Plaza Retail REIT

Good morning. I would like to welcome everyone to the Plaza Retail Deep first quarter 2024 earnings conference call. At this time, all participants are in a listen-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 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 Q1 2024 results conference call. Before we begin, 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, 2023 and management's discussion and analysis for the first quarter ended March 31st, 2024 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 widely used in the Canadian real estate industry, including FFO, ASFO, 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 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 first quarter ended March 31, 2024, under the heading Explanation of Non-GAAP Measures. I will now turn the call over to Michael Zacuta, Plaza's President and CEO. Michael?

Thank you, Kim. Good morning. We appreciate you joining today as we review our financial performance some other key metrics and achievements for the first quarter of 2024. As a development-focused REIT, we strive to create value through new retail ground-up developments, redevelopments, repositioning of assets through effective management and leasing initiatives. The first quarter of 2024 was a showcase of all of the above. In addition, we successfully began our 2024 capital recycling program. We are very pleased with the demand for the properties we are looking to sell. We continue to achieve record leasing spreads, and our portfolio of roughly 9 million square feet has very little vacancy. We continue to respond to needs of customers, which include expanding, rightsizing, and relocating tenants in order to maximize the value of our properties. The flexibility and attention to detail we provide has and will always be a vital part of our success. The real estate landscape is still affected by certain geopolitical crises, inflationary pressures, and rapid interest rate expansion. We have not yet seen the compression in interest rates that will eventually make REITs a more attractive investment. Fundamentals remain strong in the space in which we operate. Our portfolio is resilient and and comprised of high-quality essential needs retailers who target non-discretionary spending. I will now turn the call over to Jason, who will talk about our future prospects.

Thank you, Michael. During the quarter, we completed 193,000 square feet of development projects and significantly advanced a number of other developments through pre-leasing and pre-construction phases. Tenant demand is robust, and the geographic positioning of our asset mix is an advantage. The markets in which we operate have seen significant population growth, and incremental demand from customers translates to better performance for our tenants in markets where retail supply is limited. This has a direct impact on rental rates. One thing we can all agree on is that where we see strong demographic trends, whether through new job growth or population growth, this benefits retailers overall. As we prepare for the construction season, pre-leasing activity remains strong, as we finalize our tenant mix for certain projects. Pre-leased space in active properties under development was at 99.5%. Our capital recycling program for 2024 has commenced with the sale of two non-core QSR properties. We're currently working our way through various bid and due diligence processes with many qualified buyers and have completed certain dispositions since the end of the first quarter. Interest in bids remain compelling and in excess of our IFRS values. We look forward to completing the rest of the program as the year progresses. As we mentioned in the past, the overall goal and net effect of our capital recycling program is to increase the average size of our properties, reduce the average age of our assets, and improve the overall quality of the portfolio. During the quarter, we also renewed 206,000 square feet at record high leasing spreads. Fundamentals discussed earlier have allowed us to experience some of the highest leasing spreads in our history. Leasing costs for the quarter total approximately $1.6 million, and help better position our assets for the long term. We only begin to benefit from enhanced overall property NOI upon the reopening of these spaces. For the quarter, our same asset NOI was 3.8%, which is a direct result of certain asset repositionings and strong leasing spreads. 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 retails with traditional pricing models. There continues to be a lot of demand from QSRs who offer the consumer a good value proposition in contrast to any mid-priced sit-down restaurant offering. Class's focus has always been retail. We know it very well. 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. Finally, I'd like to highlight that we published our second annual ESG report this week. Some of the highlights were as follows. Plaza reduced energy intensity by 14% in our operated spaces across the portfolio. We completed 23 LED retrofits of exterior lighting at our properties, saving an estimated 500,000 kilowatt hours electricity. We have met and discussed with tenants representing 40% of our GLA, their initiatives, their ESG initiatives, and how we can collaborate on this front going forward at our properties. We are committed to board gender diversity and currently exceed our target of 30%. Our goal is to create high quality, relevant, and sustainable retail properties. We believe that success and sustainability go hand in hand. And by managing environmental impacts and improving efficiency, we can generate more desirable properties which are able to serve all of our stakeholders well into the future. With that, I'll now turn over the call to Jim Drake, our CFO. Thank you, Jason.

