SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Center's REIT Q4 2021 conference call. I'd now like to introduce Mitchell Goldhaar. Please go ahead.

Thank you, Mike. Good morning, and thank you for joining us today for our year-end conference call. I am Mitchell Goldhaar, Executive Chairman and CEO, and I am joined by Peter Sweeney, Chief Financial Officer, Rudy Gobin, EVP, Portfolio Management and Investments, and Mauro Pambianchi, Chief Development Officer. Today we will provide you with our Q4 highlights and update you on some of our major projects. Our commentary will refer mostly to the outlook and mixed use development initiative section of our MD&A, which are posted on our website. I refer you specifically to the cautionary language on pages one to six of the MD&A materials, which also applies to comments any of the speakers make this afternoon, shall I say this morning. Momentum from early 2021 carried on throughout the fourth quarter with a strong performance reflecting the strength and resilience of our tenants and portfolio. Small and mid-sized retailers were back, and even with some intermittent restrictions, occupancy and cash flow grew steadily throughout the year, reflecting the need for and role of well-located value-oriented open format retail with walmart and food store anchored centers making up virtually 100 of our portfolio physical stores met the online challenge head-on with a quick pickup more selection delivery options and easy to navigate websites demonstrating that physical and online can work together our portfolio comprised of nearly 95% prominent strong national and regional tenants provides the financial covenant and stability that has returned us to over 98% rent collections and 97.6% leased by the end of 2021. While COVID tested us operationally, our portfolio has remained strong. Retailers solidified their positions with us with new and renewing locations. while simultaneously enhance their product lines and improving the customer experience, which has allowed us to maintain full distributions to our unit holders, a decision that we are proud of. Our wholly-owned Smart Living residential banner, a name that you will hear a lot more about, and our other mixed-use developments continue to enhance value through continue to enhance value throughout 2021, unlocking deeply embedded NAV and to our unit holders on lands we already own. Here are a few highlights of the quarter and the year. Phase one of Smart Living's Art Walk launched in Q4. Art Walk is a 12-acre mixed-use art district in the heart of our flagship transit-connected smart VNC development. in the Vaughan Metropolitan Center. Located on the former Walmart parcel, when fully complete, Art Walk will consist of approximately 5 million square feet of density, including 5,000 residential units and up to 150,000 square feet of non-residential buildings. The phase one release in Q4 included over 320 condo units, nearly 95 of which sold by the end of the year. It is worth noting that SmartCenters REIT owns 50% of these condos, twice as much as the 25% it owned of the Transit City condos. In December, SmartCenters more than doubled its ownership in SmartVMC by acquiring a two-thirds interest in 53 acres within the 105-acre master plan SmartVMC city center. This acquisition united ownership across the property, making SmartCentre the largest owner in Bond's dynamic TTC subway connected downtown. 45,000 new residents are expected to call SmartVMC home, ultimately. And it is, of course, the jewel in the crown of SmartCentre's portfolio. SmartVMC, we are expecting to launch Park Place, which will be a new 1,100-unit two-tower project on the west portion of the SmartVMC, which we purchased just one and a half months ago. As you may recall, in SMART BMC, we completed the remaining 192 condo units closing in the Transit City 3 Tower in 2021, bringing the total to 1,741 units closed in the first three Transit City Towers, delivering over $60 million in FFO to the REIT, and that's at 25%. Also within the SMART BMC, Transit City 4 and 5 continued beyond schedule, with expected closings in 2023. The Millway, Vaughan's first purpose-built rental tower, is now available to rent, with the first department units taking occupancy potentially in the fall. This is being leased out of our sales center, permanently located at the heart of our at the heart of the VMC. These development updates are in addition to our current permissions in place. In 2021, we have advanced zoning applications for over 25.5 million square feet of additional density. as we continue to accelerate our transformational plans. Over time, you'll begin to see the NAV growth in fair value increments on completion of successful land use entitlements for our master plans, combined with developments having been already initiated. We currently have over 3.1 million square feet under construction, which includes six rental apartment buildings, two in Mascouche, one in Laval, two in Ottawa and one in our flagship SmartVNC. In total, we have 59 projects either underway or for which work is currently being undertaken to start construction in the next two years. Well, SmartVNC represents our vision of the future. It is only one of 93 REIT properties currently slated for intensification. Pages 20 to 23 of the MD&A highlights over 20 mixed-use projects totaling in excess of 55 million square feet of net incremental density to be built, some with partners and mostly on undeveloped land within