Q3 2020 RioCan Real Estate Investment Trust Earnings Call
[music].
This time all participants are in a listen only mode. After management's presentation. There will be a question and answer session and instructions will follow at that time I would now like to hand, the conference call over to Jennifer His senior Vice President and General Counsel you may begin.
Thank you and good morning, everyone I'm, Jennifer Davis, Senior Vice President General Counsel and corporate Secretary for Riocan before we begin I would like to draw your attention to the presentation materials that we will refer to in today's call, which were posted together with the M. DNA in financials on Riocan website earlier. This morning before turning the call over to Jonathan I'm required to read.
Following cautionary statement in talking about our financial and operating performance and in response to your questions. We may make forward looking statements, including statements concerning reopens objective its strategy to achieve those objectives as well as statements with respect to management's beliefs plans estimates and attention and similar statements concerning anticipated.
Sure events result, circumstances performance or expectations that are not historical facts. These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from a conclusion in these forward looking statements in discussing our financial and operating performance and in response to your questions. We will also be Rob.
One thing certain financial measures that are not generally accepted accounting principal measures GAAP under IR at these measures do not have any standardized definition prescribed by IRS and are therefore unlikely to be comparable to similar measures presented by other reporting issue or non-GAAP measures should not be considered as alternatives to net earnings were comparable metric determined in accordance with the IRS.
As indicators of real kids performance liquidity cash flows and profitability. We have his management uses these measures to aid in assessing the true underlying core performance and provides these additional measures. So that investors may be the same additional information on the material risks that could impact our actual results and the estimates and assumptions we applied in making these forward looking statements.
Together with details on our use of non-GAAP financial measures can be found in the financial statements for the period ended September Thirtyth, 2020, and managements discussion and analysis related there too as a flexible together with Riocan. Most recent annual information form that are all available on our website at www Dot beat our dotcom.
Thank you Jennifer and thank you everyone for joining us today and in just a moment.
Provide you with an update on our third quarter operating metrics, but before I do I just want to express my appreciation, that's an appreciation for the confidence demonstrated by our board and the real can team in my ability to take riocan into a new era as CEO.
Passionate about this business over the past few months have presented a lot of new challenges, which really only highlighted the important role that the physical spaces are going to play in our lives and the role that Riocan plays as a leader in the Canadian real estate landscape.
There's volatility in our industry, that's undeniable, but that's what creates openings for true innovation and transformation.
Continuing to help free up cash to achieve our vision in partnership with the best team in the business, that's a great opportunity and I honestly I cant wait to dive in.
I want to thank had once again, because you know he's a real estate legend and I'm fortunate that following the transition I will continue to benefit from his mentorship is advisement and his friendship as he assumes the role of non executive chairman.
Now, we're going to have a seamless phase transition over the next five months.
This is going to ensure a steady continuity a real can business strategy and vision and and I are going to be fully embedded in our new roles by April 1st of 2021.
Now lets focus on earnings and provides an important context on what we're doing in both immediate and long term to protect and grow the business and why we continue to be confident in spite of the market volatility I.
Now I know recollection is a gain on top of everyone's mind, So let me dive right into it.
For the quarter cash collected in second proceeds collectively represent 93.4% a build right.
So far in the fourth quarter the positive trend in rent collection continues with 91.9% of October's right collected and of course, there's no further sacra systems built into that number.
While would clearly prefer to report 100% collection has we have been able to do during the first 26 years of our operation. We're pleased by the steady upward collection trajectory, we've driven since April.
We're also pleased to have upheld their position as a responsible Canadian industry leader throughout this crisis, we bounced our tenants needs with the well being of our unit holders from the start we understood the need to provide immediate relief or protect smaller independent tenants.
The one set for launch we actively participated on behalf of approximately 1800 qualifying kinda locations in the second quarter although.
Although C M. A C policy dictated that all tenants were eligible in the second quarter, but all kind of the world as well in the second quarter would automatically be eligible in the third quarter real can establish its own more rigorous criteria.
That's not in the third quarter, we actively participated on behalf of approximately 950 tenants to.
Over the last six months that computer it really can't abated, approximately $14.2 million in gross rents, but in exchange for a participation riocan and the industry well, we're going to benefit from a long term survival and sustainability of these businesses. We view our participation is both good business practice.
And the right thing to do.
So secor officially expired at the end of the third quarter.
The federal government is since unveiled its new commercial rent relief program, it's called the Canada emergency rent subsidy program or the unfortunate our current remote service and you know we're still awaiting more details regarding this program. All we do know is that it will provide direct support on a sliding scale for busy.
This is that that it's in a revenue drop.
Good news is that it will operate independent of landlord contribution or administration.
So we view serves as a positive initiative, it's going to provide much needed short term relief for a lot of very good business as well.
Relief programs, such as Sacra answers are valuable however, the industry is still facing the most challenging conditions in our history.
The bottom line is the same as I discussed last quarter every dollar matters to us we're using our resources our energy in a thoughtful strategic approach to maximize rents collection.
To the extent, we need to make concessions, we continue to negotiate lease amendments with tenants that will benefit the trust over the long term.
Now, we're keenly focused on the health of retail and the impact of closures on Riocan.
There have been a lot of PC doubly filing since March however, as I'm sure you're aware CCW filings allow companies to restructure it doesn't necessarily mean that the locations will close.
Often the restructure business has been merged leaner and more resilient.
It's important to note the relative impact of these filings on Rio Kim.
Of all the retailers that have filed for CPW protection confirm closes represent only 0.9% a real cans total revenue and most are predictably predictably from the apparel sector.
Now I'm not downplaying, the very real struggles within the industry, but I do want to emphasize that to date the relative impact on REO cans revenue with far less than what one might believe in light of the ongoing negative retail narrative.
