Melcor REIT announces 2018 annual results

Annual Highlights

• Rental Revenue of $70.17 million for growth of 5% over 2017.
• Net rental income of $42.08 million for growth of 5% over 2017.
• Adjusted funds from operations (AFFO) decreased 5% to $19.15 million or $0.68 per unit.
• Debt to Gross Book Value (GBV) ratio of 48%. Debt to GBV ratio of 56% including convertible debenture, below maximum threshold of 65%.
• Distributions of $0.68 per trust unit paid out ($0.05625 per trust unit per month).
• Payout ratio trended upward to 99% compared to 86% in 2017.

Quarterly Highlights

• Rental Revenue of $17.34 million for an increase of 7% over Q4-2017.
• Net rental income of $10.36 million, for an increase of 9% over Q4-2017.
• AFFO of $4.79 million or $0.17 per unit for an increase of 5% over Q4-2017.
• Occupancy declined to 89.9% compared to 91.8% at the end of 2017.

Melcor REIT (TSX: MR.UN) today announced results for the fourth quarter and year ended December 31, 2018. 2018 rental revenue grew 5% to $70.17 million compared to $66.61 million in 2017. Adjusted funds from operations was down 5% to $19.15 million or $0.68 per unit.

Andrew Melton, CEO of Melcor REIT commented: “It is our privilege to report to you as the REIT completed its fifth year. Since our inception in 2013, we’ve experienced challenging market conditions. Since 2015, the decline in the price of oil has negatively impacted Alberta, there has been an influx of office product in downtown Edmonton where 12% of our portfolio is located, and unfavourable policies implemented by new governments both provincially and nationally.

Throughout the year, we continued to execute on our strategy, leading to stable results. We’ve paid out total distributions of $3.88 per unit to our unitholders since inception. We’ve maintained occupancy of approximately 90% through challenging markets. We’ve achieved our target of 95%+ on-time response on service calls for the past five years, which is a critical component of maintaining strong relationships with tenants for continued retention.

We’ve also grown our portfolio gross leasable area by 83% and re-balanced our asset class mix. We completed four vend-ins from Melcor – a key component of our growth strategy and our competitive advantage. In addition, we acquired assets from third parties and divested three assets to monetize the value we had created while at the same time diversifying our portfolio. Through these transactions, we’ve acquired 1,418,148 square feet and sold 118,125 square feet.

We continue to monitor and respond to market demand and trends in commercial real estate and to focus on exceptional customer care as a differentiating factor in a market where tenants have many options to choose from.

We remain committed to exceptional property management and customer care to ensure we remain the landlord of choice.”

Highlights for the year include:

In 2018, we executed on our growth strategy by adding 205,825 sf of GLA through our fourth Melcor Acquisition under our right of first offer and through a third party acquisition. We were pleased to grow our portfolio through these acquisitions following two years spent focusing on improving and maintaining our existing assets. We also continued to look for capital recycling opportunities and divested two retail assets in 2018. May 1, 2018 marked the REIT’s fifth year of operations. Over the past five years the REIT’s portfolio has grown 83% or 1.30 million sf.

Highlights of our performance in the year include:

• Revenue and NOI growth of 5% over 2017 as a result of portfolio growth.
• We continued to execute on our proactive leasing strategy to both retain existing and attract new tenants. We completed lease renewals representing 305,344 sf (including holdovers) for a retention rate of 77.4% at December 31, 2018. New leasing has been steady across the portfolio with 72,967 sf in new deals commencing in 2018 and an additional 32,000 sf in committed leasing in office buildings for future occupancy.
• Same-asset NOI was down 1% in the fourth quarter and 5% over 2017, trending with a decline in same-asset occupancy. The decline in our Northern Alberta office assets was partially offset by stability in our retail and office assets in Southern Alberta and British Columbia.
• Net income in the current and comparative periods is significantly impacted by non-cash fair value losses on investment properties due to changes in capitalization rates/NOI and on Class B LP Units due to changes in the REIT’s unit price. Management believes funds from operations (FFO) is a better reflection of our true operating performance. FFO was $26.08 million or $0.93 per unit (basic), down 2% from 2017. Lower FFO was primarily due to property dispositions completed earlier in the year, declining same-asset performance and proceeds from the over-allotment on the convertible debenture and trust units which have only been partially re-deployed to date.
• Adjusted funds from operations (AFFO) was $19.15 million or $0.68 per unit (basic), down 5% from 2017. The decrease in AFFO was due to lower same-asset NOI and an increase in normalized capital, tenant incentive and leasing commissions.
• We issued 2,035,500 trust units on January 12, 2018 to complete the Melcor Acquisition, increasing our public float by 18%.
• We paid monthly distributions of $0.05625 per trust unit during 2018 FFO payout ratio of 73% and an AFFO payout ratio of 99%. Our payout ratios are impacted by undeployed capital following the sale of the two assets earlier this year. Near term liquidity provides the REIT with the flexibility to allocate available resources towards operational, investing and financing initiatives. We continue to pursue various opportunities to maximize value for our unitholders.
• We took advantage of favourable lending conditions and early re-financed our largest mortgage securing $39.00 million in financing at an interest rate of 3.84% in 2018. Early re-financing was a strategy employed to mitigate and re-balance our risk in 2019, reducing our percentage of mortgage maturing from 32% to 16%.
• As at December 31, 2018 we have $1.58 million in cash and $29.92 million in additional capacity under our revolving credit facility. We conservatively manage our debt, with a debt to GBV within our target range.