Ladies and gentlemen, thank you for standing by, and welcome to the Choice Properties Real Estate Investment Trust Q3 Earnings Announcement Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised, today's conference is being recorded. I would now like to turn the call over to your speaker today, Doris Bonn, Senior Vice President, General Counsel and Secretary. Thank you.
Please go ahead.
Thank you. Good morning, and welcome to Choice Properties' Q3 2020 conference call. I'm joined here this morning by Rell Diamond, President and Chief Executive Officer Mario Barrafato, Chief Financial Officer and Anna Radek, Executive Vice President, Leasing and Operations. Before we begin today's call, I'd like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward looking statements, including statements regarding Choice Properties' objectives, strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, intentions, outlook and similar statements concerning anticipated future events, results, circumstances, performance or exceptions that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward looking statements.
Additional information on the material risks that can impact our financial results and estimates and assumptions that we are made in applying in making these statements can be found in the recently filed Q3 2020 financial statements and management's discussion and analysis, which are available on our website and on SEDAR. I will now turn the call over to Ralph.
Thank you, Doris, and good morning, everyone. Thank you for taking the time to join our Q3 conference call. We are pleased with both our financial and operational results for the quarter, which reflects solid earnings, increased rent collections and the resumption of investment activity. The strength of our quarter must be tempered by the ongoing impact of the COVID-nineteen pandemic and the risk that this represents to our business. We continue to take thoughtful actions to mitigate the effects of the pandemic on our business operations, while focusing on the best interest of our employees, tenants and other stakeholders.
Our diversified portfolio is well occupied at 97% and is leased to high quality tenants across Canada. As I mentioned last quarter, the pandemic has had the most notable impact on our retail assets. At Choice, we're in a solid position given the makeup of our portfolio. Our retail assets are primarily leased to grocery stores, pharmacies and other necessity based tenants who continue to perform well. Beyond retail, we also own high quality industrial, office and residential properties in Canada's largest markets.
This diversification enables us to further reduce risk and stabilize cash flows. Before Mario discusses our financial results and balance sheet, I wanted to spend a moment discussing transaction activities. We are pleased with the resumption of investment activities since the start of the pandemic. Capital recycling is a continued focus for Choice as we look to improve the overall quality of our portfolio. Since the end of the prior quarter, we've completed or entered into agreements to dispose $341,000,000 of properties and to acquire $334,000,000 of new properties.
That's over $675,000,000 of transactions. I would like to highlight a few transactions. First, on dispositions. In October, we sold a 50% non managing interest in a retail portfolio for $151,000,000 The portfolio included 10 grocery anchored retail assets totaling 591,000 square feet with the purchaser having the option to acquire an additional 3 assets for an additional $50,000,000 The portfolio is a mix of standalone and multi tenant assets that are all anchored by Loblaw on long term leases and located in secondary and tertiary markets. The purchaser is a passive institutional investor and we will retain management of the assets, providing us with incremental fee income through property management and asset management.
This is an excellent transaction for Choice and provides potential for longer term disposition pipeline with an aligned joint venture partner. We also entered into agreements to sell 2 additional retail portfolios for 107,000,000 dollars The first portfolio consists of 3 standalone Canadian Tire assets that we agreed to sell for proceeds of $64,000,000 The second portfolio consists of 5 assets anchored by Loblaw that we agreed to sell for proceeds of $43,000,000 All 8 of these assets are located in secondary and tertiary markets. Collectively, these dispositions highlight the liquidity in our existing portfolio at pricing above our IFRS values. Overall, we're encouraged by the interest from institutional partners and the strong pricing for our retail assets, both of which speak to the high quality of our assets. Next, on acquisitions.
As we previously announced, we acquired 2 assets from Whittington for $209,000,000 This includes the Western Center, a multi tenant office and retail asset that includes a grocery store that includes a Loblaw grocery store at grade. Located at the intersection of Yonge Street and St. Clair. This asset is exceptionally well located and is the current head office for Choice. We also acquired the remaining ownership interest in West Block, a mixed use site that includes retail, anchored by Loblaw grocery store and office space above.
