RioCan Real Estate Investment Trust

Before we begin, 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 RioCAN'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 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 booking 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 REOCAM's performance, liquidity, cash flows, and profitability. REOCAM'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, 2024, 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.cdarplus.com.

Thanks, Jennifer, and thank you all for joining RioCAN's senior management team. Today, I'll discuss our operational highlights of the quarter, focusing specifically on our standard net leasing results. RioCAN's portfolio and team are successfully built upon sequential quarters of positive momentum, setting new records and leasing results this quarter. These results are a testament to the sustained demand and attractive growth prospects for RioCAN's high-quality retail portfolio. Retail space is scarce, and building new supply is currently in a standstill. Canada's major markets are witnessing substantial population growth. RioCamp boasts a unique combination of a top-tier team and ideal locations in Canada's six largest and most densely populated cities. This backdrop, coupled with our resilient tenant mix and persistent emphasis on portfolio quality are the ingredients for sustained demand and enable RioCAN to preserve stability and fuel growth in the long term. Three key elements drive our leasing results for the quarter. First, our portfolio has never been more desirable or more defensive. Within a five-kilometer radius of RioCAN's assets, the average population is 273,000 people with an average household income of $148,000. In the last year alone, each of these demographic statistics has improved by 5%. Since 2017, the average population and household income within a five kilometer radius of Rio Can sites has increased by a staggering 77% and 45% respectively. Second, our leasing strategy prioritizes strong and stable essential tenants who will drive traffic in any economic backdrop and attract similarly high-quality tenants to our property. Approximately 88% of Ritokan's annualized net rent comes from strong and stable tenants. Third, the current market dynamics include population growth and retail scarcity. The scarcity is due to tight zoning regulations and the exorbitant cost to build. These conditions will not change. Our retail portfolio's committed occupancy increased to 98.3% in the second quarter, reflecting ongoing demand. We leased more than 1.15 million square feet of space in the second quarter, nearly half a million of which were new leases. The strength of our portfolio, combined with robust market conditions, resulted in record-breaking leasing spread. The leasing spread on new deals reached an all-time high of 52.5%, driving blended leasing spreads to 23.4%. Renewal spreads were also healthy at 10.7%. The average net rent of the new leases was $26.16 per square foot, a 19% increase over RioCan's average net rent. Alongside achieving record-breaking leasing spreads and enhancing the resilience of our income, our Q2 leasing stands out for two reasons. Firstly, we preemptively leased a 135,000 square foot unit in the GTA to Canadian Tire which was set to become vacant later this year. Secondly, we released another two of the ten vacant units that resulted from the failures of Bad Boy and Rooms and Spaces, which previously occupied 261,000 square feet of space in our centers. As of August 8th, eight of the ten locations for 203,000 square feet have been leased at significantly higher base rents, higher embedded year-over-year growth, and fewer restrictions and exclusion. Negotiations for the remaining two units are in the final stages. While vacancies typically raise concerns, our defensive portfolio and leasing prowess turn temporary issues into opportunity for medium and long-term benefits with shopping center upgrades and space recycling with new tenants. As we recycle tenants, we purposefully and thoughtfully select retailers that enhance the cross shop and convenience of our centers. In doing so, we also accommodate the increasing space requirements of organizations such as Loblaws, Metro, Sobeys, Dollarama, Winners, and Homestead. Our leasing achievements signify more than just strong operating metrics for a quarter. We've taken a purposeful approach to replace transitional tenants with more relevant and resilient retailers. including signing six new grocery leases that will transform three previous open-air or urban retail assets into highly valued grocery anchored centers. Tenant upgrades lead to enduring organic growth as great retailers attract other great retailers. Building out spaces for these types of users takes more time than is required if we were to backfill with a lesser tenant. We've intentionally chosen to prioritize long-term quality and growth over short-term same-property NOI. This decision results in temporary downtime, reducing SPNOI for the current year. Consequently, we've adjusted our commercial SPNOI guidance for 2024, excluding provision, to 2% to 2.5%, while maintaining our long-term commercial SPNOI guidance of 3%. I'll briefly illustrate the sequence of this leasing cycle to demonstrate how it impacts our results. First, space comes back, causing a decrease in occupancy and creating a drag on FFO and same property NOI. Second, we secure a high quality new tenant, which brings committed occupancy back