Q2 2021 CT Real Estate Investment Trust Earnings Call

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All participants please standby your coffee tea from Haiti.

Begin.

Good morning, My name is Valerie and I'll be your conference operator today at this time I would like to welcome everyone to see T. REIT. The Q2.2021earnings results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question not true session. If you would like to ask a question during that time simply press Star then the number 1 on your telephone keypad.

To withdraw your question Press Star then the number 2.

The speakers on today's call are Ken Silva, Chief Executive Officer of P. T REIT, Leslie Gibson, Chief Financial Officer T T REIT, and Kevin Salzburg, President and Chief operating Officer of T. T REIT.

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

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

The C C J REIT totally filings for discussions of these risk factors, which are included in there of 2020 M. D. N. A N a I F which can be found on P. P reached website and on SEDAR.

Now I'll turn the call over to Ken Silva, Chief Executive Officer of PT REIT Ken.

Thank you operator, and good morning, everyone.

We're very pleased to welcome you to see T. REIT second quarter 2021 the Investor Conference call.

With Canadians, having significantly embraced vaccination, resulting in lower Covid case rates and the lifting of the most public health restrictions, we can be hopeful that the worst of the pandemic is behind us.

Yeah, we can see with the emergence of the delta of period and ongoing health crises in various parts of the world that the future is not without risk.

Even given the paths. We're currently on there as much of uncertainty still regarding the safe return to the workplace schools travel and other elements of normal life.

Nevertheless in many ways the second quarter marked the transition from the Canadian economy constrained and impacted by the pandemic 2 of step on the way to of new somewhat different normal.

M. A C T. REIT perspective, we're pleased to share with you the results of another strong quarter of Cui.

Order towards large extent reflected this transition and the Canadian economy.

1 of the key takeaways from the past year or so is that throughout the pandemic our portfolio demonstrated tremendous resiliency delivering uninterrupted growth in the F O per unit of strong balance sheet and credit metrics and distribution growth.

We believe that we are well positioned to navigate whatever twists and turns may emerge.

All of these hallmarks of our strong performance were again reflected in our Q2 results.

In addition renewed market confidence has contributed to growth in our I FRS fair value driven by strong fundamentals in both the retail and industrial components of our portfolio.

The reduction in our bad debt expense is also a reflection of greater confidence in the resilience of our ancillary tenants as the economy moves to reopening.

We are also excited about the growing list of projects that will support our future growth with the new investments that we announced yesterday, bringing our acquisition and development pipeline to approximately 1.25 million square feet of attractive low risk investments.

Our resilience and our growth are owing to the success of commodity entire.

Which continues to demonstrate its ability to deliver on the wants and needs of Canadians yearend in euros through good times and bad for now almost 100 years.

With that I'm going to turn the call over to Kevin to provide an update on our investing activities and operations.

Leslie will then review the financial aspects of the quarter before turning the call over for questions Kevin.

Thanks, Kevin and good morning, everyone and I hope, you're all doing well.

As outlined in yesterday's press release, we are pleased to announce 5 new investments this quarter, requiring an estimate of $63 million to complete.

These new projects consist of the vendors of an existing Canadian tire store it can be.

The entire gas plus Caspar and Trenton, Ontario, Canadian tire store expansions in Toronto, Ontario.

As well as the Canadian tire store expansion that required the acquisition of land from a third party and Drummondville, Quebec.

Finally, we also announced the vendors of land for the development of the new Canadian tire store in the third party kind of in Moose jaw, Saskatchewan. When completed these investments are expected to earn a weighted average going in cap rate of approximately $6.5 per cent and will add roughly 266000 square feet of incremental GLA to the portfolio.

This brings the total new investment activity announced since the beginning of the year to $173 million 130 million of which relates to the expansion and development of Canadian type of retail and supply chain of assets.

As we continue to work collaboratively alongside Canadian tire on these projects. The REIT has opportunistically engaged in discussions with our largest tenant surrounding the remaining lease terms.

As can be seen this quarter. These proactive negotiations allowed us to extend the weighted average lease term for the entire portfolio by almost half of year to 8.9 years of 1 of the longest in the sector. This.

This improvement was primarily driven by the extension of 1 Canadian tire distribution center lease and 9 Canadian tire store leases and we are pleased to have extended the lease terms for all but 1 of the Canadian tire stores that were set to expire between now and the end of 2023.

We are in discussions with Canadian tire regarding possibly replacing this remaining location to a larger format store that will potentially better serve the market in the long term and we will announce further details in the future should this project come to fruition.

At the end of the second quarter CPA REIT at 28 properties that were at various stages of development.

