Plaza Retail REIT

Good morning. I would like to welcome everyone to the Plaza Retail REIT second quarter 2023 earnings conference call. At this time, all participants are in a lesson-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for the operator. I would like to advise everyone that this conference is being recorded. I will now turn the conference over to Kim Strange, Plaza's General Counsel and Secretary. Please go ahead, Ms. Strange.

Thank you, Operator. Good morning, everyone, and thank you for joining us on our Q2 2023 results conference call. Before we begin this morning, we are obliged to advise you that in talking about our financial and operating performance and in responding to questions today, We may make forward-looking statements, including statements concerning Plaza's objectives and strategies to achieve them, as well as statements with respect to our plans, estimates, and intentions, or concerning anticipated future events, results, circumstances, or performance that are not historical facts. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from the conclusions in these forward-looking statements. Additional information on the risks that could impact our actual results and the expectations and assumptions we applied in making these forward-looking statements can be found in Plaza's most recent annual information form for the year ended December 31st, 2022 and management's discussion and analysis for the six months ended June 30th, 2023 which are available on our website at www.plaza.ca and on CDAR at www.cdar.com. We will also refer to non-GAAP financial measures widely used in the Canadian real estate industry, including FFO, AFFO, NOI, and Same Asset NOI. Plaza believes these financial measures provide useful information to both management and investors, In measuring the financial performance and financial condition of PLASA, these financial measures do not have any standardized definitions prescribed by IFRS and may not be comparable to similar titled measures reported by other real estate investment trusts or entities. They should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS. For definitions of these financial measures and where to find reconciliations thereof, please refer to Part 7 of our MD&A for the six months ended June 30, 2023, under the heading Explanation of Non-Gap Measures. I will now turn the call over to Michael Zacuta, Plaza's President and CEO. Michael?

Thank you, Kim. Good morning. Plaza's business and tenants focused on essential needs, value, and convenience retail in open air centres remain strong and resilient and continue to perform well. This second quarter served as a building block for future growth with a record committed occupancy level, healthy renewal spreads and robust development pipeline which will contribute incremental income and value over the next two years. Our development program is progressing well. In the past quarter, we substantially completed redevelopment projects in Cambridge and Sault Ste. Marie, Ontario and started construction of our Atlantic Superstore and Shoppers Drug Anchored Centre in Dieppe, New Brunswick. Furthermore, we opened new winter stores in Rue Anne-Lorraine, Quebec and Sault Ste. Marie, Ontario. Construction is underway on Winners HomeSense in Bedford, Nova Scotia and Granby, Quebec and at Princess Auto in Drummaville, Quebec, with store openings anticipated before year-end. As we focus on delivering on our most robust development pipeline ever, we expect to announce more major retailer signings and openings across our geography as our projects advance. We are experiencing fewer delivery delays for critical building components and we are seeing better construction pricing. Despite the changing nature of the retail industry, we have successfully maintained strong occupancy rates across our portfolio. This achievement is testament to our strong tenant relationships and the attractiveness of our well-located retail spaces. Renewal spreads have remained healthy, contributing to stability and growth of our rental income and highlighting the value and desirability of our properties. Interest rates remain a subject of ongoing attention. Plaza has limited exposure to floating rates, which are generally reserved for our operating line and interim debt facilities. The majority of our debt is at fixed rates with a well-balanced maturity ladder, which provides stability and insulation against interest rate fluctuations. Our conservative and prudent approach ensures that we can effectively manage impacts from higher interest rates. Despite increasing interest rates, investor demand for our non-core assets remains high. During the quarter, we sold two non-core QSR assets in Ontario, eight non-core QSR assets in Quebec, one non-core QSR asset in Nova Scotia, and one non-core strip in Prince Edward Island at above IFRS values. The sale of these assets, coupled with our ongoing development and redevelopment program, improves the overall quality of our portfolio as we sell our least attractive assets and we replace them with shiny new relevant properties. Looking ahead, we remain optimistic about the future of the retail industry and our business. While challenges persist, we believe that our strong financial position high occupancy rates, disciplined approach to financing will continue to serve us well. Our developments are poised to contribute to our growth, and we will continue to capitalize on opportunities as they arise. I will now turn the call over to Jim Drake, Plaza CFO. Jim?

