Earnings Call: Q3 2022

Nov 8, 2022

Good morning. My name is Elena, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q3 2022 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 star then the number two. The speakers on the call today are Kevin Salsberg, President and Chief Executive Officer of CT REIT, Jodi Shpigel, Senior Vice President, Real Estate of CT REIT, and Lesley Gibson, Chief Financial Officer 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 2021 MD&A and 2021 AIF, which can be found on CT REIT's website and on SEDAR. I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer of CT REIT. Kevin? Thank you, Elena, and good morning, everyone. We're very pleased to welcome you to CT REIT's third quarter 2022 investor conference call. CT REIT's enduring stability and track record of delivering growth was once again on display in Q3. Despite persistent market volatility, an increasing level of uncertainty, and the continued development of macroeconomic headwinds, CT REIT did what CT REIT does. We posted AFFO per unit growth of 4.7%, announced three new attractive store projects, including the development of a new Canadian Tire store in Toronto, and announced continued progress working with our largest tenant on proactively addressing lease maturities. With respect to the future, we continue to think long term in terms of opportunities for growth. We recently submitted a zoning bylaw amendment application on behalf of CTC for their 835 Yonge Street property, located at the intersection of the upscale Yorkville and Rosedale neighborhoods in Toronto. While only the first step in a long process, setting the stage for the future of this iconic Canadian Tire site will potentially allow CTC to surface value from their asset, provide the opportunity to deliver an improved store experience in the future, and opens the door for CT REIT to potentially participate in the project, most likely as the owner of the proposed retail podium at the base of a new mixed-use complex. Furthermore, we continue to work with our partner and co-owner, Oxford Properties Group, with respect to advancing our Canada Square redevelopment project at the corner of Yonge and Eglinton, also in Toronto. While the launch of the project has been slowed by delays in the delivery of the Eglinton Crosstown LRT, we are excited with the progress at Oxford Properties, as development manager, continues to make in advancing the master plan scheme for the property. We expect that an updated application representing an improved design that addresses stakeholder feedback will be filed before the end of this year, and are proactively working with Oxford Properties to set the stage for phase one of the redevelopment, a mixed-use tower that is anticipated to include a new head office for Canadian Tire with residential above. As we have discussed on past calls, part of setting the stage for the Canada Square redevelopment involves managing lease expiries within the complex to provide the flexibility that will be required for the redevelopment to begin. As such, we continue to expect NOI at the property to trend downwards as we approach the project launch date. Leslie will discuss the details related to the financial impact of managing lease expiries at Canada Square, which are also described in this quarter's MD&A. Beyond the progress being made in our longer-term development pipeline, we are also pleased to have recently published our inaugural environmental, social, and governance report, which is now available on our website. Our first ESG report provides details and information related to our ESG journey to date and highlights our commitments for the future. We encourage you to read our report to learn more about our plans and programs. We also announced our intention to file with the TSX a request for approval to commence a normal course issuer bid. Based on our view that our units have more recently been trading below net asset value, the implementation of an NCIB will provide CT REIT with a prudent capital allocation tool to use on a selective basis in appropriate circumstances in support of our unit price valuations. We are excited about our future growth prospects, are well positioned to capitalize on market-driven opportunities, and continue to actively manage our portfolio as well as our balance sheet. With baked-in organic growth derived from our contractual rent escalations, our solid low-risk development pipeline, and the fact that we have no unsecured debt maturities to address until 2024, CT REIT is well positioned to not only weather this storm but thrive in spite of it. I will now turn the call over to Jodi to provide an overview of our investment, leasing, and development activities. Jodi? Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we are pleased to announce three new investments this quarter totaling CAD 47 million. Once completed, these projects will add an incremental 192,000 square feet of GLA to the portfolio at a weighted average cap rate of 6.67%. As we continue to work with Canadian Tire on their store investment plans, we are delighted to commence a new project involving the development of a new Canadian Tire store in Toronto located at Islington Avenue and the 401 to better serve the trade area. We also announced plans for the expansion of two existing Canadian Tire stores in Quebec, one in Granby and one in Salaberry-de-Valleyfield. In the third quarter, we completed two previously announced investments totaling CAD 11 million and added 18,000 sq ft of GLA to the portfolio. These projects included the acquisition of land for the development of a new Canadian Tire store in Lloydminster, Alberta, and the expansion of an existing Canadian Tire store in Goderich, Ontario, that we acquired in Q4 of last year. Having added nearly 700,000 sq ft of GLA to the portfolio on a year-to-date basis through completed acquisitions and development projects, we are pleased with our progress as we continue to deliver on our pipeline of opportunities. At the end of the third quarter, CT REIT had 31 properties that were at various stages of development, with 4 projects currently expected to be completed by the end of this year. The projects in our development pipeline represent a total committed investment of approximately CAD 444 million upon completion, CAD 116 million of which has already been spent and CAD 160 million of which we anticipate will be spent in the next twelve months. Upon completion, these projects will add a total incremental gross leasable area of nearly 1.5 million sq ft to the portfolio, 99.4% of which has been pre-leased at quarter end. In the third quarter, we also completed lease extensions for 12 Canadian Tire stores, bringing the year-to-date total of Canadian Tire lease extensions to 19, including one lease related to a distribution center in Calgary, Alberta. As a result, the weighted average lease term for our portfolio in the quarter was stable versus last quarter at 8.5 years, one of the longest in the sector. As well, our portfolio remains 99.3% occupied in line with last quarter. With that, I will turn it over to Lesley to discuss our financial results. Lesley? Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we were very pleased with the results delivered by the REIT this quarter. FFO per unit on a diluted basis was up a healthy 4.7% in the quarter to CAD 0.292, which was primarily driven by growth in net operating income, offset by higher net financing costs related to an increase in public debentures and an increase in the prime rate on our available rate mortgage and credit facilities. Diluted FFO per unit in the quarter was CAD 0.321, up 2.9% compared to CAD 0.312 in the Q3 of 2021. Net operating income was CAD 106.2 million for the quarter, an increase of 5.4% or CAD 5.4 million compared to Q3 2021. This NOI growth was comprised primarily of 2.5% growth on a same-store basis and 3.8% growth on a same-property basis. Same-store NOI for the quarter grew by CAD 2.5 million or 2.5% as a result of the contractual annual rent escalations, contributing nearly CAD 1.5 million, including the 1.5% average annual rent escalations included in the Canadian Tire leases. With the balance of growth, primarily from continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately CAD 1 million in the quarter. Same-property NOI for the quarter grew CAD 3.8 million or 3.8% as a result of the increase in same-store NOI, as well as an increase in the NOI of CAD 1.3 million from intensifications completed in 2022 and 2021. As Kevin mentioned, our Canada Square property is being managed in contemplation of its eventual redevelopment. As the LRT moves to completion and the commencement of the redevelopment approaches, we expect that certain expiring leases will continue to be either extended on a short-term basis or not at all, leading ultimately to lower occupancy levels and a loss in property revenue. In this regard, as set out in our MD&A this quarter, leases with terms that have already expired in 2022 or that will be expiring before year-end and that have not been or will not be extended, generate approximately CAD 3.7 million in annual NOI. In addition, Canadian Tire will also be vacating a portion of their space at 2180 Yonge Street at the end of 2022. As noted in our Q3 2022 MD&A, this Canadian Tire lease space generates approximately CAD 1.8 million of annual NOI. The process for releasing the space will begin in due course. In the third quarter, adjusted G&A expenses as a percent of property revenue were 2.5%, which is slightly higher than the 2.4% in Q3 of 2021, primarily due to fair value adjustment on unit-based awards, partially offset by increased consulting costs. With respect to our portfolio fair value, the REIT recorded a small positive adjustment of approximately CAD 0.6 million on our investment properties for the third quarter of 2022, mainly driven by growth in the