CT Real Estate Investment Trust Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 8 speakers on the call.

Operator

Good morning. My name is Maude, and I will be your conference operator today. At this time, I would like to welcome everyone to Citi Reit's Q1 2023 Earnings Results Conference Call. Question and answer to withdraw your question. The speakers on the call today are Kevin Salzberg, President and Chief Executive Officer of Citi REIT Jody Spiegel, Senior Vice President Real Estate and Leslie Gibson, Chief Financial Officer.

Operator

Today's discussion may include forward looking statements. Such statements are based on management's assumptions and beliefs. These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Please see Citi REIT's public filings for a discussion of these risk figures, which are included in their 2022 MD and A and 2022 AIF, which can be found on Citi REIT's website and on SEDAR. I will now turn the call over to Kevin Forsberg, President and Chief Executive Officer of Citi REIT.

Operator

Kevin?

Speaker 1

Thank you, Maude. Good morning, everyone, and welcome to CTE REIT's Q1 investor conference call. I am pleased to report that 2023 is off to a great start for CTE REIT. Despite the uncertainty that continues to permeate the macroeconomic environment, Our resilient portfolio and consistent growth were once again on display in Q1. Leslie will provide more details in terms of our results, but I want to call it a few key metrics that highlight just how strong the quarter was for us.

Speaker 1

Diluted AFFO per unit growth on a year over year basis came in at 5.8%. Same property NOI increased by 4.5%. Our indebtedness ratio remained at a very conservative 40.7 percent and we lowered our payout ratio even further to 73.8%. The combination of this strong growth and conservative financial management gave our Board the confidence to approve a distribution increase of 3.5% that will be effective with the July payment, the 10th increase since our inception. On a cumulative basis, CTE REIT has raised its distributions by 38.2% since our IPO in 2013, which is a true testament to The REIT's solid performance and success over the years.

Speaker 1

As part of our better connected real estate strategy, we continue to work alongside Canadian Tire, our largest tenant and majority unitholder to unearth enterprise wide opportunities to create value within our collective portfolios. And these efforts continue to take shape and contribute to our financial results. For example, the Canadian Tire store intensifications completed over the last 12 months have meaningfully driven same property NOI growth this quarter, and we are fortunate to have over 20 store expansion projects currently in the pipeline, which are set to deliver nearly 700,000 square feet of incremental gross leasable area over the next 2 years. Opportunities to surface embedded value in some of our urban assets by seeking density permissions, funding other Canadian Tire retail and supply chain investments and developing and advancing our ESG strategies are all ways that we work closely together to attain. Our 350,000 square foot distribution center development in Calgary, Alberta is yet another great way example of how we collaborate with CTC to create better connected opportunities.

Speaker 1

We are proud to announce last night that this project has now achieved the 0 Carbon Building Design Certification from the Canada Green Building Council. Not only does this development further expand CTE REIT's industrial holdings and our ventures into responsible development, but it is also expected to increase the efficiency and sustainability of Canadian Tire supply chain. We are very excited about what the future holds and CTE REIT continues to be a durable, reliable and growing choice for investors seeking our dynamic combination of growth and stability. Working closely with Canadian Tire, we have great opportunities to leverage our unique relationship to the benefit of our unitholders, and I'm proud of the work that our teams have done together to convert these opportunities into meaningful results. And with that, I will turn it over to Jody and Leslie to walk you through an overview of our investment, leasing and development activities as well as our financial results.

Speaker 1

Jody?

Speaker 2

Thanks, Kevin, and good morning, everyone. As highlighted in our press release yesterday, we were pleased to announce one new investment this quarter totaling $6,600,000 Once completed, this intensification will add an incremental 22,000 square feet of GLA to the portfolio at a weighted average cap rate of 6.37%. We also completed $113,000,000 project and added 39,000 square feet of GLA to the portfolio from the development of mid box and commercial retail space adjacent to the Canadian Tire store that we built last year in Moose Jaw, Saskatchewan. At the end of the quarter, Citi REIT had 27 properties that were at various stages of development with 11 projects currently expected to be completed by the end of 2023, which is consistent with our development pipeline over the past several years. These projects represent and a total committed investment of approximately $389,000,000 upon completion, dollars 140,000,000 $141,000,000 of which has already been spent and $123,000,000 of which we anticipate will be spent in the next 12 months.

