CT Real Estate Investment Trust

My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REITs Q1 2024 Earnings Results Conference 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 that time, simply press star 11 on your telephone keypad. To withdraw your question, please press star 11. The speakers on the call today are Kevin Salzberg, President and Chief Executive Officer of CTREIT, Jody Spielberg, Jody Spielgel, Senior Vice President, Real Estate, and Leslie Gibson, Chief Financial Officer. Today's discussion may include forward-looking statements. Such statements are based on management's assumptions and beliefs. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see CT REIT's public filings for discussion of these risk factors, which are included in their 2023 MDNA and 2023 AIF, which can be found on CT REIT's website on CDAR. I will now turn the call over to Kevin Salzberg, President and Chief Executive Officer of CT REIT. Kevin.

Thank you, Justin. Good morning, everyone, and welcome to CTREIT's first quarter investor conference call. I thought I would start the call with a little color with respect to what we are seeing in the market currently. With respect to the economy at large, growth remains muted. Inflation has tempered, but it's still above the target rates set by our central bank. And housing affordability continues to become further out of reach for average Canadians, driven by high levels of immigration over the last few years, elevated construction costs, and excessively long timeframes that are required to complete new development. For some time now, market prognosticators have been considering when interest rate cuts will begin and by how much we should expect rates to decline. The answers to these questions continue to seem uncertain and something to be determined at some point in the future. A lack of clarity, driven by the aforementioned factors, continues to constrain the property markets. and transaction volumes remain relatively muted. Fundamentals for retail real estate, however, have been strong as increased population translates into new customers for our tenants and the high cost to build coupled with the conversion of commercial assets into residential development sites have fueled a supply-demand imbalance that has favored landlords of late. Despite the turmoil of this mixed market, CTREIT continues to perform. And our Q1 2024 results are yet another example of the stability, reliability, and growth that we have delivered to date, irrespective of market conditions. From our successful IPO through our initial phase of growth to the COVID-19 pandemic and the more recent challenging economic conditions, CTREIT has proven its resilience time and again. In the first quarter, our durability and performance were once again on full display. And I'm pleased to report that we achieved growth in net operating income, or NOI, of 5.6%, growth in same property NOI of 4.1%, and growth in diluted AFFO per unit of 4.8%. All in all, a great start to the year. On the back of these strong results, we were pleased to announce that for the 10th straight year, our Board of Trustees has approved yet another increase to our distributions. The 3% increase is the 11th since our IPO and represents a cumulative increase of 42.3% over that time, which is a true testament of our success and stability over the last 10 plus years. An investor who has been with us since our inception would now be enjoying a 9.25% yield on their initial investment based on our new distribution rate. And our future continues to look bright. We have over 740,000 square feet of gross leaseable area in our development pipeline, comprising one new Canadian tire store development, 16 Canadian tire store expansions, one redevelopment, and one site intensification for third-party tenants. With respect to our balance sheet, our low leverage, strong coverage ratios, and liquidity position us well to manage our way through this higher-for-longer rate environment. We only have one debt maturity this year, a $200 million series of Class C LP units that Canadian Tire holds that will be reset effective June 1st, 2024 for an additional five years at a rate of 5.43%, and we have no other upcoming debt maturities until midway through 2025. The strength of our balance sheet, the visibility of our cash flows, and our embedded growth all make CTREIT a very attractive option for investors as we continue to navigate these choppy waters. I'll now turn it over to Jody and Leslie to provide some additional details on the quarter, our results, and our investment leasing and development activities. Jody?

Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce one new investment this quarter. This new investment relates to the expansion of an existing Canadian tire store located in Donacana, Quebec. It is anticipated that this $11.1 million Million-dollar investments will be completed by the end of 2025 at a going-in yield of 7%. In Q1, we continue to focus on our existing development pipeline. Building on the significant progress made in 2023, the REIT currently has 20 projects at various stages of development, with three of these expected to be completed this year and most of the balance expected to be completed in 2025 and 2026. These developments represent a total committed investment of approximately $287 million upon completion, $96 million of which has already been spent, and $52 million of which we anticipate will be spent in the next 12 months. Once built, these projects will add in total incremental gross leaseable area of approximately 742,000 square feet to the portfolio, 93.8% of which has been pre-leased at quarter end. During the quarter, we extended one Canadian tire store lease while maintaining a nearly fully occupied portfolio, with our occupancy rate now reaching 99.5%. As at the end of Q1, the weighted average lease term for our portfolio was 8.2 years, which remains one of the longest in the sector. With that, I will turn it over to Leslie to discuss our financial results. Leslie?

