Choice Properties Real Estate Investment Trust

Q2 2021 Earnings Conference Call

7/22/2021

spk05: and thank you for standing by. Welcome to the Choice Properties Real Estate Investment Trust Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. And if you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Doris Bond, Senior Vice President, General Counsel, and Secretary. Please go ahead.
spk01: Thank you. Good morning and welcome to Choice Properties Q2 2021 conference call. I'm joined here this morning by Rel Diamond, President and Chief Executive Officer, Mario Verrafato, Chief Financial Officer, and Ada Raddick, Executive Vice President, Leasing and Operations. Before we begin today's call, I would like to remind you that by discussing our financial and operating performance and in responding to your questions, we may make forward-looking statements, including statements regarding Choice Properties objectives, strategies to achieve those objectives, as well as statements with respect to management's belief, plans, estimates, intentions, outlook, and similar statements concerning anticipated future events, results, circumstances, performance, or exceptions that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the material risks that can impact our financial results and estimates and the assumptions that were made in applying and making these statements can be found in the recently filed Q2 2021 financial statement and management discussion and analysis which are available on our website and on CEDAW. I will now turn the call over to Rayl.
spk09: Thank you Doris and good morning everyone. Thank you for taking the time to join our Q2 conference call. We are pleased to report another strong quarter with stable financial and operating results. Our business model and disciplined approach to financial management has positioned us well throughout the pandemic. In addition to our strong results, we're advancing our development program, driving meaningful net asset value appreciation to our existing portfolio and improving our balance sheet. I'll provide an update on our development program shortly, but first, Mary will provide you with an update on our financial results for the second quarter. Mary.
spk08: Thank you, Ralph. Good morning, everyone. As Ralph mentioned, we're pleased with our second quarter results. I'd like to begin with a brief overview of our rent collections and then speak to our financial results and balance sheet activity. Rent collections for the second quarter were stable at 98%, and we reported a bad debt expense of $1.8 million. Our 98% collection rate is consistent with the prior three quarters and reflects the combination of our stable portfolio and the overall health of our tenant base. The uncollected rents relate to tenants that have been most impacted by the lockdowns, including fitness users and sit-down restaurants. and as these tenants are beginning to reopen across the country, we're optimistic that we will further improve our tax collections for the balance of the year. Our reported sponsor operations for the second quarter was $172 million. This was a relatively clean quarter, apart from the $1.8 million bad debt expense I referred to earlier being offset by approximately $1.2 million of non-recurring revenue related to lease surrender income. When compared to the second quarter of 2020, FFO increased by $31 million due primarily to a decline in bad debt expense of $12.7 million and $14.6 million of non-recurring items incurred in Q2 2020 related to a credit loss on a specific mortgage receivable and the early redemption of unsecured ventures that were set to mature in 2021. On a per-unit diluted basis, our Q2 FFO was 23.8 cents per unit compared to 20.1 in the second quarter of 2020. Despite the challenging operating environment with a third wave of pandemic-related closures, occupancy has held up, declining by only 10 basis points sequentially from Q1 to 96.9%. We actually did see positive absorption for the quarter of approximately 12,000 square feet, highlighted by leasing in our Ontario industrial portfolio. This was offset by the transfer of some vacant units in our development properties completed in the quarter, which will soon be leased. Same asset cash NOI increased by 6.1% compared with the second quarter in 2020, primarily due to a decline in bad debt expense. When excluding these bad debts, total same asset cash NOI was relatively flat, increasing by 0.1%. By asset class, retail same asset cash NOI increased by 0.3%, while industrial increased by 2.2%. These increases reflect a combination of higher renewal rates and contractual rent steps. Office same asset cash NOI decreased by 6.1%, primarily due to a reduction in occupancy and lower parking revenues. We're pleased we've been able to maintain stable occupancy and consistent same asset results over the last four quarters. Turning to the balance sheet, for the fourth consecutive quarter, we reported an increase to our net asset value. We reported a total increase to NAV of $323 million, including an increase to the fair value of our investment properties of $278 million. Of this, $238 million relates to our industrial portfolio. The increase in value in our industrial segment is in line with market sentiment. Recent market transactions and robust demand and logistics and distribution space, especially in the GTA industrial market, have contributed to further cap rate compression and improving valuation fundamentals. We had very little new financing activity in the quarter, but we did improve both our leverage ratios and our liquidity profile