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spk08: 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.
spk01: Thank you. Good morning and welcome to Choice Properties Q4 2023 conference call. I'm joined here this morning by Rael Diamond, President and Chief Executive Officer, Mario Barrafato, Chief Financial Officer, and Niall Collins, Chief Operating Officer. Rael 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 Ryo.
spk05: 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 NAB and distribution growth over time. Our team successfully delivered on these goals by focusing on our three strategic priorities on 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 reads 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 portfolio. This included 1.8 million square feet of retail and industrial space, along with a residential rental building named element in Ottawa. Our investment of approximately 295 million was delivered at an average yield of 7.7%, resulting in significant NAB creation as the current bear 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 and ROI, 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 .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 against 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 low 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 .2% and .8% respectively. Leasing activity continues to be strong as a portfolio remains near full occupancy at 98% up 30 basis points compared to last quarter. We have 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 continue 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 and 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 with 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 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 to our development, 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 Gwylombery, 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 at 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 rent on both sites 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 Westborough 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. With that, I'll hand it over to Mario to provide more color on our operational and financial results.
spk07: Thank you, Raoul. Good morning, everyone. As Raoul mentioned, Q4 was another strong quarter operationally as our business continues to operate at a high level of occupancy and deliver strong, same-asset NOI and FFO growth. Starting with funds from operations, our reported FFO for the fourth quarter was $184.6 million or $25.5 per unit. 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 GNA from one-time payments. On a per-unit diluted basis, our fourth quarter FFO of .25.5 per unit reflects an increase of approximately .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 finances completed for the last year and higher GNA 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 lease and 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 in OI increasing by 9.6 million or .2% compared to the fourth quarter of 2022. By asset class, retail same asset cash in OI 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 in OI 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 in residential same asset cash in OI increased by approximately 700,000 or 9.3%. An 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 will 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 I-FIRNAS SNAP was relatively flat with a slight decrease of $14.2 million compared to the third quarter of 2023. The change was driven by $33.9 million increase in retained earnings and a fair value increase on our investment in allied properties of $26.6 million, where we were required under I-FIRS to mark to market this investment to its trading price as of December 31st. And this was offset by net fair value losses of $73.3 million 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 and a change in lease-up assumptions with the office portion of one of our mixed-use developments. We ended the quarter and the year in solid financial position with strong debt metrics and ample liquidity. We received the proceeds from allies $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 deed adventure at .3% upon maturity. Our debt-debate 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 adventure, 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% -over-year growth in same asset and align. Annual FFO per unit diluted between $1.2 to $1.3 per unit, which reflects a 2 to 3% -over-year growth and debt to EBITDA slightly below 7.5 times. And with that, Rayll, now Erin and I would be glad to answer your questions.
spk08: All right. Thank you very much. And just as a reminder, if you would like to ask a question, simply press star one on your touchtone phone. Once again, star one 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.
spk06: Hi. Thank you. Good morning. Mario, maybe I'm missing something here, but I think you ended seven times that EBITDA in your outlook calls for slightly less than 7.5 times. That EBITDA, can you just walk us through the drivers of that increase? That in the outlook, please.
spk07: Sorry. Yeah. So right now, we're at seven times. And really, the factor is that how we, 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 use debt to finance some of these acquisitions, then we'll get closer to 7.5. That's where the wildcard
spk06: comes from. Okay. So within your guidance, what's the acquisition assumption or net acquisition assumption? So right
spk07: now, we have a balanced capital recycling program, as Rael said. So we plan to grow by about 150 to 200 million of acquisitions. And we have a disposition close at the end of this year that will carry over. So we need about 150 million dispositions to fund that.
spk06: Got it. Okay. So then the increase in the debt EBITDA seems you don't do any capital recycling, but you do execute on the assets that you want to acquire.
spk07: Exactly. It's the one thing that's under our control.
spk06: And
spk07: then in addition, we also have development of approximately 200 million that we have to incur as well.
spk06: Right. No, 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 all looks to set to continue over the next couple of years. I know, Rael, 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 a significant RESI component. I guess rates are still bouncing around here. We've had some de-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?
spk05: So, I can answer your 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 commence 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 Nal is with me on the phone and maybe you can just comment on what we see on the residential side.
spk04: Hi Michael, how are you? 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 PSD GST rebate has done a lot to subsidize these projects as well as try and accelerate projects ahead of the 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.
spk06: Okay, and last one for me before I turn it back, I guess just in the case when you have an existing law, blah, 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 lease get rewritten as the story gets rebuilt? Just trying to get a sense of the dynamics they're going forward.
spk05: Yeah, so as you recall, we have a strategic alliance agreement which sets out payments on a per foot basis that we own the 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 the law and both parties are incentivized to make it happen. The reality as well is that so many of our sites wasn't large enough that we actually don't need to close the existing store. 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 Loblaw 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.
spk06: Got it. Okay. And then the strategic alignment, pardon me, that the payments with the Mr. East 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.
