Good day and thank you for standing by. Welcome to the Choice Properties Real Estate Investment Trust Second Quarter 2021 Earnings 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 that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Doris Bond, Senior Vice President, General Counsel and Teri, please go ahead.
Thank you. Good morning, and welcome to Choice Properties Q2 2021 conference call. I'm joined here this morning by Rell Diamond, President and Chief Executive Officer Mario Verifado, Chief Financial Officer I'm Anna Radek, Executive Vice President, Leasing and Operations. Before we begin today's call, I would 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, Additional information on the material risks that can impact our financial Results and estimates and the assumptions that were made in applying and making these statements can be found in the recently filed Q2 2021 financial statements and management discussion and analysis, which are available on our website and on SINA. I will now turn the call over to Rael.
Thank you, Doris, and good morning, everyone. Thank you for taking the time to join our Q2 conference call.
We are pleased to report another strong quarter with stable financial and operating results. Our business model and disciplined approach to financial Management has positioned us well
throughout the pandemic. In addition
to our strong results for advancing our development program, Driving meaningful
net asset value appreciation to our existing portfolio and improving our balance sheet.
I'll provide an update on our development program shortly, but first, Mary will provide you with an update on our financial results for the 2nd quarter. Mary? Thank you, Ralph. Good morning, everyone. As Ralph mentioned, we are pleased with our 2nd quarter results.
I'd like to begin with a brief overview of our rent collections We reported a bad debt expense of $1,800,000 Our 98% collection rate is consistent with the prior 3 quarters and reflects the combination of our stable portfolio and the overall health of our tenant base. The uncollected rents relate to tenants that have been most impacted by the lockdowns, including fitness users and sit down restaurants. And as these tenants are beginning to reopen across the country, we're optimistic that we will further improve our tax Our reported funds from operations for the Q2 was $172,000,000 This was a relatively clean quarter apart from the $1,800,000 bad debt expense I referred to earlier being offset by Approximately $1,200,000 of non recurring revenue related to lease surrender income. When compared to the Q2 of 2020, FFO increased by $31,000,000 due primarily to a decline in bad debt expense of $12,700,000 $14,600,000 of non recurring items Incurred in Q2 2020 related to a credit loss on a specific mortgage receivable and the early redemption of unsecured debentures that were set to mature in 2021. On a per unit diluted basis, our Q2 FFO was $0.238 per unit compared to 20.1% in the Q2 of 2020.
Despite the challenging operating environment with a third wave of pandemic related closures, Occupancy has held up, declined by only 10 basis points sequentially from Q1 to 96.9%. We actually did see positive absorption for the quarter of approximately 12,000 square feet, highlighted by leasing in our Ontario industrial portfolio. This was offset by the transfer of some vacant units in our development properties completed in the quarter, which will soon be leased. Same asset cash NOI increased by 6.1% compared with the Q2 in 2020, primarily due to a decline in bad debt expense. When excluding these bad debts, Total same asset cash NOI was relatively flat, increasing by 0.1%.
By asset class, retail same asset cash NOI increased by 0.3 While industrial increased by 2.2%. These increases reflect the combination of higher renewal rates and contractual rent steps. Office same asset cash NOI decreased by 6.1%, primarily due to a reduction in occupancy and lower parking revenues. We're pleased we've been able to maintain stable occupancy and consistent same asset results over the last four quarters. Turning to the balance For the 4th consecutive quarter, we reported an increase to our net asset value.
We reported a total increase to NAV of $323,000,000 including an increase to the fair value of our investment properties of $278,000,000 Of this, dollars 238,000,000 relates to our industrial portfolio. The increase in value in our industrial segment is in line with market sentiment. Recent market transactions and robust demand and logistics and distribution space, especially in the GTA industrial market, have contributed to further cap rate compression and improving valuation fundamentals. We had very little new financing activity in the quarter, but we did improve both our leverage ratios and our liquidity With 2 key transactions. First, we early redeemed our $200,000,000 Series 9 unsecured debenture that was maturing in September of 2021 with no penalty or fee.
