Earnings Call: Q2 2019

Aug 1, 2019

Earnings release

Good morning. My name is Nadia, and I will be the operator assisting me on your call today. At this time, I would like to welcome everyone to CP REIT's Second Quarter 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 The speakers on the call today are Ken Silver, Chief Executive Officer of CTE REIT Leslie Gibson, Chief Financial Officer of CTE REIT and Kevin Salzberg, Senior Vice President of CTE REIT. Today's discussion may include forward looking statements. 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 CT REIT's public filings for a discussion of these risk factors, which are included in their 2018 MD and A and AIF, which can be found on CTE REIT's website and on SEDAR. I will now turn the call over to Ken Silver, Chief Executive Officer of CTE REIT. Ken? Thank you, operator, and good morning, everyone. We're very pleased to welcome you to CTE REIT's Q2 2019 investor conference call and to share with you the results of another strong quarter. Our results and new announcements reflect C. T. REIT's core attributes and growth strategy. Firstly, attractive, predictable and low risk organic growth driven by a large portfolio of long term net leases with Canadian Tire secondly, a privileged and aligned relationship with Canadian Tire that provides an ongoing pipeline of additional investment properties and developments to supplement the organic growth and thirdly, a disciplined approach to complementing our foundation of net leases with high quality value add opportunities. As an example of this third component of our growth strategy, we're pleased to announce our commitment to increase our ownership interest in the Canada Square Mixed Use Complex at Yonge and Eglinton in Toronto to 50% from 33% with a closing expected prior to year end. We're also pleased to announce 2 milestones in the redevelopment of the complex. The first being the conditional consolidated amended and restated ground lease with the Toronto Transit Commission and the second being a conditional lease for a new head office building for Canadian Tire Corporation that will anchor Phase 1 of the redevelopment. The ground lease provides for an extension of the term together with option and incorporates an additional 2 acres of land once the conditions have been satisfied, which will bring the total land area of the complex to approximately 9 acres. Our co owner, Oxford Properties, is advancing the redevelopment program and is working towards submitting a development application on the site. We continue to pursue a conservative approach to our balance sheet and financial metrics with the goal of providing to our investors an attractive blend of growth and security. I'm now going to turn the call over to Kevin Salzberg, our Senior Vice President of Real Estate, 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, and I'll wrap things up before turning the call over for questions. Kevin? Thanks, Ken, and good morning. As outlined in yesterday's release, we are pleased to announce 3 new investments this quarter totaling $29,000,000 These new projects include the vend in of a Canadian Tire store and Canadian Tire Gas Plus Gas Bar in Sault Ste. Marie, Ontario the vend in of a Canadian Tire store in North Battleford, Saskatchewan and the expansion of a Canadian Tire store in Fenelon Falls, Ontario. In total, these investments, when completed, are expected to earn a weighted average cap rate of 6.5% and will result in an incremental 163 1,000 square feet of gross leasable area being added to the portfolio. Additionally, we invested $44,000,000 in previously announced investments that were completed in the Q2. These projects include the development of a new Canadian Tire store located in Sherwood Park, Alberta the Vendon of 2 properties located in Matin, Quebec and Minden, Ontario the intensification of a Canadian Tire store in Huntsville, Ontario and the development of 3rd party pads at 3 existing properties. At the end of the Q2, CTE REIT had 25 properties under development. These properties represent a total committed investment of approximately $214,000,000 upon completion and a total gross leasable area of approximately 1,140,000 square feet, of which 1,080,000 square feet or 94.1 percent has been pre leased. Excluding the properties under development, our portfolio is 98.7 percent occupied as at the end of the second quarter, which is consistent Q2 of the prior year and a slight decrease from the prior quarter due to the end of the short term occupancy by Canadian Tire of a portion of our 11 Dufferin Place Southeast property in Calgary, Alberta. With that, I will turn it over to Leslie for a review of our financial results. Thanks, Kevin, and good morning, everyone. In Q2 2019, we reported FFO per unit diluted of $0.291 a slight decrease of 0.3% compared to the $0.292 per unit diluted in Q2 of 2018, while AFFO per unit increased by 3.3% to 0 point 2 $4.9 compared to $0.241 in Q2 of 2018. Reported net operating income was 91 point $5,000,000 for the quarter, increasing 4.8% compared to the same period in the prior year. As mentioned last quarter, to ensure comparability, we will continue to exclude expenses related to ground rent and NOI for 2018 for the remainder of the year as a result of the adoption of IFRS 16. Drivers of NOI growth include the acquisition of income producing properties and properties under development completed in 2019 2018. The same store NOI growth of 2.9% and same property growth of 3.3% were driven by several components, including the contractual rent escalations of 1.5% on average contained within the Canadian Tire store, Gas Plus Gaspar and long term distribution center leases the recovery of capital expenditures and the related interest earned the impact of the tenancy changes at 11 Dufferin Place Southeast and 25 Dufferin Place Southeast in Calgary, Alberta and intensifications completed in 2019 2018. G and A expenses for the quarter were 8.6% higher versus Q2 2018, primarily due to the change in fair market value of the