Primaris Real Estate Investment Trust

Good morning and welcome to Primaris REIT's fourth quarter 2021 financial results conference call. At this time, all lines have been placed on mute. After the prepared remarks, there will be a question and answer session. During this call, management of Primaris REIT may make statements containing forward-looking information within the meaning of applicable security legislations. Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties. many of which are beyond Primaris REITs control that could cause actual results to differ materially from those that are disclosed in or implied by such forward-looking information. Additional information about these assumptions and risks and uncertainties is contained in Primaris REITs filings with securities regulators. These filings are also available on Primaris REITs website at www.primarisreits.com. Your host for today's call will be Mr. Alex Avery, Chief Executive Officer of Primaris REIT. Mr. Avery, please go ahead.

Thank you, Operator, and good morning, everyone. It is with great pleasure that we join you today for Primaris REIT's inaugural financial results conference call. The team and I are very excited to be here today to discuss our strategy, results, and answer your questions. Joining me on the call are Patrick Sullivan, President and Chief Operating Officer, Rags DeVleur, Chief Financial Officer, and Wesley Bust, Senior Vice President, Finance. To begin today's call, I want to take a moment to discuss the recent evolution of the Canadian enclosed mall space and how we arrived at today's Primaris REIT. We are in the unique position of introducing the public markets to a new REIT with a 20-year track record of strong operating performance and an important inflection point in the industry. It has been nearly a decade since Canadian public equity investors have closely followed and evaluated a Canadian enclosed shopping centre focused REIT, a decade full of headwinds and challenging investment returns. In this regard, our timing is excellent. but also requires quite a bit of investor engagement and education on our part. The period between 2005 and 2015 was a robust expansionary time for enclosed shopping centres, characterised by retailers aggressively increasing store counts and pursuing top-line revenue growth, high occupancy and rising rents. During this period, investment enthusiasm for malls was strong and asset pricing was high. There was substantial capital invested into shopping centres, and their ownership in Canada consolidated with large institutional owners. In early 2015, this euphoric period for enclosed shopping centres ended when Target Canada declared bankruptcy and left Canada. This marked the beginning of an era of department store closures, with Sears Canada following suit in 2018, leaving only one conventional department store in Canada. Department store closures coincided with the onset of e-commerce headwinds. Retailers struggled to respond to the need for an e-commerce presence, leading most retailers to curtail expansion plans just as sizable former department store space became available, negatively impacting the performance of enclosed retail properties. The COVID-19 pandemic had a further profound impact on the already weakened Canadian enclosed shopping centre industry, with mandated closures in several jurisdictions and capacity constraints in others. While the immense human toll, economic impacts and disruption of societal norms are beyond debate, there were two significant ways in which the pandemic improved the outlook for enclosed shopping centres. Firstly, while retailer bankruptcies and store closures were costly for landlords, the resulting overall financial health of the remaining tenant base is the strongest witnessed in over a decade. Secondly, the pandemic sharply accelerated e-commerce adoption and market penetration. This acceleration coincided with a much more technologically savvy retail industry that had spent the prior five years learning about omnichannel retailing. Today, the collective learned experience of the retailing industry has concluded that bricks and mortar retail stores anchor a successful omnichannel retail platform. While we can't point to one single element, the reasons include customer acquisition, brand experience and brand loyalty last mile delivery and fulfillment and proximity to residential rooftops consumer-centric omni-channel retailing reveals a complementary relationship between bricks and mortar and e-commerce retailing supported by clear data showing effective offerings in each channel support stronger total sales Just last week, Target Corporation reported year-end results, including improving margins on their digital sales, which they attributed to having 95% of online sales fulfilled through their bricks-and-mortar stores. They went on to highlight that their consumer-centric omnichannel model is anchored by their store network and that they are committed to continuing to expand their store network, which, combined with their digital presence, results in higher sales across all channels. Following several years of industry headwinds, the current circumstances for mall ownership are very favorable. On fundamentals, occupancy remains depressed compared to historical levels. Rents have been adjusted downwards and property values have declined as market capitalization rates have risen. On the tenants, the pandemic eliminated many marginal retailers, offered the potential for others to restructure to become stronger, and resulted in an overall healthier tenant base that has accelerated omnichannel retailing adaptation. From a capital investment perspective, despite the fundamental outlook improving and tenants being healthier, changing investment changing investor property type preferences including rising allocations to multi-residential industrial life sciences office and data centers have led to very limited competition