Q2 2021 Choice Properties Real Estate Investment Trust Earnings Call
And then.
[music].
Good day, and thank you for standing by and welcome to the choice properties Real estate investment Trust second quarter 'twenty 'twenty 1 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask any questions. During the session you will need to press star 1.
And your telephone please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero out of it.
Now I'd like to hand, the conference over to your speaker of today doors Bond Senior Vice President General Counsel and Secretary. Please go ahead.
Thank you good morning, and welcome to the choice properties Q2, 'twenty 'twenty 1 conference call.
I'm joined here of this morning by rental time, and President and Chief Executive Officer, Mary and various auto Chief Financial Officer and <unk>.
The executive Vice President of the leasing and operations.
And we begin today's call and sounds like to remind you the funds discussing our financial and operating performance.
And and responding to your questions. We may make forward looking statements, including statements regarding the choice properties the objective.
Strategy and to achieve those objectives as well and statements with respect to management's beliefs plans estimates.
Pension outlook and similar statements concerning anticipated future events and boats.
And the performance of exceptions and are not historical facts.
These statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions and these forward looking statements.
Additional information on the material risks and risks that can impact the financial results and estimates and the assumptions of the amazing and applying and making these statements can be found and the recently filed Q2, 2021 and financial statements and management's discussion and analysis, which are available on our website and on the.
And that I will now turn the call over to Randy. Thank.
Thank you Doris and good morning, everyone. Thank.
Thank you for taking the time to join our Q2 conference calls relative to report and another strong quarter with stable financial and operating results.
Business model and disciplined approach to financial management has positioned us well throughout the pandemic and.
In addition to our strong results, while advancing our development program from.
The driving meaningful net asset value appreciation of our existing portfolio and improving our balance sheet I will provide an update on the development program shortly but first Mary will provide you with an update on our financial results for the first for the second quarter net.
Thank you Ralph and good morning, everyone.
And as Rob mentioned, we're pleased with our second quarter results I'd like to beginning of the brief overview of our rent collections and then speak to our financial results and balance sheet activity.
Great collection for the second quarter were stable at 98% and we reported of bad debt expense of $1.8 million.
Of our 90% collection rate is consistent with the prior 3 quarters and reflects the combination of our stable portfolio and the overall health of our tenant base.
Of the uncollected rents related to tenants that have been most impacted by the lockdowns, including fitness users and sit down restaurants.
And of these tenants are beginning to reopen across the country, we're optimistic and we will further improve our cash collections from the balance of the year.
Our reported funds from operations for the second quarter of $172 million. This was a relatively same quarter apart from the $1.8 million of bad debt expense I referred to earlier being offset by approximately $1.2 million nonrecurring revenue related to the surrender income.
When compared to the second quarter of 2020 as the BOE increased by $31 million due primarily to the decline in net net expense of $12.7 million and $14.6 million of non recurring items incurred in Q2.2020 related to our credit loss on the specific mortgage receivable and the early redemption of unsecured debentures.
And that were set to mature in 2021.
On a per unit diluted basis, our Q2 of <unk> $23.8 per unit compared to 21, and the second quarter of 2020.
Despite the challenging operating environment with a third way of the pandemic related closures and occupancy has held up declining by only 10 basis points sequentially from Q1 to 96, 9%.
We actually did see positive absorption for the quarter of approximately 12000 per square feet highlighted by the leasing in Ontario of industrial portfolio.
This was offset by the transfer of some vacant units and our development properties completed and the quarter, which will soon be leased.
At the same asset cash NOI increased by 6.1% compared with the second quarter of 2020, primarily due to a decline and bad debt expenses. When excluding these bad debt total same asset cash NOI was relatively flat increasing by <unk>, 1%.
By asset class retail same asset cash NOI increased by 3%, while industrial increased by 2.2%. These increases reflect the combination of higher renewal rates and contractual rent steps of.
Office same asset cash NOI decreased by 6.1%.
Primarily due to a reduction net occupancy and lower parking revenues.