Thank you, Michael. Good morning, everyone. Although our results for the quarter were somewhat muted, we are continuing to set Plaza up for future growth. NOI and same-asset NOI for the quarter were consistent with last year with rent increases and incremental NOI from developments offset by operating expense increases and properties sold. FFO for the quarter on a dollar basis was up $495,000 over last year due to incremental NOI from developments and higher other income partially offset by properties sold. FFO per unit for the quarter at 9.6 cents was down slightly versus last year as a result of the equity raise and 8.5 million trust units issued in March. Of note, interest expense for the quarter in a higher interest rate environment was consistent with last year, a result of the repayment of our $47 million convertible debentures in March. AFFO per unit for the quarter at $0.07 was down versus last year due to higher leasing costs with additional leasing, higher maintenance capital expenditures, and as a result of the trust units issued in March. For our development program, during the quarter, we completed the redevelopment of Tri-City Centre in Cambridge, Ontario, and transferred $23 million to income-producing properties. We also made significant progress on a number of other developments and anticipate additional completions this year. These will all continue to contribute to earnings growth going forward. On the leasing front, overall committed occupancy remained at 97.6%, and we are continuing to see improvement in our lease renewal spreads. Year-to-date, lease renewal spreads were 5.6%. or 7.6% excluding the renewal of one enclosed mall tenant and excluding an automatic renewal of an anchor tenant in a strip plaza at the same terms. On the balance sheet, our debt to assets ratio remained generally consistent with last quarter, down significantly since last year at just under 50% excluding land leases. We have only 8 million of mortgages rolling for the remainder of this year, and a very manageable $37 million rolling in 2024, with overall loan-to-values of 36% and 46%, respectively. Although current interest rates remain a bit high, the market for secure debt is healthy, and we continue to see strong interest in our mortgage offerings. We are currently seeing fixed rates in the mid-5% range, with longer-term Government of Canada bond yield stabilization, possibly compression, anticipated later this year and into next. Liquidity is always tighter in Q2, with annual property tax and land lease payments due during the quarter. This is a timing issue only. Liquidity at quarter end totaled $59 million, including cash, operating line, and unused development and construction facilities. We also had 14 million of unencumbered assets at quarter end. Finally, on cap rates and valuations, we continue to see strong demand for essential needs and convenience assets such as ours. Year to date, our sales of non-core assets were at prices that exceeded IFRS values by over 15%, and the weighted average cap rate for those sales was in the low 5% range. The cap rates used for our valuations were essentially flat quarter over quarter, and we took an $800,000 right down this quarter, mainly due to minor cost overruns on certain projects. Our weighted average cap rate is now 6.74%. Those are the key points relating to the quarter. We will now open the lines for any questions. Operator?

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the key, the star key, sorry, followed by one on your touchtone phone. You will hear one-tone prompt acknowledging your request. Your questions will be polled in the order they're received. If you'd like to decline from the polling process, please press star two. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. One moment, please, for your first question. Your first question comes from Gaurav Mathuro from IA Capital Markets. Please go ahead.

Thank you, and good morning, everyone. Good morning. Just firstly, on the dispositions that you've done during the quarter, could you provide some color on what the buyer pool looks like and where do bid-ask spreads generally lie?

The The buyers are smaller private investors in some cases. In other cases, they should be sold to our QSR tenant. Again, we're very happy with demand for that type of product. I'm not sure if that answers your question.

It does, and it does lead me to my next question as well, where we've heard some amount of strife among the smaller tenant base, just given the macroeconomic headwinds, and that's across both sides of the border here. Are you seeing any of that come through in your portfolio just yet, or are there no tenant concerns at this time?

Very few tenant concerns at this time. So in our portfolio, it's very much dominated by large national retailers. Then you have the franchised QSRs, which are obviously important to us, and that seems to be holding up quite nicely. Perhaps we think that because people are trading down, looking for a less expensive offering, and that seems to be driving... you know, fast food sales, you know, across our geography. That's our perspective to date. So we haven't seen, you know, real distress. There's always somebody that has some issues as a franchisee. That's normal business, you know, within the retail world. Mm-hmm.

Okay, great. And just last question on the CapEx front. I mean, you know, we've seen the spend in, say, the first half of the year. Would it be fair to say that would be the same run rate for the second half as well, or do you see CapEx increasing as you move forward?

We're probably front-end loaded in Q1 and Q2. On the leasing front, as we mentioned, we don't have a lot of vacancy left. So that spend will probably die down a little bit over the rest of the year. Same with the maintenance capex. We generally spend the majority of that in the first half of the year. So that should tamper for the rest of the year as well.

Okay, great. Thank you for the call, gentlemen. I'll turn it back. Thank you. Thank you.

As a reminder, if you'd like to ask a question, press star 1. Your next question comes from Alexander Ogimery from CIBC. Please go ahead.

Hey, good morning, everyone. Good morning. Good morning. Thanks for taking my question. I just had a quick one about your asset sales. Are you anticipating further excess land or non-core asset sales in the coming quarters?

Yes. I mean, so there's two types of asset sales. There's what we call the non-core sales. Yeah, we'll continue on with that. It's quite productive. It hurdles very well. And it really does ultimately strengthen our portfolio. So actually, I'm quite excited about that. We're trading really our least attractive assets for much better properties, in our opinion. And then there's excess land. Excess land is part of... of a strategy on a per development basis. So, for example, we buy 15 acres of land, but our property only, our development only requires 10 acres. So the five acres is sold off, and we're in the process of doing that in one particular market right now with a sale to a residential developer, which then completes our development. And the residential, the the selling rate per square foot or per acre is higher than our purchase price, therefore it reduces the cost of our retail land. That's also an interesting opportunity for us that we are pursuing in several locations. And again, part of developing, sometimes you're buying more land and that's a good way to improve your returns by, again, selling off the excess land to people that are specialists in residential development.

Okay, great. Thanks for the call on that. I can hand it back now.

Mr. Zakuta, there are no further questions at this time.

Well, thank you for taking the time to participate in this morning's call, operator.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines. Thank you.