SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Centre's REIT Q1 2022 conference call. As a reminder, if you would like to queue up to ask a question, please press star 1. I would like to introduce Mitchell Goldhar. Please go ahead.

Good afternoon, and thank you for joining us on our Q1 conference call. I am Mitchell Goldhar, Executive Chairman and CEO, and joined by Peter Sweeney, Chief Financial Officer, and Rudy Gobind. EVP portfolio management and investments. Our commentary will refer mostly to the outlook and mixed use development initiative section of our MD&A, which is posted on our website. I refer you specifically to the cautionary languages on pages one through six of the MD&A materials, which also applies to comments any of us speakers make this afternoon. Overall, we are pleased to report Q1 delivered solid performances in all areas of the portfolio. Operationally, the durability of our tenants once again revealed itself in the quarter with strong performance and demand for space in nearly every tenant category. Retailers are experiencing a resurgence of customers to their stores and sales improvements. We're looking into new locations, extending lease terms, and asking for more options to extend their leases. The latter is an important metric engaging the future through the eyes of those on the playing field of retail. For the first time in nearly two years, we are experiencing competition for space with multiple players. This improvement is being seen in our stronger cash flow, which approached 98.5% by the end of the quarter and is expected to cross 99% shortly. As retail and e-commerce continue to evolve, physical retail locations are clearly playing a central role in both platforms. At the end of the day, hyperlocality will be even more advantageous in delivering food, general merchandise, and other categories to the public. Our regionally strategic locations, which are virtually all Walmart or grocery anchored, are perfectly aligned with this trend and are increasingly becoming the origination for online fulfillment, quick pickup depots, expanded offerings, and of course, physical shopping. We believe Canadians need and more importantly deserve a fair deal. We have always positioned ourselves with that belief. That's why we have always prioritized tenants who are like-minded, that is food and general merchandise at fair prices. This has and continues to serve us well. That's also why our portfolio comprised of nearly 95% strong national and regional tenants provides the financial stability that has returned us to the near 99% rent collection and industry-leading 97.2% committed occupancy by the end of the quarter. This has allowed us to maintain full distributions to our unit holders through these unprecedented times, a defining feature that we continue to be proud of. Notwithstanding, these lean, high-performance retail assets are merely a starting point for our ultimate vision of adding a mix of uses to our properties, including primarily residential density. In that regard, Smart Living, our new, wholly-owned in-house residential brand, has been extremely active, unlocking embedded NAV to our unit holders in a number of highly accretive projects across the GPA, the MTA and across the country. Here are a few of the highlights of the quarter. Phase one of Smart Living's Artwalk launched last quarter and is already exceeding expectations. Artwalk is a mixed use neighborhood representing 9% of our flagship 105-acre smart VMC development in the TPC-oriented and connected Vaughan Metropolitan Center. Located on the former Walmart parcel, when fully complete, Art Walk will consist of 5 million square feet of density, including 5,000 residential units and up to 150,000 square feet of non-residential buildings, such as innovation and community engagement space, The phase one release of over 320 condo units is sold out. It is worth noting that SmartCentre's REIT owns 50% of these condos, twice as much as the 25% ownership in transit city condos. As you may recall, in January, SmartCentre's more than doubled its ownership in SmartVMC by acquiring a two-third interest in 53 acres within the 105-acre master-planned SmartVMC city center. This acquisition united ownership across the property, making SmartCenters the largest owner in Vaughan's dynamic TTC subway connected downtown. Following on the heels of this acquisition, and in addition to ArtWalk, We commenced the pre-sale activity two weeks ago, one month or so after Art Walk, yet another VMC neighborhood, Park Place Condos. Park Place is 1,100 units across two luxury 56-story and 48-story towers, along with service retail in a podium of contemporary design. This million-dollar plus square foot complex will be built on just two of the 53 acres recently acquired. And we'll overlook the VMCs nine acres central park, which unifies through green space, the entire smart VMC. Initial pre-sales in these projects has exceeded expectations. and we plan to commence construction later this year. Also within SmartVMC, we completed the remaining 192 condo unit closings in 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 at 25% share. As part of transit city wanted to we also plan for the construction of 22 town homes, all of which were pre sold and are now virtually complete with delivery expected in the second quarter of this year. Finally, within the smart vmc transit city four and five continue to be on schedule with expected closings in 2023. Transit City 4 is built to the penthouse, and Transit City 5 is currently built to the 44th floor. The Millway, the first purpose-built rental tower in Vaughan, is built to the 34th floor of its 36 stories and is now accepting applications to rent, with the first apartment units taking occupancy later this year. This is being leased out of our smart living discovery Center across from the subway station right here in the heart of smart bmc. These development updates. are a small subset of our current