34,082 30,906 5,552 36,428
FFO per Stapled Unit, diluted $1.06 - $1.06 $1.01 $0.18 $1.19
FFO payout ratio     71.8%     64.1%
Distributions declared     24,469     23,359
Distributions per Unit     $0.765     $0.765

FFO
FFO per Stapled Unit, excluding the impact of the SIFT current income taxes, was $0.57 in the second quarter in 2013 compared to $0.60 in the second quarter of 2012. The decrease in FFO was a result of the discontinued seniors' portfolio which represented $2.3 million of FFO or $0.07 per Stapled Unit in the second quarter of 2012, partially offset by acquisitions and improved performance on existing properties. For the six months ended June 30, 2013, FFO on a combined basis, excluding the impact of the SIFT income taxes, was $34.1 million or $1.06 per Stapled Unit compared to $36.4 million or $1.19 per Stapled Unit. For the six months ended June 30, 2012, the discontinued seniors' portfolio represented $5.5 million or $0.18 per Stapled Unit.

Residential vacancy loss

       
Region For the three months ended
June 30, 2013
For the three months ended
March 31, 2013
For the three months ended
June 30, 2012
British Columbia 15.3% 12.9% 4.6%
Alberta 3.1% 2.7% 5.3%
Newfoundland and Labrador 3.0% 2.0% 1.6%
Northwest Territories 7.7% 9.3% 3.0%
Nunavut 2.6% 3.6% 1.0%
Saskatchewan 8.1% 10.4% 17.2%
Quebec 0.0% 0.1% -
Overall 6.5% 6.4% 3.6%

Residential vacancy loss for the second quarter of 2013 increased to 6.5% compared to 3.6% for the same quarter of 2012 but remained relatively flat compared to the 6.4% in the first quarter of 2013. In 2012 NPR acquired 1,500 multi-family units and was the main reason for the year over year increase in vacancy. If the 1,500 units purchased in 2012 are excluded, vacancy for the three months ended June 30, 2013 would have been 5.1%.

In British Columbia, residential vacancy was 15.3% for the three months ended June 30, 2013, compared to 4.6% in the second quarter of 2012 and 12.9% for the first quarter of 2013.  During 2012, 1,139 units, net of dispositions, were acquired in BC and as a result have led to the increased vacancy year over year. Excluding these acquisitions, vacancy for the second quarter 2013 was 13.0%.  The economy of Northeastern BC continues to struggle with natural gas prices remaining low and decreased drilling activity negatively impacting vacancy. The 2012 acquisitions were primarily in Campbell River/Courtenay, Prince George and Abbotsford. These recent acquisitions are going through a transition to bring the properties up to NPR standards. It is common to see higher than normal tenant turnover during this period. The aggregate vacancy in these regions was 17.8% for the second quarter of 2013. Vacancy has begun to improve in these new regions as we head into the third quarter.

In Alberta, residential vacancy was 3.1% for the three months ended June 30, 2013 compared to 5.3% for the same period last year and 2.7% in the first quarter of 2013. Alberta continued its improvement with Fort McMurray and Grande Prairie leading the way with vacancy of 2.6% and 2.7%, respectively. Vacancy loss in Lloydminster increased to 4.9% during the second quarter of 2013 from 2.3% as reported in the first quarter of 2013.  This increase is a result of the new 142 unit residential buildings coming on line April 1, 2013. As of May 1, 2013, the new buildings were 100% leased.

In Newfoundland and Labrador, residential vacancy was 3.0% for the three months ended June 30, 2013 compared to 1.6% for the same period last year and 2.0% in the first quarter of 2013. Labrador City saw an increase in vacancy in the quarter to 6.6% from 1.5% in the first quarter of 2013. The increase in Labrador City was a result of the new 31 unit residential building completed in May 2013. Leasing on this property has progressed according to expectations with 24 out of the 31 units leased as of August 1, 2013 with the lease up expected to be completed by the end of the year. Excluding the new 31 residential units, Labrador City vacancy loss for the second quarter of 2013 was 0.9%.

