Earnings Call: Q3 2019

Nov 7, 2019

Earnings release

Good afternoon. I would like to welcome everyone to the Plaza Retail REIT Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be given at that time for you to queue up for questions. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Mr. Michael Zaccuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zaccuta. Thank you, operator. Good afternoon. Thank you for joining us on our Q3 2019 results conference call. We are legally obliged to tell you that today's discussions include 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 a discussion of these risk factors. We continue to be very positive about our business. Our strong pipeline of deals is starting to deliver robust growth that will continue into 2020 as revenues from new developments and redevelopments kick in over time. Our niche of value, convenience and specialty retail continues to perform. At the end of September, we attended the Toronto ICSC Convention. Our leasing team met with over 70 retailers or their brokers. The retailers present at the conference were there to pursue deals, and we see continuing demand for space in our market niche. Today's growth oriented retailers are found in the following categories: value, grocery, pets, sporting goods, specialty businesses, QSR, restaurants and fitness. Our leasing deal volume is solid, and we remain confident that these activity levels will continue into 2020. On our last call for Q2 results, we looked at a number of photos of projects under construction. Through the Q3, we started to see the opening of new stores in these projects. For today's call, we have included some recent photos of new stores on our website. You can open the presentation by going to our website, www. Dotplaza. Ca, click on the Investors Relations section, then click on Financial Reports and scroll down to Presentations and click on Q3 Analyst Conference Call November 2019 photos. The first slide shows the recently opened PetSmart HomeSense and Marshalls at our Galway project in St. John's, Newfoundland. The second slide shows a new Dollarama at Galway. We then move to Halifax, and the photo shows a new Value Village in a former Future Shop premises. We then continue down the highway to our Halifax Bears Lake property, where we replaced Home Outfitters with Giant Tiger and Canada Computers. Moving into New Brunswick, we then see a photo of our newly built RENS PET in Dieppe. In the next slide, we move to the Montreal suburb of Dalard Desormeaux, and we see a photo of a recently opened Winners store. Moving off island to Laval, we then see a new freestanding Dollarama. Heading further north of Montreal, we see a photo of a recently opened Princess Auto, their first store in Quebec. Across the parking, we just opened a Quebec cannabis store in our Saint Jerome development. Moving east along the 401 to Brockville, we see a photo of the recently opened Leon's, a space formerly used as common area and small vacant enclosed mall stores. In Q3, we continued construction of new stores in Galway as shown on the next two slides. The third, the following slide shows the construction of a new facade on our QISPAM SIS property that we acquired last December. The construction of a new structure in front of the existing building is a creative way to transform a property's image. We have successfully used this transformation strategy in other projects as we greatly improved tenant signage and modernized the property's image. The next slide shows the construction of a milestone restaurant in Moncton, New Brunswick. We then move to Granby, Quebec, where we are building a small pad for Pizza Hut and Yeezy Financial. The next slide shows our Brampton redevelopment well underway. We have constructed new building areas and are presently demolishing the old out of day part of this center. We then move to Mississauga, where we see photos of the Milvatie facilities under construction. This deal has been structured as a land lease. I trust that this illustrates that retail is still very much alive and that growth opportunities are available to real estate entrepreneurs. We continue to see opportunities where others do not. An active developer such as Pasa has a true advantage as we are constantly interacting with retailers adjusting to changes in retail real estate. We are very active in pursuing opportunities such as the redevelopment of challenged and closed malls, recycling obsolete retail buildings, new developments following demolition of existing building or buildings and new development following land assemblies based on demand from growth oriented retailers. Our properties are typically smaller and very community centric, attracting customers on a regular basis as they conduct their pre- and post work routines. Plaza's tenant lineup feature value specialty and necessity based retailers who acquire a local physical presence. We are confident that our value add business model is poised to take advantage of current retail trends and will create significant value for our unitholders. I would like to welcome Jim Drake, our new CFO, to the call. This is Jim's first conference call, so everybody will go easy on him. Jim, the floor is yours. Thank you, Michael. In summary, Placer's results for the quarter year to date were impacted by a few items considered nonrecurring, namely 2 significant leasebuyer transactions and nonrecurring general and admin costs. Excluding the impact of the leasebuyouts, same asset net operating income, which excludes any expansions or new construction on same assets, was up compared with prior year, 2.1% for the quarter and 1.6% year to date. Also excluding the impact of nonrecurring items, FFO per unit was up as well, approximately 15% for the quarter and 6% year to date. The results show our recent developments, redevelopments and acquisitions are having a considerable positive impact on our NOI and FFO. In addition, other income, which generally represents fees billed to our partners on co owned properties, including leasing, development and financing fees on properties under development or redevelopment, is up notably over last year. This is important as this signals that the rate of rental revenue from these additional developments and redevelopments will follow shortly. On asset sales, we sold $19,600,000 of noncore properties to the end of the 3rd quarter at values above our IFRS values, generating $11,000,000 of cash. Dollars 12,700,000 of these sales were former key properties that had an underwritten value of $11,700,000 As well, we recorded another meaningful fair value gain on investment properties during the quarter due to a further decrease in cap rates, largely stemming from higher values on 3rd party appraisals received. Total fair value gains for investment properties year to date were $19,800,000 or approximately $0.19 per unit of net asset and value creation. These sales and third party appraisals continue to show there is value in our assets beyond that recognized on our balance sheet under IFRS. We continued our major refinancing program, where