All participants, please stand by. Your conference is ready to begin. Good morning. My name is Valerie, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's fourth 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 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 morning, everyone. We're very pleased to welcome you to CT REIT's fourth quarter 2018 investor conference call. Our strong results in Q4 and for the full year 2018, once again point to the attractiveness of our business model and our focused execution, grounded in a strategic relationship with Canadian Tire, one of Canada's leading brands. Our continued and reliable growth is particularly attractive when considered in the context of our risk profile, given our high occupancy, minimal lease turnover, our low-risk development and construction activities, and the quality and resiliency of our balance sheet and financial metrics. Our goal has been for CT REIT to deliver in all conditions, and we're delighted that 2018 contributed once again to that track record.
Our new CFO, Lesley Gibson, who we're delighted to have on the team and to welcome to her first call, will take you through our financial results in a few moments. In addition to those strong results, 2018 also saw some important milestones, including our fifth dividend increase in the five years since our IPO. While none of us here may be aristocrats in life, we're happy to at least now consider ourselves like a dividend aristocrat. Another milestone was our first equity offering from Treasury, which coupled with a secondary offering from CTC, increased our float by over two-thirds. Together with CTC, we were delighted to be able to make significant progress on this front.
In a moment, our SVP Real Estate, Kevin Salsberg, will speak to our investment activities. In keeping with our strategic focus, we seek to leverage our relationship with Canadian Tire to great value in ways not available to others or that others overlook. Our recent investment in Niagara Falls is a good example. With our understanding of Canadian Tire's store network and real estate strategy, we can deliver a win for the retailer and its customers, as well as for the REIT, by backfilling a vacant Target box with a larger, better-located Canadian Tire store. With a long-term lease commitment and annual rent escalations in place with Canadian Tire, this is the kind of attractive low-risk development, which reflects the structural advantages of being related to one of Canada's strongest anchor tenants.
As we look ahead, we continue to see potential in leveraging these advantages and are positioning ourselves to strengthen our capabilities. In 2019, we'll complete our property management insourcing project, providing us with better and more efficient resources to manage our growing multi-tenant portfolio. With that, I'll turn things over to Kevin to provide an update on our investing activities and operations. Kevin?
Thanks, Ken, and good morning. As highlighted in our press release yesterday, we are pleased to announce three new investments this quarter totaling CAD 45 million. These new projects include the third-party acquisition of a Canadian Tire store in Canmore, Alberta, the third party acquisition of a multi-tenant property in Niagara Falls, Ontario, where we intend to redevelop a vacant former Target box for a new Canadian Tire store, as Ken mentioned. The acquisition of land from a third party to facilitate the planned expansion of an existing REIT-owned Canadian Tire store in Yarmouth, Nova Scotia. These three investments represent approximately 297,000 sq ft of incremental gross leasable area and are expected to earn an average going-in cap rate of 6.8%. The redevelopment and expansion projects are both expected to be completed in the second quarter of 2020.
In the fourth quarter, we invested CAD 29 million on previously announced investments, which included the acquisition of a Canadian Tire Gas Plus gas bar from a third party in Saint- Hyacinthe, Quebec. The intensification of two Canadian Tire stores in Winkler, Manitoba and St. Thomas, Ontario, and the redevelopment of a previously acquired redundant Canadian Tire store in Sudbury, Ontario.
The completion of these projects added approximately 110,000 sq ft of incremental GLA in the quarter. In addition, during 2018, we completed the development of two freestanding buildings comprised of 5,150 sq ft of GLA and three land leases for a total investment of CAD 4.5 million at an average cap rate of 8.7%. These developments took place at our existing retail properties in Ancaster, Dunnville, and Waterloo, Ontario, and Swift Current, Saskatchewan. These new retail units are a mix of third-party and Canadian Tire Gas Plus gas bar tenancies.
Highlighting the full-year activity, CT REIT acquired, intensified, developed, or redeveloped a total of 12 properties, representing over 680,000 sq ft of gross leasable area and a total investment of approximately CAD 142 million. At the end of the fourth quarter, CT REIT had 21 properties under development, representing a total gross leasable area of roughly 1.5 million sq ft of GLA and a total committed investment of approximately CAD 256 million upon completion. As of December 31st, 2018, the REIT's occupancy rate was 98.7%, virtually unchanged compared to 98.6% one year ago. Of this, Canadian Tire Corporation represents 94.4% of total GLA and 92.7% of annualized minimum rent. All these metrics are relatively unchanged from a year ago.
