Choice Properties Real Estate Investment Trust

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to Choice Properties Real Estate Investment Trust fourth quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. Thank you. I would now like to turn the call over to Erin Johnston, Senior Vice President, Finance. Erin, you have the floor.

Thank you. Good morning and welcome to Choice Properties Q4 2023 conference call. I'm joined here this morning by Raelle Diamond, President and Chief Executive Officer, Mario Berrafato, Chief Financial Officer, and Niall Collins, Chief Operating Officer. Roehl will start the call today by providing a brief recap of our 2023 performance and cover the highlights of the fourth quarter. Mario will discuss our operational results and conclude the call with a review of our financial results before we open the lines for Q&A. 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 beliefs, plans, estimates, intentions, outlook, and similar statements concerning anticipated future events, results, circumstances, performance, or exceptions that are not historical fact. 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 our recently filed Q4 2023 financial statements and management discussion and analysis, which are available on our website and on CDAR. And with that, I will turn the call over to Rayl.

Thank you, Erin, and good morning, everyone. 2023 was an exceptional year for our business. as we delivered strong financial and operating results. At the beginning of the year, we set up our financial goals of capital preservation, generating stable and growing cash flow, and delivering NAV and distribution growth over time. Our team successfully delivered on these goals by focusing on our three strategic priorities of maintaining our market-leading portfolio, sustaining operational excellence, and delivering on our development pipeline. We maintain our market leading portfolio by continuing to be one of the most active REITs in the transactions market. We further enhanced the quality of our portfolio by completing approximately $620 million in real estate transactions, including $285 million of acquisitions and $335 million of dispositions. We also continue to deliver on our development pipeline by adding high-quality real estate to our portfolio. This included 1.8 million square feet of retail and industrial space, along with a residential rental building named Element in Ottawa. Investment of approximately $295 million was delivered at an average yield of 7.7%, resulting in significant NAV creation as the current fair value of these investments is over $425 million. Finally, we successfully met our 2023 outlook. We maintained near full occupancy rates through the year and achieved our same assets, cash NOI, and FFO growth targets. Turning to the operating and economic environment for a moment, we remain encouraged by the supply-demand trends that are supporting each of our asset classes. Specifically, our retail tenants continue to expand their store network and suburban trade areas continue to perform well. Despite headlines regarding the slowdown in industrial rent growth, there remains substantial embedded growth within our existing portfolio, as evidenced by the 60.6% rent spread we achieved this past quarter. While we are optimistic regarding underlying fundamentals of our asset classes, we acknowledge that significantly higher borrowing costs recessionary fears, and geopolitical threats continue to cause uncertainty and overall market volatility. Nevertheless, I'm confident that choice remains in an enviable position and well-prepared to navigate these uncertain times. The quality of our real estate, which includes grocery and neighborhood centers, industrial properties with inherent rent growth, and high-quality residential properties provides a strong buffer to gain potential economic impacts. Another source of confidence lies in our strong balance sheet and significant liquidity position. Real estate is a very capital-intensive business, and having a strong balance sheet is a must. We've been disciplined in our strategy of maintaining loan leverage, and over the past year, we have proven our commitment to a staggered debt maturity profile targeting a 10-year ladder. The strength of our balance sheet enables us to maintain consistency in our development activities, and importantly, we have the flexibility to be opportunistic. While the confidence that we have in our business to continue to deliver steady and growing cash flows supported by a strong and stable foundation, our Board of Trustees has approved another distribution increase effective March 2024. This increase demonstrates our commitment to sharing our growth with our unit holders. Turning to our fourth quarter results, our momentum continued in the quarter. We delivered increases in same asset cash NOI and FFO of 4.2% and 5.8% respectively. Leasing activity continues to be strong as the portfolio remains near full occupancy at 98%, up 30 basis points compared to last quarter. We had strong rental rate growth with an average rent spread of 23% in the quarter, supported by strong fundamentals in each of our three strategic asset classes. During the quarter, we continued to execute on a capital recycling program, completing 239 million of transactions, including 83 million of acquisitions and 156 million of dispositions. We acquired two high-quality grocery-anchored retail properties in Greater Montreal and one industrial property from Loblaw. The industrial property is a 425,000-square-foot building in Calgary leased to Shoppers Drug Mart. This asset is in an established industrial node and is 15 minutes from Calgary Airport. We obtained 15-year leases on these three properties with 2% annual rent steps. Included in $156 million of dispositions was $93 million related to selling a retail asset, two industrial buildings, and a non-core office building mentioned on the Q3 call. Additional sales in the quarter included an industrial asset in Dartmouth for $7 million, two retail assets in Cambridge, BC for $50 million, and a land parcel adjacent to a retail site in Edmonton, Alberta for $6 million. Turning card developments. We delivered four retail units, two industrial projects, and one purpose-built rental building during the quarter. Included in our industrial development transfers was approximately 930,000 square feet related to the first phase of our project at Choice Eastway Industrial Center in East Gwillimbury, leased to Loblaw. This phase of the project was delivered with an expected stabilized yield of 7.8%. Also included in our transfers was 350,000 square feet, a choice industrial center in British Columbia, which I spoke about on a Q3 call. This project was delivered with an expected stabilized yield of 10.2%. Cash rents on both sides commenced in January of this year. We also delivered one residential development in Ottawa, in which we own a 50% interest. This development of 252 units offers a unique rental community in the vibrant Westboro Village, one of Ottawa's most desirable neighborhoods. The building was delivered at an expected stabilized yield of 5.1%. There continues to be strong demand at the building, and it is now 44% occupied and 58% leased, with stabilization expected in the second half of this year. I'll hand it over to Mario to provide more color on operational and financial results.