permissions in place 283 mixed use projects have been identified, mainly on lands already owned. which are expected to result in over 40 million square feet being added to our portfolio over time. As these come on stream, you will begin to see the NAV growth and fair value increments on completion of successful land use entitlements combined with the thoughtful commencement of each development initiative. We currently have over 3.3 million square feet under construction, which includes six rental apartment buildings, two in Mascouche, one in Laval, two in Ottawa, one in our flagship SmartVMC. In total, we have 65 projects either underway or for which work is currently being undertaken to start construction in the next two years. Well, SmartVMC represents our vision of the future, it is only one of 93 REIT properties currently slated for intensification. Pages 23 through 26 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 existing portfolio upon approval of all. On the financial side, maintaining our conservative balance sheet is always a priority. With an unencumbered pool of assets in excess of $8.4 billion, a 42.5% debt level and significant liquidity, which Peter will speak to shortly. As always, we 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. Lastly, in today's environment, businesses face numerous challenges, including competitive pressures, economic inflation, to name a few. We have these challenges and we take these challenges and associated risks seriously. We are strategically planning, implementing, mitigating strategies. and executing deliberately for the long-term success of the portfolio. This includes planning for other changes 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. As we have said before, ESG is woven into the fabric of our organization. ESG is embedded in everything we do and how we oversee our business, engage with our communities, and develop and energize our associates. Although ESG is getting much more attention as of late, it is not something we just started talking about. It has been part of our DNA since the beginning. When you assess our portfolio, you can see these principles applied everywhere. We've been working to formally improve our retail centers through BOMA best certification, through improved resource management, occupant safety, and shareholder communication, and continue to work towards an 80% certification by the end of 2022. Further, our $15 billion plus predominantly Smart, living-focused transformation plans to enhance Canadian communities are focused on Canadians' desire for transit-connected, pedestrian-focused homes with urban amenities, which contributes to the quality of the built environment and promotes sustainability. We are actively working on our ESG report, which will tell you more about our ESG priorities and rollout. Stay tuned. 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. Given all of this and notwithstanding the current economic climate, we see tremendous NAV creation being generated by our skilled development team, executing and focusing on intensification and center around the best fit for each community. But let's not forget our leasing team. our stable of existing retailers and industry-leading occupancy that has set the stage for all this exciting growth. And with that, I will turn it over to Rudi Goben for an operational update.

Thank you, Mitch. And good afternoon, everyone. Throughout the first quarter, we saw the underlying strength of our centres in driving leasing activity and customer traffic. Tenants in virtually every category were back seeking more space and locking up locations in our high traffic centers. And with virtually 100% of the REITs properties having a full line grocery and near 70%, including a Walmart super center, a wide variety of tenants were back adding locations to our well-located centers, including dollar stores. the TJX banners, furniture, health and beauty, QSR medical uses, full, organic, and specialty grocery stores, distribution and logistics, home decor, pet stores, and much more, all driving more traffic and improving our tenant mix in each community. So here are some highlights. We closed the first quarter with 97.2% occupancy. Virtually all of this change from Q4 was the result of one tenant, Home Outfitters, which closed all locations in Canada, four within our portfolio. You may recall that we negotiated a favorable buyout of a significant portion of the remaining 2022 to 2023 rents with this tenant in Q4. We received payment And now we are close to renting three of the locations at the same or slightly higher rental rates. With this, we see occupancy improving in Q2 and throughout the balance of this year. At the quarter's end, we have already completed or near completed 3.7 million square feet of the 2022 renewals, representing 74% of the maturities in the year. Over 150,000 square feet of leases were executed in the quarter for built space. New entrants to the market in a number of categories have started with strong interest in our open format and resilient portfolio. We continue to work with our tenants, helping them to adapt any way we can in meeting their real estate needs, which gives them the flexibility they need in a valued partnership. We've been fortunate with no creditor filings in 2021 through to the first quarter of this year, which reflects the quality of our tenants and hopefully reflects that the worst is behind us. From a rent collection perspective, we ended the quarter at 98.5%. This is expected to improve throughout the quarter going forward, quarters going forward. And again, demonstrating the stability and the financial strength of our tenancies. regarding our premium outlets in Toronto and Montreal both continue to improve and are at 100% occupancy. With the pent-up demand, accumulated disposable savings and the returning tenancies, we have a solid start for 2022 with near 100% cash flow. From all perspectives, 2022 is shaping up to be a strong