CT Real Estate Investment Trust Q4 2023 Earnings Call Transcript

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Provided by Quartr
February 14, 2024

There are 5 speakers on the call.

Operator

Good morning. My name is Daniel, and I will be your conference At this time, I would like to welcome everyone to CT REIT's Q4 2023 Earnings Results Conference Call. 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 C.

Operator

T. REIT Jody Spiegel, Senior Vice President, Real Estate of C. T. REIT and Leslie Gibson, Chief Financial Officer of C. T.

Operator

REIT. Today's discussion may include forward looking statements. Such statements may be 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 C.

Operator

T. Reid's public filings for a discussion of these risk factors, which are included in their 2023 MD and A and 2023 AIF, which can be found on CTE REIT's website and on SEDAR. I would now like to turn the call over to Kevin Salzberg, President and Chief Executive Officer of CTE REIT. Kevin?

Speaker 1

Thank you, Daniel. Good morning, everyone, and welcome to CTE REIT's quarterly investor conference call. Despite a challenging macroeconomic backdrop, CTE delivered a solid 4th quarter performance to cap off yet another strong year consistent and growing results. 2023 was filled with accomplishments, key milestones and a memorable anniversary, and I'm happy to be able to recap our from the past year with you today. 1st and foremost, I am very pleased with the strong growth rates that we achieved across our key financial metrics in 2023.

Speaker 1

For the full year, we achieved a 4.6% increase in net operating income, 2.5% growth in same store NOI, 4.3% growth in same property NOI and an impressive 4.9% growth in AFFO per unit. These results are a clear demonstration of how the successful execution of our strategy has translated into strong financial performance during the year. This growth in earnings once again contributed to CTE REIT's ability to announce yet another increase in its distributions earlier this year or earlier last year as we have done every year since our initial public offering in 2013. At year end, our payout ratio on an annual basis stood at 73.4%, a reduction of over 100 basis points relative to year end 2022. With respect to our portfolio growth, We delivered an impressive 839,000 square feet of new gross leasable area through our active development pipeline and invested over $150,000,000 This included our new 350,000 Square Foot Net Zero Certified Distribution Center in Calgary, Alberta that we completed this past quarter.

Speaker 1

Canadian Tire has now taken occupancy and will begin operating out of the facility this quarter and rent commenced on January 1, 2024. Other notable completions in 2023 included new third party retail located at our shopping center in Moose Jaw, Saskatchewan 2 new Canadian Tire store developments in Sherbrooke, Quebec and Toronto, Ontario and 9 Canadian Tire store expansion projects. From a balance sheet perspective, we repaid all outstanding amounts owing on our line of credit after raising $250,000,000 in a successful unsecured debenture offering in November. As such, at year end, we had no variable rate debt outstanding and our balance sheet is in excellent shape with our only debt maturity in 2024 related to 1 series of Class C LP units that comes due mid year. Through the course of 2023, we repurchased over 450,000 CTE REIT units through our NCIB facility at a weighted average price of $13.99 per unit for a total cost of just over $6,300,000 And as we described on our call last quarter, we also successfully celebrated CT REIT's 10 year anniversary since going public and our tremendous track record that we have established since our IPO.

Speaker 1

C2REIT's unwavering dedication to long term success remains our primary focus. As Jody will relay, our operational performance this past year reflects the strength of our assets as well as the health of the retail leasing market and our portfolio remains nearly fully We continue to proactively manage our weighted average lease term and to work towards driving rental growth by engaging in new leasing activities renewal discussions with both Canadian Tire and our 3rd party tenants. From an investment perspective, our development pipeline has been a great source of growth and opportunity for and we were pleased to announce an attractive new redevelopment project yesterday. We also continue to look for additional opportunities that suit our strategy and fit within our financial parameters. We work hard not to take undue risk and have improved our balance sheet and debt metrics in order to deal with an ever changing financial backdrop, provide flexibility and capitalize on those investments we feel are best suited to our long term growth.

Speaker 1

I want to take a moment to thank the whole CTE REIT team for their efforts, hard work and dedication over this past year. I am very pleased with how 2023 turned out and we are being purposeful about our prospects as we chart our course for 2024. And with that, I will now pass it over to Jody to walk you through an overview of our investment leasing and development activities and then Leslie will speak to our financial results. 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. This new investment relates to the redevelopment of an existing enclosed mall located in Winkler, Manitoba. If you recall, we purchased property on attractive terms in 2016 and expanded the freestanding Canadian Tire store on-site in 2018. We have now entered into a lease with an additional new anchor tenant that will allow us to partially demall the balance of the property and complete the asset strategy for this property that we devised at the time it was acquired.