Thank you, Ralph, and good morning. Everyone. As well mentioned Q4 was another strong quarter operationally as our business continues to operate at a high level of occupancy and deliver strong same asset and a wide growth. Starting with funds from operations are reported. Included in FFO in the quarter were net one-time items of $5.8 million, including $5.7 million related to the cash portion of the Allied Special Distribution and a condo gain of $4.6 million related to our Mount Pleasant Village development, where we sold our ownership interest in 94 of 142 condo units. This was offset by approximately $4.5 million of G&A from one-time payments. On a per unit, diluted basis, our fourth quarter FFO of 25.5 cents per unit reflects an increase of approximately 5.8% from the fourth quarter of 2022. This is driven by strong same asset NOI, higher interest income, and one-time income, partially offset by higher interest expense from financing completed for the last year, and higher G&A costs related to the growth and transformation of our platform. We ended the quarter with occupancy of 98%, an increase of 30 basis points from Q3. On a total portfolio basis, we had approximately 1.1 million square feet of leases expire. We had tenant retention of 85.8%, renewing 1 million square feet at an average spread of 23%. And we also completed 223,000 square feet of new leasing that commenced in the quarter. This activity resulted in positive absorption of 63,000 square feet, which is mainly driven by new leasing in our industrial segment in Alberta. In our necessity-based retail portfolio, which is the largest in Canada, occupancy remained relatively stable at 97.7%. We completed 600,000 square feet of retail renewals in the quarter, resulting in tenant retention of 78.7%. Renewals were completed at rents 14% above expiry. Occupancy in our industrial portfolio, when compared to Q3, increased 70 basis points to 99%. We had 400,000 square feet of industrial leases across Canada expire in the quarter. We renewed 395,000 square feet at rents approximately 60% above expiry, achieving tenant retention of 98.8%. This leasing activity contributed to same-asset cash NOI increasing by 9.6 million, or 4.2%, compared to the fourth quarter of 2022. By asset class, retail same asset cash NOI increased by $5.8 million, or 3.2%. The increase was driven primarily by higher base rent on renewals, new leasing, and contractual step rents, and higher capital and operating recoveries. Industrial same asset cash NOI increased by $3.1 million, or 8.5%. This increase was primarily due to higher rental rates for both renewals and new leases completed, as well as higher recoveries. Mixed use and residential same asset cash NOI increased by approximately 700,000, or 9.3%, and the increase was driven by higher recoveries and improved residential occupancy and other revenues. And one last word on performance before I move on to our balance sheet. At our investor day earlier this year, we shared how 2023 would be an important year for our business. Our efforts to improve portfolio quality, right-size the balance sheet, and invest in our development platform have now put us in a position to generate resilient and growing cash flows. We are extremely pleased that in 2023 we met or exceeded the financial targets reflected in our outlook and are once again able to increase our distribution to unit holders. Now, turning to our balance sheet, our effort at SNAV was relatively flat with a slight decrease of $14.2 million compared to the third quarter of 2023. The change was driven by a $33.9 million increase in retained earnings, and a fair value increase on our investment and allied properties of 26.6M where we're required to drive for us to mark to market this investment to his trading price as of December 31st. And this was offset by net fair value losses of 73.3M on investment properties. While our properties continue to generate strong cash flow growth, ongoing elevated interest rates continue to put upward pressure on cap rates. Our fair value loss in the quarter was largely driven by this as we reflect an extension of cap rates within certain asset classes or market segments. In our retail portfolio, we recorded a small loss related to cap rate expansions on certain properties, primarily in Western Canada. In our industrial portfolio, we recorded a fair value loss primarily due to cap rate expansion on certain properties with limited near-term rental rate growth. And in our mixed-use and residential portfolio, we recorded a small loss in the quarter driven by cap rate expansion We ended the quarter and the year in solid financial position with strong debt metrics and ample liquidity. We received the proceeds from Ally's $200 million promissory note at the end of the quarter, and subsequent to year-end, we used the proceeds to repay our $200 million Series D debenture at 4.3% upon maturity. Our debt-to-debit ratio net of this cash is seven times, and we now have $1.5 billion available in our facility. This is further supported by approximately $12.7 billion of unencumbered properties. Looking ahead, we have $700 million of remaining debt maturities for 2024, with a $550 million unsecured debenture, which is our largest debt maturity for the year, not coming due until September. Once again, we've demonstrated the strength of our portfolio and the ability of our teams to deliver. We have confidence in our business to continue to deliver steady and growing cash flows to our unit holders. In addition to our fourth quarter and 2023 results, we have shared our 2024 outlook, And in 2024, we expect to deliver stable occupancy with 2.5 to 3% year-over-year growth in same asset NOI, annual FFO per unit diluted between $1.02 to $1.03 per unit, which reflects a 2% to 3% year-over-year growth, and debt to EBITDA slightly below 7.5 times. And with that, Rail, Niall, Aaron, and I would be glad to answer your questions.

