Good morning. My name is Paul. I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q2 2023 earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then 1 on your telephone keypad. To withdraw your question, press star, then the 2. 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 filings 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, Paul. Good morning, everyone, welcome to CT REIT's second quarter investor conference call. Building on the strength of our Q1 results, I am very pleased with the accomplishments of our team in the second quarter. In an increasingly uncertain macroeconomic climate, our continued focus on providing our unit holders with a consistent, stable, and growing investment option continues to bear fruit. In Q2, we successfully extended leases representing nearly 4.5% of our portfolio, thereby maintaining our weighted average lease term at 8.6 years, one of the longest in the sector. We made solid progress on our developments, completing nearly 200,000 sq ft of new projects, which has now brought our total portfolio gross leasable area to over 30 million sq ft. We also added over 50,000 sq ft of new development projects to the pipeline.
We continue to benefit from the rollout of Canadian Tire's Better Connected strategy and are fortunate to have great opportunities to support our largest tenant and majority unit holders, bricks-and-mortar, real estate-related requirements. The impactful combination of our successful project completions through the course of 2022 and thus far in 2023, as well as the organic growth drivers within our existing portfolio that have contributed to strong same-store and same-property NOI expansion during that time, have led to meaningful growth in earnings and net asset value on a per-unit basis. We have done this all while reducing our payout ratio by over 3% on a year-over-year basis and bringing our leverage ratio below 40%. As we approach CT REIT's 10th anniversary, I am delighted with how far we have come since our IPO in 2013.
Our portfolio has grown, as has our team of dedicated professionals and the capabilities we now possess as an organization. We have established a truly remarkable track record with respect to driving cash flow per unit growth in service of annual distribution increases, while at the same time improving our balance sheet and financial metrics in order to become one of Canada's most reliable real estate investment trusts. CT REIT is well-positioned to withstand the current volatile environment and to continue to deliver on its purpose of providing investors with reliable, durable, and growing results over time. Jodi will now walk you through an overview of our investment, leasing, and development activities, and then Lesley will speak to our financial results. Jodi?
Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce three new investments this quarter, totaling CAD 22.4 million. Once completed, these projects will add an incremental 53,000 sq ft of GLA to the portfolio at a weighted average cap rate of 6.63%. These new investments include the intensification of three existing Canadian Tire stores located in Port Hawkesbury, Nova Scotia, Barrhaven, Ontario, and Peterborough, Ontario. We also completed four projects in the quarter, totaling CAD 54 million, which added an additional 187,000 sq ft of GLA to the portfolio. These included the development of a new Canadian Tire store in Sherbrooke, Quebec, as well as intensifications of existing Canadian Tire stores in Casselman, Ontario, and Chambly and Drummondville, both located in Quebec.
At the end of the quarter, CT REIT had 26 properties that were at various stages of development, with seven projects currently expected to be completed by the end of 2023. These development projects represent a total committed investment of approximately CAD 372 million upon completion, CAD 135 million of which has already been spent, and CAD 96 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 just over 1.1 million sq ft to the portfolio, 99.4% of which has been pre-leased at quarter end. As Kevin mentioned, we were also pleased with our renewal activity in the quarter, which included the completion of 23 Canadian Tire store lease extensions.
Lease extensions for all but one Canadian Tire store with 2024 expiry dates have now been finalized.
In total, leases representing over 1.3 million sq ft of gross leasable area were extended in the quarter, which helped to maintain our weighted average lease term at 8.6 years, one of the longest in the sector. Finally, our portfolio remains 99% occupied, in line with last quarter. With that, I will turn it over to Leslie to discuss our financial results. Leslie?
Thanks, Jodi. Good morning, everyone. As Kevin highlighted, we were very pleased with the solid results delivered by the Wright REIT again this quarter. FFO per unit on a diluted basis was up a strong 7.0% to CAD 0.304 compared to Q2 of 2022. This increase was primarily driven by growth in the same property Net Operating Income, as well as the positive impacts of the intensifications completed in 2022 and 2023. Partially offsetting this increase was our interest costs on our credit facilities due to the higher interest rate environment we are in. Diluted FFO per unit in the quarter was also strong for the same reasons, coming in at CAD 0.330, up 5.4% compared to CAD 0.313 in Q2 of 2022.
Same-store NOI grew by CAD 3.6 million, or 3.5%, as a result of contractual annual rent escalations, contributing CAD 1.3 million, primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases. With the balance of the growth, primarily from the continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately CAD 2.4 million to NOI this quarter. If you recall, the prime rates that drive our interest recovery were as low as 2.7% at the beginning of Q2 2022, and were only up to 3.7% by the end of Q2 last year, as compared to Q2 of 2023, where prime rates were just under 7% for the quarter, effectively a doubling of rates that we are comping over.