In the Northwest Territories, residential vacancy was 7.7% for the three months ended June 30, 2013 compared to 3.0% for the same period last year and 9.3% in the first quarter of 2013. Meaningful improvement has been realized in Inuvik over the last several months. Inuvik vacancy of 12.3% for the second quarter of 2013 improved from 20.9% in the first quarter of 2013 as a new corporate tenant lease was signed in late March 2013 in addition to the contribution of overall improved leasing efforts and the announced government project to build to the road to Tuktoyaktuk. For the month of June 30, 2013, Inuvik vacancy has fallen to approximately 10%. Yellowknife market has struggled with vacancy of 6.7% in the second quarter of 2013 compared to 6.9% in the first quarter of 2013 and 1.6% in the second quarter of 2012. The increase in vacancy is due mostly to the softer economic conditions in Yellowknife.  Focus on leasing efforts remains, with two full-time leasing agents actively marketing during the busier fall rental season.

In Nunavut, residential vacancy was 2.6% for the three months ended June 30, 2013 compared to 1.0% for the same period last year and 3.6% in the first quarter of 2013. The increase from 2012 was the result of newly constructed units completed in 2012 in Iqaluit. The decrease from the first quarter of 2013 was due to the absorption of the additional new units that have been completed over the last several quarters.

Developments
The second quarter of 2013 saw us continue our development program, completing 55 residential units and two commercial buildings totalling 28,064 square feet of space. NPR completed 31 residential units in Labrador City and the lease up of these units has progressed according to expectation with 24 units leased as of August 1, 2013. We also completed 24 out of 36 residential units in Iqaluit, NU in June 2013, with tenants moving in as of July 1, 2013.  The remaining 12 units were completed on August 1, 2013. All 36 units have been leased to the Government of Canada for 10 years. Both commercial buildings completed in the quarter were in Iqaluit, NU and both buildings have the Government of Canada as the major tenant with 10 year leases. For the remainder of 2013, NPR is expecting another 225 units to be completed, including our first property in Regina, SK with 189 units.

Portfolio Summary (including joint ventures at 100% and discontinued operations) - June 30, 2013

           
Region Multi-family Execusuites & Hotels Seniors'
(Discontinued
Operations)
Total
Residential
(units)
Commercial
(sq. ft.)
British Columbia 2,831 - - 2,831 123,164
Alberta 2,239 - - 2,239 83,243
Newfoundland and Labrador 1,492 142 54 1,688 166,721
Northwest Territories 1,305 160 - 1,465 535,711
Nunavut 1,012 162 - 1,174 196,125
Saskatchewan 240 - - 240 -
Quebec 161 - - 161 -
Total 9,280 464 54 9,798 1,104,964

Financial strength

       
(thousands of dollars, except per unit amounts) June 30, 2013 December 31, 2012 June 30, 2012
Total assets 1,388,653 1,350,072 1,304,227
Total liabilities 593,404 564,110 703,495
Mortgages payable 552,908 518,123 487,734
Gross book value 1,364,053 1,331,514 1,204,148
Debt 571,903 545,354 426,820
Debt to gross book value (fair value) 41.9% 41.0% 35.4%
Interest coverage ratio (times) 3.60 3.65 3.40
Debt service coverage ratio (times) 2.13 2.17 2.04
Weighted average mortgage interest rate 4.14% 4.37% 4.49%
Weighted average term to maturity (years) 4.5 4.1 4.4
Weighted average capitalization rate 8.0% 8.0% 8.0%

NPR continues to have one of the healthiest balance sheets in the Canadian multi-family space. Debt to gross book value has increased nearly a full percentage point from December 31, 2012 to 41.9% for June 30, 2013 and over six percentage points from June 30, 2012 as we execute on our strategy to move Debt to gross book value closer to 50%. During the three months ended June 30, 2013, NPR completed $62.3 million in mortgage financings and renewals with a weighted average interest rate of 2.8% and a term to maturity of 9.5 years.  During the six months ended June 30, 2013, NPR completed $80.7 million in mortgage financings and renewals at a weighted average interest rate of 2.87% and a weighted average term to maturity of 9.2 years. For the remainder of 2013, there are approximately $60 million of mortgage renewals and additional financing of existing and unencumbered assets of approximately $100 million available.

NPR continuously monitors interest rates to identify opportunities for the reduction of its weighted average interest rate and has benefited from historically low interest rates during the first part of 2013. Although there has been a rise in interest rates over the last several months, mortgages are still being renewed at 100 - 150 basis points less than the maturing mortgage and are providing a significant savings with respect to the mortgage interest expense.

Distributions to Stapled Unit holders
During the three months ended June 30, 2013, NPR declared monthly cash distributions of $0.1275 (2012 -$0.1275) per Unit.