all right thank you very much and just as a reminder if you would like to ask a question simply press star 1 on your touchtone phone once again star 1 on your touchtone phone and we'll pause just a moment to compile the q a roster and it looks like our first question is from mike marquitas with bmo capital markets mike please go ahead hi thank you good morning um mario

Maybe I'm missing something here, but I think you ended seven times that DBADA and your outlook calls per slate are less than seven and a half times that DBADA. Can you just walk us through the drivers of that increase? That in the outlook, please.

Yeah, so right now we're at seven times and really the factor is that how dispositions come. So we still have an acquisition plan and if it's funded by dispositions, we'll be on the lower end of the range. But if we have to to use debt to finance some of these acquisitions, then we'll get closer to 7.5. That's for the wildcard.

Okay. So, within your guidance, what's the acquisition assumption or net acquisition assumption?

So, right now, we have a balanced capital recycling program, as Raoul said. So, we plan to grow by about 150 to 200 million of acquisitions. We have a disposition close at the end of this year that'll carry over. So we need about 150 million dispositions to fund that.

Got it. Okay. So then the increase in the debt debita seems you don't do any capital recycling, but you do execute on the assets that you want to acquire.

Exactly. It's the one thing that's out of our control. And then in addition, we also have development of approximately 200 million that we have to incur as well.

Right. No, of course, of course. Okay. All right, just sort of a higher-level question here. You know, you guys are clearly getting great returns on your retail and your industrial developments, and that looks set to continue over the next couple of years. I know, Raelle, I think it was last call you talked about perhaps maybe getting started on one of the larger mixed-use urban projects that you have with significant resi components. I guess rates are still bouncing around here. We've had some of the enhanced GST rebate, the favorable financing from the CMAC. So, with all that sort of into the mix, how are you guys thinking about risk and returns on the major mixed-use projects going forward?

So, Mike, I'll ask you a question. So for 2024, we're primarily going to be focused on commercial development. And it's not because we're not long-term bullish on residential. We actually don't have anything that we believe we can actually be truly shovel-ready for to actually commit construction in 2024. So the earliest would likely be late 2024, early 2025. And as I said, long-term, we take a long-term view on residential. And we are bullish, and Noel is with me on the phone, and maybe he can just comment on what we see on the residential side. Hi, Mike.

How are you? Mike, we're really seeing a change. We are seeing a change in construction costs, and the productivity around that is improving as well. So we're hoping that costs are going to come down to offset a little bit of that interest increase. But the PSC-GSC rebate has done a lot subsidize these projects as well as try and accelerate projects ahead of the sunset date of 2030. So we are pushing ahead on a number of our key projects, both our master plan sites and our standalone sites as well.

Okay. And last one for me before I turn it back. I guess just in the case when you have an existing Loblaw lease, presumably with options, to continue, how does that dynamic work? Would you have to sort of buy out or make a payment for development rights, or does the release get rewritten as the store gets rebuilt? Just trying to get a sense of the dynamics there going forward.