In addition, same-property NOI for the quarter contributed a further CAD 2.4 million in NOI from the intensifications completed in 2022 and 2023. These all contributed to a quarter-over-quarter growth in net operating income of CAD 6 million, or a very healthy 5.8%. Excluding fair value adjustments, G&A expense as a percent of property revenue was 3.1% in the second quarter, which was unchanged from the same period in the prior year. The fair value increase of approximately CAD 31.5 million was mainly driven by changes to the growth in the underlying cash flows from completed developments and intensifications, as well as the lease renewals within our portfolio, which include the renewal of the 23 Canadian Tire store leases that Jodi mentioned.
Consistent with our valuation methodology, we had 24 properties externally appraised this quarter, spanning geographies across the country, which are reflective of our portfolio. As a result of the appraisal information and other market data, there was little movement in our investment metrics, with the overall terminal cap rate for our portfolio increasing 2 basis points and the overall discount rate by 1 basis point compared to the prior quarter. Despite the challenging transaction market, limited comparable sales and a continued higher borrowing environment, demand and pricing for necessity-based retail like our portfolio remains strong. Distributions in the quarter grew 2.2% over the same period of last year to CAD 0.217, resulting in an AFFO payout ratio of 71.4%, a decrease of 3.2% over the same period last year, driven by strong AFFO per unit growth.
In Q2 2023, we repurchased units through our NCIB facility that was put in place towards the end of last year. Although no large quantum, we repurchased approximately CAD 1.4 million of our units at an average price of CAD 14.45 in the quarter. Turning to our balance sheet, our debt metrics continue to remain strong, with no significant changes from prior quarter. The interest coverage at 3.74 times was improved from the second quarter of 2022. The indebtedness to EBIT EBITDAFV ratio was 6.63 times, also an improvement from Q2 2022. CT REIT's indebtedness ratio of 39.9% was down from the same quarter last year, which marks the first time our leverage has dipped below 40%.
Although this ratio currently sits slightly below our target range, given the macroeconomic backdrop and interest rate environment, we continue to be pleased with the progress we have made to continuously improve our balance sheet and run our business with financial prudence. We are also pleased to be well insulated from refinancing risks, as we have no debt scheduled to mature in 2024 and no public unsecured debentures coming due until 2025. Our liquidity remains strong, with CAD 152 million available through our committed credit facility and a further CAD 300 million available through our uncommitted facility with Canadian Tire Corporation. With that, I'll turn the call back to the operator, Paul, 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 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question is from Jenny Ma from BMO Capital Markets. Please go ahead. Your line is open. Thank you. Good morning, everyone.
Morning, Jenny. Welcome back.
Thank you. Wanted to dig a little bit into the lease renewals. Congrats on the volume that was completed. Can you let us know if the contractual rent steps are similar to what you've seen in the past, the 1.5% annually? Secondarily, I wanted to ask if there's any ability to insert some sort of inflation protection in rent steps or new leases that you're signing.
Good morning, Jenny. It's Jody. I can answer your question for you. This quarter, approximately 90% of the renewals were the Canadian Tire stores. Most of those were our typical escalations, but we did achieve some higher ones, to your point, in this inflationary market, in our urban markets. We are starting to see some increases, in some, in some select urban markets due to inflation. For the other 10% of the renewals this quarter, the non-Canadian Tire stores, we were quite pleased with our results to getting north of a 10% spread, also reflecting the inflationary times.
In, in terms of the inflation protection, Jenny, that's, that's not something that we're contemplating at this time.
Okay. All right. In terms of the SPNOI this quarter, it was pretty strong. Leslie, you touched on the interest rate doubling being a contributor to that. Is that the main driver of it being up year-over-year, or is there a greater volume of the recoveries themselves that's driving that number? How should we think about this contribution going forward?
Sure, Jenny. Definitely interest rate was a contributing factor. Also during Q2, when we completed the final billings for 2022, too, there was a contribution of sort of just north of CAD 1 million that related to recovery of capital and interest that was related to 2022. A little bit of revenue there that will not be recurring.
Okay.
That'll- that will maybe mute things if you just compare Q2 to other ones. You know, our, our, our same-store NOI, you know, does go up and down a little bit, depending on when we sometimes find development completion. You know, if you look back to Q3 or Q4 of 2022, they were also quite strong because we had, you know, a number of developments come online. There is a bit of variability, you know, in that, in that number quarter-over-quarter, but that would probably be the other contributing factor. It's, you know, the 2022 piece, the change in interest rate, and just also the continued growth in the capital pool that we continue to amortize. As we spend more money on our portfolio, that deferred balance we're recovering from tenants has also been increasing.
