Earnings Call: Q4 2018

Feb 12, 2019

Earnings release

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 4th Quarter Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. All the speakers' remarks 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 CTE REIT Nestle 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 CTE 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 Silvers, 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 Q4 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 Community and 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 CTE to deliver in all conditions, and we're delighted that 2018 contributed once again to that track record. Our new CFO, Leslie 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 5th dividend increase in the 5 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 twothree. The single most consistent piece of feedback from investors since our IPO was about the size of our float. So together with CTC, we were delighted to be able to make significant progress on this front. In a moment, our SVP Real Estate, Kevin Salzberg, will speak to our investment activities. In keeping with our strategic focus, we seek to leverage our relationship with Canadian Tire to create value in ways not available to others or that others overlook. And our recent investment in Niagara Falls is a good example. With our understanding of Canadian Tire 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 3 new investments this quarter totaling $45,000,000 These new projects include the 3rd party acquisition of a Canadian tire store in Canmore, Alberta, the 3rd 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, and 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 square feet 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 Q2 of 2020. In the 4th quarter, we invested $29,000,000 on previously announced investments, which included the acquisition of a Canadian Tire Gas Plus Gaspar from a third party in Saint Hyacinth, Quebec the intensification of 2 Canadian tire stores in Winkler, Manitoba and Saint 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 square feet of incremental GLA in the quarter. In addition, during 2018, we completed the development 2 freestanding buildings comprised of 5,150 square feet of GLA and 3 land leases for a total investment of $4,500,000 at an average cap rate of 8.7%. These developments took place at our existing retail properties in Ancaster, Dunville and Waterloo, Ontario and Swift Current, Saskatchewan. These new retail units are a mix of 3rd party and Canadian Tire Gas Plus Gaspar tenancies. Highlighting the full year activity, CT Re acquired, intensified, developed or redeveloped a total of 12 properties, representing over 680,000 square feet of gross leasable area and a total investment of approximately $142,000,000 At the end of the 4th quarter, CTE REIT had 21 properties under development, representing a total gross leasable area of roughly 1,500,000 square feet of GLA and a total committed investment of approximately $256,000,000 upon completion. As of December 31, 2018, the REIT's occupancy rate was 98.7 percent, virtually unchanged compared to 98.6 percent 1 year ago. Of this, Canadian Tire Corporation represents 94.4 percent of total GLA and 92.7 percent of annualized minimum rent. All these metrics are relatively unchanged from a year ago. Finally, as discussed last quarter, we are continuing the implementation of the new ERP system as part of our property management in sourcing initiative, which is expected to be in place by mid-twenty 19, and we are pleased with the project's progress at this time. With that, I will turn it over to Leslie for a review of our financial results. Thanks to both Ken and Kevin for their comments and introduction. As this is my 1st 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 CTE 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 C. T. Reid and the Canadian Tire team for the generous welcome I have experienced over the past 4 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 $0.286 as compared to $0.283 per unit in Q4 2017, an increase of 1.1%. Additionally, for the full year 2018, we reported FFO per unit of $1.14 as compared to the $1.12 per unit in 2017, an increase of 1.8%. Our results demonstrate continued predictable growth with AFFO per unit of $0.239 compared to $0.232 for the Q4 of 2017, representing a 3% growth rate. For the full year 2018, we reported AFFO per unit of $0.954 compared to $0.919 per unit of 2017, an increase of 3.8%. Additionally, after normalizing for both CFO transition and in sourcing project costs, AFFO for Q4 was $0.245 or 5.6 percent higher than Q4 2017, and full year normalized AFFO per unit is $0.962 or 4.6 percent higher versus prior year. The AFFO payout is consistent with prior years at a rate of 76%. Net operating income for the Q4 full year was 88 $300,000 $345,500,000 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 and 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 CTE 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 in sourcing project, costs incurred at 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 twenty nineteen. As at December 31, 2018, the REIT's indebtedness ratio was 45.1%, a decrease compared to the indebtedness ratio as at December 31, 2017, primarily due to CTE'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 an approximately $288,000,000 available to our credit facilities as well as