Good morning, ladies and gentlemen. Thank you for standing by. I would like to welcome everyone to the Plaza Retail REIT First 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 provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Mr. Michael Zakuta, Plaza's Chief Executive Officer. Please go ahead, Mr. Zakuta.
Thank you, operator. Good morning, and thank you for joining us on our Q1 2019 Results Conference Call. We are legally obliged to tell you that today's discussion includes forward-looking statements. We'd like to caution you that such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainty and other factors that could cause actual results to differ materially from such statements. Please refer to Plaza's public filings for discussion of these risk factors. We are very positive about our prospects as we grow our business across our geography. We have 12 projects under construction, and our pipeline is solid. We continue to bring in new opportunities to refill our pipeline as we finish existing projects. Plaza continues to be a very active operator of its existing portfolio and its portfolio of development and redevelopment projects.
Leasing volume and momentum have been particularly strong over the last few months. We are observing an uptick in leasing demand for our strip centers and QSR sites. Our redevelopment of the former Sears store in Chicoutimi, Quebec, is substantially leased. At our Brockville redevelopment, acquired last year, we have taken occupancy from 48% at the time of purchase to 96.5% today. The vacant Sears in this redevelopment is now 100% leased. We have also filled all of the 35,000 sq ft of the former Home Outfitters space in Halifax, which represented our only exposure to HBC. We renewed early 15 leases that were coming due in Q4 2019 and Q1 2020 with our largest retailer. Revenues from new development and redevelopment leasing should start to contribute materially in Q4 and particularly in Q1 2020. We continue to see opportunities where others do not.
An active developer such as Plaza has a true advantage as we are constantly interacting with retailers and adjusting to changes in retail real estate. Given the acceleration of the pace of change in retail in Canada, this advantage has never been more important. We remain one of the few buyers in the current market that has the ability to accurately assess leasing and construction risk. The result is that the passive investment money continues to pursue finished product at lower cap rates. There is less money chasing anything with construction or leasing risk. The pricing for unfinished product is attractive as the number of bidders for these assets remains low. These trends have created a market environment where it's particularly beneficial for Plaza to sell finished product at attractive prices and recycle that capital into high-yield opportunities.
Pursuing joint venture initiatives with various types of partners, such as residential land developers with excess retail land, and institutions and property owners seeking a strong and capable development partner such as Plaza, is an important part of our strategy. We will continue to recycle capital in order to fund our growth, and we will pursue structured deals with private and institutional-style investors. After the quarter end, we concluded the purchase of the Tri-City Centre in Cambridge, Ontario, for redevelopment. In addition, we continue to auction land for new developments and pursue redevelopment projects based on retailer demand in various markets across our geography. Floriana will comment on property sales for capital recycling and our important refinancing initiatives that will fund our developments and redevelopments and position us to take advantage of opportunities going forward.
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 features value, specialty, and necessity-based retailers who require a local physical presence. Over the years, we have built a stable and geographically diversified portfolio to support our monthly distributions. We are confident that our value-added business model is poised to take advantage of current retail trends and will create significant value for our unitholders. I will now turn the call over to Floriana Cipollone, Plaza's Chief Financial Officer, who will provide you with a brief summary of our results for the quarter.
Thanks, Michael. At a high level, Plaza's results for the quarter were impacted by two significant lease buyout transactions. The first was done to replace an empty mid-box with one that would drive more traffic to the center. The second was a full present value buyout of a store that we are confident in our ability to retenant. Excluding the impact of the lease buyouts and other similar items that are considered to be non-recurring in nature, funds from operations were consistent with the prior year, and on a per-unit basis, were only marginally lower due to the continued issuance of units under the distribution reinvestment plan, which was suspended in November 2018. Notwithstanding a decrease in net operating income of CAD 344,000 from the sale of non-core properties, net operating income grew by CAD 390,000 over the prior year from developments, redevelopments, acquisitions, and organically from same asset net operating income.