CTREIT's unit price and increased consulting costs related to the new ERP CTREIT implemented during the quarter, which was partially offset by lower service agreement costs and higher income tax recoveries. Excluding the fair market value changes, G and A expenses as a percentage of property revenue remained flat for the quarter compared to the prior year at a rate of 2.4%. The interest coverage ratio decreased slightly to 3.35x this quarter compared to the 3.38x for the same period in 2018. This is primarily due to the IFRS 16 impact of adding the interest expense related to the lease liabilities as well as higher interest and other financing charges, partially offset by the growth in EBIT fair value. With respect to the balance sheet, we continue to remain a strong financial position. We have approximately $257,000,000 available on our credit facility as well as over $8,000,000 of cash, which also keeps our balance sheet in a liquid position. As of June 30, CTE REIT's indebtedness ratio was 44.0%, a decrease compared to the 45.1% as of December 31, 2018. The decrease in the ratio is due to our continued investing activities and fair market value adjustments made to the investment property portfolio and the IFRS related impact of including the right of use asset in investment properties, partially offset by an increase in total indebtedness. Debt as compared to earnings before interest, taxes and fair value adjustments was 7.16x, lower than the 7.34x reported in Q4 2018, primarily related to EBIT fair value growth exceeding the growth in CTG REIT's total debt. Our AFFO payout ratio this quarter remains consistent with Q2 2018 at 76%. Distributions per unit the quarter amounted to $0.189 4.0 percent higher than the same period in the prior year due to the increase in the annual distribution effective with the 1st distribution paid in 2019. Lastly, I'd take a minute to speak to the trend in our book value per unit. As of June 30, 2019, the net book value per unit was $14.31 representing a 4.4% growth over the book value of 14.01 dollars reported at the end of Q4 2018. The following are contributing factors to this increase: a higher fair value for the income producing properties due to ongoing growth in the cash flow resulting from the annual rent increases, ongoing recoverable CapEx spend and retained FFO. With that, I'll turn it back to Ken. Thank you, Leslie. With another solid quarter under our belts, we're very pleased with the way 2019 is unfolding, and we look forward to continuing to execute on our focused strategy. And now, operator, I'll turn the call back to you for any questions from our listeners. Thank The first question is from Samu D'Agnani from TD Securities. Please go ahead. Thank you. Good morning, everyone. First, I just want to congratulate you on the progress at Canada Square. I just wanted to see if you could shed a little more light on what we can expect to see with this project over the next few years. How close do you think Oxford is in terms of finalizing its application? And if you could shed any light on the size of the CTC lease for the head office space and what percentage of the total GLA of the development that might represent? Hi, Sam. It's Ken speaking. Obviously, we're very pleased with the progress that we've announced on Canada Square. It is a little bit premature for us to go into any great details on the development plan for the project, including the Canadian Tire Building. Oxford is proceeding with its architectural and design work to support a municipal application and that will be the next critical step forward in the development. Would you best guess, would that application be submitted this year or next year? I think practically, at this point, it's going to be next year. Next year. And just high level, is residential likely to be a meaningful component of the overall project? I would expect that it would be a mixed use development, yes. Okay. And just sort of on that, does C. T. REIT have an appetite to add more large mixed use development projects similar to this either on new acquisition, new land acquisitions or on existing Canadian Tire Store sites? Sam, I think we've said before that we're taking a more measured approach to mixed use development than some of our peers. We certainly have opportunities embedded in our portfolio where redevelopment or densification could be realized. But we're really focusing on the Canada Square asset 1st and foremost to proceed and test the waters, if you like, with mixed use development. Okay. I'll look forward to hearing more about it. Last question before I turn it back is just on the portfolio growth. On a year over year basis, the GLA growth is now kind of in the low single digit percentage range on a year over year basis, and that was down from sort of mid single digit growth over the last couple of years. What would you say is a better expectation over the next couple of years for annualized GLA growth? Sam, I wouldn't draw any conclusions from that rate of growth that you're seeing this year. I think it's kind of a function of opportunities we see in the marketplace and when we decide to drop down properties from Canadian Tire as well as a reflection of the development pipeline that we're working on with Canadian Tire. So I wouldn't draw any conclusion from that. The next question is from Pammi Bir from RBC Capital Markets. Please go ahead. Thanks and good morning. Just with the amended lease terms with the TTC, can you just describe what are some of the conditions that are attached to that and along with the lease with Canadian Tire? Pammi, it's Ken. I think in both cases, I mean, without getting into the terms of either of those agreements, I would say generally the conditions are related to what you would expect the coners requiring in order of being able to proceed with the redevelopment. Okay. And then just maybe thinking about the increase in the ownership stake for both yourselves and Oxford. What should we think about in terms of the incremental cost? I guess that transaction