underlying cash flows, almost entirely offset by increases in the investment metrics for certain properties within our portfolio. Though determining fair values this quarter continued to be challenging, there were a few more comparable sales transactions to draw upon than last quarter. This led to a slight increase in our overall portfolio cap rate during the quarter by 2 basis points to 6.07%. Our retail average cap rate increased a couple of basis points, with the change being primarily driven by increased cap rates at certain properties located in smaller secondary and tertiary markets, while the average cap rate for our industrial assets remained flat for the quarter. Distributions in the quarter grew 3.3% over the same period last year to CAD 0.217, resulting in an AFFO payout ratio of 74.3% in the third quarter, which is broadly in line for the same quarter last year. Now turning to the balance sheet. Our debt metrics remain strong, with interest coverage at 3.7 times in Q3 2022 compared to 3.8 times for the third quarter of 2021. CT REIT's indebtedness ratio remains strong and was 40.6% at December 30, 2022 compared to 40.2% last quarter and 41.2% as at year-end. The decrease in the ratio compared to the year end was primarily due to acquisition intensification and development activities completed in 2022 being funded primarily by retained cash rather than incremental debt. As the current interest rate environment remains elevated, we're pleased to currently be largely insulated from refinancing risk as we have no secured debt maturity scheduled to mature until 2024 and no public unsecured debentures coming due until 2025. Our equivalent liquidity remains strong, with CAD 294 million available through our committed credit facilities, along with CAD 6 million of cash on hand and a further CAD 40 million available on our uncommitted facility with Canadian Tire Corporation. With that, I'll turn the call back to the operator for any questions. Thank you. At this time, I would like to remind everyone in order to ask a question, please press star then 1 on your telephone keypad. To withdraw your question, press star then 2. We'll pause for just a moment to compile the Q&A roster. The first question is from Sam Damiani with TD Securities. Please go ahead. Thank you, and good morning, everyone. Congratulations on a great quarter, by the way. Just wanted to start off maybe on the lease extensions that were announced this quarter. Could you give a sense into the average contractual rent step up over the terms and the lease terms of those extensions, and what impact, if any, would be on the straight-line rent accrual next quarter? Good morning, Sam. It's Jodi. Thanks for the question. As mentioned, we did for Canadian Tire renewals, there were 12 lease extensions completed in the quarter. The rates are in line with all of our renewals to date. We do take the long-term view working with Canadian Tire, and the typical 1.5% annual increase, you know, which is compounded every year since IPO does become meaningful over time. I would say, Sam, on average, you know, for those 12 extensions, I think, in that bucket, it would have extended the average lease term by about 6+ years. Okay. On the straight line question, maybe Leslie can take that. Um- We can get back to you. Yes, I'll have to get back to you. I don't have the impact of straight-line rent to hand. Okay. Just switching over to the development pipeline, which is, you know, back to one of its biggest sizes ever. Great to see, obviously, with lots of opportunity. What are the financing plans for that sort of remaining CAD 300-odd million that needs to be spent? Also, when would you start capitalizing interest on the first phase of Canada Square? Sam, as far as financing goes, you know, I think we're really open to, you know, many different alternative forms of financing, whether it's public debentures, it could be some secured debt. If the equity price is right, then obviously we'd consider some equity financing in terms of the overall mix. I think, you know, we're open to various forms of financing. As far as capitalization of interest, we have started capitalizing some small amounts of interest related to the building at 2200 Yonge Street that we put into PUD, sorry, a year or so ago. We are anticipating putting 2190, the other building just beside us, into PUD at year-end. We'll be capitalizing interest on that portion starting in 2023. Okay. I think the nice thing, Sam, just to follow up on that, is we do have, you know, flexibility in terms of our financing plan. We've obviously worked hard over the last nine years to de-lever the balance sheet. You know, we're sitting just over 40% right now, which gives us comfort if in the short term we need to borrow a little bit more than we have in the past. That's probably okay. Still meets within our targets and aspirations. You know, a month or so ago, I would have said equity was off the table. This has