Thanks, Jodi. Good morning, everyone. As Kevin highlighted, we are pleased with the strong results delivered by the REIT again this quarter. Reflecting on the solid growth within the portfolio, same-store NOI grew 3.0% or $3.2 million. Drivers of the same-store NOI increase were contractual rent escalations of $1.4 million, primarily being the 1.5% average annual escalations included in the Canadian entire leases. With the balance of the growth primarily from continued recovery of capital expenditures, and interest earned on the unrecovered balance, which contributed approximately $1.9 million to NOI in the quarter. Same property NOI grew by 4.1% or $4.4 million compared to the prior year. This was due to the increase in the same store NOI noted, as well as from the intensifications completed in 2023. Overall in the first quarter, NOI grew by a healthy 5.6% or $6.1 million. driven by the increase in same-property NOI and the completion of development projects in 2023. In the first quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 3.7%, which was higher than the same period in the prior year of 3.0%. This increase was primarily due to the timing of the deterred income tax provision amending to $503,000, which is expected to reverse over the balance of the year. The fair value adjustment of $23.6 million in the quarter was mainly driven by contractual rent escalations and leasing activity within the portfolio during the period. Investment metrics for the portfolio remained unchanged relative to the 2023 year-end. In the quarter, diluted FFO per unit was up 3.4% to $0.331 compared to $0.32 in the first quarter of 2023. This growth can be primarily attributed to the intensification and developments completed during 2023 and the increased recovery of capital expenditures and interest earned on the unrecovered balance, as well as contractual rent escalations from Canadian tire stores, other CTC banners, and third-party tenant leases partially offset by higher interest costs. The growth in ASFO per unit on a diluted basis was strong for the same reasons, coming in at 30.8 cents. up 4.8% compared to the Q1 of 2023. Distributions in the quarter increased by 3.5% compared to the same period in the previous year. As Kevin already mentioned, we were pleased to announce a 3% increase to the monthly distribution, effective with the July 2024 payment to unit holders. This is the 11th such increase, and we're pleased to have been able to raise our distributions at least once per year since IPO. AFFO payout ratio for Q1 was 73.1%, slightly lower than the payout ratio of 73.8% in the same period last year. This decrease was attributed to the growth in the diluted AFFO per unit, outpacing increase in the distribution per unit. In Q1 2024, we continued repurchasing a modest amount of units through our NCIB facility, buying back approximately $3 million of our units below the intrinsic value at an average price of $13.92. Now turning to the balance sheet, our interest coverage ratio was 3.57 times for the current quarter, compared to 3.70 times in the comparable quarter of 2023. The decrease was mainly driven by the increase in interest expense and other financing charges outpacing the growth in the EBIT fair value. The indebtedness to EBIT fair value ratio improved to 6.64 times down from 6.83 times in Q1 of 2023, primarily because the growth of EBIT fair value outpaced the increase in indebtedness. Our indebtedness ratio was up slightly to 41.4% from 40.7% in the same quarter of last year due to the issuance of the Series I debentures partially offset by an increase in fair value of the investment properties. Our indebtedness ratio continues to be within our target range, And considering the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet. Lastly, with respect to liquidity, we ended Q1 with $50 million of cash on hand and $297 million remains available to our committed credit facility. A further $300 million is available in our uncommitted facility with the entire corporation. And with that, I will turn it back to the operator for any questions.

And thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then 11 on your telephone keypad. To withdraw your question, press star then 11 again. We'll pause for just one moment to compile the Q&A roster, and one moment for our first question. And our first question comes from Sam Damani from TD Cowan. Your line is now open.

Thank you. Good morning, everyone. First question, I guess, is probably one I've asked before, which is just what's your vision for growth over the next decade given the smaller pool of Canadian Tire and third-party-owned real estate that could come available or be shaken loose, and what is the REIT's appetite for materially diversifying the tenant base beyond Canadian Tire going forward?

