Q3 2021 CT Real Estate Investment Trust Earnings Call
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All participants please standby your conference is ready to 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 <unk> Q3, 2021 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 Star then the number two.
The speakers on the call today are Ken Silva, Chief Executive officers P. T REIT Kevin's Salzburg, President and Chief operating Officer, Peter you read unless we get from the Chief Financial Officer CPA REIT.
Today's discussion May include forward looking statements such statements are based on management's 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.
Please see T rispoli filings for a discussion of these risk factors, which are included in their 2020 M. D. N. A N a I F which can be found on P. T reached website and on SEDAR.
I'll now turn the call over to Ken Silva, Chief Executive Officer of C. P right Ken.
Thank you operator, and good morning, everyone. We're very pleased to welcome you to <unk> third quarter 2021 Investor Conference call.
Since the pandemic began and in spite of the disruption abroad. Ctrip has added to its successful track record and deliver growth.
Per unit <unk>.
Longer balance sheet and credit metrics and distribution increases.
Our third quarter 2021 results reflect our solid business model as well as the ongoing economic reopening and recovery as once again, we recorded no bad debt expense in the quarter on top of the occupancy rates and rent collections at pre pandemic levels, which in case you thought it was going to remind you are above 90.
9%.
The hallmarks of <unk> read our not only our resilience and reliability, but our disciplined investment strategy that has seen our portfolio primarily net lease assets gross since our IPO by over 100 properties and 10 million square feet of GLA.
Yesterday, we announced the acquisition of an additional four properties one for Canadian tire and three from third parties, which have closed or will close by year end totaling 363000 square feet of incremental GLA each prime properties in their respective markets.
We also announced additional investments to intensify the existing CTC tentative properties.
With these newly announced investments our total development pipeline grows to approximately 1 million square feet.
Proximate total investment of $300 million.
With that I'm going to turn the call over to Kevin to provide more detail on our investing activities and operations.
Lastly, we will then review the financial aspects of the quarter.
Before turning the call over for questions Kevin.
Thanks, Ken and good morning, everyone.
As outlined in yesterday's press release, we are pleased to announce nine new investments this quarter, requiring an estimated $109 $5 million to complete.
These new projects consist of two Canadian tire store expansions, where the tenant will take over existing cru's space in both Belmond Villa <unk>, Ontario, and three Canadian tire store expansions, where we will actually be increasing the gross leasable area of the property and Burlington, London and Whitby, Ontario.
Additionally, we announced the vendor of a Canadian tire store and Canadian tire gas plus gas burn got arch, Ontario, and the associated future Canadian tire store expansion.
Subsequent to the quarter CPA REIT completed the acquisition of a Walmart supercenter anchored property from a third party in Halifax, Nova Scotia.
This property is very well located in the heart of Halifax as dominant retail node and serves as a great addition to our portfolio of Premier net lease assets.
Finally, we are also pleased to announce the acquisition of two Canadian tire stores from a third party located in Airdrie, Alberta and ballpark, Quebec.
This transaction remains subject to customary closing conditions and is expected to close prior to year end.
When completed all of these investments are expected to earn a weighted average going in cap rate of approximately $6 three 1% and will add roughly 449000 square feet of incremental GLA to the portfolio.
With respect to previously announced investments, we spent $14 $2 million in the third quarter and completed the previously disclosed vending and existing Canadian tire store and Canadian tire gas plus gas part in Trenton, Ontario, and the development of our freestanding BMO Bank branch pad in medicine hat, Alberta, which added approximately 75000 square feet of increment.
GLA.
In the quarter, we also completed agreements with TTC to extend six Canadian tire store leases in conjunction with future plans to invest in these locations through Canadian tire store and Densification projects.
At the end of the third quarter <unk> had 30 properties that we are at various stages of development.
As Ken mentioned in his opening remarks. These projects represent a total committed investment of approximately $300 million. Upon completion 71 million of which has already been spent and 96 million of which we anticipate will be spent in the next 12 months.
Furthermore, these projects will add a total incremental gross leasable area of approximately 1 million square feet to the portfolio, 96% of which have been pre leased.
Our portfolio remains in a strong position with theories occupancy rate of 99, 3% as of September 32021, which was slightly above the occupancy levels in Q3, 2020 as well as the prior quarter.
That I will turn it over to Leslie to review our financial results.
Thanks, Kevin and good morning, everyone.
