Q4 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Semenov fourth quarter results Conference call.

At this time, all lines and they listen only mode. Following the presentation, we will conduct a question and answer session at anytime during the call you require immediate assistance. Please press star zero for the operator also note that this call is being recorded on Thursday March 2020, and I would like to turn the conference over to Mr. since they Cook. Please go ahead.

Thank you see.

Good morning, and welcome to today's conference call, where we will be discussing our financial results.

And highlights for the fourth quarter 29 G.

The presentation for this call is part of Kids English and French and the conference call section of our website.

In line with targets flows your principal.

Access to this call is helping to financial.

Investors the public and the media.

Good question period will be hoping to financial analysts.

Before I begin we'd like to draw everyone's attention and noticed concerning forward looking statements.

On page two of their presentation.

With me today is our CFO Heather Kirk.

Members of our executive management team now do you need working that no I became widely company, so Sean I need and Michael I guess in our also here with us.

On page three please let me run you through our Q4 in full year 29 key highlights.

The transformation of our business continues to accelerate our in Hawaii growth.

Make our business model more efficient grow our portfolio value and strengthening our balance sheet.

I have delivered strong organic growth with same property I know I added 4% in Q4 2019.

The positive contribution from each of our asset classes.

For the full year same property NOI was 3.2% and above our guidance.

Our committed occupancy rate now exceeds 95% [laughter] threshold that we have not met she is 2008.

Further to dispositions at $261 million from 29 key.

And to a $278 million care about you gain on our portfolio.

We have significantly reduced our leverage to 51.4%.

Hi, almost 4% relative to 55.3 at yearend 20 a T.

Over the past 12 months, we have transformed our senior management team my adding talent and new skills in order to promote a culture of excellence.

Proved capital allocation drive operating performance and create value for our unit holders.

Yes, United Management team is excited about embracing further opportunities in 2020.

We intend to keep driving annualized growth and maintain our emphasis on surfacing untapped value.

Coding by making the most of our intensification opportunities.

I see in Central station property is our key focus and we are in the process is conducting a rigorous any thorough strategic review of our alternative is aimed at surfacing I'd have to value.

On page four further to our dispositions in 29 team and to the $278 million a fair value adjustment.

The split apart portfolio in terms of value has evolved year over year [noise].

While the office component remain stable at 39% their retail component decreased to 34% from 38% and they didn't actually all compounded decreased to 27% sort of 23%.

From a geographical standpoint, Montreal, now represent 66% of our portfolio value compared to 63% a year ago.

So back city decreased 27% from 30%.

And ought to walk remained flat at 7%.

[noise] on page five are committed occupancy rates improved to 95.1%.

On your 50 basis points year over year.

70 basis points change Q3 2019.

150 basis points above our historical average.

Our in place occupancy rate reached 91.7% at year end 20 nineties.

250 basis points year over year, and 140 basis points since Q3 20 nineties.

Our in place occupancy rate is now hundred 30 basis points above our historical library.

On page six I wish to highlight that the growth in the average net raised a renewed leases for our entire portfolio was 2.8% for 29 team.

Parents to 0.6% in 2080.

Moving onto page seven in our office portfolio.

Office Committee occupancy rate improved to 92.9%.

140 basis points year over year end up 80 basis points since Q3 2090.

The committed occupancy rates in Montreal stood at 90.5%.

And is that.

It is above 90% for the first time since Q1 2015.

Part of the 5.5% S.P. annualized growth in Q4, 2019 was 9.9% growth for our Quebec city portfolio and 5.3% growth for our Montreal paltry portfolio.

Significant leasing transactions. During Q4 included a 25000 square feet new lease at C.N. Central station with that Crown Corporation.

And you all of a 52000 square feet Leach pad complex shouldn't that in Quebec City with in public agency.

In 29 team, we recorded a 4.1% growth in the average net rent renewed leases.

Moving on to page eight in our retail portfolio are committed occupancy rates improved to 94.1%.

30 basis points year over year end up 10 basis points since Q3 29.

Our in place occupancy improved to 87.3%.

Hi, Andrew and I read 80 basis points year over year end up 190 basis points since Q3 20 United team.

Please note that approximately half of this increase results from the effect of the conversion of former Sears areas into common area.

As highlighted by Matty I believe we paid during our Investor Day last October.