Yeah, good morning, Sam. You know, I'm not sure I would characterize the pool as shrinking or smaller. You know, I think we're at a point in time where both the REIT and Canadian Tires are being a little bit more prudent with our capital allocation and spend. There's projects that we're still interested in pursuing, but they've been perhaps deferred or delayed a little bit just in the interest of seeing where the market takes us. I still think there's a huge amount of opportunity pursuing those opportunities that we surfaced through our relationship with Canadian Tire. We are always opportunistic about what's out there in the market and looking to add to our net lease portfolio, unrelated to Canadian Tire, but pricing relative to cost of funds for the last little while have been, the disconnect's just been too large. And then in terms of diversification, I think, as you've seen in that first decade, it's something that happens almost naturally in the sense that as we buy or develop more things that have components that are Canadian Tire related, there's also often third-party tendencies within those assets. But that's often offset by the amount of Canadian Tire related activity that we've done. So on percentage terms, it hasn't really moved the needle all that much. So it certainly could ebb and flow as time goes on, up or down, but So diversification in and of itself is not a current strategic objective for the REIT. We continue to lean into the opportunities that we glean through our relationship with Canadian Tire. And over time, if those opportunities change, we will certainly be open to a wider mix of tendencies. But I think Canadian Tire for the foreseeable future will make up the vast majority of the REIT's portfolio.

That's great. I really appreciate that. Very helpful. I guess just on Canadian Tire related growth, could you quantify the potential opportunity in the next three to five years? What kind of trajectory do you think is possible or a range of trajectories are possible?

A couple of years ago when Canadian Tire came out with their Better Connected strategy, there was a pretty large capital envelope that came along with that. you know, over a three to five year period, call it. And we made pretty good headway eating into that bucket. You know, our CapEx spend over the last three years has been slightly higher than our average, I would say. You know, in the go forward, I think it all depends when, you know, consumer spending sort of recovers. I think there is still a belief that Canadian Tire over time wants to improve their store and supply chain networks. And when I say improve, expand the size of their stores, bring it up to their current prototype, expand the availability of different fulfillment channels, buy online, pick up in store, greater showrooming, all the things that we've talked about in the past. So I think it's a large opportunity set. I think it's just going to take longer to effect. We still have a number of vendants we can do over time from Canadian Tire. Probably we've estimated the The pipeline there at 15 to 20 sites, you know, when we choose to, you know, to work with the entire and trying to buy those assets is market dependent. And also, you know, where we are within our growth stage and our desire to allocate capital in a given year. So no specific guidance there, but those assets also remain available for the REIT to consider purchasing over time.

Okay, great. And last one for me, just on the NCIB, it's been pretty steady sort of programmatic approach over the last few quarters. Just wondering, is there an appetite to materially step up that activity to take advantage of the current publicly traded valuation?

I wouldn't say materially, Sam. I mean, that's something we've talked about in past quarters as well. Hard to consider the trade-off between supporting the units showing the market we believe we're trading at too wide a discount to our net asset value. But also we understand that our investors are really interested actually in us increasing our float and increasing our liquidity, which is something we're also desirous of over the long term. So I think what we've done is try to take a modest approach to supporting our unit price. And that's probably what you'll continue to see from us for the next couple of quarters.

That's great. Thank you very much for answering those. Take care. Thanks, Sam.

And thank you. And one moment for our next question. And our next question comes from Lorne Calmore from Desjardins. Your line is now open.

Thanks. Good morning, everybody. Just on the – I know you don't have a lot of lease maturities coming up this year in 25, but it looks like the majority of them are third-party or non-CTC leases. I was just wondering, you know, given the strength you mentioned in retail, what type of lists are you getting on the ones you've done so far and sort of expecting to get done on the remainder through 25?

Good morning. It's Jody. Just to answer your question, so we had – a fair number of renewals this quarter that, as you noted, are third-party, approximately 182,000 renewed. And roughly speaking, we're seeing low double-digit spreads on those renewals, and I think we can expect to see that continue just based on the supply-constrained market and the fact that tenants are looking to renew, so we're getting the benefit of that.

Okay, and then you'll have to forgive me because I don't remember exactly what the typical lift is on a CTC lease, but given the broader strength in the market, is there any room to push that beyond current levels when there's some chunkier renewals coming up in 26 and beyond?