As discussed last quarter, we are continuing the implementation of the new ERP system as part of our property management insourcing initiative, which is expected to be in place by mid-2019, and we are pleased with the project's progress at this time. With that, I will turn it over to Lesley for a review of our financial results.
Thanks to both Ken and Kevin for their comments and introduction. As this is my first official quarter as the CFO of the REIT, I want to make a few comments before I address the financial results. Firstly, to thank Louis Forbes for his contribution to CT REIT and as a mentor to me over the last 15 years of my career. Also, to Ken, Kevin, and all the members of both the CT REIT and the Canadian Tire team for the generous welcome I have experienced over the past four months. My transition into this role has been seamless with the support I have received. Now turning to our financial performance. In Q4 2018, we reported FFO per unit of CAD 0.286 as compared to CAD 0.283 per unit in Q4 2017, an increase of 1.1%.
For the full year 2018, we reported FFO per unit of CAD 1.14 as compared to CAD 1.12 per unit in 2017, an increase of 1.8%. Our results demonstrate continued predictable growth with AFFO per unit of CAD 0.239 compared to CAD 0.232 for the fourth quarter of 2017, representing a 3% growth rate. For the full year 2018, we reported AFFO per unit of CAD 0.954 compared to CAD 0.919 per unit of 2017, an increase of 3.8%. After normalizing for both CFO transition and insourcing project costs, AFFO for Q4 was CAD 0.245 or 5.6% higher than Q4 2017, and full-year normalized AFFO per unit is CAD 0.962 or 4.6% higher versus prior year. The AFFO payout is consistent with prior years at a rate of 76%.
Net operating income for the fourth quarter and full year was CAD 88.0 million and CAD 345.5 million, respectively, increasing 7.4% and 7.2% over reported Q4 and full-year 2017. This growth was primarily driven by acquisitions of income-producing properties and the completion of properties which were under development in the prior year. The same-store growth of 2.5% and same property growth of 2.9% were driven by the annual rent escalations of 1.5% contained within most of the Canadian Tire store leases and the CTC distribution center leases, which are generally effective January 1st, the recovery of capital expenditures, and the related interest earned. The balance of the difference between the same store and same property growth is due to completed intensification activities undertaken on same properties. The positive contributions were partially offset by the impacts of the changes in tenancies at 1125 Dufferin Place in Calgary.
G&A expenses as a percentage of property revenue were 2.9%, an increase over the 2.4% reported at Q4 2017. This increase was primarily driven by increased personnel expenses due to CFO transition costs and increases in consulting and service arrangement costs related to the new ERP that CT REIT expects to implement in 2019, and partially offset by decreased compensation costs and trustee fees due to their fair value adjustment on unit-based awards. With respect to the insourcing project, costs incurred for Q4 are consistent with the amount we shared with you in Q3. As mentioned before, the costs will continue to be incurred throughout the first half of 2019.
As of December 31st, 2018, the REIT's indebtedness ratio was 45.1%, a decrease compared to the indebtedness ratio as of December 31st, 2017, primarily due to CT REIT's 2018 acquisition, intensification, and development activities, and fair value adjustments made to its investment property portfolio. We are pleased with the solid and liquid position of the balance sheet, and we have approximately CAD 288 million available through our credit facilities as well as cash. In November, CT REIT, along with CTC, completed a joint equity offering of an aggregate 21,115,000 units. As a result of the offering, CTC now holds a 76.2% effective interest in CT REIT and continues to indirectly own all of the Class C and Class B limited partnership units. CT REIT benefited from the transaction with enhanced trading liquidity for all CT REIT unit holders.
We are pleased with the positive impact the equity offering has had on our float as we head into 2019. Since coming off restriction and through February 8th, our average daily trading volume was 4.6 times higher than it was in fiscal 2018, prior to the announcement of the equity offering. As at December 31st, 2018, 2% of the REIT debt bears interest at floating rates compared to 8.5% at December 31st in the prior year. CT REIT's variable rate debt to total indebtedness ratio decreased primarily due to the proceeds of the new debenture offering being used to reduce borrowings drawn on the variable credit rate facilities in 2018.
CT REIT's total indebtedness to earnings before interest, taxes, and fair value ratio as at December 31, 2018, was 7.31 times, a decrease as compared to the 7.62 times total indebtedness to EBITDA at the ratio at December 31, 2017, primarily due to the growth of EBITDA fair value exceeding the growth of CT REIT's total indebtedness. The growth in EBITDA fair value was primarily due to increased NOI, as mentioned earlier. Net interest expense for Q4 2018 increased by CAD 1.7 million or 6.8% compared to Q4 the prior year. This increase was primarily due to increased interest on the debentures issued in June 2017 and February 2018, partially offset by savings resulting from the redemption of Series 10-15 Class C LP units in May 2017, savings from reduced utilization of the bank credit facility and increased capitalization on development projects during 2018.
