All participants, please stand by. The conference is ready to begin. Good afternoon. My name is Anne Louise, and I will be your operator for today. At this time, I would like to welcome everyone to the CT REIT First 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 session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT, Lesley Gibson, Chief Financial Officer of CT REIT, and Kevin Salsberg, Senior Vice President of CT 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&A and AIF, which can be found on CT REIT's website and on SEDAR. I will now turn the call over to Ken Silver, Chief Executive Officer of CT REIT. Ken?
Thank you, operator. Good afternoon, everyone. We are very pleased to welcome you to CT REIT's first quarter 2019 investor conference call and to share with you the results of another strong quarter. I am going to turn the call over to Kevin Salsberg, our Senior Vice President of Real Estate, to provide an update on our investing activities and operations. Lesley Gibson, our Chief Financial Officer, will then review the financial aspects of the quarter, and I will wrap things up before turning the call over for questions. Kevin?
Thanks, Ken. Good afternoon. We are pleased to start the year with strong results and the announcement of new investments this quarter totaling CAD 33 million. These new projects are comprised of one vend-in from CTC, two Canadian Tire store expansions, and several new third-party pad developments on existing CT REIT-owned properties. Although historically, we have not provided regular updates on the progress of our pad pipeline initiative, we felt that it was appropriate to relay our plans for the balance of the year based on the great work our team has been doing and the number of projects that we expect to come to fruition in 2019. In total, these investments, when completed, will result in an incremental 118,000 square feet of gross leasable area being added to the portfolio and are expected to earn an average going-in cap rate of 7.1%.
Additionally, we invested CAD 54 million in the first quarter towards previously announced investments. These projects included three new Canadian Tire store developments in Grand Falls-Windsor, Newfoundland, Mount Forest, Ontario, and Grande Prairie, Alberta. The Grande Prairie location now being Canadian Tire's largest single-level store in the country. The REIT also completed the redevelopment of a redundant Canadian Tire location in Calgary, Alberta for a third-party grocery store, the intensification of a property in Toronto, Ontario for a third-party grocery store, as well as the intensification of a property in Bradford, Ontario for a Canadian Tire Gas+ gas bar and car wash. As previously disclosed, CT REIT's investments in the quarter also included the acquisition of a standalone Canadian Tire store in Canmore, Alberta from a third party. In total, these investments increased our GLA by approximately 373,000 square feet.
At the end of the first quarter, CT REIT had 28 properties under development. These properties represent a total committed investment of approximately CAD 240 million upon completion and a total gross leasable area of 1,268,000 square feet, nearly 92% of which has been pre-leased. On a committed basis, our portfolio is 99.1% occupied as at the end of the first quarter, a slight increase over Q4. This modest increase relates primarily to Canadian Tire leasing approximately 100,000 square feet at our 11 Dufferin Place Southeast property in Calgary, Alberta, on a short-term basis for additional seasonal requirements. We expect that this short-term occupancy will likely only be required by CTC until the end of Q2. With that, I will turn it over to Lesley for a review of our financial results.
Thanks, Kevin. Good afternoon, everyone. Before I get into our results, I would like to highlight an accounting change that has impacted our results. As you are aware, IFRS 16 on leases came into effect January 1st, 2019. This new accounting standard is most impactful for lessees as the standard aligns the presentation of leased assets to be similar to owned assets, resulting in both an asset and a liability being recorded on the lessee's balance sheet. As CT REIT has only 10 ground leases, the impact of the conversion to IFRS 16 was relatively minimal. The adoption of IFRS 16 has resulted in the recognition of a right-of-use asset, which is classified as part of investment properties, and a lease liability for all operating leases where CT is a lessee. I do want to highlight that IFRS 16 does not change the underlying operations or economics of our business.
To ensure comparability year-over-year, we have adjusted the 2018 net operating income to exclude ground lease expense to achieve consistency in reporting under the new standard. The disclosure will be provided for the balance of 2019. In addition, the definitions of FFO and AFFO have been adjusted for IFRS 16 in accordance with the updated REALPAC definitions, which consisted of a new deduction for the principal payments related to the lease liability. Moving on to Q1 results, we reported FFO per unit diluted of CAD 0.288, an increase of 4%, compared to the CAD 0.277 per unit diluted in Q1 2018. AFFO per unit increased 5.2% to CAD 0.245 as compared to CAD 0.233 in the comparable period. Both increases were driven primarily by the impact of acquisitions of income-producing properties and properties under development completed in 2019 and 2018.