We're in the process of completing this development and transferred the first phase of the project to income producing status this quarter. Subsequent to quarter end, we acquired a high quality industrial portfolio for a total of $86,000,000 The portfolio is comprised of 4 cross dock facilities in vector markets and represents a significant land holding of 56 acres. Of note, we're excited by the opportunity to add a core 27 Acre Holding in Mississauga, Ontario. These assets are 100% leased to a national logistics company with a weighted average lease term of nearly 14 years and with strong contractual rent steps. These acquisitions speak to our ability to generate stable and growing net operating income through strategic acquisitions.
They also highlight our strength in sourcing high quality investments, both through existing related party and off market opportunities. Overall, these transactions are consistent with our ongoing commitment to strengthening our balance sheet by improving the quality of our portfolio, providing further diversification and reducing our overall leverage. On the development front, our program continues to progress well. There were no significant delays as a result of the pandemic and our team continues to make progress on our ongoing projects. In the quarter, we completed and transferred 6 development projects for approximately 193,000 square feet of GLA at our share.
This represents a total development cost of 83,000,000 dollars and includes the final phase of our Great Plains industrial development in Calgary. This final building is 73,000 square feet at our share and is a new generation industrial building that is 100% leased on a 10 year term. Taken collectively, we are very active on improving our portfolio in the quarter. I would now like to pass the call over to Mario to provide an update on our financial performance.
Mario? Thank you, Raul. Good morning, everyone. I'll begin with a brief overview of our rent collections and then speak to our financial results and balance sheet activity. Rent collection for the Q3 was approximately 98%, up from 89% for Q2 and 86% on April 1.
The improvement in rent collections reflects a combination of opening up the economy and the effectiveness of rent relief measures, which have supported our tenants throughout these unprecedented times. Continuing with rent collections, for the quarter, we've reported a bad debt expense of $4,700,000 the majority of which relates to abatements for tenants participating in SECRA. This expense is down considerably from the $14,600,000 reported in the 2nd quarter. In terms of accounts receivable, we provided additional disclosure in our MD and A, which accounts for tenant fillings in the previous two quarters. And from this, you can see that almost all of our AR has either been collected, deferred pursuant to deferral arrangements or provided against, leading a negligible amount exposed to additional credit loss.
Our reported funds from operations for the Q3 was 169,200,000 dollars This was a relatively clean quarter with the exception of the $4,700,000 bad debt expense I referred to earlier, which is offset by $1,900,000 of non recurring revenue related to lease surrender income and final tenant billings for 2019. On a per unit diluted basis, our Q3 FFO was $0.238 per unit compared to $0.25 in the Q3 of 2019. The declines in FFO per unit for the current period were primarily due to the bad debt expense and operating at lower leverage than the comparative quarter. Reflected in our per unit amounts is a higher number of units outstanding as a result of the units issued this quarter as consideration to acquire the West Block development and our head office at 22 St. Clair from Whittington.
Excluding the previously noted bad debt expense, our operating performance was stable. Quarter end occupancy increased to 97% with retail occupancy at 97.5 percent, industrial occupancy at 96.6 percent and office occupancy at 92.9%. The positive absorption of 88,000 square feet during the quarter primarily related to our Ontario industrial portfolio. We had a temporary vacancy in Q2 at an industrial facility in the GTA West that was quickly backfilled with a new long term lease with rents higher than the previous tenant. This speaks to the strength of the leasing market for our industrial products.
The increase in occupancy translated into same asset cash NOI growth of 1.2% year over year when excluding bad debt expense. This growth reflects the annual step rents embedded within the Loblaw portion of the portfolio as well as incremental cash generated from leasing activity over the last 12 months. Turning to the balance sheet. For the quarter, we reported an increase to the fair value of our investment properties of $18,000,000 The increase was related to the positive revaluation to our GTA Large Bay Industrial portfolio and gains realized on disposition transactions. This was offset by a macro downward adjustment to the value of our office properties associated with the recent increase in sublet space in the market.