with two key transactions. First, we early redeemed our $200 million Series 9 unsecured debenture that was maturing in September of 2021 with no penalty or fee. This was repaid primarily using a cash on hand, resulting in further improvements to our debt metrics. In the quarter, our leverage ratio improved from 42.3% to 41%, and our debt-to-EBITDA improved from 7.6 times to 7.3 times. The second transaction was the extension of the maturity date of our $1.5 billion credit facility to June of 2026. As part of this extension, we paid a $1.8 billion debt placement cost. Our credit facility is a critical component of our financial strategy, and taken collectively with our $12.6 billion of unencumbered assets, we have ample liquidity and significant financial flexibility. So overall, with our ability to drive meaningful net asset value growth through many avenues, our low debt levels and high liquidity levels, we believe we are well positioned. I'll now turn the call back to Rayl to address our development and investment activities. Rayl?
spk09: Thank you, Mario. On the development front, we continue to deliver exceptional assets to our portfolio and are making steady progress on the rezoning of our longer-term pipeline. For the quarter, we completed and transferred four development projects, approximately 149,000 square feet of GLA at our share, and a total development cost of $63 million. Included in the assets transferred this quarter was a new 48,000-square-foot Loblaw Superstore at our Harvest Hills retail development in Southeast Edmonton, the final phase of the retail component of our West Block development at Bathurst and Lakeshore in downtown Toronto. and the first building of our rental residential development to brixton located in the queen west neighborhood of toronto the first building includes 72 rental residential units at our ownership share the leasing program is progressing well with with approximately 50 of the buildings in a considerable pickup in activity in recent weeks as covert restrictions have continued to lift We expect that the construction of the remaining two buildings at Brexton will be complete in the coming months, and tenants will begin taking occupancy towards the end of the year. Construction is also well underway at Liberty House in Liberty Village, with an expected completion in the fourth quarter. We are about to commence pre-leasing and expect that tenants will begin taking occupancy early next year. In addition to our active residential projects, we kicked off several new commercial developments in the quarter, including a greenfield industrial project in Surrey, D.C. The 17-acre site is vacant land owned by Choice that is directly adjacent to our existing global distribution facility in the Campbell Heights industrial node. We are planning a 350,000 square foot new generation logistics facility with 40 foot clear heights. We're designing the building with sustainability in mind and will be pursuing a LEED Silver certification on completion of the project. We are well underway with detailed designs and engineering and are actively working through the municipal approval process. We expect to break ground on the project next year. This is an exceptional opportunity for us to add new product to one of the best industrial markets in the country. This project will drive significant value and highlight our ability to continue growing our existing industrial platform. Looking forward, we are busy working on our longer-term planning projects to advance the next phase of development. In the quarter, we submitted applications on two large-scale residential and mixed-use projects here in Toronto. The first application is for large mixed-use development on a six and a half acre parcel of vacant land located south of the intersection of St. Clair Avenue and Warden Avenue in Toronto. The land is exceptionally well located from a transit perspective, approximately 500 meters from the Warden TTC subway station, The site was originally acquired in Q2 2020, and we've made significant progress on envisioning the future potential. The application includes over 1,500 residential units, 1 million square feet of GFA, and a proposal for a new public park. The second application is for mixed-use redevelopment at an existing retail site at 25 Photography Drive in Toronto. The approximately eight acre site is located southwest corner of Eggington Avenue West and Black Creek Drive, across from the Mount Pleasant, sorry, Mount Dennis Transit Hub, which is set to open in 2022. The Transit Hub will connect the GO Line, the Union Pearson Express, and the Eggington Crosstown NRT, making this site an exceptional location from a transit perspective. The current redevelopment plan proposes a vibrant, mixed-use, inclusive community where people can live and access amenities, services, transit, and a grocery store, all within walking distance. The project will include seven mixed-use buildings, including 2,400 residential units and over 2.1 million square feet of GLA. Both projects are in early stages, so expect that things will continue to evolve as we refine our plans. Taking collectively, With our ongoing planning projects, we have over 11,000 units and nearly 10 million square feet of GLA, either zoning approved or with zoning applications underway. And with more projects ongoing and more submissions expected, we believe we're one of the best development pipelines that will provide significant opportunity for us to deliver long-term net asset value appreciation. With that, I'd like to turn the call back to the operator for questions.
