CT Real Estate Investment Trust Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 2, 2024

There are 7 speakers on the call.

Operator

Good morning. My name is Gigi, and I'll be your conference operator today. At this time, I would like to welcome everyone to C. T. REIT's Q2 2024 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 C. T. REIT Jodi Spiegel, Senior Vice President, Real Estate and Leslie Gibson, Chief Financial Officer.

Operator

Today's discussions 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 CT REIT's public filings for a discussion of these risk factors, which are included in their 2023 Management's Discussion and Analysis and 2023 Annual Information Form, which can be found on C. T.

Operator

REIT's website and on SEDAR Plus. I will now turn the call over to Kevin Salzberg, President and Chief Executive Officer of C. T. REIT. Kevin?

Speaker 1

Thank you, Gigi. Good morning, everyone, and welcome to C. T. REIT's 2nd quarter investor conference call. Despite a challenging economic backdrop, CTE REIT continues to perform well, and I am pleased with our results again this quarter as NOI and AFFO per unit increased by 4.4% and 3.6% respectively.

Speaker 1

Our track record and ability to grow cash flow on a per unit basis has allowed us to raise our distributions 11 times since our IPO in 2013, with the most recent increase in distribution payments being enjoyed by our investors starting last month. Including this latest increase, our compound annual growth rate in distributions over the last 5 years is 4.1%, and we have achieved this growth while managing to improve our payout ratio to its current level at just over 70%. I am also pleased that notwithstanding a very slow property transaction market, we continue to be able to source strategic opportunities to grow our portfolio of net lease assets. We were happy to announce in our Q2 release that we acquired a Canadian Tire anchored property in a very strong market with high barriers to entry on the island of Vancouver in the province of British Columbia. Additionally, we sold a former Canadian Tire anchored property in Chilliwack, BC in Q2 to an end user at a price well above our IFRS value for the asset.

Speaker 1

Although our hope is that the recent moves by the Bank of Canada to continue to lower interest rates will spur additional market activity and deal velocity, we continue to manage our portfolio for the future and prudently seek out avenues for growth. As it relates to our balance sheet, we completed the previously announced rate reset on our Series 4 Class C LP units with Canadian Tire in the quarter and continued to buy back units under our NCIB program, taking advantage of the fact that we were trading well below net asset value. Finally, I am pleased to share that we recently released our 3rd annual ESG report, detailing our efforts and achievements from 2023. The report is available for download on our website and I encourage you to take a read as we are proud of the progress that we continue to make along our ESG journey. I will now turn the call over to Jody and Leslie to provide some additional details on the quarter, our results and our investment leasing and development activities.

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. This new investment relates to the acquisition of a property with a Canadian Tire store and a Mark store in Nanaimo, British Columbia. This investment of $45,200,000 with a going in yield of 6% will add 141,000 square feet of incremental GLA to the portfolio. As Kevin has already highlighted in Q2, CTREIT has also sold a former Canadian Tire property in Chilliwack, BC for $90,000,000 and completed the previously announced intensification of a Canadian tire store in Granby, Quebec.

Speaker 2

The total investment required for the Canadian tire store expansion was $7,600,000 and this project added 27,000 square feet of incremental GLA to the portfolio. Building on the progress made in 2023, the REIT currently has 19 projects at various stages of development with 2 of these expected to be completed this year and with the remaining projects expected to be completed in 20252026. These developments represent a total committed investment of approximately $283,000,000 upon completion, dollars 98,000,000 of which has already been spent and $85,000,000 of which we anticipate will be spent in the next 12 months. Once built, these projects will add a total incremental GLA of approximately 715,000 square feet to the portfolio, nearly 94% of which has been pre leased at quarter end. During the quarter, we extended 3 Canadian Tire store leases as well as approximately 98,000 square feet of non Canadian Tire tenancies and our occupancy rate is now at 99.4%.

Speaker 2

As at the end of Q2, the weighted average lease term for our portfolio was 8.0 years, which remains one of the longest in the sector. 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 pleased with the strong results delivered by the REIT again this quarter. Same store NOI grew by 1.0 percent or 1,100,000 dollars Drivers of the same store NOI increase were contractual rent escalations of $1,800,000 primarily being the 1.5 percent average annual rent escalations, including the Canadian Tire leases, partially offset by lower recovery of capital expenditures, which reduced NOI by $600,000 in the quarter, primarily as a result of the final billings completed in Q2 2023, which contributed over $1,000,000 excluding which our same property NOI would have been 2.2%, which is more in line with our historic average. Same property NOI grew by 1.9 percent or $2,000,000 compared to the prior year. This increase was primarily due to the increase in the same store NOI noted as well as from the intensifications completed in 20232024.

Speaker 3

Overall, in the second quarter, NOI grew by a healthy 4.4 percent or $4,800,000 driven by the increase in the same property NOI, the completion of development projects in 2023 and from lease surrender revenue, which contributed approximately $1,000,000 In the Q2, excluding fair value adjustments, G and A expense as a percentage of property revenue was 2.8%, which was lower than the same period in the prior year 3.1%. This decrease was primarily due to the timing of the deferred income tax provision amounting to $525,000 which is expected to reverse over the balance of the year. The fair value adjustment of $22,900,000 in the quarter was driven by a combination of contractual rent increases and the leasing activity within the portfolio during the period, as well as a gain from the disposition of a property, which accounted for about half of the quarter's fair value increase. Investment metrics for the portfolio remained unchanged relative to Q1 2024. In the quarter, diluted FFO per unit was up 2.1 percent to 0 point 3.