Speaker 2

Once built, these projects will add a total incremental gross leasable area of nearly 1,300,000 square feet to the portfolio, 99.4% of which has been pre leased at quarter end. We were also pleased to have completed 2 Canadian Tire store lease extensions in Q1. At 8.5 years, the weighted average lease term for our portfolio continues to be one of the longest in the sector and our portfolio remains 99.2% occupied, in line with last quarter. As we noted on our last call. We had 1 Bed Bath and Beyond within our portfolio that was located in our Collingwood Shopping Center.

Speaker 2

The Bed Bath and Beyond lease has now been assigned to Winners pursuant to the court order process. This location is adjacent to a current Winners store and it is expected that they will use the former Bed Bath and Beyond premises for their new home for their HomeSense banner. We are pleased that this has come to a resolution and that the center continues to attract and be occupied by high quality retail tenants. As Kevin highlighted, we achieved a significant milestone at our Calgary distribution center by obtaining our net zero certification, one of the first industrial developments to receive such an accreditation to date. Our leasing, operations, development and construction groups went to great efforts to design and construct this building so that it met the rigorous standards of the Canada Green Building Council's 0 carbon building design criteria, which include thermally improved building construction, increased air tightness, a building wide geothermal heating and cooling system and roof mounted solar panels.

Speaker 2

Once the building is operational for a predetermined period of time. We will be applying for and expect to receive the 0 Carbon Building Performance Certification, which is based on the building producing as much energy as it consumes. I am proud of the accomplishments of our cross functional teams and the positive impact that this project will make. And with that, I will turn it over to Leslie to discuss our financial results. Leslie?

Speaker 3

Thanks, Jody, and good morning, everyone. As Kevin highlighted, we were very pleased with the solid results delivered by the REIT again this quarter. AFFO per unit on a diluted basis was very strong, up 5.8 percent to 0 $0.294 which is primarily driven by growth in AFFO exceeding the growth in weighted average diluted youth outstanding. Diluted FFO per unit this quarter was $0.32 0 up 4.2 percent compared to $0.37 in Q1 of 2022. Net operating income of $107,400,000 an increase of 4.5 percent or $4,600,000 compared to Q1 2022.

Speaker 3

Same store NOI group grew by $2,500,000 or 2.5 percent as a result of the contractual annual rent escalations contributing $1,800,000 including the 1.5% average annual rent escalations included in the Canadian Tire leases. The balance of the growth, primarily from continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately $1,000,000 to NOI in the quarter. Same property NOI for the quarter grew $4,600,000 or 4.5 percent as a result of an increase in same store NOI as well as $2,100,000 in NOI from the intensifications completed in both 2023 2022. Excluding fair value adjustments, G and A expense as a percent of property revenue was 3.0% in the 1st quarter, which was slightly less than the same period in the prior year of 3.2%. The fair value decrease of approximately $4,200,000 was mainly driven by changes to underlying investment metrics in our industrial portfolio, partially offset by cash flow growth during the quarter.

Speaker 3

The overall terminal cap rate for our portfolio increased 2 basis points and overall discount rate by 3 basis points. Distributions in the quarter grew 3.3 percent over the same period last year to $0.217 resulting in an AFFO payout ratio of 73.8%. As Kevin already mentioned, we announced a 3.5% increase to the monthly distribution effective with July 2023 payment to unitholders. This is the 10th increase in as many years and we're pleased to have been able to raise our distributions at least once per year since inception. Turning now to the balance sheet.

Speaker 3

Our debt metrics continue to remain strong. The interest coverage ratio at 3.70 times improved from the Q1 of 2022. CTE REIT's indebtedness ratio of 40.7% was broadly in line with last quarter. With the current interest rate environment expected to remain elevated for at least the balance of the year, we're pleased to be presently insulated from refinancing risk as we have no debt scheduled to mature until 2024 and no public unsecured debentures coming due until 2025. Our liquidity remains strong with $135,000,000 available through our committed credit facility and a further $300,000,000 available on our uncommitted facility with Canadian Tire.