our portfolio upon approval of all. On the financial side, maintaining our conservative balance sheet is always top of mind. With an unencumbered pool of in excess of $6.6 billion, a 42.9% debt level and significant liquidity, which Peter will speak more about shortly. We will continue to only move forward with capital-intensive construction initiatives as market conditions warrant. Sufficient pre-sales occur in the case of condos and only when financing is in place. We told you earlier in the year that we would undertake strategic and targeted capital recycling to strengthen the portfolio and assist with funding requirements. In this regard, we completed just over $100 billion in dispositions during the year, consisting of assets where no intensification were identified and NOI was below market. Lastly, the world is facing sustainability challenges. such as climate change, an aging population, and inequality. At Smart Centers, we prefer to do the right thing and have the results speak for themselves. Our actions over the past three decades speak to our commitment to the communities we serve. ESG is woven into the fabric of our organization. Smart Centers was founded with the economic realities of the average Canadian household in mind. We focus on bringing value and convenience-oriented retail to the Canadian market with like-minded retailers. ESG is embedded in how we operate, oversee our business, engage with communities, and develop and energize our associates. Although ESG is getting much more airtime today, it's not something we just started talking about. It has been part of our DNA since the beginning. And when you assess our portfolio, you can see these principles applied everywhere. We have been working to formally improve our retail centers through BOMA BEST certifications, through improved resource management, occupant safety and stakeholder communications, and we continue to work towards an 80% certification by the end of 2022. These days, Canadians want transit-connected homes with urban amenities, so smart centers is evolving from shopping centers to city centers, and smart living has emerged with our $15.2 billion transformational plan to enhance Canadian communities. Smart living apartments, condos, towns, and seniors' residences are designed around public squares and central parks within pedestrian-focused, transit-connected master plan communities. all of which contribute not only to the quality of the built environment, but also promote sustainability. We are grateful for the exceptional work of our talented and dedicated associates who represent the diversity of our community and the customers we serve. Stay tuned for more formal ESG reporting to come. You will like what you will see. Given all of this, you should recognize that our team is capitalizing on what it does best, executing and focusing on change centered around each community. Now, I would like to turn it over to Rudy Gobin.

Thanks, Mitch, and good morning, everyone. Throughout the fourth quarter, and in fact, throughout all of 2021, we saw the underlying strength of our centers in driving leasing and customer traffic. Tenants in most categories were back with an even better appreciation for our well-located and open format centers. And with virtually 100% of our REITs properties having a full line grocery and near 70% including a Walmart super center, a wide variety of tenants were back doing deals such as dollar stores, TJX banners, QSRs, medical uses, grocery stores, distribution and logistics warehouses, personal services, home decor, pet stores, and a wide variety of service retailers, all driving traffic and improving our tenant mix and occupancy. Here are some highlights. Our leased occupancy continued to strengthen throughout the year, approaching pre-pandemic levels with a 97.6% achievement by year end. We completed 3.6 million square feet of renewals, representing 85% of the maturities during the year. Over 925,000 square feet of leases were executed for built space within our portfolio. Our tenants continue to work with us to adapt by expanding their e-commerce, product line, delivery model, pickup, and space utilization all while striving to maintain customer loyalty and sales. And we are there to support them along the way. Compared to the bankruptcies and CCAA filings in 2020, there were virtually none in 2021, reflecting and hopeful that the worst is behind us. From a rent collection perspective, we ended the year at just above 98% and that is climbing. demonstrating the sustainability of the tenant mix and portfolio. Regarding our premium outlets in Toronto and Montreal, both are now open and are at 100% occupancy. With the pent-up demand, accumulated disposable savings, and the reopening of the Canada-US border, Christmas shopping was very strong, and we expect to be back to full sales and rent collections by mid-2022 in these centres. As we've highlighted previously, Walmart Canada plans to spend $3.5 billion to make the online and in-store shopping center experience simpler, faster, and more convenient. This continued commitment to its retail operations in Canada speaks to the ongoing strength of Walmart and its growing ability to drive traffic to our centers. 