CT Real Estate Investment Trust Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 6 speakers on the call.

Operator

Good morning. My name is Marie and I will be your conference operator today. At this time, I would like to welcome everyone to C. T. REIT's Q3 I have 2023 Earnings Results Conference Call.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. The speakers on the call today are Kevin Salzberg, President and Chief Executive Officer of CitiREIT Jody Spiegel, Senior Vice President, Real Estate and Leslie am Chief Financial Officer. Today's discussion may include forward looking statements. Such statements are based on management's assumptions and beliefs.

Operator

These forward looking statements are subject to uncertainties and other factors that would cause actual results to differ materially from such statements. Please see Citi Reit's public filings for a discussion of these risk factors, which are included in their 2022 am with MD and A and 2022 AIF, which can be found on C. T. REIT's website and on SEDAR. I will now turn the meeting over to Kevin Spielberg, President and Chief Executive Officer of Citi REIT.

Operator

Kevin?

Speaker 1

Thank you, Marie. Good morning, everyone, and welcome to CTE REIT's 3rd quarter investor conference call. Despite a challenging economic environment, CTE continues to deliver consistent growth and stable results. When CTE was established over a decade ago, the tagline of delivering reliable, durable and growing results was a vision for an enterprise that was set up to not only withstand headwinds, but to thrive in spite of them. Irrespective of market conditions over the last decade, We have grown our portfolio, earnings, net asset value and distributions, all while improving our balance sheet and payout ratio.

Speaker 1

I'm pleased to report that

Speaker 2

we are in the

Speaker 1

process of delivering the next several years. As we recently celebrated the 10 year anniversary of our initial public offering, this milestone has given us an opportunity to pause and reflect on our track record since inception, and I'm proud of what our team has been able to achieve over this time. Will now turn the call over to the operator. Highlights to the end of the quarter include delivering a total return to unitholders of 131%, outperforming both the S and PTSX Composite and the S and PTSX capped REIT indices, which delivered total returns of 100% and I'm going to be taking a look at the 2% respectively, adding 117 properties consisting of 11,500,000 square feet to the portfolio, investing approximately $2,600,000,000 in acquisitions, developments, redevelopments and intensification projects, am confident that we will be able to achieve our balance sheet. Achieving compound annual growth rates of 7.03 percent in net operating income, 5.67 percent in AFFO per unit and I'm happy to take your questions.

Speaker 1

And declaring an increase in our distributions at least once every year for a total increase of 38%, all while reducing our payout ratio to 74.8%. Our occupancy rate has consistently remained above 98% and our weighted average lease term and the weighted average term to maturity on our debt remain amongst the longest in Additionally, our annual rent escalations and CapEx recovery mechanisms have and will continue have a question to provide steady and reliable organic growth. The underlying fundamentals of our business today are in great shape. I'd like to turn the call over to our operator. Our occupancy rate stands just above 99%.

Speaker 1

Our development pipeline tied primarily to Canadian Tire's better connected strategy am currently in the range of $1,000,000 square feet. And although not immune, we are fortunate to currently be well insulated from the impacts of higher interest rates have a question with you.

Speaker 2

With only one debt

Speaker 1

maturity to refinance over the next 18 months. CTE REIT's Q3 2023 results are an extension of our track record thus far and validation of a strategy that seeks to continuously deliver above average relative returns for below average relative risk. I'm happy to take your questions.

Speaker 3

Jody and Leslie will speak to

Speaker 1

the quarter in greater detail. But as we look to the next 10 years for CTA REIT, we are confident in our ability to continue to grow our business and I will now walk you through an overview of our investment leasing and development activities and then Leslie will speak to our financial results. Jody?

Speaker 4

Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce one new investment this quarter of $28,000,000 This new investment relates to the land lease and development have a new Canadian Tire store located in Kingston, Ontario that will add an incremental 113,000 have a few square feet of gross leasable area to the portfolio upon completion at a cap rate of 6.9%. In Q3, we completed 2 projects totaling $40,000,000 which added an additional 158,000 square feet of GLA will translate to the portfolio. These included the intensification of an existing Canadian tire store located in Summerside, Prince Edward Island I'm pleased to report that we're going to be able to see the development of a new Canadian tire store located at Islington Avenue and Highway 401 in Toronto, Ontario. I'm happy to take your questions.

Speaker 2

If you're in the Greater Toronto area, I strongly

Speaker 4

recommend checking out this recently opened Canadian Tire store, which has been built using am CTC's latest Concept Connect design and features state of the art in store technology that elevates the omnichannel customer experience.

