Plaza Retail REIT

Good morning. I would like to welcome everyone to the Plaza Retail REIT fourth quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. Following the presentation, we'll 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 operator assistance at any time. 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. Good morning, everyone, and thank you for joining us on our Q4 2023 results conference call. Before we begin today, 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 which 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 PLASA's most recent Annual Information Form for the year ended December 31, 2022 and management's discussion and analysis for the fourth quarter and year-ended December 31, 2023, which are available on our website at www.plaza.ca and on CDAR Plus at www.cdarplus.ca. We will also refer to non-GAAP financial measures this morning, 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 the trust. 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 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 fourth quarter and year ended December 31st, 2023 under the heading Explanation of Non-GAAP Measures. I will now turn the call over to Michael Zucuda, Plaza's President and CEO. Michael.

Thank you, Kim. Good morning. In 2023, retail property developers and owners faced strong headwinds as we dealt with the impact of geopolitical crises, inflationary pressures, and rapid interest rate expansion. Despite all of this, Plaza experienced many achievements, and we have once again showcased our resilience by developing and maintaining a high-quality portfolio of essential needs retailers who target non-discretionary spending. During the year, we completed 626,000 square feet of development projects and significantly advanced a number of other developments through pre-leasing and pre-construction phases. We raised $40 million of equity at the end of March, our first equity issue since 2016, which allowed us to delever and strengthen our balance sheet. We successfully completed a $47 million disposition program at prices in excess of our IFRS values. The net effect of our capital recycling program was that we have increased the average size of our properties, reduced the average age of our assets, and improved the overall quality of the portfolio. We renewed 871,000 square feet at record high leasing spreads. We were very active repositioning existing space and creating new space in our existing properties. Repositioning tenants typically comes with some short-term pain due to the fact that we sometimes must move tenants out and temporarily lose revenues. Additionally, leasing costs are incurred. We only begin to benefit from enhanced overall property NOI upon the reopening of the space. At the beginning of the year, we added depth to our management team with the addition of Jason Paravano as COO. With the addition of Jason, We have the strongest management team in Plaza's history with all of the key players in the age bracket that will ensure long-term success for our business. With market sentiment starting to favor retail, with our development pipeline and the strength of our management, we are very optimistic about our future. I will now turn the call over to Jason, who will talk about our future prospects.

Thank you, Michael. First and foremost, I'm incredibly excited to join a company with a long history of success, a track record for growth, and a reputation that goes unmatched. From the warm welcomes I've received to the passion for the business I've witnessed so far, I have to say I'm excited for the future of Plaza. Tenant demand is robust, and the geographic positioning of our asset mix is definitely an advantage. The markets in which we operate have significant population growth, and incremental demand from consumers translates to better performance for our tenants in markets where retail supply is limited. This has a direct impact on rental rates. And one thing we can all agree on is that where we see strong demographic trends, whether through drop growth or population growth, this benefits retailers overall. We continue to experience the great contrast between non-discretionary retail versus discretionary retail. This is primarily due to a downturn in the economy due to ongoing inflation. We hope these challenges will soon be behind us, but until then, the non-discretionary retailer continues to march forward. This would include any essential needs retailer, such as grocers, pharmacies, pet food stores, dollar stores. These non-discretionary retailers are aggressive in seeking new opportunities, whether opening net new locations or expanding into bigger spaces when available. We are also experiencing an important contrast between discount or value retailers versus retailers with traditional pricing models. We are seeing a lot of demand from QSRs who offer consumer a good value proposition in contrast to any mid-price sit-down restaurant offering. We recently participated in the Whistler ICSC where we met with approximately 50 national retailers, all who expressed the need to expand and open new locations. Our relationships with these retailers have always and will always be key to our success and will help build our development pipeline. Our reputation in the industry for delivering successful retail projects within an increasingly complex and costly regulatory environment, coupled with fewer pure-play retail developers operating our geographies, has resulted in significant barriers to entry for new players. Blazo's focus has always been retail. We know it very well. With most retail REITs having pivoted into other sectors, especially residential and industrial, we remain focused on being a best-in-class developer and owner of retail properties. We are the only publicly traded REIT offering investors access to pure-play essential needs, value, and convenience retail developments. Our capital recycling program, as Michael mentioned, resulted in the sale of $47 million of properties in 2023. We are hard at work deploying net proceeds through numerous developments and tenant repositionings. I do not expect our 2024 program to be as robust. However, we are currently in the process of listing a handful of properties, and we are seeing some good demand from purchasers. I will now turn the call over to Jim Drake, our CFO.