These projects represent of total committed investment of approximately $280 million. Upon completion of 66 million of which has already been spent and 54 million of which we anticipate will be spent in the next 12 months.

These projects will add of total incremental gross leasable area of approximately 923000 square feet to the portfolio of upon completion of 9.

The 95% of which has been pre leased.

As of June 30th 2021 C. T rates occupancy rate was 99, 2% in line with both Q2.2020 as well as of year end.

With that I will turn it over the Leslie for a review of our financial results.

Thanks, Kevin and good morning, everyone.

We are again very pleased with the strong future results of the CET REIT has delivered.

The rent collections for the second quarter remained stable at 99.7 per cent and we've reported no bad debt expense, reflecting the stable portfolio and health of our tenants.

Our reported <unk> per unit on a diluted basis was 27, 7%.

An increase of 8.2% compared to Q2 of 2020, reflecting the positive net impact of an NOI variances, including reduced credit losses and lower interest expense.

Reported net operating income increased 6.5% or $6.1 million from the quarter compared to Q2.2020.

The main contributors to this growth R&D same store NOI results, which contributed $3.3 million as well as intensification and the acquisition of income do you think properties completed in 2021, and 2020, which contributed a further $2.8 million to NOI growth.

Even excluding the credit losses recorded in Q2 of 2020 organic NOI growth would have been a healthy 4.9%.

Same store NOI increased by 3.6 per cent or $3.3 million compared to the Q2.2020 different by contractual rent escalations contributing $1.5 million and lower lower provisions of the expected credit losses due to the improving business environment, which increased NOI by $1.4 million.

General and administrative expenses as a percentage of revenue were 2.5 per cent, which is in line with recent quarters.

The REIT record fair value increase of $106.5 million on our investment properties of the second quarter of 2021.

The increase in the fair value adjustment on investment properties was driven by changes to the investment metrics from both the industrial properties and the retail properties within the portfolio with about 57 per cent of the increase attributable to the industrial and the balance to retail.

This was supported by recent market activity and external appraisals completed during the quarter.

Our <unk> payout ratio has improved for the 3 months ended June 30 of 2021 and was 72, 6% of decrease of 3.4% from the same period in 2020.

There has also been continued improvement in our debt metrics with interest coverage ratio increasing to 373 times in Q2 compared to 3.5 times for the second quarter of 2020.

The increase in the interest coverage ratio was primarily due to the gross up of the EBIT of fair value as well as the decrease in the interest and financing charges.

The <unk> recent Dennis ratio has also improved and was 41, 6% as of June 30 of 2021 compared to 42, 5% of quarter ago.

The decrease was primarily due to the growth from the.

The property fair value adjustments, along with the reduction in the total indebtedness.

In addition, the $294 million available through our committed credit facilities and $3 million cash on hand, coupled with no debt maturities of the remainder of 'twenty 'twenty..1 we continue to maintain of liquid position.

Lastly, the book value increased to $15.31 in the current quarter up from $14.74 per unit in the first quarter of 2021, primarily due to net income exceeding our distributions.

And with that I'll turn it back to the over to the operator for any questions.

Thank you.

Just kind of would like to remind everyone in order to ask a question. Please press Star then the number 1 on the telephone keypad, we'll pause for just a moment to compile the Q&A roster.

Our first question is from send them young with TD Securities. Please go ahead.

Thank you and good morning, everyone.

Morning.

Yes, just to just to close the loop on the renewals, which were great to see the lease renewals.

Did any of those renewals the.

Of those what would the interrupt the same store NOI growth of the REIT has been enjoying historically of the 2.2% plus range.

Hey, Dan it's Kevin.

I think youre basically asking if it maybe at the annual rent Escalations would be continuing in the extension of terms and the answer for these lease extensions is yes, they will be.

Okay, great and the.

The the DC lease extension.

Was that just the renewal or was it like a blend of extend it might it might impact ramps.

In the short term.

It was tied to the expansion that we announced earlier this year.

And the exercised options.

In conjunction with the funding.

Okay great.

Okay and.

I guess, great to see the results showing basically zero impact of the pandemic do you expect that to continue in the latter half of 2021.

Kevin It's Eric.

Sam It's Leslie.

Well, we're very happy that that happened that for the second quarter. You know it is really hard to predict with what's going to happen in future quarters.

The tenants of shown resilience and found a way to operate through this and in our rent collections and the bad debt kind of have virtually gone back to pre pandemic levels, but you know what 1 can't guarantee what happens in other quarters, but we we certainly hope that is that the continued to experience that we have.