Re o'canas either by the stability and diversity of our rental revenue let me explain.
78%, a real cans rental revenue is derived from tenants that we deem to be either strong or stable even in this current environment.
Now we collected 96.7% of the rent from these tenants in the third quarter. These categories are comprised primarily of grocery pharmacy liquor central services and value retailers that have strong covenants and have demonstrated resilience and very volatile economic cycles.
Our strong foundation of strong necessity based tenants with excellent covenant has been invaluable through the pandemic as they deliver stable revenue and long term value.
The strength and the stability of the score allows our team to focus on the much smaller proportion of tenants within our portfolio that are potentially vulnerable. In these current conditions are not surprisingly. This category is comprised primarily of apparel, some personal services, Jim sit down restaurants and movie theaters and although we anticipate.
The majority of tenants in this category will return to stability. After this pandemic as always we continue to strategically evolve our portfolio.
For instance, when the apparel segment started showing signs of weakness 10 years ago, We ocana initiated a significant reduction of our exposure in this category.
And now represents only 7.4% of our annualized rental revenue and we're going to continue to reduce this number further overtime.
There are more restructurings and failures to come there's no doubt about that its pandemic has created an environment, where there is potential vulnerability and unexpected sectors such as restaurants in gems.
However, 90% of the tenants that we have <unk> that we've identified as potentially vulnerable well, there and well located a major markets and real cans major market properties are really always in demand.
We've got the strongest leasing team in Canadian real estate, we've got a highly adaptable portfolio, we're going to continue to lean into these attributes to rebalance and mitigate exposure to these vulnerable categories, we're going to use our well located space to tap into evolving trends.
Even in the midst of this pandemic real cans leasing team negotiated an impressive 63 deals representing 368000 square feet of new leases in the third quarter. This is actually more new leasing than we did in the same quarter last year and the rents we achieve were well above our average rent per square foot across our portfolio.
Yep.
We're signing deals with the kind of resilient tenants a strong covenants that that really are emblematic of our overall portfolio and our third quarter renewals also speaks to the strength of our locations.
In spite of the unprecedented disruption in the market Riocan signed a 145 renewals totaling nearly 950000 square feet in the third quarter.
This translated into retention ratio of 88.4% very much in line with our historic pre pandemic results and the blended new leasing and renewal spread for the quarter was a healthy 5.5%.
Our renewal and new leasing spreads demonstrate there is still healthy upside between our average portfolio end market rents. We ended the quarter with 96% committed occupancy that's a respectable number at any time, but even more impressive in this existing environment.
Our Q3 same property NOI growth was negative 9.1, so not really growth, but negative 9.1, but stronger than it was the previous quarter. However, as anticipated. It really was impacted by the short term inflows of COVID-19.
So now moving over to Riocan living which is our residential portfolio in the face of COVID-19, the collection of over 99% of our third quarter residential rent is really a testament to the desirability of Riocan livings offerings.
Overall leasing velocity continues to progress well that our rental residential properties, including Brazil, which is a 163 unit property in Calgary and our first development with partner Boardwalk wheat.
Sure. It's progressing extremely well you see towers, which is a 503 unit highrise portion of the site is 95% pre sold and you see Uptown. The 153 unit low rise component, it's effectively pre sold.
The first phase of retail at the sight, excluding too undeveloped pads is nearly 93% leased to strong necessity based tenants such as Soviet fresco and others and this is pretty good in the face of the prevailing beliefs, but there's no need for new physical retail locations collectively.
Collectively these projects add much needed high quality residential inventory into some very tight Canadian markets. In addition, they provide us Rio cannon, it's unitholders with additional revenue diversification, while we don't rely on the income generated from these condo and townhouse projects. It will provide a bridge to supplement our core.
Particularly during this pandemic.
Rio cans intensification program will continue to unlock a significant value. That's that's inherent in our existing assets. This program add substantial net asset value and diversify their sources of cash flow. It's as relevant now in fact potentially even more relevant than it was pre COVID-19.
And our focus has obviously been on managing our business and tapping into growth opportunities to drive resilient sustainable value, but it's also important to highlight that our commitment sustainability sustainable growth hasn't diminished.
We published our second sustainability report in September or achievements since last year include achieving the highest grasp the public disclosure score, which is an a rating and improving our survey score by almost 29% over last year that makes three consecutive years of improvement and we've also included environmental and social competencies in our.
Fourth skills matrix, and we've incorporated ESG specific goals and our employee performance review process and.
And we know that embedding sustainability in all aspects of our business improves the value of our assets and our organization as a whole it will continue to be an ongoing focus of ours.
We're now well into the second wave of the spend demick, it's clear that recovery will take time the balance of 2020 will certainly bring ongoing challenges in our sector.
We will continue to explore the variety of new and relevant commercial uses that have increased and their viability. Throughout this pandemic. This includes micro fulfillment community care centers and alternative retail uses there are many other examples of innovative uses to which our portfolio lends itself and we're we're carefully considering each and every one of them.
Where long term thinkers and we will proceed responsibly, but quickly to make sound decisions to drive sustainable growth is always create value.
For 26 years your team here at Ryokan has demonstrated its ability to diversify our tenant makes them tap into evolving growth trends, we've done so to drive resilience sustainable unitholder value.
We continue to see proof that are adoptable major market properties are always in demand, we're going to continue to repurpose always moving towards evolving needs, we're going to rapidly reshape our tenant base to focus more than ever on resilience.
We've got the team the locations and certainly the balance sheet and we also have the drive expertise in relationships to weather. The storm is always ryokan will adopt and we will thrive and I will now turn it over to Chi Tanger CFO for some more information. Thank you John and good luck.
