First Capital, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the first Capital Reef Q1 2020 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star 1 on your telephone keypad. I would now like to turn the conference over to Alison. Please proceed with your presentation. Thank you, and good afternoon, everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control, and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these statements. A number of these underlying assumptions, risks, and uncertainties A summary of these underlying assumptions, risks, and uncertainties is contained in our various securities filings, including our Q1 MD&A, our MD&A for the year ended December 31, 2019, and our current AIF, which are available on CDAR and on our website. These forward-looking statements are made as of today's date, and acceptance required by securities law we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the company's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this conference call. I'll now turn the call over to Adam.

Okay, thank you very much, Allison. Good afternoon, everyone, and thank you for joining us today. After I speak, Kay will take us through the quarter, and there are other members of our management team joining us as well for the Q&A section. But Q1 really does seem like a distant memory. The world has changed so much since then. So my comments today will focus on the state of our business in light of the environment brought about by COVID-19 and the related government-imposed shutdowns. I'll frame the discussion by starting with the current shutdown phase, followed by the reopening phase, and conclude with some thoughts we have as we look into the future beyond COVID-19 as it relates to FCR. To begin with the current phase, I'd like to start by acknowledging the efforts of the First Capital team, who have done a remarkable job in responding to the pandemic as a result of their focus, agility, and dedication. When this first hit, one of the first to act was our IT team. Within 48 hours, they had 100% of our staff up and running with the tools needed to work safely, effectively, and remotely. Our property operations staff have been exceptionally busy as well, ensuring the safety and security of our tenants and properties. FCR's frontline workers are our property operations teams. These dedicated employees continue to be front and center at our properties to ensure they are safe, secure, and that maintenance standards are met in order for our essential tenants to continue serving their respective communities who are relying on them more than ever. Communication with tenants has been a big priority. This is not business as usual, so the focus on direct communication has been increased. Everything from dealing with tenant requests, helping them navigate available government programs, and sharing links and information on COVID-19 best practices, among other information. Our accounting, valuations, and finance teams didn't miss a beat and completed Q1 results and reporting while working together but apart. Our leasing and legal teams continue to work with operations and with many tenants directly. In addition to our small business support program, This team has also been negotiating and completing lease renewals and even a handful of new lease transactions. Our brand and culture team has been providing employee support and implemented a communications hub for information on the coronavirus, as well as a resource center for webinars on topics such as leading teams remotely and enhancing mental wellness. And our development and construction teams are doing their very best to move our active projects along, while keeping the site safe, whether they're open or closed. Furthermore, this team is preparing for the full reopening of our sites and projects while still working directly with city officials on high priority files the city has kept working on remotely, such as the rezoning of our Christy Cookie site. In terms of our portfolio, its foundation is necessity-based, which has provided us with some cushion. Through the lockdown, there has obviously been bifurcation between retail that is designated essential versus non-essential. FCR has been and remains focused on providing communities with essential services through our properties, including grocery, pharmacy, liquor stores, restaurants for curbside takeout or delivery, certain medical uses among others. This combined with our urban locations should serve us well as we slowly commence reopening. Our portfolio today can be summarized as follows. Approximately 1,700 tenants representing 54% of total rent are fully open. Approximately 330 tenants representing 7% of total rent are partially open. And roughly 2,300 tenants representing 39% of total rent are closed, although we still consider these tenants an important part of our tenant mix going forward. In terms of April rent, we collected 74% of the total gross rent payable before adjusting the rent roll for rent deferrals that have been agreed to, such as those under our small business support program. At this stage, we believe that a significant portion of the uncollected April rent will ultimately be collected Aside from small business tenants subject to deferral arrangements, tenants that have not paid generally fall into one of two categories. The