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CT Real Estate Investment Trust
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Good morning. My name is Alana, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Fourth Quarter Earnings Results Conference Call. [Operator Instructions] The speakers on the call today are Ken Silver, Chief Executive Officer of CT REIT; Louis Forbes, Chief Financial Officer of CT REIT; and Kevin Salsberg, Senior Vice President of CT REIT.Today's discussion 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 2017 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?
Thank you, operator, and good morning, everyone. We're very pleased to welcome you to CT REIT's Fourth Quarter 2017 Investor Conference Call. While 2017 may have been a year of interesting times for retail and retail real estate in North America, CT REIT's results for the fourth quarter and full year continue to underscore how robust our business model is. The start to 2018 has also been interesting so far, if for perhaps different reasons. Yet no matter the circumstances, CT REIT was designed to predictably deliver attractive results.The planning for CT REIT began with a host of advantages, not the least of which was a high-quality real estate portfolio and an outstanding anchor tenant. It's worth remembering as well that CT REIT went public in the fall of 2013 after the so-called taper tantrum and the -- and in the face of expectations for rising interest rates. And these expectations informed how we built CT REIT and how we've operated it since IPO. Our leases with Canadian Tire with built-in annual rent escalations provide both predictable and reliable organic growth, coupled with the security of term from an investment-grade tenant. We have managed the business to proactively insulate us from rising rates, accessing the unsecured debt market for longer terms, giving us today the longest weighted average term on our debt in the sector.At the same time, we have managed our investment agenda and leveraged our strategic relationship with Canadian Tire to deliver better-than-average growth in AFFO per unit since our IPO without having to resort to short-term debt. Our business model has performed as well we could have hoped, and we don't see the need for any significant changes to our approach. But do note that, for the first time since our IPO, our units are trading at a discount to net asset value.Turning to some of the highlights of 2017. CT REIT completed $314.8 million worth of investments and developments, of which $118.3 million was directly with CTC for new developments, intensifications and acquisitions, $142.2 million was for purchases from third parties for multi-tenanted properties anchored by CTC and other banners, $32.8 million related to non-CTC anchored properties acquired from third parties and $21.5 million was related to third-party development on existing CT REIT properties.Including properties under development, we added approximately 1.5 million square feet of GLA to the portfolio last year, and continue to be well positioned to acquire or develop new sites that we view as a good fit.While it may be a stretch to say we planned for Sears Canada's liquidation and for CTC to backfill the Sears distribution center in Calgary with a long-term lease, it certainly was the scenario we contemplated when we completed the sale-leaseback of the property with Sears in 2016. In what we're calling the Dufferin District, we're delighted to own a significant portfolio of industrial assets in one of the strongest distribution nodes in Western Canada and appreciate that the strategic relationship with CTC put us in the position to do so.CT REIT continues to be well received by investors in the unsecured debt market. In June of 2017, we raised $175 million of debt with a 10-year term at a record low coupon for the term in the sector. Last month, we raised $200 million in 9.8-year unsecured debentures in an offering that was significantly oversubscribed.Our continued strategic focus, attractive growth and conservative financial management led to growth in AFFO per unit of 6.6% in 2017. That growth, together with an improved payout ratio, coverage ratios and other financial metrics, allowed us to increase our distribution for the fourth time in 4 years.At this point, I will now turn the call over to Kevin Salsberg, our Senior Vice President of Real Estate, to lead off the discussion of our leasing, investments and development activities. Louis Forbes, our Chief Financial Officer, will then briefly review the financial aspects of the quarter, and I'll wrap things up before turning the call over for questions. Kevin?