This was repaid primarily using cash on hand, resulting in further improvements to our debt metrics. In the quarter, our leverage ratio improved from 42.3% to 4.1% As part of this extension, we've got a $1,800,000 of debt placement costs. Our credit facility is a critical component of our financial strategy And taken collectively with our $12,600,000,000 of unencumbered assets, we have ample liquidity and significant financial flexibility. So overall, with our ability to drive meaningful net asset value growth through many avenues, our low debt levels and high liquidity levels, We believe we are well positioned. I'll now turn the call back to Raul to address our development and investment activities.
Raul? Thank you, Mario.
On the development front, we continue to deliver exceptional assets to our portfolio and are making steady progress on the rezoning of our longer term pipeline. For the quarter, we completed and transferred 4 development projects, approximately 149,000 square feet
of GLA at our share and a total development cost of $63,000,000
Included in the assets transferred this quarter Was a new 48,000 square foot Loblaw Superstore at our Harvest Hills retail development in Southeast Edmonton. The final phase of the retail component of our West Block development at Bathurst and Lakeshore in
Downtown Toronto. And the first building of our rental residential development, The Brixton, located in the Queen's West neighborhood of Toronto.
The first building includes 72 rental residential units that are ownership share. The leasing program is progressing well With approximately 50% of the building leased and a considerable pickup in activity in recent weeks as COVID restrictions have continued to lift. We spent in the construction of
the remaining two buildings at Brakespan
will be complete in the coming months, and tenants will begin taking occupancy towards
the end of the year. Construction is also well underway
at Liberty House in Liberty Village With an expected completion in the 4th quarter, we are about to commence pre leasing and expect that tenants will begin taking occupancy early next year. In addition to our asset residential projects, we kicked off several new commercial developments in the quarter, including a greenfield industrial project in Surrey, BC. The 17 acre site is vacant land owned by choice that is directly adjacent to our existing Loblaw distribution facility in the Campbell Heights Industrial Node. We are planning a 350,000 square foot new generation logistics facility With 44 clear eyes, we're designing the building with sustainability in mind and will be pursuing a LEED Silver certification on completion of the project. We are well underway with detailed designs and engineering and are actively working through the municipal approval process.
We expect to break ground on the project next year. This is an exceptional opportunity for us to add new product to one of the best industrial markets in the country. This project
will drive significant value and highlight our ability
to continue growing our existing industrial platform. Looking forward, We are busy working on our longer term planning projects to advance the next phase of development. In the quarter, we submitted applications on 2 large scale residential and mixed use projects here in Toronto. The third application is for large mixed use development On a 6.5 basis parcel of vacant land located south of the intersection of St. Clair Avenue and Warden Avenue in Toronto, The land is exceptionally well located from a transit perspective, approximately 500 meters from the Wharton TTC subway station.
The site was originally acquired in Q2 2020, and we have made significant progress on envisioning the future potential. The application includes over 1500 residential units, 1,000,000 square feet of GFA and a proposal for new public park. The second application is for mixed use redevelopment at an existing retail site at 25 Photography Drive in Toronto. The approximately 805 is located southwest corner of Eglinton Avenue West and Black Creek Drive Across from the Mount Pleasant sorry, Mount Dennis Transit Hub, which is set to open in 2022. The Transit Hub will connect the GO Line, The Union Pearson Express and the Edmonton Post Time LRT making the site an exceptional location from a transit perspective.
The current redevelopment plan proposes a vibrant mixed use inclusive community where people can live and access amenities, Services, transit and a grocery store, all within walking distance. The project will include 7 mixed use buildings, including 2,400 residential units and over 2,100,000 square feet of GLA. Both projects are in early stages, So we expect that things will continue to evolve as we refine our plans. Taken collectively, with our other With our ongoing planning projects, we have over 11,000 units and nearly 10,000,000 square feet of GLA, either zoning approved With zoning applications underway and with more projects on going and more submissions expected, we believe we have one of the best development pipelines that will provide significant opportunity for us to deliver long term net asset value appreciation. With that, I'd like to turn the call back to the operator for questions.
Your first question is from the line of Mark Rothschild with Canaccord.
Thanks, Dan. Good morning, guys. Good morning. Maybe just picking up rail on what you're talking about the development, some new projects. Do you have a range of a budget?