We're pleased we've been able to maintain stable occupancy and consistency and thats the results over the last 4 quarters.
Turning to the balance sheet for the fourth consecutive quarter, we reported an increase to our net asset value.
We reported a total increase of to nap of $323 million.
Including an increase to the fair value of our investment properties of $278 million.
Of this 238 million relates to our industrial portfolio the.
The increase in value and our industrial segment is in line with market sentiment and recent market transactions and robust demand and logistics and distribution space, especially in the GTA and industrial market and <unk>.
Tribute to further cap rate compression and improving valuation of fundamentals.
We had very little new financing activity and the quarter. The we did improve both our leverage ratios and our liquidity profile with 2 key transactions.
First we early redeemed our $200 million series 9 unsecured debenture that was maturing in September of 2021, and with no penalty of fee.
This was repaid primarily using our cash on hand, resulting and further improvements to our debt metrics.
And the quarter, our leverage ratio improved from 42, 3% to 41% and our debt to EBITDA improved from 7.6 times to 7.3 times.
The second transaction was the extension of the maturity date of our 1 to 4.
The $5 billion credit facility to June of 2026.
As part of this expansion, we paid of $1.8 million of debt placement costs.
Our credit facility is a critical component of our financial strategy and taken collectively with our $12.6 billion of unencumbered assets, we have ample liquidity and significant financial flexibility.
So overall with our ability to drive meaningful net asset value growth through many avenues are low debt levels and high liquidity levels. We believe we are well positioned.
I'll now turn the call back to rail to address our development and investment activities.
Thank you Mary on.
And on the development funds, we continued to deliver exceptional assets to our portfolio and are making steady progress on the rezoning of our longer term pipeline full.
Total of order, we completed and transfer of 4 development projects of approximately 149000 square feet of GLA and I'll share and of total development cost of $63 million included and the assets transferred this quarter.
The 48000 square foot global superstore at our harvest skills retail development and southeast Edmonton and <unk>.
Final phase of the retail component of our weighted loss development and passes and natural and downtown Toronto.
And the current building of our rental residential development the Brexit located in the Queen's West neighborhood of Toronto the.
First building into the 72 rental residential units and our ownership share of the leasing program is progressing well with approximately 50% of the building's east and the considerable pickup and activity in recent weeks and Covid restrictions have continued to left.
We extended the construction of the remaining 2 buildings at breakeven will be complete in the coming months and tenants will begin taking occupancy towards the end of the year.
Construction is also well underway and Liberty House, and Liberty village with and expect the completion in the fourth quarter. We are about to commence pre leasing and extend the tenants will begin taking occupancy early next year.
In addition to ask the residential projects, we kicked of several new commercial development in the quarter, including of Greenfield industrial projects and salary and DC the <unk>.
17 acre site is vacant land and by choice that is the group that is directly adjacent to our existing level of distribution facility and the Campbell industrial load.
We are planning of 350000 square foot new generation of logistics facility with 40 foot clear.
We are designing the building with sustainability and months and we will be pursuing a LEED silver certification and completion of the project.
We are well underway with detailed design and engineering and are actively working through the municipal approval process, we expect to break ground on the project next year.
This is an exceptional opportunity bucket and new product to under the best and industrial markets and the country. This project will drive significant value and highlights our ability to continue growing our existing industrial platform.
Looking forward real busy working on a longer term planning project to advance the next phase of development in the quarter, we submitted applications on the true large scale of residential and mixed use projects here in Toronto.
The first application is for large mixed use development on the 600 of enhanced base of parcel of vacant land located south of the intersection of same play Avenue and water and Avenue and Toronto demand is exceptionally well located from of transit perspective, approximately 500 meters from the award and PTC subway station.
And the thought was originally acquired in Q2, 2000 and training and we've made significant progress on envisioning the future potential. The application includes the 500 residential units and 1 million square feet of GSA and the proposal from new public policy.
And second application is a mixed use redevelopment and and existing retail sites and 25003 drive and Toronto.