Thanks, Ken, and good morning. As Ken mentioned, 2017 was a busy year for us in terms of our investing activities. We were very pleased to acquire 5 Canadian Tire anchored assets from RioCan in December and expect to close during the first quarter of 2018 on the remaining 2 properties in Collingwood and St. Catharines, Ontario, for an additional investment of $66 million.As outlined in our earnings release, during the fourth quarter, CT REIT also completed the intensification of 5 properties consisting of the expansion of existing Canadian Tire stores in Quesnel, BC, and New Liskeard, Ontario, the construction of Canadian Tire Gas plus gas bars in Bradford and Arnprior, Ontario, and the construction of a new Mark's store in Martensville, Saskatchewan.Including properties under development, CT REIT added approximately 1.5 million square feet of new space to the portfolio during the year at a total cost of $314.8 million, including approximately 1 million square feet that was added in the fourth quarter. For the year, this represented 31 acquisitions, including the 5 properties that we acquired from RioCan and the portfolio of 12 CIBC bank branches as well as 1 development and 14 intensifications. As previously disclosed and subsequent to the year-end, Sears disclaimed its lease at the Canadian Tire -- sorry, at the Calgary distribution center and has now provided vacant possession to us. CTC is working on their plans and is expected to take occupancy of the main distribution center building in the second quarter.We are also happy to announce that we have entered into an offer to lease with a third-party tenant for the 30,000 square-foot building located at 5500 Dufferin Boulevard Southeast, and have begun to market for at least 11 Dufferin Place Southeast as CTC will be vacating their current premises shortly after taking occupancy of the former Sears DC building.As at December 31, 2017, on a committed basis, our portfolio was 98.6% occupied, a 110 basis point decrease versus the 99.7% occupancy level as at December 31, 2016. The primary driver of this decrease is due to the change in lease arrangements at CT REIT's Calgary DCs. Beyond what was completed during and subsequent to Q4, we continue to make progress as expected on the balance of our development projects as detailed in our latest MD&A. With that, I'll turn it over to Louis for a review of our financial results.
Thanks, Kevin. Our fourth quarter results represent continued growth in AFFO per unit over the reported results for Q4 2016. In Q4 of 2017, we reported FFO per unit of $0.283 as compared to $0.274 per unit in Q4 of 2016. AFFO per unit was $0.232 as compared to $0.222 in the comparable period, representing a 4.5% growth rate. Net operating income was $81.9 million, an 11.2% increase over the $73.7 million of NOI reported for Q4 2016.Our MD&A breaks this headline growth into its components: 2% growth on a same-store basis; 2.2% growth on a same-property basis; and the balance as a result of acquisition and development activity, of which the most significant contribution came from the Bolton DC. The same-store growth is the result of the approximate 1.5% average annual increase in minimum rent contained within the Canadian Tire store and CTC distribution center leases, which are generally effective January 1.The recovery of capital expenditures and the related interest earned on the unrecovered balances and intensifications completed in 2017 and '16. G&A expenses as a percentage of property revenue were flat versus Q4 2016 at 2.4%. G&A expenses increased to 9.1% versus Q4 2016, due to increased personnel expense due to the variable components -- compensation awards and increased headcount.Not affecting AFFO, but perhaps noteworthy, the REIT recorded a positive fair value adjustment to invest in properties of $36.7 million during the fourth quarter of 2017. Included in this larger-than-normal amount was an increase in the value of the Bolton distribution center resulting from an increase in the capitalization rate used in the valuation. The net amount recorded in the quarter also reflects value write-downs for the 2 distribution centers in Calgary that Kevin just mentioned, net of proceeds of security realized in relation to the Sears lease.With respect to the balance sheet, the financial position continues to be strong and liquid. At December 31, the REIT's indebtedness ratio was 46.7%, 120 basis points higher than last quarter. The indebtedness ratio increased primarily due to the use of the CTC bridge facility and an increase in the use of the credit facility to fund acquisitions completed during the fourth quarter of this year.We also had approximately $268 million available on our credit facilities as well as approximately $11 million of cash, a very liquid balance sheet at year-end. As Ken mentioned, we closed our recent successful debt offering last week, further enhancing the strong liquidity position at year-end. As a reminder, the CTC bridge facility was extended to the REIT in December of 2017 for a term of 1 year and was for the purpose of partially funding the purchase of the RioCan portfolio, and the facility has since been repaid in the first quarter this year.Debt as compared to earnings before interest, taxes and fair value adjustments was a solid 7.62x. This ratio has improved notably since December 31, 2016, as the Bolton DC has begun to produce EBIT fair value.However, the ratio dipped from that reported for the September quarter this year. This dip was the result of increasing debt to fund acquisitions late in the year, but with very little EBIT earned during the period from the assets just acquired. 329 of the REIT's assets are not encumbered, representing approximately $5.3 billion of assets. Or said another way, approximately 98% of our assets.In addition, interest coverage for the fourth quarter of 2017 continues to be strong at 3.46x. The decrease versus 3.74x in Q4 2016 is primarily due to the capitalization of interest on the Bolton DC in 2016 and the recognition of NOI on the Bolton DC in 2017. Our AFFO payout ratio was a solid 75%, an improvement as compared to the 77% ratio in Q4 2016. The change in the payout ratio from Q4 of last year reflects the growth in our AFFO per unit, partially offset by the increase in our distribution rate in January.ACFO was $53.1 million in Q4 2017, an increase of 12.6% from the same period in 2016. The increase in ACFO over Q4 2016 is primarily related to the contribution of cash generated from operating activities, partially offset by increases in interest expense and an increase in the normalized capital expenditure reserve.Canadian Tire represents 90.7% of our annualized base minimum rent on a committed basis, and when combined with other CTC banners, represents 93.2% of our annualized base minimum rent. All of these metrics are largely unchanged from a year ago. Again, I would like to take a minute to speak to the trend in our book value per unit.At December 31, 2017, the book value per unit was $13.39, representing 6.9% growth over the book value of $12.52 a year ago. A number of factors contribute to this growth in book value: A higher value for the income-producing properties due to ongoing growth in cash flow resulting from annual rent increases, retained cash flow, ongoing recoverable CapEx spend and accretive investing activity financed in part by equity issuance that is accretive to this book value per unit.On a trailing basis, combining distributions and book value per unit growth, CT REIT has, since IPO, consistently delivered a total annual return in excess of 10%. With that, I will turn it back to Ken.
