Plaza Retail REIT

Good morning. I would like to welcome everyone to the Plaza Retail REIT second 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 operator assistance at any time. I would like to advise everyone that this conference call 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 Q2 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 31, 2023, and our MDNA for the second quarter ended June 30, 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 today, which are 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 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 second quarter ended June 30, 2024, under the heading Explanation of Non-GATT Measures. With that, I will now turn the call over to Michael Fukuda, Plaza's President and CEO. Michael?

Thank you, Kim. Good morning. We appreciate you joining today as we review our financial performance and some other key metrics and achievements for the second quarter of 2024. As a development-focused REIT, we strive to create value through new retail ground-up developments, redevelopments, the repositioning of assets through effective management and leasing initiatives. The first half of 2024 was a showcase of all of the above. Over the last few months, we have witnessed a drop in bond yields and two encouraging prime interest rate cuts. Inherently, this helps our business and will help make the overall REIT market a more attractive investment. Our portfolio is resilient and comprised of high-quality essential needs retailers who target non-discretionary spending. Fundamentals remain very strong in the space in which we operate. I will now turn the call over to Jason, who will talk about our future prospects. Jason.

Thank you, Michael, and good morning. As we reach the halfway point of the year, I'm pleased to mention that the overall portfolio is demonstrating great operating metrics. Our occupancy rate remains stable and leasing spreads continue to move in the right direction. Tenant demand is robust and geographic positioning of our asset mix is an advantage. The markets in which we operate have seen 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. One thing we can all agree on is that where we see strong demographic trends, whether through job growth or population growth, this benefits retailers overall. We renewed 575,000 square feet so far this year at record high leasing spreads. Fundamentals discussed earlier have allowed us to experience some of the highest leasing spreads in our history. We continue to respond to the needs of customers, which include expanding, right-sizing, and relocating tenants in order to maximize the value of our properties. Leasing costs year-to-date total approximately $2.9 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 the space. For the quarter and year-to-date, our same asset NOI was 2.7% and 3.8% respectively, which is a direct result of certain asset repositionings and strong leasing spreads. Our capital recycling program for 2024 is well underway, having disposed of various non-core single-tenant QSR properties, and a small QSR anchored strip before the end of the quarter, along with other closings which have since occurred. I am pleased with the success of these asset sales and looking forward to completing the 2024 program as planned as the year progresses. Interest and bids remain compelling and in excess of our RFRS values. We look forward to completing the rest of the program as the year progresses. As we have 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. 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. There continues to be a lot of demand from QSRs who offer the consumer a good value proposition in contrast to any mid-price sit-down restaurant offering. That said, we're looking forward to launching in the fall the construction of a new development in the city of Welland, Ontario, anchored by a 37,000 square foot grocery tenant, along with many other of our usual customers. This project is a great example of our team being able to identify a market which is undersupplied, assemble and entitle land and deliver space to our tenants. When finished, the project will have approximately 100,000 square feet of retail space. Plaza will retain a 50% interest in the project. Our teams are actively in the market searching for similar style developments where we can create value. As Plaza'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. I will now turn the call over 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. First, for operating results, total NOI was up 4% over last year, which includes impacts from recently completed developments. as well as that strong same-asset NOI growth that Jason mentioned. FFO for the quarter was essentially consistent with last year, which is notable given the higher interest rate environment we have experienced. AFFO for the quarter was up 14% on lower leasing and maintenance capital expenditures this quarter. On the leasing front, overall committed occupancy is up 50 bps over last quarter, now at 97.6% and in line with our best performance in recent history. Lease renewal spreads remain strong at 7.9% overall for the first year of the renewal term or 9.7% using the average rent over the renewal term. This includes renewal spreads for open-air centres, the significant majority of our portfolio, at 11.3% for the first year of the renewal or 12.3% using the average rent over the renewal. Under our capital recycling program, prices for non-core asset sales year-to-date exceeded IFRS values by 11% at a weighted average cap rate of 5.9%. On the balance sheet, our debt-to-assets ratio is consistent with last quarter at 51% excluding land leases. We have $15 million of mortgages rolling for the remainder of this year with a weighted average rate of 4.1% and an overall loan-to-value of 49%. Government of Canada bond yields continue to stabilize and trend down, and we are seeing strong interest and attractive pricing on our debt offerings. For fixed-rate mortgages, current all-in rates are in the low 5% range. Mortgage refinancing continues and the previously mentioned capital recycling have improved our liquidity. We now have $50 million of liquidity available from cash, operating line, development and construction facilities, as well as $9 million of unencumbered assets. For the fair value of our investment properties, we took a $7.3 million write-down during the quarter on revised stabilized NOI at an enclosed mall, and some cost overruns on a development property. Our weighted average cap rate is consistent with last quarter at 6.84%. We continue to believe this is a very realistic, if not conservative valuation, 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 begin the question and answer session. If you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Questions will be taken in the order received. Should you wish to cancel your request, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. Once again, that is star one. Should you wish to ask a question, And there are no questions. Please proceed. We still don't have any questions. You may proceed. Thank you.

Well, thank you. We wish to thank all of you for participating today in the call. Thank you. Operator?

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