Speaker 3

This growth can be primarily attributed to the intensifications and developments completed during 2023 2024, the contractual rent escalations in our Canadian Tire leases and the previous mentioned surrender revenue, partially offset by higher interest costs. Growth in AFFO per unit on a diluted basis was strong for the same reasons, coming in at $0.315 up 3.6% compared Q2 of 2023. Cash distributions paid in the quarter increased 3.5% compared to the same period in the previous year due to the increases in the monthly cash distribution paid in July 2023. And as announced last quarter, we have the 11th time in as many years declared a further increase to our distributions of 3%, which is effective for the cash distribution payment made on July 15. This represents a cumulative increase of 42.3% since our IPO in 2013.

Speaker 3

The AFFO payout ratio for Q2 was 71.4%, which is unchanged from the same period last year. In Q2 twenty twenty four, we continued repurchasing our units to the NCIB facility, buying back approximately 8 point $4,000,000 of units at an average price of $13.37 per unit, which is below their intrinsic value. Now turning to the balance sheet. Our interest coverage was 3.59 times for the current quarter compared to 3.74 times for the comparable quarter of 2023, with the decrease mainly driven by the increase in interest expense and other financing charges outpacing the growth in EBIT fair value. The indebtedness to the EBIT fair value ratio improved to 6.59 times, down from 6.83 times in Q2 of 2023, primarily because of the growth in EBIT fair value outpacing the slight increase in indebtedness.

Speaker 3

Our indebtedness ratio was up slightly to 40.9% from 39.9% in the same quarter of last year due to the issuance of the Series I senior unsecured debentures, partially offset by an increase in fair value properties. 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 the balance sheet. Lastly, with respect to liquidity, we ended Q2 with $31,000,000 of cash on hand and $297,000,000 remains available through our committed credit facility. A further $300,000,000 is available on our uncommitted facility with Canadian Tire Corporation.

Speaker 3

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

Operator

Thank you. Our first question comes from the line of Lorne Kalmar from Desjardins.

Speaker 4

Thanks and happy Friday everybody.

Speaker 1

Good morning.

Speaker 4

Maybe just good morning. Just first on the dispositions, I haven't been covering you guys for that long, but I believe this is not typical. Is this something we can expect more of going forward? And maybe you can give us a little bit of an idea of what the genesis of the transaction was?

Speaker 1

I would say broadly, no. I wouldn't expect a lot more of that in the future. I mean, typically, our preference in this instance where Canadian Tire had relocated from the site would be to redevelop it and try to create incremental value. This particular location in the strong retail node, Chilliwack, in the Lower Mainland, in British Columbia, really strong site. We had an end user who came along and made us a very compelling offer.

Speaker 1

Canadian Tire still had some lease term with us, so coupled a strong offer with a lease surrender buyout arrangement. And the financials were just, I guess, too compelling to hold on to the asset. So we've made the decision to sell it.

Speaker 4

Fair enough. And that kind of dovetails my next question. Is the lease term income related to the disposition?

Speaker 1

It's not related to the disposition and that it wasn't directly tied to the purchase agreement, but the end user did want vacant possession. So indirectly, yes.

Speaker 4

Okay, fair enough. And then maybe just last one for me. I know kind of the last few quarters have benefited from the higher rate on the recovery of the capital expenditures and with rates coming off. Is it sort of fair to expect maybe a below typical same asset NOI, same asset NOI growth profile for the next few quarters?

Speaker 3

Lauren, it's Leslie. This quarter was maybe a little bit tougher when to comp over because of final billings in the prior quarter. Obviously, the rates have come down and are coming down and we will expect that. So we will be comping off a little bit of low interest expense, but I think the bigger delta quarter over quarter this year is the final some final billings that were done in Q2 of 2023. The interest change in the rate will be perhaps I

Speaker 2

think a little bit more modest going through the other quarters as it's only go down another quarter point. Okay. Thank you very much. I will turn it back.

Speaker 1

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Pammi Bir from RBC Capital Markets.

Speaker 5

Thanks. Good morning. I wanted to come back to the BC acquisition. Can you maybe provide a little more color on that one? And just given maybe a bit more of a favorable rate environment, I'm curious if you're starting to see some more attractive opportunities start to shake loose from 3rd parties.

Speaker 1

Sure, Pammi. I'll take that and good morning. Off market deal, this is a relationship we had with the existing or the vendor, I guess. And we have been in discussions for some time. It was part of a larger asset that is part of a broader redevelopment scheme that they're contemplating.

Speaker 1

And this component of the property was more stabilized. So, yes, lots of discussions. We've been in, I guess, negotiations and under contract for some time as it did require a subdivision. So this is something that we had in the pipeline for, I guess, an extended period of time. But very happy to be transacting 1 in BC and 2 on island of Vancouver.