Thanks, Louis. As we enter our fifth full year of operations, we see a bright future and opportunities to add to our track record of success. From day 1, we have managed the business in preparation for a rising rate environment and continue to view our business model of long-term leases with annual built-in organic growth in investment-grade tenant, conservative financial management and a focused approach to growth as continuing to support our strategy of reliable, durable and growing results for our unitholders. We're off to a good start in 2018 with a successful debt transaction already behind us and an active pipeline of investments. And now, operator, I'll turn the call back to you for any questions from our listeners.
[Operator Instructions] The first question is from Sumayya Hussain with CIBC.
On the portfolio acquisition, what was the range of cap rates on the individual properties?
Sumayya, it's Louis. Are you asking about the RioCan portfolio?
Yes.
I don't have the range, but we gave the average as 6.3%.
Okay. Any color on if it was a big spread or just kind of around the low 6% range?
There was not a big spread.
Okay. And what would be the weighted average lease term on the portfolio?
I do not have that metric at my fingertips. So I can get back to you.
Okay. It's probably early on, but any thoughts on what to do with the Orillia Square property?
Sumayya, it's Kevin. We are working closely with Canadian Tire right now on their interest in bringing some possible banners to the property and possibly expanding their store there. Still early days, but we're just kind of in the preliminary stages of working on the concept planning.
Okay. And my understanding was that there wasn't a replacement tenant for Target in the mall yet. Is that still true?
Well, that plays into the discussions we're currently having with Canadian Tire, so stay tuned.
Right. And lastly for me, can you just remind us of the leverage range that you guys are comfortable with?
I think as we've stated in the past, our targeted IPO was roughly 50%. We started to express that more of a range between 45% and 50%. And we're kind of comfortable where we are today.
The next question is from Sam Damiani with TD Securities.
Just on the Bolton DC IFRS fair value increase. Was that the first increase on that property since it was completed?
Yes.
And it sounds like that was the only positive contributor to fair value gains in the quarter, so by implication the gain on it was something more than $37 million?
That's not a fair assumption, Sam. We had a number of increases, Bolton was by far the largest, and we had a number of decreases. I drew attention to the Calgary DCs, but there might have been a couple of other small decreases and there were miscellaneous increases.
So I think it was reportedly going in cap rate at the time of announcement with Bolton was 5.2%, any comment as to where it sits today on a fair value basis?
We used 4.75% at year-end.
4.75%. And that was primarily based on just market comps?
Yes.
Of course. Okay, switching over to developments. Haven't heard you talk about the old Brampton DC that the Canadian Tire is apparently, I guess, decommissioning this year. Any updated plans or timing on that project and the potential for the REIT to get involved?
Sam, it's Ken. Certainly the possibility of the REIT getting involved is -- I would say, is reasonably high. We continue to have conversations both with the City of Brampton and with Canadian Tire on potential redevelopment scenarios for that site. The site will be part of an overall secondary plan process in the City of Brampton, and we will be involved in that unfolding.
So what does that mean exactly, part of an overall secondary plan?
Well, I think it means that the city is considering how that sector around the Bramalea GO Station will be ultimately developed. And we'll consider the range of uses that would be appropriate for a site like ours.
Okay, okay. And just as far as status today, has Canadian Tire vacated the property essentially and are they in the process of decommissioning as we speak or?
I believe they've largely vacated the property.
Just finally for me, with -- as you see the unit price for the first time trading below IFRS fair value, would you consider unit buybacks given the valuation relative to investment opportunities, say?