The net effect is that the REIT has replaced inexpensive short-term debt with longer fixed-rate debt, which has served to reduce CT REIT's interest rate and refinancing risks. This, coupled with only one debt expiring in 2019, being a CAD 37 million mortgage, has greatly insulated CT REIT from changes in interest rates. The interest coverage ratio was at 3.3x for the fourth quarter, which is lower compared to the prior year value of 3.46x . The decrease in the interest coverage ratio is primarily due to the growth in interest and other financing charges, exceeding the growth of CT REIT's income before interest, taxes, and fair value adjustments. The REIT recorded a smaller increase in its fair value adjustment on investment properties by CAD 25.2 million in the fourth quarter of 2018 compared to the same period in the prior year.
The difference is primarily due to the net higher gains in the prior year on the distribution center in Bolton, Ontario. Net income was CAD 74.5 million for the quarter and CAD 300.9 million for the year, down 23.3% and 5.2% respectively, compared to the same periods in the prior year, primarily due to small increases in the fair value adjustment on investment properties, an increase in net interest and other financing charges, partially offset by an increase in NOI. Distributions per unit in the quarter amounted to CAD 0.182 or 4% higher than the same period in 2017 due to the increase in the annual rate of distributions effective with the first distribution paid in 2018. For the full year, distributions amounted to CAD 0.728 or 4% higher than the same period in 2017. The trend in our book value unit continues a steady course.
As at year-end December 2018, the book value per unit was CAD 14.01 versus CAD 13.39 in the prior year, an increase of 4.6%. This growth is primarily due to the net income exceeding distributions. With that, I'll turn it back to Ken.
Thanks, Lesley. Given the solid performance and fundamentals of our business, we're entering 2019 with our strategy, growth plans, and optimism intact. We look forward to continuing to share those with you in the quarters ahead. 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 please pick up the handset or step closer to your speakerphone system when asking a question to provide maximum audio clarity. We'll pause for just a moment to compile the Q&A roster. Our first question is from Sumayya Syed with CIBC. Please go ahead.
Thanks. Morning, everyone, welcome, Lesley.
Thank you.
I just wanted to touch on the same property growth in the quarter. It was pretty strong, and if I'm not mistaken, it was your strongest ever. Anything one time in there at all?
No, nothing particularly one time. The 2.5% was obviously primarily driven by the CTC leases, and then increased recoveries that are perhaps a little bit more skewed towards the fourth quarter and the interest carry on those. There was nothing particularly one time in that number.
Okay, just the year-end and the truing up are probably a driver there. Great. I just wanted to get your thoughts on your funding sources for developments and other investments. You have used multiple sources before, and one of them includes Class B and then just following the recent equity offerings and the progress you guys have made with increasing your float. Do you still anticipate using Class B as one of your funding sources going forward?
Yes. When we have various sources, we retain about CAD 50 million or CAD 55 million of retained FFO in any given year. In addition, Class B and Class units would definitely be something that could factor into our future funding strategies.
Okay, thanks. I'll turn it back.
Thank you.
Thank you. Our next question is from Jenny Ma with BMO Capital Markets. Please go ahead.
Thanks. Good morning, and welcome, Lesley.
Thanks, Jenny.
I have a question with regards to the rent uptakes. We know the CTC 1.5% has a nice contribution to SPNOI. Could you comment on the lease structure and any rent upticks built into the third-party leases? I know it's a small part of the portfolio, but it's been growing over the years.
Hi, Jenny. It's Kevin. The third-party portion of our portfolio is so small, and the lease rollover in any given year is quite minimal. I would say, on the whole, it has a very minimal, if negligible, impact at all as of right now.
Would they be structured with annual rent upticks similar to CTC? Is it more like every five years on renewal?
Typically, it'd be every five years on renewal.
Okay, gotcha. To a similar magnitude, would you say?
Depends on the market and the property. Somewhere in the range of 5%-10% is where I would guide you.
Okay.
Every five years.
Yep. Gotcha. Okay. I just picked up a comment on the appraisal of your portfolio. It looks like there was a small change of reducing it from 100%- 80% of the total portfolio. Just wanted a little bit of color on the reason for that change. What is the threshold for the size of the property that you would subject to the external appraisal?