We continue to take actions to strengthen our financial position and support our business with an industry leading balance sheet. This is evidenced with the issuance of equity to acquire 2 assets from Whittington earlier in Q3 as we increased our net asset value and reduced our leverage. We had very little finance activity in the quarter as the early redemption in the second quarter of 2 of our debentures maturing in early 2021 has left us with no significant debt maturities until September of 2021. Over the course of 2020, we have significantly improved our balance sheet by reducing our risk profile and improving our financial flexibility. This includes extending our weighted average term of debt, lowering our weighted average interest rate and maintaining over $1,400,000,000 undrawn on our credit facility, giving us ample liquidity in addition to approximately $12,000,000,000 of unencumbered assets that we can finance or prune to raise capital.
And in the quarter, DBRS upgraded our credit rating to BBB high, reflecting the strength of our credit. So overall, with our low debt level, our high liquidity level and our upgraded investment grade credit rating, we believe we are well positioned to manage the current challenging environment. And I'd now like to turn the call back to the operator for questions.
Your first question comes from the line of Sam Giamani of TD Securities. Please go ahead. Your line is open.
Thanks and good morning everyone. Just to start off, we've seen the REIT acquire some office assets and some industrial assets. Just wondering, when you look at the market today, clearly, the biggest dislocation arguably is in the retail space. Just wondering what the appetite is for adding more multi tenant retail in the major markets?
Yes, Sam. If it's well located, good tenant roster, we would love to add that product as well to our portfolio. There's just not a lot of that on the market at the moment, because I think it's held by parties that are generally well capitalized and I don't think they're going to be selling. We just don't see much activity.
Okay. And just looking at the balance sheet, you guys have done a great job since the CREED acquisition in reducing leverage and terming out debt. How far do you want to go just in terms of how we think about the next couple of years? Should we assume that deleveraging is going to be maintained as a priority?
Hey, Sam. I don't know if it will be a priority. I think directionally, we'd like to get lower. And if we have opportunity to issue equity or sell assets at reasonable pricing, then we would do so. But right now, I think the goal was to stretch out our debt ladder and take advantage of the pricing we're getting in the unsecured debt market.
So again, I think it's the next few years you look at it, I think just being disciplined and conservative and really set us up to when we start ramping up our development program.
Okay. And last question is on the residential side, I guess, twofold. What's how is VIA-one hundred and twenty three performing with pandemic? Any impact there? And is it too early to get any sense of the market demand for the units at 390
Yes, Sam, it's Raul. So VIA-one hundred and twenty three, we have seen some increase in vacancy. I think it's trended towards about 90%, but the rents have actually held in quite well. At 3.90 Dufferin, it is too soon. We've just opened a leasing office, I think over the last month, but it's a little soon.
But there's been productivity, good interest from what I hear, but still too soon.
Thanks. I'll turn it back.
Thank you. And your next question comes from the line of Mark Rothschild of Canaccord. Your line is
open. Thanks, Zane. Good morning, guys.
Hey, Mark.
Whereas early this year, everyone pretty much stopped the disposition activity just as the pandemic picked up. The talk from most of your peers lately has been on resuming selling non core assets. I'm not asking you to speak for your peers, but you guys are probably the first to actually be active in getting some things done in selling. Were these generally transactions that you had been working on earlier or did you just do you feel that maybe you just moved quicker in starting things up again and just talk about how this came about?
Yes, Sam. So the institutional sorry, Mark. The institutional partner we had been working with for a while, but the pricing basically never changed through the pandemic. The other 2 really started, I would say, they started doing due diligence during the pandemic. But people are there's still strong interest for our product and people still continue to reach out to us.
Okay, great. And it seems like strengthening the balance sheet further is not something that is a top priority that has to be done today and it's more of a long term plan. But can you just talk about if there's any interest right now from you guys in selling into some of your long term development assets, selling partial interest? Clearly, some of these are extremely long term projects that probably wouldn't produce any cash flow for more than 5 years, and in some cases, even longer. Do you view that as an opportunity to generate more cash in the near term?