Sam, that would always be on the list of things to be considered. I don't think you'll see a knee-jerk reaction from us in that regard. There are costs of raising equity. And so we want to compare what we would realize to treasury on a future issuance to what we would be paying to repurchase units, and that doesn't always necessarily generate good math. And I think one of the challenges for CT REIT is the size of our flow, and we don't want to make that problem worse.
Okay. And I guess, by extension, it sounds like you've got a reasonable and consistent amount of investment opportunities in the near term or medium term to continue to consume capital for growth.
Yes. And just remind people that we are generating -- we're self-funding equity at about $50 million a year now.
The next question is from Troy MacLean with BMO Capital Markets.
Just on the 5.5 acres of land you bought in Calgary next to 11 Dufferin, is that more of a longer term project? Or is that something you could develop in the near term?
I would say it would be short to midterm. We're considering the property in light of the assembly of the various assets we have now in the neighborhood, as Ken referred to as the Dufferin District. So we're starting to think about what we're going to do with it now, and I think you'll see something in the next few years.
So the 200,000 square feet you're going to lease there, could that be a part of a -- if you don't get the leasing traction you want could this be redeveloped maybe even in 2018?
I'm not sure I would say redeveloped, it could be subdivided for multiple users. And with the 5-or-so acres that sits directly adjacent to it also could be made larger, if appropriate.
And then just finally, it's probably too early, but just kind of wondering has the increase in interest rates had any pact on -- any impact on the valuation of investment opportunities you're seeing in the acquisition market? Or like is your vendor expectation is still staying pretty constant?
I think it's still early days. I think in terms of recent trades, we haven't seen any upticks on the cap rates yet. But there is a lot of retail property, especially retail property in the secondary and tertiary markets that is on the market today. So it will be interesting to track the trades over the coming quarter to see where things land.
[Operator Instructions] The next question is from Michael Smith with RBC Capital Markets.
Most of my questions have been answered, but may -- what is the current -- just wondering what the current occupancy of Orillia Square is?
It's 61%.
61%. And the vacancy is mostly is the Target?
Yes, correct.
Yes, I would say 90% of the vacancy is the target.
90%. Okay, great. And then just one follow-up on the 200,000 square-foot industrial building. So it -- are you actually in the market trying to lease it now? Or are you just rethinking? And if you are trying to lease it, what's the initial interest?
We are in the market. We've just begun that process. And I would just say, it's early days.
The next question is from Pammi Bir with Scotia Capital.
Just -- can you maybe just comment on the investment outlook for the year? 2017 was obviously a pretty active year and a bit of surprise, I guess, on some of the acquisitions that you were able to do. But just given how much real estate you mentioned is out there at this stage, how does the acquisition pipeline look, whether it's from third parties or from Canadian Tire?
Pammi, it's Ken. It's always challenging to predict what the investment outlook will be exactly. Certainly, we're actively looking and involved in the market. Of course, in the first quarter, we're still to close on the 2 remaining assets from RioCan, the properties in Collingwood and St. Catharines. As Kevin suggested, there may be other opportunities that interest us in the market. We're always looking for opportunities to create value. I would say, as I've said in the past, is we kind of take a balanced approach to our growth between Canadian Tire -- transactions with Canadian Tire and with third parties. So either one of those levers may -- we may pull more or less over the course of the year. But it's obviously still very early in the year, and that's probably as much as I could share with you in terms of the outlook.
Great, that's helpful. With 3 -- just on the 30,000 square-foot lease for the -- I guess, the remaining piece of the Sears DC. Just a small question here, but how does that rent compare to what Sears was paying? And when does that lease start?
So general comment on the rent, it's better. And it starts right away, so that we're able to negotiate with no downtime.
Right, okay. I guess, with the -- I guess, going back to Michael's question on the -- on 11 Dufferin, is that something that you think would lease-up with the same sort of quickness? Or is this a bit more of a unique property?
I would expect that one to take a little bit longer. And it will depend on market conditions.
Okay. Okay. And then just lastly, any updates on Canada Square and the development plans there, has that progressed any further at this stage?
Pammi, it's Ken. It's progressing slowly, but in line with our expectations around the development of the site. The redevelopment of Canada Square, the time frames were always tied to the construction of the Crosstown LRT. So that kind of -- if you're back up from there, you kind of work out a development schedule. And I would say that we're on track for that development schedule.
But still, I guess, we're talking probably several years out still?
Yes.
And the next question is from Tal Woolley with National Bank.
