CT Real Estate Investment Trust

TSX:CRT.UN

Earnings Call Analysis

CT REIT Q3 2024: Stable Growth and Strategic Investments

In Q3 2024, CT REIT demonstrated stability with a 3.4% increase in NOI and a 2.3% rise in AFFO per unit. The planned investments total $85 million, projected to yield 6.2%, adding 283,000 square feet of space. The recent acquisition of a Canadian Tire property for $47 million added another 141,000 square feet. Occupancy remains high at 99.4%, and lease renewals reflect positive mid-teen spreads. However, future same-store NOI growth is expected to dip below 2%, as market conditions fluctuate and interest rates stabilize. The payout ratio stands at 75%, consistent with previous periods.

A Robust Q3 Performance

CT REIT kicked off its earnings call by highlighting a stable and healthy quarter for Q3 2024. Key metrics showed a notable increase in Net Operating Income (NOI), which rose by 3.4%, translating to an additional $3.7 million, while Adjusted Funds From Operations (AFFO) per unit saw a 2.3% increase amounting to $0.308. These improvements were largely driven by solid growth in same-property NOI, which grew by 1.2% or $1.3 million through contractual rent escalations.

Strategic Investments and Acquisitions

During the quarter, CT REIT made $85 million in new investments, expecting a yield of 6.2%. This includes a $47 million acquisition of a Canadian Tire and Mark's store in Nanaimo, contributing 141,000 square feet to their portfolio. These new ventures signal their strategy of strengthening a solid pipeline with over 0.5 million square feet of new developments planned between now and the end of 2025.

Development Pipeline and Future Prospects

CT REIT currently has 20 projects at various stages of development, projected to cost approximately $319 million upon completion. Notably, 95.2% of these projects have already been pre-leased. This robust pipeline reflects the company’s commitment to growth, with significant financial outlays planned for both the current year and next.

Balancing Costs and Revenue

Despite the various positive growth indicators, expense management remains crucial. General and Administrative expenses decreased from 2.9% to 2.2% of property revenue year-over-year, benefiting from an expected reversal of a deferred income tax provision. Yet, the interest coverage ratio did decline from 3.71x to 3.52x, indicating rising interest expenses that are steadily being monitored.

Shareholder Returns and Unit Repurchases

CT REIT also announced a 3.0% increase in quarterly cash distributions compared to last year. The payout ratio for AFFO remained stable at 75%, and unit repurchases were moderated in light of rising unit prices, with approximately 486,000 units bought back at an average price of $13.20.

Navigating Economic Conditions

Management pointed to an improving macroeconomic backdrop as being beneficial for real estate. The pace of rate cuts by the Bank of Canada has rekindled interest in the sector, aligning well with CT REIT's growth strategies and market re-engagement efforts. They are optimistic about potential future acquisitions and the overall investment climate.

Outlook and Guidance

Looking forward, CT REIT anticipates sustained growth in same-store NOI, albeit at a lower level compared to previous years, influenced by current interest rates. The guidance suggests maintaining growth below 2% for the next year while the company focuses on capturing incremental opportunities from its existing assets and ongoing development activities.

Conclusion: A Path Forward

In summary, CT REIT is showcasing a strong financial position with ongoing developments, strategic acquisitions, and disciplined cost management. The positive environment for REITs amid shifting interest rates presents opportunities for continued growth as they harness their close relationship with Canadian Tire and effectively manage their large portfolio.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. My name is Gigi, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q3 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 managements 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 Third Quarter investor Conference Call. I am pleased to report that Q3 was once again a healthy and stable quarter for CT REIT. Lesley and Jodi will provide the details, but at a high level, our occupancy, renewal spreads, payout ratio and credit metrics were all relatively in line with our results for the past few quarters. Growth once again was strong with NOI increasing by 3.4% and AFFO per unit increasing by 2.3% in the quarter. .

In the internal environment, the recent rally in REIT equities has helped to narrow the gap in terms of discounts to net asset value. In addition, the pace of rate cuts by the Bank of Canada, including the most recent outsized reduction continues to drive interest back to the real estate sector as the benefits of alternative yield opportunities for investors narrow on a risk-adjusted basis. .

Although transaction volumes remain low by historic standards, it is hoped that these recent moves will provide a catalyst for market participants to begin to reengage and seek out new investments. For CT REIT, we were pleased to announce $85 million of new investments this quarter, which will help bolster our strong pipeline of projects. Between now and the end of 2025 we intend to deliver over 0.5 million square feet of new development projects.