We are rebalancing, our tenant mix by reducing our exposure to apparel in fashion and increasing our exposure to food and beverage entertainment and services.

In 29, TV, we leased at 2200 11000 square feet to tenants in these sectors.

Translating into a 2.2% increase it this sector or the contribution of this sector to our retail category mix.

On page nine with respect to our seven Sears locations, which totaled 673000 square feet.

We signed leases for 313000 square feet or 47% of the total area.

We are in advance discussions on a 113000 square feet or 17% of the total area.

Bind sign space station advanced discussions now totals, 64%, how the total available space.

A decrease from 70% as that last quarter.

This decrease is attributable to the fact that we have decided to add office tenant assays in my Shockley, where we have solid demand from office towers due to the modest location adjacent to the future Panama ran station.

To sum it up 64% Garcia space is or is about to be lease and is expected to generate approximately 50%.

Higher rental income and when leases Sears.

As shown on page 10.

Our all store sales increased by 2.2% in 20 United team.

With the growth in 11 of our 19 months.

Same store sales on a per square foot basis experienced a slight decrease seven 0.3% year over year.

Our strongest same store sales performance, where I think seen deal with a 6.3% increased followed by Tom that both hopper with a 1.9% increase careful how you Josh with a 1.8 increase and class known today with a 1.3% increase.

Moving onto page 11, our industrial segment recorded the highest committed occupancy at 97.1%.

210 basis points year over year end up 170 basis points since Q3 29 TV.

In place occupancy increased 250 basis points to 96.2%.

Most importantly, the growth in average net rent a renewed leases reached 10.1% in Q4, a second quarter in a row above 10%.

Dogs, 10.6% in Q3.

Close to 50% of our industrial leases expire by the end of 2022.

Including 3.2 million square feet in 2020.

Setting a unique opportunity for significant incremental rental growth given the strength of the industrial sector.

On page 12 during the quarter, we sold 14 properties for gross proceeds of $50 million.

At an average pricing.

I'm, sorry, I didn't aggregate pricing a $1.7 million below our most recent IRS values at an average cap rate on I know why in place 70.3%.

Half of these properties in value, where retail properties, 42% office properties and 8% industrial properties.

29 team, we completed dispositions for $261 million at an average cap rate of 6.9%, excluding three properties sold on Atlantic value basis.

This was in line with our revised target for dispositions at a $250 million for 29 team.

Moving onto page 30 at 800 Palladium drive in Ottawa forward accounted as 96000 square feet occupancy is expected to started in September 2020.

We have also signed a lease for the remaining 4% of the property and we are now fully leased well ahead of schedule.

The project its budget into cost approximately $27 million, including land with a targeted yield on cost of approximately 9% and a potential value creation of approximately $11 million today, our spend is approximately $14 million.

Moving onto page 14 with regard to Densification opportunities.

We believe that we have a potential closer to 10000 residential units on that nine different sites subject to optionality in certain cases.

For each of these sites, we are assessing our best options, including a development on our own a development any partnership or sale of air rights or <unk>.

Hi, there will now discuss our financial results. Thank you something.

On page 15 operating revenues of $170.2 million for Q4, 2019 decreased by 1.1% compared to Q4 2018. This decrease of $1.9 million resulted mainly from a $7.4 million decrease from property sold in 2018 and 2019.

And five and a half million dollars of gross and same property operating operating revenues for the full year. Our operating revenues declined by 4% did where I dispositions, partially offset by the growth in same property operating revenue.

Q4, and Hawaii $93.7 million increase by 0.2% year over year. Despite the disposition we completed in 2019.

This increase is explained by the fact that operating expenses decreased by 2.5% well operating revenues decreased by only 1.1%.

But that full year ally declined by 3.6% slightly less than our operating revenues, it's lower operating expenses.

Moving onto page 16 for the fourth quarter, our same property NOI increased by 4% to 91 and a half million dollars.

We're pleased to have continued to accelerate our organic growth in Q4, 2019, which in the fourth consecutive quarterly increase [noise].

Q4 frozen same property NOI was driven by a strong 6.9% increase for the industrial in flex portfolio supported by a 5.5% increase for the office portfolio and bias narrow 0.4% increase for retail.

The increase reflects an increase in same property in place occupancy at 220 basis points.

[laughter] in place same property occupancy increase for all property types, including 290 basis points for our industrial flex portfolio 240 basis points for the office portfolio and 110 for retail.