Reported NOI was CAD 89.9 million for the quarter, increasing 5.4% compared to the same period in the prior year. As I mentioned, this is after excluding expenses related to the ground rent in NOI for 2018 as a result of the adoption of IFRS 16. This growth was primarily driven by the acquisition of development activity that was referenced previously, which contributed CAD 1.9 million to NOI growth this quarter. The same-store NOI growth of 2.8% and same-property growth of 3.2% were driven primarily by two components. Firstly, the average rent escalations of 1.5% contained within the Canadian Tire store and CTC distribution center leases. Secondly, the recovery of capital expenditure and the related interest earned. In addition, this quarter, compared to Q1 2018, there was a positive NOI impact related to the changes in tenancies at 11 and 25 Dufferin Place in Calgary, Alberta, that occurred last year.
G&A expenses as a percentage of property revenue increased to 3.9% versus Q1 2018, primarily due to the change in fair market value of CT REIT's unit price. If one excludes the fair market value changes, G&A expenses as a percentage of property revenues decreased to 3.0% versus 3.1% in the prior year. Included in G&A expenses this quarter was approximately CAD 400,000 related to our previously announced property management insourcing project. I would like to note that effective May 1st, we have now gone live with this project, including the implementation of our new ERP system and the internalization of property management functions related to the majority of our multi-tenant assets.
With the hard work and effort of the project team, including individuals from both CTC and the REIT, we've successfully entered a new stage at CT REIT where we are much better positioned to optimize results from our portfolio and to develop internal capabilities that we believe will meaningfully contribute to CT REIT's future. While we are still in the early stages of rolling out this project, we continue to look to ways to optimize the process from our learnings thus far in Q2, and expect that there will be a net positive change related to general and administrative expenses and property operating expenses once the transition is complete in the latter part of 2019. The balance of the project costs of approximately CAD 700,000 are expected to be incurred in the next two quarters.
Lastly, in Q1 2019, we saw an increase in the interest coverage ratio to 3.35 times as compared to the same period in 2018 due to the growth in EBITDAFV, excluding this growth of interest in other financing charges, as well as the impact of IFRS 16. Moving to the balance sheet, we continue to hold a strong financial position. As of March 31st, CT REIT's indebtedness ratio was 44.1%, compared to the indebtedness ratio of 45.1% as of December 31st, 2018. The decrease in this ratio is due to our continued investing activities, fair value adjustments made to the investment property portfolio, and the IFRS 16-related impact of including the right-of-use asset in investment properties, partially offset by an increase in total indebtedness.
We also have approximately CAD 288 million available on our credit facility, as well as over CAD 8 million of cash, which keeps our balance sheet in a strong and liquid position. Our AFFO payout for this quarter was 77%, lower by 1.3% than in Q1 2018. The decrease is mainly due to the growth in AFFO exceeding the rate of increase in our distributions. Distributions per unit for the quarter amounted to CAD 0.189, or 4% higher than the same period in the prior year due to the increase in the annual rate of distributions, effective with the first distributions paid in 2019. I would also like to speak to the trend in our book value per unit. As of March 31st, 2019, the book value per unit was CAD 14.15, representing a 4.5% growth over the book value of CAD 13.54 reported at the end of Q1 2018.
The main contributing factor was the increase in our net income exceeding distributions. With that, I'll turn it back to Ken.
Thank you, Lesley. We're delighted to kick off 2019 with another strong quarter, a quarter characterized by attractive growth, underpinned by a solid balance sheet and financial metrics, and an increase in the distribution to unitholders. As I described at our AGM this morning, our ability to consistently deliver these kinds of results is owed to our privileged relationship with Canadian Tire, our majority unitholder, and most significant tenant. In an era of retail disruption, the Canadian Tire brand, nearly 100 years old, continues to grow and evolve with Canadians, competing effectively in an emerging multi-channel world, building on one of the best-located and most convenient bricks-and-mortar store networks in the country. Let me give you a flavor for what we see from the REIT's perspective. Since our IPO, we have completed or have underway the development of 11 replacement Canadian Tire stores and five incremental stores.
The replacements have been to larger on-concept stores in proven markets, the incremental stores have been in high-growth markets across the country. One of the replacement stores is in Grande Prairie, Alberta, which just opened in Q1, and as Kevin reported, is the largest one-level Canadian Tire store in the country. Two of the replacement projects will be stores relocated to larger vacant target boxes in multi-tenant assets we acquired from others, providing both growth opportunities for the retailer and value-add opportunities for the REIT. In addition to the new builds and redevelopments, we have expanded over 40 Canadian Tire stores in our portfolio. This is just Canadian Tire's development with CT REIT and doesn't include the company's development with third parties.