spk05: Ladies and gentlemen, as a reminder, if you would like to ask a question at this time, please press star followed by the number one on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Again, that's star one. Your first question is from the line of Mark Rothschild with Canaccord.
spk08: Thanks, Dan. Good morning, guys. Maybe just picking up real on what you're talking about with the development, some new projects. Do you have a range of a budget, how much you expect to spend in development maybe over the remainder of this year and looking into next year as well? Obviously, some of the larger projects still don't appear to be at the point where you can be investing significant capital.
spk09: Yeah, you're correct, Mark. And some of the larger projects are still in the rezoning process. But we would expect about $150 to $200 million over the next couple of years. The only thing that could flex out a little bit are some of these industrial developments as we get zoning, particularly on our Tullamore industrial lands. It's pretty quick to ramp up development as there's strong leasing demand. But right now we would foresee $150 to $200 million.
spk08: Okay, thanks. Moving to the balance sheet, leverage has, you know, obviously come down a decent amount over the past year. To what extent is reducing that further a priority, or are you in the range now where you're comfortable? Hey, Mark. Yes, you know, we were in the range even before. Our goal was to get it down to seven and a half times, and we thought that would give us a lot of flexibility. We happened to sell assets and had some cash on hand, and when the opportunity came to repay the venture coming due without a penalty, we decided to take it rather than force an acquisition that didn't meet our criteria. So it was just a good use of proceeds. So we're really comfortable where we are right now and really don't have any intention to lower it. But again, if opportunities come up, it gives us flexibility and we can do more, we will, but it's not in our plans right now. Okay, great. Thanks. And maybe just lastly, parking revenue was down in the quarter. Last year, this quarter also was pretty quiet. So I'm just curious what happened with the memberships that people canceled, parking memberships people canceled. through the quarter last year, I would expect that it's already been pretty low last year.
spk04: It is, yeah, a function of actually, you know, we did have a drop in vacancy in one of our buildings, so that had a small impact. And, you know, as people started have not been, you know, coming into the office. And, you know, that also resulted in lower parking revenue.
spk09: And, Mark, just a moment. People last year in Q2, no one expected it to last as long as people were slow to cancel their spots.
spk08: Yeah, no, that's what I thought. Okay. Thank you so much.
spk05: Our next question is from the line of Mark Ice. Desjardins Capital Markets.
spk06: Hi, good morning. Two questions on my end. Number one, I was just wondering if you could comment on the leasing environment, any step changes that you've seen since the restrictions have been lifted. I realize it's only been a short period of time. And your expectation for occupancy, particularly in the retail and office segments over the next 12 months.