up. Third, in recognition of the strength of this new tenancy, NAV improves and due to straight line rent, so does FFO. And fourth, the tenant moves in and the SPNOI improves. Choosing high-quality tenants requires investing time and resources to build up the space to their standards, resulting in a longer gap between steps two and four. Simply put, replacing tenants with higher-quality ones that offer better uses, as REOCAN does, typically involves a cycle where there's an initial dip in some metrics, followed by stabilization and then significant improvements. RioCan's results this year showcase numerous examples of our strategic decision in action. Last quarter, we saw a dip in occupancy and SPNOI, largely due to the vacancy of the 10 spaces I mentioned a moment ago. RioCan has signed leases for eight of the 10 spaces. We're now well into the second step of the process, doing the work to get all eight tenants in place. As a result, occupancy has increased. SPNOI, FFO, and NAV impacts will follow as these tenants commence rents and open their doors, driving incremental traffic to our properties and, said simply, making them better. We've made a conscious, thoughtful, and responsible long-term decision to focus on high-quality tenancies to drive sustainable growth in FFO and NAV. Yes, the macroeconomic environment continues to show weakness and some volatility, However, our strategy is anchored in building a resilient portfolio that ensures steady growth. We've crafted a portfolio designed to absorb macroeconomic reverberation and intentionally focused on tenants who fare well in any economic environment. These tenants recognize the quality of our offer, and they are increasingly turning to RioCAN to fortify their positions in the Canadian retail landscape. While RioCAN remains focused on operations, Our balance sheet is also a top priority, particularly within the current elevated interest rate environment. We're well equipped and are taking prudent steps to fortify our future and mitigate interest rate impacts. We're on track to achieve our adjusted net debt to EBITDA target range of eight to nine times. We've charted a clear roadmap to lower debt, including reducing construction spend by pausing new project starts and repatriating proceeds from inventory property sales. We've begun to recognize the benefits of our inventory portfolio. Looking ahead, inventory proceeds are expected to generate approximately $700 million in sales revenues and are earmarked for creative uses such as debt repayment. We recognize that new sales of condominiums have slowed. Fortunately, we pre-sold approximately 90% of the over 2,500 units we will complete through 2026. The majority of these firm deals were secured before prices peaked. Additionally, for all units sold, meaningful purchase deposits mitigate risk as they motivate buyers to close or, in the unlikely case of default, can be used to insulate margins on resale. On the other side of our V leveraging equation, we have the ramp up of EBITDA through a steady stream of diversified NOI from development deliveries such as The Well, our flagship mixed-use development in Toronto's downtown West. On that note, the launch of Wellington Market at The Well in May was a resounding success. Traffic to The Well has consistently been in the range of 200,000 visitors a week since Wellington Market opened. Fully licensed and with more than 35 diverse food and beverage merchants, Wellington Market has been celebrated for its contributions to advancing Toronto's food scene. launch exceeded our expectations regarding traffic which has remained consistently high since opening before i turn the call over to dennis i want to reinforce that beyond our secure plan to reduce net debt to eva does eight to nine times our portfolio also has considerable development density and low cap rate property these assets provide ryokan with incremental levers such as disposition to further enhance financial flexibility to attractive opportunities arise. A great example of this is our recent agreement to sell an underutilized portion of an open-air retail site in Laval, Quebec. In this transaction, approximately half of the site will be sold to an industrial developer at a market capitalization rate that is in the low threes based on current income. The sale results in net proceeds that are approximately 84% higher than IFRS carrying value. I will also emphasize that while we remain focused on our operations and balance sheet, we're committed to responsible growth. RioCamp published its annual ESG report in June. I encourage you to read the report illustrating our significant advancement in sustainability, ethical governance, and fostering a positive culture. I will summarize by reiterating that RioCamp operates a top tier retail portfolio in the country's most desirable market. The dynamics of retail real estate are in our favor and create long-term demand for our product. Our approach is patient and strategic, negating the need for hasty asset sales, rushed leases, or developments under suboptimal conditions. Quality of our assets provides a foundation for growth and mitigates downside risk. We have numerous incremental levers to drive growth. And we remain dedicated to prudent financial management backed by an exceptional team. Our consistency, vision, and demonstrated commitment to responsible growth will continue to benefit our unit holders while ensuring the trust's stability. And with that, I'll turn the call over to Dennis.

