CT Real Estate Investment Trust

Good morning, my name is Gigi, and I'll be your conference operator today. At this time, I would like to welcome everyone to CTREIT's Q1 2025 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 1-1 on your telephone keypad. To withdraw your question, please press star 1-1. The speakers on the call today are Kevin Salzberg, President and Chief Executive Officer of CTREIT, Jody Spiegel, 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 Reads Public Filings for a discussion of these risk factors, which are included in their Q1 2025 and Annual 2024 Management Discussion and Analysis, as well as their 2024 Annual Information Form. all of which can be found on CTREIT's website and on CDAR+. I will now turn the call over to Kevin Salzberg, President and Chief Executive Officer of CTREIT. Kevin?

Thank you, Gigi. Good morning, everyone, and thank you for joining us this morning on CTREIT's first quarter investor conference call. I am very pleased to report that Q1 was another strong quarter for CTREIT. Our solid portfolio continues to provide a steady and growing base that underpins our ability to deliver reliable and durable results, even in these challenging macroeconomic times. With occupancy stable again this quarter at 99.4%, we delivered growth in same-store NOI of 1.5%, which when coupled with our intensification activity over the past year, led to growth in same-property NOI of 3.1%. NOI overall grew at 4.6% on the back of the same property NOI growth, coupled with growth driven by recently completed acquisitions and developments, as well as a development fee earned in the quarter. This development fee relates to entitlement work that CT re-completed on behalf of Canadian Tire for one of its own properties located in the City of Toronto, and Jody will speak to this a little further in her remarks. The robust growth in net operating income drove AFFO per unit growth of 3.9% in Q1, a very strong showing. On the back of these positive results, our Board of Trustees approved an increase in our distributions of 2.5%, payable with the July 2025 distributions. This represents the 12th time since our initial public offering in 2013 that we have provided our unit holders with such an increase in the monthly amounts they receive from us. A unit holder who has been with us since IPO has enjoyed a 45.9% cumulative increase in distributions paid since that time, which represents a 3.3% compound annual growth rate, a track record that we are very proud of. When I look back over the last five years, whether we were managing our way through a pandemic, volatility spurred on by rapidly rising interest rates, or the most recent economic turmoil and uncertainty brought about by tariffs, CTREIT has managed to consistently deliver strong growth in earnings, increase its distributions on an annual basis, and maintain its strong balance sheet and credit metrics. I am appreciative of the efforts of our team and our relationship with Canadian Tire, which are key drivers of this success, and which put us in a great position to continue to navigate our way through these volatile times. I will now turn it over to Jody and Leslie to provide some additional details on the quarter, our results, and our leasing and development activities.

Thanks, Kevin, and good morning, everyone. As Kevin mentioned, the REIT earned a development fee from Canadian Tire in the quarter for work completed related to the submission of official plan and zone by-law amendment applications for a commercially zoned property owned by CTC in the City of Toronto. These applications, which have now been approved, have set the stage to allow for a mix of uses on-site, including residential and retail, and achieved a total density of approximately 900,000 square feet, as well as permissions for approximately 1,050 residential units. The REIT oversaw and managed this process and was successful in achieving these entitlements. Neither Canadian Tire nor CTREIT currently have any plans or intentions to redevelop this property. We are pleased to report that our own development activities continue to provide tremendous opportunities for us to grow our portfolio of high quality assets. For example, early in the quarter, CTREIT entered into a ground lease agreement with a third party to facilitate construction that is now underway of a new Canadian tire store in Kelowna, British Columbia. Upon completion in Q4 2025, this store will add approximately 186,000 square feet of incremental GLA to our portfolio and will be built to Canadian Tire's Net Zero Ready prototype, which has an energy efficient design. And our development pipeline overall remains strong with 20 projects at various stages, with approximately half of these projects expected to be finished this year, and the remainder expected to be completed in 2026 and beyond. These developments represent a total committed investment of approximately $331 million upon completion, 112 million of which has already been spent, and 154 million of which we anticipate will be spent in the next 12 months. Once built, these projects will add a total incremental GLA of approximately 891,000 square feet to the portfolio, approximately 97% of which has been pre-leased. During the quarter, CTREAD also completed two Canadian tire store lease extensions, and as at the end of Q1, The weighted average lease term for our portfolio was 7.5 years, which remains one of the longest in the sector. As Kevin mentioned earlier, at the end of the quarter, CTREIT maintained its 99.4% off-frequency rate. With that, I will turn it over to Leslie to discuss our financial results. Leslie?

Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we were pleased with the results delivered by the REIT again this quarter. Same-store NOI grew 1.5% or $1.7 million. Drivers of the same-store NOI increased for contractual rent escalations of $1.9 million, primarily being the 1.5% average annual rent escalations included in the Canadian tire leases, partially offset by lower capex and interest recoveries, which reduced NOI by $219,000. Same-property NOI grew by 3.1% or $3.5 million compared to the prior year. This increase was primarily due to the increase in same store NOI noted, as well as an increase of $1.8 million from the intensifications completed in 2024. Overall in the fourth quarter, NOI grew by a healthy 4.6% or $5.2 million, driven by the increase in the same property NOI, as well as by acquisition activity, the completion of development projects in 2024, and the development fee revenue that Kevin and Jody spoke to earlier. Excluding the development fee revenue, NOI grew by a solid 3.7%. In the first quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 2.7%, which is 100 basis points lower than in the same period of the prior year of 3.7%. This decrease was due to the timing of a deferred income tax provision of $1.1 million in 2024. The fair value adjustment of $24.8 million in the quarter was primarily driven by contractual rent increases. as well as loosening activity within the portfolio. In the quarter, diluted FFO per unit was up 3.3% to $0.342, compared to $0.331 in the first quarter of 2024. Growth in AFFO per unit on a diluted basis was $0.320, up 3.9% compared to the first quarter of 2024. Cash distributions paid in the quarter increased by 3%, compared to the same period in the previous year due to the increase in distributions, which became effective with the monthly distributions paid in July 2024. As Kevin mentioned earlier, we're pleased to announce our 12th distribution increase since our IPO, reflecting our financial strength and consistent delivery of strong results, which will become effective with the July 2025 distribution. With growth in AFFO outpacing the growth in distributions, the AFFO payout ratio for Q1 was 72.2%, down from 73.1% in the period last year. Now, if we turn to the balance sheet, our interest coverage ratio was 3.55 times for the current quarter, which was in line with the 3.57 times in the comparable quarter of 2024. As previously discussed, in 2025, we anticipate refinancing certain maturing debts at a higher interest rate, which will lead to an increased net interest expense compared to the previous year. The interest rate for the $252 million of Class C LP units maturing at the end of May has been reset to 4.38% for a five-year term. The indebtedness to EBIT fair value ratio is 6.55 times for the quarter, lower than last year's ratio of 6.81 times, primarily due to the growth in EBIT fair value from an increase down to Y, as well as a slight decrease in total indebtedness. Our indebtedness ratio was 40.3% for the quarter, which is lower than the indebtedness ratio from last year of 41.1%, primarily due to an increase in fair value of investment properties and partial repayment of the credit facilities. Our indebtedness ratio continues to be within our target range. Lastly, with respect to liquidity, we ended Q1 with $3 million of cash on hand and $297 million remains available through our committed credit facility. A further $232 million is also available in our uncommitted facility with Canadian Tire Corporation. And with that, I'll turn the call back over to the operator for any questions.

At this time, I would like to remind everyone, in order to ask a question, please press star, then 1-1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Lorne Calmar-Wilson. from Desjardins Capital Markets.

Thanks. Good morning, everybody. Just a quick one from me, and I appreciate all the color on the development fee revenue, and I feel like I have a good idea, but just wanted to confirm. Is this something that you expect to be repeatable, or this is sort of a one-off and we might see quarters down the road where we have it and we might not?

Good morning, Lauren. It's Jody. It is actually just a one-off. There's possibly more in the future, but really it's a one-off.

Okay, fair enough. And then maybe one last quick one. To the extent that you guys are already looking at the 2026 lease negotiations, just wondering if you'd give us any update on how those are proceeding.

Yeah, if you recall, Lauren, the notice period for exercising of options with Canadian Tire is 18 months out, so we're already in the thick of dealing with 2026. I would say those negotiations are progressing well. They mirror probably our performance on renewals to date, but I think they also take into consideration the strength we're seeing in the retail leasing market more broadly and our experience over the last 12 months plus with our third-party tenants as well. trying to triangulate all those things to make fair and balanced renewals and also drive rents.

Okay, great. Thank you very much.

Thank you. As a reminder, to ask a question, please press star then 11 on your telephone keypad. One moment for our next question. Our next question comes from the line of Gaurav Mathur from Green Street.

Thank you, and good morning, everyone. Just a quick question from me on the parent company. Now, we've seen Canadian Tire streamline their operations and even merge and shut down a couple of banners. Has there been any conversation around future intensification opportunities beyond the training project that you have currently in the pipeline and how that would be affected?

You're talking about REIT-specific sites, Gaurav? Yes. Yeah, I mean, we own great urban assets and we recognize that one day they could certainly have higher and better uses. Having said that, there are operating retail stores that are generally quite profitable for the parent company. So we've talked about it in the past, but any type of intensification or redevelopment, the first thing we'd have to do is solve for what happens to the store. And obviously there's a series of options that could be available in terms of a relocation or closing down and reopening, but those are all complicated and they take time. So I guess what I would say as well, That optionality exists. There's no specific plans in place today for any of our locations on an imminent basis.