been a better week, so we'll just have to see how 2023 unfolds and what our optimized funding strategy will be at that time. Okay. Just lastly, on Canada Square, it's exciting to see, you know, hopefully what will be a final application there, a final design and everything. When do you think, you know, the earliest you could be actually, you know, digging and starting to do some shoring, et cetera? It continues to be highly dependent on completion of the Crosstown LRT. We obviously can't start until they're done. They're using the phase one lands as the staging area currently. There's no formal announcement that's been made in terms of the delay. I think the official timeline is still summer of 2022, which obviously has come and gone or somewhere around there. You know, I think some parts of the line are well advanced and probably almost ready to go. Sitting at the corner of Yonge and Eglinton, we still see a big hole in the ground. Our hope is that by kind of mid next year, they do wrap it up. Obviously that remains to be seen. You know, hopefully, that dovetails with the timing of our application and receiving the necessary permissions, and we'll be able to put a shovel in the ground shortly thereafter. That's great. Thank you, and I'll turn it back. Thanks, Sam. Thank you. Once again, please press star then the number one on your telephone keypad to ask a question. The next question is from Pammi Bir with RBC Capital Markets. Please go ahead. Thanks. Good morning. Just on the NOI impact at Canada Square, how much of the, I think it was CAD 3.7 million that you expect on an annual basis, how much of that is already in the Q3 numbers? Pammi, it's Lesley. I would say none. Those leases generally run to the end of 2022, for those are still income generating till the end of this year. Got it. In terms of next year, presume more will be coming off. Any initial thoughts on what the impact would be for 2023? We generally don't give forward guidance, but if all the leases come off at the end of 2022, I think you'll probably have enough to model the impacts going through forward to next year. I think it would be a smaller impact, significantly smaller thereafter. Yeah. Yeah. Sorry. Yeah. I was thinking about the leases that would be coming off in 2023, not so much in what's already known, but in the 2023 impact. Kevin, you were saying that the impact would be minimal beyond the CAD 3.7 million? Correct. Yeah. Just in terms of the re-leasing prospects on the Canadian Tire space at 2180 Yonge. Any color there in terms of what's, you know, what the prospects are at this stage? Yeah, just to remind our listeners, Oxford is our property and development manager here, so they'll be leading the charge on the re-leasing. Obviously, they're well entrenched in the Toronto office leasing market, seeing what's going on. Obviously, a tremendous depth of skill sets and talent there. So we are hopeful. Obviously, the environment on office leasing is challenged and remains challenged based on the last three years. So I do think it will take some time. You know, it's a big floor plate that we have available. But you know, midtown Toronto only continues to improve in terms of its amenities and its connection and its transit. I don't have a great answer in terms of the when or how, but we're hopeful that in due course, through the course of 2023, we'll identify and secure a tenant and you know and at some point maybe later in the year or thereafter, we'll you know get that space rent producing again. Got it. Just thinking, sorry, what is the total square footage of that lease? It's about 80-90 thousand sq ft. Okay. Last one for me. At what point does, you know, the entire Canada Square property move into the development bucket? I think, Lesley, you mentioned that a portion of it is, but when do you think the whole property will be shifting? Pammi, I mean, the development is probably, you know, a decade-long project done in sort of multiple phases. I think right now we're really just focused on what we're describing as phase one being the north end of the project encompassing sort of the land or hole in the ground, as Kevin described, plus the buildings that we refer to as 2200 Yonge Street and as far south as 2190 Yonge Street. The sort of second phase that encompasses where the sort of parking garage and some of the aspects are in, and 2180, which would really be the third phase, you know, at least a decade out. I think it's gonna be, you know, a little while into the future before we make any decisions on that. Got it. Thanks very much. I'll turn it back. Thank you. Thank you. As there are no further questions at this time, I will turn the call over to Kevin Salsberg, President and CEO, for closing remarks. Thank you, operator, and thank you all for joining us this morning. We look forward to speaking to you again in February after we release our Q4 results. Thank you. This concludes today's call. You may now disconnect.