among institutions for enclosed shopping centers as institutions rebalance portfolios it is with a combination of significant recovery potential from depressed operating and financial performance modest asset pricing and limited competition for assets from institutional investors that we have created Primaris REIT. As early as 2018, management began the planning and design of Primaris REIT, starting from the enviable position of a blank slate. As the plan took shape, we had the opportunity to choose optimal characteristics consistent with industry best practices and investor preferences. Firstly, our financial model. Acknowledging both the clear preference public investors have for REITs with a conservative financial model and the headwinds that enclosed shopping centres have encountered in recent years, Primaris was designed with the lowest leverage among Canadian REITs, with 5.3 times debt to EBITDA and 28% debt to total assets, as well as a low 45-50% target FFO payout ratio. This highly differentiated financial model allows the REIT to reinvest $60 million a year back into the business after paying distributions and funding ordinary leasing and capital maintenance costs on a leverage-neutral basis. And as was announced on Friday by DBRS Morningstar, we are very proud to have been assigned an issuer rating of BBB with a stable trend, which Rags will discuss in more detail shortly. Secondly, on scale. both operational and as a public company. The acquisition of the six additional shopping centers for $800 million concurrent with the formation of the REIT enabled Primaris to achieve critical mass of 3.2 billion of assets, aggregating 11.5 million square feet of gross leaseable area. The enclosed mall business is a scale business for a variety of reasons. Pat will get into the specialized operational skill set we have at Primaris, but at a high level, enclosed shopping centers require very specific industry experience and relationships to leverage those economies of scale. As a publicly traded entity, reaching institutional scale provides sufficient equity market capitalization, permitting index inclusion and trading liquidity that allows institutions to invest. Finally, sufficient scale supports an investment-grade credit rating, allowing access to the unsecured debt market, providing strategic flexibility to the REITs capital structure, while also improving our cost of capital. Primaris has already achieved critical scale to enjoy these benefits. From a governance perspective, in keeping with the theme of best practices and investor preferences, Primaris was performed with all non-management trustees being independent each of whom was carefully selected for their specific skill sets and expertise relevant to our business. Our board is truly remarkable and represents a tremendous strategic resource to management and unit holders. Finally, the core of our business is our robust, fully internal property and asset management platform. We inherited our exceptional platform with nearly 20 years of operating history, a deep bench of long-tenured professionals, and a unique and scarce management capability tailored specifically to enclosed shopping centres. We plan to leverage this rare capability and take advantage of current shopping centre landscape features. At Primaris, we have no shortage of capital allocation opportunities. Large Canadian institutions own more than 50 billion of Canadian enclosed shopping centres that represent outsized weightings within the real estate portfolio allocations. We believe many of these properties may be available for purchase over the next few years as portfolio rebalancing initiatives make room for data centres, life sciences, multi-residential and industrial property exposures. This opportunity could be very large and Primaris stands alone as a potential buyer having achieved institutional scale as the third largest owner-operator of enclosed shopping centres in Canada and with a differentiated financial model and a mandate for growth. Similarly, the mixed-use and multi-residential opportunity in our portfolio is significant, actionable, and highly attractive. Our flagship development site, Dufferin Grove, comprising four acres of the 21 acres at our Dufferin Mall, is located steps from the Dufferin TTC subway station and is one of the most attractive development sites in central Toronto and arguably the country. Several of our other shopping centers have near-term economically compelling intensification opportunities that can be executed on directly through joint ventures or severed and sold. However, our measure of success is growth in value per unit and cashflow per unit. And as it stands today, our most attractive use of capital bar none is buying back units, a deep discount to net asset value per unit on a leverage neutral basis. We believe that demonstrating disciplined capital allocation and a commitment to delivering per unit growth is essential to building confidence among investors. Our near-term priorities include increasing awareness of investors about the compelling characteristics of an investment in Primaris REIT units, the opportunity in Canadian enclosed shopping centres, and on delivering on the business plan we have laid out. Operationally, we expect to deliver rising occupancy over the next few years into the 94% to 96% occupancy range as shoppers continue to demonstrate strong interest in returning to in-person shopping. Primaris REIT is exceptionally well positioned to participate in the recovery of the Canadian enclosed shopping centre industry with a differentiated financial model, gold standard governance, a fully internal specialized management platform, and a portfolio of well-maintained, well-located shopping centers across Canada with significant occupancy improvement potential. And with that, I'll turn the call over to Pat to discuss our platform operating and leasing results. Pat? Thank you, Alex, and good morning.