And as mentioned on previous conference calls, we continue to monitor the market and seek out differentiated and strategic opportunities for CT REIT. Such as the $47 million acquisition of a Canadian Tire and Mark stores property Nanaimo BC that closed in the quarter. We also sold an outparcel to a multi-tenant property in Orillia, Ontario, post quarter end for $4 million.

To remind listeners, we bought the Orillia Square property from a third party in Q4, 2017. At the time of acquisition, this roughly 320,000 square foot asset was only 61% occupied and anchored by a no-frills and a 62,000 square foot Canadian Tire store. Over the last several years, we have relocated and expanded the Canadian Tire store, which now occupies over 125,000 square feet of GLA and backfilled the old Canadian Tire store with Mark's, Sport Chek and Dollarama stores as well as a new Shoppers Drug Mart that will be opening by the end of Q1, 2025.

We have also extended the lease with no fills and occupancy for this center now sits at approximately 90%. By selling the outparcel for double what we paid for this portion of the site, we have sold a nonstrategic part of this asset and reduced our cost base in the process. This project is a great success story for the REIT and shows how we can leverage our relationship with Canadian Tire to create value in our real estate.

We are fortunate to continue to benefit from our strong and stable portfolio of assets. Our unique relationship with Canadian Tire and the development pipeline that comes alongside this privileged association and continue to seek out new acquisition opportunities that fit our strategy when market conditions allow for it.

I will now turn it 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 3 new investments this quarter. These new investments relate to the vend-in of a newly built property containing Canadian Tire, Marks and Dollarama stores in Mont-Tremblant, Quebec and vend-in of a Canadian Tire store in Winnipeg, Manitoba as well as an expansion of a Canadian Tire store located in Penticton, British Columbia.

These new investments totaling $85 million are expected to earn a going-in yield of 6.2% and will add approximately 283,000 square feet of incremental GLA to our pipeline of projects and our high-quality asset portfolio. As Kevin previously noted, in Q3, CT REIT completed the previously announced third-party acquisition of a property containing Canadian Tire and Mark's stores in Nanaimo, British Columbia for an investment of $47 million, adding 141,000 square feet of incremental GLA to the portfolio.

Our development activities remain strong with 20 projects at various stages of development, two of which are expected to be completed this year and the remaining projects expected to be completed in 2025 and and 2026. These developments represent a total committed investment of approximately $319 million upon completion, $102 million of which has already been spent and $114 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 769,000 square feet to the portfolio, nearly 95.2% of which has been pre-leased at quarter end. At the end of the quarter, CT REIT maintained its 99.4% occupancy rate, representing a portfolio that is substantially fully leased a true indication of the quality and strength of our assets. Year-to-date, we have completed four Canadian Tire store lease extension. And as at the end of Q3, the weighted average lease term for our portfolio was 7.8 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 results delivered by the REIT again this quarter. Same-store NOI grew 1.2% or $1.3 million. Drivers of the same-store NOI increase were contractual rent escalations of $1.6 million, primarily being the 1.5% average annual rent escalations, including the Canadian Tire leases, partially offset by a decrease in the property operating recoveries and which reduced NOI by $378,000 in the quarter.

Same-property NOI grew 1.8% or $2 million compared to the prior year. This increase was primarily due to the increase in same-store NOI noted as well as an increase of $666,000 from the intensifications completed in '23 and '24. Overall, in the third quarter, NOI grew by a healthy 3.4% or $3.7 million, driven by the increase in same-property NOI as well as the acquisitions and completion of development projects in 2023 and 2024.

In the third quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.2%, which was lower than the same period in the prior year of 2.9%. This decrease was primarily due to the timing of the deferred income tax provision amounting to $417,000, which is expected to reverse over the balance of the year. The fair value adjustment of $17.7 million in the quarter was driven by a combination of contractual rent increases within the property portfolio as well as a modest gain recognized from the portion of a property sold subsequent to quarter end.

Investment metrics of the portfolio remain unchanged relative to Q2 of 2024. In the quarter, diluted FFO per unit was up 1.2% to $0.331 compared to $0.327 in the third quarter of 2023. This growth can be primarily attributed to the acquisition intensifications and developments completed during '23 and '24 as well as the contractual rent escalations in our Canadian Tire leases partially offset by higher interest costs related to the debentures issued in Q4 of 2023 and the impact of higher rates on our line of credit.

In addition, the straight lining of the base rents included in FFO related to the Canadian Tire store leases from IPO, reached their inflection point at the beginning of 2023. Prior to this period, the straight lining served to contribute to FFO growth.