first are large companies who we believe have the means to pay rent. Aside from whether or not they are operating, their covenant strength and access to liquidity are important factors to us in assessing their ability to pay. We will take an aggressive approach to collect the rent owed from these tenants. The second are tenants who we believe do not have the means to pay full rent. Many of these are small business tenants who are among the most vulnerable. To help them, we launched FCR's small business support program in March that provided immediate relief through up to $30 million in the form of rent deferrals. Thus far, approximately 1400 qualifying tenants with a total monthly rent obligation of $9.3 million have applied. We launched this program to provide immediate relief. Since then, government has announced additional support. One such program is the Canada Emergency Commercial Rent Assistance Program, or SECRA for short. While well-intentioned, important details need to be finalized and understood before we definitively understand the impact to FCR. However, at this stage, we believe that roughly 25% of our tenants may qualify for the SECRA program, including substantially all of our tenants who qualify for FCR's Small Business Support Program. SECRA may prove to be a better option than FCR's Small Business Program, both for FCR and the tenant, but we'll await further details on SECRA to make that determination. Now on to May. It does take a bit of time to get an accurate picture or an accurate picture on monthly rent given the timing of when tenants pay or are obligated to pay timelines for checks to clear, timelines for electronic fund transfers to clear and so on. However, based on the three business days incurred to date to start the month, May rent collection is shaping up to be very similar to April. Nevertheless, we'll wait for funds to clear before making that final determination. Speaking of May, I'll move into the reopening phase with preliminary plans already in place in certain provinces. The only thing we know for certain is that the reopening phasing and timeline will vary by province. Our team will be supporting our tenants with health and safety requirements, customer or physical distancing control, PPEs where applicable, designated curbside pickup areas, and more. We have a wonderful tenant base. However, we can't predict how different retailers will adapt to a graduated reopening, but some tenants may not survive causing vacancies. We'll endeavor to work with our tenants to ensure their success, failing which we're very confident in the quality of our locations and our ability to release space. Now looking beyond the immediate future. Our team's focus is now turning to how best to harvest the learnings from this global tragedy and to develop a plan to enhance our current property attributes and business in general. We're more convinced than ever that our super urban strategy of creating thriving urban neighborhoods positions FCR well for the future. We know that essential service tenants, have fared better in close proximity to higher or more dense populations. We know that food service locations, while impacted by the loss of seating and in-dining availability, were able to shift a larger portion of their businesses to take-out and food delivery, again, because of their proximity to higher and more dense populations. More than ever, we also know the value proposition of our real estate being centrally located in the heart of the last mile, a major factor in the future value of real estate. The walkability of our property should also result in better performance coming out of this. From a financial perspective, our objective to lower our debt through dispositions remains. However, we recognize the property transaction market is largely paused, as was the case during the initial phase of every previous crisis. We have had great success over the last year or so, selling over $900 million of our leased urban properties. Fortunately, we were ahead of our disposition plan coming into this. We will not be inclined to dispose of high-quality properties at undervalued pricing, and accordingly, we expect our dispositions program to pause for the time being. Capital allocation, always a very strong focus, will be of paramount importance. It's too early to talk of any specifics in this regard, as the lockdowns remain in place and the reopening timeframe lacks clarity. But we are not coming off our objective to reduce debt in the short to medium term. Before I conclude, I would like to again reiterate FCR's deepest sympathy to those who have been victimized by this pandemic. I would also like to express thanks and gratitude to the many frontline workers who are the true heroes of this pandemic. As a means to support FCR's independent food tenants through this and to express our appreciation to frontline staff, FCR is proud to be providing thousands of healthy and delicious meals to frontline workers in several cities in which we operate. I will end where I began, with the FCR team. Through video calls, phone calls, town halls, and emails, we have kept connected as a team, and we've accomplished an awful lot. I am tremendously proud of how the SJR team has lived our values and worked as one team with one purpose through this. I will now turn things over to Kay. Kay?

