CT Real Estate Investment Trust

TSX:CRT.UN

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, my name is Valarie and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q1 2021 Earnings Results Conference Call.[Operator Instructions]. The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT; Lesley Gibson, Chief Financial Officer of CT REIT; and Kevin Salsberg, President and Chief Operating Officer of CT REIT's.Today's discussion may include forward-looking statements such as -- 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 the 2020 MD&A and AIF, which can be found on CT REIT's website and on SEDAR.I will now turn the call over to Ken Silver, Chief Executive Officer of CT REIT. Ken?

[Kenneth Silver, CEO & Trustee]

Thank you, operator, and good morning, everyone.We're very pleased to welcome you to CT REIT's first quarter 2021 investor conference call and to share with you the results of another strong quarter. Notwithstanding the disruption, headache, and [ annex ] the pandemic has created for now over a year, CT REIT has continued to produce the same kind of solid results it delivered prior to the pandemic and since our IPO.We designed and have consistently managed the REIT to produce consistent growing value reflected in growth in AFFO and NAV per unit, not to mention distributions. We continue to leverage the relationship with our majority unitholder and most significant tenant Canadian Tire, which provides a solid foundation anchored in high quality, well-located, real estate and long-term triple net leases.While, we complement that foundation of freestanding retail and distribution facilities with value-add acquisition and development opportunities, at its core, our focus net lease strategy predicted -- predictably delivers resilience and growth. Those core attributes resilience and growth, were never more clearly on display than in the most recent quarter and over the past year.I'm going to turn the call over to Kevin Salsberg, our President and Chief Operating Officer, to provide an update on our investing activities and operations, Lesley Gibson, our Chief Financial Officer will then review the financial aspects of the quarter before turning the call over for questions. Kevin?.

[Kevin Salsberg, President & COO]

Thanks, Ken, and good morning everyone. I hope you're all keeping well. As outlined in yesterday's press release, we are pleased to announce 6 new investments this quarter that will require an estimated $40.2 million to complete. These new projects include the expansion of 6 Canadian Tire stores in Cochrane, Casselman, and Milton, Ontario, Charlottetown and Summerside, PEI and Lethbridge South, Alberta. When completed, these investments are expected to earn a weighted average cap rate of 6.4% and will add approximately 162,000 square feet of incremental GLA to the portfolio. It is one of our core competitive advantages that we support Canadian Tire and its ongoing real estate requirements.Since IPO, CT REIT has funded the expansion of over 40 Canadian Tire stores within its portfolio, adding approximately 400,000 square feet of GLA through these investments. With the addition of these 6 newly announced store expansions, we currently have 15 store intensifications and one expansion of a Canadian Tire distribution center planned for completion over the next 2 to 3 years, which will add an incremental 446,000 square feet and 322,000 square feet to the portfolio respectively.With respect to the previously announced investments in the first quarter, we completed the vend-in of an existing Canadian Tire store in Lower Sackville, Nova Scotia, which added approximately 53,000 square feet of incremental GLA. The REIT also sold its Arnprior Mall property in Arnprior, Ontario during the quarter. At the end of the first quarter, CT REIT had 26 properties that were at various stages of development. These projects represent a total committed investment of approximately $240 million upon completion, $59 million of which has already been spent and $34 million of which we anticipate will be spent in the next 12 months excluding the Canada Square redevelopment and the development lands that we own in Calgary, Alberta. These projects will add a total incremental gross leasable area of approximately 860,000 square feet to the portfolio upon completion, 95% of which has been pre-leased.As of March 31, 2021, CT REIT's occupancy rate was 99.3% in line with both Q1 2020 as well as year-end. With respect to the impact of COVID-19 on our property operations, rental collections remain strong and generally in line with the REITs pre-pandemic historical average. With the recent lockdowns and stay at home measures put in place by various government agencies throughout the country, in response to the third wave of the pandemic, we continue to monitor and manage to the extent possible the impact of such measures on our portfolio, reinstate required operating policies and procedures at our properties and continue to work with those tenants whose businesses have been negatively affected.With that I will turn it over to Lesley for a review of our financial results.

