CT Real Estate Investment Trust Q1 2024 Earnings Report

CT Real Estate Investment Trust EPS Results

• Actual EPS: C$0.35
• Consensus EPS: C$0.34
• Beat/Miss: Beat by +C$0.01
• One Year Ago EPS: N/A

CT Real Estate Investment Trust Revenue Results

• Actual Revenue: $144.22 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

CT Real Estate Investment Trust Announcement Details

• Quarter: Q1 2024
• Date: 5/6/2024
• Time: N/A
• Conference Call Date: Tuesday, May 7, 2024
• Conference Call Time: 8:00AM ET

CT Real Estate Investment Trust (TSE:CRT.UN) is an unincorporated real estate investment trust that invests in retail properties across Canada. The most significant portion of properties are located in Ontario, followed by Quebec and Western Canada. The trust generates the vast majority of revenue from leasing its properties to Canadian Tire Corporation, which operates the Canadian Tire retail stores. The trust's portfolio primarily consists of properties anchored by a Canadian Tire retail store, in addition to retail properties not anchored by Canadian Tire, distribution centres, and mixed-use commercial property.

CT Real Estate Investment Trust Q1 2024 Earnings Call Transcript

Key Takeaways

• NOI grew 5.6%, same property NOI rose 4.1%, and diluted AFFO per unit increased 4.8% in Q1 2024, demonstrating resilient financial performance.
• The Board approved a 3% distribution hike—its 11th since IPO—for a 9.25% yield on initial investment, highlighting consistent unitholder returns.
• The REIT’s development pipeline encompasses over 740,000 sq ft of new gross leasable area with 93.8% pre-leased, backed by $287 million in committed investment.
• Portfolio occupancy stood at 99.5% with a weighted average lease term of 8.2 years, and the balance sheet shows low leverage, strong liquidity, and only one debt maturity in 2024.
• Market uncertainties persist as muted economic growth, above-target inflation, and high interest rates continue to constrain property transactions and development timelines.

Presentation

[Operator]

Good morning. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to CT REIT's Q1 2024 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star one one on your telephone keypad. To withdraw your question, please press star one one. The speakers on the call today are Kevin Salsberg, President and Chief Executive Officer of CT REIT; Jodi Shpigel, Senior Vice President, Real Estate; and Lesley Gibson, 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 could cause actual results to differ materially from such statements. Please see CT REIT's public filings for discussion of these risk factors, which are included in their 2023 MD&A and 2023 AIF, which can be found on CT REIT's website on SEDAR. I will now turn the call over to Kevin Salsberg, President and Chief Executive Officer of CT REIT. Kevin?

[Kevin Salsberg, President and CEO at CT REIT]

Thank you, Justin. Good morning, everyone, and welcome to CT REIT's First Quarter Investor Conference Call. I thought I would start the call with a little color with respect to what we are seeing in the market currently. With respect to the economy at large, growth remains muted. Inflation has tempered but is still above the target rates set by our central bank, and housing affordability continues to become further out of reach for average Canadians, driven by high levels of immigration over the last few years, elevated construction costs, and excessively long time frames that are required to complete new development. For some time now, market prognosticators have been considering when interest rate cuts will begin and by how much we should expect rates to decline. The answers to these questions continue to seem uncertain and something to be determined at some point in the future.

[Kevin Salsberg, President and CEO at CT REIT]

A lack of clarity, driven by the aforementioned factors, continues to constrain the property markets, and transaction volumes remain relatively muted. Fundamentals for retail real estate, however, have been strong, as increased population translates into new customers for our tenants, and the high cost to build, coupled with the conversion of commercial assets into residential development sites, have fueled a supply-demand imbalance that has favored landlords of late. Despite the turmoil of this mixed market, CT REIT continues to perform, and our Q1 2024 results are yet another example of the stability, reliability, and growth that we have delivered to date, irrespective of market conditions. From our successful IPO, through our initial phase of growth, to the COVID-19 pandemic and the more recent challenging economic conditions, CT REIT has proven its resilience time and again.

[Kevin Salsberg, President and CEO at CT REIT]

In the first quarter, our durability and performance were once again on full display, and I'm pleased to report that we achieved growth in net operating income, or NOI, of 5.6%, growth in same property NOI of 4.1%, and growth in diluted AFFO per unit of 4.8%. All in all, a great start to the year. On the back of these strong results, we are pleased to announce that for the 10th straight year, our board of trustees has approved yet another increase to our distributions. The 3% increase is the 11th since our IPO and represents a cumulative increase of 42.3% over that time, which is a true testament of our success and stability over the last 10+ years.