Speaker 2

It is anticipated that this $9,100,000 investment will be completed by the end of 2025 at a cap rate of 9%. In Q4, we successfully completed 7 projects totaling $96,000,000 which added an additional 455,000 square feet of GLA to the portfolio. The projects included expanding 4 existing Canadian Tire stores located in Napanee, Ontario In Vermeer, British Columbia and Sydney and Bedford, Nova Scotia. Furthermore, we developed a third party pad at one of our properties in Hamilton, Ontario, as well as entered into a ground lease with a 3rd party in Kingston, Ontario to enable the future development of a new Canadian tire store. Lastly, as Kevin noted, we completed our 1st net zero certified distribution center in Calgary, Alberta and turned over occupancy of the building to Canadian Tire.

Speaker 2

As you can see, there was significant activity to conclude the Q4 and wrap up a very busy year. At the end of the quarter, C. G. REIT had 18 properties that were at various stages of development. These development projects represents a total committed investment of approximately $258,000,000 upon completion, dollars 86,000,000 of which has already been spent and $43,000,000 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 approximately 571,000 square feet to the portfolio, 98.8 percent of which has been pre leased at quarter end. We also continue to focus on our existing portfolio of high quality net leased assets. In 2023, we successfully extended 28 Canadian Tire store leases and over 310,000 square feet of third party leases At a 10.3% blended weighted average renewal spread, our portfolio remains nearly fully occupied at 99.1%. As at the end of Q4, the weighted average lease term for our portfolio was 8.4 years, which remains one of the longest in the sector. With that, I will turn it over to Leslie to discuss our financial results.

Speaker 2

Leslie? Thanks, Jody, and good morning, everyone. As Kevin highlighted, we were pleased with the solid results delivered by The REIT again this quarter and for the full year. Underpinning the solid growth, our 4th quarter NOI grew by $4,800,000 or 4.4 percent as a result of same store NOI growth of $2,300,000 or 2.2 percent as well as the contribution from intensifications, acquisitions and developments, which contributed a further $2,500,000 to NOI growth. Drivers of the same store NOI increase contractual rent escalations of $1,600,000 primarily being the 1.5% average annual rent escalations included in the Canadian Tire leases, with the balance of the growth primarily from the continued recovery of capital expenditures and interest earned on the unrecovered balance, which contribute approximately $900,000 to NOI in the quarter.

Speaker 2

Same property NOI for the quarter was $3,800,000 or 3.6% higher due to the increase in same store NOI and a further $1,500,000 from intensifications completed in 20222023. In addition, acquisitions developments completed in 2022 and 2023 added a further $900,000 to total NOI. In the Q4, excluding fair value adjustments, G and A expense as a percentage of property revenue was 2.6%, which is slightly less than the same period in the prior year. The same metric for the full year was 2.9%, which was the same as 2022. With respect to the fair value adjustment, the decrease of approximately $39,300,000 in the quarter was mainly driven by changes in underlying investment metrics for a number of retail properties as well as an industrial property within our portfolio.

Speaker 2

However, these decreases were partially offset by positive changes to underlying cash flow assumptions related to the retail portion of our portfolio. For the full year, the fair value adjustment was a decrease of $78,600,000 for the same reasons as the Q4 changes. Diluted FFO per unit in the quarter was up 2.5 percent to $0.3300 compared to $0.32 in the Q4 of 2022. This increase was primarily driven by the growth in net operating income, partially offset by increased interest costs on the public debentures and an increase in the interest expense related to the credit facilities due to higher utilization and higher cost of borrowing. For the full year, Diluted FFO per unit was up 3.5 percent to $1.38 Growth in AFFO per unit on a diluted basis was strong for the same reasons, coming in at $0.303 up 3.8 percent compared to Q4 of 2022.

Speaker 2

On a full year basis, diluted AFFO per unit increased to $1.23 representing growth of 4.9% versus 2022. Distributions in the quarter increased by 3.5% compared to the same period in the previous year. As a result, the AFFO payout for Q4 was 74.3%, which is unchanged from the same period last year. Additionally, in Q4 2023, we continued repurchasing units through our NCIB facility, buying back approximately 3,000,000 units of our units at an average price of $13.50 Turning now to the balance sheet. Our interest coverage ratio was down slightly to 3.6 times for the current quarter compared to 3.72 times in the comparable quarter of 2022, mainly driven by the growth in interest expense and other financing charges outpacing the growth in EBIT fair value.

