Q4 2021 CT Real Estate Investment Trust Earnings Call
Calls to differ materially from such statements. Please CCT reads public filings for a discussion of these risk factors, which are included in their 2021 M. DNA in 2021, Aif, which can be found on <unk> website and on SEDAR I will now turn the call over to Ken Silver Chief Executive Officer, a C T right Ken.
Thank you operator, and good morning, everyone. We're very pleased to welcome you to <unk> fourth quarter 2021 Investor Conference call.
This time, a year ago, we were anxiously awaiting the rollout of vaccines and the expected end of the pandemic.
All candidates vaccination program has indeed been successful there.
Corona virus presented us all with more twists and turns in 2021 proved to be another challenging year.
Yet again, we look forward to spring and a much hope for it needed returned to normal.
From a business perspective, and notwithstanding the ongoing pandemic related challenges.
Read once again delivered a healthy set of results in Q4 and for the full year in 2021 with strong growth in <unk> per unit continued high occupancy rates attractive new investments and a growing pipeline of developments.
And another distribution increase our eighth since our IPO and third since the start of the pandemic.
All supported by a strong balance sheet and credit metrics.
As Kevin and Leslie will detail in a few moments our business model focused on net lease assets with investment grade tenants and long lease terms and a growing pipeline of investments combined with Conservative financial management provides a compelling combination of growth and resilience.
In 2021, we began to extend leases with Canadian tire provided providing continuing annual rent escalations and further visibility to extremely low lease turnover.
The sufficient model provides ongoing growth in cash flows and largely avoids temporary vacancy in leasing capex.
We kicked off 2022 with another successful unsecured debt offering redeeming our series a bonds maturing later in the year.
With no additional significant debt maturities until 2024, and a weighted average term of our debt of seven two years, we're pleased with how well insulated we are from rising interest rates.
As we have since our IPO, we continue to build on this extremely healthy core portfolio with incremental investments, which have totaled in excess of $2 billion.
Yesterday, we announced the development of a new 350000 square foot distribution center on lands, we acquired a few years ago from the city of Calgary.
Jason to two distribution centers, we previously acquired the larger of the two with direct access to the CP intermodal yard.
This development will complete the build out of this block adjacent to the Railyard, making what we call the Dumper district, a key logistics hub.
Notably we will be building it to a net zero standard an important step forward on our emerging ESG path.
With respect to our joint venture with Oxford properties on Canada square at Yonge and Eglinton in Toronto, We continue to make progress towards an expected start of phase one of the redevelopment in 2023 following completion of the Eglinton crosstown LRT and receipt of requisite municipal approvals.
On the municipal front, we have received input from the city and feedback on our application from the extensive public consultation process, which Oxford led over the course of 2021.
Overall, we anticipate delivering an even more compelling mixed use transit oriented and sustainable development.
Significant community benefits on one of the most important crossroads in the city of trough.
Back in December our board announced the appointment of Kevin Salzburg, as President and CEO of the read upon my retirement at the end of May.
While this is not my last opportunity to address you I do just want to remark that my retirement reflects my absolute confidence in where the REIT is positioned today and going forward as well as in Kevin Leslie and the rest of the <unk> team to deliver on its promise.
With that I will now turn the call over to Kevin and lastly, before me ask the operator to open it up for your questions.
Kevin.
Thanks, Kevin and good morning.
As highlighted in our press release yesterday, we are pleased to announce four new investments this quarter totaling $71 million.
These new projects include the expansion of two existing Canadian tire sourcing Bedford in Sydney, Nova Scotia.
<unk> of land and development of a new Canadian tire store in St. Catherine Lesjak, Cartier, Quebec, which is a bedroom community.
Located just outside Quebec City, and finally, the development of a new distribution center in Calgary, Alberta to be built in <unk> standards.
These four investments represent approximately 459000 square feet of incremental gross leasable area.