[Kevin Salsberg, President and CEO at CT REIT]

An investor who has been with us since our inception would now be enjoying a 9.25% yield on their initial investment based on our new distribution rate. Our future continues to look bright. We have over 740,000 sq ft of gross leasable area in our development pipeline, comprising one new Canadian Tire store development, 16 Canadian Tire store expansions, one redevelopment, and one site intensification for third-party tenants. With respect to our balance sheet, our low leverage, strong coverage ratios, and liquidity position us well to manage our way through this higher-for-longer rate environment.

[Kevin Salsberg, President and CEO at CT REIT]

We only have one debt maturity this year, a CAD 200 million series of Class C LP units that Canadian Tire holds, that will be reset effective June 1st, 2024, for an additional five years at a rate of 5.43%, and we have no other upcoming debt maturities until midway through 2025. The strength of our balance sheet, the visibility of our cash flows, and our embedded growth all make CT REIT a very attractive option for investors as we continue to navigate these choppy waters. I'll now turn it over to Jodi and Lesley to provide some additional details on the quarter, our results, and our investment, leasing, and development activities. Jodi?

[Jodi Shpigel, SVP, Real Estate at CT REIT]

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 expansion of an existing Canadian Tire store located in Donnacona, Quebec. It is anticipated that this CAD 11.1 million investment will be completed by the end of 2025 at a going-in yield of 7%. In Q1, we continued to focus on our existing development pipeline. Building on the significant progress made in 2023, the REIT currently has 20 projects at various stages of development, with three of these expected to be completed this year and most of the balance expected to be completed in 2025 and 2026.

[Jodi Shpigel, SVP, Real Estate at CT REIT]

These developments represent a total committed investment of approximately CAD 287 million upon completion, CAD 96 million of which has already been spent, and CAD 52 million of which we anticipate will be spent in the next 12 months. Once built, these projects will add in total incremental gross leasable area of approximately 742,000 sq ft to the portfolio, 93.8% of which has been pre-leased at quarter end. During the quarter, we extended one Canadian Tire store lease while maintaining a nearly fully occupied portfolio, with our occupancy rate now reaching 99.5%. As at the end of Q1, the weighted average lease term for our portfolio was 8.2 years, which remains one of the longest in the sector. With that, I will turn it over to Lesley to discuss our financial results. Lesley?

[Lesley Gibson, CFO at CT REIT]

Thanks, Jodi, and good morning, everyone. As Kevin highlighted, we are pleased with the strong results delivered by the REIT again this quarter. Reflecting on the solid growth within the portfolio, same-store NOI grew 3.0%, or CAD 3.2 million. Drivers of the same-store NOI increase were contractual rent escalations of CAD 1.4 million, primarily being the 1.5% average annual escalations, including the Canadian Tire leases, with the balance of the growth primarily from continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately CAD 1.9 million to NOI in the quarter. Same-property NOI grew by 4.1%, or CAD 4.4 million, compared to the prior year. This was due to the increase in the same-store NOI noted, as well as from the intensifications completed in 2023.

[Lesley Gibson, CFO at CT REIT]

Overall, in the first quarter, NOI grew by a healthy 5.6%, or CAD 6.1 million, driven by the increase in same-property NOI and the completion of development projects in 2023. In the first quarter, excluding fair value adjustments, G&A expense as a percentage of property revenue was 3.7%, which is higher than the same period in the prior year of 3.0%. This increase was primarily due to the timing of the deferred income tax provision, amounting to CAD 503,000, which is expected to reverse over the balance of the year. The fair value adjustment of CAD 23.6 million in the quarter was mainly driven by contractual rent escalations, increase, and leasing activity within the portfolio during the period. Investment metrics for the portfolio remained unchanged relative to the 2023 year end.

[Lesley Gibson, CFO at CT REIT]

In the quarter, diluted FFO per unit was up 3.4% to CAD 0.331, compared to CAD 0.320 in the first quarter of 2023. This growth can be primarily attributed to the intensifications and developments completed during 2023 and the increased recovery of capital expenditures and interest earned on the unrecovered balance, as well as contractual rent escalations from Canadian Tire stores, other CTC banners, and third-party tenant leases, partially offset by higher interest costs. The growth in AFFO per unit on a diluted basis was strong for the same reasons, coming in at CAD 0.308, up 4.8% compared to the Q1 of 2023. Distributions in the quarter increased by 3.5% compared to the same period in the previous year.

