Good morning. My name is Maude. I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q1 2023 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, please 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; and Lesley Gibson, Chief Financial Officer. 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 filing for a discussion of these risk factors, which are included in their 2022 MD&A and 2022 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, Maude. Good morning, everyone, Welcome to CT REIT's first quarter investor conference call. I am pleased to report that 2023 is off to a great start for CT REIT. Despite the uncertainty that continues to permeate the macroeconomic environment, our resilient portfolio and consistent growth were once again on display in Q1. Lesley will provide more details in terms of our results, but I want to call out a few key metrics that highlight just how strong the quarter was for us. Diluted AFFO per unit growth on a year-over-year basis came in at 5.8%. Same property NOI increased by 4.5%. Our indebtedness ratio remained at a very conservative 40.7%, and we lowered our payout ratio even further to 73.8%.
The combination of this strong growth and conservative financial management gave our board the confidence to approve a distribution increase of 3.5% that will be effective with the July payment, the 10th increase since our inception. On a cumulative basis, CT REIT has raised its distributions by 38.2% since our IPO in 2013, which is a true testament to the REIT's solid performance and success over the years. As part of our better-connected real estate strategy, we continue to work alongside Canadian Tire, our largest tenant and majority unitholder, to unearth enterprise-wide opportunities to create value within our collective portfolios, and these efforts continue to take shape and contribute to our financial results.
For example, the Canadian Tire store intensifications completed over the last 12 months have meaningfully driven same-property NOI growth this quarter, and we are fortunate to have over 20 store expansion projects currently in the pipeline, which are set to deliver nearly 700,000 sq ft of incremental gross leasable area over the next two years. Opportunities to surface embedded value in some of our urban assets by seeking density permissions, funding other Canadian Tire retail and supply chain investments, and developing and advancing our ESG strategies are all ways that we work closely together with Canadian Tire. Our 350,000 sq ft distribution center development in Calgary, Alberta, is yet another great example of how we collaborate with CTC to create better connected opportunities.
We are proud to announce last night that this project has now achieved the Zero Carbon Building design certification from the Canada Green Building Council. Not only does this development further expand CT REIT's industrial holdings and our ventures into responsible development, but it is also expected to increase the efficiency and sustainability of Canadian Tire supply chain. We are very excited about what the future holds and CT REIT continues to be a durable, reliable, and growing choice for investors seeking our dynamic combination of growth and stability. Working closely with Canadian Tire, we have great opportunities to leverage our unique relationship to the benefit of our unitholders, and I am proud of the work that our teams have done together to convert these opportunities into meaningful results.
With that, I will turn it over to Jodi and Lesley to walk you through an overview of our investment, leasing, and development activities, as well as our financial results. Jodi?
Thanks, Kevin. Good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce 1 new investment this quarter totaling CAD 6.6 million. Once completed, this intensification will add an incremental 22,000 sq ft of GLA to the portfolio at a weighted average cap rate of 6.37%. We also completed one CAD 13 million project and added 39,000 sq ft of GLA to the portfolio from the development of mid-box and commercial retail space adjacent to the Canadian Tire store that we built last year in Moose Jaw, Saskatchewan. At the end of the quarter, CT REIT had 27 properties that were at various stages of development, with 11 projects currently expected to be completed by the end of 2023, which is consistent with our development pipeline over the past several years.
These projects represent a total committed investment of approximately CAD 389 million upon completion, CAD 141 million of which has already been spent and CAD 123 million of which we anticipate will be spent in the next 12 months. Once built, these projects will add a total incremental gross leasable area of nearly 1.3 million sq ft to the portfolio, 99.4% of which has been pre-leased at quarter end. We were also pleased to have completed two Canadian Tire store lease extensions in Q1. At 8.5 years, the weighted average lease term for our portfolio continues to be one of the longest in the sector, and our portfolio remains 99.2% occupied, in line with last quarter.
As we noted on our last call, we had one Bed Bath & Beyond within our portfolio that was located in our Collingwood Shopping Center. The Bed Bath & Beyond lease has now been assigned to Winners pursuant to the court-ordered process. This location is adjacent to a current Winners store, and it is expected that they will use the former Bed Bath & Beyond premises for their HomeSense banner. We are pleased that this has come to a resolution, and that the center continues to attract and be occupied by high-quality retail tenants. As Kevin highlighted, we achieved a significant milestone at our Calgary Distribution Center by obtaining our net zero certification, one of the first industrial developments to receive such an accreditation to date.