How much you Expect the spend in developments maybe over the remainder of this year and looking into next year as well. Obviously, some of the larger projects still don't appear to be at the point where you can be investing
Yes, you're correct, Mark. And some of the larger projects are still in the rezoning process. But we would expect about $150,000,000 to $200,000,000 over the next couple of years. The only thing that could flex that a little bit Some of these industrial developments as we get zoning, particularly on our Tullamore industrial lands, it's pretty quick to ramp up development as there's Strong leasing demand. But right now, we will foresee $150,000,000 to $200,000,000
Okay. And moving to the balance sheet, leverage has Obviously, some down a decent amount over the past year. To what extent is reducing that further a priority? Or Are you in the range now where you're comfortable?
Hey, Mark. Yes, we were in the range even before. Our goal was to get it down to 7 point And we thought that would give us a lot of flexibility. We happened to sell assets and had some cash on hand. And when the opportunity came to repay The debenture coming due without penalty, we decided to take it rather than force an acquisition that didn't meet our criteria.
So it's just a good use of proceeds. So we're really comfortable where we are right now and really don't have any intention to lower it. But again, if opportunities come up, it gives us
Okay, great. Thanks. Maybe just lastly, parking revenue was down in the quarter last year. This quarter also was pretty quiet. So I'm just curious what happened with the memberships People canceled parking membership people canceled through the quarter last year.
I would have expected it's already been pretty low last year.
It is, yes, a function of actually We did have a drop in vacancy in one of our buildings, so that had a small impact. And As people have not been coming into the office and that also
And Mark, just wanted to remember, people last Sure. In Q2, no one expected it to last as long as people were slow to cancel their spots.
Yes. No, that's what I thought it might be. Okay. Thank you so much.
Your next question is from the line of Mark Marcheiss with Desjardins Capital Markets.
Hi, good morning. A few questions on my end. Number 1, I was Just wondering if you could comment on the leasing environment, any step changes that you've seen since the restrictions have been lifted? I realize it's only been a short period of time. And your expectation for occupancy, particularly in the retail and office segments over the next 12 months?
Hi. So we've had strong retail demand from a leasing perspective Throughout the pandemic, interestingly enough, our occupancy stayed stable, but we are seeing more tour activity as Restrictions are being lifted and that's picking up across all areas of retail With certain tenants being really active and wanting to grow their footprint, like in the pet sector, discount, department And a lot of activity QSRs really weren't That's impacted during the pandemic because they had heavy off premises sort of like take out business and so forth. So That's another sector that's growing. So we hope occupancy will increase over the next 12 months. I think on office, The tour activity has been very much correlated with the lockdowns.
And as lockdowns are lifted, We've seen tour activity pick up. And if that's just happened in Ontario, where it's starting in Alberta, We've definitely seen a pickup in tour activity, which we're optimistic about. But I think retail Office occupancy will take longer to improve before relative to retail.
Okay. That's helpful. Thank you. And then my second question would just be with respect to the Industrial segment. And it would appear that liquidity In secondary and tertiary markets is improving.
There's several types of portfolios that have And you guys happen to own some Industrial and Land of Canada. I was just wondering what your thoughts were with respect to those legacy assets as
Yes. Look, we did sell a few assets. I think it was about 2 years ago. The assets that we own are really well located. It's a strongly done for market right now.
Low vacancy, we're getting good rent left. So right now we're quite happy and comfortable owning them Just given the lack of supply in the market.
Your next question is from the line of Sam Gianni with TD Securities.
Thanks. Good morning. Just a follow on the leasing discussion. Maybe just to give us an update on what you're seeing in the Alberta market? Seems to be a bit of a rebound happening in the latest quarter.
And so do you mean office
Sorry, I meant industrial. I meant industrial, yes.
Yes, I think the retail definitely logistics And we've even seen a little bit of a pickup in Edmonton, which is great. We just did a 40,000 square That's the future of this deal. It doesn't commence in the quarter. So it is improving.
That's great. And on the retail side, it sounds like you're increasingly optimistic about a near term sort of rebound For occupancy to go back to towards where it was in pre pandemic, do you have any stats on the percentage of your Tenants that are open now versus, let's say, Q1 or expected to be open in August, anything like that to sort of give us an indication on those kinds of trends?