I just wanted to ask a couple of questions about Canadian Tire and CT REIT's role within it. Last November, Tire rolled out its new 3-year financial targets. And so for the first time they're sort of specifying total sales growth targets, they had been more specific about comp targets. They also featured much bigger capital return goals than maybe that have been there in the past. So I was wondering versus maybe 2013, '14, when CT REIT was launching versus now. Is there any changes or subtle shifts for the role of CT REIT within sort of the whole Canadian Tire complex going forward?
It's Ken. No, I'd say that the relationship that the REIT has with Canadian Tire, as it was established at the time of the IPO, hasn't changed. We continue to operate in the same way. We continue to fulfill the same role, if you like, within the Canadian Tire family of companies. So the quick answer is, there have been no changes.
Okay. And is there anything to -- you still anticipate that even under this new strat plan that Tire's retail square footage growth, the -- your ability to access drop downs remains roughly similar to what it was before?
Yes. I -- as I said, I don't see that there are any changes coming out of Canadian Tire's strategic plan that impact the REIT's strategies or growth agenda.
Okay. And then the other big push Tire is expected to make sort of over the course of the next 12 to 18 months is rolling out a ship-to-home delivery solution. Is there a role for CT REIT to play as a capital provider if that requires more infrastructure?
It's possible. I mean, we have stated before that we are as interested in growing the industrial and distribution center component of our portfolio as we are the retail component. So in the event that we can be a space provider for Canadian Tire, as their needs develop over time, we would certainly be having that conversation with Canadian Tire.
The next question is from Jenny Ma with Canaccord Genuity.
Most of my questions have been answered, but I was wondering if you would be able to provide a little bit of background color on how you selected the properties from the RioCan portfolio. To the extent you can comment, was there a large list of properties that you sort of got to pick and choose from? Do you think there'll be any future opportunities coming from RioCan? Just a little bit of color would be helpful.
Jenny, it's Ken. As is typical with most transactions, the path between point A and point B isn't always the straight one. So I can tell you, we've had discussions with RioCan before over a number of years around various opportunities. And I would say, this portfolio clearly, when it comes down to it, is, obviously, focused on the Canadian Tire anchored assets in our portfolio. And we arrived at a portfolio and a transaction that was, obviously, acceptable to both parties. With respect to future opportunities with RioCan, it's possible. We have a good relationship with RioCan at the REIT and at Canadian Tire Corporation, so I'm sure there'll be ongoing discussions. But I couldn't point to anything at this time.
Okay. Is it fair to say that -- just as an extension that the first kick at the can was really focused on the CTC-anchored properties and then perhaps future opportunities may be a bit more variable in terms of the CTC, non-CTC weighting?
Well, I suppose it's always possible. We clearly like to own Canadian Tire anchored properties. Through our relationship with Canadian Tire, we can identify markets that we think are attractive to invest in, and that's, as I said before, a kind of a screen that we can use to inform our investment activity. So the long and short of it is it's possible that other opportunities may arise where there is a fit for our portfolio and a transaction that makes sense for both parties.
The next question is a follow-up question from Sam Damiani with TD Securities.
Just thought I'd ask about a couple of developments that are completing over the next few months here, Amos, Québec and Antigonish, Nova Scotia. Just wondering how the remaining availability mix-up is going? And if you expect those projects to be 100% occupied on completion?
Sure, Sam, it's Kevin speaking. Amos is a greenfield development site where we're building a new Canadian Tire store and gas bar. The uncommitted GLA that's noted in the MD&A relates to potential development. As of right now, we do not have any tenants for the balance of the lands. And so I would not expect that to be -- then in the next few quarters we still are working on our leasing efforts and then we'd, obviously, have to build out the space. Antigonish is the redevelopment of an enclosed mall, and that remains in the development tale, mostly as a result of we're continuing to move some of the tenants around, trying to eliminate more common areas within the mall, but that one's getting a lot closer. So -- and we expect that to be completed at some point this year.
And the Sudbury project was leased up and completed it looks like. Could you just give us a sense of the kind of tenants that you filled up that development with?
Sure. So that was an old redundant Canadian Tire store that was vacated when they relocated into an adjacent Target. That was actually in one of the RioCan tenants we just acquired. And we have done a deal with a dollar store with Mark's and with what I'll call an entertainment center.
As there are no further questions at this time, I will turn the call over to Ken Silver, CEO, for any closing remarks.
Thank you, operator, and thank you all for joining us today. We expect our first quarter results will be released the second week of May, and we look forward to speaking with you then.
Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.