Canadian Tire, unlike many in retail, too burdened by debt and lack of imagination, has been executing a program of investment in digital technology and in keeping its store network up-to-date and relevant for customers. I love the fact that CTC considers its websites, e-commerce business, and consumer apps as digital properties, extending the concept of real estate beyond bricks and mortar in a multi-channel world. One of the most visited websites in the country works together with a high-quality network of stores located close to customers across the country, allowing Canadians to shop the way they want. Whether in-store, online for pickup in-store, or online for delivery to home, Canadian Tire's multi-channel strategy, together with outstanding merchandising, is delivering for Canadians. Winning companies thrive in times of disruption, and as the headlines scream retail apocalypse, Canadian Tire keeps growing, and we at CT REIT grow together with it.
Including the investments I just mentioned, we have since IPO acquired, developed, or have in development almost 10 million square feet of GLA and have committed approximately CAD 1.8 billion pursuing a strategy linked to Canadian Tire store network, supply chain, and office requirements. As many in the REIT sector turn to mixed-use and high-rise development, recycling capital out of secondary markets to invest in high-cost urban markets, we are pursuing a different path, a path that provides visibility to predictable and growing results in a business model less challenging and risky to execute. While we have embedded in our portfolio high-quality urban assets and pursue select value-add multi-tenant opportunities, as our path diverges from our peers, CT REIT increasingly emerges as Canada's premier net lease REIT, a space we're more than happy to occupy.
For our investors, this means continued focus on our key competitive advantage, our relationship with Canadian Tire, to deliver reliable, durable, and growing results. Now, operator, I'll turn the call back to you for any questions from our listeners.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number 1 on your telephone keypad. We ask that you pick up the handset or step close to your speakerphone and system when asking your question to provide maximum audio clarity. We'll pause just for a moment to compile the Q&A. We do have a first question from Matthew Logan from RBC Capital Markets. Please go ahead.
Thank you. Good afternoon.
Hi, Matt.
In terms of Canadian Tire's digital initiatives, can you talk about your distribution center portfolio and how the REIT is helping Canadian Tire adapt its supply chain?
Matt, it's Ken. As we demonstrated with the investments we've made so far, particularly the investment we made in what was formerly their Sears Canada distribution center, we're obviously more than happy to provide space to Canadian Tire for them to use. How they use the space between direct-to-store and direct-to-customer delivery or how they fulfill their e-commerce strategy, we kind of leave to them. Suffice it to say that we try to stay very close to them on all elements of their real estate requirements, whether it's retail, whether it's supply chain, and whether it's their office needs.
As you guys redevelop some of the former Canadian Tire stores for other purposes, can you talk about what makes the Canadian Tire footprint ideal for other uses?
Sure. One of the things that, or a couple of things that distinguish the Canadian Tire buildings relative to some of our peers in the big box retail industry is firstly, our stores were typically smaller on average than some of the larger players. The dimensions of the stores were also a little bit different. They weren't as deep as, say, a Home Depot box or a Walmart box. That lends themselves to either dividing them up for multi-tenants or allowing them to be recycled for tenants who don't need quite as much space, like a supermarket.
Appreciate the color. In terms of some of your secondary market acquisitions as your peers sell assets, can you talk maybe what you're seeing in terms of pricing in the market?
Hey, Matt, it's Kevin. I think generally speaking, we're seeing cap rates fairly flat for the most part. In secondary markets, it's been an interesting dichotomy to see certain assets trade and certain assets not trade. I think, where vendors can get their pricing, they're happy to transact, and where they don't feel they're being properly rewarded, we've seen them pulling deals. I think cap rates are holding up, but there is some tension in the bid-ask spread that we're seeing as well.
Suffice it to say, for the types of assets the REIT owns, pricing is generally holding pretty firm.
Yeah, I think there's that mid-market space that REITs are getting out of, private investors are hopping into, where there is a lot of capital chasing strong covenants, long-term leases, management-free assets, similar to the ones we would own, for sure.
Well, thank you very much, guys. That's all for me.
Thank you.
Thank you. The next question is from Sumayya Syed from CIBC. Please go ahead.
Thanks. Hi, everyone.