Thank you, Adam. Good afternoon, everyone, and thank you for joining us on our call today. As Adam mentioned, due to the worldwide pandemic, we are operating in a very different environment today. Never has it been any clearer how important our properties are to the communities in which we operate. Many of our tenants are providing everyday essentials in the midst of a global pandemic, the daily essentials we've always assumed that we would have ready access to and literally cannot live without. We would like to recognize and thank all of our team members and our tenants for how quickly they have transitioned to the new requirements for social distancing and operating our properties, which has allowed the residents of our communities to safely acquire the products and services they need. I want to touch on our balance sheet and liquidity position leading into the pandemic prior to discussing our results for the quarter. In 2019, we completed 835 million of dispositions, which put us ahead of our internal targets. Early in Q1, we closed on another 81 million of dispositions and had another disposition go firm with closing expected in Q2. Given the significant amount of dispositions completed over the past 15 months, combined with our investment activities, our asset quality has never been higher. And we were in a positive cash position with 800 million of undrawn operating credit facilities heading into the pandemic. We had approximately 7 billion or 70% of our assets unencumbered, including the vast majority of our very best assets. Additionally, our near-term maturities were very manageable with about 6% of our debt coming due in 2020, and another 7% in 2021, which is well below the 10% target we set for our annual maturity. Overall, a very solid position. I would like to briefly touch on our results for Q1, which for the most part were unimpacted by the pandemic, with the exception of $119 million non-cash adjustment to the fair value of our properties as described in our MD&A. We've posted our conference call deck on our website, which presents the quarterly results in detail. I will briefly summarize the results rather than taking you through the deck to allow more time for Q&A. As we expected, our Q1 FFO declined versus the prior year, given the success of our disposition program over the past 15 months with $916 million of completed dispositions. as well as a year-over-year reduction in our outstanding loan receivables. The loans that were repaid, primarily in Q3 of last year, generated very attractive returns for us and supported our deleveraging objectives. But as we previously indicated, this has and will result in lower interest and other income in 2020. We also had higher other losses in the year, which included $1.4 million of selling costs related to our Humbertown condo project, which has reached pre-sales of 50% and is slated to begin construction in 2021, as well as $900,000 of non-recurring reconversion costs as we closed out this project. Same property NOI growth was negative as expected due to an unusually large lease termination fee we received in the first quarter of last year from a tenant which we have since backfilled. Our occupancy declined 50 basis points from Q4. The majority of this decline was intentional as we are making room for new tenants taking occupancy throughout the remainder of the year. For the eighth consecutive quarter, we achieved double-digit increases on our lease renewal rates with an overall lift of 18% in the quarter. This is a testament to the quality of our assets. We continue to advance our super urban strategy in Q1 by further enhancing our portfolio quality through the disposition of properties inconsistent with our strategy while at the same time investing capital in our targeted high-growth urban neighborhoods. As a result, the average population density surrounding our properties increased to 293,000 at quarter end, which is very close to our 300,000 target and up 42% from January of 2017. Additionally, our average rental rate grew by 5.5% over the prior year. record growth, and well above our five-year historical average growth rate of 3.2%. During the quarter, Gazit sold its remaining interest in FCR, which further increased our public float. Looking forward, our liquidity position as of May 5th remains strong and includes approximately $680 million of cash and undrawn credit facilities. Our debt maturities for the remainder of 2020 totaled just 80 million, with 310 million maturing in 2021. And our unencumbered asset pool exceeds 7 billion and 70% of our assets. To further enhance our liquidity, we are implementing a $75 million cost reduction program, which includes both proactive and naturally occurring reductions in spending over the remaining quarters of the year. This program includes a reduction in property operating costs and in general and administrative expenses, totaling approximately $15 million, as well as a reduction in development spend and elective maintenance capex of approximately $60 million. We will also be taking advantage of the government support programs that are available to us, including the ability to defer certain payments like HSP and realty tax, and we'll continue to evaluate the potential merits of the SECRA program Adam touched on earlier, as well as any other programs announced by the government as details become available. While it is too early to predict the full impact of the pandemic, we are actively monitoring and evaluating all aspects of our business as the impact of this crisis continues to unfold. During this time of uncertainty, we continue to be guided by our values and our corporate responsibility and sustainability program. I am proud of our employees who now more than ever demonstrate day after day our core values of collaboration, innovation, excellence, accountability, and passion. And I'm confident that the superior quality of our portfolio and our tenants, the vast majority of whom offer everyday essentials will differentiate us in the months and years to come. At this time, we would be pleased to answer any questions you have. Melanie, could you please open the call for questions? Certainly. Once again, please press star one at this time if you have a question. The first question is from Mark Rothschild. Please go ahead.