I would like sacrifices.
Both at on their new ago effected neck April.
Entirely okay.
Behind John it's a great pleasure.
And then half again.
Great job building the team as our next CEO Congratulations John.
At Gmail can kind of the guy that.
The driving force behind our Tech I have learned a lot from over there for years I think seems to be okay.
Look forward to continuing to learn from.
A package and the other channels.
Thank you ma'am actually on leadership and Mentorship.
As Jonathan outlines real can't have delivered strong performance for the third quarter picking on very challenging environment due to the pandemic.
We saw poverty Frank collection trend continue that momentum meeting activities and maintain a high occupancy me.
For the quarter lately 44 per unit of 41.
As accents.
All 17.2% improvement over two two.
Julian challenging times, such as we find ourselves and make a global pandemic liquidity is of Paramount importance.
At the end of the third quarter real can continue to maintain and told the quantity over 800 meetings in the form of cash and cash equivalents anjouan committed revolving line of climate and.
For today.
In addition, our unencumbered assets still at eight 7 billion January 18, 67%, our annualized NOI and providing 2021% coverage for our unsecured debt.
Our that too I get the EBITDA matrix slid 913 times and that's a total assets was 44, 8%.
These two matrix increase from Q2 driven.
Driven by the impact of the pandemic on property operation.
Relation for the past two quarters.
This is particularly notable for a desk to adjusted EBITDA, considering the 18th at 12 months trailing measure.
We maintain our long term goal all keeping our leverage and adjusted debt to EBITDA between the target range up 42% or lower and under a time effective.
However, we expect them to make savings to increase marginality in the near term even the impact of the pandemic on the 12 months trading basic.
Our cost of that continue to decline bigger weighted average effectively increased only 3% to 5%, which compared to three point.
As of the year, and and 329% last quarter at.
These are expect to capture recycling during the quarter, we soda, 50% now managing interest in our mixed use residential development and Sapphirine Plaza in Toronto at the approximate me $115 per square feet.
Of the normal density our new partner Maple then is affiliate of a large real estate conglobate facing uhm.
This is maple then.
To the Canadian real estate market and attachment to the attractiveness of our asset not only to Canadian investment, but also internationally.
Also in the quarter, we still to Palin apparently reached 50% Cole initial intake in Loma at approximately $45 per square foot up bone density.
Reimbursement of development costs.
This is our third partnerships these kara.
Is the first phase of the redevelopment of real can.
Neil acres shops penetrating model.
We have already started construction on the project, which spent a discreet portion of the center that no existing income.
These two transactions combine the two small deal generated a total girl feels process of about $55 million, including developing cost reimbursement and 11 million inventory gains for the third quarter.
We announced yesterday first agreement to sell a 50% nonmatching increase in the rate essential rental component essential and the commercial components of Rx place mixed views property Axion Eglinton two oborne on behalf of itself and went out.
Pension fund clients.
158 million in line with our Amtrak staff.
This valuation represents capitalization rates of between 5% and 45% for the residential and retail component respectively based on stabilized NOI.
We also agreed to sell were born of 50% non managing interest in a reason residential rental development four five client or meeting at $51 per square foot bone density plaque reimbursed pre closing development and construction costs with some exceptions.
Wisdom is a first base of multi faith mixed use development on a discreet portion of our worst case shopping center in central auto.
Importantly, our asset.
Prominent high growth location attractive demographics, and superior transit trended access have strong interest and commitment from revenue both partners here in Canada and abroad.
These partnerships attracted deal pricing and the ongoing momentum residential projects during the current global pandemic.
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Located high quality residential assets as well as our establish development expertise and the significant value creation opportunities at real Kent pipeline offers.
We will continue our strategy to monetize the value inherent in our portfolio and development pipeline and reduce the amount and cost of capital required to build us our urban mixed use development.
As of yesterday, including the essential unreasonable firm deals I noted earlier, we have fun on conditional deals to sell assets for growth proceeds of about 276 million.
These assets are mostly located in the major markets.
Position consist of $227.6 million of income producing properties and about 49 million of development property.
These income producing properties have a weighted average in place capitalization rate of three 6% based on firm all conditional deal prices and development properties.
Do not have material in place NOI of course.
We remain committed to our development program and unlocking the significant value in carrying that our portfolio.
Our development project on nearly all mixed use development between candidates six major markets and will provide meaningful that equation when complete.
On slide 18 of our conference call presentation, we highlight the benefit of our development program.
When just asset diversification as we diversify our portfolio into mixed use residential.
Another is NOI and as a full creation police intense leever development.
Assuming hour, 42% leverage target the amount of my yields is further enhanced by the local CMS.
T H C financing reach for mixed use residential asset.
And then there's the benefit of accelerated snack assets growth gave.
Even though cap Theresa fort residential asset intensifying, our existing properties, Lisa residential assets provide significant annualized growth compared to that of equivalent commercial development.
Assuming a residential development, it's five 5% yield and capitalization of three 5% it could generate over 55% nap growth over cost compared to about 10% announced growth over cost visit commercial development, assuming the same environment yields bye.
Hired capitalization retail 5%.
Currently retail accounts for about 92% of the trust annualized rental revenue followed by all face eight 1% and residential at 1.7%.
And small real kidney beans.
Actual rental buildings currently underway completed and stabilize the residential proportion of the trials portfolio won't grow and the mixed use nature and that accent of the traps will expand.
Is that I would like to turn the call over to our CEO at focus closing remarks.
Thank you achieve thank you Jonathan Thank you Jennifer and good morning, everyone.
So here, we are almost eight months into a pandemic the likes of which the world is actually not seen really and just over 100 years.