Our leasing, operations, development, and construction groups went to great efforts to design and construct this building so that it met the rigorous standards of the Canada Green Building Council's Zero Carbon Building design criteria, which include thermally improved building construction, increased airtightness, a building-wide geothermal heating and cooling system, and roof-mounted solar panels. Once the building is operational for a predetermined period of time, we will be applying for and expect to receive the Zero Carbon Building performance certification, which is based on the building producing as much energy as it consumes. I am proud of the accomplishments of our cross-functional teams and the positive impact that this project will make. With that, I will turn it over to Lesley to discuss our financial results. Lesley?
Thanks Jodi and g ood morning, everyone. As Kevin highlighted, we were very pleased with the solid results delivered by the REIT again this quarter. AFFO per unit on a diluted basis was very strong, up 5.8% to $0.294, which is primarily driven by growth in AFFO exceeding the growth in weighted average diluted units outstanding. Diluted FFO per unit this quarter was $0.320, up 4.2% compared to $0.307 in Q1 2022. Net operating income of CAD 107.4 million, an increase of 4.5% or CAD 4.6 million compared to Q1 2022.
Same-store NOI growth grew by CAD 2.5 million or 2.5% as a result of the contractual annual rent escalations contributing CAD 1.8 million, including the 1.5% average annual rent escalations included in the Canadian Tire leases. The balance of the growth, primarily from continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately CAD 1 million to NOI in the quarter. Same-property NOI for the quarter grew CAD 4.6 million or 4.5% as a result of an increase in same-store NOI, as well as CAD 2.1 million in NOI from the intensifications completed in both 2023 and 2022.
Excluding fair value adjustments, G&A expense as a percent of property revenue was 3.0% in the first quarter, which was slightly less than the same period in the prior year of 3.2%. The fair value decrease of approximately CAD 4.2 million was mainly driven by changes to underlying investment metrics in our industrial portfolio, partially offset by cash flow growth during the quarter. The overall terminal cap rate for our portfolio increased 2 basis points and overall discount rate by 3 basis points. Distributions in the quarter grew 2.3% over the same period last year to CAD 0.217, resulting in an AFFO payout ratio of 73.8%. As Kevin already mentioned, we announced a 3.5% increase to the monthly distribution effective with the July 2023 payment to unitholders.
This is the 10th increase in as many years, and we're pleased to have been able to raise our distributions at least once per year since inception. Turning now to the balance sheet, our debt metrics continue to remain strong. The interest coverage ratio at 3.70 times improved from the first quarter of 2022. CT REIT's indebtedness ratio of 40.7% was broadly in line with last quarter. With the current interest rate environment expected to remain elevated for at least the balance of the year, we're pleased to be presently insulated from refinancing risk, as we have no debt scheduled to mature until 2024 and no public unsecured debentures coming due until 2025. Our liquidity remains strong, with CAD 135 million available through our committed credit facility and a further CAD 300 million available on our uncommitted facility with Canadian Tire.
With that, I will 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 the number one on your telephone keypad. You may cancel your question at any time by pressing star two. We ask that you limit yourself to one question and one follow-up. There will be a brief pause while participants register for questions. We thank you for your patience. Our first question is from Lorne Kalmar from Desjardins. Please go ahead.
Thanks. Good morning, everyone, and congrats on another solid quarter. Quick one from me. There was a little bit slower on the investment activity this quarter. Was that just a matter of timing, or are you guys expecting a slower year just given the broader market volatility?
Good morning, Lorne. No, I wouldn't read too much into it. I think, you know, it's somewhat seasonal in nature in terms of how we schedule the projects. Canadian Tire certainly remains committed to their better connected strategy. If you recall, a component of that was investing CAD 1.2 billion in the store and supply chain networks and improving the real estate. We're still optimistic that the pipeline will remain robust. Obviously, there'll be quarters where there's more or less to announce, and this just happened to be a bit of a quieter quarter.
All right. That's all for me. Thank you.
Thank you.
Thank you. Once again, please press star 1 at this time for any questions or comments. Following question is from Himanshu Gupta from Scotiabank. Please go ahead.
Thank you, good morning.
Morning.
Just on the IFRS valuation, I mean, do you think you know the impact of higher debt financing is now fully reflected on your discount rates or terminal gap rates, where it's been almost one year since we, you know, started seeing the spike in the bond yields?
Certainly an interesting question. I can't say for certain. I mean, we've seen pricing move a little. Obviously retail has been a little less impacted some than some other asset classes. We've saw positive leverage dynamics impacting our sector, which I think is a good thing. It has fared us well. You know, to the extent we see more transactions, I think the last year has still been pretty quiet on a relative basis, that could prove out to have further impacts on valuation. That obviously remains to be seen. From our perspective, we think we're tracking to market at this point. Where market goes, obviously is uncertain.