Speaker 5

At the end of

Speaker 4

the quarter, CT REIT had 25 properties that were at various stages of development with 5 projects currently expected to be completed by the end of 2023. These development projects represent a total committed investment have approximately $365,000,000 upon completion, dollars 144,000,000 of which has already been spent and $54,000,000 of which we anticipate will be spent in the next 12 months. Once built, these projects will add a total incremental gross leasable area of approximately 1,100,000 square feet to the portfolio, 99.4 percent of which has been pre leased at quarter end. We were also pleased to have completed 2 additional Canadian Tire store lease extensions this quarter, am taking the year to date total of Canadian Tire lease extensions to 27. As at the end of Q3, Finally, our portfolio remains 99.1 percent occupied in line with last quarter.

Speaker 4

With that, I will turn it over to Leslie pleased to discuss our financial results. Leslie? Thanks, Jody, and good morning, everyone.

Speaker 5

As Kevin highlighted, we are pleased with solid results am delivered by the REIT again this quarter. AFFO per unit on a diluted basis was strong, up 3.1 percent to $0.301 compared to Q3 of 2022. This increase was primarily driven by growth in the same store net operating income have the same reasons coming in at $0.327 up 1.9% compared to $0.321 in Q3 of 2022. Same store NOI grew by $1,900,000 or 1.8 percent as a result of contractual escalations contributing $1,500,000 primarily being the 1.5 percent average annual rent escalations included in the Canadian Tire leases. With the balance of the growth primarily from continued recovery of capital expenditures have a few questions on the unrecovered balance, which contributed approximately $1,300,000 to NOI in the quarter, partially offset by a decrease in property operating cost recoveries of $800,000 In addition, same property NOI for the quarter was $3,600,000 or 3.4 percent higher due to the increase in the same store NOI in the Q3 when excluding the fair value adjustments, G and A expense as a percentage of property revenue was 2.9%.

Speaker 5

I've. This figure represents an increase from 2.5% in the same period of the previous year. The primary reason for this increase is higher compensation costs, specifically to the variable component of compensation awards. With respect to the fair value adjustment, The decrease of approximately $66,700,000 in the quarter was mainly driven by changes in the underlying investment metrics for industrial properties within the portfolio and to a lesser extent from changes to investment properties metrics related to certain small market retail properties, will discuss the financial results, all partially offset by changes to underlying cash flows as a result of NOI growth and lease extensions. Distributions in the quarter increased by 3.5% compared to the same period in the previous year reaching $0.225 As a result, the AFFO payout ratio stood at 74.8%, which represents an increase of 0.5 percent from the same period last year.

Speaker 5

Also in Q3, we continued to repurchase units through our NCIB facility, am buying back approximately $1,900,000 of our units at an average price of $14.48 in the quarter. Turning now to the balance sheet. Our debt metrics continue to remain strong with no significant changes from the comparable quarter in 2022. The interest coverage ratio at 3 point I have the full year of 2018. The indebtedness to EBIT fair value I'm pleased to report that the ratio was 6.81 times, also comparable to 6.86 times in Q3 of 2022.

Speaker 5

CT REITs and deadness ratio slightly increased from 40.6% in the same quarter of last year to 41.1%. This increase can be primarily attributed to the higher utilization I've provided the financial results to finance intensification and development activities in 2023. Our indebtedness ratio continues to be within our target range. And concerning the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet. Lastly, with respect to liquidity, have $73,000,000 remains available through our committed credit facility and a further $300,000,000 is available on our uncommitted facility with Canadian Tarver Corporation.

Speaker 5

And with that, I'll turn the call back to the operator for any questions.

Operator

Thank you. Will now begin the question and answer session. We ask that you please limit yourself have to one question and one follow-up. We'll pause for just a moment to compile the Q and A roster. The first question is from I'm now from Desjardins.

Operator

Please go ahead. Your line is now open.

Speaker 2

Thank you very much and good morning everybody. Just wanted to quickly chat on the development spend, obviously, up quite a little bit this quarter. Can you maybe give a little bit of color I On what drove that and I know you kind of alluded to your development spend expectations over the next 12 months, but maybe a little bit more color on that as well if you wouldn't mind.

Speaker 5

It's Leslie, I'll start off. I think really it's just more towards the like summer construction season. It's I see when we've been building through July, August and sorry, June or July, August September, it tends to be that sort of in a better month seasonally in terms of what we're developing and what we're paying and accruing for. But I think beyond that, it's nothing unusual from my perspective.

