Earnings Call: Q1 2021

May 11, 2021

Good morning. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to CTE REIT's Q1 2021 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. The speakers on the call today are Ken Silver, Chief Executive Officer of C. T. REIT Leslie Gibson, Chief Financial Officer of C. T. REIT and Kevin Salzberg, President and Chief Operating Officer of C. T. REIT. Today's discussion may include forward looking statements such as such statements are based on management's assumptions and beliefs. These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see CTE REIT's public filings for a discussion of these risk factors, which are included in their 2020 MD and A and AIF, which can be found on Citi REIT's website and on SEDAR. I will now turn the call over to Ken Silver, Chief Executive Officer of Citi REIT. Ken? Thank you, operator, and good morning, everyone. We're very pleased to welcome you to CTE REIT's Q1 2021 investor conference call and to share with you the results of another strong quarter. Notwithstanding the disruption, heartache and angst the pandemic has created for now over a year, CTE REIT has continued to produce the same kind of solid results it delivered prior to the pandemic and since our IPO. We designed and have consistently managed the REIT to produce consistent growing value reflected in growth in AFFO and NAV per unit, Not to mention distributions. We continue to leverage the relationship with our majority unitholder and most significant tenant, Canadian Tire, Which provides a solid foundation anchored in high quality, well located real estate and long term triple net leases. While we complement that foundation of freestanding retail and distribution facilities with value add acquisition and development opportunities, At its core, our focused net lease strategy predictably delivers resilience and growth. Those core attributes, resilience and growth, were never more clearly on display than in the most recent quarter and over the past year. I'm going to turn the call over to Kevin Salzberg, our President and Chief Operating Officer, to provide an update on our investing activities and operations Leslie Gibson, our Chief Financial Officer, will then review the financial aspects of the quarter before turning the call over for questions. Kevin? Thanks, Ken, and good morning, everyone. I hope you're all keeping well. As outlined in yesterday's press release, we are pleased to announce 6 Investments this quarter that will require an estimated $40,200,000 to complete. These new projects include the expansion of 6 Canadian Tire stores in Cochrane, Castleman in Milton, Ontario Charlottetown in Summerside PEI and Lethbridge, Alberta. When completed, these investments are expected to earn a weighted average cap rate of 6.4% and will add approximately 162,000 square feet of incremental to the portfolio. It is one of our core competitive advantages that we support Canadian Tire and its ongoing real estate requirements. Since IPO, CTE REIT has funded the expansion of over 40 Canadian Tire stores within its portfolio, adding approximately 400,000 square feet of GLA through With the addition of these 6 newly announced store expansions, we currently have 15 store intensifications and one expansion of a Canadian Tire distribution center Plan for completion over the next 2 to 3 years, which will add an incremental 446,000 square feet and 322,000 square feet To the portfolio, respectively. With respect to previously announced investments, in the Q1, we completed the vending existing Canadian Tire store in Lower Sackville, Nova Scotia, which added approximately 53,000 square feet of incremental GLA. The REIT also sold its Arden Pryor Mall property in Arden Pryor, Ontario during the quarter. At the end of the Q1, C. T. REIT had 26 properties We're at various stages of development. These projects represent a total committed investment of approximately $240,000,000 upon completion, $59,000,000 of which has already been spent and $34,000,000 of which we anticipate will be spent in the next 12 months. Excluding the Canada Square redevelopment and the development lands that Owning Calgary, Alberta, these projects will add a total incremental gross leasable area of approximately 860,000 square feet to the portfolio upon completion, 95% of which has been pre leased. As of March 31, 2021, CTE REIT's occupancy rate 99.3 percent, in line with both Q1 2020 as well as year end. With respect to the impact of COVID-nineteen on our property operations, Rental collections remain strong and generally in line with the REIT's pre pandemic historical average. With the recent lockdowns and stay at home measures put in place by various government agencies Throughout the country, in response to the 3rd wave of the pandemic, we continue to monitor and manage to the extent possible the impact of such measures on our portfolio, Reinstate required operating policies and procedures at our properties and continue to work