SmartCentres Real Estate Investment Trust

Good day, ladies and gentlemen. Welcome to the Smart Center's REACH Q1 2025 conference call. I would like to introduce Mr. Peter Slant. Please go ahead.

Good afternoon, and welcome to our first quarter 2025 results call. I'm Peter Slant, Chief Financial Officer. I'm joined on today's call by Mitch Goldhar, Smart Center's Executive Chair and CEO, and by Rudy Govan, our Executive Vice President, Portfolio Management and Investments. We will begin today's call with some comments from Mitch. Rudy will then provide some operational highlights, and I will review our financial results. We will then be pleased to take your questions. Just before I turn the call over to Mitch, I would like to refer you specifically to the cautionary language about forward-looking information, which can be found at the front of our MD&A. This also applies to comments that any of the speakers make this afternoon.

Mitch, over to you. Thank you, Peter. Good afternoon and welcome, everyone.

As you've seen from our results, it was a sequential quarter of strong performance with our teams focused on all aspects of our portfolio as well as the needs of our tenants as those needs evolve. The Smart Centers platform built on the high-quality competence of national retailers continues to generate high on-site customer traffic volumes and huge in-store sales volumes. That bodes well for future quarters as we further solidify our dominance of this sector with the continued expansion of our value-oriented retail offering. Already endowed with carefully selected anchors in grocery, general merchandise, pharmacy, apparel, banking, quick service restaurants, and more. The seeds of our positioning and the resilience were planted many years ago, guided by our belief that providing value and convenience to all Canadians is good business. The first quarter performance reflects this in many different metrics. Same property NOI growth of 4.1% all in, or 6.7% excluding anchors. Positive leasing spreads of 6.3% all in, or 8.4% excluding anchors.

Near 70% of the 2025 lease maturities already extended. 98.4% occupancy for in-place and executed deals.

Cash collections above 99%. And in another milestone, signing and taking a documents, Walmart has their first presence in South Oakville at our South Oakville Center location at Third Line and Rebecca with a scheduled grand opening this fall. And just two weeks after the quarter end, Costco took possession of their premises at our 80-acre Winston Churchill and 401 Center, formerly occupied by Rona. and have commenced picturing with a planned opening later this year. This center is now anchored by a large Loblaws, Walmart, and Costco. One way or another, Canadians appreciate good value, and when it comes to value, Smart Centers is the go-to for retailers and shoppers alike. On the real estate development side, we are confidently moving forward with various projects, several in the exciting construction phase. We also continue to enhance underlying value with additional land use permissions across the platform. This means that during the period, we further secured things like mixed use permissions, adding to the 59 million square feet already zoned, possibly the largest inventory of future growth of any Canadian real estate company. When the time comes, this lucrative inventory will be more difficult to ignore. Active developments include the 340-unit Art Walk condo project, which works its way to grade. As previously reported, 93% of the units are pre-sold with substantial deposits. Also worth mentioning, Our recently completed 458-unit Millway Apartments is now 96.5% leased and performing ahead of budget. Construction of our Vaughan Northwest Townhomes with our partners is progressing well, with four more closings taking place in the quarter, bringing the total to 90% of the pre-filled units now closed. In addition, we will continue to move forward with construction of the 224 1,000-square-foot Canadian tire flagship in Leaside, which will be completed and pictured for opening in the second quarter of 2026. And six smart stops are under construction with three opening in Q2 of this year. Once open, that will bring the gross square footage of the 14 projects to near 1.9 million square feet at 100%. Simultaneously, we have engaged in discussions with potential buyers for mostly non-operating projects valued at approximately $100 million, which, if satisfied, could close before year end. While the business continues to grow organically and through new income-producing developments, we carefully manage our debt and debt-related metrics. In that regard, we have improved our financial flexibility and increased our unencumbered asset pool to $9.6 billion, which Peter will speak to in a moment. But before that, let me turn it over to Rudy for some more operational highlights. Rudy?