So Mark, we have a wonderful position because we don't have the density on our balance sheet. That's the first thing. So what we really focused on is getting the entitlement trying to create as much value through that entitlement process ourselves. And then as it comes closer to execution, we will likely bring in a partner for a phase of some
of the
projects. And what the partner will help bring obviously is not only capital, but they'll bring expertise because we don't have the full house in house capabilities to go through the full development or construction process ourselves. But that's something we're going to look at, but when we closer to construction, not very far out. Okay, great. Thanks.
Thank you. And our next question comes from Himanshu Gupta of Scotiabank. Your line is open.
Thank you and good morning. So just on the material portfolio acquisition for $86,000,000 how competitive was the acquisition process? And any details, what is the going in CapEx and can you specify the markets where these properties are located?
Yes. It's so you're referring to the industrial portfolio that we purchased?
That is correct. The 4 properties that you purchased for $86,000,000 What was the cap rate? And anything in terms of the markets, where the markets are, what kind of growth opportunities and growth opportunity you have on that?
Yes. So Himanshu, it was actually off market. It actually was an existing tenant about that, the individual who runs our office and industrial group is very close with the tenant and the tenant actually had spoken to him about the opportunity. So it was purely off market. We love the investment because we really view it as a long term land play for redevelopment.
The markets are all primarily it's primarily GTA is the bulk of the portfolio is in the GTA, but it's all Vectum. And the cap rate was just sub-five and there's above market rent steps in the lease term.
Got it. And do you think this will be the focus going forward as well in terms of acquiring more industrial properties and perhaps monetize on some of the non core retail assets?
Yes. We always every year or every quarter we look to recycle assets and we'll continue to look for good opportunities to do so. And we'll do it across all asset classes.
Got it. And then with respect to the dispositions, that 50% interest for $151,000,000 Just wondering, did the buyer approach you guys or that was a marketed process as well? And what are the prospects for asset management or property management fee there? And do you expect to further grow this fee bearing business for you?
Yes. So it came through, again, it came through actually came through a broker who had approached us. And we view it as we like this potential partner because we think there's an opportunity to further grow this relationship. And it's initially $150,000,000 They have an option for another $50,000,000 And hopefully, we can keep expanding it to grow that fee platform as you spoke about.
Got you. And does the buyers have the option to purchase the remaining 50% at any point of time?
No, no. We like the portfolio. We view it as a long term ownership portfolio with them.
Got it. Okay. There would
be normal liquidity sorry, there would be normal liquidity right in the partnership, but the intention is to own it on a long term basis fifty-fifty.
Got it. And then just turning on the retail portfolio, I think you disclosed the restaurants and the fitness tenants. They account for roughly 10% of the retail portfolio. So the question is, are any of these tenants coming up for renewal next year? And do you expect any pressure on market rents with respect to these type of tenants, which might have been impacted due to COVID?
So
you're referring to the restaurants and then fitness. So look, restaurants are about 5, I think let me find the exact number. I think it's 5% of our retail portfolio and half of its quick service and half of its sit down. I don't think there are any major expiries over the next 12 months. But remember, there are lots of very small locations.
And in fitness is about 1%. So in the disclosure, we had grouped the categories, but fitness is about 1%. Anna, you want to expand?
No, I also want to
say that, yes, our average restaurant tenants are usually 5,000 square feet, 7,000 square feet at max and those would be the sit downs, but the majority of QSRs are considerably smaller. And there's no material role in that sector. And then in the fitness as well, we actually don't have any material role. We renewed Good Life in several locations this year and as part of our negotiations with them as we provided them small rent abatements through 2020. We've extended the leases with them in many locations.
So we've actually extended the term with these tenants.
And I just want to clarify in the disclosure, it was fitness and other personal services. So fitness would represent 1% of that, but included in that would be medical, health, wellness and other tenants.
Sure. Thanks for clarifying that. And maybe just final question from Neil. What kind of sale property NOI growth do you expect in 2021 in the retail portfolio, especially in the context that not much leases are coming for renewal next year?