Thank you, Jonathan, and good morning to everyone on the call. Our results reflect the fundamental operating strength of our business as the supply-demand dynamics that we have highlighted for some time continue to bear fruit. This is seen across our operating metrics, from record new leasing spreads to rapid rebounds in our committed and in-place occupancy rates. Strong leasing with top-quality tenants enhances long-term value as this improves portfolio quality and future growth potential. Our FFO for the second quarter was $0.43 per unit, compared to $0.44 per unit in the prior year quarter. Organic NOI growth in our operations and the ramp-up of developments continued to add to our earnings, for a combined positive impact of $0.02. Also benefiting FFO this quarter were higher inventory gains and impacts of $0.02, which included the sale of a non-core residential inventory property. This growth over the prior year quarter was partially offset by one cent due to a higher provision reversal last year, as well as a one cent reduction related to various other items that benefited the prior year quarter and did not recur. This provision variance also had an impact on same property NOI, resulting in muted same property NOI growth of 0.3%. Excluding the provision impact, same property NOI growth was 2.6%. The higher provision reversal amount in 2023 and resulting impact on variances in our financial metrics is a hangover from the pandemic, the impact of which we expect will be largely behind us after this year. Finally, higher interest expense net of higher interest income had an unfavorable impact of 3 cents. Of this 3 cents, Approximately $0.01 is related to lower capitalized interest. A highlight this quarter was the construction completion of 450 The Well. This is a positive step forward, but comes with a temporary impact on results. Similar to all of our residential rental projects, we ceased the capitalization of interest relating to this asset upon completion. While 450 The Well is in lease now, The NOI is positive, but is not currently sufficient to cover interest expense. For the quarter, this transitional lease-up effect resulted in an FFO drag of approximately $1.5 million. We expect this property to reach stabilization by the end of this year and generate positive FFO for many years of future. On a full-year basis, we have reaffirmed our FFO premium guidance. In addition, our guidance for FFO payout ratio of 55 to 65% and mixed-use development spending of $250 to $300 million remain intact. Jonathan already discussed our revision to same property NOI guidance, which is due to downtime while new exceptional tenants are fitting out their space. We have also reduced our expected spend on retail infill projects by $20 million, to a range of $30 to $40 million due to permitting delays. This spend will simply shift into 2025. Turning now to our balance sheet. Net debt to EBITDA of 9.18 times is down from 9.28 times at the beginning of the year and 9.49 times at this time last year. This metric is essentially flat relative to the first quarter of this year as development spending at the well continued during the second quarter. Spending on this major project will decelerate given that construction is essentially complete. We executed a number of financing activities over the course of this year, covering all major refinancing requirements for the year and extending our weighted average terms of maturity from three years at the beginning of the year to 3.6 years at the quarter end. We have an option to call our $300 million Series AI 3NC1 debentures at par on or after September 29th of this year. The interest rate on this debenture is approximately 6.5%. Based on today's pricing, we would expect to exercise the repayment option and refinance at a much lower rate, while further extending the weighted average terms of maturity of our debt. Jonathan reiterated that we are on track to achieve our eight to nine times net debt to eBudget target, expecting to reach nine times by the end of this year. We expect this to fall further to the lower end of our range based on the ramp up of EBITDA from operations development, slowdown of spending on major projects, and repatriation of a significant amount of capital from contracted condo sales. I'll walk through these key drivers. The growth and ramp up of EBITDA from our existing operations and development and deliveries will have a combined impact of approximately half a turn. Importantly, as EBITDA from development and deliveries ramps up, construction spending will diminish as projects are completed. The estimated cost to complete for projects currently under construction