Thanks, Mitch, and good afternoon, everyone. As Mitch mentioned, the first quarter was once again a standout in many areas and related operating metrics. Tenant demand for space remains strong with 178,000 square feet of vacancy leasing in the quarter, delivering high-quality income across all provinces with a cumulative 98.4% occupancy at the quarter end. Same property NOI continues its momentum with 4.1% growth overall and 6.7% excluding anchors compared to the same period in the prior year. With 5.3 million square feet of space maturing in 2025, the REIT has already extended 68.4% of its leases by the end of the quarter, with rental spreads of 8.4% excluding anchors, 6.3% all-in. Cash collections continue to exceed 99% in the quarter. On a more exciting note, as Mitch mentioned, shortly after the quarter end, Costco, with a 20-year initial lease term, took possession of the ex-Verona space at our 550,000 square feet or 650,000 square feet shopping center with Loblaws at Winston Churchill and 401, with opening scheduled for this fall. Walmart, also with a 20-year term, took possession of the ex-target space in our South Oakville center during the quarter, and it too plans for a fall opening. As we have mentioned recently, the relaxation of grocery restrictions will not only continue to benefit large open format retail, but we believe will also accelerate the pace of tenant demand and customers to our center, maintaining strong cash flow and high occupancy. Generally, we have also been adding to the portfolio and upgrading uses with medical, daycare, entertainment, health and beauty, fitness, pet stores, and more. Our premium outlets continue to excel in driving traffic with improving tenant sales, leading to strong growth in EBITDA and value to the REIT. As mentioned before, tenant sales has our premium outlets in Toronto in the top three highest performers of all of Canada and remains an outperformer in the Simon portfolio. You will have heard about the Unfortunately, HPC used, and while we do not have any such banners in our portfolio, we did have one stacked off fifth location at our Toronto location, tuning outlets, for which we have received strong interest from multiple tenants, given that the centre was 100% leased. Based on our discussion with tenants, we expect replacement rent to be in the three to four times higher than the prior tenant. Overall, The REIT continues strengthening its cash flow and stability while reducing risk through strong rental lifts, higher covenant quality, and increasing new brands and more grocery. We expect this momentum to continue throughout the year. Thank you, and I will now turn it over to Peter.

Thanks, Rudy. The financial results for the first quarter once again reflect a strong performance in our core retail business For the three months ended March 31, 2025, net operating income increased by $7.4 million, or 5.5% from the same quarter last year, primarily due to lease-up and renewal activities. FFO per fully diluted unit was 56 cents in the quarter, compared to 48 cents in the comparable quarter last year. The increase was primarily due to higher NOI and changes in the fair value adjustments on our total return slot, partially offset by higher net interest expense and a non-recurring severance cost related to reduced staffing from some deferred development activities. For the three months ended March 31, 2025, FFO with adjustments, which excludes the townhome profits, transactional gains and losses, and the total return slot, was $0.54 per unit, compared to 52 cents for the same period in 2024. FFO with adjustments per unit was lower by approximately one cent as a result of the one-time severance charges that we incurred during the quarter. We again maintained our distributions during the quarter at an annualized rate of $1.85 per unit. The payout ratio to ASFO is continuing to show improvement. For the three months ended March 31, it was 83.8% or 87.6% for the trailing 12 months. Adjusted debt to adjusted EBITDA was 9.6 times for the rolling 12-month period ending in Q1, which is unchanged from last quarter and an improvement from 9.8 times for the same period last year, primarily due to continued growth in EBITDA. Our debt-to-aggregate assets ratio was 44.1% at the end of the quarter, a 30 basis point increase compared to the same period last year. Compared to Q4, our unencumbered assets pool increased by over $100 million to $9.6 billion as we used a portion of the proceeds from our Series AD debenture offering to repay some maturing mortgage debt. Unsecured debt, including our share of equity-accounted investments with $4.6 billion at Q1, slightly higher from the prior quarter, and represents approximately 84% of our total debt of $5.5 billion. During the quarter, we also recorded a fair value loss on our investment properties portfolio of $80.1 million. This adjustment was mainly attributable to a delay of development activities for certain properties under development. From a liquidity perspective, we remain comfortable with our current liquidity position. As of March 31, 2025, we have approximately $856 million of liquidity, which includes both cash on hand and undrawn credit facilities, but excludes any accordion features. The weighted average term to maturity of our debt, including debt on equity-accounted investments, is 3.3 years. Our weighted average interest rate is 3.93%, virtually unchanged from the prior quarter. Our debt ladder remains conservatively structured, with the recent senior unsecured debenture offering extending our weighted average term to maturity. Approximately 90% of our debt is at fixed interest rates. Just before we open up the call to questions, I want to touch briefly on our development projects that are underway. As in previous quarters, we have updated our MD&A disclosure, focusing on those development projects that are currently under construction. As you will see on page 17, there were 10 projects under construction at the end of Q1, unchanged from last quarter. We expect three self-storage facilities to open during the second quarter of 2025. two of them in Toronto and one in Norval, and I believe one of them has already opened. It just opened last month, in fact. The reach share of the total capital cost of these 10 development projects is approximately $515 million, with our share of the estimated cost to complete standing at $275 million. And with that, we would be pleased to take your questions. Operator, can we have the first question on the line, please?