I think the results were reached this morning, and the presentations by Jonathan and cheat confirm the resilience of recast property portfolio and our people.
Notwithstanding that the pandemic is causing greater difficulties for our tenants and accordingly us than we expected as recently as a couple of months ago, not only a results holding up well by our progress in filling the holes that are created by bankruptcies and our tenants simply disappearing is extremely encouraging.
We exist right now and what I've taken to calling an upside down world as a result of the pandemic cloud that we're all living under.
Rent collection, rather than the ability to grow <unk> net asset value have become normal has become the most important metric by which reach seemed to be judged.
The formerly irreplaceable and for weeks in Canada, virtually unobtainable downtown office towers, and forecast malls have suddenly become properties that customers and tenants don't even want to go to.
Urban retail is hurting while suburban comparably is performing very well.
And even that always thought to be bulletproof sector multi residential rental apartments is being questioned due to a number of factors not the least of which our government intervention by way of rent freezes, an eviction prohibitions and these from.
Largely conservative provincial governments.
And unfortunately, I could go on and showing you that everything there was accepted wisdom in the real estate business only eight months ago has been turned on its head even in the face of record low interest rates and massive government spending.
The sole exception to this seems to be the market for new condominium developments and even more so single family homes of downloads.
Perhaps that is one sector that is actually reacting the way it should and the current interest rate environment, where just yesterday the bank of Canada promised us a low interest rates well into 2023.
And yet we can is getting through this upside down world, even better than I would've thought.
In the spring of this year I warned that occupancy could go as low as 94% by year and in fact as Jonathan has told you. It stood at 96% as of September 30th and we don't foresee much if any deterioration in that metric by year end.
I believe we are leasing space up almost as fast as it disappears as the dentist disappear.
Unfortunately, no one any more believes that single bite of 2020 will mark the end of the pandemic or its effects on our business but.
But it will and I.
I hope earlier in 2021, rather than later, but this is out of our control.
All we can do is ensure then no matter how long it lasts our liquidity remains robust, which it is and will be in there are amazing tmp's, finding new uses and tendencies for the space that inevitably will become available.
Based on their performance and their last quarter and for the last 26 years quite frankly, I have no doubt they will.
And when the all the lights itself. Some time next year re can will continue and resume this growth in ways. We are already working on of this I am certain.
And those who choose to invest in what is a ridiculous we undervalued units will be rewarded and I believe awarded very well.
Finally.
I have addressed well over 100 quarterly conference calls, but this is my pen ultimate call.
You only have to put up with me one more time at our year end call, which I believe is currently scheduled for February 11th 2021.
While I will leave for then any stories thoughts on the future and lessons learned.
I will tell you now that I have complete confidence in the existing team soon to be led by Jonathan Giftlet.
I believe they have a portfolio that not only produces great cash flow, but is so ripe with opportunities for growth and income and value. They will keep them profitably engaged for at least the next couple of decades. Thank.
Thank you for dialing in and we are now happy to take whatever questions you had for us.
Thank you ladies and gentlemen, if you have a question at this time. Please first start than the one key on your touch tone.
Telephone if your question has been answered all you wish to remove yourself from the queue. Please press the pound key.
B one moment for our questions.
Okay.
Our first question comes from the line of Sam Damiani from television Securities. Your line is open.
Thanks, and good morning, everyone may.
Maybe just to start off on.
On the transaction market, it's encouraging to see the pipeline of dispositions in progress at this time.
So obviously the east central.
And some other of development properties form the bulk of it can you comment on the market for more traditional stabilized retail properties.
How is that shaping up and do you see the ability for real can too just like load of some of those assets to raise capital in the in the quarters ahead.
Sure well I was going to say.
We're actually not looking to sell.
Our traditional ash assets personal retail assets and any.
Really.
Big move Big way, it's a very slow market in any event for those because I think there's just so much uncertainty as to what.
Quite frankly, not only next year, but the future retail.
Narrative out there is so negative.
About the future of retail, which we don't agree with that narrative, obviously and I think our numbers are showing how you can collect that narrative is.
That it's it's.
It is a bit of a.
Bad way to raise capital.
Instead, we're going to continue with what we've been doing which is taking and partners.
And a lot of our.
Development assets, where we've created tremendous value that's quite simply not even on our balance sheet and when we do sell them, we give up either very little if any income.
Or sell them at a tremendously hold cap rate like essential and I think we're going to be focused on that rather than traditional assets, but in any event the market for traditional assets right. Now is so slow as to be almost non existent.
Let's see.
Second question is just on the the mixed that you disclose this quarter between.
Drawing stable and potentially vulnerable was still just it was just over 20% in the in the potentially vulnerable.
Like how how is the right collections in there.
Forward, you've got any around 85% in the quarter, but given the restrictions that have been imposed by governments in recent weeks.
How should we think about that in the next couple of quarters.
And a couple of course is a long time, Sam I mean, we've seen had.
We've been going through this world.
As we came through our call at August and even into September I think we all thought the world was in a pretty good place.
As you can see from our collections and even into October.
Ah rent collections of October were.
Considering what's going on quite excellent.
Again, we always strive for 100% but.
Maybe we will get back there again next year, but then in October we had this 28 that day of shutdown, which has been extended in Quebec. Luckily we are exposure to Quebec is fairly small in the overall scheme of things, but even here in Toronto, and Ottawa, which are really our two biggest individual markets.
By far.
Especially include.
The the larger GTA appeal.
There was this 28 day lockdown.
And there's only so long that tenants can go.
Without revenue before they start wanting to talk to the landlord.
I think this quarter, depending on how long it all depends on how long the lockdown.
S Premier Ford.