Thanks, and good afternoon. Adam, maybe in regards to your comment about reducing leverage, you also said that you probably will not be selling assets in the near term. So outside of the cost reductions, can you maybe just talk a little bit about how you plan on reducing leverage in the near term?

Thanks, Mark. It's a very good question, and it's a topic that we're spending a lot of time on as a management group and a board. and you know i think i would i would first come back to capital allocation in general and despite the intense short-term focus that the pandemic is forcing on all companies including ours our approach meeting management and the board the approach we're taking extends beyond the short term and A lot of the discussion at the board level is geared to the best long-term interests of the company. So it's been discussed within that framework. And certainly our board's been and will continue to meet more frequently than normal to consider all courses of action. Nothing's off the table for consideration, I can tell you. I think it's an obligation of the board to make sure nothing is off the table. and capital allocation decisions are being discussed and will continue to be discussed at every meeting. And, you know, whether there are decisions to change certain courses or not, will be discussed each month and as we meet on the most relevant information we have and the future visibility that's available at the time, and that's continuing to unfold. This is a very fluid situation, so I can't point to one specific lever today that I can tell you over the next few months we're going to execute on because there's so much volatility in the world and in our business. But we're looking at all of the potential options, and we will think through all of the potential options. And then we will act accordingly where we have a firm belief that it is in the best interest of the company. So certainly dispositions is our preference. We've said right now that's on pause. We don't know how long that will be on pause for and a bunch of other factors and how they'll unfold over the short to medium term, but we're going to look at all of them.

Okay, thanks, Ed. You also said that you expect to get most of the rent from the tenants, the retailers that haven't paid yet in general, but clearly some are likely to need some help and not able to pay much risk. To what extent are you willing to accept vacancy and just not allow the tenants to get by, or are you willing to work with them and understand that they might be able to operate their business and pay rent once we come through this, but in the near term, they will need additional help than just a deferral.

Yeah, it's a very complicated scenario, or I should say it's a very time-consuming endeavor because we don't believe that a cookie-cutter approach is the right approach to this. And so, Unfortunately, I say unfortunately from a time perspective, we have to really analyze each situation individually. We created a small business program that actually provides for a lot of efficiency. And, you know, you can make the case for some of the tenants that are qualifying for this, like, you know, a doctor, let's say. Well, we know that a lot of medical practitioners like doctors in our portfolio are can probably find a means to pay their rent and get through this differently than certain small businesses that may be in a different scenario. We have not segregated those. And so we've said, look, with the dentist or the doctor, we've said we're going to give it to you. We're not scrutinizing it differently than other small business tenants. And kind of the worst case scenario is we have a higher probability of collecting the full rent from that type of tenant. But it is a case-by-case basis. And we look at the space that they occupy. We look at their business heading into this. We look at their history with First Capital, their payment history, their sales history, the strength of their business. And then we make a call. And unfortunately, there are some tenants that perhaps were weak heading into this. And it won't make sense for us to do extraordinary things to keep them alive. and the space is really good and we'll say, you know, look, there's not much more we can do here and we will look for an alternate tenant if required. And we're very comfortable with our ability to secure another tenant given the quality of the space and, you know, generally at more rent. And, of course, you've got downtime and other things. And then others, we may say, look, this has been a long-term great tenant. The business has been a great business. They didn't plan for a pandemic where their revenues went from a certain level to near zero. And they really do need some help. And we will work with those tenants to get them the help and to get them back to where they were if we believe in them and there's a demonstrated track record. It's a bit of a long-winded answer, but it's really been done on a case-by-case basis. And there's a lot of factors that we consider in making the decision, including compassion as part of it. I can tell you, the way tenants are approaching this with us does have an influence over the type and depth of help that we're prepared to provide, including large tenants. Large tenants that are being very transparent and respectful and reasonable on the situation, you know, we're going to get to a meeting of the minds between us and them much more quickly than some others who have taken a, I'll call it a more opportunistic approach. Okay, great. Thank you. Thank you, Mark.

Thank you. The following question is from Sam Damiani. Please go ahead.

Thanks. Good afternoon, everyone. First off, maybe just on the fair value losses that you booked in the quarter. It seems like a pretty substantial number at $129 million relative to the quarterly revenue run rate for the REIT, especially when you think about the pretty high collection rate that the REIT has enjoyed for April. I wonder if you could just give a little more color as to how you arrived at that fair value loss.

Sure. Hi, Sam. It's Kay. So we adjusted the value of certain assets that had a lower percentage of essential tenants by adjusting the growth in market rents and vacancy rents in the near-term years in our 10-year DCF model. We didn't make any adjustment to cap rates, as you noted, when reviewing materials. We really felt there was a lack of objective evidence that the reporting to date to conclude on an overall change in cap rates. However, we did feel there was evidence of change in cash flows. We had announced our small business support program prior to the end of March, which is why we made a look at all of our DCF models and selectively made those adjustments. It's obviously a very fluid environment, as Adam said. So we'll be reassessing cap rates at Q2 based on the information that's available at the time. But overall, that was the approach that we took is to look specifically at near-term assumptions in our DCF models for certain assets within the portfolio.