Absolutely. As a reminder, if you'd like to ask a question, please dial star 1 on your phone's keypad. The first question is from Lorne Talmar from the Dijon Bank Capital Markets. Go ahead, Lorne.

Thank you. Good afternoon, everybody. I was wondering, you guys, you provided a little bit more color on the same property and why changes by segmenting retail, multi-res, and self-storage. I might have missed it, but could you provide the actual same property NOI growth percentage by each of those categories?

Yeah, Lauren, we don't disclose that breakdown, but of the 4.1% overall same property NOI growth, About three-quarters of it comes from our retail portfolio, which includes the premium outlet, and the other quarter comes from apartments and self-storage.

Okay, fair enough. And then just on the occupancy decline, I know everything's still humming along, but I figured that's good a little bit. Could you give us a little more color on what drove that quarter over quarter?

You mean the drop of the 98 core?

Yes.

Well, yeah, it's minimal, and it's just seasonal related.

Okay, fair enough. I did notice that Toys R Us was pulled out of the top ten. Did that have anything to do with it, or what happened there?

No, because those were pretty much released almost immediately. Well, two of the three, I think, that we got back were released right away, so it didn't really... move the needle, the toys thing. It was just a variety across, you know, very widely distributed across, you know, the portfolio related to the seat time of year.

Okay. And then just last one for me, the premium outlet has been a standout, probably laugh at some tough comps. Is there any concern about, you know, the impact that the broader macro uncertainty might have on the performance of those two assets?

Well, in terms of, I mean, Toronto is just, you know, a wonder child that I don't think any of us could have ever expected or predicted. So, you know, we are actually, I don't know if we mentioned this in this or not, but we are looking at potentially expanding it, just so you know. So from the point of view of your question, and that's not going to, rise or fall over interest. It's going to rise and fall over getting, you know, just the approvals. But I guess, you know, if there's really a, you know, a recessionary type situation, maybe, but a little bit. But it's, you know, our sector tends to generally attract more people. They may spend a little less per trip, but more of the population, um, you know, shops at our centers when, you know, when there's budgetary, you know, types of economic conditions. So we usually get a little bit more actually upside as people move away from full, full price retail. We're sort of the, uh, beneficiaries of that. So, hard to predict on that particular aspect, but in general, we're not, you know, we're not concerned about, you know, some tough macroeconomic conditions.

Okay. Thank you so much for your call. I'll turn it back.

All right. Thank you. The next question is from Sam Damiani from TD Securities. Go ahead, Sam.

Thanks. Good afternoon, everybody. Maybe just to follow on on the topic of a recession, I think it was mentioned, you know, workflow is a bit different today than it was 15 years ago, but if you had to sort of look out into a potential economic slowdown over the next year and compare it to what we saw in 2009, I mean, what would be the main differences as it relates to smart centers?