Well, right now actually, Mark, most of our tenants are open Because we have Open Air Retail, so we're not restricted the way the malls are restricted. So I would say the majority of our retail is open.
And the tenants that were close to us were some of the personal services at gyms, And Jim's and Restaurants, as Anna mentioned, and those the majority of those are now open.
Absolutely. I walked I drove by Orangeville and saw a long line So they are definitely
open. Great. And what would be the next sort of major redevelopment to take place? And what are like what's the backup plan for the Loblaw store that would be impacted there in terms of Temporarily relocating or just temporarily closing the location in that trade area? So
I'd say the next major redevelopment is Golden Mile, and there's enough we have enough land that we can accommodate building a new store before we ever have to take down the old store or the existing store. The other one would be Woodbine And Dan Folta, we actively working with Loblaw. The store is very tied, but we're going to target and do it make sense for
That's great. That's all for me. Thank you.
Your next question It's from the line of Jenny Ma with BMO Capital Markets.
Thanks and good morning everyone. I'm following the MD and A that you mentioned in the retail discussion that there were some leases that were transitioned from net to growth. And I'm just wondering That was something that was material, the reasoning behind those changes and whether it related to any Loblaw leases?
No, it didn't relate to any Loblaw leases. I think we did have a few, SAQ, which is the Quebec liquor store And welcome Quebec that did move to a gross lease, but That's the material.
So is that just a discussion that was had at the time of renewal? Or what was the thinking behind that? And is that something we Could see more of down the line?
No, definitely not. I think it's just the SAQ has been moving to this model. I mean, they're like run by the government of the provincial government of And so they prefer to have a gross lease and we set that at a sort of at a higher Number to give us cushion so that we do have full recovery.
And Jenny, it's not material on its own, but given the lower level of It was more magnified this quarter, but really as part of our business, it's not a big issue right now.
Okay, great. And then could you give us an update on what you're seeing in the acquisition or disposition pipeline? I think last quarter you had talked about Potentially selling some assets sort of in the second half, is that still something you're looking to do? I'm not sure if that was sort of driven by looking at the Did it solve for a desire to reduce leverage? How should we think about transaction activity in the second half of this year?
Jenny, so we've been very active on capital recycling, as you know. On the acquisition side, there are some vanities that we're working with Loblaw Nothing that significant. And in the dispositions, it's just a normal capital recycling. It's going to sell down. We've just listed a small portfolio in Edmonton sorry, Calgary Industrial.
I think just a few Nothing significant. We won't be as active as we were last year.
Okay, great. And now that you mentioned that small industrial portfolio in Calgary, are these some of the smaller assets that you would consider to be non core? Yes.
It's just normal capital recycling.
Okay. Thank you very much. I'll turn it back.
Your next question is from the line of Samayi Syed with CIBC.
Thanks. Good morning, everybody. Just wanted to touch on the fair value changes in Industrial. I'm just wondering if the cap rate changes were sort of level across the border, could you speak to any differences by market?
Yes. Hey, Sumayag. Yes, I mean, definitely GTA Large Bay Industrial has the larger gains. Small Bay had some gains, probably half the cap rate compression and large they did. And then also we had a bit of growth And value in Vancouver as well.
So spread across, but really GTA, large bay was the driver. And as Rell said in his opening, We've seen strength in the property markets. We've seen strength in the capital markets. The industrial REITs are performing well And they're doing well in the credit market, so there's really value in industrial and it's reflected in these numbers.
Right. And the way you're seeing in the transaction market for grocery anchored centers and any
We don't have much to
update further towards what we spoke about last quarter. Still lots of liquidity, Cap rates have held in and continue to be strong for grocery anchored centers and really differentiated themselves Since the start of the pandemic, we continue our inbound calls, but Yes, I'd say no major changes on the cap rates.
Okay. And then lastly from me on the office Just curious what you're hearing from your tenants in terms of the plans for returning to the office and how that's
Yes, the plans are varied. And we do have actually quite a few smaller tenants Who are who have remained in their offices other than when they were in force shutdown. So some of our smaller 5,000 Square feet and less tenants plan to return sooner or already there. And some of our larger ones have indicated sort of phased in returns in September and A few and then other ones are waiting to make some decisions to see how the summer progresses now that restrictions have been lifted. So those are kind of the themes we're hearing from our tenants.