Just talking about good news coming today, we will see what that is I think a lot of the tenants are pushing back against these quite frankly in my opinion arbitrary lockdowns all the tenants by the way that have been locked down there in that vulnerable category.
And.
I would expect that none of them are disappearing and the next quarter or two certainly I say that was quite quite confidently when it comes to tenants like.
Cineplex like good life.
And.
Talking yesterday, the CEO of.
Cineplex and.
There's been a lot of publicity about the gyms pushing back, but he's pushing back to perhaps not as publicly it would have a bunch of members that can send letters form.
But as far as he knows that hasn't been one case that has been traced to a movie.
Movie Theater.
So again arbitrary things happen I understand government has to react.
But even mayor Tori.
Who I think is until fairly recently been Ah.
A fan of stay home lock everything down again, I'm, probably overstating, what you're saying, but even he understands that you're destroying society not just business for society. When you don't have.
Places for people to go where they can just get out of their apartments of their homes and be entertained and feel a little bit of normalcy, whether that's a gym, a restaurant or a theatre and let those things even when it comes to mental health.
Perform a great a great service, so I'm, giving you a very long answer to a short question comes to numbers I'll, let Jonathan.
I can I have one more one more approach, which is we also don't know at this point the extent and the nature of the new governmental assistance program serve and I do think that that will assist.
A fair bit of these potentially vulnerable tenants until we have that sense.
Also hard to predict what the overall impact will be.
Oh, that's great. Thank you I'll turn it back but before I do so just congratulate you add a new Jonathan.
Okay. Thank you very much ma'am.
Our next question comes from the line of how lowly from National Bank Financial Your line is open.
Hi, good morning, everybody.
Okay.
I just wanted to follow up on the discussion around essential any condo.
Thinking last night you when the press release came out I was like Okay. This is great demonstration of.
With the company can do the values that you can achieve when you.
Look to sell some of these.
Projects, but at the same time I kind of wonder if it's like Okay. You took a lot of time development financing, where it's gonna be you're you're selling.
Portion of the project and so can you maybe talk to me about why.
This particular project.
And maybe just a bit about the run up into the decision to sell the 50% interest in this because you were you're sort of already getting to stabilization.
Well.
And I'll, let Jonathan.
Of course, what he would like keep in mind until.
Just over a year ago, we only have our own 50%.
And basically our strategy.
If you look at almost all of our residential assets is to be a 50% owner.
And that that originally started out quite frankly as a way for us to learn the business where the original partners. We took in where people who are already in the multi <unk> business because.
Actually operating the things may or may not be rocket science, but designing them figuring out what amenities, you'll want to put in how they actually operate on a day to day basis.
And to keep them least at the highest possible and that's something wrestler lately, while we switched doing is bringing in more.
What I call monetary passive partners capital partners and.
That's that's a program that if we want to raise capital to keep building new ones is something that is quite frankly essential because.
We're laser focused on our balance sheet.
We think that the quality of our balance sheet. The very objective subjective objective I had it right. The first time way in which we do our App ifr's valuations.
The measurements we take.
We really think that within our sector. We have just a fantastic balance sheet and this is one way of keeping it that way and one way that's that's.
Fits in with overall strategy.
And how I think that's a pretty fulsome answer I don't have much to add to it other than it also is just a testament to our ability to to manage these properties. I mean, we oversee will ask that manage this asset and we're also at the rhythm property out of Westgate Inaudible, we will be the manager of that development. So I think there's been.
A recognition that we've got a great skill set within Rio can and for us and our ability to really capitalize on that expertise I think it's a good thing for our unit holders. So I think you will see that's just it more and more examples of us being development manager or asset manager to these assets, where we bring in these.
Call them capital partners.
Add a little more because he asked a good question.
Cause it's something we really thought about a lot internally here before coming from delusion that that's the sort of disposition strategy, we should follow.
And the fact is.
What is our expertise or expertise.
E as in developing these properties, creating the value rezoning the lands in the first place.
And then even marketing.
The properties and.
And we create them out of existing shopping centers, an existing properties, we own and by selling these 50% interest and not to say that the market is cynical, but it is.
We actually improve the value that were created.
To the marketplace. We don't just talk about it we've proven and we think that's an important factor too. In addition to the balance sheet and cash factors that I mentioned earlier.
Okay.
And then I guess my next question would be for Chi Uhm.
You know, we're starting to see ratings agencies, you know take some actions around.
Different sectors and the TSS.
Can you just give an update sort of like on maybe when you last spoke and how you're feeling about how they're going to continue to look credit ratings.
So that's changed at all.
Sure Count Hi, good morning, everyone.
Oh of course address S&P as you probably know I think it's back in May I say.
Generally industrywide conference open 'til holiday issuers talking about there waiting matching geology, they particularly emphasize they are going to take a long term view.
19 that the pandemic searching advantage of these short term phenomenon. So they are they also not long ago only a few weeks ago. A couple of weeks ago issued their report reinstating the triple be reading on us So I think more clearly.
Safety communicating their methodology DVR at 72 hour discussion with them. They also indicated that they will take a more a longer term view, but very small dialogue going on and we actually have some meeting scheduled to leave them coming up posted a quarter, but in the past from our discussion. They also express.
View to look into.
We did meet with GPRS as well and S&P after our second quarter results. So.
<unk>.
They tend to watch a little more carefully perhaps today.
But we certainly see no indication of any issues there okay.
Okay, and then add you had mentioned probably your number one question is around collection rates I would say that's probably number two for me number one question is always about.
And I'm sure you can guess what it is it's the distribution can you just talk about how the board thought about.
Distribution versus asset sales people like that going forward.
Yeah, and and look at.
It is a question that we discussed at the board, while we didn't used to discuss it as often.
But.
Something that obviously has been discussed since.
Quite frankly.