spk04: We've had strong retail demand from a leasing perspective. Throughout the pandemic, interestingly enough, our occupancy stayed stable, but we are seeing more tour activity as restrictions are being lifted. And that's picking up across all areas of retail, with certain tenants being really, really active and wanting to grow their footprint, like in the pet sector, discount department stores and so forth, and Dollarama is another discount. and a lot of activity. QSRs really weren't as impacted during the pandemic because they had heavy off-premises sort of like takeout business and so forth. So that's another sector that's growing. So we hope occupancy will increase over the next 12 months. I think on office, you know, the tour activity has been very much correlated with the lockdowns. And as lockdowns are lifted, you know, we've seen tour activity pick up. And if that's just happened in Ontario, it's starting in Alberta, we've definitely seen a pickup in tour activity, which, you know, we're optimistic about. But I think retail office occupancy will take longer to improve before, you know,
spk06: relative to retail okay that's helpful thank you and then my second question would just be with respect to uh the industrial segment and it would appear that liquidity in uh secondary and tertiary markets is improving um there's several um types of portfolios that have recently been listed. And you guys happen to own some industrial and land in Canada. I was just wondering what your thoughts were with respect to those legacy assets as a potential disposition candidate in your group. Thank you.
spk09: Yeah, look, we did sell a few assets. I think it was about two years ago. The assets that we own are really well located. You know, it's a strongly done for market right now. You know, no vacancy. We're getting good rent left. So right now we're quite happy and comfortable owning them. Just given, you know, the lack of supply in the market. Thank you.
spk02: your next question is from the line of sam community with tv security thanks good morning um just to follow on the the leasing discussion maybe just to give us an update on what you're seeing in the alberta market seems to be a bit of a bit of a rebound happening in the latest quarter and so do you mean office or sorry sorry i meant i meant industrial i meant industrial yeah
spk04: Yeah, the retail, definitely logistics demand is very strong in Alberta as well. You know, Amazon's one of the tenants that's definitely been very active. And we've even seen a little bit of a pickup in Edmonton, which is great. We just did a 40,000 square foot logistics deal there. That's a future lease deal. It doesn't commence in the quarter. So it is improving.
spk02: That's great. And on the retail side, it sounds like you're increasingly optimistic about a near-term sort of rebound for occupancy to go back to toward where it was in pre-pandemic. Do you have any stats on the percentage of your tenants that are open now versus, let's say, Q1 or expected to be open in August? Anything like that to sort of give us an indication on those kinds of trends?
spk04: Well, right now, actually, Mark, most of our tenants are open because we have open-air retail. So, you know, we're not restricted the way the malls are restricted. So I would say the majority of our retail is open.
spk09: And the tenants that were closed for us were some of the personal services and gyms and restaurants, as Anna mentioned, and the majority of those are now open.
spk04: Absolutely. I drove by Orangeville and saw a long line outside Good Life, so they are definitely open.
spk02: Great. And what would be the next sort of major redevelopment to take place? And what's the backup plan for the Loblaw store that would be impacted there in terms of temporarily relocating or just temporarily closing the location in that trade area?
spk09: So I'll say the next major redevelopment is Golden Mile, and we have enough land that we can accommodate building a new store before we ever have to take down the old store or the existing store. The other one would be Woodbine and Danforth, and we're actively working with Love Law. The store is very tired, but we're going to time it and do what makes sense for Love Law.
spk02: That's great. That's all for me. Thank you.
spk05: Your next question is from the line of Jenny Ma with BMO Capital Markets.
spk03: Thanks, Anne. Good morning, everyone. I saw in the MD&A that you mentioned in the retail discussion that there were some leases that were transitioned from net to gross, and I'm just wondering if that was something that was material, you know, the reasoning behind those changes and whether it related to any law of law leases.
spk04: No, it didn't relate to any law of laws leases. I think we did have a few SAQ, which is the Quebec liquor store in Quebec that did move to a gross lease. But that's the material.
spk03: So is that just a discussion that was had at the time of renewal or what was the thinking behind that? Is that something we could see more of down the line?
spk04: No, definitely not. I think it's just, you know, the FAQ has been moving to this model. I mean, they're like, you know, run by the government of the provincial government of the Quebec. And so, you know, they prefer to have, you know, a gross lease. And we set that at a sort of at a higher number to give us cushion so that we do have full recovery.
