Q3 2020 CT Real Estate Investment Trust Earnings Call

Good morning, My name is salary and I will be your conference operator today at this time I would like to welcome everyone to <unk> Q3, 2020 earnings results Conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers remarks, there will be a question and answer session.

If you would like to ask a question during that time simply press Star then the number one on your telephone keypad.

To withdraw your question press the pound key.

The speakers on the call today are Ken Silver Chief Executive Officer <unk> Leslie.

Leslie Gibson <unk>, Chief Financial Officer of <unk>, and then Kevin sales pitch Chief operating officer of <unk>.

Today's discussion May include forward looking statements such statements are based on managements assumptions and beliefs.

These forward looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

Do you see do you read the public filings for a discussion of these risk factors, which are included in their 2019, M.D.N. <unk> and <unk>.

Which can be found on P.D. weeks, what's right in on the C. Dollar.

Now, let's turn to call over to Ken Silver Ken.

Thank you operator, and good morning, everyone. Thank.

Thank you all for joining us for <unk> third quarter 2020, Investor Conference call.

That's the pandemic has unfolded each quarter of 2020 has had a somewhat different focus.

At the end of Q1, the priorities were crisis management, focusing on the health and safety of our employees tenants their employees and customers and on preserving liquidity.

In Q2, the focus shifted to the financial health of our relatively small portfolio of ancillary and non essential retail tenants working.

Working with them to manage through the crisis, and then preparing to participate in the secret program.

With continued high occupancy and rent collections, the resilience of our business model showing through in the quarter and was recognized by our board who declared a distribution increase which took effect in September.

In Q3, our focus has once again returned to building for the future.

Managing the pandemic related issues in the prison.

We were delighted to announce a number of new investments, marking a return to our growth strategy.

These new investments are consistent with what we have been pursuing since day one.

No risk net leases with strong covenants, well leveraging our relationship with Canadian tire to acquire well located in highly desirable locations within their markets.

We're confident these kinds of assets will stand the test of time, both in the short term in the face of the ongoing pandemic and in the longer term.

With that I'll turn things over to Kevin and Leslie to discuss our Q3 results in more detail.

Thanks, Ken and good morning.

Outlined in Yesterdays press release in the third quarter see tier recompleted, the vendor and other Canadian tire store and Canadian Tar gas plus gas bar and Napanee, Ontario.

Subsequent to the quarter Threed acquired a property consisting of two single tenant buildings leased to Merck's and Tim Hortons from a third party in Yellowknife northwest territories.

Actually we announced that we will be acquiring three Canadian tire stores from a third party. These.

These properties are located in Drayton Valley, and the Duke Alberta as.

As well as sales ultra Slim, Quebec has.

Noted in our release this new investment is anticipated to close in the fourth quarter and remains subject to customary closing conditions.

We're very pleased to be resuming our investment.

Activities based on the strength and resiliency of our business model and these newly announced acquisitions will be a great complement to our existing portfolio of Canadian tire properties and third party net leased assets in total CP will be spending approximately $77 million on these newly announced investments and when completed they will add 311000.

Square feet of gross leasable area to the portfolio. They are expected in aggregate to earn a weighted average cap rate of 6.58%.

At the end of the third quarter 50, Reed had 15 properties that we're at various stages of development.

These projects represent a total committed investment of approximately $187 million 70.5 million of which has been spent to date and 48 million of which we anticipate will be spent in the next 12 months.

Upon completion these projects will add a total incremental gross leasable area of 785000 square feet to the portfolio nearly 94% of which has been pre leased.

As at September Thirtyth 2025, if you read occupancy rate was 98.8% inline with last years Q3, but down slightly from Q2 2020, reflecting the end of the short term tenancy in a portion of our 11 tougher place southeast property in Calgary, Alberta.

Lastly, with respect to the impact of COVID-19 on our property operations tenants, representing approximately 99.1% of annual base minimum rent fulfilled their October financial obligations threep compared to 99% for September and August and 98.5% for July.

So we continue to work with tenants, whose businesses were negatively affected by the pandemic, including by continuing to participate in the secret program for approximately 50 of our tenants in the third quarter.

I should also note that subsequent to the quarter and the federal government announced a new rent relief program, the Canada emergency rent subsidy or service to replace the secret program.