And are expected to earn a weighted average going in cap rate of approximately six 8% upon completion.
I would be remiss, if I didn't take the opportunity to speak a little further about one of these new investments for the new 350000 square foot Calgary DC development, our first net zero project.
<unk> remains committed to improving our sustainability efforts and reducing our carbon footprint and this project represents an opportunity for us to advance our progress towards those goals.
Net zero will be achieved through the implementation of an improved building envelope and increased <unk>, along with upgraded mechanical and electrical systems in the form of in ground geothermal systems and rooftop mounted solar will tax once constructed our new building will produce as much energy of the consumers on an annual basis.
And we will have no onsite combustion.
And therefore zero reliance on fossil fuels.
Jason to our existing Calgary industrial properties.
This development will be a great complement to our existing dufferin.
<unk> assets and is a project that we are proud to announce to you here today.
With respect to the fourth quarter, we invested $90 million and previously disclosed investments, which included two third party acquisitions of existing Canadian tire stores in Airdrie, Alberta and ballpark, Quebec.
The vendor of an existing Canadian tire store Faintheart gas plus gas part in Goderich, Ontario.
The expansion of three existing Canadian tire stores, and Cochrane in Kanata, Ontario, as well as all muscle back the development of third Party third party.
D pads at five existing properties and finally, the third party acquisition of a Walmart supercenter anchored property in Halifax, Nova Scotia.
These investments added approximately 400000 square feet of incremental GLA in the quarter.
We also completed agreements with TTC to extend the leases related to Canadian tire stores, bringing the total number of Canadian tire store and distribution center lease extensions to <unk> 24 for the full year.
These lease extensions have accumulative effect of increasing our weighted average lease term for the portfolio by a total of just over 0.7 years.
At year end <unk> had 26 properties that were in various stages of development.
These projects represent a total committed investment of approximately $353 million upon completion $79 million of which has already been spent and $159 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 approximately 137 million square feet to the portfolio, 71% of which have been pre leased and nearly half of which consists of development related to industrial assets over.
Over the course of 2021, we nearly doubled our development pipeline invested approximately $113 million in completed projects and ongoing development and grew the portfolio by approximately 366000 square feet.
At year end <unk> occupancy rate was 99, 3%, which was in line with occupancy levels. Both in Q4 2020 as well as the prior quarter and with that I will turn it over to Leslie to review our financial results. Thanks.
Thanks, Kevin and good morning, everyone as.
As Ken noted we are very pleased with the strong fourth quarter and full year results delivered by <unk>.
Our rent collections are back to pre pandemic levels and yet again this quarter, we recorded no bad debt expense.
In the corner, we've appointed <unk> per unit.
The basis of 27 five.
An increase of five 8% compared to Q4 of 2020.
This brings the full year diluted <unk> per unit to $1 10, four representing growth of 7% versus 2020.
Additionally, diluted <unk> per unit in the quarter increased by four 1% to 38% compared to 29, 6% in Q4 of 2020.
On a full year basis 2020 diluted <unk> per unit increased by four 8% to $1 $23 eight.
Net operating income was $100 9 million for the quarter, an increase of four 2% or $4 1 million compared to Q4 and 2020.
This NOI growth was comprised primarily of two 4% growth on a same store basis, and two 5% growth on a same property basis.
Full year reported NOI with forehand 1 million, which was a five 1% increase over $382 million in 2020.
Same store NOI for the coronary grew by $2 3 million or two 4% primary primarily as a result of contractual rent annual rent escalations contributing nearly $1 6 million, including the one 5% average rent escalations included nicknamed higher leasing.
And compared to prior year lower expected credit losses of <unk> 5 million for tenants due to the improving business environment.
For Q4, 2021, adjusted G&A expenses as a percentage of property revenue were two 9%, which is slightly higher than the two 5% in Q4 2020.
The increase was driven by the acceleration of the amortization of long term compensation costs related to our CEO transition.