The approximately 8 HSI and relocated the southwest corner of Internet and you win and Black week drive across from the Mount Pleasant side of mountain Dennis the trend without which the center opened in 2022 of the transit hub and then the girl on the Union and express and the Edmonton.
And RP, making of size and exceptional location from a friend of the spectrum.
And the current redevelopment plan proposes a vibrant mixed use inclusive community will be a flow and live and active and amenity services transit and the grocery store or within walking distance of the project will include 7 mixed use buildings, including 2400 residential units the $2.1 million square feet of GLA.
Hi.
Both projects and early stages sort of expect that things will continue to evolve as we refine our plans.
And collectively with the other.
With the ongoing planning projects, we have and we had over 11000 units and 10 million square feet of GLA EBIT.
Zoning approval of the zoning applications underway and with more projects ongoing and most of our nation's expenses. We believe we are 1 of the best development pipeline that will provide significant opportunity flagship and long term net asset value appreciation.
With that of Lockheed turn the call back from the operator for questions.
And ladies and gentlemen, as a reminder, if you would like to ask the question of his time. Please press star followed by the number 1 I guess kind of funky.
To withdraw your question Chris of the town P. Please standby, while we compile the Q&A roster again, that's time line.
And your first question is from the line of Mark Rothschild with Canaccord.
Thanks, Dan and good morning, guys.
1 and maybe just maybe just picking up rail and what Youre talking about the development of some new projects do you have.
A range of of budget, how much do you expect the spend and development maybe all of the remainder of this year and looking into next year as well obviously some of the the larger projects.
Don't appear to be at the point, where you can be investing significant capital.
The Isos law.
And some of the larger projects are still and the reserving process and.
But we would expect about $150 million to $200 million over the next couple of years and.
The other thing it could flex that a little bit of some of these industrial developments as we did voting, particularly some of the more industrial land.
And that's pretty quick to ramp up development as the strong leasing demand and right now we would foresee and reflect seeking 200 per day.
Okay. Thanks, and then.
Moving to the balance sheet leverage has.
And obviously come down and take them out over the past year to what extent.
And reducing that further a priority or are you in the range now of where you're comfortable.
Hey, Mark, Yes, we were and the range even before our goal is to get it down to 7.5 times and we thought that would give us a lot of flexibility.
We have the to sell assets and have some cash on hand, and when the opportunity came to repay.
Of the debentures coming due without a penalty we decided to take it rather than force and acquisition.
And meet our criteria. So just the goodies proceeds and so we're really comfortable of where we are right now and really don't have any.
The intention to lower it but again if opportunities come up.
And it gives us flexibility.
Sure it will but none of our plan and fragrance.
Okay, great. Thanks, and maybe just lastly parking revenue was down and the quarter last year. This quarter also was pretty quiet and I'm just curious what happened with the memberships the people cancel the dark and leverage those people canceled I went.
We ended the quarter last year I would expect it it's already been pretty low last year.
It is a function of <unk>.
Actually.
Yes, we did have a drop of vacancy and and as 1 of our buildings of that.
While the impact.
And as people.
Have not been coming into the office and.
And that cash.
And so.
The resulting in lower parking revenue.
And Mark just looking at the remainder of people people last year and Q2, Melanie I expect that to last as long as the people are slow to cancel the spots.
Yes, no debt.
That's what I thought okay. Thank you so much.
Your next question and it's been a line of Mike Mark I split the guidance capital market.
Hi, good morning.
2 questions on my and number 1.
I was just wondering if you could comment on the leasing environment any step changes that you've seen since the restrictions have been with the they realize it's only been a short period of time.
And your expectation for occupancy and I, particularly.
And the retail and office segments over the next 12 months.
And so with that.
The retail demand.
And from the linked and perspective.
The trout pandemic interestingly enough.
And just stay.
Same stable, but we are seeing and more tour activity.
And as restrictions are being net cash.
And that and.
Net picking up the cross sell across all areas of retail.
And certain tenants being really really active and wanting to grow their footprint.