Hi, Sumayya.
Just firstly to confirm on the temporary vacancy or tenancy, I guess, at Dufferin Place. Will the NOI contribution in Q2 be similar to what we saw in Q1?
Hi, Sumayya, it's Lesley. CTC occupied the space for one month in the first quarter. We're expecting that CTC will probably occupy for all three months of Q2. There'll be a little bit of increase for that in the second quarter.
I think it was about CAD 1 million additional NOI from that tenancy.
No. It's less than CAD 100,000 a month.
100,000. Great. Just I wanted to touch on to leverage. It's at 44%, it's pretty conservative. There are a couple of your peers that are even lower, but maybe with slightly different business models. Any thoughts on if you're comfortable where you are right now, or would you want to see it go even lower?
Sumayya, I think we're very comfortable where things are right now. I think one thing that perhaps puts us in a different position is the creditworthiness of our tenant in CTC and how they're doing and how we feel about the certainty of those cash flows. Perhaps compared to some, we could be higher up in the spectrum. Right now, in the area we're in, we're very comfortable.
Okay, makes sense. Thank you.
Thanks.
Thank you. The next question is from Sam Damiani from TD Securities. Please go ahead.
Thank you. Good afternoon.
Hi.
Just on the balance sheet, could you just confirm or talk about to what extent the Yonge and Eglinton asset has been maybe written up from a very fair value perspective since the original acquisition?
Sure, Sam, it's Lesley. The asset at Yonge and Eglinton, as originally purchased, and then the subsequent purchase of some air rights, has basically been at the acquisition price. There's been no change to sort of the cap rate metrics we've applied to that property since we've acquired it.
Presumably, the NOI coming off the property is pretty stable. The building's pretty full still.
It is. Yeah, it is. The NOI's gotten a little bit better, a little marginally better since the initial acquisition, relatively stable.
Thank you. Just going over to the Calgary industrial properties. Obviously, nice to have some temporary income. What is the pipeline of discussions looking like for long-term leasing of that space?
Hey, Sam, it's Kevin. Unfortunately, we don't have a concrete update for you on the leasing progress. More qualitatively, I can say we've had several groups at the table who, I could say, still may yet materialize, that we've had what I'd describe as advanced discussions with. All of those groups have been a little hesitant to pull the trigger while they wait for a little bit more clarity on the state of the Alberta economy, generally speaking. There's interest from the industrial players, the 3PL groups, the groups who are servicing the oil and gas fields. We're seeing a little bit of hesitation in terms of actually pulling the trigger so far.
Okay. Just finally, on the Steeles DC that is on Canadian Tire's balance sheet, any update there? Any progress since last quarter?
Sam, it's Ken. There's no progress really to report on that. We continue to have discussions with Canadian Tire around potential built form on the property and how it might be used. Nothing concrete to report at this moment.
They've confirmed that they do not need that site for their own purposes anymore?
At the moment, yes.
Thank you. I'll turn it back.
Thank you. The next question is from Jenny Ma from BMO Capital Markets. Please go ahead. Your line is open.
Thanks. Good afternoon.
Hi, Jenny.
Hi. This question's probably for Lesley. I just wanted to make sure that the contribution from acquisitions and developments in 2019 that you guys break out in the MD&A ties to the CAD 81 million of total investments for Q1.
Sorry. The CAD 81 million, sorry.
It's the CAD 360,000 on page 36. I just want to make sure that was just from the bucket that's being described in page 10, the CAD 81 million, the acquisitions, and the redevelopments that were done during the quarter.
Just catching up with you, Jenny. Hang on.
Thanks.
378,000. Mentioned aid. Stratford, Calgary, and all those. Toronto. Yes. Jenny, I'm just looking through the list of properties. Yes, all those ones are either new acquisitions or items that have been moved from property development into investment property in the current quarter.
Okay.
They should be in those 2018, 2019 sort of net operating, but not same store.
Right. I guess based on that number, the CAD 360,000, most of these would've closed, I guess, towards the end of the quarter, there's probably a bit more contribution coming from that bucket into Q2?
Yes, you're correct. Some of the stores were truly the last couple of days of March.
Okay, gotcha. Going back to the question about the secondary markets. Your peers have been selling quite a bit. Have you guys internally sort of gone through your portfolio to see if there are some properties that you might consider to be non-core, so to speak, or have maxed out their growth potential and you would potentially look at selling, or do you view these sort of because they're Canadian Tire anchored, and occupied that they are all core to the CT REIT portfolio?