[Lesley Patricia Gibson, Senior VP & CFO]

Thanks, Kevin, and good morning, everyone. Despite the impact from the pandemic, we are again very pleased with the strong Q1 results that CT REIT has delivered. In the quarter, we reported a diluted AFFO per unit of $0.273, an increase of 7.5%, compared to the $0.254 per unit in Q1 of 2020. Reflecting the positive impact of the NOI variances and lower interest expense.Diluted FFO per unit increased 5.1% to $0.308 versus $0.293 in Q1 of 2020 due to the same factors affecting AFFO per unit growth. Reported net income increased $3.7 million or 3.9% in the quarter compared to the prior year. The main contributors to the growth are the rent escalations and the CTC banner leases, which contributed $1.6 million and the net addition of income-producing properties and completed developments and intensifications in 2021 and 2020 which contributed a further $1.4 million to NOI growth.Same-store NOI increased $1.6 million or 1.7% compared to the prior year, primarily result of contractual rent escalations contributing nearly $1.9 million, which includes the 1.5 annual rent escalations on average contained within the Canadian Tire store leases, partially offset by the expected credit losses for tenants, who were significantly impacted by the pandemic, which decreased NOI by $0.4 million.Same property NOI increased by $2.3 million or 2.5% compared to Q1 2020, primarily due to the increase in same-store NOI by $1.6 million and intensifications completed in 2021 and 2020, which contributed $0.7 million to NOI growth. Our rental collections remained strong through the fourth quarter at 99.4% and this is continued through both April and May with collections at 99.6%.General and administrative expenses, as a percent of property revenue were 3.1%, which is higher than the 2.4% in Q1 2020 driven by the fair value adjustments on unit-based compensation and the lower income tax expense in the current quarter. Excluding these non-cash items, we anticipate our annual G&A run rate to be in line with prior years.The REIT recorded a fair value increase of $4.3 million of our investment properties for the first quarter of 2021. The valuation metrics used were virtually unchanged from those used in our December 2020 reporting. Our AFFO payout ratio for 3 months ended March 31, 2021, was 73.6%. This was a decrease of 5.2% from the same period in the prior year, due to the increase in the AFFO per unit exceeding the rate of distribution -- of the distribution rate.The interest coverage ratio increased to 3.68x in Q1, compared to 3.43 for the first quarter of 2020. The increase in the interest coverage ratio is primarily due to the growth of EBITFV, combined with the decrease in interest and financing charges. The quarter-over-quarter, interest expense and financing charges decreased primarily due to decrease in the Class C LP units from resetting the interest rates as of June 1, 2020, on the Series 3, 16, 17, 18 and 19 Class C LP units with CTC and decrease mortgage interest expense partially off by -- offset by an increased utilization of the credit facilities.Moving to the balance sheet, we continue to be in a strong financial position. CT REIT's indebtedness ratio was 42.5% as at March 31, 2021, compared to 42.9% a quarter ago. The decrease was primarily due to the reduction of total indebtedness along with the growth of the REIT's investment property portfolio. Early in the first quarter, we successfully completed the issuance of 150 million of unsecured debentures with the 10-year term and a coupon of 2.371%. The proceeds were then used to complete the early redemption of the $150 million unsecured debentures originally set to mature on June 1, 2021.With this early refinancing completed, we have no further debt maturities to refinance until the second quarter of 2022. This recent issuance illustrates a couple of points about our continued debt strategy, a chosen term of 10 years is consistent with our sector-leading weighted average term to maturity of just under 8 years. The coupon was chosen -- chosen was as typical slightly more expensive than the shorter-term debenture would've been, but much less so than on some other occasions in the market.Additionally, the longer-term chosen provides flexibility for the REIT with respect to future borrowings and allows us to consider a broad range of potential terms in response to market conditions in the future. In addition, with $294 million available through our committed commercial -- committed credit facilities and $7 million cash on hand, coupled with no debt maturities for the next 12 months. We continue to maintain a liquid position.I would also like to speak to the trend in our book value per unit. As at March 31, 2021, the book value per unit was $14..74, up from $14.62 per unit price as of the December 31, 2020, primarily due to net income exceeding distributions. And with that, I will turn it back to the operator for any questions.

[Operator]

[Operator Instructions] Our first question is from Himanshu Gupta with Scotiabank.

[Himanshu Gupta, Analyst]

Just looking at the new investments, I mean you have 43,000 square feet expansion in Milton, Ontario Just wondering, what is the cap rate on this intensification. I know overall, you mentioned 6.4% for the total investments.