So no single theme.
Okay. That's helpful. Thank
Our next question is from the line of Tyler Woolley with National Bank Financial.
Hi, good morning. Good morning.
Just for Brixton and Liberty House, now that you're sort of To the leasing process, can you give a sense of what the sort of gross per square foot rents you are asking?
They around $4 a $1 a $1.
Okay. And are you at the time going to be offering any incentives on
So we have been offering incentives and we are probably likely start peeling the debt on the brakes that just given the activity. But We've been offering 2 months free rent and then for I think the first 100 leases we offered gift card from them as well of about $1,000 Okay.
And just my last question, I can sort of see how the Kind of target asset mix or sorry, how the asset mix is going to evolve like over time. You're always The resi portion increase, the industrial portion increase. I guess like longer term, I'm thinking further out. Like is there kind of like a target asset mix you ultimately want choice to be at?
So we are not targeting a specific asset mix. Our real focus is on quality and durability of cash flows. And you're right. Just we're always going to be a necessity based REIT. Naturally, just given the land holdings we own, we're going to be investing And more capital into residential.
Just again, given some of the industrial development land bearing, we're going to be investing more and more into industrial. We will obviously continue to buy gross record sites in particular where we can facilitate an opportunity for Laval, although Small opportunity set in the first two we just spoke about and office will be a function of some mixed use development. So the portfolio will naturally reshape as you just
Okay. And then just lastly at the West Loch site, do you have like an early read like on how the performance What the retail portion is and how Loblaw is looking at it right now?
Yes. I mean the store itself It's performing incredibly well, obviously. It's and then our other two tenants, Our anchors are open. Shoppers Drug Mart, Joe Fresh was just able to open with the latest So that's fully occupied. Our office building is leased.
And so we expect our other ancillary retail, we have a big deal with the LCBO and they're open. So now we just have small pockets of retail that will open hopefully later in the year and interest From a bank and some good tenants.
Okay. So the but the yes, the productivity there and then early on
is sort of like hitting
the mark For what your tenants
are hoping for?
Yes, yes, absolutely. Traffic has been very, very strong. It's, yes, much needed in the neighborhood.
Okay, perfect. Thanks very much everybody.
Thanks.
And our final question comes from the line of Pammi Byrne with RBC Capital Markets.
Thanks and good morning. Just maybe coming back to the office environment, can you maybe just comment on how rents are holding up Your portfolio, maybe the mark to market spread and your thoughts on the outlook for leasing costs.
So, Tommy, Ann will speak to it in a moment, but you have to remember there's been a lot There's been very little activity. And so any it's not really indicative of our conviction In the sector, but we think things are going to start improving. We've been seeing improvements in our own offices. What I mean by that is just We've opened offices recently. We haven't asked staff to come back.
And today, we've hit essentially the capacity that we've internally set, which is roughly 30%. So we're starting to see employees wanting to come back and we think they'll translate to the office leasing environment. And now Adam can maybe give you a little bit of We have a very small volume that we're using to give you these tax.
Yes. As Raul said, I mean, we had 8,000 Square feet of renewals in the quarter. So and one being in Alberta, which was a tenant that was rolling from a lease Pre-twenty 17. So and most of our tenants in Alberta have we rolled those rents down. So now so it's about 20 we had a of about 20%, and but again, very small segment and none of that was in Ontario.
So where Ontario, I think rents There may be a little bit more inducement offers, but generally, we're optimistic.
Yes. So Valvera is not indicative of market as a whole.
Got it. And maybe just sticking to the discussion earlier On the portfolio mix, maybe thinking about it long term, frankly, look, the office portfolio is not a significant piece of the overall At this point, in any case, but what are your thoughts on perhaps reducing the exposure further over the long term through Possibly through dispositions or will it just naturally happen through growth
in the other segments of the business?
Look, we think all naturally happened through growth in the other segments and then just as normal capital recycling, then maybe 1 or 2 of the assets
Thank you, ladies and gentlemen. That concludes our Q and A session. I would now like to turn the call back over to Rael Diamond.
Thank you so much. I want to thank everyone for joining us on today's call. Please do all that you can to stay healthy and be safe. Thank you.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.