Scott s Real Estate Investment Trust. Interim Consolidated Financial Statements (Unaudited) March 31, 2009 and 2008

Transcription

1 Interim Consolidated Financial Statements March 31, and

2 Interim Consolidated Balance Sheets (in thousands of dollars) Assets March 31, December 31, Income-producing properties (note 3) 172, ,135 Intangible assets (note 4) 8,590 8,909 Cash and short-term investments Accounts receivable Prepaid expenses and other assets (note 7) Due from related companies (note 11) 9 80 Straight-line revenue accrual 2,181 2,133 Liabilities and Unitholders Equity 185, ,642 Mortgages payable (note 6) 112, ,225 Convertible debentures 18,970 18,903 Demand loan (note 5) 3,200 1,900 Accounts payable and accrued liabilities 1,144 1,264 Due to related companies (note 11) Distributions payable to Unitholders (note 8) , ,904 Class B Exchangeable Units (note 9) 16,298 16,910 Unitholders Equity Contributed surplus 2,588 2,218 Class A Units of Scott s REIT 44,676 45,346 Convertible debentures Cumulative earnings 983 1,277 Cumulative distributions declared on Class A Units (note 8) (15,374) (14,312) 33,172 34, , ,642

3 Interim Consolidated Statements of Operations and Cumulative Earnings For the three months ended March 31, and Revenue Rental revenue (note 11) 4,735 4,123 Amortization of below-market rentals 19 8 Straight-line revenue accrual ,802 4,234 Expenses Amortization 2,066 1,804 Operating (note 11) Interest (note 6) 1,977 1,670 General and administrative (note 11) ,229 4,349 Loss before non-controlling interest (427) (115) Non-controlling interest of Class B Exchangeable Units (133) (34) Net loss for the period (294) (81) Cumulative earnings - Beginning of period 1,277 1,813 Cumulative earnings - End of period 983 1,732 Basic and diluted loss per Unit (note 10) (0.059) (0.015) Class A Units outstanding 4,993,964 5,410,527 Class B Exchangeable Units outstanding 2,254,909 2,254,909

4 Interim Consolidated Statements of Comprehensive Loss For the three months ended March 31, and (in thousands of dollars) Net loss for the period (294) (81) Other comprehensive income - - Comprehensive loss (294) (81)

5 Interim Consolidated Statements of Cash Flows For the three months ended March 31, and (in thousands of dollars) Cash provided by (used in) Operating activities Net loss for the period (294) (81) Add (deduct) Non-controlling interest of Class B Exchangeable Units (133) (34) Amortization of income-producing properties 1,728 1,581 Amortization of intangible assets Amortization of deferred financing charges (note 6) Amortization of deferred costs (note 7) 6 1 Interest accretion Straight-line revenue accrual (48) (103) 1,710 1,695 Change in other non-cash operating items Prepaid expenses and other assets (248) (326) Accounts receivable Accounts payable and accrued liabilities (120) 121 Due to/from related companies 98 (162) Investing activities Construction-in-progress - (15) Property acquisitions 2 (32) Acquisition-in-progress 1 (56) 1,594 1,328 3 (103) Financing activities Buy back of Class A units (300) - Demand loan 1,300 - Mortgage financing fees (4) - Principal repayments on mortgages payable (184) (53) Distributions paid (1,546) (1,632) (734) (1,685) Increase (decrease) in cash and short-term investments during the period 863 (460) Cash and short-term investments - Beginning of period Cash and short-term investments - End of period Cash and short-term investments consist of Cash Short-term investments Supplemental cash flow disclosure Interest paid 1,493 1,