<unk> cost run rate will continue through Q2 of this year until Kents retirement.
The REIT recorded a fair value increase of $53 3 million on our investment properties for the fourth quarter of 2021.
The increase in the fair value adjustment on investment properties was mainly driven by changes to investment metrics and then the portfolio based on recent market activity.
Our <unk> payout ratio decreased to 76, 4% compared to 77, 3% for the same period in 2020, despite having increased distributions four 5% in July of last year.
Turning now to the balance sheet, our debt metrics remains solid with interest coverage ratio increasing to 372 times in Q4 2021 compared to three five times for the fourth quarter of 2020 being.
The increase in interest coverage ratio is primarily due to both an increase in our debenture interest costs and a growth and EBIT fair value.
Recent debt in this ratio has also improved and was 41, 2% at December 31, 2021, compared to 42, 9% a year ago.
The decrease in the ratio was primarily due to increases in the fair value adjustments made to the portfolio throughout 2021 as well as the <unk> 2021 acquisition intensification development activities exceeding the growth in our total indebtedness.
Subsequent to quarter end <unk> completed the issuance on a private placement basis of $250 million of unsecured debentures at a rate of $3 <unk> to 9% for seven year term maturing in February 2029.
In conjunction with the offering we took the opportunity to early redeem the $150 million of debentures. Originally scheduled to mature in June 2022, and incurred a $744000 prepayment penalty for the early redemption.
With this early refinancing completed we have no further debentures scheduled to mature until 2020 for taken the majority of our refinancing risk off the table for the rest of this year and what has thus far proved to be more volatile market.
Pro forma these transactions serve to increase <unk> weighted average term to maturity of seven two years from six eight years.
In addition, with $294 million available through our committed credit facilities and 4 million cash on hand, we continue to maintain a strong and liquid position.
And with that I will turn the call back to the operator for any questions.
Yes.
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.
The first question is from <unk> Gupta with Scotiabank. Please go ahead.
Thank you and good morning, good morning.
So just hold the Calgary distribution center can you provide some more color teams.
Costal bend.
So underwriting and what could develop on.
Okay.
We don't generally provide specific project guidance issue, but.
No.
Order of magnitude probably roughly.
So $40 million for the project.
The interesting thing about industrial rents.
The increase every quarter so.
You have some good data points in terms of the recent comps.
But those seem to be updated every time, we look to each new lease deal Thats completed in the market.
Can see rates, obviously going way down across.
Most large industrial.
Markets throughout the country Calgary being one of them.
So we feel pretty good about where we pegged the rents in our pro forma relative to where we may end up as we as we go through the process of taking it to market.
And then getting it leased up.
Okay.
Lucas downloads with committed business all of this will be occupied by today.
Right now it will be done on a speculative basis.
<unk> is currently evaluating their space requirements related to their supply chain in Western Canada.
As of now have not made any commitments to the facility.
Okay, and then to get to net <unk> standards is there any incremental cost in <unk>.
This is more of a requirement from the potential gentlemen.
You probably went up even more.
On the basis.
So yes, absolutely there is an incremental cost.
Running roughly around 20% premium over built.
Building to an enhanced industrial spec today.
But we think that tenants will pay a premium.
There's a lot of larger tenants out there who have their own sustainability goals.
Just also based on the health of the industrial investment market, and where we're seeing cap rates.
Project makes a lot of sense for us.
Got it and then just to clarify this is the only non Boston Youre sitting on the industrial development is concerned. So you should not expect anymore of these coming anytime soon.
I would say this is the only land industrial personal in our portfolio right now.
Okay got it okay.
Then maybe just taking a look at the industrial I think the 11 doesn't places.
Music players coming into this year.
Any color there.
No color there at this point, we are in early discussions with the tenant whose lease was coming up to remind the audience of about 100000 square feet midyear lease expiring.
<unk>.
But again based on the health of the industrial market.
We are optimistic about our.