Okay.
That was probably the other contributing factor that, that does continue each quarter.
Okay, great. That's helpful. That's all for me. Thank you.
Thanks.
Thank you. The next question is from Pammi Bir, Burr, sorry, from RBC Capital Markets. Please go ahead. Your line is open.
Thanks. Good, good morning. Just maybe I wanted to come back to the renewals for a second, the million square feet. It wasn't entirely clear to me in terms of, I guess, the answer there. If we had to sort of simplify it, what sort of lift did you get on those renewals?
So, Pammi, what I think Jodi was trying to say is, there was about 1.3 million sq ft renewed in the quarter. Not all of that was the 23 Canadian Tire store lease extension. If you look at the breakdown, it's about 90% contributing from the CTR stores and the balance, the 10% being third-party tenancies. The third-party tenancies, we don't have the same rent features as the Canadian Tire store leases with the annual bump, so the spreads we were able to achieve on, I would say, average five-year renewals was over 10%.
Within the Canadian Tire store bucket of lease extensions, we did get the continued annual rent growth, which on average, does approximate the portfolio, but in urban markets, we were able to push the envelope higher than the average, which is, I, I think, a, a, a benefit to us. I think in terms of the composition of the 23 stores, it was more highly skewed to small market than large market, but that's just, a timing pers- issue, I guess, in, in various quarters or various years, that composition and mix changes. We did get... I, I, I would describe it as on average, 1.5%, but there was a focus on, on driving that annual escalation higher in those markets where we're seeing higher inflation.
Right. I guess the 1.5% is the annual escalator that it sort of continues on the renewals. I was just thinking on the actual year 1 renewal, you know, I believe the leases there's a floor, and there's a cap at 12%. That's what sort of I was looking at, is the year one renewal spread.
Yeah.
On the Canadian Tire leases.
Yeah. I get it. So I think the comment I would make is, on average, we actually feel that the portfolio of Canadian Tire store leases is at market. So.
Okay.
For the, the small exception here or there, which does happen from time to time, generally, we don't see a specific lift related to year one of the extension period. It's more a continuation of the annual increases over time.
Okay. Yeah, that's what I wanted to clarify. Thank you for that.
Yep.
Just maybe looking at the development pipeline, you know, it does look like a number of projects were pushed into, to 2025. Can you just comment on maybe some of the drivers there? I'm curious if you're starting to see costs start to stabilize.
I'll take the second part of that question first. I think the short answer is yes, we are seeing costs stabilize. I would say we are seeing them stabilize at an elevated level. Things are still very expensive. And I think part of what's driving that is the fact that it's taking longer. Those, those development completion dates that got pushed out, whether it be municipal applications that are taking longer, the lack of availability of skilled trades, the ability to procure, building systems, equipment, it's all contributing to those delays. I don't think there's one thing that we can point to. I think it's a bit of a global contribution of various impacts, that is leading to project delays, across the country, really.
It's not even regional at this point.
Okay. Then just lastly, on the NCIB, again, you're a little bit active. I'm just curious, you know, with the unit price where it is, maybe a bit higher than what you were buying at in the quarter, what are your thoughts on buybacks at this point versus just the development program, which is still fairly fairly substantial, versus maybe some acquisitions that might be of interest, and curious to what you're seeing on the transaction market as well?
maybe I'll start, and then if Lesley wants to jump in, she, she can. The first thing I would say is the NCIB is probably not our preferred method of allocating capital. I mean, we always prefer to reinvest in the core portfolio or find new investment or development opportunities. There is a level at which we find the need to support our, our unit price, and, and we certainly dip below that floor in the quarter. You'll see the amount of activity was de minimis. It was not large.
I don't think we'll be big users of the NCIB on a go-forward basis, but when it does get to a certain, you know, percentage discount relative to where we feel our NAV is trading, we will, we will jump into the market to support the units. Lesley, I don't know if you have anything to.
No, I think that's, that's definitely where we're going to be using the NCIB going forward.
Thanks very much. Well, I guess maybe just the, to comment on any thoughts with respect to to acquisitions or what's in the market?
Not a ton in the market right now. There's a couple, couple of marketed opportunities, but nothing, nothing that necessarily we're working on. I think I've, I've mentioned in past calls that there's more chatter out there, I would suggest. You know, more people taking calls, more people making calls to explore what it would look like to, you know, to, to, to sell assets. I, I think it's going to be pretty quiet for, for the balance of the year. That's my, my, my best guess.
