RioCan Real Estate Investment Trust

Good day, ladies and gentlemen, and welcome to the RioCAN Real Estate Investment Trust Second Quarter 2022 Conference Call and Webcast. As a reminder, this conference call is being recorded. I would like to turn the conference over to Ms. Jennifer Seuss, Senior Vice President, General Counsel, and Corporate Secretary. Ms. Seuss, you may begin.

Thank you, and good morning, everyone. I am Jennifer Seuss, Senior Vice President, General Counsel, and Corporate Secretary for RioCAN. Before we begin, I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the MD&A and financials on RioCan's website yesterday evening. Before turning the call over, I am required to read the following cautionary statement. In talking about our financial and operating performance, and in responding to your questions... we may make forward-looking statements, including statements concerning REOCAN's objectives, its strategies to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements with respect to management's, excuse me, similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts. These statements are based on our current estimates 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. In discussing our financial and operating performance and in responding to your questions, we will also be referencing certain financial measures that are not generally accepted accounting principle measures, GAAP, under IFRS. These measures do not have any standardized definition prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other reporting issuers. Non-GAAP measures should not be considered as alternatives to net earnings or comparable metrics determined in accordance with IFRS as indicators of REOCAN's performance, liquidity, cash flows, and profitability. REOCAN's management uses these measures to aid in assessing the trust's underlying core performance and provides these additional measures so that investors may do the same. Additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward-looking statements, together with details on our use of non-GAAP financial measures, can be found in the financial statements for the period ended June 30, 2022, and management's discussion and analysis related thereto as applicable, together with RIOCAN's most recent annual information forms that are all available on our website and at www.cdar.com. I'll now turn the call over to our CEO, Jonathan Gitlin.