In March of this year, Plaza entered into an automatic securities repurchase plan in order to facilitate repurchases of its units under its normal course issuer bid. By the end of the quarter, almost 96,000 units were repurchased, and we continue to repurchase units. We believe that this is a desirable use of funds and in the best interest of unitholders at the current trading price. We sold approximately CAD 11.3 million of non-core properties in the quarter and subsequent to quarter end at values above our IFRS values, generating approximately CAD 7.3 million in cash. In terms of Plaza's IFRS values, we recorded a meaningful fair value gain on investment properties due to a decrease in capitalization rates in the quarter, largely stemming from higher values on a number of appraisals received on properties during the quarter.
Both of these confirm that there is value within our existing portfolio that doesn't necessarily come out through internal valuation processes done for financial statement purposes. Finally, we currently have a number of financings, refinancings, and early refinancings underway. Since quarter end, we have closed or are nearing closing on approximately CAD 87 million of financings on new developments and refinancing of existing mortgages at 100% for longer terms, better amortizations with generally lower rates and generating approximately between CAD 21 million and CAD 25 million of cash. We are also currently working on approximately CAD 43 million of early refinancing at 100% at rates lower than their current rates. We are doing this in order to lock in current low Government of Canada bond rates. We will continue to review our mortgage portfolio for early refinancing opportunities that make sense in terms of cash flow savings to Plaza.
Those are the key points relating to our financial results for the quarter. With that, we'll now proceed to open up the lines for any questions. Operator?
Thank you. We will now begin the question and answer session. If you have a question, please press star then the number one on your telephone keypad. If you wish to be removed from the queue, you may press the pound key. Once again, that's star followed by the number one. Your first question comes from Sumaiya Hussain from CIBC. Please go ahead, your line is open.
Thanks. Good morning.
Good morning.
Can you just firstly tell us a little bit about Tri-City Centre and maybe what your vision is for that site?
Tri-City Centre, we think is a very strong location, like the location. There is excess land that will create value for the REIT. There are different value add opportunities here, excess land. There is some new building on the site and some very old building on the site. Our goal is to transform the old building into a new, more modern, higher rent style facility. There is also a level of vacancy that we also will do some renovation and expect to fill space and grow our yield on this property.
Okay. Did you mention what the vacancy was currently at the site?
No, the vacancy is substantial.
Right. Okay. Just sort of moving on to the assets you've sold and just touching on the type of buyer. Can you go over what the mix is there, if it's institutional, residential, developer, maybe, what you think their motivation is with those assets?
I'm assuming you saw our press release where we announced the sale of a number of properties, they're all small properties. Majority were KFCs, some of them were recycled KFCs. The buyers are all private money. Our overall cap rate is sub six. I think that's a pretty good validation of value for us. There's still a lot of life in the market area where you have the ability to buy smaller assets, CAD 2 million to CAD 3 million a piece or CAD 1 million a piece. I think we've talked about that in previous calls, versus the CAD 30 million, CAD 40 million deals that are available in the market. The bite-size stuff is still very much in demand.
Right. Just kind of touching on that, generally, you've done a fair bit of capital recycling over time. Do you still see many more opportunities like this, in your current portfolio?
I thought we were finished last year, but it continues. If I had to answer the question today, I'd say I don't see a lot of capital. Yeah, we see some minor stuff. I really expected it to slow down, and I would've said the same thing a year ago, and it kept on going. Again, I think we're close to the end, and I think that we're generating enough capital to fund our development for some time. We're feeling good about that.
Right. Well, that's a good color. Thank you. I'll turn it back.
Next question comes from Matt Logan, from RBC Capital Markets. Your line is open.
Thank you. Good morning.
Good morning.
Good morning.
Michael, your properties under development have remained fairly steady at about 5% of total assets for the last few years. With the acquisition opportunities and redevelopment opportunities that you talked about earlier on the call, do you see any opportunity to increase the overall amount of development that the REIT's doing?