Speaker 3

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

Operator

Call. Thank you. We ask that you limit yourself to one question and one follow-up. There will be a brief pause while participants register for questions. We thank you for your patience.

Operator

Our first question is from Lorne Karlmar from Desjardins. Please go ahead.

Speaker 1

Thanks. Good morning, everyone, and congrats on another solid quarter. Quick one from me. There is a little bit slower on the investment activity this quarter. Was that just a matter of timing?

Speaker 1

Or are you guys expecting a slower year just given the broader market volatility? Good morning, Lauren. No, I wouldn't read too much into it. I think it's somewhat seasonal in nature in terms of how we schedule the projects. Canadian Tire certainly remains committed to their better connected strategy.

Speaker 1

If you recall, component of that was investing $1,200,000,000 in the store and supply chain networks and improving the real estate. So we're still optimistic that the Pipeline will remain robust. Obviously, the lead quarter is where there's more or less to announce and we just have to be a bit of a quieter quarter. All right. That's all for me.

Speaker 1

Thank you. Thank you.

Operator

Thank you. Following question is from Himanshu Gupta from Scotiabank. Please go ahead.

Speaker 4

Thank you and good morning.

Speaker 1

Good morning.

Speaker 4

Yes. So just on the IFRS valuation, I mean, do you think the impact of higher debt financing is now Fully reflected on your discount rates or terminal cap rates, where it's been almost a year since we started seeing the spike in the bond yields?

Speaker 1

Certainly an interesting question. I can't say for certain. I mean, we've seen pricing move a little. Obviously, retail has been a little less impacted than some other asset classes, which we saw positive leverage dynamics impacting our sector, which I think is a good thing and has fared us well. To the extent we see more transactions, I think the last year has still been pretty quiet on a relative basis.

Speaker 1

That could prove out to have further impacts on valuation, but that obviously remains to be seen. So from our perspective, we think we're We're tracking to market at this point. Where market goes, obviously, it's uncertain.

Speaker 4

Fair enough. And are you seeing like return of transactions in the I mean, it's been a slow second half. Are things finally picking up given that you're seeing some kind of stability in 10 year and 5 year as well?

Speaker 1

I would say it's been really lumpy. I mean, a lot of fits and starts, some things that have been marketed unsold, some things that have gone through, The couple of transactions that we believe are in progress that we're following because I think they'll be They'll demonstrate kind of where the market is sitting for certain quality retail assets, but certainly not completed as of yet. So It's choppy.

Speaker 4

Fair enough. Okay. Thank you. And then just turning to Calgary distribution center, First of its kind, I think mentioned by unit 0 carbon building. Are these building getting a red premium over the traditional buildings out there.

Speaker 4

I mean, just getting a sense of the market there.

Speaker 1

Yes. We've talked to that on past calls, Manju. There was a bit of a premium that we received and really what that worked out to be equal to was the utility cost savings that we were able to pass along to the tenant. I don't think there's necessarily a premium for the cachet of being a tenant in a net zero building. I think people are still focused on Keeping occupancy costs as low as possible, but I think it is gaining importance to users, especially Our feeling though is the building is more valuable from a cap rate or discount rate perspective, from a terminal cap rate perspective.

Speaker 1

For the fact that it is net zero, we think there are buyers out there that would pay a premium forward and I think there's also some element of future cost avoidance that could play into the valuation. So The combination of the slightly higher rent and the lower terminal cap rate certainly had an impact on our underwriting.

Speaker 4

Thank you. That's helpful. Last question is, I mean, obviously, you announced a distribution hike, so congrats on that. Any thoughts on buyback as well? I mean, the current price is below your book value.

Speaker 4

Is that also becoming a priority here on the buyback side?

Operator

You mentioned

Speaker 3

lastly, I think for the NCIB, really it's opportunistic for us. So I think Probably not at the current levels where we are. I mean, we continue to watch things every day. And if things get to a certain point, we could be in the market, but I don't think we're there today.

