CT Real Estate Investment Trust

TSX:CRT.UN

Earnings Call Analysis

Solid Quarter for CT REIT with Portfolio Growth and Strong Financials

In a challenging economic environment, CT REIT showed resilience with a 4.4% rise in net operating income (NOI) and a 3.6% increase in adjusted funds from operations (AFFO) per unit. The REIT's portfolio grew with a $45.2 million property acquisition in Vancouver, adding 141,000 square feet. A strategic asset sale at an above-market price also highlighted the quarter. The REIT maintains a high occupancy rate of 99.4% and strong liquidity, ending Q2 with $31 million in cash and significant credit facilities. Future growth is supported by ongoing development projects totaling 715,000 square feet.

Strong Performance Amid Challenges

CT REIT delivered impressive financial results in Q2 2024 despite a challenging economic backdrop. They reported a 4.4% increase in Net Operating Income (NOI) and a 3.6% rise in Adjusted Funds From Operations (AFFO) per unit. The growth can be attributed to strategic management and a robust portfolio anchored mainly by Canadian Tire.

Distribution Growth Highlights

The ability of CT REIT to raise distributions is notable, having increased payouts 11 times since its IPO in 2013, with a recent hike of 3% effective from July 2023. The compound annual growth rate for distributions over the past five years stands at 4.1%. The current AFFO payout ratio is just over 71%, indicating prudent financial management.

Strategic Acquisitions and Dispositions

During the quarter, CT REIT made significant moves in asset management, acquiring a Canadian Tire-anchored property for CAD 45.2 million and selling a former store for CAD 90 million, reflecting strong demand and pricing above IFRS value. The REIT continues to find strategic opportunities to enhance its portfolio even in a slow transaction market.

Solid Operating Metrics

The same-store NOI increased by 1.9% compared to the prior year, driven largely by contractual rent escalations and new project completions. The overall occupancy rate is remarkably high at 99.4%, with a weighted average lease term of 8.0 years, which is advantageous for long-term stability.

Development Pipeline Looks Promising

CT REIT's development pipeline remains strong, with 19 projects underway, amounting to a committed investment of around CAD 283 million. Approximately 715,000 square feet of incremental Gross Leasable Area (GLA) is expected from these developments, and 94% of this new space is already pre-leased.

Financial Health and Resilience

The REIT maintains a solid balance sheet. The interest coverage ratio was reported at 3.59x, slightly down from the previous year, while the indebtedness ratio stands at 40.9%, up from 39.9% in Q2 2023, primarily due to new debenture issuances. Nonetheless, the growth in fair value of investment properties outpaces the rise in debt, indicating financial resilience.

Market Outlook and Challenges Ahead

While management expresses optimism about potential market activity fueled by lower interest rates, the overall transaction volume for retail assets remains subdued. Future growth in same-asset NOI may be moderate, influenced by recent lower interest rates and the completion of prior capital expenditure projects.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. My name is Gigi, and I'll be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q2 2024 Earnings Results Conference Call. [Operator Instructions]

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 discussions 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 2023 Management's Discussion and Analysis and 2023 Annual Information Form, 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?

[Kevin Salsberg, executive]

Thank you, Gigi. Good morning, everyone, and welcome to CT REIT's second quarter investor conference call. Despite a challenging economic backdrop, CT REIT continues to perform well, and I am pleased with our results again this quarter as NOI and AFFO per unit increased by 4.4% and 3.6%, respectively. Our track record and ability to grow cash flow on a per unit basis has allowed us to raise our distributions 11x since our IPO in 2013, with the most recent increase in distribution payments being enjoyed by our investors starting last month.

Including this latest increase, our compound annual growth rate in distributions over the last 5 years is 4.1%, and we have achieved this growth while managing to improve our payout ratio to its current level at just over 70%. I am also pleased that notwithstanding a very slow property transaction market, we continue to be able to source strategic opportunities to grow our portfolio of net lease assets.

We were happy to announce in our Q2 release that we acquired a Canadian Tire anchored property in a very strong market with high barriers to entry on the island of Vancouver in the province of British Columbia. Additionally, we sold a former Canadian Tire anchored property in Chilliwack, BC. in Q2 to an end user at a price well above our IFRS value for the asset.