Jenny, the rationale was really, over five years since IPO, the valuation process has refined itself a great deal, and there's much more sort of in-depth knowledge of all the markets. I guess for us, continuing to spend internal and external effort in appraising every very relatively small asset in all the markets wasn't as effective. We continue to have about 80% of the portfolio valued on a rotational external basis. The threshold for us of not buying it was probably CAD 10 million or so. The very, very smallest assets wouldn't be subject to valuation, and we would use some of the other assets nearby or in the same geographies and then sort of extrapolate to those assets that wouldn't be subject to the external valuation.
Okay. That's helpful. That's all for me. Thanks. I'll turn it back.
Thank you.
Thank you. Our next question is from Michael Markidis with RBC Capital Markets. Please go ahead.
Thank you, and good morning. Your cap rate on intensifications and developments, quite an attractive number at 6.8. Just wondering, is there any pressure, either upwards or downwards, on that number that you've seen over the last few months?
Hey, Michael, it's Kevin again. In short, no. I think what we've seen in the marketplace and what we're kind of gearing towards is pretty similar to past quarters. We obviously saw a small uptick in the CBRE cap rate survey for retail in a couple different markets. I would say on the whole, it's remaining pretty flat from what we're seeing.
Okay. Your pipeline, any changes to your You're pretty steady in your quarterly announcements of intensification and development. Any major changes in your pipeline that you would flag for us?
Nothing that I would flag. Each quarter will have its own ups and downs. On the whole, for the year, I think our expectation is pretty comparable to what we've done in the past.
Great. Okay. Just last question. Just, Ken, I wonder if you could just give us a quick update on Canada Square and maybe highlight your priorities for 2019.
Sure, Michael. Thank you. On Canada Square, as I mentioned before, the timing of the development is quite closely tied to the timing of the completion of the LRT on Eglinton. All the work around the project really relates to that kind of timeframe. Within that context, good progress is being made on all fronts with the city in regard both to discussions on the master plan concept as well as the TTC ground lease and discussions with the potential anchor tenant. Generally, I'd say, general themes for the year would be continuing to do more of what we've been doing in the past years, leveraging that relationship with Canadian Tire to grow AFFO per unit, and balance that with maintaining a strong balance sheet and conservative approach to our financials.
With our insourcing project, clearly, we're focusing as well internally in terms of growing productivity and efficiency from our intensifications. We're looking to drive better results out of the portfolio of existing assets that we already own. A balance of both externally driven growth through growing the asset base and improving the returns on the assets we already own.
Thank you.
Thanks.
Thank you. Our next question is from Pammi Bir with Scotiabank. Please go ahead.
Thanks, and good morning. Just maybe following up, Ken and Lesley, on the insourcing comments. I think last quarter, you mentioned CAD 2 million of total costs for the project, and I think CAD 240,000 was incurred at Q3. Can you just clarify how much was incurred in Q4 and what's left to hit in 2019?
Thanks, Pammi. Yes, the CAD 240,000 was from Q3. Roughly the same amount was spent again in Q4. The costs are ramping up, and there would be about CAD 1 million more or so being spent predominantly over Q1 and Q2 this year.
Okay, that's helpful. Just one last one. On the Calgary industrial, any update there in terms of re-leasing progress, when you might have a tenant in place or perhaps when that property may start producing some income?
Hey, Pammi, it's Kevin. There are a couple of groups that we've been advancing discussions with who have shown interest. We haven't pulled the trigger on anything just yet. I think you can see from the headlines and we're seeing on the sentiment on the ground, Alberta is causing some nerves right now for certain groups. We're not seeing that, though, operationally either, at the store level or from the rents we're deriving from our properties there. We are working to advance the leasing effort. I don't have an update on timing. We are still optimistic that we'll have something for you soon.
Optimistic that this should get leased up this year?
I'm not sure that rent would commence this year, but I think we'll hopefully have a commitment by year-end. That's our goal for sure.
Just on that side, would you expect to, I guess, incur any significant repositioning costs to accommodate a tenant, or is it in pretty good shape that it could easily just move-in ready?
The building itself is in good shape. There's a couple items that are probably required for any user, doing lighting or painting, the smaller items like that. Any material CapEx would depend on what a user would require. Hard to say right now.
Great. Thanks very much.
Thank you. Our next question is from Kyle Stanley with Desjardins Capital. Please go ahead.
Morning, everyone. Just a quick one from me today. Would you be able to disclose how much of the personnel expense during the quarter was attributed to the CFO leaving?