On August 13, 2013, the Board of Trustees approved an increase to the annual distribution from $1.53 per year to $1.58 per year per Stapled Unit.  The monthly distribution will increase to $0.1317 from $0.1275 effective for unitholders of record on September 30, 2013 payable October 15, 2013.

Tax status
Bill C-48, which includes proposed rules related to real estate investment trusts, originally announced on December 16, 2010, received second reading in the House of Commons on March 8, 2013, and is now before the House of Commons Standing Committee on Finance. Management believes it meets the requirements of the amended legislation. Bill C-48 has not been passed into legislation as of August 13, 2013.

There have been no updates to the draft stapled securities legislation ("Stapled Securities Proposals") since our first quarter 2013 financial results media release dated May 8, 2013. As at June 30, 2013, NPR's total cash tax liability resulting from the Stapled Securities Proposals is estimated to be $1.1 million, of which $0.9 million relates to 2012. This amount has not been recorded in NPR's financial statements because the Stapled Securities Proposals are not yet substantively enacted.

Additional Information
NPR's unaudited condensed combined interim financial statements and the notes thereto and Management's Discussion and Analysis for the three and six months ended June 30, 2013 can be found on NPR's website at www.npreit.com or on www.sedar.com.

Conference call
NPR's conference call will take place on Wednesday on August 14, 2013 at 1:00 p.m. Mountain Time, 3:00 p.m. Eastern Time. Participating on the call will be Mr. B. James Britton (Chair), Chief Executive Officer, Mr. Todd Cook, President and Chief Operating Officer, and Mr. Robert Palmer, Chief Financial Officer.

Investors and analysts are invited to participate in the call by calling 1-888-231-8191 or 647-427-7450. You will be required to provide the Conference Call Operator with the Conference ID #89560032 prior to being admitted to the call. A recorded playback of the call will be available from August 16, 2013 to August 23, 2013 by calling 416-849-0833 or 1-855-859-2056, passcode #89560032. The recording will also be available on our website on August 16, 2013.

About NPR
The REIT is an unincorporated open-end real estate investment trust and NorSerCo is a corporation under the Business Corporations Act (Alberta). NPR is primarily a multi-family residential real estate investor, providing a broad spectrum of rental accommodations in Canadian secondary markets with strong economic fundamentals where capitalization rates are somewhat higher and competition somewhat restrained. NPR's residential portfolio is comprised of a multi-family segment: apartments, town homes and single family rental units; and execusuites and hotels, where the rental periods range from a few days to several months. NPR also has a portfolio of commercial buildings focused on government tenancies predominantly located in Canada's far north. Geographically, NPR operates in British Columbia, the Northwest Territories, Alberta, Saskatchewan, Nunavut, Quebec and Newfoundland and Labrador. As at June 30, 2013 NPR has 9,798 residential units and 1,104,964 square feet of commercial space.

Cautionary/forward looking statements
This news release contains forward‐looking statements relating to our growth strategy, acquisition activity, completion of apartments for which development approvals have been obtained, commencement of development of new buildings, and federal rules respecting the 10% qualifying exemption for REITs.  These statements are not guarantees of future events, performance or results and will not necessarily be accurate indications of whether, or the times at which, such events, performance or results will be achieved.

Forward-looking statements are based on information available at the time they are made, underlying estimates and assumptions made by management and management's good faith belief with respect to future events, performance and results, and are subject to inherent risks and uncertainties surrounding future expectations generally which could cause actual results to differ materially from what is currently expected. Such risks and uncertainties include, but are not limited to risks associated with investment in and development of real property, competition, financing and refinancing risks, risks related to economic conditions, changes in taxation rules, reliance on key personnel, environmental matters, tenant risks, and other risk factors more particularly described in the our most recent Annual Information Form available on SEDAR at www.sedar.com.  Additional risks and uncertainties not presently known to NPR or that NPR currently believes to be less significant may also adversely affect NPR.

Readers are cautioned that the above list of factors is not exhaustive and that should certain risks or uncertainties materialize, or should underlying estimates or assumptions prove incorrect, actual events, performance and results may vary significantly from those expected. There can be no assurance that the actual results, performance, events or activities anticipated by NPR will be realized or, even if substantially realized, that they will have the expected consequences to, or effect on, NPR.  Readers, therefore, should not place undue importance on forward-looking information.  Further, forward‐looking statements speak only as of the date on which such statements are made.  NPR disclaims any intention or obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required under applicable securities laws.

SOURCE: Northern Property Real Estate Investment Trust

For further information:

For further information contact Robert Palmer, CFO, at 403-531-0720.

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