Although, our hope is that the recent moves by the Bank of Canada to continue to lower interest rates will spur additional market activity and deal velocity, we continue to manage our portfolio for the future and prudently seek out avenues [ for ] growth. As it relates to our balance sheet, we completed the previously announced rate reset on our Series 4 Class C LP Units with Canadian Tire in the quarter and continued to buy back units under our NCIB program, taking advantage of the fact trading well below net asset value.

Finally, I am pleased to share that we recently released our third annual ESG report, detailing our efforts and achievements from 2023. The report is available for download on our website, and I encourage you to take a read as we are proud of the progress that we continue to make along our ESG journey.

I will now turn the call over to Jodi and Lesley to provide some additional details on the quarter, our results and our investment leasing and development activities. Jodi?

[Jodi Shpigel, executive]

Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce 1 new investment this quarter. This new investment relates to the acquisition of a property with a Canadian Tire store and a Mark's store in the [ NiMo ] British Columbia. This investment of $45.2 million with a going in yield of 6% will add 141,000 square feet of incremental GLA to the portfolio.

As Kevin has already highlighted, in Q2, CT REIT has also sold a former Canadian Tire property in Chilliwack, BC. for $90 million and completed the previously announced intensification of a Canadian Tire store in Granby, Quebec. The total investment required for the Canadian Tire store expansion was $7.6 million, and this project added 27,000 square feet of incremental GLA to the portfolio.

Building on the progress made in 2023, the REIT currently has 19 projects at various stages of development with 2 of these expected to be completed this year and with the remaining projects expected to be completed in 2025 and 2026. These developments represent a total committed investment of approximately $283 million upon completion, $98 million of which has already been spent and $85 million, of which we anticipate will be spent in the next 12 months.

Once built, these projects will add a total incremental GLA of approximately 715,000 square feet to the portfolio, nearly 94% of which has been pre-leased at quarter end. During the quarter, we extended 3 Canadian Tire store leases as well as approximately 98,000 square feet of non-Canadian Tire tenancies, and our occupancy rate is now at 99.4%. As at the end of Q2, the weighted average lease term for our portfolio was 8.0 years, which remains one of the longest in the sector.

With that, I will turn it over to Lesley to discuss our financial results. Lesley?

[Lesley Gibson, executive]

Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we were pleased with the strong results delivered by the REIT again this quarter. Same-store NOI grew by 1.0% or $1.1 million. Drivers of the same-store NOI increase were contractual rent escalations of $1.8 million, primarily being the 1.5% average annual rent escalations, including the Canadian Tire leases, partially offset by lower recovery of capital expenditures which reduced NOI by $600,000 in the quarter, primarily as a result of the final billings completed in Q2 2023, which contributed over $1 million.

Excluding which, our same-property NOI would have been 2.2%, which is more in line with our historic average. Same property NOI grew by 1.9% or $2 million compared to the prior year. This increase was primarily due to the increase in the same-store NOI noted as well as from the intensifications completed in 2023 and 2024. Overall, in the second quarter, NOI grew by a healthy 4.4% or [ $4.8 ] million, driven by the increase in the same property NOI, the completion of development projects in 2023 and from lease surrender revenue, which contributed approximately $1 million.

In the second quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.8% which was lower than the same period in the prior year 3.1%. This decrease was primarily due to the timing of the deferred income tax provision amounted to $525,000, which is expected to reverse over the balance of the year. The fair value adjustment of $22.9 million in the quarter was driven by a combination of contractual rent increases and the leasing activity within the portfolio during the period as well as a gain from the disposition of a property, which accounted for about half of the quarter's fair value increase.

Investment metrics for the portfolio remained unchanged relative to Q1 2024. In the quarter, diluted FFO per unit was up 2.1% to $0.337 compared to $0.330 in the second quarter of 2023. This growth can be primarily attributed to the intensifications and developments completed during '23 and '24, the contractual rent escalations in a Canadian Tire and the previously mentioned surrender revenue, partially offset by higher interest costs.

Growth in AFFO per unit on a diluted basis was strong for the same reasons coming in at $0.315, up 3.6% compared to Q2 of 2023. Cash distributions paid in the quarter increased 3.5% compared to the same period in the previous year due to the increases in the monthly cash distribution paid in July 2023. And as announced last quarter, we had 11th time in [ these ] many years declared a further increase to distributions of 3%, which was effective for the cash distribution payment made on July 15.

This represents a cumulative increase of 42.3% since our IPO in 2013. The AFFO payout ratio for Q2 was 71.4%, which was unchanged from the same period last year. In Q2 2024, we continued to repurchasing our repurchase units to the NCIB facility, buying back approximately [ $8.4 ] million of unit at an average price of $13.37 per unit, which is below their intrinsic value.