Speaker 2

The Adeptinist to EBIT fair value ratio was 6.83 times, comparable to the 6.86 times in Q4 of 2022. We remain very comfortable with where our debt metrics are. The issuance of the Series I senior unsecured debentures as well as a decrease in the fair value of our investment properties took our indebtedness ratio up slightly to 41.4 percent from 40.7% in the same quarter of the last year. Our indebtedness ratio continues to be within our target range. And considering the current macroeconomic backdrop and interest rate environment, we are pleased with the strength of our balance sheet.

Speaker 2

And lastly, with respect to liquidity, at year end, we had $21,000,000 of cash on hand and $297,000,000 remains available through our committed credit facility And a further $300,000,000 is available on our uncommitted facility with Canadian Tire Corporation. And with that, I will turn the call back to the operator for any questions.

Operator

Thank you. Our first question comes from Sam Damiani with TD. Your line is now open.

Speaker 3

Thank you. Good morning, everyone.

Speaker 2

Good morning.

Speaker 3

First question is just on new investments. Obviously, nice to see the redevelopment of Winkler happening. I guess COVID kind of delayed that. Great. You got a good new tenant coming in as well.

Speaker 3

But just wondering with the quantity of the new investments relatively low and also the absence of Canadian Tire being involved, A bit of an anomaly or is this an indication that the growth rate and the trend of new investments is going to be maybe a little bit slower than it was for the near term?

Speaker 1

Sure. I can take that, Sam. So the pace has certainly slowed over the last quarter or 2. As you know, historically, this has always ebbed and flowed a little. So we seem to be in a bit of an ebb right now.

Speaker 1

Obviously, happy to have delivered over 800,000 square feet of new space last year, more than half of it in this past quarter. So Obviously, we're coming off a big pipeline. A lot of that new space was delivered for Canadian Tire as part of their better connected strategy that we've been a part of. We obviously continue to discuss projects and opportunities with Canadian Tire on an ongoing basis. As we relayed last quarter though, there's a number of new projects that have been deferred or delayed given the current environment, which I think is prudent.

Speaker 1

So I think that's what you're seeing as it triangulates back to our new investment activity. And as I said, things ebb and flow. And At some point, I think we'll get back to our baseline.

Speaker 3

Okay. That's helpful. And just on the 3rd party acquisition side, that's also been Somewhat quiet in recent quarters. If the outlook is for interest rates to at least be less volatile and eventually start to moderate a bit. Do you see are you seeing better opportunities to make third party acquisitions?

Speaker 1

Quality assets are still quite expensive relative to cost of funds. I think that's what we're seeing. I think there's an expectation That will return to the long term average or get closer to it at some point, with bond yields potentially going down at some point in the back half of the year, Maybe that happens sooner than later, but at this point, it's hard to find opportunities based on our cost of funds that we can make sense of. Okay. Thank you.

Speaker 1

I'll turn it back.

Operator

Thank you. Thank you. One moment for our next question. And our next question comes from Lorne Kalmar with Desjardins. Your line is now open.

Speaker 4

Good morning. I was up at Yonge and Ag and it looked like the construction on the on the corner there is looks to be getting close to completion. I was wondering if you have any more clarity in terms of the timing on Canada Square given the progress at that little node there?

Speaker 1

Yes. As an occupant of the Canada Square office complex here. It's great to have the intersection reopened and some of the staging removed. Unfortunately, I'm not sure below ground it's achieving the same level of progress. We have no specific further updates From the consortium or related to the LRT, our hope and I think what they've sort of communicated is Maybe by the end of the year.

Speaker 1

So, nothing new to say specifically on our ability to actually progress with the redevelopment.

Speaker 4

Okay. And then maybe just With Canada Square, I know there's some de leasing going on there and some leases that may or may not have been renewed. Are we through the majority of that de leasing or do you guys expect to be a little bit of hit on NOI as we progress through 2024?

Speaker 2

Lauren, it's Leslie. The vast majority of all that has gone through. There will be, I would say, a few odds and sods going through. There's a few tenants that we were able to keep for sort of month to month and a little bit longer as the project delays. But I would say that the de leasing of the last little bit of the 2,200 building, particularly closer to Yonge and Eglinton is fairly immaterial to the overall scheme of things.

Speaker 4

Okay, lovely. I will turn it back. Thank you.

Speaker 1

Thanks.

Operator

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

Speaker 1

Thank you, operator, and thank you all for joining us today. We look forward to speaking with you again in May after we release our Q1 results.

Operator

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

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Earnings Conference Call
CT Real Estate Investment Trust Q4 2023
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