6 March 31, and 1 Basis of presentation Scott s Real Estate Investment Trust (Scott s REIT) is an open-ended real estate investment trust established under the laws of the Province of Ontario that was created pursuant to a Declaration of Trust dated August 23, Scott s REIT was established to acquire, through wholly owned Scott s LP, 190 income-producing retail properties from Obelysk Inc. (Obelysk) and Yum! Brands Canada Management LP. 2 Summary of significant accounting policies The interim consolidated financial statements of Scott s REIT have been prepared in accordance with Canadian generally accepted accounting principles. The note disclosure in these interim consolidated financial statements includes only material changes from the disclosure found in Scott s REIT s annual consolidated financial statements for the year ended December 31,. Therefore, these interim consolidated financial statements and notes should be read in conjunction with those consolidated financial statements. Except as described below, these interim consolidated financial statements follow the same accounting policies as Scott s REIT s audited annual consolidated financial statements. Change in accounting policy Effective January 1,, Scott s REIT has adopted the following section of The Canadian Institute of Chartered Accountants (CICA) Handbook: Section 3064, Goodwill and Intangible Assets Section 3064 replaces Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs. Section 3064 establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Application of this pronouncement had no impact on the reported results of Scott s REIT. 3 Income-producing properties March 31, Cost Accumulated amortization Net Land 53,509-53,509 Buildings 138,021 19, ,542 Construction-in-progress Acquisitions-in-progress ,883 19, ,404 (1)

7 March 31, and Cost Accumulated amortization December 31, Net Land 53,509-53,509 Buildings 138,023 17, ,272 Construction-in-progress Acquisitions-in-progress Intangible assets 191,886 17, ,135 March 31, Cost Accumulated amortization Net In-place leases 8,058 2,144 5,914 Tenant relationships 2, ,731 Above (below) market rents 882 (63) ,119 2,529 8,590 December 31, Cost Accumulated amortization Net In-place leases 8,058 1,891 6,167 Tenant relationships 2, ,816 Above (below) market rents 882 (44) Demand loan 11,119 2,210 8,909 The revolving credit facility bears interest at prime rate plus 1% and is due on demand. The line may be used up to a maximum of 5,000 (December 31, - 10,000); however, once 4,000 has been drawn, Scott s REIT must repay the borrowings to nil within six months. (2)

8 March 31, and As at March 31,, 3,200 (December 31, - 1,900) has been drawn down on the facility. 6 Mortgages payable March 31, December 31, First mortgage maturing in October 2010 on the following terms Interest only payable monthly for five years with the principal repayable on the maturity date, interest rate of 4.9% compounded semi-annually 65,000 65,000 First mortgage maturing in August 2016 on the following terms Interest only payable for the first year. After the first year, the principal amount is amortized over 28 years, interest rate of 5.68% compounded semi-annually 7,805 7,837 First mortgage maturing in August 2016 on the following terms Interest only payable for two years. After the two years, the principal amount is amortized over 28 years, interest rate of 5.39% compounded semi-annually 6,983 6,983 First mortgage maturing in July 2017 on the following terms Interest only payable for two years. After the two years, the principal amount is amortized over 28 years, interest rate of 5.92% compounded semi-annually 6,060 6,060 First mortgage maturing in December 2022 on the following terms The principal amount is amortized over 20 years, interest rate of 5.788% compounded semi-annually 2,413 2,430 First mortgage maturing in August 2018 on the following terms The principal amount is amortized over 20 years, interest rate of 6.123% compounded semi-annually 3,151 3,172 First mortgage maturing in August 2018 on the following terms The principal amount is amortized over 25 years, interest rate of 6.123% compounded semi-annually 8,215 8,252 First mortgage maturing in August 2018 on the following terms The principal amount is amortized over 25 years, interest rate of 6.174% compounded semi-annually 4,157 4,176 First mortgage maturing in February 2015 on the following terms The principal amount is amortized over 21.4 years, interest rate of 5.2% compounded semi-annually 8,302 8,357 First mortgage maturing in December 2013 on the following terms The principal amount is amortized over 20 years, interest rate of 7% compounded semi-annually , ,067 Less: Deferred financing charges , ,225 (3)

9 March 31, and Income-producing properties have been pledged as security for the mortgages payable. Interest expense for the quarter ended March 31, consists of the following: March 31, December 31, Net interest on mortgages payable and convertible debenture 1,845 1,554 Amortization of deferred financing charges on mortgages Amortization of deferred financing charges on convertible debentures Interest accretion Prepaid expenses and other assets 1,977 1,670 March 31, December 31, Prepaid expenses Tenant allowances Commissions/leasing fees Deposits Mortgage holdbacks During the quarter, 5 was incurred as additional commissions/leasing fees. In addition, 4 was amortized over the term of the lease. Mortgage holdbacks include 485 that have been restricted subject to Scott s REIT completing certain capital improvements on its St. Thomas, Ontario property before August 2013, leasing on a vacant space in Longueil, Québec and replacing part of a roof in Hanover, Ontario. (4)