Similar to Fugro services applicable for small and medium size businesses significantly impacted by the COVID-19 pandemic serves as effective retroactively for the period beginning September 27 to 2020, it will be provided directly to tenants on a sliding scale up to a maximum of 65% of eligible expenses in.

In addition to the 65% subsidy a top up 25% is available to tenants who are temporarily shut down by a mandatory public health order issued by a qualifying public health authority.

We're hopeful that this new program will assist tenants in need of and hence support property owners by ensuring the timely payment of rental obligations yesterday subsidize the minutes with that I will turn it over to Leslie for her review of our financial results.

Thanks, Kevin and good morning, everyone.

Our Q3 2020 results continue to be sound, despite the headwinds of the pandemic.

We reported a diluted asset sales per unit of 26.2 cents, a slight increase compared to 26.1 cents per unit in Q3 between 19.

Reported FFO per unit decreased 1.6% to 29.9 cents versus 30.4 cents.

Net operating income increased 1.2 million or 1.2% in the current quarter compared to Q3 2019.

The primary contributor for the increase in the L.I. growth with the acquisition of income producing properties and properties under development completed in 2020, and 2019, which contributed approximately 1.2 million.

Same store NOI slightly decreased by 700000 or 0.8% in Q3 2020 compared to Q3 to Q.

Q3, 2019, well same property NOI remained relatively flat compared to the prior year. There were several factors impacting these variances.

Contractual rent Escalations, which contributed nearly 1.7 million to same store NOI growth, which includes the 1.5% on average contained within the Canadian tire store leases.

This was offset by the expected credit losses for tenants, who were significantly impacted by the pandemic clean the bad debt expense related to the rental abatement and rent relief and its speaker programs, which decreased in Hawaii by approximately $800000 as well as a decrease of $600000 related vacancies and lower parking revenues.

In addition, the proceeds of about $850000 to proceed in Q3 2019 funny assignment of the reach interest and claim against a former tenant and the company's credit arrangement that negatively impacted same store NOI growth in Q3 2020.

Excluding this lump sum payments received in 2019, and why wouldn't increased 2.2% quarter over quarter and same store NOI would have increased 4.1%.

For the quarter Genies to pretend to property revenue, excluding fair value adjustment amounted to 2.1% slightly less than the 2.2% for Q3 in the prior year.

Improvement reflects elevated spend in 2019 associated with the implementation of the new ERP system.

Moving over to liquidity and our financial condition for the corner.

The interest coverage ratio increased to 3.6 times compared to 3.4 or five times for Q3 of the prior year the.

The increase in the interest coverage ratio is due to both a decrease in interest expense and an increase in the in Hawaii in the current quarter compared to Q3 2019.

Our balance sheet continues to be strong but.

But the conservative 76.8% year to date AFFO payout ratio.

And low debt to gross book value of 42.2% and approximately 331 million available through our committed credit facilities and cash on hand.

<unk> assets and our first value of approximately 6 billion are 97% unencumbered.

In addition, as at September Thirtyth 2020, the book value per unit, which $14.75, which is slightly higher than our 2019 yearend value of $14.61 and acute she 2020 value 14, 57, and net income exceeded distributions.

Included in net income in Q3, with a $4.3 million fair value decrease which brings our year to date fair value decreased to 33.5 million.

Did you piece in the fair value adjustment on investment properties is primarily due to the updated inputs and assumptions and the property appraisal models, reflecting the impact of the COVID-19 pandemic on the reeds portfolio.

We continue to monitor the market for data points laid similar essential needs net leased retail assets.

And with that I'll turn things back to you Ken.

Thank you Leslie I know, it's a busy time for many of our listeners. So I'll turn the call back to the operator for any questions.

Thank you at this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.

We'll pause for just a moment to compile the queuing the roster.

Our first question is from Sam Damiani with TD Securities. Please go ahead.

Thank you and good morning, everyone I'm just a question for are there other hertz kit or Leslie just told me I have for US you know when you're buying some arguably tertiary market a Canadian tire stores, we don't know what the wall was but you know that's around a six and a half cap rate and your overall buyer for us is around 6.2.

But your overall sort of market footprint would be arguably more.

You know primary market than what you're investing in right now.

Do you see <unk> the low interest rates, you know pulling down cap rates for for the build the most stable retail properties like <unk>, which that you. All just wondering how you how you think about your wife rest for value in this environment.

Sam It's Ken maybe I'll just to kick things off.