spk05: Well, generally, all tenants have sort of certain control rights over the properties. I would say that the choice is in a phenomenal position opposite Loblaw or adjacent to Loblaw to work together and do what makes sense for the site.
spk06: Got it. Okay, great. Thanks very much and congrats on the strong 23.
spk08: Thanks. Thanks, Mike. And our next question comes from the line of Lauren Kalmar with Desjardins.
spk09: Lauren, 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?
spk05: 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 that 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 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, if you want to add anything. Yeah,
spk04: those are like our renewal rates are quite low, so we are in a very good position.
spk09: Would you guys have an estimate of what the mark to market is on 2024 expiries?
spk05: It's going to be significant. It's
spk04: in the region of around 65 to north 100ish.
spk09: All right, thank you, Nile. That's 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 that's excluding blah, blah. Is that correct?
spk07: Yes, yeah, for that quarter. I think for blah, blah, we renewed that quarter.
spk09: Yeah. Yeah, I was just wondering, if they're not, for tenants that aren't renewing, what type of tenant is and what are they doing? Are they closing? Are they relocating?
spk07: We had, it was out west in Calgary, the biggest vacancy was a rental depot, so they were leaving and we've now basically demised the space. We've packed over half of it. So it was just an isolated incident, nothing about a region or an area.
spk09: Okay, okay, okay. So it's just that one least Calgary. Thank you. And then maybe just lastly on the Mount Pleasant condos. What do you guys expect the cadence of the gains to be on those on the remainder? And I'm assuming, or I won't assume, but is that factored into the guidance?
spk04: Yeah, it's factored into the guidance because those units have been sold quite a few years ago. So it's really just closing on pre-existing contracts. We don't see any real gain on them. Laura,
spk07: it's about, it will be reflected in our Q1 numbers and it's about, it's small, it's a quarter of the rest of the condos, it's about two million dollars.
spk09: Perfect. Thank you very much. I will turn it back.
spk08: All right. Thanks, Lauren. Just a reminder, if you'd like to ask a question again, star one on your telephone keypad, once again, star one. It looks like our next question is from the line of Damaya Sayad with CIBC. Damaya, please go ahead.
spk02: 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 three-ish percentage range and maybe slightly lower contribution from industrial and mixed use compared to 2023.
spk07: Yeah, that'd be a good way to look at it. Again, with the retail, you know, two to two and a half percent of things are a good target. And again, we've always said industrial will be mid single digits.
spk02: Okay. And then on industrial and I guess specifically what you have underway in the Caledon Park, obviously it's a fairly active node. What do you think there, Raleigh, in terms of tenant interest and leasing and the timeframes?
spk05: So, Maya, I'll start and then I'll just give additional color. So, as we announced last quarter, we've leased a building that we're going to build on spec to a third-party logistics firm. We have a lot of site work that we're 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, it's still a way away.
spk04: 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.
spk02: 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?
spk05: 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 Miles 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.
spk02: Okay, sounds good. I will turn it back.
spk08: 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.
spk03: Thanks and good morning, everyone. And I'll echo the congratulations on the 2023 results. Maybe, Rayel, for you on the the Caledon, it's got 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, you know, initiating construction on an industrial property that could be completed during 2025? Is there an opportunity for that?
spk05: I'll
spk04: answer the question that I want, Sam. Thanks. It's not likely for 2025. 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.
spk05: Yeah, and Sam, and the first, the land lease to log law, I believe, commences rent in early 25. So it's 25 for now and 26 is now set for the next one.
spk03: Right. Okay, thank you. And then are you looking at acquiring more land, more industrial land, and around a GTA at this point?
spk05: You know, 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 on to 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 the industrial, I would 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.
spk03: Okay, very clear. Thank you. And just on the guidance, what would be the key drivers that would cause same property and a wide growth in 24 to be, you know, it's 3% max versus last year's 4.5%. What would be the, you know, the main drivers, you know, lowering the growth rates from what we saw last year?
spk07: Hey, Sam, I think, I think, first of all, though, the numbers are strong and they're coming off a strong 2023. So, so just because the numbers 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, it's come down to, you know, as Rael 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.
spk03: 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 your portfolio in the last 3 to 6 months? And if so, what categories of retailers are you perhaps increasingly concerned about?
spk05: Look, I don't think it's grown for our portfolio. You know, there are a few of the big boxes that, you know, like, I don't really, a few of the big boxes that, you know, expanded when Bed Bath & Beyond 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.
spk03: More so now than maybe a couple years ago. Well, is that something you would see more as more likely?
spk05: 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.
spk08: 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.
spk05: Thank you, Greg. To summarize, we're very pleased with our fourth quarter in 2023 operating performance. Our business is strong and our team is well positioned to continue to execute on our strategy and deliver on our look in 2024. Thank you for your interest. You invest me choice and for joining us this morning.
spk08: Thanks, Raelle. Ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect. Have a great day, everyone.
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