Now turning to the balance sheet. Our interest coverage was 3.59x for the current quarter compared to 3.74x for the comparable quarter of 2023, with the decrease mainly driven by the increase in interest expense and other financing charges outpacing the growth in EBIT fair value. The indebtedness to the EBIT fair value ratio improved to 6.59x, down from 6.83x in Q2 of '23, primarily because of the growth in EBIT fair value outpacing the slight increase in indebtedness. Our indebtedness ratio was up slightly to 40.9% from 39.9% in the same quarter of last year due to the issuance of the Series I senior unsecured debentures, partially offset by an increase in fair value and investment properties.

Our indebtedness ratio continues to be within our target range and considering the current economic backdrop and interest rate environment, we're pleased with the strength of the balance sheet. Lastly, with respect to liquidity, we ended Q2 with $31 million of cash on hand and $297 million remains available through our committed credit facility. A further $300 million is available on our uncommitted facility with Canadian Tire Corporation.

And with that, I'll turn the call back to the operator for any questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Lorne Kalmar from DesJardins.

[Lorne Kalmar, analyst]

Just first on the dispositions. I haven't been covering you guys for that long, but I believe this is not typical. Is this something we can expect more of going forward? And maybe you can give us a little bit of an idea of what the genesis of the transaction was?

[Kevin Salsberg, executive]

I would think, broadly, no, I wouldn't expect a lot of that in the future. I mean, typically, our preference in this instance where Canadian Tire had relocated from the site, it would be to redevelop it and try to create incremental value. This particular location, strong retail node, Chilliwack in the Lower Mainland and in British Columbia, really strong site. We had an end user who came along and made us a very compelling offer. Canada has still had some lease term with us. So a couple of the strong offer with at least surrender buyout arrangement, and the financials were just, I guess, too compelling to hold on to the asset. So we have made the decision to [ sell ].

[Lorne Kalmar, analyst]

Fair enough. And that kind of dovetails my next question. Is the lease term income related to the disposition?

[Kevin Salsberg, executive]

It's not related to the disposition in that it wasn't directly tied to the purchase agreement, but the end user did want vacant possession, so indirectly, yes.

[Lorne Kalmar, analyst]

Okay. Fair enough. And then maybe just last one for me. I know kind of the last few quarters have benefited from the higher rate on the recovery of the capital expenditures. And with rates coming off, is it sort of fair to expect maybe a below typical same asset NOI same asset like growth profile for the next few quarters?

[Lesley Gibson, executive]

Lorne, It's Lesley. This quarter was maybe a little tougher went comp over because of some final billings in the prior quarter. Obviously, the rates have come down and are coming down, and we will expect that.

So we'll be comping off a little bit of little bit of low interest expense, but I think the bigger delta quarter-over-quarter this year is the final -- some final billings that were done in Q2 of '23. The interest change in the rate will be perhaps, I think, a little bit more modest going through the other quarters as it's only go down another quarter point.

[Operator]

Our next question comes from the line of Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

I wanted to come back to the BC acquisition. Can you maybe provide a little more color on that one? And just given maybe a bit more of a favorable rate environment, I'm curious if you're starting to see some more attractive opportunities start to shape goes from third parties.

[Kevin Salsberg, executive]

Sure, Pammi. I'll take that. Off-market deal, this was a relationship we had with the existing or the vendor, I guess. And we have been in discussions for some time. It was part of a larger asset that is part of a broader redevelopment scheme that they're contemplating. And this component of the property was more stabilized. So yes, lots of discussions.

We've been in, I guess, negotiations and under contract for some time as it did require a subdivision. So this is something that we had in the pipeline for, I guess, an extended period of time. But very happy to be transacting 1 in BC and to the island of Vancouver. Obviously, tough to come by assets at pricing that we feel is compelling there. So we thought the financial parameters of the deal were attractive for us. And certainly, repatriating Canadian Tire stores fits squarely within our strategic plans.

In terms of the broader market, haven't seen really much movement in the way of pricing or additional volume. I would say, marketed transactions right now seem light to me by comparison, at least specifically for retail assets. Q1 was very light in terms of investment volumes. And I think you're seeing that reflected in our fair value assessment for the quarter where we essentially just help things flat. Could these recent moves by the Bank of Canada that gives buyers and sellers a little bit more confidence that it's time to start moving the needle on both exchanging assets and pricing entirely possible, but I think we'll have to see how the rest of the year shapes up and what we might see in the market.