Yeah, so as you recall, we have a strategic alliance agreement which sets out payments on a per-foot basis. that we own of law, depending if we're doing rental or condo and depending on the market. So I guess the positive is that it's pre-negotiated, the amount we own of law, and both parties are incentivized to make it happen. The reality as well is that so many of our sites are large enough that we actually don't need to close the existing source. So, for example, Golden Mile, Golden Mile, we can actually start the first phase of construction without ever touching the store. We can actually do the second phase, which we plan to rebuild a new grocery store. So on Golden Mile, we never have to close. There's another one in the GTA, which we're actually working with Love Law on the timing on, and we get great visibility into their plans when they'd be willing to close it. And then another one in Vancouver as an example, in Coquitlam, the same thing. They've actually closed the store and we are busy planning a mixed-use development on our North Road side. So I'd say in the short term, there's nothing imminent, but generally it's we just work together closely to plan our timing of it and make sure what makes sense for obviously both businesses. But as I said, our real competitive advantage is that so many of our sites are large enough that we actually don't ever have to close the store.

Got it. Okay. And then the strategic alignment, pardon me, the payments within the strategic alliance agreement, that's just for the density. There's no development rights necessarily embedded with that within the leases themselves, but the sites are large enough, so not an issue, at least in the foreseeable future.

Well, generally, all tenants have control, sort of certain control rights over the properties. I would say that their choices in a phenomenal position opposite Loblaw or adjacent to Loblaw to work together and do what makes sense for the site.

Got it. Okay, great. Thanks very much and congrats on a strong 23.

Thanks. Thanks, Mike. And our next question comes from the line of Lorne Kalmar with Desjardins.

Lorne, go ahead. Thank you very much. Good morning, everybody. Maybe just flipping over to the industrial portfolio, things seem to really accelerate. You talked a little bit about some of the slowdown we're seeing in the headlines you guys aren't really seeing in your portfolio. Do you think the performance achieved in 2023 is repeatable in 2024?

We do believe it's achievable. The first thing is, look, we acknowledge that there is a slowdown. Total market vacancy rates are up slightly. It's still an exceptionally tight market. It's just the rent growth is slowing compared to what it previously grew at. But we still have healthy, better rent growth in our portfolio. We're still getting, you know, strong demand on the pre-leasing side that we're looking at on our development. So we do expect 2024 to continue. I don't know, Niall, if you want to add anything.

Yeah, no, like our renewal rates are quite low, so we are in a very good position.

Would you guys have an estimate of what the mark-to-market is on 2024 expiries?

It's going to be significant, Niall, Jeff.

It's in the region of around 65 to north of 100-ish.

All right. Thank you, Niall. Yeah, that sets up for a good 24. And then, Mario, if I heard you correctly, I think you said retention in retail was 73%. I'm assuming that's excluding Wabla. Is that correct?

Yes, for that quarter. I think for Loveblood, we renewed that quarter.

I was just wondering, for tenants that aren't renewing, what type of tenant is and what are they doing? Are they closing? Are they relocating?

It was out west in Calgary. The biggest vacancy was a rental depot, so they were leaving. We've now basically demised the space. We've backfilled over half of it.

about a region or an area okay okay okay so it's just that uh that one least calgary thank you um and then maybe just lastly on on the mount pleasant condos um what do you guys expect the cadence of the gains to be on on those on the remainder and um i'm assuming uh or i won't assume but is that factored into the guidance yeah it's factored into the guidance because those those units have been sold quite a few years ago so it's really just closing on pre-existing um contracts

We don't see any real gain on them.

Lauren, it will be reflected in our Q1 numbers. It's about as small as a quarter of the rest of the condos. It's about $2 million.

Perfect. Thank you very much. I will turn it back.

All right. Thanks, Lauren. Just a reminder, if you'd like to ask a question, again, star 1 on your telephone keypad. Once again, star 1. It looks like our next question is from the line of Damaya Syed with CIBC. Damaya, please go ahead.

Thanks. Good morning. Just firstly on the outlook, just wondering in terms of contribution by segment and just the different pieces, fair to say retail would be steady in the 3-ish percentage range and maybe slightly lower contribution from industrial and mixed use compared to 2023?

Yeah, that'd be a good way to look at it. Again, with the retail, 2% to 2.5% of things are a good target. And again, we've always said industrial will be mid-single digits.