Speaker 4

Got it. Okay. Thank you. And I'll turn back. Thank you.

Operator

Thank you. Our following question is from Tal Woolley from National Bank Financial. Please go ahead.

Speaker 5

Hi, good morning.

Speaker 1

Good morning.

Speaker 5

I'm just A lot of your peers who have sort of gotten more into mixed use development have effectively Published a density estimate or pipeline that tries to give some sort of Shave and dimension to the development opportunity within their portfolios. Is that something you envision CTE going past CTE going down anytime soon?

Speaker 1

I think internally we've done our own kind of scrub of the portfolio and where we think density opportunities are. I'm not sure that we've On the exact amount of density that could be built. I mean, you'll have to recall that our urban sites have operated Canadian Tire stores on them with long term leases and renewal options. So we've always said we don't have a mixed use residential development program, but that doesn't mean we shouldn't be investigating how to surface embedded value through the possibility of seeking those density permissions and working with me entire to determine if there might be a path. So I don't think we'll be publishing our density potentials in the near future because it's still a work in progress and probably a longer term project for us, but certainly we also have great urban sites.

Speaker 1

I mean about 45% of our portfolio would be in Vektom. We have a lot of sites that are adjacent to subway infrastructure and transit. And certainly, we are Commencing the work to think our way through what they could be and how we might get there, but I think it's a longer ways away for us.

Speaker 5

Okay. And then last week, Leon's Group announced the potential for them to spin out REIT about 5,200,000 Square Feet. I'm just wondering like Strategically, is that like the type of transaction that CTE REIT would ever consider? I don't mean specifically, Leon, but if there were another retailer out there that maybe wasn't getting credit for the value of the real estate that they were owning that you could structure a relationship such that The properties could be bended into maybe an affiliated partner retail REIT.

Speaker 1

I mean, I think the comment I would make on that Tal is we're always mindful of the opportunity set out there and we'll evaluate each and every one of them as appropriate. I think it's great that there could be another net lease REIT out there to prove out how undervalued we are on a multiple basis, especially in relation to our peers in the U. S. Certainly, there's a lot of opportunity and a lot of interest and the net lease sector is still commanding a premium from a pricing perspective. So The more data points, the better for us.

Speaker 5

Okay. Thanks very much. I'll leave it there. Thank you.

Operator

Thank you. Our following question is from Sam Damiani from TD Cowen. Please go ahead.

Speaker 6

Thanks and good morning everyone. Just wanted to start off by circling back on the fair values. Looking at the discount rates and terminal cap rates year over year. It looks like they're up less than 10 basis points. Just wondering if you could maybe shed some light On how that how you sort of triangulate that with the market cap rates we see out there and any big differences between the retail the industrial properties within the portfolio.

Speaker 1

Yes, I mean, I could try to take that, Sam. I mean, we've obviously have our fair value process in place and we benchmark ourselves As much data and market based transactions as we can get our hands on. So what we're reporting reflects what we're seeing out there. We disclosed this quarter that's a contributor to the small tick up in rates as it relates to our valuation. This quarter was related to our industrial portfolio.

Speaker 1

We have long dated leases in our industrial assets. Obviously, what we're seeing in the industrial transaction market is short duration leases where people think they can get at the rents and mark to market are commanding a bit more of a premium relative to long dated leases. So that's That's the movement or the contributor to the movement this quarter. But we were pretty conservative over the last number of years in terms of Writing the cap rates down, and I think we've treated the way back up similarly. So on a cumulative basis or an overall differential basis.

Speaker 1

I don't think the swings have been as volatile in our portfolio.

Speaker 6

That makes sense. That's kind of the answer I was expecting. And just on the rent bumps In the quarter, Leslie, you talked about those and I think maybe the line at least for me cut out a little bit. Was it $1,800,000 of rent bumps in the quarter, is that what you said?

Speaker 3

Yes, Sam. It was about $1,800,000 was the contribution for the same store increase to NOI.

Speaker 1

Okay. It's

Speaker 3

the total increase in NOI, yes.