cash. In November, CTE, 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 percent effective interest in CTEREIT and continues to indirectly own all of the Class C and Class B limited partnership units. CTEREIT benefited from the transaction with enhanced trading liquidity for all Since coming off restriction and through February 8, our average daily trading volume was 4.6x higher than it was in fiscal 'twenty 8 prior to the announcement of the equity offering. As at December 31, 2018, 2% of the REIT debt bears interest at floating rates compared to 8.5% at December 31 in the prior year. CTEREIT'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. CTE REIT's total indebtedness to earnings before interest, taxes and fair value ratio as at December 31, 2018 was 7.31x, a decrease as compared to the 7.62x total indebtedness to EBITDA at fee ratio at December 31, 2017, primarily due to the growth of EBITDA fair value exceeding the growth of CTE's total indebtedness. The growth in EBITDA fair value was primarily due to increased NOIs mentioned earlier. Net interest expense for Q4 2018 increased by $1,700,000 or 6.8 percent compared to Q4 of the prior year. This increase was primarily due to increased interest on the debentures issued in June 2017 February 2018, partially offset by savings resulting from the redemption of Series 10 to 15 Class C LP Units in May 2017. Savings from reduced utilization of 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 CTE's interest rate and refinancing risks. This coupled with only one debt expiring in 2019 being a $37,000,000 mortgage that has greatly insulated CTE from changes in interest rates. The interest coverage ratio was at 3.3x for the 4th 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 CTE REIT's income before interest, taxes and fair value adjustments. The REIT recorded a smaller increase in the fair value adjustment on investment properties by $25,200,000 in the Q4 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 $74,500,000 for the quarter and $300,900,000 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 $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 $0.78 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 $14.01 versus $13.39 in the prior year, an increase of 4.6%. This growth is primarily due to the net income excluding distributions. With that, I'll turn it back to Ken. Thanks, Leslie. 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. Our first question is from Sumayya Hussain with CIBC. Please go ahead. Thanks. Good morning, everyone, and welcome, Leslie. 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 nothing particularly onetime. 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 Q4 and the interest carry on those, but there was nothing particularly one time in that number. Okay. So just the year end and the true interest is probably a driver there. Great. And I just wanted to get your thoughts on your funding sources for developments and other investment. And 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 Cosby as one of your funding sources going forward? Yes. I mean, we have various sources. We retain about $50,000,000 or $55,000,000 of retained FFO in any given year. In addition, Class B and Class C units would definitely be something that could factor into our future funding strategies. Our next question is from Jenny Ma with BMO Capital Markets. Please go ahead. Thanks. Good morning and welcome Leslie. Thanks Jenny. I have a question with regard to the rent uptakes. Now we know the CTC 1.5% has a nice contribution to SPNOI. But could you comment on the lease structure and any rent upticks built into the 3rd party leases? I know it's a small part of the portfolio, but it's been growing over the years. Jenny, it's Kevin. I mean the 3rd party portion of our portfolio is so small and the lease rollover in any given year is quite minimal. So 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 5 years on renewal? Typically, it would be every 5 years on renewal. Okay, got you. And to a similar magnitude, would you say? Depends on the market and the property, but somewhere in the range of like 5% to 10% is where I would guide you every 5 years. Okay. Yes. Got you. Okay. And then I just picked up a comment on the appraisal of your portfolio. It looks like there was a small change reducing it from 100% to 80% of the total portfolio. Just wanted a little bit color on the reason for that change and what is the threshold for the size of the property that you would subject to the external appraisal? Jenny, the rationale was really over 5 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. And 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 to external basis. The threshold for us of not buying it was probably $10,000,000 or so. 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 Smith with RBC Capital Markets. Please go ahead. Thank you and good morning. Your cap rate on intensifications and developments, quite 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? 