with those tenants whose businesses have been negatively affected. With that, I will turn it over to Leslie for a review of our financial results. Thanks, Kevin, and good morning, everyone. Despite the continued challenges from the pandemic, we are Very pleased with the strong Q1 results that C. T. REIT has delivered. In the quarter, we've reported a diluted AFFO per unit of $0.273 An increase of 7.5 percent compared to the $0.254 per unit in Q1 of 2020, reflecting The impact of the NOI variances and lower interest expense. Diluted FFO per unit increased 5.1 percent to 0 point 3 versus $0.293 in Q1 of 2020 due to the same factors affecting AFFO per unit growth. Reported net income increased $3,700,000 or 3.9 percent in the quarter compared to the prior year. The main contributors to the growth Are the rent escalations in the CTC banner leases, which contributed $1,600,000 and the net addition of income producing properties And completed developments and intensifications in 2021 2020, which contributed a further $1,400,000 to NOI growth. Same store NOI increased $1,600,000 or 1.7 percent compared to the prior year, primarily Contributing nearly $1,900,000 which includes the $1,500,000 annual rent escalations on average contained within the Canadian Tire store leases, Partially offset by the expected credit losses for tenants who are significantly impacted by the pandemic, which decreased NOI by 400,000 Same property NOI increased by $2,300,000 or 2.5 percent compared to Q1 2020, primarily due to the increase in same store NOI by 1,600,000 And intensification is completed in 2021 2020, which contributed $700,000 to NOI growth. Our rental collections remained strong through the Q4 at 99.4%, and this has continued through both April May With collections at 99.6 percent. General and administrative expenses as a percent of property revenue were 3.1%, Which is higher than the 2.4% in Q1 2020, driven by the fair value adjustments on unit based compensation and the lower income tax expense in the current quarter. Excluding these non cash items, we anticipate our annual G and A run rate to be in line with prior years. The REIT recorded a fair value increase Of $4,300,000 are investment properties for the Q1 of 2021. The valuation metrics used were virtually unchanged from those used Our AFFO payout ratio for the 3 months ended March 31, 2021 was 73.6%. This was a decrease of 5.2% from the same period in the prior year due to the increase in the AFFO per unit exceeding the rate of distribution of the distribution rates. The interest coverage ratio increased to 3.68x in Q1 compared to 3.43x for the Q1 of 2020. The increase in the interest coverage ratio is primarily due to the growth of EBIT FB, combined with the decrease in interest and financing charges. The quarter over quarter interest expense and financing charges decreased primarily due to decrease in the Class C LP Units From resetting the interest rates as of June 1, 2020, on the Series 3, 2016, 2017, 2018 2019 Class C LP Units with CTC and decreased mortgage interest expense, partially offset by increased utilization of the credit facilities. Moving to the balance sheet. We continue to be in a strong financial position. CTE's indebtedness ratio was 42.5% as of March 31, 2021, compared to 42.9 percent a quarter ago. The decrease was primarily due to the reduction of total indebtedness along with the growth of the REIT's Early in the Q1, we successfully completed the issuance of $150,000,000 of unsecured debentures The proceeds were then used to complete the early redemption of the $150,000,000 Unsecured debentures originally set to mature on June 1, 2021. With this early refinancing completed, We have no further debt maturities to refinance until the Q2 of 2022. This recent issuance illustrates a couple of points about our continued debt strategy. A chosen term of 10 years is consistent with our sector leading weighted average term to maturity of just under 8 years. The coupon was Chosen was, as typical, slightly more expensive than the shorter term debenture would have been, but much less so than on some other occasions in the market. Additionally, the longer term chosen provides flexibility for the REIT with respect to future borrowings and allows us to consider a broad range of potential terms in response to market conditions in the future. In addition, with $294,000,000 available through our committed commercial Committed credit facilities and $7,000,000 cash on hand, coupled with no debt maturities for the next 12 months, we continue to maintain a liquid position. I would also like to speak to the trend in our book value per unit. As of March 31, 2021, the book value per unit was $14.74 Up from $14.62 per unit price as at December 31, 2020, primarily due to net income exceeding distributions. And with that, I will turn it back to the operator for any questions. Thank you. We'll pause for a moment to compile the Q and A roster. Our first question is from Himanshu Gupta with