Like in the past Secretary of discount department stores, and so forth and dollar and that and other.
The discount.
And a lot of activity and <unk> really work.
And the impacted during the pandemic because the heavy.
Off premise it sort of.
Like take out of business and so forth. So that's another sector that is growing so lethal.
And Pete.
Great.
Over the next 12 months I think on office.
The the tour activity and it's been very much correlated with length of with the Lockdowns and and as as Lockdowns are lifted.
And the same tour activity pick up and and Thats, just happened and Ontario, where it's starting and Alberta, we definitely seen a pickup of tour activity and Richard.
We're optimistic about but I think our retail.
Office occupancy will take.
The longer to improve before.
Relative to retail.
Okay. That's helpful. Thank you and then my second question would just be with respect to the industrial segment and it would appear that liquidity in secondary and tertiary markets is improving.
No.
Types of portfolios that have recently been lifted and you guys happened on some of the industrial and by the Canada. I was just wondering what your thoughts were with respect to the legacy assets with the potential disposition candidate.
Thank you.
Yes.
We did sell a few assets and I think it was about 2 years ago and the assets that we are really well located.
The strong industrial market right now.
The low vacancy we're getting good rents.
But of that.
Happy and comfortable owning them.
And just given the lack of supply and demand and the market.
Thank you.
Your next question is from the line of Sam Damiani with TD Securities.
Thanks, Good morning.
Just to follow on the leasing the discussion maybe just give us an update on what youre seeing and the Alberta market seems to be a bit of a bit of of rebounds happening and the latest quarter.
And so do you mean offense or sorry, and then as I mentioned industrial segments industrial yes.
Yes, I think the retail gasoline logistics demand is very strong and in Alberta as well and.
1 of the tenants debt.
Definitely.
Terry and.
And we've even seen a little bit of a pickup in Edmonton and the kit, which is great. We can add.
40000 square foot logistics deal.
Baird assets.
And shortly after.
Net in the quarter, So we'll get it from me.
That's great and on the retail side it sounds like you're increasingly optimistic about the near term sort of rebound.
True occupancy to go back to towards where it was in pre pandemic.
Could you you of any stats on the percentage of your tenants that are open.
Now versus let's say Q1 and are expected to be opened in August and anything like that sort of give us some indication on those kinds of trends.
Well right now actually Mark most of our tenants are.
Wholesale because we have open error free.
Retail sales.
We're not restricted the way the malls the restricted so I would say the majority of our of.
Of our retail is the open.
And the benefit of a close of office by some of the personal services and Jim and.
And the restaurants, and as Anna mentioned and and those of the majority of investment and all open.
Absolutely.
And I drove by Orange, the Ela and style of long line of sight. Good license. So they are definitely open.
Great and what would be the the next sort of major redevelopment to take place and.
And what are what's the backup plan from the level of store that would be impacted there in terms of temporarily relocating or just temporarily closed and the closing of the location and debt.
Great area.
And so I'd say the next major redevelopment and so the model and.
And there is enough we have enough land and we can accommodate and building a new store before we ever have to take down and the old store.
All of the existing store and the other 1 would be Woodbine and then bulk and we actively.
Working with long haul and restored very true.
But we got on top of it and do what makes sense for level.
That's great. That's all from me. Thank you.
Your next question is from the line of Ginnie Mae <unk> with BMO capital markets.
Thanks, and good morning, everyone I'm.
And from the MD&A that you mentioned and the retail discussion about the respond leases that were transitioned from net to lots of growth and I'm. Just wondering if that was something that was material.
The reasons behind those changes and I'm glad that related to any blah blah blah.
Ladies and.
And related to any of our blindly spending we did have a few.
And thank you which of the Quebec liquor store.
And the.
Correct.
Net debt load.
Sure 2 of growth and.
Ladies but.
And that's the material.
So is that just the discussion that was had.
At the time of renewal or what was the.
Thinking behind that and of that.
And could see more of down the line.
No definitely not.
And it's chip.