The enclosed shopping center business requires specialized management best achieved through a large-scale, fully internalized, vertically integrated property and asset management capability. This asset class is a specialized business, different than operating an office or industrial building due to the complexity of the leases, multiple tenant locations, and the importance of merchandise mix. Over the past decade, Primaris has built an in-house platform to oversee all operational requirements. Our people are the core strength of Primaris. We are experienced and excel at acquiring, integrating, and operating enclosed shopping centres. On January 1st, we integrated six new shopping centres into our portfolio, as well as 80 people employed at these properties. Our teams have spent the past 60 days reviewing and identifying opportunities to increase value in these new centres. Specifically, we target lowering costs to align with the core focus of Primaris, providing affordable space for our retail partners, increasing occupancy by leveraging our relationships with retailers, and the identification of development opportunities on excess lands. With the addition of six shopping centres, our merchandise mix has evolved to reflect the higher concentration of credit-worthy, needs-based retailers. Our top three tenants, Canadian Tire, Walmart and Loblaws, now represent 14% of our annual minimum rent. Canada's last remaining department store, HPC, is now our 14th largest tenant, representing 1.4% of annual minimum rent. Over the past 10 years, we've been focused on growing exposure to large format fashion users such as winners, and the Gap's Old Navy banner, now our fourth and eighth largest tenant by annual minimum rent, reducing the footprint allocated to small shop fashion tenants while increasing exposure to health and beauty and electronics tenants, which generate higher sales per square foot, which enables them to pay higher rents. In the past six months, leasing activity has increased noticeably. American-based retailers have been actively pursuing expansion opportunities with Canadian retailers becoming more active following the reopening of enclosed malls in the summer of 2021. In Q4 of 2021, we completed the highest number of new deals since Q4 of 2016, and we expect this trend to continue given the strong rebound in sales productivity. Renewal rents were modestly lower in the quarter due to continued focus to maintain occupancy as tenants rebound from pandemic-related restrictions and extended mall closure periods. With sales increasing and positive absorption, we expect metrics to improve. Another differentiator for our asset class is tenant sales. Tenant sales reporting is an important metric for a business, and it's typically only done so by tenants operating in closed malls. Analysis of tenant sales enables proactive management of merchandising, the identification of trends, and potential tenant failures in advance of any formal corporate disclosures. As Alex mentioned, the pandemic resulted in the acceleration of tenant failures, and as a result, the overall health of the retail business is much stronger. Our properties reported tenant sales during Q4, which were generally between 90% and 110% of pre-pandemic figures, with Ontario malls at the lower end of this range. Generally, our Ontario malls were closed for 120 to 150 days during the year, negatively impacting both sales and any revenue that is directly tied to sales productivity. With malls now reopened and fully operational, we anticipate our Ontario property sales productivity will rebound in line with the remainder of our portfolio, and this will in turn positively benefit revenue. Tenant sales across all categories within our properties continue to show growth, and we expect this to continue throughout the year. In-place occupancy for the combined portfolio was 86% as at the end of December 2021, with the original Primaris portfolio at 87.5% and the six acquisition properties at 83.2%. The original Primaris occupancy figure is relatively flat compared to Q3 2021 and Q4 2020, and includes Northland Village Shopping Centre, which is being considered for conversion to an open-air centre. If we exclude Northland Village from the occupancy statistics, the original Primaris in-place occupancy would have been 90% as of Q4 2021 compared to 88.8% in Q3 2021 and Q4 of 2020. As well, committed occupancy would have been 92.1% as compared to 91.8% the prior quarter and 90.7% Q4 of 2020. Primaris properties are located on more than 900 acres of land, typically located on main commercial thoroughfares and proximate to public transit. With the closure of Sears and Target, many site control and development restrictions at our property have been removed, enabling densification opportunities. We've received approval at Dufferin Mall in Toronto to construct approximately 1,200 residential units as part of the redevelopment of the four-acre parcel, primarily used for parking at the north end of the property. we are considering options to develop or monetize all or a portion of this land. Northland Village in Calgary is scheduled for redevelopment with plans to demolish the interior mall later this year and convert the property into a mixed-use open-air retail center. Approximately two acres of land was recently severed and sold to a residential developer for $5.8 million. The developer has commenced construction of 240 residential units, which are anticipated to be ready for occupancy Q1 2023. Redevelopment plans for the shopping center are conditional on pre-leasing efforts, and we will provide further details in the near future. In addition, we have commenced feasibility studies pertaining to the development of excess land at seven other properties in our portfolio. Given the broad zoning typically afforded to shopping center sites, we have the potential to add more than residential to our shopping center properties, and we are considering additional uses such as self-storage, freestanding retail, and hotels. we will consider entering to land leases, land sales, or entering into traditional lease scenarios. And lastly, omnichannel. Primaris really is a key piece of our retailer's tenant omnichannel strategies. The last mile is driving store growth in Primaris trade areas as our malls are an integral piece of the solution. Our properties are the largest, property in its respective trade area, providing tenants with distribution hubs in close proximity to residential rooftops for in-store pickup or delivery. To facilitate this, Primaris has established a proprietary e-commerce integration technology platform, Primarché, offering customers a one-stop shop destination to shop multiple participating malls and direct-to-consumer brands anywhere in Canada at any time. Unlike retailer-owned e-commerce platforms, Primarché connects the shopper to the retailer and the mall. Shoppers essentially shop the mall online, select their delivery preference, and smart order routing allocates the order for in-store fulfillment with this efficient order consolidation and dispatch for delivery or curbside pickup. The platform was launched in late 2021, and we now have 27 brands under contract across five properties. Our intention is to add three centres per quarter. Primaris captures retail sales at the mall and receives a percentage of marketplace sales. And with that, I'll turn the call over to Reg to discuss our financing philosophy and financial results.