Speaker 6

Okay. And what portion of the overall Canadian Tire leases saw their rents bump in the Q1 versus what we would bump in the latter

Speaker 1

part of the

Speaker 3

year. I don't have that split to hand, Sam.

Speaker 6

Okay. Maybe just on the debt stack, if I'm not mistaken, the weighted average interest rate actually declined 9 basis points from year end. What would have caused that?

Speaker 3

1, we had in the quarter, we We paid the mortgage against Canada Square property, the Canada Square property that had a little bit of a higher weighted average interest rate than the other ones, that probably would be the one little bit of a contributor. Then the other piece is really just the probably the weighting of what we have drawn on the line versus rest of the portfolio that have remained stable.

Speaker 6

Okay. And what remaining NOI is coming in from Canada Square that would fall away Eventually over

Speaker 3

time. As I mentioned before, I think the change in the leases for Canadian Tire sort of fell away beginning January. There are some smaller tenancies in our 2,200 Yonge Street building over, I would say, the course of 'twenty three and into 'twenty four, as we approach development that, that will fall away. But it's a pretty small number relative to the other pieces at this point. So those will fall away in increments of 1500 square feet over time in bits and pieces over the next probably 18 months.

Speaker 1

And we hopefully some of that would be offset by the re leasing of the vacant

Speaker 6

Okay. Okay, perfect. Last one for me is just on the capitalized interest that did jump a bit this quarter. Is that, I guess, the new run rate, obviously, the Transfer to PUD for from was $2,190,000 is I guess the reason? Is that a good run rate going forward?

Speaker 3

I think that's pretty fair, Sam. Year over year, obviously, the run rate had a different interest rate a year ago, and so we're still seeing a little bit of that as you

Speaker 6

look quarter over quarter as well.

Speaker 1

Okay. That's it for me. Thank you.

Operator

Thank you. Our following question is from Palmer Beer from RBC Capital Markets. Please go ahead.

Speaker 7

Thanks. Good morning. Apologies if this was answered already because my line got disconnected. But just with With respect to capital allocation, I think you mentioned some transactions in the market. Can you just talk about what you are seeing from an investment Endpoint, are there opportunities out there?

Speaker 7

Or is capital mainly earmarked for developments?

Speaker 1

I'd say it's slow in terms of seeing marketed opportunities. I think for us as in past years, we've always seen the best potential opportunities to transact with 3rd parties being more relationship based and off market. So we continue to engage in dialogue with others For net lease assets or Canadian Tire anchored properties. I think we still like Allocating the majority of our capital towards the entire related development. Obviously, that is a big bang for our buck, and We view that as low risk development where we can allocate capital and get a return fairly seamlessly and quickly.

Speaker 1

And obviously with the entire store and supply chain program, there's more than ample opportunity for us to do so over the near term. So I think that's where you'll probably see the majority of our capital being allocated through the course of this year.

Speaker 7

Got it. And just on the transactions that you did What types of retail are these? Are they sort of traditional power center type, grocery anchored or net lease type assets or what can feature.

Speaker 1

There's been a bunch of there's been some grocery anchored stuff, some shadow anchored stuff, some inbox quality product, I would say. It's actually kind of across the country. And I think it seems to be mostly private buyers who are on the other side.

Speaker 7

And any noticeable shift in pricing that maybe is more notable to you in terms of relative to Say over the last 12 to 18 months from a cap rate standpoint?

Speaker 1

No, not really. A couple of them have been at lower cap rates than I would have Some of those are on the more urban side. And I would say they may have redevelopment potential, but it would be much longer term, but people are still willing to accept a lower yield for that future upside. But no, nothing too out of the ordinary.

Speaker 7

Thanks very much. I'll turn it back.

Speaker 1

Thank you.

Operator

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

Speaker 1

Thank you, Maude, and thank you all for joining us today. We look forward to welcome you to our Annual Meeting of Unitholders, which we we'll conduct virtually later this morning. We hope that you will be able to listen in and we look forward to speaking with you again in August after we release our Q2 results.

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CT Real Estate Investment Trust Q1 2023
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