[Lesley Gibson, CFO at CT REIT]

As Kevin already mentioned, we were pleased to announce a 3% increase to the monthly distribution, effective with the July 2024 payment to unitholders. This is the 11th such increase, and we're pleased to have been able to raise our distribution at least once per year since IPO. AFFO Payout Ratio for Q1 was 73.1%, slightly lower than the payout ratio of 73.8% in the same period last year. This decrease was attributed to the growth in the diluted AFFO per unit, outpacing increase in the distribution per unit. In Q1 2024, we continued repurchasing a modest amount of units through our NCIB facility, buying back approximately CAD 3 million of our units below the intrinsic value at an average price of CAD 13.92. Now, turning to the balance sheet.

[Lesley Gibson, CFO at CT REIT]

Our interest coverage ratio was 3.57x for the current quarter, compared to 3.70x in the comparable quarter of 2023. The decrease was mainly driven by the increase in interest expense and other financing charges, outpacing the growth in the EBIT fair value. The indebtedness to EBIT fair value ratio improved to 6.64x, down from 6.83x in Q1 of 2023, primarily because the growth of EBIT fair value outpaced the increase in indebtedness. Our indebtedness ratio was up slightly to 41.4% from 40.7% in the same quarter of last year, due to the issuance of the Series I Debentures, partially offset by an increase in fair value of the investment properties.

[Lesley Gibson, CFO at CT REIT]

Our indebtedness ratio continues to be within our target range, and considering the current macroeconomic backdrop and interest rate environment, we're pleased with the strength of our balance sheet. Lastly, with respect to liquidity, we ended Q1 with CAD 50 million of cash on hand and CAD 297 million that remains available through our committed credit facility. A further CAD 300 million is available on our uncommitted facility with Canadian Tire Corporation. With that, I will turn it back to the operator for any questions.

[Operator]

And thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then one, one on your telephone keypad. To withdraw your question, press star, then one, one again. We'll pause for just one moment to compile the Q&A roster and one moment for our first question. And our first question comes from Sam Damiani from TD Cowen. Your line is now open.

[Sam Damiani, Analyst, Real Estate at TD Cowen]

Thank you. Good morning, everyone. First question, I guess, is probably one I've asked before, which is just what's your vision for growth over the next decade, given the smaller pool of Canadian Tire and third party-owned real estate that could come available or be shaken loose? And what is the REIT's appetite for materially diversifying the tenant base beyond Canadian Tire going forward?

[Kevin Salsberg, President and CEO at CT REIT]

Yeah, good morning, Sam. You know, I'm not sure I would characterize the pool as shrinking or smaller. You know, I think we're at a point in time where both the REIT and Canadian Tire are being a little bit more prudent with our capital allocation and spend. There's projects that we're still interested in pursuing, but they've been perhaps deferred or delayed a little bit, just in the interest of seeing where the market takes us. Still think there's a huge amount of opportunity pursuing those opportunities that we surface through our relationship with Canadian Tire. You know, we are always opportunistic about what's out there in the market and looking to add to our net lease portfolio, unrelated to Canadian Tire.

[Kevin Salsberg, President and CEO at CT REIT]

But, you know, pricing relative to cost of funds, for the last little while have been, the disconnect's just been too large. And then in terms of diversification, I think, you know, as you've seen in the first decade, it's something that happens, almost naturally in the sense that as we buy or develop more things that have components that are Canadian Tire related, there, there's also often third-party tenancies within those, those assets. But that's obviously- that's often offset by the amount of Canadian Tire-related activity that we've done. So on, on percentage terms, hasn't really moved the needle all that, all that much. So certainly could ebb and flow, as time goes on, up or down. But, diversification, in and of itself, is not a current strategic objective for the REIT.

[Kevin Salsberg, President and CEO at CT REIT]

We have continued to lean into the opportunities that we glean through our relationship with Canadian Tire, and over time, if those opportunities change, we will certainly be open to a wider mix of tenancies. But I think Canadian Tire, for the foreseeable future, will make up the vast majority of the REIT's portfolio.

[Sam Damiani, Analyst, Real Estate at TD Cowen]

That's great. I really appreciate that. Very helpful. I guess, just on Canadian Tire-related growth, like, could you quantify the potential opportunity, you know, in the next three to five years? What kind of trajectory do you think is possible or range of trajectories are possible?

[Kevin Salsberg, President and CEO at CT REIT]

Well, a couple of years ago, when Canadian Tire came out with their, their Better Connected strategy, there was a pretty, pretty large capital envelope, that came along with that. You know, over a three to five-year period, call it. And we made pretty good headway, eating into that, that bucket. You know, our, our CapEx spend over the last three years has been slightly higher than our average, I would say. You know, in the go forward, I, I think it all depends when, you know, consumer spending sort of recovers. I think there is still a, a belief that Canadian Tire, over time, wants to improve their store and supply chain networks.