It's possible. It's all about opportunity and us having the confidence in the redevelopment asset, the vision to drive it forward and make sure that we can make money out of it. It's all about opportunity. It may go up a little bit, but I don't want to commit to that. The pipeline's pretty good. It has been for some time. There'll be more stuff, I say, moving out of development and new stuff moving in. That we've been pretty consistent for a long time.
Of course, sir. There's certainly a long track record with Plaza. Maybe you could give us a quick update on some of your larger projects, like the Shops at Galway or the Thousand Islands Mall.
Okay. We'll start with Newfoundland first. Galway, we've got just over 100,000 feet under construction. Tenant deliveries start in July, for the first part of that construction. By September, we should see a number of stores open. We should see Costco, we're not the landlord, we sold them the land. We should see Costco open by the end of June. We have additional phases. Some of it's signed, some of it under negotiation. We expect to be continually constructing at Galway for some time. That is the nature of the project. It's a large-scale project for the market and therefore, it's done in phases. Brockville has gone much better than expected. It's turned into a home-run style deal, because we leased a lot of space that we never expected that we would lease, that we were either going to demolish or mothball.
Demand has been, again, much better than we expected. As I mentioned in my comments, the Sears component of that redevelopment is entirely leased. It's not all kicking off revenue yet, because some tenants are still under construction. The other wing of the building has been leased. That was a wing that we thought we were tearing down. We have a minor vacancy, in that property. The enclosed mall is still functioning today, but should be shut down later this year. We will maximize operational savings. There's a little color on those two projects.
For the Thousand Islands Mall, can you remind us if that project had a promote or an incentive fee if you guys hit certain IRR targets?
No. What we did, that was what we call our capital partners program, where we acquired it 100%. We sold 50% to a private capital partner, who then bought 50% of the equity and lent us 30% of the total equity as a mezzanine loan, 5%, five years. That's basically our incentive. That mezz will eventually probably be paid out of refinancing proceeds or may or may not be paid out. I guess we'll have to work our way through that. There's no other promote. That's our capital partner structure that we're using today.
I appreciate the color. Maybe just changing gears. On your lease buyouts during the quarter, can you give us a little bit of color there and maybe what your plans for the assets are?
The first one, CAD 1.5 million buyout, that was a Future Shop premises in the Halifax market replaced with Value Village. The CAD 1.5 million, almost CAD 500,000 goes to reconfiguring the space. Another CAD 500,000 subsidizes the difference between Value Village's rent and what Future Shop was paying. The balance of the last CAD 500,000 is, I guess, our profit on the transaction. That's how we look at a deal like this. The second lease buyout, more important, at CAD 4 million, is a present value calculation, that we were able to obtain. Basically, we've got rent now for seven years, but we do not have a replacement tenant lined up yet. When one can get present value on seven years, we thought it was the best thing to take it, and we will lease the space.
We may not get the rent that we're getting before, but we're more than compensated for that.
Who was the tenant at the larger property?
Rexall Drugs.
Was that in Halifax as well?
No. In Ontario.
Ontario. All right. Well, I appreciate the color. That's excellent. Thank you very much.
Your next question comes from Mike Markides with Desjardins. Please go ahead, your line is open.
Hello, everyone.
Mike.
Hello.
Just kind of odds and sods here. Michael, on the sales that you've done this year, and I guess generally over the last 12 months for these sort of bite-sized things, do you typically have to run a sales process and list them, or are you just getting unsolicited offers on these properties?
Three things. One, we have listed, some we've sold to the tenant, and some are unsolicited.
Okay. A variety of-
A variety. We marketed most of the stuff, and we set goals, and if we meet those goals, we'll do the deal. That's what happened.
Okay. I was interested to hear you say that you've noticed that leasing demand is certainly, seems like it's perked up over the, and I can't remember the timeline you said, but certainly recently.
Last few months, yeah.
Last few months. Is that seasonal, would you say? Or is it something that you've noted sort of a sentiment shift from the retailers?