Okay. I was thinking the impact of the rent deferrals was the primary driver, but it sounds like there was obviously a lot more thought put into it than that. It looked like Calgary occupancy declined almost two percentage points quarter over quarter. Was there anything particularly driving that? And it looked like a good chunk of the fair value loss was actually within that market as well.

I'll start that and then I'll turn it over to Karim. And just to dovetail on the back of Kay's comment, I can tell you that our auditors' comments to our audit committee was that the gold standard was demonstrated in terms of our approach to IFRS valuations in the quarter. So they were very happy that we did a deep dive into it. things at the property level versus taking macro assumptions. And so that's why you may have seen a larger decline than perhaps one would expect, but it was a result of a pretty deep dive work. In terms of the decline in Calgary, I'll let Karm speak to the details, but there's a tenant who we have re-let their space and terminate early. But Karm, the details, if you have them, please.

Sure. Hi, Simon. It's Karm. We had a tenant in one of our properties, an anchor tenant, that we had decided to negotiate a buyout with them because we had another national tenant, a TJX banner, that wanted the space. So we ended up backfilling it. And now we're in the progress of getting the space ready for that tenant. So we purposely made that 40,000 square feet come available. and ended up doing a deal with significantly higher market rents.

It was Home Outfitters, right, Carm? That's the tenant that went out? Yes.

Yeah. Oh, okay. Yeah, sure. Maybe just one last one, if I could. I noticed today the Ontario government is allowing more stores to open up over the next few days, including basically any store with an outside entrance for curbside sales. So what percentage of your... tenants that are today closed would then be allowed to open in Ontario as a result of this change? I'm thinking it would be the vast majority, but I'm just curious what the answer is.

Yeah, we're trying to understand the full details, which has been a routine thing when some of the government announcements come out. And look, this is not a knock against them. It's just we want to make sure we get the details right. And If it's based on the stores that have an exterior access, it's well over 90% of our tenants by revenue and tenant count fall into that category.

That's helpful. I'll turn it back. Thank you.

Thank you, Sam.

Thank you. The following question is from Joanne Rodriguez. Please go ahead. Your line is now open.

Okay. Hey, everyone. Just kind of going back to Mark's question, just on the two buckets you'd mentioned about those that had the means to pay and those that don't, you know, I can appreciate it's a challenging exercise, as you mentioned, but what actual metrics do you use to determine whether a company kind of has the means to pay or not?

Market cap is one if they're a public company. Access to liquidity is another. Demonstrating their true current financial position through sales and things like that is another. So, look, we're asking in some cases for non-public information, but we're being asked to amend a contract. So, we want to make sure that we have adequate information to make the right decision to do that. So... You know, look, obviously we're dealing with a lot of tenants who their sales in April would render them not being able to pay rent. But, you know, we could say the same thing on certain properties we own that we can't afford to pay certain things there. But the expectations that we pay them, we pay our loans when they come due and when they're scheduled to be paid. And we enter into contracts with strong covenants and that's part of the decision making process. And And so we want to make sure that it's not just about, you know, we've had a really, really bad month that no one planned for. That doesn't necessarily mean you can't pay your rent for the month. So it's a typical financial analysis that one would look to and the metrics and, you know, access to liquidity, things like that. You know, private equity, you look at what type of distributions or capitals come out of the company recently. If there's a major amount, if there's a major sponsor, we encourage that tenant to use their sponsors and owners balance sheet to finance their rent, not ours. So these are some of the things that you obviously think about.

Okay. Okay, thanks. And then of the 26 that haven't paid April rent, What percentage of that would fall under the government small business program that was announced last week?

The CERCA program?

Yeah, the CERCA.

Jordi, you may have more info. I think it's roughly half because we believe a quarter of our total tenants would qualify and we think roughly 15% of our tenant base is small business that qualifies for our small business. So those would all qualify for it. And then there'd be another 10% of our tenants that we believe would qualify for it. Does that answer your question, Eli?

So then roughly half of the group that haven't paid, you think would fall under this program then. And then presumably the other half would be, you know, ones that would maybe fall under a larger retail program that is rumored to be being developed right now?

Yeah, that's correct.

Okay. Okay. All right. That's helpful. And then, Les, I know you said it was similar, but, you know, as of May 5th, what was the rent paid versus April 5th?

Identical.

Identical. Okay. Okay. Thanks. I'll turn it back.

Thank you.