Earnings Call: Q1 2021

May 7, 2021

Good morning. I would like to welcome everyone to the Plaza Retail REIT's First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time for you to queue up for questions. REIT. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Michael Zaccuta, DAS' Chief Executive Officer. Please go ahead, Mr. Sakuta. Thank you, operator. Good morning, and thank you for joining us on our Q1 2021 results conference call. We are legally obliged to tell you that today's discussion forward looking statements. We'd like to caution you that such statements are based on management's assumptions and beliefs. Please refer to Plaza's public filings for discussion of these risk factors. Our outlook continues to be very positive. Our portfolio of potential needs and value retail, open air centers located in primary and strong secondary markets across a wide geography are performing well. We had excellent collection results once again in the quarter. We can highlight several factors for this success. Our open air properties leased to central needs and value retailers, our geography with assets in suburban primary markets and strong secondary markets combined with the significant exposure to Atlantic Canada. Our people and our culture of collaborating with our retailers. As a development oriented REIT, we have grown through doing multiple deals with our retailers across our geography. You cannot do this successfully unless you figured out how to collaborate with your tenants. Leasing activity continues to improve. In the Q1, we leased over 444,000 square feet of space, 382,000 square feet of renewals, 35,000 square feet in newly created space and 28,000 square feet of backfill leasing of vacant space. We are seeing a definite uptick in opportunities. We continue to see demand from dollar and grocery stores, pet retailers, value retailers, cannabis retail and fast food players for pizza, chicken, burgers, Mexican food. Please refer to the Q1 2021 presentation that is now posted on our website for an update of our top 3 tenants, our collection numbers and photos of projects under construction and recent store openings. Our construction department is managing more tenant related projects than they were at this time in 2019 pre pandemic, which points to near term revenue growth. Rising construction costs remain a factor and we're looking to offset their effect with higher rents and lower financing costs. It is not always possible to move rents higher, but we are benefiting from low interest rates and cap rates that help us to maintain our net development margins. It's interesting to note that we're seeing 4 different categories of retailers. The retailers, 1, the retailers who never slowed down and never stopped looking at new opportunities over the last year. 2, retailers that were slowed down during the pandemic, but are now looking past the short term challenges facing their business and are looking at new opportunities 3, retailers that want to open stores but are on hold as they cannot easily tour markets without dealing with travel restrictions and 4, retailers that have been severely impacted by the pandemic and are not looking at new opportunities. This 4th category of retailers is a source of some of new opportunities that we are looking at. These retailers have generally populated the enclosed mall and we are seeing very interesting enclosed mall to open air center conversion opportunities as well as empty box store to multi tenant strip transformation deals. We are seeing lower cap rates for most essential needs retail properties. There is little or no demand for enclosed mall retail. There is likely a strong opportunity to acquire enclosed mall retail at a very deep discount. Although there's a lot of potential upside for this property type, Plaza is not structured to acquire enclosed malls unless it has a clear plan to transform the property into an open air style center. We are therefore focused on these enclosed malls that have the required physical and location characteristics that suit a complete redevelopment. We continue to pursue ways of creating unitholder value through redevelopments and new developments in primary and strong secondary markets through non core Property Dispositions and Accretive Financings. We have a solid business plan to deliver real per unit growth going forward. We believe that there is an Atlantic Canada story here that is being overlooked or underestimated by investors. We have an important exposure to growing markets in Atlantic Canada such as Halifax, Moncton or Charlottetown. The Atlantic region has had The most success in Canada in navigating through the pandemic and Plaza clearly benefits from this success. Our very strong collection rates combined with decreasing payout ratios ensures the sustainability of our future distributions. We are very confident in our future prospects as we benefit from our highly engaged management team's capability to execute the business plan, our leasing development team's ability to lease and develop high quality projects, our core portfolio of pharmacies, grocery stores, dollar stores and other essential need tenants that have performed exceptionally well over the last year, our value retailers who have shown that they can prosper and our open air retail centers during difficult times, our large network of properties that are important part of any retailer's strategy to sell products through multiple channels and our strategy of being diversified across a wide geography with open air properties that often dominate within their community. As a small cap REIT, we are nimble enough to adjust to changing market conditions. We are managing and allocating our capital carefully. We build what we lease often in multiple phases and are rewarded on our development program with attractive yields. We are successfully selling non core assets well over IFRS values. We are observing real demand from investors for quality grocery pharmacy and dollar store, open air centers or strategically located single use sites. This demand should eventually translate into higher IFRS values for our assets. Retail properties conference call. I will now turn the call over to Jim Drake, Pazza's CFO. Jim? Thanks, Michael. Despite the ongoing pandemic, our results for Q1 were strong. This is due to the strength of our tenants, our team and our portfolio. Rent collections remain high at almost 99% in Q1 98% for April to date. We also continue to collect the vast majority of deferred rent in accordance with the agreed repayment schedules. During Q1, there were only nominal deferrals and abatements granted and we took a $440,000 bad debt provision. FFO and AFFO per unit for the quarter, which benefited from minor insurance proceeds, decreased admin expenses and finance costs were $0.093 $0.084 respectively, up 6% and 12% over last year. Our liquidity at quarter end totaled $48,000,000 including cash, operating line availability and unused development and construction facilities. We also had unencumbered assets with a value of approximately 17,000,000 For long term debt, we placed $20,000,000 of mortgages during the quarter at a weighted average interest rate of 2.58 percent and we continue to refinance at very low rates. We have $35,000,000 of