Jeez. I mean, our locations are more mature. We're surrounded by much, you know, each one of our centers, I don't know what percentage, a good question, what percentage of our centers we owned and existed in 2009, but I bet you a lot of them, are much more mature. There's a lot larger populations around them and still growing. So, I mean, I like our positioning more. I liked our positioning then, frankly. We're a go-to when people don't want to feel that they're being anything but getting the most for their money. We're a go-to when people are watching on a tighter budget. And now there's larger populations around the majority of our centers. I did like our positioning back then, but I actually – you know, that you're asking, really like our positioning now, if that were to, in fact, occur.

And just broadly as it relates to the shopping center industry generally in Canada, how would you sort of call it on a relative basis from 15 years ago? How much more insulated is the business from impacts, would you say?

I think the industry is probably a little better positioned now in general. I mean, obviously, you know, you divide the world up into, you know, enclosed fashion, you know, fashion, discretionary purchases, enclosed malls, you know, and, you know, value-oriented in our case, unenclosed. And then you've got, you know, strip centers and, you know, solely smaller food anchor centers. But so much retail has been redeveloped. Population has grown quite a bit over the last 15 years, and not a lot of retail has been built. So on a per capita basis, I don't know if anyone's done the calculation recently, but I would say there's probably quite a bit of less – retail per capita now than there would have been in 2009. I think we were somewhere in the 15 square feet per capita back then, around then. I don't know where we are now, but I would say we're probably, I don't want to guess, but we're somewhere between probably 11 and 12 and a half or something like that. So I think the industry, for all kinds of reasons, no matter what sector you're in, is better now than they were in 2009. I just think there's just much less square footage per capita. But I don't know if I'd want to be in every one of the sectors if we go into a, you know, tough economic period. But I do like our positioning, you know, with the Walmarts and the, you know, the value-oriented grocery and winners and, you know, those in the Dollaramas, which are the core of our portfolio. I do like that a lot. I don't want to, you know, illuminate on any other possible sectors, but I do think everyone's better off, the industry is better off now than it was in 2009.

Those are helpful points. Thank you. And the other question I had is just on the HBC spaces, thinking of the traditional large department store spaces that inevitably will be hitting the market, at least some of them, How do you think that will divert retailer attention away from pursuing newly constructed stores? Are you seeing, you know, the Walmart and the Canadian Tires, you know, look to those opportunities and maybe hitting the pause button on some development opportunities?

No, no, no. I mean, you know, I don't want to be so absolute, but I would just say no. I think if those get taken up, I think they're in, most of them, a lot of them are in in markets that, you know, they're not in. The majority of those retailers you named, so they would just be entering, you know, version territory. And I don't know that, you know, how much of that's going to actually happen. This is not a case of, you know, Target, you know, leaving and putting a huge amount of vacancy on the market or something like that. This is very, a lot of those units are very much You need multi-level, urban, underground parking, if any. So don't see that, Sam, really being an issue in this particular case.

Thank you. Thank you very much. I'll turn it back.

Thank you. The next question is from Pammy Burr from RBC Capital Markets. Please go ahead.

Thanks. Hi, everyone. Just coming back to the occupancy commentary, you have an assurance that you have seen in demand. Are you envisioning occupancy trending back up over the next few quarters, maybe just narrowing the gap to the committed levels, or do you see it kind of stabilizing where it ended in Q1? Well, we don't know that much.

We don't have that far to go up, but I'll let Rudy join in a minute. But I think a big potential number will be, for us, will be in the next year or so, maybe in a year and a half, will be leasing up some large vacancies. some of which we've done and we've told you about. We're getting enticed on some of our properties for development, so they may end up maybe turning into retail if we see the value in doing that. It's not necessarily going to change occupancy, but it will certainly increase NOI and development because A lot of the interest is we have a lot of interest in new builds. So we'll be adding square footage. It will move occupancy up. But, you know, between 40 or 30, 40 to 120,000 square feet at a time, because that's what the majority of the new builds are going to be. So, you know, over the next year or year and a half, we'll probably do quite a bit of that. So, yes, that will move occupancy, but slowly, obviously, because we're going to be adding square footage at the same time. But there will be 100% ease. So, you know, I think we want to be careful because, you know, we want to manage our expectations. But we do have quite a few things cooking, and we feel that the occupancy of this quarter and last quarter, they're not that far apart, are probably – probably reflective of where we're going to probably be over the next few quarters and more. Rudy, do you want to add anything?