Thanks very much. I'll turn it back.
Thank you. The next question is from Lorne Kalmar, from Desjardins. Please go ahead. Your line is open.
Thank you. Good morning, everybody.
Good-
Maybe just quickly on the Dufferin distribution center. Can you remind us of the cost and the anticipated yield on the project?
I believe the cost is around CAD 40 million. I don't think we've ever communicated the exact yield on the project. I think we've we've talked about the yield in relative terms for having pursued the net zero building relative to a non-net zero building. I think probably what I would suggest is from a spread to stabilize the value perspective, we generally target 100 to 150 basis points over stabilize, and I think this would be at the short end of the curve relative to the incremental costs.
Okay, fair enough. Then I noticed, the, interest rate range on the debt jumped up, the high end jumped up quite a bit. Was that the credit facility?
Lauren, it's Lesley. That is the credit facility as a result of the interest rate hikes that we're continuing to see.
Hopefully not continuing for much more. Then maybe just lastly, maybe just lastly, would you guys consider doing another unsecured to kind of pay down the line, given where the spread between probably what you get on unsecured and what the rate is on on the credit facility?
Sure, Lauren. You know, there definitely is a spread there. I think we have to also balance the, the quantum of which we're drawn under our line of credit, you know, and, and making sure that, you know, when we issue debentures into the market, that, you know, there's also a sufficient size to, you know, maintain liquidity in any given issue. I think, you know, where, where we are only sort of 150 million drawn is probably shy of, you know, what you've seen us go out to market with for debentures, as of late. You know, definitely on our radar screen as, as a potential opportunity for funding, as we need as we look through things for the balance of the year.
That, that is obviously, one of the things we're looking at, but, you know, probably not today.
Fair enough. Okay, I'll turn it back.
Thank you.
Thank you.
Yes, the next question is from Sam Damiani, from TD Cowen. Please go ahead. Your line is open.
Thank you. Good morning, everyone. First off, just on the yields that you're doing new investments at, and also referencing the IFRS value, discount rate and terminal cap rate. You know, we've seen, obviously, a substantial rise in bond yields over the last 18 months, and I see your IFRS yields are up about 10 basis points. You know, can you just talk about, you know, how you're pricing new investments? You know, you did the 6.6% on the new, new deals announced last night, in the context of the, I guess, the risen bond yields and your IFRS as well.
Sure. I can take that, Sam. You know, I think it's always interesting when we disclose our cap rates on a quarter-by-quarter basis, because it really just describes the, the, the basket of investments that we're announcing at that time. Sometimes it could be more skewed development, intensification, and in, urban markets, small markets. So it, it really is a point in time and a composition, co- a commentary on, on really the composition of that, that, that bucket. I think what we're always trying to do is improve the portfolio quality. So whether that be by, im- you know, improving our assets by, by, expanding them or adding new developments to, to the portfolio, increasing the weighted average lease term, in, in due process.
We also disclose the cap rates, but I would say we're even more focused on IRR, so the annual growth doesn't really necessarily get taken into consideration in the, the one metric we actually speak to in the, in the press releases. Overall, I think we have seen the, the, the yields, the cap rates for our new investment activity rise over time, along with rising bond yields. We've had a lot of conversations that are productive with Canadian Tire on how the market is moving and, and how our cost of capital has impacted our ability to finance some of that new activity. I think we are keeping track lock, lockstep with, with those movements.
Obviously, each particular announcement is a moment in time that speaks to a particular composition of assets and deals. We're trying to, you know, manage obviously the relationship and the ability to continue supporting Canadian Tire's growth over time, when we engage in those discussions as well.
Well, that's great. That's helpful. Thank you. Just a couple quick ones, too, for me to finish off here. I think you mentioned all but one Canadian Tire store lease has now been extended. I wonder if you could just address that last remaining one. Also, just on the third-party leasing spreads over 10%, I wonder if you could be a little bit more specific and compare that to CT REIT's historical average on third-party leasing.
Good morning, Sam, it's Jodi. On your first question, in terms of the all but 1 2024 expiry, that one, there's no issue or anything there. It's, Canadian Tire is just contemplating potential expansion and on-site relocation in that particular case. While they work through that, it'll get extended. Long before the expiry, it'll get extended. It's just, they're trying to sort out what they want to do with that particular asset, which will result in further growth for the REIT. On your second question, in terms of the north of 10% on the non-Canadian Tire stores, this is, I'd say, this particular quarter is probably higher than previous quarters.