Hey, Himanshu. Right now, I mean, this year we're kind of we were looking at before bad debt expense hitting about 1.5%. Last year we were over 2%. But with some of the rollover that is not COVID related just naturally tenants kind of moving and expanding their spaces or shrinking their spaces. I think for next year, given potentially the continued effect of what's happened kind of in the power centers in our portfolio, I think we're probably looking at the lower end, maybe closer to 1%, same asset NOI.
Just again, without that debt and if there's going to be any tenant solvency issues, I mean that's that we'll have to deal with that when it comes.
But right now, I
think we're targeting for just low 1%.
Got it. And sorry, one just final follow-up from me on the dispositions. And I think, Raul, you mentioned in the remarks that they were done above the IFRS value. Just wondering, were any of these assets written down in Q2 when you took the portfolio wide some write downs in Q2?
No, I don't believe they were.
Okay. Thank you. Thank you, guys. I'll turn it back.
Thank you. And your next question comes from the line of Tal Woolley, National Bank Financial. Your line is open.
Hi, good morning, everybody.
Good morning.
Your sort of major way through the stretch of the pandemic with fairly easily, it's obviously been a lot of work, but your results have held up nicely. As you sort of think back over the last 6 to 9 months, is there anything you sort of found in the portfolio or the strategy that you guys are pursuing that you are sort of looking to change in light of the pandemic? I'm thinking maybe something like the target asset class mix in the portfolio, things like that.
So truthfully, Talak, we don't think there are any major strategic changes based on the pandemic. We think things we're very comfortable with the types of assets we own. We love the diversified nature of the portfolio. We really like very bullish on necessity based retail. Our industrial is performing very well and the type of office we own, even though a lot of tenants are working from home, they've still had higher occupancy through the pandemic and we continue to see higher occupancy, we continue to see more and more people back in the building.
So overall, we are there's nothing major that we would change. In fact, it's probably reinforced our strategy and the ownership of the mix of assets.
Okay. And then you sort of mentioned in terms of your balance sheet, you'd certainly be open to continue to work down the leverage before you sort of more aggressively accelerate the development. Is there like is there a right number we should be thinking about in terms of where you'd like to see that leverage trough?
Hey, Tal. We don't have a number, right? We had a number of 7.5 when we first started this about a year and a half ago. And so really right now, we're more focused directionally. We don't want to see it have a run rate higher than 7.5.
But ideally, yes, I mean, probably directionally to the low 7s. I think where we like to go, our focus was really to get the liquidity balance of the debt maturity profile and de risk the portfolio. So now that we're there, if we have the ability to delever, we will, but there's no priority in the near term.
Okay. And then just lastly, on the Whittington asset acquisitions, are you able to provide like a pro form a cap rate on those deals?
It was just it was between 5.5% and 6%.
Okay, perfect. Thanks very much gentlemen.
Thank you. Thank you.
And your next question comes from the line of Pammi Bir of RBC Capital Markets. Your line is open.
Thanks and good morning. Just maybe coming back to the dispositions, I'm curious, are you seeing more inbound inquiries perhaps from new partners or has there really not been much change there?
We have seen some increase in inbound inquiries.
And would any of that be perhaps for any I guess the non Loblaw anchored or traditional power centers in the portfolio?
As Prama, I think the inbounds are more focused on where it's truly a necessity based assets. It doesn't necessarily have to be a Loblaw anchor. It could be the other major retailers. People like the stability.
Right.
Okay. Thanks for that. And then just on just maybe coming back to the comments on the office portfolio, I guess, you some comments on the sublet side. Can you talk about what you're seeing from in your portfolio from a sublet standpoint? And maybe just some of the conversations that you're having with respect to tenants in the office portfolio for upcoming renewals?
Yes. Hi, Pammi. We have seen an uptick in the availability of sublease space in our buildings as well, kind of similar to the market. I mean, our vacancy rate or availability rate is quite low in our Toronto portfolio or Vancouver portfolio, even our Montreal portfolio, I think. And Calgary is an outlier.