Paul.
When this whole mess hate us and the whole country went into lockdown.
We advise the board at that time that from the liquidity point of view there was no issue.
And that's still the case, there's certainly no issue from liquidity point of view.
Is it.
Being valued by the market I don't know probably not.
That's not something we would take too much into account at the end of the day the board.
We will have a continuing discussion with management over quite frankly is this the absolute best use of our funds.
Or are there other things, we can do to create more value for unitholders like buying back stock now keep in mind.
The distribution itself.
There's a certain level that we're required to maintain to keep our tax situation being what it is and.
I guess, the Americans, who there were lots of <unk>.
<unk> down there and just eliminated distributions that's never going to happen.
I won't say in Canada, I guess in some cases, maybe some I have no choice, but that's never going to happen to any week that wants to stay a week.
For tax purposes. So.
Yeah.
It's something we look at ongoing today, there's there's.
Not obviously announcing any changes.
And.
It's something that is going to be like I was like a lot of things depends on how the world's looking over the course of.
As the future unfolds, which nobody knows how about what that will be.
Okay. Thanks, very much guys that's great.
Okay.
Our next question comes from the line is Jenny <unk> BMO capital markets. Your line is open.
Thanks, Good morning, everyone and congrats to add and Jonathan on your respective career most.
I wanted.
I wanted to ask a question about the composition of your rent collection buckets. If you look at the Pie chart that you had from this quarter versus last quarter. There's obviously been a huge improvement. So I'm just trying to understand the moving parts in terms of the increase in cash rent collected would you say a lot of that came from but the bigger.
Deferral buckets from last quarter that caught up to this quarter or the to be collected.
Hi teeth.
And then also my second related question is for the provision piece, which is a little bit better would you say the composition of the Lisa that are in there are more or less more or less the same.
Hi, Danielle address that question.
My understanding on your question you want to understand what's the underlying driver that between the cash collection change improvement in between Q2 and Q3, it's really the fundamental.
Tenant the strength of the tenant we collected as you can see this Q too.
When we first announced queue to read out the queue to collections only 73%. So since then of course, we collected more part of that collection relating to the deferral.
To be deferred in queue too and now based on the reschedule.
It's only a portion if deal with in Q3. So they got paid is this quarter. So you will see that drop in deferral from the seven 7% and <unk>, when we announced queue to arrange to only six 5%. So it's really a combination of collection of the deferral amount as well additional collections for.
<unk>, because more and more businesses are open and of course that the strength of the tenants are a collection efforts you can see we already.
Pure attendant cash collection is already about 91% October again without any sacro funding is 92%. So really it's a combination of how many business are open between Q2 and Q3 fundamental strength of the tenants as well as our rent collection efforts.
The second part of your question I immediately it's on the provision.
Q to a probation as you know represent about six 8% of the total Bill rent Q3 represents about five three and the reason the date cause you May ask party is because.
They are too fat two main factors one of Q2 probation because we have it because so many business. We're closed during Q too we have agreed again back referring to the seven seven.
7% deferral on that so those as you can imagine when we did the queue to provision we provided some provision even relating to deferral based on all the collections in Q3, we're very comfortable with the queue to provision Q3, if you look at a cash collection and do the remainder because cash collection.
Including Sextra is already 93, four and <unk>.
Excluding the probation, we only have about 1.3% to be collecting that's between different so essentially all the rest and we provide in the probation.
And it's really a combination of Q truly is relatively.
Lower appears to be it's only because of it mainly because of the deferral in that book.
Okay, Great that's great color and I apologize if I missed this if you discussed early on the call, but as far as the residential inventory game that we're booked in the quarter.
Where they are related to and do you expect to be an item that pops up in the coming quarters.
Inventory gain pretty.
Really exasperating, Nevada, as we announced central coast, so that one because we sell the assets we already anticipate like even several quarter to go as we disclosed that property already been moved to inventory because we expect to develop as a condominium project. So when we sell the assets partially in Tracy.
Course full accounting purpose that's.
That portion relating to the inventory part is recognized as the inventory again and the second part of your question. The second part of your question is yes.
We were the decision has already been made that a portion of a development arm case in fact, all of the development is going to be a condominium rather than a rental we.
We classify it as inventory and as we bring in partners or dispose of of those assets.
There will be those kinds of games.
Y'see varying amounts of timing timing is a bit unpredictable because it depends on zoning on.
On the market it depends on a lot of things, but I think you'll see that as a regular part of our F. F O over the next quite a few years.
Okay. Thank you so just to be clear two three was just suffering plaza that's correct.
Okay.
And then on the other.
Okay.
And then moving to E. Central can you tell us what the split in the NOI is between the between east Central and eat place I I presume to eat placed pieces relatively small.
Yeah, we didn't disclose.
Split precisely, but it's predominantly of the vast majority of it is the residential component I think there's only 28000 feet of.
Retail now, it's very well at least retail most of it's occupied by.
<unk> Bank.
And the rest by mostly restaurants.
Q S are restaurants that.
Open and.
Exact amount that it was time.
Okay and then my final question is for the stabilize NOI at at essential eat place you've got 892% occupancy now what is the assumed occupancy and to stabilize number.
Closer to 98%.
Okay great.
Thank you very much I'll turn it back.
Our next question comes from airline of Howard loves from there.
As investments your line is open.
Hi, Thanks for taking my question I, just wanted to get a sense of the fair value changes in the quarter.
It looks like the adjustments, where where I guess in queue to you could say they were all lined.
In one direction and now there there is a bit of variance.
And then policy if if I missed it.
And the actual notes a call, but I just wanted to find out why.
<unk> urban there was a write down there and gains in the grocery anchored centers.
Okay.