2021 demonstrated what you've heard us say all along. that this portfolio was built for heavy weather. Our high quality tenants are adapting. Customer traffic is improving. Occupancy and cash flow are back to near pre-pandemic levels. And most importantly, all of this is happening concurrently with the extensive mixed use development initiatives already identified or underway in more than half of our centers, translating into significant NAV growth and NAV growth to come. And now I will turn it over to Peter Sweeney. Thanks very much, Rudy, and good morning, everyone. The financial results for the fourth quarter reflect the continued steady improvement in our core business that both Mitch and Rudy have mentioned. For the three months ended December 31st of 2021, FFO per unit increased by 12%, or 6 cents, over the comparable quarter last year. This increase resulted principally from lower ECL provisions, lower overall financing costs, and contributions from our total return swap initiative as compared to the prior year's results. It's important to note also that there were no condominium closings in the fourth quarter of 2021 as compared to the same period in 2020 that included FFO per unit of 9 cents from closings in the Transit City 2 project. In addition, IFRS fair value adjustments in our investment properties portfolio increased by $581 million to $10.7 billion at the end of the quarter. This substantive increase resulted from progress in the zoning and entitlements process associated with several strategic properties together with improved market conditions. It is important to note that as we continue to advance additional properties through similar zoning and entitlements processes, we will be assessing the appropriateness of similar adjustments in the future. And lastly, note that our annual distribution level continues to be maintained at $1.85 per unit, as Mitch has noted, and given the cash generated by the business, our 12-month ACFO payout ratio ended the year at 90.3%. Each of these financial metrics are representative of a common theme of steady and continuous improvement in our core business supported by our growing development pipeline that is now beginning to contribute to both earnings and cash flow. We have also continued our focus on further fortifying the strength of our balance sheet. In this regard, we note the following strong debt metrics for the fourth quarter of 2021 as compared to the same quarter in 2020. Number one, our debt to aggregate assets ratio has now improved to 42.9% as compared to 44.6% in the prior year. Number two, in keeping with our strategy to repay maturing mortgages and to further grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 71% from 68%. And as Mitch had mentioned, our unencumbered pool of assets continue to grow and now exceeds $6.6 billion, growing by over $800 million over the past 12 months. We continue to employ a strategy to repay most maturing mortgages. And accordingly, we expect these metrics to further improve in the future. This strategy provides us further agility when considering opportunities and alternatives for a portfolio of mixed-use developments. Number three, pursuant to our refinancing activity over the last 12 months, our weighted average interest rate for all debt continued to decrease, and at the end of the quarter, was 3.11% as compared to 3.28% for the prior year. While concurrently, our weighted average term of debt was maintained at approximately five years. Excluding construction financing, substantially all of the Trust's current outstanding debt is fixed rate debt. This continued focus on both the weighted average term of our debt and fixing interest rates is deliberate and is yet just another example of the risk mitigation strategy that we have employed to significantly insulate the trust from interest rate volatility in a rising interest rate market. And lastly, number four, our interest coverage ratio net of capitalized interest improved from the prior year level of 3.2 times to 3.4 times. in spite of the impact that COVID-19 has had on our operating results over the last two years, and in addition to reaffirming the foundational strength and stability of our core business, provides us with a substantive advantage from which to fund our pipeline of development activity. From a liquidity perspective, As we look to the immediate future and continue to manage through the current uncertain capital markets environment, in addition to the conservative debt metrics noted previously, consider also that when factoring in our cash on hand together with our new $300 million facility that was established just subsequent to year end to support the $500 million VMC West acquisition, the $150 million new revolving line of credit that was completed last year, and the $250 million accordion feature associated with our existing undrawn $500 million operating line, our current liquidity position of an excess of $1 billion provides appropriate flexibility for the capital funding requirements associated with our development pipeline activity. Recall also that the next series of debentures in our debt ladder does not mature until May of 2023, and notwithstanding the challenges associated with COVID, over the last 24 months, our business has continued to demonstrate its ability to generate sufficient cash flow to fund both our operating needs and our distributions. Accordingly, we anticipate a requirement for additional funding over the next 12 months to be limited to construction financing and any potential acquisition financing requirements that may arise. However, we continue to review opportunities to early redeem debentures and mortgages when appropriate. And with that, now I will turn it back to Mitch.