Good morning, everyone. I will expand on a few of Michael and Jason's comments and highlight our results. Total NOI was up more than 7% over last year, which includes impacts from recently completed developments, as well as that same asset NOI growth that Jason mentioned of 3.8%. This is one of our strongest performances for same asset NOI. On a dollar basis, FFO was up almost 6% over last year with per unit performance impacted by our equity raise and issue of 8.5 million units in March of 2023. AFFO was impacted by leasing costs as a result of increased leasing, which will lead to growing revenue going forward. AFFO was also impacted by maintenance capital expenditures, including replacing a portion of a roof and roof structure at one of our properties during the quarter. On the leasing front, overall committed occupancy was consistent with last quarter, now at 97.1%, which remains at the high end of our recent history. lease renewal spreads continue to improve at 8% for the first year of the renewal term or 9.9% using the average rate over the renewal term. This is our strongest performance for renewal spreads over the last few years. On the balance sheet, our debt-to-assets ratio is consistent with last quarter at 51% excluding land leases. We have $32 million of mortgages rolling for the remainder of 2024 with a weighted average rate of 4.38% and an overall loan-to-value of 46%. Although Government of Canada bond yields remain a bit volatile, we do anticipate they will continue to trend down. The market for debt for our assets and an attractive borrower like Plaza is very healthy. and we continue to see strong interest in our offerings. This is evidenced by the reduced spreads we are seeing from lenders with all in rates for our fixed rate mortgages currently in the 5.4 to 5.9% range. Under our capital recycling program, sales prices, including properties held for sale at quarter end, exceed IFRS values by 10% at a weighted average cap rate of 5.8%. For overall valuations, we took a $1.3 million write-down during the quarter, and our weighted average cap rate is now 6.84%. In the current environment, we believe this is very realistic, if not conservative, given the quality of our portfolio. 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 star followed by the number one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Your questions will be polled in the order they are received. If you would 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. Once again, it is star one to ask a question. Your first question comes from the line of Mark Rothschild from Canaccord. Your line is now open.

Thanks, Sam. Good morning, everyone. In regards to the development projects that you've completed and maybe what you're looking at now, can you just give a little more color on the yields that you're getting and you're seeing and how those shifted with greater construction costs and just cost in general?

Hi, Mark. It's Jason here. With respect to our development projects, our target yields on our development projects are obviously higher than the average cap rate of the portfolio. We're always trying to target the open airstrip development north of an 8% yield. Obviously, some of the projects that have come online over the last couple of years Many of those projects would have started, call it pre-COVID. That said, those projects would have been impacted by certain price inflations, which obviously reduced the overall construction yields. So I would say that the projects that would have come online at the end of 2023 would have been impacted and would have had lower yields than what our target is. But the projects that have recently come online or that are going to become online in the future are are closer to what our traditional targets would be.

Okay, great. Thanks. And then just on leasing spreads, we look at what you've been able to do lately. Is that a good estimate of what we should expect? Not necessarily exactly, but in the range of what we should expect to see in the near term going forward? Clearly, rents in general have gone up.

Yeah. So for the rest of the year, we do have Some renewals that we are working on, a handful of them at market rates. I expect a nice chunk of them to be at the higher end of the spreads like we've experienced. But it's a balance, right? There's a mix. So we have approximately 300 and some odd thousand square feet remaining for the rest of the year. Much of them do have contract renewals baked into them. But where we can take advantage of the higher lease of spreads, obviously that is the goal. Okay, great. Thanks. That's good for me.

Once again, as a reminder, if you have a question, please press 1 on your telephone keypad. Your next question comes from the line of Sumaya Syed from CIBC. Your line is now open.

Thanks. Good morning. Firstly, on the EFFO and noting that the leasing cost can be lumpy, would it be fair to say that the majority of the items in that bucket would be what you would deem to be revenue-enhancing? And as a follow-on, where do you expect the payout ratio to trend over the course of the year?

So, hi, it's Jason here again. So our AFF over the quarter was largely impacted by a one-off roof and structural repair. So typically our capex for the year runs around $2, $2.5 million mark. So taking into consideration we had a one-off charge capital spend of approximately seven, in the range of seven to $800,000 during the quarter. Again, that's a one-off charge, but we expect our CapEx to range or to be in the range that it has been historically with that exception.

Okay, thank you. And on the same property NOI for the quarter, it was pretty high and I think there was a comment that there was some benefit from repositioning activities. Excluding that, would the same property number have been more in line with what you've delivered historically, like in the 1% to 2% range?

No, I think our same property NOI is benefiting again from our higher leasing spreads. Yes, the quarter was significantly high as we have a boost from certain repositioning of a couple of QSR assets, which didn't have any revenue from the prior year. I think it'll likely trend a little bit lower as the year progresses. But again, we are benefiting it from higher leasing spreads on our properties.

Okay, great. Thank you.

Mr. Jakuta, there are no more further questions at this time.

We wish to thank all the participants for joining us today.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.