Yeah, Lauren, historically, we've continued on the average 1.5% rent escalations that we enjoyed in the initial term through extension periods. Certainly, the 1.5% as it relates to what we're seeing in the leasing market right now has been a hot topic for us and something we've engaged with Canadian Tire in. There's been a bit of a unique attribute to the first couple sets of renewals that we've had to deal with through 2023 and 2024, and that is that they've been heavily skewed to smaller markets. I think as we get into the 25 and 26 renewals, it's more of an uneven mix between smaller markets and urban markets, and certainly in those larger centers where we're seeing higher renewal spreads, that's something we'll be addressing with Canadian Tire.

Okay, so there might be some potential to see the lifts pick up a little bit.

Yeah, you have to also appreciate the 1.5% is the average over 25 million square feet of the entire store. So rolling over 5%, 6% a year, it will take some time for that average to move. But that doesn't mean it's not a worthwhile endeavor and something we're not going to talk to Canadian Tire about.

Okay, great. And then... I did notice, I think outside of the one you guys highlighted in the press release, there was another project, Winkler in Manitoba. I think that was added to the pipeline. I was just wondering if maybe you could give a little more color on that project.

Yeah, so as you know, Q4 we added Winkler, and this year we added it to the PUD table. So that's a mall in Winkler, Manitoba. It's Canadian Tire Anchored, and there's an enclosed mall, and so the development relates to the enclosed mall portion of that property.

Right.

Thank you. Thank you for the reminder.

And then just last quick little one for me. The capped interest came down a little bit. I think that's probably not entirely unexpected. Is that sort of a good run rate going forward given the $52 million development spend over the next 12 months?

Yeah, Lauren, it's Leslie. That probably is given where we expect developments in the development spend to go for the balance of the year.

Okay, great. Thank you so much for taking my questions. I'll turn it back.

Thank you.

And thank you. And one moment for our next question. And our next question comes from Pommy Beyer from RBC Capital Markets. Your line is now open.

Thanks. Good morning. Kevin, you mentioned, you know, deal flow is still limited and, you know, pricing is still disconnected. Can you maybe just talk about maybe what you have seen in terms of maybe what's come your way, maybe any transactions that you have looked at? what sort of pricing have you seen? And just curious, you know, what types of assets are these or even the vendor types? I know there's a lot in there, but just any additional color on the transaction side.

It's been a strange market, to be honest, Pommy. It's a little bifurcated right now. You know, you're seeing some assets that are out of favor trade. We've seen some office trades in the last quarter. You've seen A lot of interest still in grocery anchored essential needs retail, but there's not a lot out there to buy right now. Multifamily is obviously still very active, probably I would think the most active of the asset classes. So different pools of capital chasing different things, different buyer perspectives in terms of whether it's a good time to sell or not. You know, we've seen a couple of net lease sites that we've looked at, single tenant, I would say mid-market stuff. But, you know, we've been surprised by the degree to which we've been off on pricing. You know, we have a view on risk and, you know, there are others who are looking at assets very differently. So I think that disconnect is real. And, you know, there's a couple of things we've we've gone down the line on. And like I said, we've just been surprised the degree to which we've been off on pricing.

Got it. In terms of just one last one for me, the occupancy pickup this quarter, and I think Jody mentioned it, was that partly driven by the shift of Winkler into properties under development? I'm just curious on the retail side that I think it was a 40 basis point pickup.

Yeah, that's correct, Tommy. It's basically just the move of the asset into PUD.

Okay. And then just on Canada Square, a bit of an uptick there as well. Was that some leasing that was completed in the quarter?

It was. I would describe it as short-term leasing, though. It wouldn't be anything to write home about necessarily.

Okay. So no big change in terms of the near-term releasing of some of the vacancies.

No, we're still sticking with our asset plan, and the degree to which we can hold on to short-term income for longer is great, but still maintaining that flexibility to have access to the site to redevelopment.

Got it. Thanks very much.

And thank you. As there are no further questions at this time, I would like to turn the call over over to Kevin Salzberg, President and CEO, for closing remarks.

Thank you, Justin, and thank you all for joining us today. We look forward to welcome you to our annual meeting of Uniholders, which we will conduct virtually later this morning at 10 a.m. We hope that you'll be able to listen in, and we look forward to speaking with you again in August after we release our Q2 results. Thank you. This concludes today's call.

You may now disconnect.