spk08: And Jenny, it's not material on its own, but given the lower level of growth, it was more magnified this quarter. But really, as part of our business, it's not a big issue right now.
spk03: Great. And then could you give us an update on what you're seeing in the acquisition or disposition pipeline? I think last quarter you had talked about potentially selling some assets sort of in the second half. Is that still something you're looking to do? Not sure if that was sort of driven by looking at the asset itself or a desire to reduce leverage. How should we think about transaction activity in the second half of this year?
spk09: Jenny, so we've been very active on capital recycling, as you know. You know, on the acquisition side, there are some vendings that we're working with Loblaw on, nothing that significant. And in the dispositions, it's just the normal capital recycling, you know, going to sell down. We've just listed a small portfolio in Edmonton. Sorry, Calgary. Industrial, just a few assets, but nothing significant. We won't be as... you know, as active as we were last year.
spk03: Okay, great. And now that you mentioned that small industrial portfolio in Calgary, are these some of the smaller assets that you would consider to be non-core?
spk09: Yes, it's just normal capital we're talking. Great.
spk03: Thank you very much. I'll turn it back.
spk05: Your next question is from the line of Samaya Saeed with CIBC.
spk00: Thanks. Morning, everybody. Just wanted to touch on the fair value changes in industrial. I'm just wondering if the cap rate changes were sort of level across the board or did you speak to any differences by market?
spk08: Yeah, I mean, definitely GTA, large bay industrial has the larger gains. Small bay had some gains, probably half the cap rate compression that large bay did. And then also we had a bit of growth in value in Vancouver as well. So spread across, but really GTA, Large Bay, was the driver. And as Israel said in his opening, you've seen strength in the property markets. You've seen strength in the capital markets. The industrial REITs are performing well, and they're doing well in the credit markets. So there's really value in industrial, and it's reflected in these numbers.
spk00: Right. And what are you guys seeing in the transaction market for grocery-anchored centers and any cap rate indications on them on a more recent time period?
spk09: So while we don't have much to update, you know, further than we spoke about last quarter, you know, still lots of liquidity. Cap rates have, you know, held in and continue to be strong for grocery-anchored centers. and they've really differentiated themselves since the start of the pandemic. We continue to have inbound calls, but I'd say no major changes on the cap rates.
spk00: Okay. And then lastly from me on the office side, just curious what you're hearing from your tenants in terms of the plans for returning to the office and how that's playing out in these conversations.
spk04: Hi. Yeah, the plans are varied, you know, and we do have actually, you know, quite a few smaller tenants who have remained in their offices other than when they were in four shutdowns. So some of our smaller 5,000 square feet and less tenants, you know, you know, return sooner or are already there. And some of our larger ones have indicated sort of phased in returns in September. And a few and then other ones are, you know, waiting to make some decisions to see how the summer progresses now that restrictions have been lifted. So those are kind of the themes we're hearing from our tenants. So no single themes.
spk00: Okay, that's helpful.
spk05: Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Our next question is from the line of Tal Woolley with National Bank Financial.
spk07: Hi, good morning. Good morning. Just for Brixton and Liberty House, now that you're sort of into the leasing process, can you give a sense of what the gross per square foot rents you're asking?
spk09: They're around $4 a foot.
spk07: Okay. And are you, at this time, going to be offering any incentives on top of that?
spk09: So we have been offering incentives, and we are probably likely start peeling them back on the break stage just given the activity. But we've been offering two months free rent. And then for, I think, the first 100 leases, we offered a gift card program as well of about $1,000. OK.
spk07: And just my last question, like, I can sort of see how the, you know, kind of target asset mix or how the asset mix is going to evolve, like, over time. You know, you're always going to see the resi portion increase, the industrial portion increase. I guess, like, longer term, like, I'm thinking further out, like, is there kind of like a target asset mix you ultimately want choice to be at?