Thank you very much. I'll turn it back to the operator.

Thank you.

Thank you. As a reminder, in order to ask a question, please press star, then 1-1 on your telephone keypad. One moment for our next question. Our next question comes from the line of Linda Wang from TD Securities.

Hi, this is Linda standing in for Sam Damiani. So on the fair value gains that are recognized for five consecutive quarters, largely on growing NOI, while cap and discount rates have remained largely unchanged. How are you thinking about the relationship between rising rents and NOI versus the cap and discount rates? And do you expect higher cap rates and discount rates to become more negative offset in determining share value gains in the future?

Hi, Linda. I can try to take that. I mean, as you know, we have embedded annual rent escalators in our leases with the name Tire on average. They are 1.5% every year. From the base portfolio, we're experiencing that rent and NOI lift. We triangulate that against what we see in the market in terms of cap rates for comparable assets. Quite frankly, the investment market over the last year, year and a half has been a little slower than we would have expected. Retail is certainly still a coveted asset class from investors. There's just not a lot being sold right now, not a lot on the market. So from what we're seeing out there, cap rates for defensive solid tenant credit retail has remained fairly constant, fairly flat. And obviously, to the extent our NOI is growing, we apply what we believe is the best estimation of market cap rates against our growing NOI base to come up with our fair value. So I hope that answers your question, but that's how we kind of approach it.

Okay, thank you. Thank you. One moment for our next question. Our next question comes from the line of Giuliano Thornhill from National Bank.

Good morning, guys. Just had a couple. To the extent that you can comment, are you aware of what the recent involvement might be in the True North strategy at the parents?

Yeah, so Canadian Tire this past quarter launched an updated, refreshed new transformational strategy they're calling True North. I think, you know, for the REIT, it'll probably be not all that different from their last version of strategy that they were calling Better Connected, where the store is still a central part of the relationship between the company and the customer, which is at the heart and focus of what they're trying to do, trying to be more consumer-centric. And the bricks and mortar and the supply chain obviously play key roles in that. We have talked over the last couple of quarters about the pace at which new store projects have been slowing. Our development pipeline right now we're very happy with. It's amongst the largest it's been in some time at almost 900,000 square feet. We'll be delivering hopefully five to 600,000 square feet by the end of this year. But I think True North, like Better Connected, will continue to drive opportunities for us, albeit perhaps at a slightly slower pace.

Okay, thank you. And then just my next one was just on the distribution increase. What are the key kind of inputs to deciding the two and a half versus 2.7 last year or before that it was three?

Certainly, it's Leslie. You know, we definitely look at where we're forecasting our results to be. And obviously, with a little bit higher headwinds and interest rate, we felt that, you know, our ASFO growth might not have been as high as it is in the past. And I think we try to take a balanced approach between, you know, rewarding unit holders with that and then retaining cash back into our operations. So I think those are probably the main factors in coming up with the two and a half this year versus three.

Okay. Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Brad Sturges from Raymond James.

Hey, good morning. Just one question for me. Just on the, just looking at your Series B debenture coming due, I guess, in June, just, you know, can you walk through the refinancing options that you're looking at right now? And I guess more specifically, kind of, what's been the movement in the credit spread market for unsecured debt in the last few weeks since Liberation Day.

Thanks. Hi. Well, I was going to say, as far as our plans, I mean, we still are focused on the public markets for our primary source, the debt funding, with all of our sort of assets, barring sort of one being secured. Really, it's an unsecured balance sheet, so I think that's still our main focus. As far as where things have gone in the last number of weeks, I would say, you know, last week's credit spreads went up a little bit. And then in the last sort of week and a half have actually come back down. You know, all in all in rates are still a little bit more expensive than they were sort of eight weeks ago. But really, you know, we we've seen. you know, in the last even two weeks, you know, 10 to 20 basis point change in the all-in. So it's, they're definitely moving all over the place, but I would say last 10 days have been moving lower this week, lower than last week, a couple of weeks a bit higher. So hard really to triangulate and what never knows what news might arrive tomorrow that could change that. So definitely a state of flux.

Okay. So, you know, from a modeling perspective, where would like an all-in rate be today or roughly speaking?

I would say in like the, you know, around the sort of 430 plus or minus, et cetera, where things were, but it's for a five year. But again, you know, a week before that could have been 10 or 15 basic points higher and a few weeks before that lower. So it's hard to really peg it. Day-to-day things are really changing.

Yeah. Okay. Makes sense. Thank you.

Thanks. Thank you. As a reminder, to ask a question, please press star then 11 on your telephone keypad. As there are no further questions at this time, I will turn the call over to Kevin Salzberg, President and CEO, for closing remarks.

Thank you, Gigi, and thank you all for joining us today. We look forward to welcoming you to our annual meeting of Unitholders, 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.