Speaker 2

Okay. And then maybe just to follow-up on that, I guess, the credit facility has kind of ticked up a bit. Any thoughts on maybe terming that out?

Speaker 5

Yes. No, Lauren, I mean, our debt strategy in the long term has not changed. We're constantly watching the debt markets. And Obviously, the recent week and a half sort of decrease in the underlying GSEs is constructive from that perspective. I've been very pleased with the progress we've made.

Speaker 5

But we also have the option to be patient. We've still got room on our bank line and are in conductivity with CTC. But yes, definitely markets have are a lot more positive in the last little while compared to have they have been say for the last 5, 6 months.

Speaker 2

Yes, it's a low bar to get I won't take anything at this point. Okay, thank you.

Speaker 5

I'll take the quarter point or so. No problem.

Operator

Thank you. The next question is from Sam Diemeny from TD. I'm Marie. Please go ahead. Your line is now open.

Speaker 3

Thanks and good morning everyone. I guess Kevin just for you on the pace have a question on the new investment announcements year to date. It's a little slower than what we saw last year. And I wonder if you could give I can give a little color on what you're expecting over the next few quarters in terms of the pace and whether or not you might add another 11,000,000 square feet over the next 10 years?

Speaker 1

Thanks very much, Dan, and good morning. Obviously, it ebbs and flows from quarter to quarter, But the positive is that Canadian Tire remains committed to their better connected strategy. They've come out and said that publicly. I've The better connected strategy to remind you has a significant real estate component to it, which the REIT will play a role in. Obviously, we're having continued discussions with Canadian Tire on new projects, new opportunities.

Speaker 1

I I would say in the context of the current environment, I think both the REIT and CTC are proceeding a little bit more cautiously. We could potentially see the I see the timing of certain projects shipped out, but nothing concrete to say about it at this point. Should there be any changes or specific updates, obviously, we'll telegraph that at the appropriate time. But I am still confident in the pipeline and the opportunity set. I think in the next decade, I'm certainly hopeful that we'll be able to replicate the amount of growth that we've had in our 1st 10 years, but obviously that I That remains to

Speaker 2

be seen.

Speaker 3

That's very helpful. And second one for me would just be on Canada Square. If there's anything Tangible you can provide in terms of an update there both in terms of the progress of the redevelopment, but also any potential impacts will take the NOI line for the REIT over the next couple of years.

Speaker 1

So I can definitely provide an update. I'm not sure I would describe my update as tangible though, because there hasn't been too much movement since last quarter, quite frankly. Our municipal approval process is ongoing. We still expect that that will conclude at some point next year in 2024. Obviously, we're still working and Oxford continues to work with Canadian Tire on the future office requirements, but this Workstream is still very much underway and we have no update from the LRT in terms of timing completion.

Speaker 1

I think the one thing that continues to evolve I just referenced the macro environment. And obviously, we'll see that how that unfolds over the next little while in terms of Decisions that we have to make in terms of next steps and the phasing of the development. But in terms of NOI erosion, I mean, I think we've kind of taken our lumps thus far last week.

Speaker 5

Yes. Same as well, yes. I mean there are still continued some tenancies within the buildings at the north end of the site that are contribute to NOI and they will continue to decrease as we head towards the development. But whether we're renewing them on short term basis or on a gross lease I'm sorry, whatever it happens to be. We'll try to keep those as going as long as we can and those tenants are happy to be here.

Speaker 5

So there will but I'm not expecting it to be overly material in any given quarter over the next little while.

Speaker 1

And just I On the flip side, Sam, just in terms of the lease up of 2,180, which is not part of the first phase of the redevelopment, I think The comment I would make is the office leasing market is slow. We have a couple of floors that are available. I think we could see The floors go independently or portions of floors. So I think it will be a staggered lease up over time. And I think it will be on the slower end of the lease up as we're used to relative to our retail portfolio.

Speaker 3

Don't think anybody would be surprised to hear that. Thank you very much and I'll turn it back. Thanks.

Operator

Thank you. As there are no further questions at this time, I will turn back the meeting over to Kevin Salzberg, President and CEO for closing remarks.

Speaker 1

Thank you, Marie, and thank you all for joining us today. Look forward to speaking with you again in February after we release our Q4 results. Have a good day.

Operator

Thank you. This concludes today's call. You may now disconnect.

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CT Real Estate Investment Trust Q3 2023
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