Okay. And then on industrial, and I guess specifically what you have underway in Caledon Park, obviously it's a fairly active node. What are you seeing there, Raleigh, in terms of tenant interest and lease-up timeframes?

um so my i'll start and then i'll we'll we'll just give additional color um so we've as we announced last quarter we've leased um you know a building that we're going to build on spec to a third-party logistics firm we have a lot of site works that we actually underway on the project right now and we're starting to market you know, call it the next phase of the project. We've had strong interest, but it's still quite a bit, still a way away.

Yeah, we are continuing to respond to RFPs, and there is some very large users out there that are very interested in the site, especially with the momentum we've got from that recent lease.

Okay, so should be able to meet your timing expectations. Thanks for that. And then the last question I had was just a broader one on strategy now that you've hit the milestone of exiting office. What should we view as the next upcoming milestone in the evolution of the REIT?

Look, I think we have a phenomenal operating plan where we're going to keep you know, delivering on growing our industrial portfolio through the development Niall spoke about, through capturing those embedded rent spreads on both the retail industrial and then slowly executing on the mixed use and residential pipeline. And as we've said earlier on the call, maintaining that strength in the balance sheet.

Okay. Sounds good. We'll turn it back.

All right, thank you very much. And it looks like our final question today comes from Sam Damiani with TD Cowan. Sam, please go ahead.

Thanks, and good morning, everyone, and I'll echo the congratulations on the 2023 results. Maybe, Raoul, for you, on the Caledon, it's gotten a little bit of discussion here, but you've got the Building A coming on later this year, Building H coming on early 26, but there's kind of a hole in the completions with 2025, is there a potential and are you striving for initiating construction on an industrial property that could be completed during 2025? Is there an opportunity for that?

I'll answer the question that I'm on, Sam.

Thanks. Sam, it's not likely for 25. Like I said, we are responding to some RFPs. They're very large demands, but that timeline is probably an 18-month building, so not 25, most likely 26.

Yeah, and Sam, the land lease to Loblaw, I believe, commences rent in early 25. So it's 25 for the hour and 26, as Niall said, for the next one.

Right. Okay, thank you. And then are you looking at acquiring more land, more industrial land in and around the GTA at this point?

You know, like we acquired Caledon at, you know, an opportune time was during COVID when we used our balance sheet strength to acquire the large piece of land at very attractive pricing. You know, since we acquired that land, you know, there was a massive run-up in what people paid for land. If some of those developers cannot hold onto their land, just given what's going on in the environment with higher carrying costs and a potential slowdown in, you know, just leasing velocity in industrial, I'm going to say potential because, you know, speculating, obviously. You know, there may be a window of opportunity, but we're going to remain very, very prudent and make sure that we can create value on any land purchases. And right now we have more than enough on our plate to keep going.

Okay. Very clear. Thank you. And just on the guidance, what would be the key drivers that would cause same property NOI growth in 24 to be at 3% max versus last year's 4.5%? What would be the main drivers lowering the growth rates from what we saw last year?

Hey, Sam. I think, first of all, though, the numbers are strong, and they're coming off a strong 2023. So just because the number's a bit lower doesn't mean the quality of the portfolio is still not there. It's just really coming off a high number in 2023. Really, let's come down to, you know, as we all said, the retail market is strong. And so to get outside, we're just pushing rents a bit higher. And right now, it is strong, but we'll see what happens with the economy and the consumer strength and how retailers do. But again, with the visibility we have, we still think delivering at 2% for retail coming off a high base is a good number.

Okay, that's helpful. And last one for me, just on the sort of tenant watch list or risk list or whatever whatever you don't want to call it has it grown for for your portfolio in the last three to six months and if so what categories of retailers are you perhaps increasingly concerned about um look i i don't think it's grown for our portfolio um you know there are a few of the the big boxes that um you know

like a few of the big boxes that, you know, expanded when Bed Bath & Beyond, you know, went bankrupt that are under some pressure. And I think, you know, we don't have any exposure left to them, but HPC would be concerning.

More so now than maybe a couple years ago, Raoul? Is that something you would see as more likely?

Again, we don't have great visibility. But we just hear anecdotally through our leasing people that, you know, their stores aren't doing well.

In the back, thank you. Okay, thanks, Sam. And that does conclude our Q&A session. So I will now turn it back to CEO Raelle Diamond for closing remarks. Raelle, you have the floor.

Thank you, Greg. To summarize, we're very pleased with our fourth quarter and 2023 operating performance. Our business is strong, and our team is well positioned to continue to execute on our strategy and deliver on our outlook in 2024. Thank you for your interest, your investment choice, and for joining us this morning.

Thanks, Raoul. Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Have a great day, everyone.