I was going to say, maybe a little bit of softness in the immediate future. Like we talked about the facts of FIFT, which obviously will get leased up, but there will be a little gap in time. But if you're looking out to the end of the year, I think it will be an uptick. And like Nick said, the amount of U-bills from grocers and TJXs and dollaramas and shoppers and so on is really also, which, by the way, is mostly on lands we already own. So that will intensification of lands we already own and building out. some raw land within our shopping centers is only going to drive us to, or drive tenants' demand for whatever remaining vacant space there is. But, you know, again, there isn't a long way to go, given that we're 98.4 committed. But we do see an uptick by the end of the year, yeah.

Great. That's helpful. And, Mitch, just coming back to your comments around the, I think you said 100 million of potential dispositions by year end. Can you expand on that? You know, which markets? It sounds like these are lower-yielding or no-yield sort of development density type sites, but it sounds like you're a little bit more confident in actually transacting. So maybe what's changed in your mind as well over the last few months?

I mean, yes, they're not producing right now these assets that are potentially being sold, so I just think it's, you know, a slight improvement in the marketplace, a little bit more confidence by others to buy, to step up. So, yeah, I mean, I think that's what it's a reflection of. I do feel that that is a trend. So, obviously, as we've talked before, you know, we're interested on the right terms. So, those deals got done. We like them. They're in conditional periods, so you never know. Right now, I mean, you know, anything happening in the market, in the news, can spook the kind of people that are purchasing these. I mean, they're solid, but they're still, you know, everyone's got their antenna pretty high. So, These could fall away, but, you know, we went this far because we don't think they're going to fall away. So we think there's probably better than a 50-50 chance that these people will firm up and close on these transactions. And I hope I'm right about a slight improvement to the market and we'll be able to do some more transactions. I will say, because you might be thinking, I don't see a lineup for, you know, high-density stuff, you know, land at the moment. But maybe some mid-density rental potentially at the right price. Maybe this year we'll see a little bit of that.

Okay. No, that's a good caller. Last one for me, just on Artwalk, can you just remind us the total expected proceeds on that project and Just maybe in terms of how you underwrite, you know, have you made some provisions or some assumptions on, you know, some of those units maybe not closing or just some update on that would be helpful.

I'll answer the second half to Saul for Peter to answer the first half. Yeah, so we absolutely analyze the many different what-if scenarios, you know. if people do default. So with that analysis and that information, we are confidently going forward with the completion of the building because we feel that with the deposits that we can still sell, resell any of the units at an attractive price and get out and be whole, or we can rent them. And I don't know whether we mentioned this or not this time. I don't know. I don't think we did. But we did shrink the building at one point. It was a much bigger building. So we shrunk the, like the repetitive, we shrunk a bunch of repetitive floors to just mash up basically the sales that we have, almost. And for good reason, we didn't do it exactly. And so it's not really that big a building in the end of the day. and these people do have big deposits. We do anticipate most people will close, but we're ready if they don't, and we're okay if they don't from various points of view. Peter, is that long enough for you to answer?

Tommy, on the first part of your question, as we've discussed, it's 340 units at Art Walk, 93% pre-sold, and the average sales price was a little north of $1,100 a foot. So that should give us some color around gross proceeds.

And... Okay. Okay. No, that's great. I'll turn it. Thank you.

I wanted you to know, Pammy, as well, that we are building extra parking there as well. So, you know, it's not some home run. So just don't do the math on that straight up because... You know, it's a strategically located building, so we built an electric parking there for the betterment of the overall project so we can take away some of the surface parking and make way for, you know, future phases.

So just keep that in mind. There are no further questions. Thank you. Okay. Is that – there are no further questions still?

Correct. No further questions at this point.

Okay, well, just before we end the call, I want to let you know that we will be hosting our AGM next week on Wednesday, May 14th. We hope to see many of you there. Please feel free to reach out to any of us if you have any further questions, and have a great day. Thanks.

Ladies and gentlemen, this concludes the Smart Center's Meet Q1 2025 conference call. Thank you for your participation, and have a nice day.