I don't have a split really between. We just really have the aggregate for the new CFO onboarding and some of the change in estimates for the CFO departing. The aggregate of both those is circa CAD 1 million.
Okay, perfect. That's good. That's it for me. Thanks. I'll turn it back.
Thank you.
Thank you. Once again, please press star one at this time if you have a question. Our next question is from Tal Woolley with National Bank Financial. Please go ahead.
Hi. Good morning.
Good morning.
Just wanted to talk a bit about your planned CapEx development spend. Obviously, it was down a fair bit this year because you had far fewer acquisitions. Are you able to give some sort of broad strokes on what you expect to spend on development intensification CapEx through 2019?
Sure. Hi, Tal, it's Ken. Our capital investment from year to year is generally consistent over a longer period of time, but there will be ups and downs from year to year, kind of depending on the flow of deals and projects. I would say generally, obviously, we have very good visibility to the pipeline with Canadian Tire.
We continue to work away at our intensification projects on the assets that we have in the portfolio. Of course, sort of the third-party acquisitions tend to be a little bit more opportunistic and you'll see greater variation in those from year to year. Generally, our outlook is quite positive. There's nothing fundamental that's changed in terms of what we see out there in terms of our potential growth agenda.
You'd look at 2018 as that's kind of more of a normal year than what you had seen previously? Because there were a fair number of drop-downs in the years following the IPO, and it's not that it slowed, but it is a little bit less than what it's been in the past.
Yeah, I would say it's probably on the average to low average of our program over the last number of years. We've obviously had some much bigger years, and those tended to be more transaction-focused. We did have the tail end of our RioCan transaction was part of our investment plan in 2018. It will depend from year to year. As I said, the prospects really haven't changed.
Okay. Historically at Canadian Tire, there's kind of been a five, six-year cycle for store redevelopment. I can't remember the name of the last one, but there was Concept 2020 and then several that came after that. In your conversations with Tire, I would assume, as they start to roll out kind of new generation stores, that's an opportunity for you to play a bigger role, in terms of repositioning properties. Can you give me a sense of where you are in that kind of cycle? Or is that not really maybe as relevant going forward?
I'm not sure it's not relevant. I mean, clearly, anything that Canadian Tire does, we'll be pretty closely involved with. It does have implications for us. I can't speak to the next generation or what thinking Canadian Tire has around what the next real estate-driven retail strategy will be. I'll leave it to Canadian Tire to speak to that if and when they're ready to do so. Clearly, we'd be very much involved in that.
Okay. That's it for me. Thank you very much.
Okay. Thank you.
Thank you. Our next question is from Sam Damiani with TD Securities. Sam, please go ahead.
Thank you. Just on the Niagara Falls acquisition, that looks like it's going to be quite creative. I'm just curious, with the relocation of Well, first of all, is the Canadian Tire going in there a relocation? And secondly, the work with Canadian Tire to get that lease going and the approvals with the municipality, was that initiated by yourselves or the vendor?
That was on, I'll call it the discussion list for some time with the vendor, knowing, obviously, what Canadian Tire's plans were for the market. It took a little bit more time to crystallize, and we weren't ready for it to be part of the initial tranche that we did with them at the end of 2017 and beginning of 2018. Canadian Tire saw an opportunity to relocate their store to a better, bigger location. Fortunately, we had our role to play in the deal, and it worked out for everybody.
That's great. Is it a relocation from the one in the north end of the city there?
Yeah. Sam, it's a reconfiguration of the market. It essentially will be a consolidation of the two locations into one large one.
Oh, I see.
In a more central location.
Got it. Very good. Just sort of big picture, what sort of tenants are you seeing sort of growing and looking at leasing space in your portfolio as you lease up some of the non-Canadian Tire spaces in your developments and recent acquisitions? I notice you've got a Farm Boy in the Lakeshore recently, which was great to see. What are you seeing in Orillia Square and Fort St. John, et cetera?
Sure. Farm Boy is a great example. They just opened at the end of January, From what we hear, so far, so good on that front. I think the typical retailers that you've been hearing about are still quite active. The Winners, TJX group, Dollarama, other dollar store operators, restaurants, pad tenants of that ilk. Fortunately for us, we don't have a ton of third-party leasing that we are undertaking. In terms of the development opportunities we have that you noted, those would be the groups that would probably be most prominent.
Great. Thank you very much.
Okay. Thank you.
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 first-quarter results will be released the second week of May. We look forward to speaking with you then.
Thank you, everyone. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.