long term mortgages rolling for the remainder of 2021, 40% of which relate to grocery or pharmacy anchored properties. And with an overall loan to value of approximately 40%, we are confident we will refi these mortgages. Subsequent to quarter end, we issued a $12,000,000 convertible debenture via private placement. Demand for the issue was very strong. Proceeds will be used to repay maturing debentures in May June of this year, enhance liquidity and fund our development program. Under our development program, during the quarter, we opened a Loblaws grocery store at our Hogan Court development in Halifax and delivered a few pads across the portfolio. We also remain very active on the development front and have advanced a number of projects across our geography. For asset sales, we sold a few non core QSRs and the parcel of excess land during the quarter for net proceeds of $2,700,000 We are seeing very strong demand for our small non core assets at attractive pricing. Our capital recycling program remains a very efficient source of capital, allowing us to reinvest the proceeds in new developments and redevelopments, which are often grocery anchored strips at healthy spreads over the hurdle rates on sales. Finally, on fair value, we recorded a $3,000,000 gain on investment properties during the quarter as a result of some minor cap rate compression and appraisals obtained during the quarter. Our weighted average cap rate is now at 7.17% and we anticipate further compression of that cap rate and fair value appreciation going forward. Those are the key points relating to our results for the quarter. We will now open the lines for any questions. Operator? Thank you. Ladies and gentlemen, we will now conduct a question and answer session. REIT. Your first question comes from the line of Kyle Stanley from Desjardins. Your line is open. Thanks. Good morning, guys. Good morning. Good morning. Could you be able to remind us What's included in the other income line and maybe if what was reported this quarter is a good run rate? I mean, it looks like that number has been a little bit elevated over the last two quarters. So generally that includes fees build to partners on co owned developments. In this quarter, we had about $300,000 of insurance proceeds, which run through that line. So it's a little higher than our normal run rate this quarter. Okay, perfect. And then so in your disclosure, you're referencing new opportunities for development and redevelopment across your geographies. I'm just wondering if you could provide a bit more color on that and maybe What exactly kind of what development projects you'd be looking at completing? So if you look at our list in our MD and A, we'd be able to list of projects presently under construction and then a list of the in planning and development. So a number of in planning and development projects Will be launched this year. Exact timing, it's very difficult to pin down today. There obviously is there is pandemic related stall on some of this stuff of getting permits and getting through planning. But you'll see us we'll be building and Sault Ste. Marie will be building in Cambridge this year, will be building in Oshawa, will be doing some building in Smiths Falls, Continue to build in Halifax and other places in Atlantic Canada and as well Some continued projects in Quebec. We have some projects under construction present in Quebec, in Sherbrooke, in So those will continue and will contribute In a meaningful way as they come on stream. Okay. Thanks. And you mentioned you had a good quarter on the leasing front. Is the demand you're seeing, is that broadly across your portfolio? Or would you say it's more specific to a Certain geography or asset type? No, I think it's pretty broad. Obviously, It's the Open Air Centers. We're having a good success in our leasing efforts. There's certainly a lot more activity today than last year. We're seeing a lot of positive signs about leasing. Okay, Perfect. And just the last one for me. You mentioned some of the mortgage refinancing you've been doing. Over the balance of this year, do you expect to be able to Finance maybe any of those maturing mortgages and just to further enhance liquidity and fund future development? We will. So as I mentioned, the maturing loan to value is about 40%. So we will upward refi certain of those mortgages to do exactly that. Okay, perfect. That's it for me. I'll turn it back. Thanks. Thank you. Thank you. Your next question comes from the line of Sumayya Syed from CIBC. Your line is open. Thanks. Good morning, everyone. Good morning. Michael, you mentioned that you would be sort of in a more disciplined way exploring opportunities to acquire enclosed malls as long as there is a clear vision for transforming them. So is there anything you're currently exploring that meets this criteria and could come to fruition in the near term? Yes. No, we're very active in looking at these opportunities and making proposals so that hopefully we'll see Some new activity in the mall to open air center transformation business. Yes, but clearly those opportunities are there And it's all about you have to buy it right. We've talked about this in past calls. If you don't buy it right, it becomes Very difficult. And if you buy it right, well, you can definitely be successful. These are not easy undertakings. We have a lot of experience though, so we really like this type of business. It certainly distinguishes us from the market And it's really exciting when you have a, for example, a grocery anchored and closed mall that nobody wants and you've created a grocery anchored strip and all of a sudden that's what everybody wants. So I think that's a very worthwhile process. So we're that's a priority for us. Right. And then the 2nd category of retailers you mentioned were those that slowed down, but looking to move past short term challenges. Just wondering what kind of retail falls into this category? It's more the I would classify it as value retail than anything else. There's some specialty mixed into that. So again, some of these people would not have Had any interaction or very linked interaction in 2020, they were just on the sidelines and trying to work that your way through the pandemic. Now all of a sudden, they are open for business. So again, that's very reassuring for us as a development and growth oriented REIT that all of a sudden we're seeing not just the pure essential needs people, we're seeing Some of the value in specialty retailers looking for new opportunities. All right. And just lastly, I wanted to get an update on how discussions are going on your enclosed mall renewals in terms of rent and really strong purchasing. Well, it's obviously very challenging on the enclosed mall front And will continue to be challenging. That's quite clear. Fashion has been terribly impacted and It's going to take some time. So we're battling to maintain occupancy levels And rent in the enclosed mall world. Fortunately, it's a small part of our business. Right. Okay, thanks. I'll turn it back. Thank you. Thank you. Mr. Zaputa, there are no further questions at this time. Well, thank you, operator. Ladies and gentlemen, this concludes conference call for today. Thank you for participating. Please disconnect your lines.