However, more recently, this has detracted from FFO growth and is expected to continue to do so through the end of the initial lease terms for the next many years. Growth in AFFO per unit on a diluted basis was strong for the same reasons though it excludes the impact of straight-line rents, which is not included in AFFO and came in at $0.308, up 2.3% compared to Q3 of 2023.

Cash distributions paid in the quarter increased by 3.0% compared to the same period in the previous year due to the increase in monthly cash distributions paid in July 2024. The AFFO payout ratio for Q3 was 75.0%, which is in line with the same period last year of 74.8%. During the third quarter, our unit price rallied, and as a result, we slowed the repurchasing of units through our NCIB facility, buying back approximately [ 486,000 ] of units at an average price of $13.20 per unit.

Turning now to the balance sheet. Our interest coverage ratio was 3.52x for the current quarter compared to 3.71x for the comparable quarter in 2023. With the decrease mainly driven by an increase in interest expense and other financing charges outpacing the growth in EBIT fair value again this quarter. The indebtedness to EBIT fair value ratio improved to 6.61x down from 6.83x in Q2 of 2023, primarily because the growth in EBIT fair value outpaced the slight increase in indebtedness.

Our indebtedness ratio was down slightly to 40.7% from 41.1% in the same quarter of last year due to the increase in fair value on investment properties, partially offset by the issuance of the senior unsecured debentures. Our investments ratio continues to be in our target range. And considering the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet.

Lastly, with respect to liquidity. We ended Q3 with $5 million of cash on hand, $291 million remains available through our committed credit facility and a further $300 million is available on our uncommitted facility with Canadian Tire Corporation.

And with that, I will 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, Capital Markets.

[Lorne Kalmar, analyst]

Thanks. Good morning, everybody. I wanted to focus in on the pickup in the investment activity in the quarter and more specifically on the vend-ins. I was just wondering if you could give a little bit more precise timing on the closing and the value of those 2 assets and how you expect to fund them.

[Kevin Salsberg, executive]

Lorne, just a little color, and then I'll pass it over to Jodi for some specifics. We are fortunate to have a number of different growth levers that we can pull at different times. Obviously, for a couple of years there, we were adding quite significantly to our development pipeline, which we continue to work through and deliver. Last quarter, we announced and closed this quarter is a third-party acquisition. And this quarter, leading into the vend-ins a little bit more fulsomely, which I believe is the first time we've we've picked up a vend-in in about 3 or so years. So fortunate to have those growth options. Jodi, you can give the specifics on the properties.

[Jodi Shpigel, executive]

So the Winnipeg is a stand-alone Canadian Tire store and it's been on the list of the vending pipeline for some time. And so the opportunity arose. So that's why that one has worked out. And Mont Tremblant is a newly built shopping center in Tremblant. It is built like [indiscernible] Canadian Tire. They have built the Canadian Tire, the Marks and the Dollarama. And so now that it's fully built, we are vend-in that into us. Both of these are expected to close in the fourth quarter, and the combined value of these are approximately $70 million.

[Lorne Kalmar, analyst]

Okay. Perfect. And then maybe just as a follow-up, do you -- how do you kind of see the investment activity evolving maybe over the next 4 quarters? Do you expect it to lead more vend-ins or kind of stick to the development pipe -- building up the development pipeline. .

[Kevin Salsberg, executive]

I mean 2025 will be a big year for us in development completions. As Jodi mentioned, there's probably over $100 million to be spent on our previously announced activity. I think the acquisition activity you've seen last quarter this quarter is us sort of feeling better about the more constructive backdrop.

Obviously, cost of financing seems to have settled a little bit more fulsomely. Our unit price had a nice run up over the last 3, 4 months. So obviously, acquisitions will be opportunistic for us, especially third-party acquisitions. But we're going to be busy over the next 12 to 18 months just with our existing pipeline and what we've announced.

[Lorne Kalmar, analyst]

Okay. Great. And then sorry, I just realized I forgot get one answer on the first part of my question. How do you guys fund the vend-ins?.

[Lesley Gibson, executive]

Lorne, the vend-ins are -- the ones that that Jodi spoke about, largely cash, there'll be a small amount of Class B units that are also issued in connection with those, but the majority of those will be cash.

[Operator]

One moment for our next question. Our next question comes from the line of [ Gora Mathur ] from Green Street.

[Unknown Analyst]

It's Fred. Just one question for me. You had these debentures coming due. I was wondering if you could give us a bit more color on what you're seeing for the $200 million coming due next year?