[Kevin Salsberg, President and CEO at CT REIT]

When I say improve, expand the size of their stores, bring it up to their current prototype, expand the availability of different fulfillment channels by online pickup in store, greater showrooming, all the things that we've talked about in the past. So I think it's a large opportunity set. I think it's just gonna take longer to effect. We still have a number of expansions we can do over time from Canadian Tire, probably. You know, we've estimated the pipeline there at 15 to 20 sites. You know, when we choose to work with Canadian Tire on trying to buy those assets, is market dependent.

[Kevin Salsberg, President and CEO at CT REIT]

And also, you know, where we are within our growth stage and our desire to allocate capital in a given year. So no specific guidance, there, but, those assets also remain available, for the REIT to consider purchasing over time.

[Sam Damiani, Analyst, Real Estate at TD Cowen]

Okay, great. And last one from me, just on the NCIB, it's been pretty, pretty steady, sort of programmatic approach over the last few quarters. Just wondering, is there an appetite to, you know, materially step up that, that activity to take advantage of the current publicly traded valuation?

[Kevin Salsberg, President and CEO at CT REIT]

I wouldn't say materially, Sam. I mean, that's something we've talked about in past quarters as well. Hard to consider the trade-off between supporting the units, showing the market we believe we're trading at too wide a discount to our net asset value. But also, we understand that our investors are really interested, actually, in us increasing our flow and increasing our liquidity, which is something we're also desirous of over the long term. So, I think what we've done is tried to take a modest approach to supporting our unit price, and that's, well, probably what you'll continue to see from us for the next couple quarters.

[Sam Damiani, Analyst, Real Estate at TD Cowen]

That's great. Thank you very much for answering those. Take care.

[Kevin Salsberg, President and CEO at CT REIT]

Thanks, Sam.

[Operator]

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

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Thanks. Good morning, everybody.

[Kevin Salsberg, President and CEO at CT REIT]

Good morning.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Just on the, I know you don't have a lot of lease maturities coming up in this year in 2025, but it looks like the majority of them are third party or non-CTC leases. I was just wondering, you know, given the strength you mentioned in retail, what type of lifts are you getting on the ones you've done so far and sort of expecting to get done on the remainder through 2025?

[Jodi Shpigel, SVP, Real Estate at CT REIT]

Good morning, it's Jodi. Just to answer your question, so we had a fair number of renewals this quarter that, as you noted, are third party, approximately 182,000 renewed. Roughly speaking, we're seeing low double-digit spreads on those renewals, and I think we can expect to see that continue just based on, you know, the supply-constrained market and the fact that, you know, tenants are looking to renew. So we're getting the benefit of that.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Okay. And then you'll have to forgive me because I don't remember exactly what the typical lift is on a CTC lease. But given, you know, the broader strength in the market, is there any room to push that beyond current levels when, you know, there's some chunkier renewals coming up in 2026 and beyond?

[Kevin Salsberg, President and CEO at CT REIT]

Yeah, Lorne, historically, you know, we've continued on the average 1.5% rent escalations that we enjoyed in the initial term through extension periods. You know, certainly the 1.5% as it relates to what is what we're seeing in the leasing market right now has been a hot topic for us, and something we've engaged with Canadian Tire in. You know, there's been a bit of a unique attribute to the first couple sets of renewals that we've had to deal with through 2023 and 2024, and that is, that they've been heavily skewed to smaller markets.

[Kevin Salsberg, President and CEO at CT REIT]

I think as we get into the 2025 and 2026 renewals, it's more of a, an even mix between, smaller markets and urban markets. Certainly, in those larger centers where we're seeing higher renewal spreads, that's something we'll be addressing with Canadian Tire.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Okay, so there might be some potential to see the lifts pick up a little bit?

[Kevin Salsberg, President and CEO at CT REIT]

Yeah, I mean, you have to also appreciate the 1.5% is the average over, you know, 29 or 20, you know, 25 million sq ft of-

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Mm-hmm.

[Kevin Salsberg, President and CEO at CT REIT]

Canadian Tire stores. So, you know, rolling over 5%, 6% a year, it will take some time for that average to move. But that doesn't mean it's not a worthwhile endeavor and something we're not gonna talk to Canadian Tire about.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Okay, great. And then I did notice, I think outside of the one you guys highlighted in the press release, there was another project, Winkler in Manitoba, I think that was added to the pipeline. I was just wondering if maybe you'd give a little more color on that project.