I don't know if it's gonna set a future trend in this regard, but certainly we're always looking to get the highest spreads as possible, especially in this environment. We'll see how this plays out with the next round of renewals that come forward. We're quite pleased with this particular spread.
And that spread would be sort of 6%-8% historically, would you say, Jodi?
Yeah, we've always, I, I think high single digits is probably, you know, accurate, Sam, and this would probably be almost double, double that.
Excellent. Thank you, I'll turn it back.
Thank you. The next question is from Tal Woolley from National Bank Financial. Please go ahead. Your line is open.
Hi, good morning. Just wanted to ask about.
Good morning, Tal.
The development pipeline. You know, one of the great things is that, you know, it moves along fairly quickly and converts to cash, you know, in fairly short order. In terms of, like, the ability to grow that maybe or accelerate that, is the rate limiting factor you or Canadian Tire?
It's probably a resource issue more than anything in terms of how quickly we can actually push new projects through the pipeline, collectively, both on our side and Canadian Tire. I would suggest the current level is one we're quite pleased with, in terms of managing risk, and at the same time, growth. You know, to the extent there is more we can do or should do, we will obviously, you know, contemplate adding, adding to the, the size of the pipeline. At nearly CAD 400 million, for the next, call it 24 months, I think that's, that's a level that, that we and Canadian Tire collectively have a level of comfort with.
Okay. Then, just lastly, on the Canada Square development, I'm just wondering, you know, Eglinton LRT, what your best kind of... I know a lot, you know, that kind of has to get done before things can really kick off in earnest, but maybe you can just sort of give us an update on where you see timing and next steps for that project.
Well, before we got on the call, Jody was just complaining about the construction and the fact that she might have got a nail in her tire, so, We see no letup, visibly close to home office, in terms of cues or signals that would indicate it's nearing completion. There's no specific guidance or news from Metrolinx, TTC, or Crosslinx, as it relates to progress they're making. We have no specific update or guidance that we can provide. The only thing I can say is the discussions with the city as it relates to our rezoning proposal that Oxford is managing and leading, continues to go well.
You know, our best guess is, possibly by the end of this year, but more likely the beginning of next year, we're hoping to achieve our rezoning, you know, subject to certain site conditions, but we are working closely with Oxford to advance the plans, take next steps and, you know, hopefully, the timing of our approvals will also dovetail with the timing of the LRT's completion, but that is obviously out of our hands.
Okay. That's great. Thanks very much.
Thanks, Tal.
Thank you. The next question is from Sumayya Syed from CIBC. Please go ahead. Your line is open.
Thanks. Good morning.
Good morning.
Just wondering if you could share your thoughts around setting up the ATM in the quarter and the potential use of any funds?
Sure, Sumaiya. You know, the, the ATM, you know, just as we set their NCIB up last year, we set the ATM up concurrently with the renewal of our base shelf prospectus in the second quarter. Really, you know, for us, it's another tool in the tool belt. You know, we're, we're not necessarily expecting to, you know, see any kind of huge issuances under this, but I think, you know, we, we want to be able to have that as an opportunity, you know, assuming our unit price gets to a level where we would be comfortable issuing equity, that we would have that as another tool that we could use.
We think it suits us with this sort of smaller size, you know, asset and developments, et cetera, that adding, you know, small bits of equity at the right time over the next couple of years would be a good fit for us.
Okay. Thank you for that. This is more of an overarching question, how do you guys view your industrial assets in the context of your portfolio, with the Calgary Centre nearing completion? Would you say that asset is a long-term hold, or would you be open to recycling if the opportunity were to present itself?
I, I think we view them more as long-term holds. They're, they're sort of mission-critical facilities for Canadian Tire. That, you know, for us, we have very long-term leases on, so, with, with obviously, you know, embedded annual growth, and we like that. At about 15%, of our portfolio, a little bit less, you know, it's certainly, a sizable, component. It's one we'd be, we'd be potentially interested in, in growing for the right type of asset. I mean, we're not gonna be, out there speccing industrial land and just trying to compete with merchant developers. We think there's opportunity within the Canadian Tire ecosystem to potentially, find, find more industrial opportunities.
I, I wouldn't suggest that we're looking to recycle capital, as it relates to those assets at this time.
Okay, great. Thank you for that. 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, Paul, and thank you all for joining us today. I hope you enjoy the rest of your summer. We look forward to speaking with you again in November after we release our Q3 results. Thank you. Have a good day.
Thank you. This concludes today's call. You may now disconnect your lines.