Melcor REIT announces Q3-2022 results

Melcor REIT announces third quarter 2022 results

Melcor REIT (TSX: MR.UN) today announced results for the third quarter ended September 30, 2022. Revenue was stable in the quarter and year-to-date. Net operating income was down 3% in the quarter at $11.61 million due to the timing of operating expenses and inflated costs including utilities like gas/heat and power. Occupancy currently sits at 88%, a 1% improvement over second quarter and year-end, and we have retained 89% of expiring leases year-to-date.

Andrew Melton, CEO of Melcor REIT commented: “I am pleased to share Melcor REIT’s third quarter results. Our portfolio continues to produce stable results despite being tested by numerous factors, including inflationary pressures, increasing interest rates, and a slower than expected return to office following the lifting of work-from-home restrictions.

Our leasing team is finding success in new leasing and renewals while our property management teams focus on providing a strong tenant experience. To date we have signed 127,914 sf of new leasing and 319,079 sf of renewals. Further, we have commitments on an additional 85,024 sf of upcoming renewals. While our occupancy displays a modest increase, we have experienced a significant increase in committed space that will translate to occupancy in the coming months.

Our 2017 Debenture is set to mature on December 31, 2022. We are in the process of reviewing options for financing and have room on our current credit facility to absorb this debenture if required. We are focused on ensuring that the REIT has the flexibility to enter the market under more stable conditions. The REIT continues to monitor its secured debts, including our mortgages and Class C debt, and we proactively engage with lenders in regards to upcoming maturities.

We held our distributions for July, August, September and October at $0.04 per unit. The Board of Trustees also declared a distribution of $0.04 per unit for both November and December 2022.”

HIGHLIGHTS:

Certain factors contributed significantly to results in 2022 when compared to 2021. They are:

• 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 year-to-date comparative results.
• Non-cash fair value adjustments: Non-cash fair value adjustments on Class B LP Units and investment properties often cause significant 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 in August 2021 and has remained stable at $0.04 per unit throughout 2022.

FINANCIAL HIGHLIGHTS

Financial highlights of our performance are summarized below:

Third quarter:

• Revenue was up 1% at $18.19 million (Q3-2021: $18.09 million)
• NOI was down 3% at $11.61 million (Q3-2021: $11.92 million)
• FFO was down 5% to $6.31 million or $0.22 per unit (Q3-2021: $6.64 million or $0.23 per unit).
• ACFO was down 10% at $4.62 million or $0.16 per unit (Q3-2021: $5.13 million or $0.18 per unit). The third quarter payout ratio was 76%based on ACFO (Q3-2021: 65%).

Year-to-date

• Revenue was stable at $55.31 million. (2021: $55.55 million) Excluding the Early Termination event, year-to-date revenue was up 1%.
• NOI was down 4% at $34.86 million. (2021: $36.12 million) Excluding the Early Termination event, year-to-date NOI was down 1%.
• FFO was down 7% to $18.94 million or $0.65 per unit (2021: $20.31 million or $0.70 per unit). Excluding the Early Termination event, FFO was down 2%.
• ACFO was down 10% at $14.19 million or $0.49 per unit (2021: $15.84 million or $0.54 per unit ). Excluding the Early Termination event, ACFO was down 4%. The year-to-date payout ratio was 74% based on ACFO (2021: 60%).
• Fair value on our investment properties portfolio was up 0.4% to $726.91 million compared to $723.73 million at year-end.

As at September 30, 2022 we had $2.71 million in cash and $29.92 million in undrawn liquidity under our revolving credit facility. We have completed financing renewals on 5 properties totaling $41.34 million in renewals at interest rates ranging from fixed at 3.70% – 5.00%, and prime plus 1.00%.

Management believes FFO best reflects our true operating performance. and ACFO best reflects our cash flow and therefore our ability to pay distributions.

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.

OPERATING HIGHLIGHTS

We are proactively renewing existing tenants and have produced a strong retention rate of 89% year-to-date. We continue to pursue new tenant opportunities and have commenced 127,914 sf in new leases. New leasing includes 40,613 sf of temporary seasonal space that will not produce long-term cash flows.

We are pleased with the volume of new leasing activity across our portfolio. Year-to-date leasing includes 446,993 sf of new and renewed leases (including holdovers) and we have retained 89% of expiring leases year-to-date. Future leasing is promising, with commitment on an additional 85,024 sf in new deals.

Retail properties have seen increased occupancy and maintained strong WABR compared to Q3-2021 while office properties continue to navigate downward pressure on rental rates and an increase in supply in some of our key geographic areas. As such, we have seen compression on both WABR and occupancy, down 1% and 3% respectively in the office market. Overall, WABR has remained stable compared to Q3-2021 and year-end.

DISTRIBUTIONS

Our monthly distributions remained at $0.04 per unit in 2022, stable over year-end after a 14% increase in August 2021.

The quarterly payout ratio was 76% based on ACFO and 55% based on FFO (Q3-2021: $0.035 per unit; ACFO: 65% and FFO: 50%). The year-to-date payout ratio was 74% based on ACFO and 55% based on FFO (2021: $0.035 per unit; ACFO: 60% and FFO: 47%).

SUBSEQUENT EVENT

Subsequent to the quarter, we declared distributions for November and December and will be paying the previously declared October distribution as follows:

Month	Record Date	Distribution Date	Distribution Amount
October 2022	October 31, 2022	November 15, 2022	$0.04 per Unit
November 2022	November 30, 2022	December 15, 2022	$0.04 per Unit
December 2022	December 30, 2022	January 16, 2023	$0.04 per Unit