[Jodi Shpigel, SVP, Real Estate at CT REIT]

Yeah. So, as you know, Q4, we added Winkler, and this year we moved, added it to the PUD table. So that's a mall in Winkler, Manitoba. It's Canadian Tire-

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Oh.

[Jodi Shpigel, SVP, Real Estate at CT REIT]

-anchored, and there's an enclosed mall, and so the development relates to the enclosed mall portion of that property.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Right. Thank you. Thank you for the reminder. And then just last quick little one for me. The, you know, capped interest came down a little bit. I think that's probably not entirely unexpected. Is that sort of a good run rate going forward, given, you know, the CAD 52 million development spend over the next 12 months?

[Lesley Gibson, CFO at CT REIT]

Yeah, Lorne, it's Lesley. That probably is given where we expect developments and the development spend to go for the balance of the year.

[Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins]

Okay, great. Thank you so much for taking my questions. I'll turn it back.

[Kevin Salsberg, President and CEO at CT REIT]

Thank you.

[Operator]

And thank you. And one moment for our next question. And our next question comes from Pammi Bir from RBC Capital Markets. Your line is now open.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

Thanks. Good morning. Kevin, you mentioned, you know, deal flow is still limited and, you know, pricing is still disconnected. Can you maybe just talk about maybe what you have seen in terms of maybe what's come your way, maybe any transactions that you have looked at? What sort of pricing have you seen? And just curious, you know, what types of assets are these or even the vendor types. I know there's a lot in there, but just any additional color

[Kevin Salsberg, President and CEO at CT REIT]

Yeah.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

on the transaction side.

[Kevin Salsberg, President and CEO at CT REIT]

It's been a strange market, to be honest, Pammi. It's a little bifurcated right now. You know, you're seeing some assets that are out-of-favor trade. We've seen some office trades in the last quarter. You've seen a lot of interest still in grocery-anchored, essential need retail, but there's not a lot out there to buy right now. You know, multifamily is obviously still very active, probably, I would think, the most active of the asset classes. So, different pools of capital chasing different things, different, you know, buyer perspectives in terms of whether it's a good time to sell or not. You know, we've seen a couple of net lease sites that we've looked at, single tenant, I would say mid-market stuff.

[Kevin Salsberg, President and CEO at CT REIT]

But, you know, we've been surprised by the degree to which we've been off on pricing. You know, we have a view on risk and, you know, we're-- there are others who are looking at assets very differently. So, I think that disconnect is real and, you know, there's a couple things we've gone down the line on and, like I said, we've just been surprised the degree to which we've been off on pricing.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

Got it. In terms of... just one last one for me, the occupancy pickup this quarter, and I think Jodi mentioned it. Was that partly driven by the shift of Winkler into properties under development? I'm just curious on the retail side that I think it was a 40 basis point pickup.

[Kevin Salsberg, President and CEO at CT REIT]

Yeah, that's, that's correct, Pammi. It's basically just the move of, of the asset into PUD.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

Okay. And then just on Canada Square, a bit of an uptick there as well. Was that some leasing that was completed in the quarter, or?

[Kevin Salsberg, President and CEO at CT REIT]

It was. I would describe it as short-term leasing, though. It wouldn't be anything to write home about, necessarily.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

Okay, so no big change in terms of the near-term re-leasing of some of the vacancy?

[Kevin Salsberg, President and CEO at CT REIT]

No, we're still sticking with our asset plan and, you know, the degree to which we can hold onto short-term income for longer is great, but still maintaining that flexibility to have access to the site to redevelop it.

[Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets]

Got it. Thanks very much.

[Operator]

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

[Kevin Salsberg, President and CEO at CT REIT]

Thank you, Justin, and thank you all for joining us today. We look forward to welcome you to our annual meeting of unitholders, which we will conduct virtually later this morning at 10:00 A.M. We hope that you'll be able to listen in, and we look forward to speaking with you again in August after we release our Q2 results. Thank you.

[Operator]

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

Participants

Analysts

• Jodi Shpigel, SVP, Real Estate at CT REIT
• Kevin Salsberg, President and CEO at CT REIT
• Lesley Gibson, CFO at CT REIT
• Lorne Kalmar, VP, Equity Research, Real Estate at Desjardins
• Pammi Bir, Managing Director, Real Estate and REITS at RBC Capital Markets
• Sam Damiani, Analyst, Real Estate at TD Cowen