[Pammi Bir, analyst]

Got it. No, that's helpful color. Just on -- maybe one more on that acquisition. What's the term left on the Canadian Tire lease or, I guess, the mix of leases from the Canadian Tire vendors in there? And I guess if it's -- would there be any changes, I guess, to maybe reflect leases that are more similar to the CT REIT portfolio?

[Jodi Shpigel, executive]

So in terms of the lease term, there's many, many years with options left on the term goes for an extended period of time. And so that was -- another part of the reason why it was compelling for us to purchase. We do have a lot of lease term left on this asset between the Canadian Tire and the market.

[Kevin Salsberg, executive]

Yes. I think the Canadian Tire is north of 10 years, for sure.

[Jodi Shpigel, executive]

Oh, yes. It is definitely north with options after that.

[Pammi Bir, analyst]

Got it. And just on the development pipeline, it seems to be holding steady. I guess 1 expansion was done in the quarter. But as you think about maybe the next year or so, how do you see that unfolding? Just curious if maybe any chance it starts to expand again? Or any -- or possibly on the other side, maybe projects getting pushed back at all?

[Kevin Salsberg, executive]

So the project delays have sort of already been baked in. I mean, I think that's what we've seen over the last few quarters. The current pipeline at about 715,000 square feet, $280-ish million is pretty close to our historic average run rate.

So we're happy with the pipeline. I think in terms of money is to be spent, call it, over the next 12 months versus the back part of it, probably a little bit more weighted to the back part right now. I think the number was $85 million that we intend to spend in the next year. And there's been about $95 million spent to date, so call it a little over $100 million for the back part of the development pipeline horizon. The pace of new projects have certainly slowed. I think, again, dovetails between 2 things. One, Canadian Tire's intentions and I think there's still -- of the firm belief that investing in the retail bricks-and-mortar network is core to their strategy. Certainly, the last couple of quarters have been a little tougher for them than, say, '22, '23.

So I think that's playing into a slower pace, and then the interest rate story and our ability to fund those projects accretively, which also dovetails into the cost to build these stores. So all that's playing together to say slow that pace, but I do think at the appropriate time, we'll have additional projects that we revisit and we'll be working with Canadian Tire closely on our joint ability to move those forward.

[Operator]

Our next question comes from the line of Sam Damiani from TD Cowen.

[Sam Damiani, analyst]

I just wanted to really just touch on renewal leasing spreads. I didn't catch that. And most of my other questions were asked. So yes, just on the third party and the CTC leases that were extended, I wonder if you could just provide some color on the spreads that you experienced in the quarter versus the prior history.

[Jodi Shpigel, executive]

Sam, it's Jodi. So total renewals this quarter, including the CT stores were approximately 300,000 square feet, so about 1% of the portfolio. That includes, obviously, the combination of fixed and market renewals.

The 3 Canadian Tire stores that renewed this quarter were at the 1.5%, pretty typical, as you know, for the CT renewals. In terms of the non-Canadian Tire renewals, those were in the high single digits, so we're pleased with that in terms of the spread. So I'd say pretty normal quarter in terms of volume and renewal rates.

[Sam Damiani, analyst]

That's great, Jodi. And just -- I guess, just sort of generally in the market today, I mean, I think it was double digits last quarter, high single digits this quarter. I mean is that a reflection of any change in the market or just a different mix of leases that were transacted this quarter? I mean, what's your sense on the overall leasing environment now versus 3, 6 months ago, the same, better, worse?

[Jodi Shpigel, executive]

I'd say see -- again, I'd say pretty normal. In this quarter, I think we just had a higher amount of fixed renewals versus market renewal. So that's why high singles versus low double digits, but pretty much on trend with what we would expect.

[Kevin Salsberg, executive]

And although the market renewal piece was probably smaller this quarter than in the past, that was done pretty much around that 10% spread number. So kind of similar to the past experience there, where we had a little bit more pricing power.

[Operator]

[Operator Instructions] As there are no further questions at this time, I will turn the call over to Kevin Salsberg, President and CEO, for closing remarks.

[Kevin Salsberg, executive]

Thank you, Gigi, and thank you all for joining us today. We look forward to speaking with you again in November after we release our Q3 results, and I hope everybody has a great long weekend.

[Operator]

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