should happen by year end, but how should we think about that? Well, this is another question or answer you're going to love. Just by way of background, the Canada Square ownership group comprises CTE REIT in Oxford as well as a private group. And the co owners agreement provides for certain liquidity events. And so one of which was exercised. And the co owner's agreement provides for a process for determining the purchase price and that process is underway. So once the transaction is completed, it will be reflected in our disclosure at that time. And presumably, there is a valuation process underway. And I guess secondly, can you remind us again, going back over the years, what the initial cost of that transaction was? I'm trying to remember whether we disclosed it or not at the time we did that acquisition. I don't recall that we did. So I think I'll just defer on that. The next question is from Tal Woolley from National Bank Financial. Please go ahead. Hi, good morning. Good morning, Tom. I'm just wondering, in your conversations with Tire right now, given that their e commerce has been more up and running over the last 18 months. Are you getting any sense when they look out to building their next generation stores that the footprint might change or the type of space that they want as we go and look at redeveloping and relocating some of these stores. Can you talk at all about what the changes in the store might be? No. No, sorry. I'm really, I would allow or defer to Canadian Tire to allow them to talk about their merchandising plans, development plans and whatnot. Suffice it to say is, as you all know, we have a close relationship with Canadian Tire and work with them on their forward requirements for their retail network strategy. And certainly, they would be thinking about all the things that you've asked about. Okay. And then this might be a tough one to answer, but just in your in some of your smaller markets where you've got some third party space, are you seeing any sort of big challenges in terms of like vacancies or leasing spreads? Like are those numbers generally just holding up as you would expect? Hey Tal, it's Kevin. I think the first thing I would note is we don't actually have that much multi tenant property types in smaller markets. And the ones we do have either been or are in the process of being redeveloped. So we bought them with a plan and we're in the midst of executing that plan. As a general comment on multi tenant assets in smaller markets, I think your supposition is probably correct. There is some pressure on rents and upward cap pressure on cap rates. What's interesting is we're seeing a bifurcation between multi tenant and single tenant. There's still large appetite on the investment side from private investors for single tenant assets with credit tenancies. So from a cap rate perspective, while smaller market multi tenant assets may be seeing slight cap rate increases, we're not really seeing that with the majority of our asset type being the single tenant. Okay. And then just lastly, any can you give any sort of progress update on the leasing activity in Calgary and the DCs? Sure. It's Kevin again. As you know, Canadian Tire occupied the space on a short term basis. So we just got it back again at the end of June. So we're relaunching our marketing efforts. At a high level, Calgary is still seeing a slight positive absorption, I think in the last quarter, but there's a lot of new supply coming online. So, from a leasing effort perspective, I would say it's as tough as you might imagine in Alberta right now. Okay. And is that sorry, just to recall, is that a Canadian Tire DC or is that are those the old Farzani DCs that were in Calgary when it was acquired? It was a DC that we acquired from a 3rd party and we leased to Canadian Tire and then they vacated when they flipped over to the old Sears DC. Okay, perfect. Thank you. Thank you. The next question is from Jenny Ma from BMO Capital Markets. Please go ahead. Thanks. Good morning. Most of my questions have been answered, but just going back to Canada Square briefly, I believe very recently we were talking about the timeframe of developing it that you would wait until the Eglinton Crosstown was sort of completed. Does the announcement that came out with the quarter change that timeline? Jenny, it's Ken. No, it doesn't. The incremental acreage that would be folded in for the construction or development of the LRT. So we would need that to be completed before we could start. Okay. That's fair. And then just a quick housekeeping question. Leslie, you had talked about some of the one time costs in G and A that related to the new ERP system. I believe it was about $700,000 that you mentioned and the Q2 G and A looked lighter than I expected. Can you give us a sense of whether or not the majority of it's going to be booked in Q3? Or has that number changed? No, Jenny. There were some few 100 of 1000 booked in Q2, and I'm expecting still some amounts as we sort of finalize some of the sort of last modules and various things, so the ERP through Q3 and Q4. So I still think there's another few $100,000 to come in the balance of 2019. Okay. That's everything for me. Thank you. Thank you. Thank you. The next question is from Sam Damiani from TD Securities. Thanks. I just wanted to just check-in on the carrying value of Canada Square from when it was originally acquired, I think, over 5 years ago. Has it been written up at all from an IFRS for value perspective since that date? Sam, it's Ken. Our IFRS value on Canada Square is essentially our share of the original purchase price subject to some small adjustments. That's great. Thank you very much. Thank you. As there are no further questions at this time, I will turn the call over to Ken Silver, CEO, for any closing remarks. Thank you, operator, and thank you all for joining us today. We expect our Q3 results will be released early November, and we look forward to speaking with you then. Thanks. This concludes today's call. You may disconnect your lines.