[Lesley Gibson, executive]

Thanks, Fred. Yes, we have $200 million of poly debentures that come due in June of 2025. Obviously, those are on our radar screen, but it's still fair ways away for us. We're obviously looking at rates given where the interest rates are going and political things are moving. We do have a bit of time to decide what we're going to do. I think, our still primary desire would be to refinance those into the public markets. We're happy to have the size of program that we have for our debentures, but we'll be making sort of some of those calls over the next quarter or 2 as we get a bit closer to the maturity.

[Unknown Analyst]

That's great. Maybe one more, if I may. As you know, I mean, the Canadian store count has reduced over the last 2 years. So when we look specifically at your external growth like your views on external growth. How do you think this will impact your acquisition pipeline going forward? I know your focus will be on development next year, but just purely looking at your acquisition pipe.

[Kevin Salsberg, executive]

Yes. I mean I just -- my take on Canadian Tire is there -- the number of stores they have out there has pretty much remained flat for some time. Having said that, though, they've been expanding stores or relocating to bigger locations.

So their total footprint has actually grown, and we've certainly been a beneficiary of that, and that's what's led to the development activities we've undertaken over the last few years in our current development pipeline. So I think there's still opportunity there. It's a big fleet that they have that they modernize and update over time, which, again, provides us with that access to pipeline and we complement that with the vend-ins we pull off the shelf as we deem appropriate.

And as I said in my comments, we are hopeful that transaction activity in the third-party space will also pick up as market participants sort of try to get back to what is the new normal. So hopefully, that answers your question, but I think there's lots of opportunity working with Canadian Tire and hopefully, some new things we can do externally as well.

[Operator]

One moment for our next question. Our next question comes from the line of Himanshu Gupta from Scotia Capital.

[Himanshu Gupta, analyst]

So just looking at same-store NOI growth, same-store NOI growth was tracking 2.5% in the last 2 years. And obviously, this year tracking less than 2%. So how should we think about same-store NOI next year and in general, the vote outlook?

[Lesley Gibson, executive]

Himanshu. A couple of things, I guess, on the same-store NOI growth for the current quarter. We did have some higher nonrecoverable property costs, particularly, or in closed mall properties, where we do have some gross leases and some caps and some of the leases there. But probably the other factor that is impacting the same-store NOI growth is the contribution that we recover from our maintenance capital.

So the amortization and also the related interest carry in a flat interest rate environment like quarter-over-quarter, that had typically provided us about 50 to 60 basis points of NOI growth. And obviously, now that we're in an interest rate environment that's going, that's on a decreasing, the interest carries much less. And the combination of that really is now providing us less than 10 basis points when the prime rate is decreasing.

I would expect sort of that to sort of continue really until we get to a point where sort of the prime rate stabilizes. And then that growth would set dividend typically resume after that point. So that's obviously impacting things a bit more negatively as we've had sort of swings in the interest rate, and we'll probably for a few more quarters when we go quarter-over-quarter comparisons. .

[Himanshu Gupta, analyst]

Okay. So fair to say that -- I mean next year, like we do track like less than 2% kind of similar to what we have seen in the recent quarters? .

[Lesley Gibson, executive]

Himanshu, we inductively provide guidance on the future, but mathematically when the interest rates are going to be less this year than they were in the comparative, that number will be less than it is, so lower growth for us for a couple of quarters really until that sort of that quarter-over-quarter stabilizes. .

[Himanshu Gupta, analyst]

Okay. Fair enough. Yes. And then on Canada Square, should we expect any more incremental NOI erosion next year. I'm talking '25 versus '24.

[Lesley Gibson, executive]

Himanshu, I'd say the amount is going to be really small. There's very -- there are a few tenancies left at our 2,200 Yonge Street property, which is probably at the very north end of our property, which is part of the first phase that will be redeveloped. So I would say there'll be nothing significant, no material change in that for the next few quarters.

[Himanshu Gupta, analyst]

Last question. I think Fred asked about the debentures. I'm asking about the Class C units. I think there's some Class C units expiring next year? Any thoughts on the interest rate there?

[Lesley Gibson, executive]

Sure. Yes, we do have $252 million of Class C units that roll over at the end of next May in 2025. they do fall a slightly different process. As Canadian Tire, who owns those debentures, they do have the opportunity to redeem them or can decide whether they'd like to roll them over. Typically in the past, they have rolled those units over. But there is a process and a time line sort of laid out in those Class C, like in the agreements.