For the full year, our same property NOI was up 3.2% supported by a strong 7.2% increased for the industrial portfolio, a 4% increase and the office portfolio and a slight zero five 0.5% decrease for the retail portfolio.

Moving onto page 17.

Same property NOI for both Q4, and the full year, reflecting property revenues growing at a faster rate and same property expenses and highlights the positive impact of our 2019 cost rationalization initiative.

For Q4 same property revenues grew at 3.3% versus same property expenses at 2.4 to deliver 4% crops and analyzed.

And for the year same property revenues grew like 2.7% relative to 2.2% increase in same property expenses for total same property NOI of 3.2%.

Moving onto page 18, we're pleased that are operating performance has exceeded our forecast and expect our same property NOI to increase by 2% to 3% and 2020, we're confident that implementation of our strategic initiative position us to continue to accelerate organic growth and delivered strong results.

Moving on to pages 19 and 20.

That's that's all for Q4 2019 was $49.2 million increased 3.4% compared to the same period and 20 team.

Excluding infrequent items core FFO reached $54.4 million in Q4 to 2019, 84.1% increase year over year.

Hey, AFFO for the first quarter was $35.6 million, a decrease of 8.7% year over year [noise].

Excluding the same infrequent items core assets, so reach $40.9 million, an increase of 1.9% year over year.

For the full 2019 year, that's I phone reached $195.1 million at 5.5% decrease compared to last year, excluding infrequent items core FFO was $206.2 million a decrease of only 2.2% compared to 20 team.

For the full year SFR reached $140.9 million at 12% decrease compared to last year and excluding infrequent items Korea, so what's the $152.1 million translating into an decreased 7.7% compared to 2018.

If we look at numbers on a per unit basis core FFO for the quarter was 30 cents once that higher than in Q4 2018.

Our AFFO for the quarter with 22 cents inline with Q4 2018, despite an increase in capex or.

As a result, the payout ratio remained stable at 81.8%.

Core FFO for 2019 decreased by three cents year over year from a dollar and 16 cents.

<unk> dollar and 13 cents assets all adjusted for 2019 was 83 cents compared to 90 cents 2018, and the payout ratio was 93.5% in 2019 up from 89.8% in 2018.

Moving onto page 21, we do $180 million on our secured credit facility in December 2019, I've total capacity of up to $300 million. It's 40 or financing is secured by investment properties at an average LTV at 55% and its are payable at any time without penalty.

Also in Q4, we upped finance elecsys neon by $107 million, including the transfer of $44 million mortgages on four properties with the same lender the strategic transaction enabled us to extend the term from 3.7 10 years to reduce our interest rate from 4.77% to 3.9.

Nine improving our AFFO per unit by a penny and to unencumber for property values at $90 million, which improved our unencumbered asset ratio I 0.06 times.

Post year end, we also refinance a $110 million of mortgages with low LTV and high interest rate.

And together, we paid well up $328 million at mortgages at an average LTV of 34% and average interest rate of 4.91% and we refinance them with $388 million of mortgages at an average loan to value, 60% and average interest rate of 3.78 the trends at.

Since have allowed us to unencumber 34 properties of which 20 form are unencumbered post quarter.

These transactions evidence our continuous efforts to improve our balance sheet and credit metric.

On page 22 aren't that ratio was 51.4% at yearend down from 55.2% at the end of 2018, and the lowest rate Q3, 2013, putting us well in line to reach our 50% target ahead of schedule. We're now targeting it that way show that is below 50%.

Our debt at that that was 10.6 times at the end there [laughter] at 10.6 times at the end of the corner, our net debt to EBITDA ratio was 10.1 time when taking into account.

The impact of cash an improvement from 10.3 times as at year end 2018.

Our interest coverage was 2.36 times and our unencumbered asset pool stood at $2.1 billion, representing 1.82 times, our unsecured indebtedness a significant increase from 1.53 times at year end 2018.

This reflects increased asset values as well as a strategic approach to our financing plan at year end, our liquidity position with $553 million of which 153 million was cash and the balance was undrawn amount on our credit facility.

Moving to page 23, weve $81 million of mortgages and $400 million unsecured debentures maturing in 2020, which we expect to refinance which we can easily refinance with our liquidity, we have a staggered maturity profile when that averaged 14.4% our debt stack maturing annually.