Well, some of it is seasonal, but some of it has to be a sentiment shift, in that we lease some chronic vacancy, which always makes me very happy. When you've had vacancy for a number of years and you struggle to lease it, and all of a sudden you lease it. I don't know, that's pretty good. I think it's a combination of things. It often is seasonal, but I think we've seen sort of more activity this year than, say, prior years at the same time.
Okay.
Hard to explain, but we're definitely experiencing it.
Is there any common themes in talking to these retailers as to why maybe they're seeing the ramp in demand or?
Maybe it's certain retailers looking for opportunities in markets that they perhaps were not in or looking to. Some of them are upgrades and some of them are new entrants to the market. It's a combination, I think. It's not just one clear sort of reason.
Okay. This is on the last question for me, just on the two lease buyout transactions that you've noted a very good outcome for sure. One of the things I was curious on, though, is why in each case, I guess how I'm trying to think of where these properties are and just trying to get a sense as to why the re-leasing that you would do, specifically with Value Village, would be lower. Secondly, on the CAD 4 million where you said we'll get a lease, but the rents might be lower. Just kind of a sense why the rents are trending in the opposite direction of what you might think.
The first one, the value, was really based on a decision that we had to make, that we had a tenant, and we made the deal. The whole deal was conditional both ways. It just happens to be that's the tenant. Since we did that deal, we had another tenant knock on our door for the space that would've paid us more rent than Future Shop. Unfortunately, that's timing in our business. That's very hard to predict. In the case of the Ontario buyout, the lease was very much over market. It's unrealistic to think that we're going to meet those rental numbers, not even trying.
Was that property one that you acquired in the KEYreit transaction or?
That's exactly it.
That's exactly it. Okay.
That explains a lot.
It didn't sound very Plaza Retail-like, that's why I was curious.
No, it's not Plaza. Yes. We've done a pretty good job. I'm very happy. We've cleansed a lot of some of the KEYreit strips that were questionable. We've really done, I think, a pretty good job of tuning them up, keeping the ones that we believe in, being able to sell the ones that we don't believe in. We just finished tuning up one on Lawrence and Bellamy in Toronto and Scarborough. Looks great. Great end result. We're tuning one up in Brampton, Ontario, at Torbram and Queen. That one's probably about three-quarters done. Others we've sold in the past, which has been good. Clearly, yeah, there were some over-rent deals there, and we're dealing with them, or we've actually dealt with most of them.
Okay. Before I sign off here, you may, or I don't expect you have this information off the top of your head, but it would be interesting to see maybe a slide of the number of properties you acquired in the GLA from KEYreit and how much has been sold and how much has been recycled, and owned in a much better state today. I think that'd be neat to see. If you ever had that slide kicking around, I wouldn't mind seeing it.
Well, I think that's a good idea. We'll organize something. I do know that we're well over CAD 30 million of net gain over our underwriting numbers. We will put something together. We've obviously reduced our exposure to KFC substantially at a profit. We're happy to share that with everybody.
Okay, great. Thanks very much.
Thank you.
Ladies and gentlemen, if there are any additional questions at this time, please press the star followed by the one. As a reminder, if you are using a speakerphone, please lift the handset before pressing the keys. Your next question comes from Jenny Ma with BMO Capital Markets. Your line is open.
Hi. Thanks. Good morning.
Good morning.
Morning.
Michael, I was curious about some of the comments you made about Plaza's ability to look at assets closely and what the potential is for more Plaza-like. Curious, with regards to the deals that you've seen come across your desk, we know that there's been a lot of assets put up for sale in smaller markets. For the ones that you've seen. What's the proportion of the ones you'd characterize as being gems that you could work with, and what's the proportion that, in your view, you'd classify as, I guess, for lack of a better word, kind of broken?
We're not looking for the finished product gem. We're looking for the broken product that we can make into a gem. Most of the stuff that we see is pretty polished, finished product from our perspective, meaning there's not a big vacancy, there's not clear redevelopment opportunity. There are leases in place for long-term, with tenants, so it's very hard for us to redevelop. That's probably the majority of stuff that comes onto the market. We dismiss it pretty quickly. We're very focused on what's broken, what's challenged, but as we've talked about our 4-step test in the past, do we believe in the market? Do we believe in the location? If we can get there, do we have a vision? If we don't have a vision, we're not going to go any further. Can we make money?