Fair enough. Are you seeing, like, return of transactions in the market? I mean, it's been a slow second half. Are things finally picking up given that, you know, you're seeing some kind of stability in ten-year and five-year as well?
I would say it's been really lumpy. I mean a lot of fits and starts. Some things that have been marketed unsold, some things that have gone through. There are a couple transactions that we believe are in progress that we're following because I think they'll be - they'll demonstrate kind of where the market is sitting for certain quality retail assets. Certainly not completed as of yet. It's choppy.
Fair enough. Okay, thank you. You know, just turning to Calgary Distribution Center you know, first of its kind, I think mentioned by you, net zero carbon building. Are these building, you know, getting a rent premium over the traditional buildings out there? I mean, just getting a sense of the market there.
Yeah. We've talked about that on past calls, Himanshu. You know, there was a bit of a premium that we received, and really what that worked out to be equal to was the utility cost savings that we were able to pass along to the tenant. I don't think there's necessarily a premium for the cachet of being a tenant in a net zero building. I think people are still focused on, you know, on keeping occupancy costs as low as possible. I think it is gaining importance to users, especially institutional quality users. Our feeling though, is the building is more valuable from a cap rate or discount rate perspective, terminal cap rate perspective, for the fact that it is net zero.
We think there are buyers out there that would pay a premium for it, and I think there's also some element of future cost avoidance that could play into the valuation. The combination of the slightly higher rent and the lower terminal cap rate, certainly had an impact on our underwriting.
Thank you. That's helpful. Last question is, I mean, obviously you announced a distribution hike. Congrats on that. Any thoughts on buyback as well? I mean, the current price is below your book value. Is that also becoming a priority here on the buyback side?
Himanshu, it's Lesley. you know, I think for the NCIB, really it's opportunistic for us. I think, probably not at the current levels where we are. I mean, we continue to watch things every day, and if things get to a certain point, we could be in the market. I don't think we're there today.
Got it. Okay. Thank you. I'll turn it back. Thank you.
Thank you.
Thank you. Our following question is from Tal Woolley from National Bank Financial. Please go ahead.
Hi. Good morning.
Morning.
I'm just wondering, you know, a lot of your peers who have sort of gotten more into mixed-use development have effectively published a, you know, density estimate or, you know, pipeline that, you know, tries to give some sort of shape and dimension to the development opportunity within their portfolios. Is that something you envision a path CT going down anytime soon?
I think internally we've done our own kind of scrub of the portfolio and where we think density opportunities are. I'm not sure that we've honed in on the exact amount of density that could be built. I mean, you'll have to recall that our urban sites have operating Canadian Tire stores on them with long-term leases and renewal options. You know, we've always said we don't have a mixed-use residential development program. But that doesn't mean we shouldn't be investigating how to surface embedded value through the possibility of seeking those density permissions and working with Canadian Tire to determine if there might be a path. I don't think we'll be out publishing our density potentials in the near future, because it's still a work in progress and probably a longer-term project for us.
Certainly, we also have great urban sites. I mean, about 45% of our portfolio would be in VECTOM. We have a lot of sites that are adjacent to subway infrastructure and transit. Certainly, we are commencing the work to think our way through what they could be and how we might get there. I think it's a longer ways away for us.
Okay. Then last week, Leon's group announced, the potential for them to spin out, REIT about 5.2 million sq ft. I'm just wondering, like, strategically, is that, like, the type of transaction that CT REIT would ever consider? I don't mean specifically Leon's, but if there were another retailer out there, that maybe wasn't getting credit for the value of the real estate that they were owning, that you could structure a relationship such that, the properties could be vended into maybe an affiliated partner retail REIT.
I mean I think the comment I would make on that, Tal, is we're always mindful of the opportunity set out there, and we'll evaluate each and every one of them as appropriate. I think it's great that there could be another net lease REIT out there to prove out how undervalued we are on a multiple basis, especially in relation to our peers in the U.S. You know, certainly there's a lot of opportunity and a lot of interest, and the net lease sector is still commanding a premium from a pricing perspective. The more data points the better for us.
Okay. Thanks very much. I'll leave it there.
Thank you.
Thank you. Our following question is from Sam Damiani from TD Cowen. Please go ahead.
Thanks. Good morning everyone. just wanted to start off by circling back on the fair values. Looking at the discount rates and terminal cap rates year over year, it looks like they're up, you know, less than 10 basis points. Just wondering if you could, maybe shed some light on how you sort of triangulate that with the market cap rates we see out there and any big differences between the retail and the industrial properties within the portfolio?
