Melcor REIT announces Q2-2022 results

Melcor REIT announces second quarter 2022 results

Melcor REIT (TSX: MR.UN) today announced results for the second quarter ended June 30, 2022. Rental revenue was up 1% in the quarter at $18.15 million and down 1% at $37.12 million year-to-date. NOI was down 2% in the quarter at $11.39 million and down 4% year-to-date at $23.25 million. ACFO for the quarter was $4.51 million or $0.15 per unit, and $9.57 million or $0.33 per unit year-to-date. Occupancy held steady over the first quarter and year-end at 87% and we retained 86% of expiring leases year-to-date. We continue to actively pursue new tenant opportunities and have commenced 53,444 sf in new leases. Including new leasing, renewals and holdovers, we have signed 273,154 sf to date.

Second Quarter Highlights:

• Revenue was up 1% at $18.15 million compared to Q2-2021;
• Net operating income (NOI) was down 2% to $11.39 million compared to Q2-2021;
• Funds from operations (FFO) was down 7% to $6.11 million or $0.21 per unit compared to Q2-2021;
• Adjusted cash flow from operations (ACFO) was down 9% at $4.51 million or $0.15 per unit compared to Q2-2021;
• Occupancy remained stable at 87%;
• Distributions of $0.04 per unit were paid in Q2-2022 for a quarterly ACFO payout ratio of 77%.

Andrew Melton, CEO of Melcor REIT commented: “The second quarter of 2022 presented similar results to what we saw in the first quarter. We are pleased with stability in a market that continues to see challenges. Our leasing team has worked diligently to renew expiring leases and source new tenants, resulting in a healthy retention rate of 86% and 273,154 sf of new and renewed leasing. Future leasing remains a priority and we have commitment on an additional 110,966 sf of future renewals and over 78,000 sf in new deals.

Rising interest rates and inflation place even more pressure on the market and we expect to further feel the effects of this as our mortgages come up for renewal. Our weighted average interest rate rose to 3.71% over year-end. (December 31, 2021 – 3.62%).

Our distributions remained stable over Q1-2022 at $0.04 per unit, an increase of 14% over Q2-2021. Subsequent to quarter-end, the Board of Trustees declared distributions for July 2022, unchanged from previous months.”

HIGHLIGHTS:

Our portfolio performance remained stable in the second quarter and year-to-date. Year-to-date NOI and net rental income was down 4% due to $1 million in early termination fees paid in Q1-2021. Excluding these payments, year-to-date NOI was stable and net rental income was up 1%. In the quarter, both NOI and net rental income were down 2% due to the timing of operating expenses.

We continue to proactively renew existing tenants which has resulted in a strong retention rate of 86% year-to-date. We are actively pursuing new tenant opportunities and have commenced 53,444 sf in new leases. Occupancy remained stable over the first quarter and year-end at 87% (Q1-2022 – 87%, Q4-2021 – 87%). On average, WABR has decreased slightly from year-end, down 1%, due to ongoing challenges within the office class. Following the lifting of work-from-home orders, demand for office space continues to fluctuate while supply increases. WABR on our retail properties increased 1% over Q1-2022.

The factors that contributed most significantly to results in 2022 compared to 2021 are as follows:

• Early Termination event: In Q1-2021, we received $1.00 million for the early lease termination of a fast food chain which was included in other revenue, and impacts the comparative results.
• Non-cash Fair Value Adjustments: Non-cash fair value adjustments on Class B LP Units and investment properties often cause dramatic swings in results. Class B Units are valued at market value, thus a change in unit price has a counter-intuitive impact on net income, as an increase in unit value decreases net income. These revaluations have had a material impact to net income in both the current and prior periods, making comparison less meaningful. Management considers FFO and ACFO better measures of our performance as these non-cash items are removed from those metrics.
• Distribution Increase: Our monthly distribution increased by 14% to $0.04 per unit compared to Q2-2021.

FINANCIAL HIGHLIGHTS

Financial highlights of our performance in the second quarter and year-to-date include:

• Revenue was up 1% at $18.15 million in Q2-2022 and down 1% at $37.12 million year-to-date. Excluding the Early Termination event, year-to-date revenue was up 2%.
• NOI was down 2% at $23.25 million in Q2-2022 due to the timing of operating expenses. NOI was down 4% year-to-date. Excluding the Early Termination event, year-to-date NOI was stable.
• FFO was down 7% to $6.11 million or $0.21 per unit in the quarter (Q2-2021: $6.57 million or $0.23 per unit). Year-to-date, FFO was down 8% to $12.64 million or $0.43 per unit (2021: $13.67 million or $0.47 per unit). Excluding the Early Termination event, year-to-date FFO was stable. Management believes FFO best reflects our true operating performance.
• ACFO was down 9% at $4.51 million or $0.15 per unit in Q2-2022 (Q2-2021: $4.96 million or $0.17 per unit). Year-to-date ACFO is down 11% at $9.57 million (2021: $10.71 million). Excluding the Early Termination event, year-to-date ACFO was down 1%. Management believes that ACFO best reflects our cash flow and therefore our ability to pay distributions. The second quarter payout ratio was 77% based on ACFO, and 73% year-to-date (Q2-2021 – 62% and year-to-date 2021 – 57%).
• Net income in the current and comparative period is significantly impacted by the non-cash fair value adjustments described above and thus not a meaningful metric to assess financial performance.
• Year-to-date we have completed financing renewals on 3 properties, for net proceeds of $1.44 million.
• As at June 30, 2022 we had $4.55 million in cash and $32.00 million in undrawn liquidity under our revolving credit facility.

DISTRIBUTIONS

Our monthly distributions remained stable over year-end at $0.04 and increased 14% over Q2-2021. The quarterly payout ratio was 77% based on ACFO and 57% based on FFO (Q2-2021: distribution of $0.035 per month; 62% ACFO and 47% FFO). Year-to-date the payout ratio was 73% based on ACFO and 55% based on FFO (2021: distributions of $0.035 per month; 57% based on ACFO and 45% based on FFO)

SUBSEQUENT EVENT

Subsequent to the quarter, we declared the following distribution:

Campeonato Brasileiro Série A, Série B, Série C e Série D; Copa do Brasil; Paulistão; Campeonato Carioca; Campeonato Mineiro; Gauchão; Campeonato Paranaense; Baianão; campeonato brasileiro Campeonato Cearense; Campeonato Pernambucano; Goianão; Candangão; Campeonato; Potiguar; Parazão; Campeonato Sergipano; Campeonato Alagoano; Campeonato