year in retail and especially in the value segment an area where we dominate. As we have said before, this portfolio was built for heavy weather. Our high-quality tenants are adapting, customer traffic is improving, occupancy and cash flows 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 over half of our centres translating into significant NAV growth to come. And with that, I will now turn it over to Peter. Thank you, Rudy, and good afternoon, everyone. The financial results for the first quarter reflect the continued steady improvement in our core business that Mitch had mentioned earlier. For the three months ending March 31st of 2022, FFO increased by 9.4% or $8 million over the comparable quarter last year. This increase resulted principally from improvements in NOI, lower ECL provisions, lower overall financing costs, and contributions from our total return swap initiative as compared to the prior year's results. On a per unit basis, FFO with adjustments increased to 52 cents per unit from 49 cents per unit for the same period last year. And this level for 2022 includes the impact of 200 million in new units being issued in December of 2021 to accommodate the REITs purchase of a two-thirds interest in Smart VMC West. The results also reflect IFRS fair value adjustments in our investment property portfolio representing $271 million for the quarter, resulting in the REIT's total assets now exceeding $11.7 billion. $241 million of this substantive increase is a result of progress in the zoning and entitlements process associated with several strategic properties together with improved market conditions and is consistent with the approach to valuation for our development properties that we discussed on our last call. It is important to note that as we continue to advance additional properties through similar zoning and entitlement processes, we will be assessing the appropriateness of similar adjustments in the future. Given the cash flow generated by the business, our rolling 12-month ACFO payout ratio ended the quarter at a very respectable 91% level. And this level reflects the continuance of our annual distribution level of $1.85 per unit throughout the pandemic, as Mitch had previously mentioned. These financial metrics have followed a consistent trend over the last several successive quarters demonstrating steady continued growth in the operating platform of our core business, and they support our growing development pipeline that is expected to provide unit holders with FFO and NAV growth for many years to come. We have also continued to focus on further fortifying the strength of our balance sheet. In this regard, we note the following strong debt metrics for the first quarter of 2022 as compared to the comparable quarter in 2021. Firstly, our debt to aggregate assets ratio has now improved to 42.5% as compared to 44.7% in the comparable period. Secondly, In keeping with our strategy to repay maturing mortgages and to grow our unencumbered pool of assets, unsecured debt in relation to total debt increased to 75% from 69%, and our unencumbered pool of assets has now grown to an excess of $8.4 billion. 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 permits us further agility when considering opportunities and alternatives for our portfolio of mixed-use developments. Thirdly, 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 3.09% as compared to 3.26% for the prior year comparable period, while concurrently our weighted average term of debt continues at approximately five years. This continued focus on both the weighted average term of our debt and fixing interest rates is deliberate and is yet another example of risk mitigation strategy that we have employed for several years now to insulate the trust from interest rate volatility as we are currently witnessing in this rising rate market. As at March 31st, approximately 85% of the Trust's current outstanding debt is fixed rate debt, which provides tremendous stability during periods of interest rate volatility. And lastly, our interest coverage ratio net of capitalized interest improved from the prior year level of 3.2 times to 3.5 times. This in spite of the impact that COVID-19 has had on our operating results over the last two years. And in addition, it reaffirms the foundational strength and stability of our core business, providing us with a substantive advantage from which to fund our pipeline of development activity and refinance maturing debt. From a liquidity perspective, for the first quarter, cash flows provided by offering activities exceeded distributions paid by $20.5 million. Notwithstanding the macro challenges that have resulted in tremendous volatility in the capital markets over the last 24 months, our business has continued to demonstrate its unique ability to generate sufficient cash flow to fund both operating needs and distributions to our unit holders. 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 subsequent to year end to support the 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 $500 million operating line. Our liquidity position of an excess of $675 million provides appropriate flexibility for the capital funding requirements associated with our pipeline of development activity. In this regard, we anticipate a requirement for additional funding over the next 12 months to be limited to construction and any potential acquisition financing requirements that may arise, as the next series of debentures in our debt ladder does not mature until May of 2023. And finally, it is important that we can confirm our unwavering commitment to our balance sheet. It has withstood the unprecedented challenges that the past 24 months have proffered. It has permitted the REITs development plans to continue without delay or impediment. And it is in a position to serve as the backbone to fund and support the vast array of opportunities that lie ahead for smart centers. And now I will turn the call back to Mitch.