Thank you, Jason. Good morning, everyone. A few of the accomplishments Michael and Jason mentioned, although having a positive impact and setting us up for long-term growth and resilience, do have a short-term impact. Our non-core asset sales, for example, are very positive for the business as they assisted with repaying our $47 million ventures earlier in the year and contributed to strengthening our balance sheet and portfolio quality. They did have an impact on NOI, though. Total NOI for the quarter and year were slightly below last year, with increases from SAMS to NOI and development completions offset with operating expense inflation those asset sales. KMASSIF NOI, however, was up 0.4% for the quarter and 1.1% for the year as a result of new leasing, rent escalations on existing leases, and our strong lease renewal spreads. On a dollar basis, annual FFO was up 0.3% over last year with per unit performance impacted by our equity raise and issue of 8.5 million units earlier in 2023. AFFO was impacted by the repositionings Michael mentioned, which improve our portfolio and tenant quality, but can be capital intensive. Excluding the few significant repositionings completed during the year, annual AFFO on a dollar basis would have been up 2% over last year. Under our development program, the completion Michael mentioned represented six projects, and we transferred $44 million net to income-producing properties. These projects tenants, which focused on essential needs and non-discretionary spending. We also made significant progress on a number of other projects and anticipate additional completions over the next few quarters. These will all contribute to earnings growth going forward. On the leasing front, overall community documents was 20 bps from last quarter, now at 97%, which is still at the high end of our recent history. We are continuing to see improvement in our lease renewal spreads at 7.7% overall or 8.2%, excluding the automatic renewal of an anchor tenant at the same terms. This represents our strongest performance in recent history. On the balance sheet, our debt-to-assets ratio is down significantly since last year. at 51% excluding land leases. We have a very manageable $37 million of mortgages rolling in 2024 with a weighted average rate of 4.43% and an overall loan to value of 47%. We will renew these mortgages and in certain cases, upward refinance to 60% loan to value. In December and into January of 2024, We issued a $5 million unsecured debenture with a 6.75% coupon, approximately $600,000 of which was for a six-month term with the remainder for one year. The proceeds were used to repay some maturing mortgage bonds and pay down our operating line. We have an additional $6 million of unsecured debentures and $3 million of mortgage bonds maturing in 2024, which we intend to renew. The market for debt for a disaster like Plaza is very healthy, and we continue to see strong interest in our secure and small unsecured offerings. Although interest rates remain a bit volatile, we do anticipate they will trend down over 2024. We are seeing interest rates for fixed-rate mortgages in the 5.4% to 5.7% range. Liquidity at year-end totaled $51 million, including cash, operating line, and unused development and construction facilities. We also had 9 million of unencumbered assets at year-end and 3 million of unused construction financing facilities at non-consolidated properties. Finally, on valuation, we took a $9.5 million write-down in Q4, generally due to cap rate movement, bringing the fair value rate down to $20 million for the year. Our weighted average cap rate is now 6.86%. Those are the key points relating to the quarter and year. We will now open the lines for any questions.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you have a question, please press the key Click the star key followed by 1 on your touchtone phone. You will hear a one-tone prompt acknowledging your request. Your questions will be polled in the order they are received. If you'd like to decline from the polling process, please press star 2. Please ensure you lift the handset if you're using a speakerphone before pressing any keys. Again, to ask a question, press star 1. One moment please for your first question. Your first questions come from Pammy Bear from RBC. Please go ahead.

Thanks, and good morning. Just with respect to the project pipeline, what are you seeing in terms of cost there? Have they now started to stabilize? And then as well, just your outlook for the returns on I think the $130 million plus that you've got currently gone.

So we're definitely seeing a serious improvement in cost. We believe that we've turned the corner and any recent bids that we have look a lot better than what we would have bid a year or two ago. So that we're clearly very positive about cost. And in terms of yields, we're obviously working towards a higher yield than we would have pre-pandemic very much based on the cost of debt and being able to have some strong positive leverage on our deals. I don't know, Jim or Jason, anything to add?

Maybe I'll just quickly add, Michael. On a non-levered basis, in the past, we've always stated we were looking for 70% or higher We'll still see that on the new developments that we have underway.

Got it. Okay. So it's still north of 7%. Just on the, I believe there was an impairment of a note receivable, just over a million bucks. Can you just expand on what that related to?

Sure. So we've had some of those notes receivable outstanding for a few years now, and they relate to some details indications where we redeveloped properties the plaza invested the costs on behalf of DLP. So we'll collect those in due course. We just thought it would be prudent at this point to set up that receiver.

And sorry, are these just a variety of projects, or is it one in particular? No, it's across a few projects. Okay. And then just in terms of... The NOI outlook, demand is pretty strong. Your renewal spreads, as you mentioned, are record levels. Does this set you up, you think, in 2024 to put up something stronger from a same property NOI standpoint? I think this year you're tracking around, call it 1%. And then just secondly, any weak spots that you're anticipating from an occupancy standpoint or any sort of tenant segments?

I can take that one. Hi, Pammy. It's Jason here. So with respect to our same asset NOI, we continue to see that similar level of growth from our renewal spreads. With respect to vacancies, there's nothing really in the foreseeable future that we're tracking at the moment. Obviously, with the economy where it is, bankruptcies could happen, and tomorrow morning we can be the victim of a tenant going bankrupt. We've seen... Retail bankruptcies at the later part of 2023. It's been relatively quiet earlier this year, but I think we have a plan in place to reposition assets that could be effective by retailers going underwater.

Thanks very much. I'll turn it back. Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press star 1. As a reminder, if you're using a speakerphone, please leave the handset before pressing any keys. Mr. Zakuta, there are no further questions at this time.

Well, we wish to thank all of the participants for joining us today.

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