The changes, while while they're looking that up I'll just tell you the changes were minimal.
And write downs weren't really related to market sometimes in the next few serve and we we tend to take a very conservative.
<unk> and some of the mixed use the write downs, which are relatively small in the scheme of things really were just where our cost a complete went up.
By a million dollars.
The that gets reflected in the in the value.
That's actually pretty much the case history, we only have about 9 million fair that into law received a combination of variety of little things going to see some app them down it's really fine tuning there were no major movements in anything really.
Understood. So so I guess they don't these these changes don't really relate to.
I guess the the.
Second wave Lockdowns that we've seen I guess it would be after the quarter to rate that'd be October. So if there's any changes that may not be until cute for it.
Right, Yeah, that's right and also R. A Q3 ran collection is significant improve so if anything we actually in our queue to Erskine may combat cash flow impacts is actually a much more.
CPA impact them.
Right right now I think our fri's values are.
On the conservative side, and we took a very conservative view at the end of cute too.
By the time, we actually sat down to start doing the ifr's calculations for Q3.
Downs restarted so we said, let's just leave things largely alone and just make the the changes that are required by reason of individuals changing circumstances property and we looked when we did the queue too.
Values Asian, we look very much and use the location. We went through our property is one by one as we always do and we focused on enclosed malls and.
Ones that have large theaters or ones that were located in some secondary Alberta markets, which is where the there hasn't been a lot of trades to evidence it but our senses that there would be some diminished value there and that's what was reflected largely in those queue to write down and we think that nothing changed between Q2 Q3 in that regard.
Okay, no that that that makes sense and then I guess my other question I want to touch on the question, but distributions and <unk> in there.
About how I guess you looked at the distribution and kind of said there is kind of a necessary amount of distribution that needs to be paid each year to maintain the tax status can you kind of quantify roughly how much that would be I guess as a percentage of the current distribution right now yes.
It's not an exact science because it depends on your go forward.
Estimates of what's doing but roughly it's above I'd say, 60%.
Must be paid of our current distributions that <unk>.
Yes current year that will be a fair estimate.
Driven quite extend beyond the the income from operations. It's also how many transaction we do how much tactical game right right. So it's a varying number there's no bright line figure that I could give you, but if you use 60% is a must distribute you'd be.
You wouldn't be far off either way okay.
That that that's pretty helpful and I guess when she talks about these couple of games that includes a partial dispositions like <unk> central that actually that that's part of the Midwest, Okay that makes sense.
Right.
And I guess that kind of relates to the next question but failed.
Are you are you looking at kind of a consistent pipeline are expecting the pins pipeline a partial dispositions.
And what I had no it's hard to projected range, but if you think about next year fiscal 21, but what range could that be and are we talking about 100 million plus doing a million pets.
Yeah, I mean, we don't have a specific number in mind I think I think there's gonna be opportunity given the strength of our of our land holdings does that suggest earlier to do.
A number of other transactions, where we bring in capital partners for development properties, while giving up very little in the way of NOI NFO.
But I think it's reasonable to say that there would be.
A couple of hundred million dollars over the next 12 months or so but that's again at this point and estimates and they were still in the process of finalizing our business plan for next year will be doing that.
Quite frankly, our most of the way there, but quite frankly in about 10 days here in the next couple of weeks for presentation into our board at the beginning of December and I wouldn't be surprised if it contemplates a couple hundred million dollars and dispositions.
Right right, yeah, and that should free up some liquidity as well so that.
No.
No. Thanks, Thanks for all the thanks for answering my questions that was very helpful and congrats to add and Jonathan.
Thanks, so much.
Our next question comes from the line of Pammy from RBC capital markets. Your line is open.
Thanks, and good morning Uhm.
Is considered it looks like the operating metrics were looking a little better in Q3, even if they are still challenge and I realize this is tough to answer but how do you see your bad debts and abatements trending over the next six to 12 months or so.
Yeah. It is it is tough to answer because so much depends on what happens with.
Retailer's being open I mean, what we clearly saw as we got through the second quarter and into the third.
When we retailers are open they pay rent I mean, they don't just always do it voluntarily but.
They're doing business that may or may not be making a lot of money depending on the particular.
Situation, but they pay rent. So if you can tell me who is going to be open and who's going to be closed over the next.
Six to nine months I could give you a real good answer to that but we're relatively optimistic.
With so much of it depends on what goes on medically I mean, if you would have told me that France was going to go into a complete lockdown. This weekend after seemingly to come out of the summer in very good shape I would've been.
While I would've been very cynical about that.
I think Canada overall is doing.
Very well compared to many other parts of the world, including obviously, the United States.
But I also think that there is a real realization.
Amongst.
The politicians that really matter when it comes to this which is the provincial politicians by and large that and you can see how they're trying to deal with things that you can't just keep closing down the world.
That is it has more negative impacts and I'm not just talking about business, but all kinds of things then it says positive so I'm relatively optimistic.
That what we saw in the second quarter won't be repeated and that until the war totally writes itself.
Will be chugging, along more or less where where we are with our third quarter results, possibly diminished a little the longer that this this last.
Bob.
As we again I mentioned, our business plan and.
Listen, we're going to build and plenty of provisions because.
There are going to be ongoing bankruptcies.
There are going to be ongoing requests for abatements as tenants just can't get going and.
We'll we'll deal with them in a fashion, that's best for weak and all that weekend unitholders, which is not always best for them in the short term.
Got it thanks, that's a great color.
Just maybe thinking about maybe the overall leasing trends can you comment on what you're seeing with again coming back to potentially vulnerable category tenants.
Retention or are you seeing are you dig percentage rent deals are shorter terms any color you can provide.
Yeah.