We're looking for assets that's going to meet our 4-step criteria. Clearly, we have to have a vision about how we're going to turn around the property. If we don't have a vision, well, then maybe you should be calling a residential guy, tear it down and start over or something else. Very often, sometimes these properties shouldn't be retail anymore. In other cases, yeah, we have a vision, and we're happy to attack it. Brockville is an example, and Cambridge is a new example. We're obviously on the hunt for those types of properties. We bought the Quispamsis Town Centre in December, and we'll add some value to that asset. That's what we're looking for. It's a small number. It's not the majority.
Right. No, I guess what I was getting at was actually more what assets are sort of broken beyond what you guys can do. The way I'm thinking about it is that if you're not willing to take it on, you don't see the vision, and I don't know how many other players out there would be. It wasn't broken in terms of potential for Plaza, but just broken, period, if you've seen a lot of those kinds of assets go for sale.
No, we haven't seen that many, but we get those phone calls. I kind of block them out because I say, "Guys, you're calling the wrong developer," for a variety of reasons. One, we don't believe in the market. We don't have a vision. Like I say, it should be another use. The retail has moved, for example. It's no longer a viable retail street. The market's moved or things have happened, and therefore, forget retail. That happens, and sometimes we'll miss. We don't miss too many, but sometimes you miss some opportunities that we should have taken advantage of. For a variety of reasons, we didn't. Yeah, there's some stuff that we won't touch, again, for some of the reasons I just explained.
You're saying that's a fairly small proportion of what you-
Very small proportion. Yeah. Most of the stuff that's in the market is actually good property and has good tenants, but just doesn't have enough upside for us.
Okay.
That's why I say Yeah.
Yeah, no, go ahead.
That would be the majority of assets that we're seeing.
Okay.
Are good finished product, but they happen to be in secondary markets, therefore they're less attractive to some of the big property owners.
Right. With regards to those polished assets, from what you've seen, would you say that the values that they're being marketed at are sort of fair or aggressive? I guess where on the continuum is your sense of where they're at?
I think there are two important factors. The geography has an impact, but the most important factor is deal size today.
There's a lot less activity, and I said in the CAD 40 million, CAD 50 million or CAD 30 million, even the CAD 10 million and CAD 20 million deal size. The minute you get under CAD 5 million, there's a lot of demand. That's what's fueled sort of our capital recycling.
Okay. That's fair. With regards to that bite size that you talked about, would you say that everything you have in your portfolio now are the bite sizes you want to keep? Or are you still-
No.
poring over opportunities?
No, there's always some stuff that we would probably sell over time. You also have to be careful. We sell too much, we whack our NOI or FFO in the short term, and that hurts. There's got to be a little bit of balance going on, even if there were people chasing us on some of the bite-size stuff. Mind you, the bite-size stuff is a little smaller, but you accumulate it does have a short-term negative impact. You have to be careful.
Okay. Lastly, there was mention of the impact of some new rents coming in for end of this year, early next year. I think there's a lot of ins and outs. Is there any way you could quantify that impact or help us think around it, whether it's from a square footage perspective or sort of a same property NOI number, anything that could be helpful?
I think we'll have to put something together that's clear. We will do that.
Okay. I look forward to it. Thanks a lot.
Thank you.
Mr. Zakuta, there are no further questions at this time.
Thank you. Going forward, we'll continue to pursue our goals as Plaza grows via new developments and redevelopments, takes advantage of its strong leasing and development infrastructure, adapts to changing market conditions, and positions itself to take advantage of opportunities. Plaza continues to take advantage of long-term fixed rate debt markets and recycles capital by selling mature, finished product using the proceeds to invest in new, higher-yielding projects. 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.