Speaker 1

Obviously, tough to come by assets at pricing that we feel is compelling there. So we thought the financial parameters of the deal were attractive for us. And certainly repatriating Canadian Tire stores is it's squarely within our strategic plans. In terms of the broader market, haven't seen really much movement in the way of pricing or additional volume. I would say, marketed transactions right now seem light to me by comparison, at least specifically for retail assets.

Speaker 1

Q1 was very light in terms of investment volumes. And I think you're seeing that reflected in our fair value assessment for the quarter where we essentially just held things flat. Could these recent moves by the Bank of Canada give buyers and sellers a little bit more confidence that it's time to start moving the needle on both exchanging assets and pricing entirely possible, but I think we'll have to see how the rest of the year shapes up and what we might see in the market.

Speaker 5

Got it. No, that's helpful color. Just on maybe one more on that acquisition. What's the term left on the Canadian Tire lease or I guess the mix of leases from the Canadian Tire vendors in there? And I guess, if it's would there be any changes, I guess, to maybe reflect leases that are more similar to the C2REIT portfolio?

Speaker 2

Good morning. So in terms of the lease term, there's many, many years of options left on this term. It goes for an extended period of time. And so that was another part of the reason why it was compelling for us to purchase. We do have a lot of lease term left on this asset between the Canadian Tire and the Mark.

Speaker 2

Yes.

Speaker 1

I think the Canadian Tire is north of 10 years for sure.

Speaker 2

Yes. It is definitely north of 10 years with options after that.

Speaker 5

Got it. And just on the development pipeline, it seems to be holding steady, I guess, one expansion was done in the quarter. But as you think about maybe the next year or so, how do you see that unfolding? I'm just curious if maybe any chance it starts to expand again or any or possibly on the other side, maybe projects getting pushed back at all?

Speaker 1

So the project delays have sort of already been baked in. I mean, I think that's what we've seen over the last few quarters. The current pipeline at about 715,000 square feet, dollars 280 ish million is pretty close to our historic average run rate. So we're happy with the pipeline. I think in terms of monies to be spent, call it, over the next 12 months versus the back part of it, probably a little bit more weighted to the back part right now.

Speaker 1

I think the number was $85,000,000 that we intend to spend in the next year, and there's been about $95,000,000 spent to date. So call it a little over $100,000,000 for the back part of the development pipeline horizon. The pace of new projects has certainly slowed. I think, again, dovetails between 2 things. 1, Canadian Tire's intention, and I think there's still of the firm belief that investing in the retail bricks and mortar network is core to their strategy.

Speaker 1

Certainly, the last couple of quarters have been a little tougher for them than say 2022, 2023. So I think that's playing into the slower pace. And then the interest rate story and our ability to fund those projects accretively, which also dovetails into the cost to build these stores. So all that's playing together to say, slow that pace. But I do think, at the appropriate time, we'll have additional projects that we revisit, and we'll be working with Canadian Tire closely on our joint ability to move those forward.

Speaker 5

Got it. That's helpful. Thanks very much, Kevin. I'll turn it back.

Operator

Thank you. Our next question comes from the line of Sam Damiani from TD Cowen.

Speaker 6

Thank you. Good morning, everyone. Good morning. I just wanted to really just touch on renewal leasing spreads. I didn't catch that And most of my other questions were asked.

Speaker 6

So yes, just on the 3rd party and the CTC leases that were extended, I wonder if you could provide some color on the spreads that you experienced in the quarter versus the prior history?

Speaker 2

Good morning, Sam. It's Jody. So total renewals this quarter, including the CT stores, were approximately 300,000 square feet, so 1% of the portfolio. That includes obviously the combination of fixed and market renewals. The 3 Canadian Tire stores that renewed this quarter were at the 1.5%, pretty typical, as you know, for the CT renewals.

Speaker 2

In terms of the non Canadian Tire renewals, those were in the high single digits. So we're pleased with that in terms of the spread. So I'd say a pretty normal quarter and in terms of volume and renewal rates.

Speaker 6

That's great, Jody. And just I guess just sort of generally in the market today, I mean, I think it was double digits last quarter, high single digits this quarter. I mean, is that a reflection of any change in the market or just a different mix of leases that were transacted this quarter? I mean, what's your sense on the overall leasing environment now versus 3, 6 months ago? The same, better, worse?

Speaker 2

I'd say again, I'd say pretty normal. In this quarter, I think we had a higher amount of fixed renewals versus market renewals. So that's why high singles versus low double digits, but pretty much on trend with what we would expect.

Speaker 1

And although the market renewal piece was probably smaller this quarter than in past, that was done pretty much around that 10% spread number. So kind of similar to the past experience there where we had a little bit more pricing power.

Speaker 6

That's great. Thank you very much and I'll turn it back.

Operator

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

Speaker 1

Thank you, Gigi, and thank you all for joining us today. We look forward to speaking with you again in November after we release our Q3 results, and I hope everybody has a great long weekend.

Powered by Quartr
Earnings Conference Call
CT Real Estate Investment Trust Q2 2024
00:00 / 00:00