Our strong results in the third quarter continued to demonstrate the underlying quality of our portfolio.
Rent collections for the third quarter remained stable at 99, 7% and again this quarter, we recorded no bad debt expense.
In the quarter, we reported <unk> per unit on a diluted basis of $27 nine an increase of six 5% compared to Q3 of 2020.
Additionally, diluted <unk> per unit increased by four 3% to 31 <unk> compared to $29.
$9 million in Q3 of 2020.
Reported net operating income was $100 8 million, an increase of five 9% or $5 7 million in the quarter compared to Q3 2020.
The main contributors to growth.
Rent escalations in the D. T C banner leases, which contributed $1 6 million as well as the acquisition of income producing properties completed in 2021, and 2020, which contributed a further $1 8 million to NOI growth.
Compared to Q3 2020 same store NOI increased by three 5% or $3 3 million and same property NOI increased by $3 6 million, three 6% or $3 4 million, primarily due to increased revenue derived from contractual rent escalation improved tenant recover.
And lower credit loss provisions.
Adjusted G&A expenses as a percentage of property revenue for two 4% for the quarter, which was in line with the two 5% for Q2 2021.
The required fair value increase of $5 8 million on our investment properties for the third quarter of 2021.
The increase in the fair value adjustment investment properties was mainly driven by contractual rent escalations.
Our <unk> improved slightly compared to the same period in 2020 to 75, 3%.
Turning to the balance sheet briefly there's also been continued improvement in our debt metrics with the interest coverage ratio increasing to 376 times in Q3 compared to three six times for the third quarter of 2020.
The increase in interest coverage ratio is primarily due to continued steady growth in net operating income.
Recent debt in this ratio has also improved and was 41, 1% as of September 32021, compared to 42, 9% a quarter ago.
The decrease was primarily due to the growth from the fair value adjustments and the REIT 2021 acquisition and transportation and development activities, along with a slight reduction in total indebtedness.
In addition, with our bank credit facility now extend to 2026 and $294 million available through our committed credit facility and 7 million of cash on hand, we continue to maintain liquid position.
And with that I will 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 Q&A roster.
Our first question is from human shoe Gupta with Scotiabank.
Please go ahead.
Thank you and good morning.
So just looking at the investment activity the Walmart Supercenter. So what was the rationale for this investment.
I mean, I don't have them or you're buying a Walmart supercenter and is that something you can consider the sweet spot for expansion.
Thanks for the question Matthew Yes, this would be our first acquisition of a Walmart.
I would describe it as an opportunistic buy that fits with our net lease portfolio strategy, obviously, Walmart being a great investment grade tenant.
We're very comfortable with the real estate.
There is a Canadian tire in that node and a third party owned assets. So yeah. I think it's just you know we we liked the property we liked the deal and it fit the strategy.
And can you disclose the cap rate on this.
Particularly for the Walmart and what was the lease term on this asset.
We wouldn't disclose the specific cap rate I would just say it would be higher.
Higher than our average going in yields for most projects Theres, a little less rent growth associated with this asset so on ice.
Our basis, it would be comparable to say, our Canadian tire deals and there are.
Just five years left on the wall Wal Mart lease.
That's great.
Thanks for the color there and then looking at the total investments <unk> hundred $10 million, how will that be five months like.
Do you know how much equity will be sure.
I mean, obviously you bet as well.
Hmm issue it's Leslie.
We will take a look at that meeting where we are right now into the low 40% in terms of leverage it is a sort of wearable MISO will be financing that sort of overdue course went with it.
Sort of a similar mix of debt and equity.
For that.
Perhaps more unlikely to finance it through class CS and things.
From Canadian tire REIT, and we're likely to finance through the class B units.
But otherwise it'll.
It'll be financed with our so you've got more typical mix of definitely.
Got it okay.
The final question back to the investment activity to.
New acquisition of Canadian sourced from third party.
Just wondering was this a competitive process or was it like an off market transaction.
It was off market.
Awesome. Okay. Thank you I was talking about.
Thank you. Thank you.
Thank you. Our next question is from a semi side with CIBC. Please go ahead.
Thanks, Good morning.
Just following up on the Walmart anchored center this quarter just strategically wondering why.
What's the risk appetite of doing it on a.
The portfolio of business update us a bit bigger than a one off assets.
We would absolutely consider it I mean, it sort of follows the same logic for this asset or any other deal we've done on Canadian tire related.