I would say generally we're seeing valuations for the kind of assets, we own a to be stable.

We haven't seen any significant movements, obviously, they're not there haven't been a lot of data points.

To draw on but generally.

You know the feedback that we've had and the experience that we've had in the market would suggest that that cap rates have been pretty steady.

For those kinds of assets.

Okay, and maybe just one other question just given given the volatility.

I would in the marketplace and C.T. roots, you know relative resilience.

You're putting more capital to work in the types of assets that you know best but given the.

Difference in valuation so at least to do stuff perception for.

For more multi tenant or retail properties that do require more leasing do you see this potentially as an opportunity to take the read into more oh, well multi tenant retail and reduce the concentration on the entire does that is that it all makes sense for the <unk>. During this time of dislocation.

Hi, Sam.

Certainly when the market is disrupted as we've seen you can create interesting opportunities I would say in terms of the strategy. We're pursuing we're going to continue on the path that we're on which is.

Primarily focusing on net lease assets, so to the extent to which those kind of net lease assets would fit our criteria that are not Canadian tire assets. Those would certainly be things that we would be looking at but I don't think you'll see that will be diving into you know significant acquisitions in the multi tenant space.

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

Thank you.

Thank you. Our next question is from human to Gupta with Scotia Bank. Please go ahead.

Thank you and good morning.

Just to follow up on the Threeg TD Jive.

The stores that you should come into it.

D.

Just wondering how did you decide you spoke of diesel and how did you agree on that got page.

Just wondering if these acquisitions were done on an opportunistic basis. All did you get any color just called on valuation.

Hi, I'm not sure it's Kevin So the deal was sourced off market based on existing relationships that we had with the.

Owner.

We had had been in discussions with them for some time actually even.

Even pre pre pandemic.

Working towards a potential deal and then obviously when a when this all first is in the early parts of.

I guess Q2 or put our pads down in an effort to preserve liquidity.

As we kind of went through Q2 and the early parts of Q3 and ER.

You know with our strong operating results and ER and the resiliency of the portfolio. We decided it was prudent to pick it back up and I would say there was a slight repricing or so but.

Very very minor and are probably less related to.

The tendency Ur cobot and more linked to the fact that two of the properties were in Alberta since the original discussions Alberta economy has continued to soften slightly so all in all I'm pretty much acquired close to pre pandemic pricing. Obviously, we have a lot of data points in terms of buying the entire stores.

And made her rents more broadly.

So we felt very comfortable with the the cap rate and ER and are very happy to be I guess acquired these properties.

Thank you Kevin I'm, a then what do you do that lease come on do you see Oh acquired properties I just wonder you know given the uncertainty in the market and then you're going to acquire <unk>, perhaps a longer lease terms in order to minimize the risk.

Sure I mean for us.

Longer is always preferred you know the three properties were quite heavily from slightly under five years. So that would be on the shorter end of what we would typically look to buy but we also I would say have a high degree of certainty that there are strong performing stores and that their their locations the Canadian tire well hopefully want to stay in the <unk>.

For for for a longer period, you know, we also bought the property in Yellowknife and there you know the third party tendency, which was the Tim Hortons had 17 years of term and then when we do that 15 years. So typically we obviously want to go longer and do what we can to.

Extend that or with average lease term, but on these ones, we felt pretty comfortable just based on.

Our knowledge of the sites.

Got it.

Maybe you don't have to follow How's the acquisition pipeline looking going forward.

You mean on new investments for school would do.

Do you think the underwriting.

Any change or are you, hoping to avoid shipping so diverse set of markets. That's fun Hobbs had become you know, but we glad you called it.

So I mean, the pipeline as you know at this point I would say still opportunistic you know, we're not seeing a lot of stuff being marketed but are continuing to have a lot of dialogue I think there's a lot of stuff you can you can buy off market right now so.

Stay tuned in terms of the underwriting criteria I mean, I think it's actually the pandemic has reinforced exactly what were looking for which is you know strong covenant essential needs retail.

Yeah fundamentally good underlying real estate and obviously as we just discussed a you know long term leases and so you know I think.

On a risk adjusted basis, we still very much like that space and and we're hopeful there'll be more opportunities in the coming quarters.

Sure. Thank you and maybe just last one for me on the.

Yep on the 11 dozen states guidance. He you called them out of default do you sense a bad all you know is there anything specific about the property.