totals $294 million, of which $110 million is expected for the balance of this year, $151 million in 2025, and $33 million in 2026. This travels to zero in 2027 and beyond. We expect to allocate some capital toward the advancement of our development pipeline through the entitlement process and to additional retail infill opportunities should such opportunities arrive at rents that justify construction, noting that the capital requirements for such projects are much lower than for mixed-use projects. The next driver of expected death EBITDA improvement is the impact of the $700 million of condo revenues that we expect to receive. Given recent news regarding weakness in condo sales, this topic has been top of mind. Because of this, it's worthwhile to take a moment and break down our condo proceeds and the related impact on our balance sheet. Of the approximately $700 million of expected revenue, approximately $600 million relates to pre-sold units. where the average deposit received to date on these units is 19% of the purchase price. Think of these pre-sold condo units as simply contracted zero cap rate assets. When the proceeds are received, they will recapitalize or balance sheet as follows. Funds will first be allocated to repaying construction loans. On a fully drawn basis, construction loans associated with condo projects is expected to be approximately $420 million. This results in 1.4 times coverage of pre-sold revenues over a construction loan balance. Given that there is no EBITDA currently associated with this debt, its repayment has an outsized impact on debt to EBITDA compared to the sale of income producing assets. Repaying these loans will improve our net debt to EBITDA ratio by approximately half a turn. The remaining pre-sold proceeds will be repatriated to the corporate balance sheet. As mentioned, The average deposit received to date on units pre-sold is 19% of the purchase price, equating to an average of approximately $150,000 per unit sold. This is a meaningful amount and a strong deterrent against buyers walking away from their investment. Combined with the fact that purchasers have a legal obligation to close, our assumption is that the vast majority of purchases will be completed on existing terms. In the event that some buyers default, our first option is to retain the deposit and put the unit back on the market. Based on current prices and factoring in sales proceeds combined with retained deposits, we would expect to achieve projected revenue. The impact of this element is approximately another quarter turn on net debt to EBITDA, bringing the total impact related to pre-sold units to approximately three-quarters of the term. we are left with a balance of approximately $100 million of unsold proceeds. We acknowledge that sales are very slow in this market. We note that approximately 80% of the unsold proceeds relate to one building, which is our UC Tower 3 project. We should also point out that the financing of this project is combined with UC Tower 2, and the combined pre-sold revenues from the two towers provide 1.3 times coverage over the construction loan. We further note that completion of UC Tower 3 is scheduled for late 2025 and into the first half of 2026, but new condo stock is expected to be low. There is a housing shortage in Canada, with population-driven demand outpacing supply. Higher levels of new supply for condo projects that are delivering now, which were started a number of years ago, will be absorbed. Ongoing supply shortages will worsen since there has been a low level of construction starts in the current environment, so there will be limited new supply as we move into late 2025 and 2026. If we see further interest rate cuts over the next year, as most economists predict, and which we have started to see recently, our ability to sell these units will be further improved. Given these dynamics, we are being patient and will continue to monitor the market ahead of the late 2025 completion of this project. As this illustrates, The common revenues will serve as a reliable source for debt reduction in the future. To conclude my remarks, I want to reiterate that market fundamentals, the quality of our portfolio, and our exceptional team have driven our current year operating metrics to levels that are as strong as we have seen over RioCat's 30-year history. This, combined with our low payout ratio, disciplined approach to capital allocation, and steadily improving balance sheet, will support earnings growth and provide us with the opportunity for sustainable distribution increases for many years in the future. With that, I will pass the call to the operator for questions.