Sure.
Right time, right place right price.
Well, we really like about the slate of investments we announced this quarter is the diversity in the types that really highlights our strategy. You know, there's there's third party net lease stuff, there's Canadian tire consolidation from third parties as Canadian tire store expansions abandoned so it really shows the breadth of the.
The available opportunities out there.
So yes, absolutely we would consider it.
Okay.
And I guess, the reason progressing while consolidating the king tire store number but just.
Any thoughts on consolidating the entire industrial facilities.
Obviously pricing is a loft in most markets, but just curious if you've looked at it and thought about it.
We've absolutely looked at it we've absolutely thought about it just to remind our listeners.
We do have.
A healthy amount of industrial property at least the Canadian tire within the portfolio it would be about 15% of our gross leasable area.
There is some of it out there.
Owned by third parties, and we would absolutely consider looking at those investments as well.
Okay. That's all for me thank you.
Yes.
Thank you. Our next question is from timing Barrett with RBC capital markets. Please go ahead.
Thanks, and good morning, just with respect to the Walmart acquisition, you mentioned I think Theres five years left on the lease.
Can you just comment does that renewal or does that just walmart have a fixed rate renewal option or at flat rent or market rent any color you can provide there.
They have many fixed year fixed rate options to extend.
And sorry, just staying in place rent.
Yes.
Okay and I'm just curious are you seeing more.
Walmart type acquisitions in the market and.
And is there anything else in your pipeline at the moment from a Walmart standpoint.
Nothing specific to Walmart I would tell you there is a lot available out there right now I mean, we've seen generally as it relates to the investment market, what's shaping up to be a I think a record year retail volumes are way up.
And I think net lease and grocery is clearly where people's interests lie so.
Certainly a good amount of transactions, we're seeing taking place in the market, especially over the last quarter or two and I think there is opportunities out there or is that a fair consideration.
Got it.
Just with respect to the Canadian tire store lease extension can you comment on those particular extensions and any changes to the rents are or the annual escalators in those in those leases.
Similar to the lease extensions, we've announced so far.
To date, we've been able to stay on the same Ryan pattern, where the.
Annual lease expense Escalations, which have averaged one 5% continue on in the extension term.
For those six properties, we took a portfolio that had a weighted average lease term of about six years and extended it to roughly 14 years. So.
Again in conjunction with store expansions, where it's a win win for both parties and.
Certainly.
Our agenda to focus on our weighted average lease term and keeping it as long as possible.
Got it.
You are seeing you know a number.
<unk> came into our expansions in the portfolio can you just maybe talk about the future expansion opportunities in the portfolio, perhaps that haven't been identified and if it's possible to maybe quantify that longer term opportunity.
I'm not sure I can quantify it.
I would suggest there are still a great many a number of opportunities.
Clearly the store has to.
Have a certain level of productivity for Canadian tire to consider the requirement for more space.
There has to be the adjacent land to make the building bigger.
But within our portfolio, we're pretty confident that there's quite a bit of runway for more of them.
And is it.
I guess, just extending that is it fair to say that their space needs are perhaps increasing in terms of maybe how the stores are laid out as opposed to shrink like any I.
I guess, we're at risk of shrinkage of perhaps the store.
Size or even in the store count.
Yes, I mean for the entire would certainly be better position to comment on that but I think what we've been seeing is Ah.
A desire for more space to showroom more of their product assortment as well as increasing space requirements for the warehouse portion of the stores. So.
I think it's the combination of those two things that's really driving the need for <unk>.
More space in the store expansion projects that we've been announcing.
Got it just maybe one last one for me can you remind us how many properties are perhaps left up at Kayne tower that they still own and what the potential the abundant opportunities might look like over the next call. It 12 months.
I would say there is plus or minus 20 properties that sort of fit our criteria and we would consider vending in.
I can't really speak to the pipeline over the next 12 months. So at this time.
Great. Thanks, I will turn it back.
Thank you.
Our next question is from Tal Woolley with National Bank financial.
Please go ahead.
Hey, good morning, everybody good morning.
Just wondering you have a sort of attune to distribution increases this year.
When do you think the board looks at maybe touching the distribution again, given that the payout ratios down to mid seventies.
And it helps Leslie.
Could you talk to the board every quarter about the payout and distribution increases so it's a regular topic of conversation.
And.
We will be talking with every quarter going forward. So.