Like what has prevented it to be a traditional <unk>.

Well the short term arrangement that we had with.

The party that just because it.

Was actually supposed to be a longer term lease they sort of had a an option to occupy it for a couple of months with you know and we're intending to flip it into something longer was actually a film production studio and basically went to cope with it and they couldn't get their actors up from L.A.O.

However, there are coming from and they decided to give back the space. So it's.

It's a it's a pretty adaptable a 100000 square foot space, you know were still showing it to tenants were in discussions with one particular group has shown some keen interest. Your hope is we can materialize as you say a longer term arrangement, but obviously there is some softness and.

Alberta, right now Calgary industrial it seems to be holding up okay, especially in that mid until to large b type space. I think you know service or small baby product or is a little bit more challenging right now, but that's not what we're dealing with so I think it'll just take time to find.

The rate occupant Ah Ah Ah totally so I think we're still optimistic we'll have.

We'll have somebody in the next six to 12 months or in their opinion.

Sure. Thank you guys.

Thank you. Our next question is from Ginnie Mae <unk> with BMO capital markets. Please go ahead.

Thank you good morning.

Good morning.

Going back to the third party acquisition can you tell us about the lease structure and whether or not it differs from the wanting to have annual rent steps that you have for most of the portfolio.

I'm sure. So a as I mentioned the weighted average lease term is a it's just under five years there Jamie.

And it is a flat rent during that time.

Okay. Thank you and then with regard to the funding given that most of it is that is the apart from that third parties is there any element units being issued or should we presume that it's mostly debt financed.

Denise, let's see we're going to be a using cash on hand, and our line of credit to you to finance the acquisition.

Perfect and then lastly, with regard to the bad debt and secret expenses was just a little bit of a discrepancy that I wanted to figure out I think the actual provision total was 800 K, but in the same property and a wide that your friends. So I think it was 923 CAE is there what am I missing between those two numbers.

And I think Jenny just a rounding when we are taking the nine month year to date number and what we reported last quarter and this quarter. They the ramping just rounds, perhaps a little bit less ideally that would be so when it's.

No there's really no difference.

So largely immaterial.

And then you had said you had talked about some same property numbers. Excluding some items could you just repeat those I missed them when youre speaking initially.

Sure Jenny just 2.2%.

Yes, the we have the.

Revenues, we see we see about $850000 in Q3 of 2019 and regarding former tenant that we sold I see she to lay claim.

Well, if I exclude that one then the and why would have been about 2.2% positive and same store and why it would've been positive, 0.1%, so a little bit better than what we would have reported.

Okay great.

That is all for me thank you very much.

Thank you.

Our next question is from Palmer with RBC capital markets. Please go ahead.

Thanks, and good morning.

Just with respect to these leases on these third party acquisitions when they do come up for renewal is the intent to sort of that switched and I guess to the structure that you would typically be typically do with your oh other.

Other countries are these.

Oh, Hey problem, it's Kevin.

Short answer is yes, we would like we'll see if we can achieve [laughter] and it's a it's subject.

To certain contractual provisions that are within the lease already around the.

The rent and the renewal term and so we'll just have to I guess a negotiated at the time.

If not earlier.

Just from an acquisition perspective, I guess coming back to the commentary there are you seeing any more opportunities from third parties that might be looking to perhaps raise some liquidity.

It's Kevin again, probably a short answer is yes, I think there there you know there there are a number of private and public players out there who had you know disposition programs in place pre Pandemics and obviously you have certain commitments to meet and still view a capital recycling as a an auction or in terms of raising that Rick.

Hard capital, but I think you know people are looking to give away the farm and so they're they're happy to sell on market terms and I think there'd be me market terms to be pricing that is comparatively.

Comparatively similar to a degree pandemic levels for that you know a strong covenant that essentially means retail. So I think there is there is stuff out there to be acquired.

Yes, it's just been measuring a risk and and return. So you know we're in discussions as we always have been with lots of various groups and ER and our hope is we can find a few more jobs like the ones. We we just bought.

Great. Thank you for that just to with respect to I guess, the the incremental rise and they can see keeping in mind.

She's very modest but he can you comment on the re leasing prospects for some of that space and also perhaps some color on the drop in occupancy at the Canada square.

Sure Paul Me I'll take that so you have about 90% of the 50 Bip a reduction in occupancy relates to 11 dufresne. So that's our 100000 square foot industrial.