we are refinancing and placing new mortgages, locked in historically low rates for long terms and generating capital for our business. To date, we have closed on $161,000,000 at 100 percent of long term financing for longer terms, better amortizations and generally lower interest rates. This program has generated $28,000,000 of cash for Plaza, which has been used to reduce our operating line, thereby reducing operating line interest going forward. We are also currently working on $49,000,000 at 100 percent of long term financing, which should generate almost $7,000,000 of additional cash for Plaza. As the market remains a borrower's market, we will continue to review our portfolio for financing and refinancing opportunities. Finally, under our normal course issuer date to September 30, we repurchased 584,000 units, and we continue to repurchase units. We believe this is a desirable use of finance, is accretive to FFO per unit and in the best interest of unitholders. Those are the key points relating to our financial results for the quarter year to date. We will now proceed to open up the lines for any questions. Operator? Thank you. And our first question comes from Jenny Ma from BMO Capital Markets. Welcome and congratulations, Jim. Thank you. So Michael, you mentioned that there were some key REIT assets that were sold. Can you remind us again that you were selling some assets in a high volume in the past, but are these still part of that initiative or are these sort of opportunistic sales of former CREIT assets? I guess a little bit of both. Some of it is opportunistic. Some of it was planned based on lease renewal and us trying to manage a little bit of timing in terms of losing NOI. So how much of the Key REIT assets would be left for sale over the next year or so? It's there are still assets that I believe will be sold. The numbers will not be significant. They will be less than what we've seen to date. Okay. Moving on to the refinancing opportunity. The refi that you've done this year was sort of at a weighted average of 3.9%, which seems a little high in the current context. So I'm just wondering if you can give some color on what we can expect for future refinancings and whether or not that 39% may have been weighted towards sort of earlier this year when the rates are a little bit higher. It was a bit of weighted to earlier this year, and we did some blend and extends on existing mortgages that had a fair bit of term left. So we had a slightly higher rate. Going forward, we'll see more market rates, which would be under 3.9.5 today. Okay. And with the view just because you're coming off a higher in place rate to really maximize the term you can get on these renewals? Absolutely. We're generally very conservative on the mortgage front, so we'll say longer term, over shorter term, subject to existing asset requirements. Okay. And then lastly, Michael, have you had any conversations with Morguard following the announcement? Yes, we just had some very simple discussions talking about what's going on. And I think that the actually, the newspaper article that came out after that was very reflective of our discussions where they like our asset class, they like our management, they like diversification of our geography, and they saw an opportunity, and they seized it and nothing more than that. So is the expectation that they'll remain a passive investor? Or do you expect them to somehow get involved in parts of your business? I think I don't see them as I see them more as an investor. If we felt perhaps that they could help us, I think they would be prepared to look at that, but that's not has not been our discussion to date. Okay. So fair to say the lines of communication are open and cordial? Yes, they are. And our next question comes from Sumayya Sayers from CIBC. Michael, wanted to get your thoughts. Just on the potential of doing more collaborations with other REITs like you've done with RioCan in the recent past and now with more of the mall owners looking to reposition and look at some large vacancies, are you seeing more opportunities to work with them? I think we're seeing a lot of opportunities to work with various players that can benefit from our experience and expertise. We're definitely seeing that. Does it mean large REITs? No, not necessarily. But there are many property owners that I think can benefit from, again, our experience, our expertise in reworking challenged assets. And we definitely have a lot of stuff ongoing, would be joint venture style deals just because the again, the owner is there, not necessarily looking to sell, but would like to see change to their property and that becomes our role. So something that you'll see, I think, in the future, more JVs than less. Okay, great. That's helpful. And then just to move on to given the sort of recent interest for single tenant type assets in the market, can you speak to the shoppers' assets that you own and maybe note any fair value changes or cap rate trends for just that slice there? I don't know, Jim, do you have any thoughts on that here? Yes, absolutely. The shopper's assets we have, have generally been relatively consistent on a cap rate basis. The stuff that would be closer to primary markets across our geographies would probably see some minor compression cap rates. Okay. But generally in line with the 7% cap for the overall portfolio? No, absolutely not. No, no. But we were running that at a lower number. And there's probably some difference between what we're showing and what the market will actually pay. And we're obviously solicited on a regular basis from people looking to buy those types of assets. And it's been our approach to date that we do not sell those assets. We think it's a really interesting portfolio. We worked hard to build it, and we think that the unitholders can benefit by owning it over time. We're able to refinance them. We've renewed all the leases that are that have been due in 2019, and most of 2020 is renewed. So we really like that asset class, and we think it's an important part of our portfolio, gives great stability to our business. And therefore, it's not something that we're looking to sell even if somebody would pay us a big number at a lower cap rate than we're carrying. Thank you. And Mr. Zekuta, there are no further questions in the queue at this time. Thank you, operator. In conclusion, we continue to offer a very different real estate investment opportunity with our focus on very accretive developments and redevelopments. We are focused on growing our FFO per unit and our NAV. We will continue to recycle capital in order to fund our developments, and our per unit growth will drive down our payout ratios in order to strengthen our business. We've consistently demonstrated our entrepreneurial abilities by adapting to changing market conditions in order to grow our business. Insiders hold an important ownership position and look forward to creating value for unitholders in the future. Thank you for participating in today's call. Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.