That have sort of a time line as to when they have to provide us notice as to what they'd like to do, and it will flow from there. So we have some more information on that probably at our year-end call as to what Canadian Tire would like to do or what the process will be for those Class C units.

[Himanshu Gupta, analyst]

Got it. And is there an option or a provision in the agreement where they can convert Class C into Class B.

[Lesley Gibson, executive]

There is, Himanshu. So Canadian Tire does have the opportunity they could ask to redeem those units and they can redeem them for cash or they can redeem them for Class B units. So they do have some options for that.

[Operator]

One moment for our next question. Our next question comes from the line of Sam Damiani from TD Cowen. .

[Sam Damiani, analyst]

Don't have a lot of questions left, but maybe I'll just chime in on Canada Square. Just wondering if you have some visibility on commencing active redevelopment there. And related to that, just with all the changes in rental development in Toronto. Is there -- would you say like a clearer path to sort of economic justification of building rental on that site? Or is the residential component going to be mostly condos.

[Kevin Salsberg, executive]

Sam, so the residential was always contemplated to be apartment or rental. If you'll recall, we have a very long-term ground lease that we sit on the Canada Square. So -- there is a small portion of the site that we can convert to freehold and potentially do condominiums, but that would be a much later phase of the project.

So the new policies that are coming into play federally, provincially, municipally certainly are providing a little bit of help and support for the development of new residential. As we've talked about in the past, we can't really get out that density until MetroLinx departs a portion of the site where we are contemplating building the first towers.

And there's still no time line in sight. Unfortunately, I feel like I say this every quarter, but for them to complete the project and ultimately depart the lands that we need. Having said that, we are still working with the city, Oxford as our development partner to advance the master plan and the zoning and related entitlements.

That process is going well, but obviously, it takes time and continues to follow a wholesome process where we engage with stakeholders and city staff to try to do all the things that are required to affect the changes. So everything is going fine. It's just obviously slow.

And certainly, we anxiously await being able to travel east and west along Eglinton on a new subway line.

[Sam Damiani, analyst]

Okay. That's helpful. And I did forget about the rental focus of that the project. So thank you for reminding me. So just on retail leasing spreads, I jumped on the call a little late, so I may have missed it, but if you have any leasing spreads to update us with in the third quarter, that would be of interest.

[Jodi Shpigel, executive]

Sam, it's Jodi. You didn't miss the answer to that, if you were asking for the first time. This quarter, the leasing renewal volume was pretty low. As you know, it's -- each quarter is a bit different. This one happens to be lower volume than typical. However, we did achieve mid-teen spreads in the renewals, so we're quite pleased with that result. .

[Sam Damiani, analyst]

I guess how many square feet would that be, Jodi? That sounds like a great number, but if it's on like 22,000 square feet, is it still a decent sort of sample? Or is it really .

[Kevin Salsberg, executive]

I would say it would not be a statistically significant Sam, so yes, it is a smaller GLA. .

[Sam Damiani, analyst]

Okay. And just back to, I believe, maybe Lorne's question just on the vend-ins small bit of Class B issuance to come there. How would those units be priced?

[Lesley Gibson, executive]

They're priced at a VWAP at the closing date. So the public units.

[Operator]

.

[Operator Instructions] Our next question comes from the line of Pammi Bir from RBC Capital Markets.

[Pammi Bir, analyst]

Just maybe one question for me. On the development pipeline, it looks like costs went up a little bit on a per square foot basis. Can you just remind us what sort of range you're expecting on these projects, either maybe the deliveries for next year or on an overall basis? Just curious how that compares to the acquisition yield that you quoted in the release.

[Kevin Salsberg, executive]

Sure. I assume you're talking about kind of return metrics or are those projects that will be delivered in '25. If you recall, the way we fund our development with Canadian Tire is they actually undertake the construction activities, take the construction risk and that the combination of the project. .

We reimbursed them those funds through a tenant allowance and then rent begins. So we definitely take the development and construction risk off the table. But obviously, the returns are commensurate with the acquisition of a stabilized asset as a result. So I don't have the number off hand specifically for what the, call it, next 12-month deliveries would would yield, but I would suggest it would approximate what our average has been or what an acquisition of entire store or a vend-in would look like for us. .

[Pammi Bir, analyst]

Okay. So somewhere in the, call it, 6% to 6.5% range. .

[Kevin Salsberg, executive]

I was saying it's somewhere plus or minus 6.5% yes, mid-6.5.

[Operator]

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 the New Year in Febuary after we release our Q4 results. Have a good day. .

[Operator]

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