Yeah. I mean I could try to take that, Sam. I mean we've obviously have our fair value process in place, and we benchmark ourselves with as much data and market-based transactions as we can get our hands on. What we're reporting reflects what we're seeing out there. You know, we disclosed this quarter that a contributor to the small tick-up in rates as it relates to our valuation this quarter was related to our industrial portfolio. You know, we have long-dated leases in our industrial assets. You know, obviously, what we're seeing in the industrial transaction market is short duration leases where people think they can get at the rents and markets are commanding a bit more of a premium relative to long-dated leases.
That's the movement or the contributor to the movement this quarter. We were pretty conservative, you know, over the last number of years in terms of writing the cap rates down, and I think we've treated the way back up similarly. On a cumulative basis or an overall differential basis, I don't think, you know, the swings have been as volatile in our portfolio.
That makes sense. T hat's kind of the answer I was expecting. Just on the rent bumps in the quarter, Lesley you talked about those, and I think maybe the line at least for me, cut out a little bit. Was it CAD 1.8 million of rent bumps in the quarter? Is that what you said?
Yes, Sam. It was about CAD 1.8 million was the contribution for the same store increase to NOI.
Okay.
It was the total increase to NOI, yeah.
Okay. What portion of the overall Canadian Tire leases saw their rents bump in the first quarter versus. the bump in the -
I don't have that.
latter part of the year?
I don't have that split to hand, Sam.
Okay. maybe just on the debt stack. If I'm not mistaken, the weighted average interest rate actually declined 9 basis points from year-end. What would've caused that?
One, we had in the quarter, we repaid the mortgage against the Canada Square property. That had a little bit of a higher weighted average interest rate than the other ones. That probably would have been one little bit of a contributor. The other piece is really just the, probably the weighting of what we have drawn on the line versus the rest of the portfolio that have remained stable.
Okay. What remaining NOI is coming in from Canada Square that would fall away eventually over time?
You know, as I mentioned before, I think the change in the leases for Canadian Tire sort of fell away back in January. You know, there are some smaller tenancies in our 2200 Yonge Street building, you know, over, I would say, the course of 2023 and into 2024, as we approach development that will fall away. It's a pretty small number relative to the other pieces at this point. You know, those will fall away in increments of, you know, 1,500 sq ft over time in bits and pieces over the next probably 18 months.
We hopefully some of that would be offset by the re-leasing of the vacant space in 2180 Yonge that will probably take place hopefully in the next year or so.
Okay. Okay, perfect. Last one for me is just on the capitalized interest that did jump a bit this quarter. Is that, I guess, the new run rate? Obviously, the transfer to PUD for, from, with 2190 Yonge is I guess, the reason. Is that a good run rate going forward?
I think that's pretty fair, Sam. You know, year-over-year, obviously, the run rate had a different interest rate a year ago, and so we're still seeing over the buy if you look quarter-over-quarter as well.
Okay. That's it for me. Thank you.
Thank you. Our following question is from Pammi Bir from RBC Capital Markets. Please go ahead.
Thanks. Good morning. Apologies if this was answered already because my line got disconnected. Just with respect to capital allocation, I think you mentioned some transactions in the market. Can you just talk about what you are seeing from an investment standpoint? Are there opportunities out there, or is capital mainly earmarked for developments?
I'd say it's slow in terms of seeing marketed opportunities. I think, you know, for us, as in past years, we've always seen the best, the best potential opportunities to transact with third parties being more relationship-based and off-market. We continue to engage in dialogue with others, for net lease assets or Canadian Tire anchored properties. You know, I think we still like allocating the majority of our capital towards Canadian Tire-related development. Obviously, that is a big bang for our buck, and we view that as low risk development where we can allocate capital and get a return fairly seamlessly and quickly. And obviously with Canadian Tire's store and supply chain program, there's more than ample opportunity for us to do so over the near term.
I think that's where you'll probably see the majority of our capital being allocated through the course of this year.
Got it. Just on the transactions that you did reference, what types of, you know, retail are these? Are they sort of traditional, power center type, grocery anchored or net lease type assets? Or what can you share?
There's been some grocery anchored stuff, some shadow anchor stuff, some mid-box, quality product, I would say. It's actually kind of across the country, and I think it seems to be mostly private buyers who are on the other side.
Any noticeable shift in pricing that, maybe you know, is more notable to you in terms of relative to, say, over the last, 12 to 18 months from a cap rates perspective?
No, not really. A couple of them have been at lower cap rates than I would have thought or expected. Some of those are on the more urban side. I would say they may have redevelopment potential, but it would be much longer term, but people are still willing to accept a lower yield for that future upside. No, nothing too out of the ordinary.
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, Maude. Thank you all for joining us today. We look forward to welcome you to our annual meeting of unitholders, which we will conduct virtually later this morning. We hope that you will be able to listen in, and we look forward to speaking with you again in August after we release our Q2 results.