And I think you had been moving to this and model I mean, there and kind of like.
And by the government of Peru.
And so kind of a line of them.
Back and so on.
And they prefer to half of our gross lease and we set that out of sort of at a higher at a higher number to give us cushion. So that we can have full of our coverage.
And Jenny.
And the material on its own but given the lower levels of growth. It was more magnified this quarter really as part of our business and startup.
The big issue right now.
Okay great.
And then could you give us an update on what youre seeing and the acquisition or disposition pipeline.
Last quarter, you guys talked about potentially selling some assets other than the second half does that sort of something you are looking to do.
Not sure if that was sort of chip and by looking at the asset itself, our desire to reduce leverage and how should we think about transaction activity and the second half of the tier.
And Jenny said, we've been very active on chemical recycling as you know.
On the acquisition side, there are some vendors that we're working with lovelorn nothing Thats significant and then.
The dispositions of just the normal capital recycling.
And.
Dennis fell down.
And just lifted of small portfolio and Edmonton and.
And Calgary industrial look of just a few assets, but nothing nothing significant but we won't be as.
And as.
As active as we rolled assets.
Great and then.
I think you mentioned that small industrial portfolio and caviar or the some of the smaller assets that you can take the non.
Core.
Yes, it's just normal capital recycling.
Okay.
Thanks, very much I'll turn it back.
The next question is from the line of semi site with the CIBC.
Thanks, Good morning, everybody.
Just wanted to touch on the fair value changes.
And industrial.
Just wondering if the capex changes or sort of the level across the board or could you speak to any.
The differences by market.
Yes.
And yes definitely the GTA.
A large bay industrial type of.
The larger gains.
Small day at some basically half the cash.
Recompression and flourish.
And then also we had a visit growth and value.
You'd think of as well so sort of spread across the really GTA and large day was the driver and.
As Ralph noted.
And the ability.
You've seen strength and the property markets.
Seeing strength and the capital markets the industrial research.
And while on the credit market. So there is really.
Value of industrial and.
And it's reflected in these numbers.
Alright, and the way, they're seeing and the transaction market or.
Grocery anchored centers and and any cap rate of indications.
And then 1 on the more recent time period.
And while we don't match assets.
And.
And the total we started the last quarter still lots of liquidity cap rates have held and continue the strong for grocery anchored.
And really differentiated themselves.
Since the start of the <unk>.
And we continue of inbound calls.
But the.
I'd say no major changes on the cap line.
Okay and.
And then lastly from me on the off the side just curious what youre hearing from the tenants in terms of all the free.
Science by returning to the office and how that's playing out and and leasing conversations.
Hi.
Yes, the plans are and Barry.
And we do have actually.
And quite a few smaller tenants, who are who and Renee.
And in their offices other than when they were and enforced shutdowns of some of our smaller 5000.
And at peak.
And the tenants.
And I'm sorry.
And our returns are already there and some of our larger volume had indicated.
And sort of stays and.
The returns in September.
And a few and and other ones are waiting to make a decision.
And to see how the summer.
Progressive now the restrictions have been.
And then most of it so those are kind at the same store and hearing from our tenants of.
No single theme.
Okay. Okay. That's helpful. Thank you.
Ladies and gentlemen, as a reminder, if he would like to ask the question. Please press star followed by the number 1 on of your telephone keypad. Our next question is from the line of Tau and <unk> with National Bank financial.
Hi, good morning.
Good morning.
Just for Brixton, and Liberty House, now that you're sort of into the leasing process and a sense of what the sort of gross per square foot.
Rent and sewer or you're asking.
And they are around and around $4 per device.
Okay and are you at the time going to be operating and incentives on top of that.
So we have been operating expenses and we are probably likely start peeling the debt of the brakes debt just given the activity that we've been offering 2 months free rent and therefore I think the first 100 leases we often.
And the gift card and from them as well of about $1000.
Okay.
And just sort of last question.
I can sort of see how the kind of targeted assets or how the.
The assets.
Evolve over time.