Sure I think some of those potentially vulnerable tenants rights with a very tenants that are coming out of <unk> protection.
And largely apparel tenants and in certain cases, depending on the strength of the location. We're doing we're actually retaining the exact terms bad prior to go into the seafood I believe but yet certain in certain situations. We are reverting to short term.
Deals that have floors on them. So at least the tenants are covering a certain amount of rent, but there will be some variability in the in the rental rates. So there are percentage rent deals, but we are keeping most a very short term I can't give you an exact percentage as to how much of our portfolio represent but it's fairly it's fairly marginal in the scheme of things we are trying to keep it.
Variability to a minimum for our own selves for predictability purposes, I am we just figured it's better business.
But there are certainly some of those that are being considered.
Largely evolve potentially vulnerable.
And I think we've got to emphasize potentially.
If you include all the tenants that are mandated closed right now they're all in that.
Yeah.
If you include virtually every apparel retailer that we have they're all in that book.
And.
That pretty well tells a tale so what's gonna have depend on what percentage of those we.
I'm actually quite pleased the way Jonathan and all our operating people in leasing people have gotten us through the last eight months, we have not entered into any <unk>.
Long term.
Negative deals we haven't had too we haven't been given up any long term abatements, we haven't been required to and where we gave any partial abatements, which which we have done.
That forms.
A chunk of the provisions we've always gotten something back forward.
Whether that's an extension of term future growth in rentz or quite frankly control of a site that has great development potential.
So there's always.
We don't give away where you can't money for nothing.
Got it last word for me I think we're we're getting into overtime here, but just to see those transactions with with a mood board and some of the others in the works.
When you think about the development program.
Clearly mentioned laser focus on the balance sheet. So just where do you see leverage trendy go over the next year.
That's a good question, we're focused on our leverage we want to keep our leverage.
I'm really not much higher than it is now that doesn't mean, it may not and I'm focused more on the net debt to EBITDA number which is.
As I'm sure you know a much more real and objective number then net than a percentage of gross book value 'cause gross book value.
I hate to tell you, but not all reached gross book value are created equal.
Probably something you already know.
Become right above but the.
So so looking at at that net debt to EBITDA.
We want to keep it.
No higher than it is now as best we can it's one of the things driving the disposition program that we've got.
Because we do have a development program, where clearly we're creating huge value.
And we don't want to stop it except to the certain cases, we're certainly going slow it down, but even though we're slowing it down with that leverage figure in mind and over the course of the next year or two.
Again going back to my opening remarks, assuming the world and that year or two desk go back to right side up instead of upside down.
We're sticking to the targets that we currently published where we want to have our our net debt EBITDA down on that eight or less area and I have no doubt that Jonathan will get us.
Got it thank you very much and Jonathan Congrats again and Ed Congrats to you as well as your at your the next chapter ability congrats to a few moments to go thanks for <unk> fine.
Okay, operator, if there's no other questions.
We have one more question and this will be the last one.
Okay. Our final question comes from the line is seen Wilkinson from Cibc's. Your line is open.
Alright.
Yeah last <unk> last and least congratulations to both of you add it felt like you were just getting started so I've.
Yeah.
Feel that way and but.
What I'm looking forward to just as as chair of the board just being supportive of Jonathan has it takes it takes the ship into all kinds of interesting directions.
It's in good hands. It just reminded me that when I first met you that you were younger than I am now so that makes me feel old.
I don't know.
I just Wanna.
Yeah, well, we're about to sleep do so yeah.
I just wanted to quickly circle back on that issue of of of of that Uhm and you've seen a cycle or 233 of two weird and and you certainly look at things.
Three four cap rate seems really low but.
That's the 300 basis points spread over tenure bond yields effectively so I you know I don't know that it as well.
The last time real can unit square, yielding 10% it probably cost you, 8% plus to borrow.
In a world, where you can borrow with a two in front of it.
And if we were to stay like that for for for a little bit longer is the optimal capital structure to perhaps have more leverage or how do you think about that if if the market doesn't sort of.
Get us back on the right side of things.
I can tell you first of all we think about it a lot.
Because certainly with some of the CMA C product.
That is coming on stream for us the number actually starts with a one rallies too.
175 for 10 years.
Is the kind of numbers that are being thrown at us so.
That's why I used the phrase a year or two to get back to our targets.
Might we over the course of months and quarters rather than years, let it move up a little if we find that there is a really good use for those funds.
I think the answer to that is we're going to talk about it internally.
All within the context of.
Going back through all the prices and.
Issues and meltdowns that I've lived through.
And survive.
The strike for your balance sheet.
Is what differentiates you from others.
Our unit values not sure that right now the market is focusing on that.
But as we come through this pandemic and lenders, which I think is already starting to happen become a little more picky.
As to who they're prepared to fund having.
Having that very strong balance sheet.
Is critical to the long term prosper.
Prosperity of an entity like re again and so yeah, we might let it move up Hello.
Few takes on the net debt to EBITDA or the gross but value percentage in the short term just to take advantage of what are historically low interest rates and yeah borrowing money at 2% or less as rocket fuel.
For any company, but ultimately there is a price to pay for it and.
Generally notwithstanding.
Others May think we're pretty conservative when it comes to that.
Great that answers it fully again, thanks, congrats and and I'm sure. We're gonna see you for a long time stolen.
You're very much well you may see me, but you won't hear me on these calls [laughter].
Okay, I think that's the end of it.
Operator, thank you very much and everybody that that'll then thank you very much this'll be the end of regains Q3 and look forward to talking to you for the last time and.
In February everybody keep well stay safe bye-bye.
Hi.
Ladies and gentlemen, thank you for participating today's conference. This concludes today's program you may I'll disconnect everyone have a great day.