We continue to see growth in our in our results et cetera, and want to keep the payout ratio where it is does that those discussions are.
It may lead to future increases, but don't have any information on timing.
Okay.
And then.
Ken before so you guys have been somewhat unique among our retail Reits in that.
Having chosen to pursue a lot of mixed use development, you've obviously got some stuff on the horizon, but.
Not as robust a program and you sort of had spoken in the past that maybe.
The timing wasn't right to do it or the economics weren't there for you.
What has changed obviously through the course of the pandemic how are you thinking about.
Some of the mixed use opportunities.
On your sites now.
<unk> I think it's.
I've always had the perspective that.
We werent under the gun to reach for higher risk endeavors, given the nature of our portfolio and the sources of our growth and that's certainly been borne out in our results.
Having said that though you can't ignore the fact that we've got great real estate.
In some great markets with great.
Great potential to surface value, so I still view it as a longer term opportunity.
But having said that we are starting.
To proceed on the entitlement process.
On a number of sites.
In the portfolio.
Are you able to disclose like how many.
Our sites are working on right now to increase the zoning.
I think I think we'd probably give you a little bit more direction and disclosure once we've actually submitted some applications and move forward on those I think it's I mean.
Suffice it to say that we're starting to look to these opportunities, but again I would view them more as a longer term.
Uh huh.
Opportunities to create value within the portfolio, but there's no there's no doubting that those opportunities exist.
Okay.
And then just lastly.
You continue to work your leverage down.
The lowest of the group.
I'm just wondering.
<unk>.
But we've got a goal to keep it at this level because I mean.
There are you can certainly make an argument that.
Okay.
You could look at buying back stock you could look at other things.
To try and increase your ROE if you wanted to I'm, just I'm just curious where.
If theres been any sort of thought given to the cap structure over the longer haul.
Nowhere.
Where the leverage is there.
Theres not a specific target were aiming to right now.
It's sort of at the low forties, where we arguably could ebb and flow a little bit hearing narrow activity acquisitions. We've just now completed before year end, assuming we fund those on the line of credit leverage will go up a little bit.
But.
We're at this point, you're not looking at some of those other other metrics on how to do it to keep.
Slowed F&B and things like that that's mainly worked on in the last few years. So.
We're not as interested in perhaps right now instead of share buybacks, we think there's more opportunity to keep growing that portfolio and leverage.
Leverage may move around a little bit here and we are very fortunate with the b.
Quality set of the income stream that yes, it could be a little bit higher and we'd still be very comfortable with that but.
We're happy to continue to have no leverage at the lower end of the peer group.
Okay. That's great. Thanks, thanks, everyone.
Yes.
Thank you. Our next question is from Ginnie Mae <unk> with BMO capital markets. Please go ahead.
Thank you and good morning, good morning.
Good morning.
So I'm looking at the investment volume for this quarter up $110 million and also the development pipeline is sitting at about $300 million.
Wonder if you could talk us through it.
That number represents anything over $110 million.
It was a record on a quarterly basis is that just.
A function of what you.
<unk> seen in the market.
Consistent with that <unk> been doing or can we start to look at these numbers as a bit of an acceleration in your growth strategy in terms of you taking advantage of maybe a lower cost of capital in an open market condition.
Hey, Tony its Kevin.
I think I don't know, if maybe three or four quarters ago. We described.
Coming out of the resiliency within our portfolio.
Our ability to pivot from defense to offense.
And look for opportunities in the market.
Our clear fit with our strategy.
I think this set of announcements is the fruit that was born from from that pivot.
So I think.
I wouldn't say, it's representative of anything we're obviously very pleased with it.
And we hope.
With our growth mindset.
Place will will have a nice pipeline in future quarters as well.
Okay great.
So when you're sitting at about $300 million under development.
Is there room for much more that you would be comfortable with or is that sort of where it kind of pops up give or take call it 10% of $300 million.
I think we feel very comfortable with.
Uh huh.
The type of development, that's embedded in that $300 million I mean, it's all pre leased at all a lot of it if not almost all of it has to Canadian tire. So we.
We would consider it quite low risk.
So I think we certainly have.
The risk appetite to continue adding to the pipeline.
Okay. Great. That's helpful. And then my last question is probably for Leslie there were some recovery adjustment.
Barton NOI and certainly help with the same property growth can you just talk us through those and whether or not you would expect them to be apparel or is it one time adjustments.
Not really onetime journey.