And I was going to be the rest of the portion of increase the industrial portion of increase.
I guess like longer term like of thinking further out like is there kind of like a target ex you ultimately.
And we want choice to be at.
And so we are we.
We are not targeting a specific asset mix, our real focus is on quality and durability of cash flows and.
And you're right, we're always going to be and necessity based reads the.
Naturally just given the land holdings the item that we're going to be investing more and more capital into residential.
And just again, given some of the industrial development and bandwidth and investing more and more into the industrial.
And we'll obviously continue to volume growth, Greg and side and.
And particularly where we can facilitate and opportunity for level of though.
A smaller opportunity set and the first 2 we just spoke about and office will be a comfortable range. The function of some mixed use development sort of portfolio would after the reshape as you just discussed.
Okay, and then just lastly at the.
You have like a.
And early read like Buck how the performance of the.
The retail portion of this and kind of loblaw is looking at it right now.
Yeah, I mean the store.
<unk> itself is performing incredibly well obviously.
And then our other 2 tenants alright.
Alright, and Chris our hope and shoppers drug Mart, Joe fresh and shift table 2 of bandwidth.
The latest kind of restrictions being lifted.
Matt.
And so we occupied our office building.
Sure.
And at least.
And so.
<unk> expenses.
Our other.
Ancillary retail.
We have the big deal and the <unk> and narrow band. So now we just have a small part of small pockets of retail that will all of that hopefully later later in the year and interest from bank and then sort of ends.
And good day.
Okay.
The productivity, there and and the early on and sort of looked at and the Mark for what Youre kind.
And the court.
Yes, yes, absolutely traffic has been very very strong.
Yes.
And in the neighborhood.
Okay perfect. Thanks, very much of everybody.
Thanks.
And our final question comes from the line of Tommy <unk> with RBC capital markets.
Thanks, and good morning.
And maybe coming back to the office environment can you maybe just comment on how rents are holding up and your portfolio.
And maybe the mark to market spread.
And your thoughts on the outlook for leasing costs.
So.
Pardon me.
And I'll speak to it and the amendment.
You have to remember there's been a lot of the has been very little activity and.
And so any.
It's not really indicative of of.
Conviction.
In the sector.
And we think things again and start improving and we haven't seen improvements and our own and office is what I mean by that is just.
We've opened the office and recently, we have and asked us to come back and and today, we've hit the essentially the capacity that we've entered the debt which is roughly 30%.
So we're starting to see.
Employees wanting to come back and we think that will translate to the office leasing environment, and now and and and maybe give you a little bit of specifics of the habit of very small.
There is more volume than we do we use it.
Yes, and as Ralph said, any net 8000 square feet of renewal and the acquirer. So.
And 1 being and Albert out.
And the tenants that list for all of <unk>, primarily Scott pre 2017, so and most of our tenants and Alberta.
And for all of those rents down so from.
And now from 2020 and it's.
Klein of apparel.
20%.
And again, very small segment and none of them.
That was and Ontario, the warehouse hearing I think renter.
Very helpful.
And maybe a little bit more on Houston and offers.
And candidly we're optimistic.
Yes, so the Alberta.
And sort of ticket above market as a whole.
Got it.
And maybe just sticking to the the discussion earlier on the portfolio mix, maybe thinking about the long term.
And frankly look the office portfolio is not a significant piece of the overall business at this point in any case, but what are your thoughts on perhaps reducing the exposure further over the long term.
True.
And possibly through disposition or will it just naturally happen through growth and the other segments of the business.
The retail and naturally happen through growth and the SEC.
And then just as normal capital was talking and maybe 1 or 2 of the assets themselves over time.
Great. Thanks, very much I will turn it back.
Thank you ladies and gentlemen, this concludes our Q&A session and I would now like the turn the call back over to real Diamond.
Thank you so much 1 of the thank you everyone for joining us on today's call to all of that you tend to stay healthy and be safe. Thank you.
Sure.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Net.
Yes.
And then.
Yes.
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All of that.
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Yes.