Great and the last question I have before I turn it back is just an update on the Brampton Steels Avenue property owned by the entire any any update on the plans. There is is the company still utilizing that.

Of that space at all.

It's Kevin I'll take that 1 so yes claims are continuous to use that facility I think with the robot sales they've been generating.

They were looking for excess capacity and have the facility available to them. So in the.

The short term it is still in use.

We continue discussions with Canadian tire on the future of that site and the potential to redevelop it and in conjunction are working on obviously, our concept planning and working.

Working towards advancing some of municipal approvals.

Overtime.

Great. Thank you I'll turn it back.

Thank you. Our next question is from Jane Jenny MA with BMO capital markets. Please go ahead.

Oh good morning, good morning.

I'm looking I'm looking at the development pipeline schedule and it looks like there were some projects that were actually moved up in terms of the timeframe could you talk to us about why that was the case when you're able to make a lot of progress or maybe you had you.

You had been conservative and some of the timing estimate.

Jamie I think youll see quarter to quarter project shifting both forward and backwards a lot of that depends on.

The municipal approval process and how long it takes certain jurisdictions, obviously, we foresee it happening sooner and it takes longer or vice versa, and then obviously.

The construction related delays or no.

So.

No no specific commentary on the.

The projects that moved up or any rationale I think it's just.

Of the development process, sometimes can be lengthy or sometimes it takes less time than we anticipated and youll see from natural movement.

Within the projects related to that.

Okay sounds good what's the.

Guards to the Leslie and Shepherd expansion that was mentioned in the press release. It says its expansion into the of course from currency are you space is that a result of cash.

The entire desire to expand that specific store or did you have any tenant failures that may have bought this opportunity of Lam is there something specific that you can share about dislocation.

Sure so.

Totally related to the entire its desire to expand that particular location.

It was actually the reverse of the tenant failures, we had to remove certain tenants to accommodate the store expansion, which obviously was the to the benefit of our anchor tenant in and financially made sense to us as well so.

They just expanded into adjacent space. It was really the story there.

Okay great.

And it's great to see that but the bad debt has basically been eliminated. So is it safe to assume that there wasn't any issue with that with the rent collection is all of about 100 per cent for Q2.

Yes, Jenny I'll say our rent collections.

Putting in the sort of 99, 7%.

We're really really close to full rent collections and yeah, and the bad debts of fresher have effectively subsided the during the quarter, which was great to see.

Okay, Great do you know of any of your tenants are still taking the assistance at all I realize that it's not very old paid with the thought that.

Yes, I do understand we have a handful of tenants that are still participating in the <unk> to the best of our knowledge.

Great.

Okay, well congratulations on the strong quarter I'll turn it back thanks.

Thank you.

Once again, please press star 1 on it at this time if you have a question. Our next question is comes from I assigned with CIBC. Please go ahead.

Thanks, Good morning, good morning.

So I just kind of personally on the distribution policy EBITDA.

Hi, bumped the announced more recently following I guess the smaller increase.

Last year. So just how are you thinking about that.

Should we expect a similar pace going forward and what payout ratio of would you be targeting.

Hi, <unk>.

Ken.

I can't give you a ton of guidance on a on the distributions I mean, obviously, it's something with the review.

With our board and that they approve on a monthly basis. So really it's a reflection of of what's happening in the business and what we see going forward. So I wouldn't.

Infer from what we've done in the past year end and make any conclusions about what you might see going forward.

Okay.

And then just on the investment activity in the quarter of doors.

Land of NN.

And John just wondering what does the the scope of the pipeline of book fire land held like the entire here that could be REIT suitable down the line.

Well, there's a couple of land banks that kind of her has on some historic somewhere recent the.

Our strategic to them and should they decide to move forward in terms of developing new locations or larger format stores on those land parcels that would be the appropriate time for the reach of stepped in and kind of acquirer.

Right Okay.

Okay. That's all from me. Thank you. Thank you all right. Thank you.

Thank you.

Next question is from the Tal Woolley with National Bank Financial. Please go ahead.

Hi, good morning, good morning.

Just to follow up on some of my question in the soup.

You're asking about the payout ratio, but obviously you are continuing to work down your leverage and you're still seeing good cash flow growth.

Maybe we could just expand the question a little bit more.

Do you know if you like.

What's the goal leverage that maybe you're trying to trying to get to you know should we expect from TD REIT to sort of continue to work down the leverage over time or.

Given that you are continuing to build excess cash.

You could look at distribution of Christians, maybe you look at share buybacks that kind of thing.

Given the sort of sense of where you want that.