Jenny, it's Ken. I'll never say never.
We currently have no plans to divest certainly of Canadian Tire anchored properties in secondary markets. There are circumstances where we might see Canadian Tire move out of an existing store into a newly built store. At the time of the IPO, we had identified a number of stores that we didn't think would meet Canadian Tire's long-term requirements. We did not vend those into the REIT at that time. The old store in Grande Prairie was an example, so Canadian Tire still owns that. We now own the new store. It's possible that we might sell a property that Canadian Tire's moved out of because we don't want to reinvest in that building in that specific market. It's really a case-by-case basis as opposed to some sort of overarching strategy that we want to recycle capital out of secondary markets.
Okay. That makes sense. With regards to Hold on one second. Let's see here. You know what? I will have to circle back with you on that. I'll get back to you. I just lost my train of thought there.
Okay.
Great. Thanks.
Thank you.
Thank you. The next question is from Pammi Bir from Scotia Capital. Please go ahead.
Thanks. Good afternoon. Just not to beat a dead horse here, but coming back to 11 Dufferin. Is there a possibility that Canadian Tire might have some interest in permanently occupying that space, or can you convince them?
Well, we can certainly try. It is Kevin speaking, Pammi. As of right now, there is no indication they require the space beyond Q2. Obviously, should that change, we can update you at that time.
I guess maybe just sticking with that. Are there any challenges or maybe unique features that make this property maybe a bit more difficult to lease at all?
No. Not specifically. The depth of the building is good. It's, I believe, 28 feet clear high. Got bays, got some additional land next to it. It's near the CN rail yards and highway infrastructure, so it's actually highly desirable. I think it's more the state of the Calgary industrial market. There's some supply, a new supply coming on stream, over the next few quarters. Probably a different type of asset, newer inventory, higher rent. We actually like our positioning. It's just waiting for the right tenant.
Right. That was actually one of my questions, I guess, on the new supply side. Maybe just switching gears. If you look at the balance of the year from an investment standpoint, how much do you expect to spend on developments for, say, again, through 2019 versus transferred to income producing?
Pammi, it's Ken. Well, we've got pretty good visibility, obviously, as laid out in the MD&A as to when we expect some of the properties in the development pipeline to transfer to income producing. We're pretty clear on that. With respect to We continue to work with Canadian Tire as they develop their pipeline of new projects. Above and beyond that is, if there's an acquisition that we'd like to move on, as we said before, that tends to be a little bit more opportunistic. We've been, frankly, I think, relatively patient with regard to what's been on the market and what we're prepared to bid on.
Okay. Just one last one. If you look at what Canadian Tire has left in terms of their retained portfolio, you gave us some color with respect to back at the IPO and some of the assets that they kept. Do you have a rough sense of how much of that could be ready to be vended into the REIT over the next 12 months?
It's Ken. We've invested or are moving a couple of stores in this year so far. Frankly, we view the inventory of properties that Canadian Tire still owns, frankly, as inventory. We'll tap into that as a source of growth, depending on other things that we see happening.
Thanks very much.
Thank you.
Thank you. The next question is from Tal Woolley from National Bank Financial. Please go ahead.
Hi, good afternoon.
Hi.
I just wanted to ask, to go back to the secondary market question. In your conversations with Tire, have you heard any concerns about some of those secondary market locations not being able to sort of support the 1.5% rent increases over the long term?
Tal, it's Ken. Two things. One is we average 1.5% rent increases across the portfolio. We actually distribute over the portfolio in different ways. Not every store is 1.5% every year. There are some that are lower. At the time of the IPO, we kind of were reflecting what we thought of as the potential growth rates within that market. What I can tell you is, since the IPO, frankly, I think Canadian Tire has done a great job competing in the retail market. If you look at same-store sales growth has been quite robust for the past five years or so. We're quite comfortable with really where Canadian Tire has been. If anything, if there is a pressure, it's that Canadian Tire is outgrowing the stores. As I mentioned in my script, we've expanded 40 stores so far.
Canadian Tire kind of gets to the point where when they see store productivity kind of bumping up into certain levels, they'll look to expand the stores. I can tell you that those store expansions and that pressure has come across as much in secondary markets as anywhere. We don't see any concerns.
Okay. That's great. Thank you very much.
Okay. Thanks, Tal.
Thank you. 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. Thank you all for joining us today. We expect our second quarter results will be released the last week of July. We look forward to speaking with you then.