You can see that came back to us in.

In the corridor and as I mentioned to you know that there's there's some groups that we're in discussions with so I'm not going to repeat myself, there, but the balance being a really kind of the square and I would describe.

The vacancy there as being purposeful just in terms of gearing up to.

Be in a position to redevelop the property obviously once we have our municipal entitlements in place and indicated at it in terms of deal or two construction being completed and ER and pumping into I guess, the first phase of that project.

Okay.

Is that profit any further updates on I guess, the timing of that project or.

Tommy its Ken.

It's just a further comment on on the vacancy firstly on Canada square.

We call it a de leasing the property, so I'm not sure I'd ever come across that term elsewhere, but as Kevin said it is purposeful to get the property.

Pardon me ready for for development.

In terms of a status update concept design and municipal engagement or are proceeding and why we can't put a date on it right. At this moment, we are expecting municipal application in the foreseeable future. So the project is proceeding.

Pretty much on schedule.

Got it.

Just last one just on the back of this I guess, the New service program. What do you see back right bad debts are you trending a bit lower partly as a result of that and or any color you can provide in terms of deal.

I mean, it's Leslie and yes, we do hope that that test service program. When we are probably a few more details will help some of the tenants that China that were previously in secret programming and help them through but I think the you know the restrictions that are put on in place and depending what happens with second a future waves are also going.

I have just as much impact on you know how how those tests performed by I think until we hear more details about that the serious program and and see how things are going for those tenants, it's hard to tell for sure but yeah. There. There's some some tests are being more impacted than others. So we do hope over time that Chad that that's kind of cool.

She needs to trickle down, but I'm not expecting not to disappear in Q4.

Great. Thanks, very much I'll turn it back.

Thank you once again, please press star one at this time, if you have a question.

Our next question is from totally with National Bank. Please go ahead.

Hi, good morning, everybody good morning.

I just wanted to start with.

Okay, the entire or do you expect like over the next year or you are obviously potentially one of the liquidity providers to the corporation any.

Any chance that we would expect to see maybe a higher number of dropdowns for pay entire are there any assets they would still like to move into the reach over the next year.

I'd tell it's a it's Ken.

There are still assets in Canadian tire that can be moved into that Reid I wouldn't.

Couldn't comment right at this moment or whether the pace of that would be different going into the new year.

Okay.

And can you remind.

Remind me or like too many of the individual dealers actually own their own real estate or is it like it's part of the structure with tire like they absolutely do not on their own real estate, but the dealer will not on sorry, yeah.

Yeah, none of the Canadian tire stores are owned by a dealer.

Okay got it.

And just back to the Kendall Square project for a second in terms of the plan that you have like if the existing or the existing building regulations like fixing to do what you want to do or.

Will there be a you know you have to see new zoning and when would we expect to see that application.

Ultimate decision.

Child or their existing planning documents, if you like that that apply to the Canada square property.

But having said that and existing entitlement, having said that given the size and complexity is approaching.

There is a process that a you'll see the beginning to unfold, where those entitlements will be a further crystallize so.

More work to come and I think.

As I mentioned, I think you're going to see an application within the foreseeable future.

Okay [noise] Ah.

And then finally I think the Buffalo I'll just be for Leslie you have the series B debentures coming up I believe early or early next year.

Any thoughts about how.

You're looking at refinancing those.

Sure I think healthy I'd be June 1st hundred $60 million on that the PUCT ventures do come due.

Yeah, we're definitely monitoring that market right now in terms of that he has U.S. election feature.

Feature waves of kind of it but you know we are actively monitoring.

Monitoring and seeing now what the opportunity is maybe and they're very cognizant of that time, you know that pending renewal, but at the same time and you know we don't feel a lot of pressure because we have plenty of liquidity on our line of credit and other you know sources. So there's definitely other backstops, but we will be actively watching and seeing what our options are for the.

Coming weeks and months.

Okay. That's great. Thanks, very much thanks much everybody.

Thank you.

Thank you.

There are no further questions registered at this time I would like to do any meeting back over to you still there.

Thank you operator, and thank you all for joining us today.

Expect our fourth quarter results will be released in the second week of February and look forward to speaking to you.

In the meantime, wishing you all a safe upcoming holiday season.

Thank you. This concludes today's call you may now disconnect.

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