We actually have no sublease space ironically in Calgary and our portfolio is our availability is pretty much in line with the market. So that's less a COVID issue. But so our availability in Toronto is still like sub 4%. And the majority of the subleases that we have are for longer terms, typically 5 plus years is the length of term on these spaces. So they do compete to some extent with our direct space, but it's not a huge concern relatively speaking to us in the portfolio.
And then in terms of discussions with tenants, interestingly enough, we had a recent scenario where we had a large tenant who had an option to terminate or surrender a portion of their space and this would be a tenant over 100,000 square feet. And through our conversations with them and they decided not to exercise that option and that was because they saw that their culture as an organization was really linked very closely to how they could bring their teams together and the collaboration that comes with being in an office space. And we're seeing that in some cases, but that it varies, but I don't know. I do think people are bringing more of their employees back. We're seeing it in our buildings across the country.
That's great color. I guess maybe just one last one from an office standpoint. What sort of, I guess, trends are you seeing from on renewal rents?
Actually renewal rents are holding very firmly. If anything retention has increased because tenants are less anxious to make a big change in a very uncertain environment. That's where there really hasn't been any downward pressure on renewal rents. With Calgary being the exception, we always have to it's always a little tougher out there.
Right. Got it. Thanks very much. I will turn it back.
Thank you. And your next question comes from the line of Jenny Ma of BMO Capital Markets. Your line is open.
Thank you. Good morning, everyone.
Good morning, Jenny.
Back to the dispositions, it sounds like just based on the different structure versus the deal you did last year, this is a new JV partner, correct?
Correct.
Can you speak to whether or not this investor is a domestic or a foreign entity?
It's a domestic life insurance company.
Okay, great. And then there was a question about the option for them to buy the other 50%, but I'm wondering if there's an option the other way for you to buy back the 50% and if there's any timeframe on this investment relationship?
There's no timeframe. We view this as a long term partnership. And then as I said earlier, there'd just be normal liquidity rights.
Okay, great. Turning to the provisions this quarter, it's improved materially from what you guys took in Q2. I'm just wondering with the Q3 number, below $5,000,000 did that include any chewing up of Q2 numbers? Or is that a clean Q3 figure?
That would be a clean Q3 number. So I think just over half was sekra abatement related. The rest were just normal course provisions.
Okay, great. And then on Seqra, did Choice offer it to your tenants for the full 3 months?
Yes. 6 months actually. Sorry.
Sorry. I meant 3 months in Q3, yes. Yes, the full 6 months of the program. Yes. Okay, perfect.
And then my last question is with October collections, just given that the SIRS program is sort of still in progress, what has the rent collection been like for some of your formerly secret tenants?
I don't know specifically about those tenants, but we're at the same levels consistent with Q3. We're in the high 90s.
Okay, okay. Great. Thank you very much.
Your next question comes from the line of Sam Damiani of TD Securities. Your line is open. Thanks.
I just had a follow-up on the IFRS fair values. Given that the dispositions were at a premium and the commentary around the gain recognized in Q3, it sounds like that pickup might not have been insignificant. I'm just wondering if you think the longer interest rates stay at these levels, the cap rates are going to have to reflect that and we'll see some fair value gains in long term leased assets like the ones that you own?
That's a great question, Sam. I think so. I haven't had anybody agree with me yet, but I do think that we have long term leases with investment grade tenants and they're long term and you have the bond rate where it is, at some point there has to be a value shift. But so maybe over time, I think that asset becomes more valuable. So I think that on the long term leases and the long term tendencies, that's kind of where I think you'll see it.
I think everything else, the market still has to play out. And so we're just waiting for kind of objective data and there's not a lot of data points right now on the remaining portfolio.
Could you comment specifically on the dispositions this quarter as to where the sales prices were relative to IFRS?
I don't have specifics, but I mean it would be healthy single digits.
That's helpful. Thank you very much.
And there are no further questions in the queue at this time. I turn the call back to the presenters for any closing remarks they may have.
So we want to thank everyone for joining us on today's call. Please do all you can to stay healthy and be safe. Thank you.
And this concludes today's conference call. You may now disconnect.