What we're finding is that to the pandemic is some of our operating costs actually at the properties of the diversity of it in 2020 quite mindful of spending money and we're being judicious about where spending.
But with some of the further.
Fiction and things are going on the some of the operating cost of some of our properties have actually gone down and we.
A number of properties that have language kramlich semi gross leases where they have.
Some cap on cost so what's happening is when we have some decrease in our operating cost our recovery ratio was going up and so that's actually adding to our NOI in the quarter improving it.
And so with that that's what we've seen a little bit up.
Some of the expenses, we have are a little bit more seasonal in nature.
Some of our larger expenses, our snow falling and that type of thing, which which are not in Q3, and so as our expenses ramp up on that.
That's not necessarily going to need to continue out favorably.
So I think if you look if we look on a year like full year over year basis, there, they're more consistent but maybe yes, maybe theyre showing as a little bit more positive in the current quarter.
Okay. So given that as some residual sort of pandemic related adjustment is it fair to expect that there might still be a factor I mean, just the next couple of quarters and then it starts to taper off.
Hard to say I think some of the other sort of seasonality to some of the expenses are going to sort of contemplate into it.
<unk> is a little bit into Q4 and definitely through the first quarter next year.
Pretty smaller journey.
Okay, Great. That's all for me. Thank you.
Thank you.
Once again, please press star one at this time, if you have a question and our next question is from Sam Damiani with TD Securities. Please go ahead. Thanks.
Thanks, Good morning, everyone, maybe just to start off with the small occupancy uptick that.
<unk> experienced this quarter any particular tenant and tenant category that drove that.
We we did announce that small bank pad that we developed.
And Alberta, which helped we have got some some CRE you lease.
Leasing as well in the quarter.
There was a small uptick also related to some temporary tenancies in some of our enclosed mall, which I would say are seasonal in nature. So.
Those are sort of the main drivers.
Okay, and then looking over to a really a mall.
The availability there is still around 30% 35000 square feet I know that space isn't quite ready yet but.
What are the prospects for getting that leased up in the in the near term.
I would say, they're good we're working with one tenant for about a third of that space right now.
And then it's just a matter of.
Some of the prospects we have.
In terms of the use types, we are looking at for the balance of the space.
Pre pandemic, we are sort of humming and hires as to whether or not we want to continue on.
From a <unk>.
Property strategy perspective, with those users so.
We went back to the drawing board to see again, who is out there in.
It will take a little time beliefs, I think Sam but.
But with the nuclear entire started doing as well. It is it is in the grocery store there.
We're bringing <unk> to the property they are under construction now I think that will only help.
Okay, that's great and then over to.
Kenneth Square.
Any updates on the timing for that to get really going.
Hi, Tim It's Ken I'll give you a bit of an update no real changes.
On the on the timing.
There is no update for Metro links on the completion date for the allergy. So we're still targeting a <unk>.
123 construction start date.
We are making good progress on on the municipal side of things.
Given the size and importance of the site and and its plan.
Connections to public transit.
The development application has gone through a public process I would describe as above and beyond the statutory requirement.
The feedback and input from the acuity community has been really thoughtful and and.
And with the benefit of that at Oxford in the city are proceeding too.
So the next steps of the process so.
I'm pleased with how things are moving forward.
Alright, and last one from me is over in Brampton any update on the timing of kick starting that redevelopment is Canadian tire so using that.
The old site there.
Any updates would be it would be of interest.
So can I infer is still using the property. They actually it was decommissioned and then recommissioned over the last year.
Year or two just based on the I guess.
Supply chain requirements of the business.
As Ken mentioned there is some.
Properties, both in our portfolio and Canadian tires portfolio, where we are working to advance municipal applications.
It would be one of them as well, we haven't yet made that application.
But it would be for a industrial redevelopment.
Timing is still somewhat uncertain both in terms of when the obligation will be ready to submit and how long it will take to get approved and ultimately Canadian tires ongoing needs for the space. So.
That's where we're at.
And as we know more as we make any submission as well.
Be happy to talk about it further.
That's great. Thanks, so much that's very helpful and congrats on the great quarter. Thank.
Thank you very much thank you.
Thank you.
And there are no further questions at this time I will turn the call over to Ken Silvers CEO for any closing remarks.
Thank you everybody wishing you a good day and happy holiday season, and we'll talk to you in February.
Thank you. This concludes today's call you may now disconnect.
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