Scotiabank. Please go ahead. Thank you and good morning. Good morning. So just looking at the new investments, I mean you have 43,000 square feet Thanks, Shneur, in Milton, Ontario. Just wondering what is the cap rate on this intensification? I know overall you mentioned 6.4 for the Good morning, guys. And the answer is Kevin. We don't typically break out cap rates per We typically report them on a combined basis. I don't think we'd be prepared to disclose that at this point. Sure. So maybe my question was more around the difference between the GTA versus the second retouching market. I mean, I can clearly see Milton is a standout there. So just wondering is there like any spread or any big difference between a GTA versus Yes, there would be. So we typically, I guess, price the cap rate or the return On the respective investment based on the market characteristics, and it would approximate a market cap rate. So I think it's fair to say there would be a spread between the urban Intensification in the secondary market ones. Got it. Okay. And then just sticking to Milton, the completion looks like it's still 2 years out, is there anything which is taking a bit longer there? Or it's the typical what you are seeing in the market right now? Well, Well, similar to what we would see with most developments, anything in a more urban setting generally takes longer. So from both an approvals, entitlement And then obviously, it's a slightly larger expansion, so a little bit longer to construct as well. Got it. And then in general, the expansion of Crazy Dash stores, I mean 6 announced a bit earlier this time. The expansion, is that in response to the pandemic? I mean, that is Canadians are looking for larger stores? Or they were always in the pipeline with or without COVID? Well, I'll let Kenny and Tair comment on their plans for the store network more broadly. But we have described previously how the The trend has been and what we've seen is the requirement for more square footage, not less as time goes on. And I think the pandemic has only served to reinforce that With the store performance and Canadian Tire's sales more generally. So we're very happy, obviously, with the growing pipeline. We like the development program as it stands and with completions slated to start mostly at the beginning of next year. We're sort of ramping up from some of the deferred and delayed projects that were put on hold at the outset of the pandemic. Got it. And maybe just final question from me. How is the pipeline looking for 3rd party acquisitions? I mean, are you seeing any improvement in deal flow there on that front? There's a little bit more deal flow that I've seen in the market more broadly. There's a couple of interesting transactions out there that I'm aware of that I think will be or help with benchmarking for net lease assets as we go forward coming out of the pandemic. Couple of things that we're looking at, but nothing to report at this point. Yes. And in terms of pricing, is there any I mean, you mentioned a couple of interesting things going out there. Anything like pre pandemic versus what is being treated right now? I think my comments from previous quarters would still hold. I think quality net lease assets with covenant tenants long term Are commanding a lot of attention in premium valuations, and I think cap rates on those assets will be lower than they were heading into the pandemic. I think there's what's been interesting is we've seen some other retail non grocery anchored trade in the quarter. I think there's less interest in that, but at least the trades are picking up again. I think the pricing on that is higher than pre pandemic. But obviously, The depth of buyers for those assets has been significantly reduced over the last 12 plus months. Awesome. Thank you for the color. I'll turn it back. Thank you. Thank you. Our next question is from Sam Damiani with TD Securities. Please go ahead. Thanks. Good morning everyone. I guess I'd like to just get into the expansions that were announced last night with the math pointing to an average price A cost per square foot of $2.50 and an average rent in and around the $16 mark. And both of these metrics would be at sort of Plus or minus 10%, 15% premiums to the current portfolio, but the location mix Doesn't seem to be materially off base with respect to the overall portfolio. So I'm just wondering, are these rents on these expansions the same as Respect of existing stores or are they set at current market rents and so different than the existing store rents? And just some color there would be of interest. Thank you. Sure. To answer your second Question first, a comment about increasing construction costs is really the reason why that is escalations coming in as they have, That's leading to slightly higher rents. And I think the trend on market rents as it relates to increasing construction costs will be Interesting to watch over the next couple of quarters. We feel comfortable, obviously, with