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 CB cap rate survey for retail in a couple of different markets. But I would say on the whole, it's remaining pretty flat from what we're seeing. Okay. And your pipeline, is it any changes to your you're pretty steady in your quarterly announcements of intensification and developments. Any major changes in your pipeline that you would flag for us? Nothing that I would flag. I mean, each quarter will have its own ups and downs. But on the whole, for the year, I think our expectation is pretty comparable to what we've done in the past. Great. Okay. And 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. So all the work around the project really relates to that kind of time frame. Now 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. And 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 in sourcing 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. So 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 Paul Meyburn with Scotia Capital. Please go ahead. Thanks and good morning. Just maybe following up Ken on the and Leslie on the in sourcing comments. I think last quarter you mentioned $2,000,000 of total costs for the project and I think $240,000 was incurred at Q3. So can you just clarify how much was incurred in Q4 and what's left to hit in 2019? Thanks, Pammi. Yes, the $240,000,000 was from Q3, roughly the same amount was spent again in Q4. The costs are ramping up and there would be about $1,000,000 more or so being spent predominantly over Q1 and Q2 this year. Okay. That's helpful. And then just one last one. On the Calgary Industrial, any update there in terms of releasing progress, when you might have a tenant in place or perhaps when that property may start producing some income? 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 from we're deriving from our properties there. But we are working to advance the leasing effort. I don't have an update on timing, but we are still optimistic that we'll have something for you soon. And 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. And just on that side, are there any would you expect to, I guess, incur any significant repositioning cost 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, smaller items like that. Any material CapEx would depend on what a user would require. So hard to say right now. Great. Thanks very much. Thank you. Our next question is from Kyle Stanley with Desjardins Capital. Please go ahead. Good morning, everyone. Just a quick one for 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 the we just really have the aggregate for the new CFO onboarding and the some of the change in estimates for the CFO departing. So the aggregate of both those is circa $1,000,000 Okay, perfect. That's good. That's it for me. Thanks. I'll turn it back. Thank you. Thank you. Thank you. Our next question is from Paul Woolley with National Bank Financial. Please go ahead. Hi, good morning. Good morning. I 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. But 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. These our capital investment from year to year will 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. As well, we continue to work away at our intensification projects on the assets that we have in the portfolio. And then, of course, sort of the 3rd party acquisitions tend to be a little bit more opportunistic, and you'll see greater variation in those from year to year. But 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. And so you'd look at 2018 as best as kind of more of a normal year than what you had seen previously? There were a fair number of like drop downs in the years following the IPO and it's not that they've slowed, but it's just it is a little bit less than what it's been in the past? Yes. 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. So it will depend from year to year. But as I said, the prospects really haven't changed. Okay. And then I'm just like historically at Canadian Tire, there's kind of been a 5, 6 year cycle for store redevelopment. I can't remember the name of the last one, but there was like Concept 2020 and then several that came after that. Like, in your conversations with Haier, like I would assume as they start to roll out kind of like 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 will be pretty closely involved with. So 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 Canadian Tire to speak to that when if and when they're ready to do so. But 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. Thank you. Please go ahead. Thank you. Just on the Niagara Falls acquisition, it looks like it's going to be quite accretive. 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 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 'seventeen beginning of 'eighteen. King Terry saw an opportunity to relocate their store to a better, bigger location. And fortunately, we had our role to play in the deal and it worked out for everybody. That's great. And is it a relocation from the one in the north end of the city there? Yes. Sam, it's a reconfiguration of the market. It essentially will be a consolidation of the 2 locations into 1 larger one in a more central location. Got it. Very good. And 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 in recent acquisitions? I noticed you've got a Farm Boy in the Lakeshore recently, which was great to see. But what are you seeing in O'Reilly Square and Fort St. John, etcetera? Sure. Farm Boy is a great example. They just opened at end of January. And from what we hear so far so good on that front. I think that the typical retailers that you've been hearing about are still quite active. 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. But 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 Q1 results will be released the 2nd 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.