The structure to be over the longer haul.

The talents Leslie.

As far as our leverage goes yes, we have been sort of slowly working that down I think.

Whether where it is sort of now until the that sort of low 40 per cent range of is where we'd like to sort of see it in targeted and they're just not a specific goal of at significantly lower than that that where we're actually aiming towards.

In terms of stuff like share buybacks I think we've worked over the last few years because of increased flow do other things. So that's not something that I would see us looking to on our radar screen, but.

And you know and the ratio of the payout ratio has moved around and continues.

It continues to be the lower obviously with the the recent distribution increase that will inch up a smidge.

We're thinking of in that sort of mid Seventy's range is probably where you'll see the the payout ratio of land and we'll still be looking at are wanting to have sort of I guess conservative leverage compared to our peer group of rates here.

Okay, and then just to go back to the lease extensions for a second.

Kevin I think you said basically like you've handled all of.

The CTC leases, except for 1 through to 2023 do I have the correct that is correct, yes. Okay.

And.

I was just wondering can you remind me what exactly the mechanism as I haven't had enough time to look it up this morning.

I remember there was a.

The sort of end of lease term.

The mechanism that would bear I just can't remember exactly what it is can you just talk about whether this was negotiated out of you just follow the market.

So the mechanism is basically they have an option to extend that they can exercise within the 18 months of the expiry of the term.

The rents or set of markets subject to a floor of not less than.

The determine the initial or the rent and the initial term.

A ceiling.

That basically works out to the not greater than roughly 12% more of than that number.

These negotiations were done on the outside of that process.

We've obviously.

Have the weighted average lease term of the focus of ours for a long time now and are obviously in constant dialogue with Canadian tire for the number of different.

Items are we starting day 1 of them.

And the.

The as being strong performing stores and.

In conjunction with other discussions around.

The new store development.

The store expansion of their program.

The came to the conclusion of that both sides were amenable to.

Dig into the lease extensions and find win wins.

So how these ones came came about.

So can you give us some sense of with us.

The other periods of obviously hasn't been an issue for you guys. Since your debut of the public markets, but can you give us some sense of purpose.

The renewal spreads were on those leases.

Well as I mentioned.

Sam's to Sam's question.

The lease extensions provide for the same annual rent increases as a as it says in the initial term.

Okay. So it's just more of a continuation of that then you are seeing a big step you got it yes.

And then just finally on the Triple net market.

How have you seen many.

The deals outside of the transactions are doing okay I'm sorry.

A couple of interesting things out there that we are seeing and working on.

I think you've probably heard commentary from some of our other retail REIT peers around just the you know.

And depth of demand for obviously grocery and essential needs of retail.

So theres a couple of transactions that we are aware of that are.

Either tied up or closed.

That are really driving cap rates down for strong retail assets and the.

I'd say there was a good amount of marketed product that came out first part of the year, It's a little slower now in the mid part of the summer.

But I think theres still lots of capital private and otherwise are chasing.

These deals and and hopefully in the fall, we'll see some of some new supply to address that the men.

But nothing out there that was like you guys were dying dying to get your hands on.

Well like I said, there are some transactions out there that we are looking at and working on.

Once we are I guess, the bring those to fruition of all at once.

More to say about it.

Okay perfect. Thank you very much thank you.

Thank you. Our next question is from Sam Damiani with the TD Securities. Please go ahead.

Thank you I just wanted to see if there was an update on Canada square with the approvals the expected timeline any update on the <unk> et cetera.

Hi, Sam it's it's Ken.

Happy to give you an update.

Although there's not a ton of new news or development manager in corner of Oxford properties.

Continues to advance the building design for a for the first phase as well as the the overall municipal approval process.

Nothing has changed from a timing perspective, as we continue to be subject to.

The timing of the completion of the LRT.

T.

Again.

Lands that metro links of using for the construction of the project at the North end of the site are part of the phase 1 lands' end.

Theres been no new announcements from them and we are still expecting a construction start in in 2023.

With respect to the municipal approval process.

Hmm.

Obviously this is a very significant cited of key location and are in the city of Toronto, and and we would expect it to be giving careful consideration by by many stakeholders.

Our master planned concept of reflects the policies and guidelines are the city developed the site over a significant number of years. So.

We continue to work with a with the city to advance the application.

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

Thanks Sam.

Thank you.

As there are no further questions registered at this time of I'll turn the call over to Ken Smith CEO for closing remarks.

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

Enjoy the rest of the summer and we look forward to speaking with you all in November.

Yeah.

Thank you.

This concludes today's call you may now disconnect.

Okay.

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