the slightly higher rent Because we're blending it with the existing in place rent, and it's the expansions are smaller than the typical store size. So it blends Not too far away from the current average. But yes, it's a concern, construction costs. It's something we're watching closely, and Obviously, it's going to have an impact on rental figures. And so the $2.50 a foot obviously doesn't include land. Correct me if I'm wrong, because We already own the land on these respective sites. So what would be the all in replacement cost, if you will, If the land is excluded at $2.50 would it be another $50 a foot for the land? It really depends where you're buying land, Tim, on average, could that be approximately correct? It sounds in the ballpark, yes. Thanks. And just over to, I guess, Canada Square, any update on the process there? I guess there was a design review Paneled recently and just what we can expect for next steps as well. Hi, Sam, it's Ken. Our development manager and Koner Oxford Properties submitted application back in December 2020. So the municipal process is underway. So that's moving forward. Really nothing changes in terms of our timing. We're still waiting For Metrolinx to give us some indication as to when the LRT will be completed on Eglinton and We would get the land upon which we would be building Phase 1. So no significant changes on that front. Okay. Thank you. I'll turn it back. Thanks, Anne. Thank you. Our next question is from Jenny Ma with BMO Capital Markets. Please go ahead. Thanks, and good morning, everyone. Good morning. Good morning. Further to Sam's question about the new developments, can you comment on whether or not you're securing a similar type and quantum of rent escalations On these deals that you have within the current portfolio? Yes. The rent escalations will continue. And to also mention, where there's less than a certain amount of term, we're extending the leases as well. Okay. And I guess broadly speaking, are you still able to secure that kind of rent escalation when you're talking about Renewals with CT, I'm not sure if you're doing much at this point, because I think the next ones are still a couple of years out. But just wanted to get a sense of whether You're still able to get similar rent escalations going forward. So we did have one Canadian Tire store lease that comes up for This year, it was a lease we acquired from a 3rd party. And because it was a 3rd party lease, they actually had fixed rate options to extend, and Canadian Tire has extended that lease. The next round of leases that expire in 2023, so we are still in the process of working through the future of those sites. When we vend in new assets, typically, we do get the rent escalations. So that pattern Continues on at this time. Okay, great. And then with regards to the 2023s, at what point do you start discussions? Is this still a little bit early now? No, those discussions have already begun. Okay, great. And then there's I think this question is for Leslie. It Looks like there is one mortgage expiring. I believe that's secured against Canada Square. Can you remind me when that expires? That one is not until March of 2023. We have one other small mortgage secured by a standalone Canadian tire store we acquired that Expires in summer of 2022. Summer of 2022, great. And I mean, there's so little by We have secured mortgages. Is it fair to say that you're probably looking at paying these off when they come due and then just going full 100% unsecured? I think that's fair to say for the standalone Canadian Tire store. As it relates to the Canada Square, when that mortgage comes due, We'll be sort of hopefully heading into construction in different phase of that project. So we'll be looking to work with our partner and do and put some financing on Project, it's probably unlikely that that secured financing, it may change into some different form of construction or some other kind of facility, but We're probably more unlikely to roll that into it unsecured. Okay. Thank you. That's all for me. Thank you. Our next question is from Tom Woolley with National Bank Financial. Please go ahead. Hi, good morning, everybody. Good morning. Good morning. Just wondering, the stock price is up significantly Since the last time Canadian Tire sold down some of its interest in the REIT, have there been any conversations about Potentially lightening up in the future, in terms of their position? Hi, Tal. It's Ken. We've had no indication from Canadian Tire with respect to any of their plans one way or the other. Okay, that's great. Thanks very much everyone. Thank you. Thank you. As there are no further questions registered at this time, I would like to turn the meeting over to Ken Silversteo for closing remarks. Thank you, operator, and thank you all for joining us today. Hopefully, by the time we speak to you again in August, we will be speaking of the Thank you. This concludes today's call. You may now disconnect.