spk09: So we are not targeting a specific asset mix. Our real focus is on quality and durability of cash flows. And you're right, just, you know, we're always going to be a necessity-based REIT. Naturally, just given the land holdings we own, we're going to be, you know, investing more and more capital into residential. You know, just again, given some of the industrial development land ground, we're going to be investing more and more into industrial. We will, you know, obviously continue to buy gross record sites in particular where we can facilitate an opportunity. opportunity for Loblaw, although, you know, a small opportunity set in the first two we just spoke about, and offers will really be a function of some mixed-use development. So the portfolio will naturally reshape, as you just discussed.
spk07: Okay. And then just lastly at the Westlock site, do you have, like, an early read, like, on how the performance of the retail portion is and how Loblaw, you know, is looking at it right now?
spk04: Yeah, I mean, the store itself is performing, you know, incredibly well, obviously. And then our other two tenants, our anchors are open, Shoppers Drug Mart. Joe Fresh was just able to open with the latest restriction being lifted. So that's what we occupied. Our office building, you know, is leased. And so we expect our other, you know, ancillary retail, we have a big deal with the LCBO and they're open. So now we just have, you know, small pockets of retail that will open hopefully later in the year and interest from, you know, a bank and some good tenants.
spk07: Okay. So, yeah, the productivity there early on is sort of like hitting the mark for what your tenants are hoping for.
spk04: Yes, yes, absolutely. Traffic has been very, very strong. Yeah, much needed in the neighborhood.
spk07: Okay, perfect. Thanks very much, everybody. Thanks.
spk05: And our final question comes from the line of Tommy Bird with RBC Capital Markets.
spk08: Thanks, and good morning. Just maybe coming back to the office environment, can you maybe just comment on how rents are holding up in your portfolio, maybe the mark-to-market spread, and your thoughts on the output for leasing costs?
spk09: So, Tommy, and I'll speak to it in a moment, but you have to remember there's been very little activity. And so any, you know, it's not really indicative of, you know, our conviction in the sector. But we think things are going to start improving. We're even seeing improvements in our own offices. What I mean by that is just we've opened offices recently, we haven't asked staff to come back, and today we've hit essentially the capacity that we've internally set, which is roughly 30%. So we're starting to see employees wanting to come back, and we think they'll translate to the office leasing environment. And now Anna can maybe give you a little bit of specifics that we have, but a very small volume that we're using to give you these stats.
spk04: As Raelle said, we had 8,000 square feet of renewals in the quarter, and one being in Alberta, which was a tenant that was rolling from a lease done pre-2017. Most of our tenants in Alberta, we've rolled those rents down. So now, so it's about 20, we have a decline of about, you know, 20%. And, but again, very small segment. And none of that was in Ontario. So where Ontario, I think rents are going to hold up. You know, there may be a little bit more inducements offered. But generally, we're optimistic.
spk09: Yeah, so the Alberta is not indicative of the market as a whole.
spk08: Got it. And maybe just sticking to the discussion earlier on the portfolio mix, maybe thinking about it long term. You know, frankly, look, the office portfolio is not, you know, a significant piece of the overall business at this point in any case. But, you know, what are your thoughts on perhaps reducing the exposure further over the long term, you know, through, you know, possibly through dispositions, or will it just naturally happen through growth in the other segments of the business?
spk09: Look, we think it will naturally happen through growth in the other segments. And then just as normal capital recycling, then, you know, maybe one or two of the assets can sell over time.
spk08: Great. Thanks very much. I will alter it back.
spk05: Thank you, ladies and gentlemen. That concludes our Q&A session. I would now like to turn the call back over to Rail Diamond.
spk09: Thank you so much. I want to thank everyone for joining us on today's call. Please do all that you can to stay healthy and be safe. Thank you.
spk05: Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

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