[Kenneth Silver, CEO & Trustee]

Himanshu, it's Kevin. We don't typically break out cap rate per investment. We typically report them on a combined basis. I don't think, we would be prepared to disclose that at this point.

[Himanshu Gupta, Analyst]

Sure! So, maybe my question was more around the difference between the GTA versus the secondary, tertiary markets. I mean I can clearly see, Milton is a stand-out there. So just wondering, is there like any spread or any big difference between GTA versus like a tertiary market?

[Kenneth Silver, CEO & Trustee]

Yes, there would be. So we typically, I guess price the cap rate or the return on the respective investment based on the market characteristics and it would approximate on market cap rate. So I think it's fair to say, there'll be a spread between the urban intensification and the secondary market ones.

[Himanshu Gupta, Analyst]

Got it, okay. And then you are just sticking to Milton, the completion looks like it's still 2 years out. Is there anything which is taking a bit longer there? Or it's the typical, what you are seeing in the market right now?

[Kenneth Silver, CEO & Trustee]

Well, similar to what, we would see with most developments anything in a more urban setting generally takes longer. So from an approvals impediments perspective and then, obviously it's a slightly larger expansion, so a little bit longer to construct as well.

[Himanshu Gupta, Analyst]

All right. And then in general, the expansion of Canadian Tire stores on 6 announced net leased this time. The expansion -- is that in response to the pandemic, I mean that is Canadian Tire looking for larger stores or they were always in the pipeline with or without COVID?

[Kenneth Silver, CEO & Trustee]

Well, I'll let Canadian Tire comment on their plans for the store network more broadly, but we have described previously, how the trend has been and what we've seen is the requirement for more square footage, not less as time goes on and I think the pandemic has only served to reinforce that, with the store performance and Canadian Tire's sales more generally. So, we're very happy obviously with the growing pipeline. We like the development program as it stands and with completions slated to start mostly beginning of next year, we're sort of ramping up from some of the deferred and delayed projects that were put on hold at the outset of the pandemic.

[Himanshu Gupta, Analyst]

Got it. And maybe just final question from me. How is the pipeline looking for third-party acquisitions. I mean are you seeing any improvement in deal flow there on that front?

[Kenneth Silver, CEO & Trustee]

There is a little bit more deal flow that I've seen in the market more broadly. There is a couple of interesting transactions out there that I'm aware of that I think we'll be benchmarking or help with benchmarking net lease assets as we go forward to coming out of the pandemic. A couple of things that we're looking at, but nothing to report at this point.

[Himanshu Gupta, Analyst]

Yes. And in terms of pricing, is there any difference there. I mean, you mentioned a couple of interesting things going out there, anything like pre-pandemic versus what is being triggered right now?

[Kenneth Silver, CEO & Trustee]

I think I think my comments from previous quarters would still hold, I think quality net lease assets with covenant tenants long terms are commanding a lot of attention and premium valuations and I think cap rates on those assets will be lower than they were heading into the pandemic. I think there's -- what's been interesting, we've seen some other retail non-grocery anchored trade in the quarter. I think there's less interest in that, but at least the trades are picking up again. I think the pricing on that is higher than pre-pandemic, but obviously, the depth of buyers for those assets has been significantly reduced over the last 12 plus months.

[Operator]

[Operator Instructions] Our next question is from Sam Damiani with TD Securities.

[Sam Damiani, Director, Institutional Equity Research]

I guess I'd like to just get into the expansions that were announced last night with the math pointing to an average price per square or cost per square foot of $250 and an average rent in and around the $16 mark and both of these metrics would be sort of plus or minus 10%-15% premiums to the current portfolio, but the location mix doesn't seem to be materially off base with respect to the overall portfolio. So I'm just wondering, are these rents on these expansions, the same as the respective existing stores or they set at current market rents and so different than the existing store rents? And just some color there would be of lot of interest.

[Kevin Salsberg, President & COO]

Sure. To answer your second question first. The rents will be slightly higher than in place and I think your comment about increasing construction cost is really the reason why that is. We base it off the market cap rate as I described and with cost escalations coming in as they have that's leading to slightly higher rent and I think the trend on market rents as it relates to increase in construction cost will be interesting to watch over the next couple of quarters. We'll -- we feel comfortable obviously with the slightly higher rent because we are blending it with the existing in-place rent and it's -- the expansions are smaller than the typical store side. So it blends not too far away from the current average, but yes it's a concern. Construction cost is something we're watching closely and obviously, it's going to have an impact on rental figures.