The next five years.

Also financings attorney and the next couple of years have interest rates that are significantly higher than what we would expect to finance in the current market.

Moving on to slide 24.

Investments in 2019, an income properties, including capital expenditures leasing cost and leasehold improvement totaled $134 million down 39.3% from $220.7 million for 2018.

Including investment in development activities capital expenditures for 2019 totaled $158.7 million down 32.8% from $236.1 million in 28.

And finally, moving to slide 25, net asset value per unit rose from 15 point.

$15.47 to $17.30, an 11.8% increase year over year.

The strong increase was supported by our $279 million fair value in our investment properties.

Moving onto page 26, this gain was largely driven by a 25% increase.

Our industrial portfolio value.

Which was a reflection of both gross and Hawaii and cap rate compression. We also recorded and 50 million dollar gain in our office portfolio and a 132 million dollar loss in our retail portfolio related primarily to cap rate adjustment honest flexion assess the increased provide strong.

Validation of the strategic initiatives, we've put in place and 29 team and is a testament to the work of I'll comment ours employees and ensuring we reach our goal to create value and deliver performing for investors I will now pass it back to sell Matt.

Thank you have on back the management team I would like to take this opportunity to thank all of our employees as well as our trust fees for their contribution over the last quarter.

2019 wasn't actually year and comedy are and we look forward to 2020.

I'll now turn now Mike over to the operator for questions.

Thank you ladies and gentlemen, if you do have a question. Please go so it's almost by one and you touched on something you will then here three tone prom acknowledging you request should you wish to withdraw your question simply press star forming side too.

Let me show using just speakerphone. Please lift the handset before parsing indicates and your first question will be from Brad. So just that I am Securities. Please go ahead.

Hi, good morning.

Good morning.

So starting with the the same property NOI growth guidance, 2% to 3% can you give us the expectations by property segment on what that could look like.

I think the growth will be primarily driven from industrial and office. We expect those two categories to have similar growth and slot in retail.

Okay, and then in terms of occupancy expectations, you've had a pretty good increase in me.

Average physical occupancy rates as.

Within that growth assumption are you, assuming a similar occupancy rate from him.

Yeah, so in terms of paying occupancy where forgotten the about 30 basis point uptick.

Due to often retail rising but you have to recall also that we had a shifting strategy in 2019 with respect to industrial and so we're much more focus on driving rents so you'll probably see occupancy in that portfolio actually go any opposite direction.

In terms of the industrial portfolio. The obviously, there's a pretty good game to lease opportunity. There has that since the investor day in October as that.

Opportunity in your forecast change at all from from the the numbers were provide them.

In terms of what we think the mark to market would be I think as we roll forward every month the markets getting stronger so it it's what we presented style or better.

Okay, and with the growth guidance as well as.

What's the assumption in terms of cost savings on.

On the operating expense one.

We haven't gotten 10 million of the 16 million that we expected to do.

I think that it's a little bit hard to give a specific number because we continue to have new people like that not who joined the team recently and I think as we roll forward into 2020.

We'll be able to give more color.

Okay, and then maybe just lastly on the on the fair market value game can you comment on whether whether or not that would have included the change with the guar central valuation.

Very little change at dotcom.

So that that it's up modestly in IR at value versus what we had on the books Harbin. It's still includes no value for the density.

Guess until these strategic reviews completed I guess that's.

Kind of status quo interest valuation for now.

Correct.

Okay, great. Thank you.

Thank you next question will be from Jonathan Culture TD Securities. Please go ahead.

Thanks, just just sticking with Garceau trial, there when when would you expect the your view on that too to be completed the first half of this year.

We are as we mentioned Jonathan we're conducting a very rigorous reviewed all our attorneys, we're pretty well advanced on that so.

No. We are trying to move forward as quickly as we kind with an opportunity Dan I find the best means to surface. The untapped value. So I think I can say at this stage and stay too but we're.

We're not too that we mentioned on prior calls we've been working with BMO and RBC on the new shape.

Okay.

And then just on the refinancing or.

Oh, Lexus me on what what's sort of spread did you get on that.

Oh goodness sometime and then you have that off the top yeah yeah.

[noise] on 190 that [noise].