10 March 31, and 8 Distributions to Unitholders Distributions declared during the period from January 1, to March 31, were as follows: Unitholder record date Total Per Unit Paid or payable Class A Units January 30, February 16, February 27, March 31, March 16, April 15, 1, Class B Exchangeable Units January 30, February 16, February 27, March 31, March 16, April 15, ,541 On February 1,, Scott s REIT announced a normal course issuer bid whereby Scott s REIT may purchase its Units during the period from February 1, to January 31,. Pursuant to the notice, Scott s REIT was permitted to acquire up to a maximum, per trading day, of 2,310 Units, which represented approximately 25% of the average daily trading volume, and up to a maximum, in a 12-month period, of 493,930 Units, which is approximately 10% of the public float. Purchases were made at market prices through the facilities of the TSX. Units taken up and paid for by Scott s REIT were cancelled. For the quarter ended March 31,, Scott s REIT purchased a total of 67,000 Units at a weighted average purchase price of 4.48 for a total cost of approximately Class B Exchangeable Units of Scott s LP The Class B Exchangeable Units of Scott s LP issued by Scott s REIT to Obelysk have economic and voting rights equivalent, in all material respects, to Scott s REIT Class A Units. They are exchangeable, directly or indirectly, on a one-for-one basis for Scott s REIT Class A Units at the option of the holder, under the terms of an Exchange Agreement. Each Class B Exchangeable Unit entitles the holder to receive distributions from Scott s REIT, pro rata with distributions made by Scott s REIT on a Scott s REIT Class A Unit. (5)

11 March 31, and The Class B Exchangeable Units are accounted for as a non-controlling interest. Movement in the carrying value of Class B Exchangeable Units, during the three months ended March 31,, was as follows: March 31, December 31, Balance - Beginning of period 16,910 19,067 Share of net loss for the period (133) (239) Distributions declared (479) (1,918) Balance - End of period 16,298 16, Earnings (loss) per unit The computation for basic and diluted earnings per Unit is as follows: Loss available to Unitholders (294) (81) Dilutive effect of Non-controlling interest (133) (34) Convertible debentures Diluted earnings (loss) available to Unitholders (56) 241 Basic weighted average number of Units ( 000s) 5,010 5,411 Dilutive effect of Non-controlling interest 2,255 2,255 Convertible debentures 4,912 2,887 Diluted weighted average number of Units 12,177 10,553 Loss per Unit Basic and diluted (0.059) (0.015) 11 Related party accounts and transactions JBM Properties Inc. (JBM) is the asset manager and property manager for Scott s REIT. JBM is a company controlled by the principal shareholder of Obelysk, which owns approximately 40% of Priszm LP. Scott s REIT earns a significant portion of its rental revenue from Priszm LP. Scott s REIT entered into the following transactions during the period, which were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. (6)

12 March 31, and a) During the quarter ended March 31,, Scott s REIT earned rental income of 2,999 ( - 2,695) from Priszm LP. Included in operating expenses is 45 ( - 13) in common area expenses paid by Priszm LP. As at March 31,, included in due from related parties is 7 (December 31, - 71) of rent receivable from Priszm LP. b) Pursuant to a Property Management Agreement, Scott s REIT retained JBM, a company controlled by the principal shareholder of Obelysk, to administer the day-to-day property and leasing operations of the income-producing properties. Fees payable under the Property Management Agreement are 3% of the cash rental revenue received from income-producing properties. Included in operating expenses is 142 in property management fees for the quarter ended March 31, ( - 123). As at March 31,, 2 is included in due from related parties (December 31, - 8 is included in due to related parties) in respect of the property management fees. c) Pursuant to an Asset Management Agreement, Scott s REIT retained JBM to provide advisory, asset management and administrative services, subject to the overriding supervision and direction of the Trustees of Scott s REIT. Fees payable under the Asset Management Agreement are as follows: a base fee of 0.25% per annum of the gross book value of consolidated assets, calculated and payable quarterly; an incentive fee for each fiscal year equal to 15% of the distributable income per Unit in excess of 0.85 per Unit, multiplied by the number of Units outstanding; a development fee equal to 4% of the gross costs of a development project, or as otherwise agreed between Scott s REIT and JBM; and an acquisition fee of 0.5% to 1.0% based on the property value and leasing fees of 0.75 to 2.50 per square foot. The base fee and the incentive fee are to be paid in cash or, at JBM s election, in Units of Scott s REIT. Included in general and administrative expenses for the three-month period ended March 31,, is 130 ( - 118) in asset management fees and 30 ( - nil) in incentive fees. As at March 31,, a total of 121 ( - 86) is included in due to related parties in respect of the above fees. d) Included in due from related companies is nil (December 31, - 9) due from Obelysk relating to reimbursement of expenses. Included in general and administrative expenses is 2 (December 31, - 1) of expenses incurred by Obelysk on behalf of Scott s REIT. (7)