[Sam Damiani, Director, Institutional Equity Research]

And so the $250 a foot obviously doesn't include land. Correct me if I'm wrong. That we've already own the land on these respective sites. So what would be the all-in replacement cost, if you will, if the land is excluded at $250. Would it be another $50 a foot for the land?

[Kevin Salsberg, President & COO]

It really depends, where you're buying land Sam. On average, could that be approximately correct, it sounds in the ballpark.

[Sam Damiani, Director, Institutional Equity Research]

And just over to I guess Canada Square, any update on the process there. I guess there was a design you paneled recently and just what, we can expect for next steps as well.

[Kenneth Silver, CEO & Trustee]

Hi, Sam. It's Ken. Our Development Manager and Co-owner Oxford Properties, submitted a development application back in December 2020. So the municipal process is underway. So that's moving forward, really nothing changes in terms of our timing. We're still waiting for metro links to give us some indication as to when the LRT will be completed on Eglinton and when, we would get the land upon which we would be building phase one. So no significant changes on that front.

[Operator]

Our next question is from Jenny Ma with BMO Capital Markets.

[Jenny Ma, Analyst]

Further to Sam's question about the new developments, can you comment on whether or not you're securing a similar type and quantum of rent escalations on these deals, that you have within the current portfolio?

[Kenneth Silver, CEO & Trustee]

Yes, we -- the rent escalations will continue and also mentioned, where there is less than a certain amount of term, we're extending the leases as well.

[Jenny Ma, Analyst]

Okay. And I guess, broadly speaking. Are you still able to secure that kind of rent escalation, when you're talking about renewals with CT, I'm not sure if you're doing much at this point. I think the next ones just still a couple of years. I would say, but just wanted to get a sense of whether or not you're still able to get similar rent escalations going forward.

[Kenneth Silver, CEO & Trustee]

So, we did have one Canadian Tire store lease that comes up for expiry this year. It was at least we acquired from a third party and because it was a third-party lease, it actually have fixed-rate options to extend and Canadian Tire has extended that lease. The next round of extensions -- leases that expire in 2023. So, we are still in the process of working through the future of those sites. But when we vent in new assets, typically we do get the rent escalations. So that pattern continues on at this time.

[Jenny Ma, Analyst]

Okay, great. And then with regards to the 2020 lease, at what point do you start discussions, is it still a little bit early now?

[Kenneth Silver, CEO & Trustee]

No those discussions have already begun.

[Jenny Ma, Analyst]

Okay, great. And then there is, I think this question is for Lesley, looks like there is one mortgage expiring, I believe that secured against Canada Square, can you remind me when that expires?

[Lesley Patricia Gibson, Senior VP & CFO]

That one is not until March of 2023. We have one other small mortgage secured by a standalone Canadian Tire store we acquired that expires in summer of '22.

[Jenny Ma, Analyst]

Alright. Great. And I mean there is so little by way of secured mortgages, is it fair to say that you're probably looking at paying these off when they come due and then just going 400% unsecured.

[Lesley Patricia Gibson, Senior VP & CFO]

I think that's fair to say for the standalone Canadian Tire store as it relates to the Canada Square when that mortgage is coming to you, you will be sort of hopefully heading into construction at different place of that project. So we'll be looking to work with our partner, and do you -- and put some financing on that project. It's probably unlikely that, that secured financing, it may change into some different form of construction of some other kind of facility, but we'll probably more unlikely to roll that into it unsecured.

[Operator]

Our next question is from Tal Woolley with National Bank Financial.

[Tal Woolley, Research Analyst]

Just wondering the stock prices that significantly since the last time Canadian Tire sold down some of its interest in the REIT. Have there been any conversations about them potentially lightening up in the future in terms of their position?

[Kenneth Silver, CEO & Trustee]

Hi, Tal, it's Ken. we've had no indication from Canadian Tire with respect to any of their plans one way or the other.

[Operator]

As there are no further questions registered at this time, I would like to turn the meeting over to Ken Silver, CEO for closing remarks.

[Kenneth Silver, CEO & Trustee]

Thank you, operator, and thank you all for joining us today. Hopefully, by the time we speak to you again in August, we will be speaking of the pandemic, mostly in the past tense. Until then, please stay safe.

[Operator]

Thank you. This concludes today's call. You may now disconnect.