<unk> and what was it with the same same lenders sort of a blend and extend type of thing or yeah. Yeah. What we did we got a significant fair valued gain adolescent neon and we had them as a lender I'm on a couple of retail FX. So we took the those mortgages and put them on.

Electricity on an increase the total value of alone over and above that total loan amount that we had on the collective Uh huh.

Okay.

<unk> and then lastly, just on the played <unk> comes on September.

Yes September this year.

What is that your you'll start recording it will widen.

I'm not probably September early October it will be in that area correct.

For its just going through their setting and we deliver Dan.

Okay. So Florida has the building they start paying and in September.

That said around September October.

Okay. Thanks, all up I'll turn it back.

Thank you [laughter] once again, ladies and gentlemen, if you do have any questions. Please press star followed by one on I touched on the phone and your next question will be from Mike Mark you. This at these all day. Please go ahead.

Hi, there.

I just noticed in your fair value disclosure that last year, you would have done 15% of the B assets me, a DCF and this or change the 63% I would've thought if anything.

Oil was more stabilized today than it would have been a year ago. So I was wondering if you give us a little bit more color as to why that change sort of what would've been driven not change.

Yeah like last year, we only get I think it was 16 assets under DCF its lots of its not only about the Atlas has stabilized versus not stabilized you'll also notice that over half of the portfolio was appraised externally. So that typically tcf is a more rigorous approach then just doing.

Capping the forward I know I assume that the explanation, it's not really it wasn't driven by our views on that you know whether assets were stabilized or are not.

Okay and then just.

Dovetailing that into a guard is centered around the the comment that there wasn't much written up in terms of value I'm not asset. The density values is obviously one thing that that is one of the drivers of incremental value. But you guys have also talked about redeveloping, the retail and and securing additional revenue streams I'm just curious if any of that.

Baked into your value idle not at all.

Okay.

Regarding our eye as he is the property as is here.

Okay with respect to your refinancing plan Heather do you have a sense of.

What the quantum of refinancing of low LTV high coupon mortgages could be there.

Oh, what's going into Q1, I do have a number for you, but I will ask that step back to you on a second because I've got a flip to that page stuff here [laughter], Christy, we don't want to that yeah, and I'm actually it to be honest I'm not looking for the the charge what I'm just trying to get a sense of is you know are you gonna be you've obviously got a maturity.

I'm trying to give a sense of how many early refiners, we could see in progress you could make in terms of pushing out your your weighted average term or what kind of done you did we did one one portfolio plus the.

Plus the electricity on mortgages that we didn't Q4, I'm not pretty much and so I mean and it is that it's a cost versus benefit trade off. So you know the notion was that it was obviously with the what the electricity on that there was a significant benefit there. We've got a few cents from the combined that to transaction, but.

I knew especially in the current fine environment as you look at longer term it becomes a more cost prohibitive or.

To do it.

Sure I'll formation when a 21, we look at our mortgage maturities, we have a and important segment as I said CN station. So given the process, where we were very flexible.

Okay. Thank you.

I'm.

Just two more quick ones for me here your decision to switch some of the old cure space to office at mall Champlain was that a one off or is it something that you might contemplate some of the other assets.

No we are contemplating it in a two other assets.

You know office rents are poor second floor of the Sears assets or more attractive than what we can opinion retail and we're also creating a very captive market you know for them. All you know in terms of using restaurant services and shopping.

Got it to the economics of those leases are better than what you would have otherwise unwritten previously.

Correct right, Okay and last one for me.

Just go back to your your Investor day presentation, and the target of 15% AFFO per unit growth over a two to three years one of the levers that you would have done a flight was unit repurchases and I don't think that's something we've seen thus far.

Just wondering if you give us an update on your thought process.

Hi, Matt.

It'll be a function of available cash and our disposition activity. So I think like we said at the Investor day is definitely something that on our radar screen a question Mark is timing.

Okay. That's great. Thank you I'll turn it back.

Thank you as a reminder, ladies and gentlemen, if you do have a question. Please press star followed by one I know touchtone phone.

And at this time as it goes up we have no other questions.

[noise]. Thank you very much in D.N.. Thank you to everyone, who took the time to listen to our call today that we look forward to talking to you for Q1 results have a nice day.

Ladies and gentlemen, this doesn't be concludes your conference call for today once again, thanks for attending and at this time, we do have fit you. Please disconnect your lines.

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On mute HM.

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