13 March 31, and 12 Management of capital Scott s REIT views its capital as the combination of its mortgages payable, convertible debentures, Unitholders equity and non-controlling interest. Scott s REIT s objectives when managing capital are to safeguard Scott s REIT s ability to continue as a going concern while maintaining the growth of its business and the distributable cash to its Unitholders. In general, the overall capital of Scott s REIT is evaluated and determined in the context of its financial objectives and its strategic plan. Scott s REIT determines the appropriate level of mortgages payable and convertible debentures in the context of its cash flow and overall business risks. Scott s REIT has historically generated sufficient cash flow to pay monthly distributions to its Unitholders and maintenance expenditures. The funds from mortgages payable and convertible debentures were mainly used to finance growth initiatives such as acquisitions. The current level of capital is considered adequate in the context of current operations. The strategic plan of Scott s REIT may necessitate additions to the capital of Scott s REIT. The decrease of the equity component of capital is mainly based on the income or loss of the business less the distributions paid. Although there are no externally imposed capital requirements, Scott s REIT is subject to a number of covenants and restrictions under the mortgage agreements, including the requirements to meet certain financial ratios such as interest and coverage. Management also uses these ratios as key indicators in managing Scott s REIT s capital. Scott s REIT complied with all covenants and restrictions throughout the period ended March 31,. 13 Financial instruments and financial risk management Scott s REIT is exposed to credit risk, liquidity risk and interest rate risk. Scott s REIT s Board of Trustees has overall responsibility for the establishment and oversight of Scott s REIT s risk management framework and reviews Scott s REIT s policies on an ongoing basis. Credit risk Scott s REIT s financial instruments that are exposed to credit risk consist primarily of cash and short-term investments and accounts receivable. Cash and short-term investments are maintained at major financial institutions that have high credit ratings assigned by international credit rating agencies, and therefore the exposure to credit risk is minimal. Credit risk from accounts receivable is minimized as a result of the review and evaluation of customer account balances beyond a particular age and credit limit. Scott s REIT accounts for a specific bad debt provision when management considers the expected recovery is less than the actual accounts receivable. The credit risk of accounts receivable is limited because the balance of accounts receivable is not significant. (8)

14 March 31, and Liquidity risk Liquidity risk is the risk that Scott s REIT will not be able to meet its financial obligations as they come due. Scott s REIT manages liquidity risk through continuously monitoring forecast and actual cash flows, and also the management of its capital structure. Scott s REIT continually reviews its available liquid resources as compared to the timing of the payment of liabilities to manage liquidity risk. Interest rate risk Scott s REIT s interest rate risk is low due to the fixed rate nature of the mortgages payable and convertible debentures. Scott s REIT may be subject to interest rate risks as its revolving line of credit facility bears interest at varying rates in accordance with borrowing rates in Canada. Management assesses that the interest rate risk exposure is not significant based on the level of the revolving line of credit. Financial instruments The carrying amounts of cash and short-term investments, trade and other accounts receivable, due to/from related companies, and accounts payable and accrued liabilities, and distributions payable to Unitholders approximate their fair value because of the near-term maturity of these instruments. 14 Subsequent event Subsequent to March 31,, Scott s REIT negotiated the termination of a lease in its Thunder Bay, Ontario property for a fee of 150. Scott s REIT has since filled this vacancy with a new tenant at similar rental rates. (9)