Thanks so much, Jennifer, and thanks as always to everyone for taking the time to join us today. I hope you are enjoying this summer. As usual, I'm surrounded by the exceptional senior management team here at RioCAN. Through the second quarter, we and the 600 others who make up this great organization demonstrated RioCAN's ability to succeed in any environment. The team is united in concentrating on the critical pillars that support the five-year plan we shared earlier this year at our investor day. Our second quarter results reflect this continued and acute focus on reimagining retail, customer centrism, intelligent diversification, and responsible growth. Based on the quality and positioning of our portfolio and the strength of our balance sheet, my confidence in our performance remains unwavering despite the obvious unpredictability in the economic background. The underlying macro level factors obviously necessitate language such as cautiously optimistic. And I'll address these factors in a moment. But before doing so, I want to highlight the portfolio's performance in this last quarter. The best way to summarize our operating results is to say it was a tremendously successful quarter and we're achieving results that are in line with where we stood before COVID. Occupancy is at 97.2%, bolstered by our retail occupancy, which is now at 97.6%. SFO per unit is 7% higher than it was in this quarter in 2021. Leasing results, which are, I would say, the purest indicator of the overall health of a commercial portfolio, they're very strong. Blended leasing spreads were 10.5% for the quarter. Same property NOI grew by 6.2%. Tenant retention was over 93%. Now this number tends to bounce around a little, while it tends to bounce around a little, the prevailing trends confirm that tenants value the space and the service that RioCam provides, and they really don't like to give it up. The 11.2% spread achieved on renewal rents in the quarter highlights how aggressively tenants are pushing to maintain existing space. As most view the time leading up to March of 2020 as a stabilized environment, there's much emphasis on comparing current results with those achieved pre-COVID. We're proud to deliver results in line with our pre-pandemic metrics, but there's underlying context that further enhances my confidence in our growth trajectory. You're well aware that RioCAN's commitment to enhance the quality of our offerings started long before the pandemic and, in fact, accelerated during the pandemic environment. We continue to sell low growth assets and advance our major market presence. Over 92% of our income is now generated in the Vectom market. On average, the people shopping at RioCans properties have a household income of $129,000 and come from a population base of over 206,000 people within a five kilometer radius of our centers. We also invested in our physical property, technology, ESG, and the dynamic team here at RioCAN. Those improvements and investments are now paying significant dividends. Since 2020, we've delivered a combined total of 1.1 million square feet of successful developments, mainly in Toronto. That number is expected to increase to 2.5 million square feet of new development completions by the end of 2023, including our iconic Toronto development, The Well. We now have 2,005 residential rental units in the portfolio, with another 1,134 under construction. Demand for these units has continued to demonstrate the desirability of the RioCam Living offering. The resilience and diversity of our tenant mix is markedly enhanced, with over 95% of our tenants classified as strong, stable, or compelling traffic drivers. Our standing as an ESG leader in the commercial real estate sector has only improved. Simply put, our efforts over the years are yielding results now and will continue to bolster our success despite market volatility. The scarcity of quality retail space further enhances our competitive advantages. It's safe to say that in major Canadian markets, very little new retail supply has been created in the past decade. Replacement costs for well-located retail are now well above market values. Now I'm going to illustrate that with some numbers. The implied value of our income-producing properties in our current unit price is about $330 per square foot. Now if you compare that to the cost of constructing new retail, It's quite illuminating. In the GTA, with the high construction costs and market value of land included, the cost to construct new retail is in the range of the mid-$600 per square foot. This tells us a couple of things. First, there's a clear gap between valuations and replacement costs. Second, it's virtually impossible to buy land and construct new retail without a substantial increase in market rent. It's only feasible to build new retail on land that's already owned or as part of a high density misuse development. This means the quality retail space, the kind that we at RioCan offer, is and will continue to be in short supply. Meanwhile, particularly in the GTA, the population continues to grow, driving demand further upward. These conditions are entrenched and reinforce our confidence in the sustainability solid operational performance well into the future. Yet, as I mentioned a moment ago, there are numerous unknowns that linger in the environment. Our stakeholders have voiced their concerns about how these factors impact RioCan, and I'd like to address these questions. First, I'll talk about the recessionary environment, specifically the viability of retail during a prolonged economic slowdown, if in fact that arises. 86% of RioCAN's tenants are categorized as strong and stable. These businesses have stable rent-paying ability, strong covenants, and reliable foot traffic. They provide the day-to-day essentials consumers require in any economic climate. I'll pause here for a moment to reflect on our performance in Alberta over the last 10 years. Now, I use our performance in Alberta as a logical barometer as our portfolio composition in that province mirrors that of our national portfolio. It comprises largely open air, necessity-based retail, and has exceptional demographic profiles. The Alberta market has been in the throes of a resource-based economic slowdown for the better part of a decade. And within those 10 years, the operational metrics for our assets in Alberta were equal to or better than our national portfolio. In as much as anyone can draw any conclusions in this uncertain environment, we feel that our consistent performance in Alberta in the face of an economic downturn is indicative of our portfolio's resilience and viability in any market conditions. Our leasing results support that conclusion as demand for our space continues to be high, driven by national grocers, discount retailers, beauty, medical, and pharmacy uses. Next, I'll address concerns about rising interest rates. Now we're fortunate to have a debt ladder, as we always have, that helps us to shield the impact of violent spikes in interest rates. We have $411 million of debt due for the remainder of 2022. Now as Dennis is going to tell you, we will benefit from our $250 million hedge of the underlying GOC bonds, which will drive down the actual cost of the remaining financings for this year. In 2023, we won't have the benefit of those hedges on new financing, and there will be an impact on our FFO results. But due to the timing of 2023 debt maturities, the FFO impact will be weighted more to the second half of the year. It's also important to note that the overall impact, even if rates continue to increase, will be offset by numerous positive FFO factors, including gains from the scheduled sale of condo units, and increasing NOI from development deliveries and organic growth from our existing income-producing portfolio. Finally, there's inflation. This impacts us in several ways, including an impact on consumer spending and increases in construction costs. As I already mentioned, much of our tenant base provides necessity-based goods that consumers need in any economic cycle. Many of our tenants have the ability to pass through inflation to their customers. That said, Some of our prominent retailers, including Walmart, have indicated that inflation drives shoppers to avoid high-margin discretionary items in favor of lower-margin necessity items. This is a concern but will not, in our view, impact the long-term viability of our largest tenants, as they have a long and strong track record and sizable balance sheet. With respect to construction costs, well, they've been impacted by sustained year-over-year inflation for many years now. The vast majority of REO-CAMs in the ground construction projects have fixed contracts, which provide a high degree of cost certainty. When it comes to new project starts, REO-CAM will continue to exercise a high degree of discretion, scrutiny, and judgment in assessing whether cost and revenue conditions are suitable before we proceed. Our future development sites are typically active retail sites that currently generate high-quality income. As such, when conditions suggest that timing isn't favorable for development, we can simply elect to wait. Now, I'm not for a second downplaying the obvious volatility in the macro-level environment, but we face these conditions confident that we have strategically and responsibly managed every aspect of our business over which we have control. Our efforts over the years have set RioCan up for success. We're hitting our stride and executing on key growth initiatives. We remain confident in our growth trajectory and the ongoing demand for our scarce and high-quality real estate. The objectives in our five-year plan were established with purpose and conviction. In concert with RioCan's many differentiating attributes, these objectives are achievable in almost any environment. Aligned with our strategic pillars, we'll continue to grow responsibly and sustainably. We'll continue to support this growth by investing in talent and structuring our team to maximize alignment with our objectives. With this in mind, I'm pleased to announce the recent appointment of Oliver Harrison to the position of Senior Vice President, Leasing and Tenant Experience. This hybrid role was designed to support our commitment to customer centrism by optimizing value to our tenants from lease execution all the way through construction, onboarding, and renewal. I'm also pleased to share that RioCAN's Board of Trustees continues to evolve with the recent election of Marie-José Lamas. Ms. Lamas is well known for her expertise in global branding and digital transformation. Her experience is especially relevant for RioCAN as we continue to support our tenants through the merging of e-commerce and physical retail. With that, I'm delighted to turn the call over to Dennis Busuti to take you through our balance sheet metrics and provide insight into how an active disposition program has supported them. Dennis, over to you. Thank you, Jonathan, and good morning to everyone on the call.