SmartCentres Real Estate Investment Trst Q2 Earnings Call Highlights

Key Points

• Operating performance remained stable: Same-property NOI grew 2.6% year over year, occupancy reached 98.1%, and lease-extension rents rose 12% excluding anchor tenants. SmartCentres also leased four of six former Toys “R” Us locations at higher rents.
• FFO was flat while costs increased: FFO held at C$0.58 per unit, as higher interest and administrative expenses offset rental-income growth. The REIT maintained its C$1.85 annualized distribution, with a 90.5% AFFO payout ratio and leverage of 9.8 times adjusted EBITDA.
• Management is balancing development and capital discipline: SmartCentres recorded a C$196.2 million fair-value loss largely because some development projects were deferred, while it continued nine projects under construction and planned a Toronto Premium Outlets expansion. Liquidity was approximately C$715 million, and management reiterated plans to pursue C$200 million–C$300 million of dispositions over the next two to three years.

SmartCentres Real Estate Investment Trst TSE: SRU.UN reported steady second-quarter operating performance, supported by leasing activity, high occupancy and continued retail tenant demand, while management said it remains focused on balance-sheet management and selectively advancing development projects.

Executive Chairman and CEO Mitch Goldhar said the company delivered same-property net operating income growth of 2.6% in the quarter, or 4.4% excluding anchor tenants. Occupancy for in-place and committed deals rose to 98.1%, while rental rates on lease extensions increased 12% excluding anchors.

Goldhar also said 86% of leases maturing in 2026 had been completed by the end of the second quarter. The company’s 200,000-square-foot flagship Canadian Tire store at Leaside/Rosedale remained on track for completion this year, with turnover expected in the coming months.

Leasing Momentum and Toys “R” Us Replacements

Chief Portfolio and Asset Management Officer Rudy Gobin said SmartCentres signed nearly 0.25 million square feet of leases during the quarter, with activity driven by grocers, TJX banners, pharmacies, dollar stores and banks.

The REIT had leased four of its six former Toys “R” Us locations by quarter-end, with higher rents achieved at those properties. Goldhar said leases for three locations had been completed by the end of the quarter, while a fourth was completed shortly thereafter.

Management said the replacement tenants are expected to provide stronger covenants and generate more frequent customer traffic than the former Toys “R” Us stores. Gobin said increased traffic could support sales at neighboring tenants and contribute to future rent growth on renewals.

Goldhar said the two remaining former Toys “R” Us locations have attracted interest, including what he characterized as strong interest for one site. Management expects the two locations still under negotiation would likely begin producing rent in 2027. Of the four leased locations, some are expected to commence rent in the fourth quarter of 2026, while one could move into early 2027 depending on renovation timing.

Cash collection remained at 99% during the quarter. In response to questions regarding increased tenant receivables, Gobin said the change reflected seasonal tax and property-expense items and that there was nothing unusual in expected credit loss provisions. CFO Peter Slan added that collections remained high and there were no aging concerns in receivables.

FFO Flat as Higher Costs Offset Rental Income Growth

Funds from operations were unchanged from the comparable period a year earlier at C$0.58 per unit. FFO with adjustments was C$0.54 per unit, compared with C$0.55 per unit in the second quarter of 2025.

Slan said the modest decline in adjusted FFO was primarily due to higher interest expense and general and administrative costs associated with a new long-term incentive plan. Those factors were partly offset by growth in net rental income.

The company maintained its annualized distribution at C$1.85 per unit. Its AFFO payout ratio was 90.5% for the trailing 12 months through June 30, while adjusted debt to adjusted EBITDA was unchanged from the prior quarter at 9.8 times.

SmartCentres said 88% of its debt was fixed-rate, a position Goldhar said helps insulate the REIT from potential interest-rate increases. The weighted average term to maturity of debt, including debt on equity-accounted investments, was 2.9 years.

As of June 30, the REIT had approximately C$715 million of liquidity, including cash and undrawn credit facilities, excluding accordion features. Including those features, liquidity totaled C$965 million. The company also extended its corporate revolving credit facility by two years to 2031.

Development Plans and Property Valuation Loss

SmartCentres recorded a C$196.2 million fair-value loss on its investment-property portfolio in the quarter. Slan said the adjustment was mainly related to the deferral of development activity at certain properties under development, partly offset by modest discount-rate changes in the income-producing portfolio.

Goldhar said the valuation adjustment was not based on negotiations for individual property sales. Rather, he said it reflected management’s view that values associated with a number of potential high-rise development sites were not accurately reflected, given that such projects were not expected to proceed imminently.

The company had nine projects under construction at the end of the quarter, one more than in the prior quarter. Vaughan Northwest Townhomes was completed and removed from the list, while SmartCentres added a self-storage project in Edmonton and a 65-unit rental apartment project in the ArtWalk block of Vaughan Metropolitan Centre.

Management said development represented approximately 12% to 12.5% of asset value. Goldhar emphasized that the company’s retail development strategy centers on low-rise, single-storey projects with at-grade parking, where rent typically begins within one year of construction starting. He said SmartCentres is pursuing projects anchored by major retailers and expects a potential pace of roughly three shopping-center projects under construction or delivered annually by 2027.

Goldhar said the company sees development as an accretive use of capital because projects are anchored and substantially pre-leased, rather than speculative. He added that proceeds from any significant dispositions could be directed toward debt reduction, development or other uses while management monitors leverage metrics.

Outlet Expansion and Capital Allocation

Toronto Premium Outlets and Montreal Premium Outlets were nearly fully leased and continued to generate improving tenant sales and percentage rent, according to Gobin. He said Toronto Premium Outlets remained among the top three centers in Canada by sales.

A nearly 100,000-square-foot expansion at Toronto Premium Outlets is scheduled to begin construction in the fourth quarter. Management said the expansion was about 50% leased, with average rents in the triple digits and an expected yield above 8%. The project includes a parking deck with more than 1,200 spaces and is expected to result in a net increase of roughly 600 to 700 parking spaces.

During the quarter, SmartCentres unwound its remaining total return swap and repaid the related debt. Slan said the transaction resulted in a modest gain and that the swap had generated a meaningful positive return over the four years since it was initiated. The second quarter will be the last period in which the REIT reports a total return swap adjustment to FFO, aside from comparable-period disclosures.

Goldhar said the company does not currently plan to repurchase units. He reaffirmed management’s commitment to a C$200 million to C$300 million disposition pipeline over the next two to three years, though he said there were no transactions ready to announce.

About SmartCentres Real Estate Investment Trst (TSE:SRU.UN)

SmartCentres is one of Canada's largest fully integrated REITs, with a best-in-class and growing mixed-use portfolio featuring 200 strategically located properties in communities across the country. SmartCentres has approximately $12.3 billion in assets consisting of income producing value-oriented retail, purpose-built rental, first-class office and self-storage properties. SmartCentres owns 35.5 million square feet of leasable space with 97.6% in place and committed occupancy, on 3,500 acres of owned land across Canada.

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