<unk> you Sir.
Got it Okay and maybe just final question from my side.
Fair value gains this quarter.
Are you seeing in the private market transactions.
Any color why we.
This concrete close with you soon.
We continue to see private capital Chase deals.
The transaction volume heading into the end of the year last year was significantly elevated relative to where we started 21, which was elevated relative to 2020. So.
Sure.
Retail as we've talked about before net lease assets strong investment.
Great covenants long term leases are very much.
Favre, we saw it in the cap rate survey by CBRE put out.
Additionally, we had some movement in our <unk>.
Industrial asset valuations. So the two contributed to the decline in the discount rate.
The increase in overall fair value Mark.
Got it fair enough that's it from my side I just wanted to come back. Thank you so much.
Thank you. The next question is from Jimmy <unk> with BMO capital markets. Please go ahead hi.
Hi, Good morning, good morning morning.
A few follow up questions on the Calgary industrial belts. So this was just a build on excess land that was already in the portfolio.
So if you recall, we bought about five and half acres from the city of Calgary, a couple of years ago.
Which is adjacent to <unk> 11, Dufferin and also in the same block as our 25 different.
Building that can be entire leases.
On a personal.
There was a small building that we leased to a trucking logistics company four offices in a garage and there were some adjacent land that they have for their trailer parking.
So we were able to.
Our work with that tenant on an early exit.
Our lease premises and so we have a combined roughly 19 acres of combined land between the city of Calgary parcel and the.
Glad that they were firmly on that we will consolidate to build the new DC.
So is that $40 million you quoted for the project just the incremental cost or does that include the land cost as well.
Build build out cost incremental cost okay.
It's interesting to see the net zero Im sure thats going to be very relevant going forward.
Just thinking about how you might structure Lisa is there going to be any sort of green provision that you put in there and what kind of.
Rent premium would you expect to get important features.
We will certainly address the green elements in the leaves I mean green elements and most leases related to sharing of information on utility consumption.
The interesting thing about this particular building is not going to consume much in the way of utility.
So.
That's something we're looking at it more broadly over the whole portfolio and obviously, we're working hand in hand with Canadian tire on.
Our benchmarking and thinking our way through.
Measuring our carbon footprints collectively.
Youll recall, we're a net lease rates of our tenants have Karen carriage of the buildings and therefore.
Are the owners and most of that data and information.
But we.
We are working alongside our largest tenant to work through how we will use information.
And how the impact.
So we said as we enter into with them.
Okay, Great would you say theres much by way of Green light provisions in your existing leases or is that something that you addressed I guess as you renew or.
And all of our leases.
I think in terms of specific provisions related to what they refer to screen leases there isn't so much addressed in our current standard form.
Because like I said to Kevin.
<unk> is responsible for the operations of the site.
Teva utilities directly.
But that doesn't mean, we are working together.
Collaboratively outside of the contractual requirements of the document.
Okay.
So going back to the new build.
You mentioned that it's on spec but has.
Actually.
Uh huh.
Moving on this property or are they still kind of in the mix.
Occupying it.
As I mentioned, they're evaluating their space requirements and have.
We have not committed.
Okay. What is the lease expiry on I think a 25000 Duffy that they've signed a few years ago.
What about a 10 year deal I believe it's 2027.
Kevin.
My memory, but I think it was.
A 10 year deal Okay. Okay, and then lastly for me it looks like there's been some expansion that sort of your I.
I guess industrial development, our industrial focus would you say that as a REIT.
And I guess backfill maybe answered the question to some extent.
Is it expansion and industrial really geared towards catering to move or something.
I'll make a strategy that you might want to expand.
Every third party users of industrial.
I think like a lot of the investments we embark on we leverage our relationship with Canadian tire to surface opportunities. So clearly if there is a need from the Canadian tire side to fulfill a supply chain requirement, we're more than happy to step in and be a part of that.
Even.
The spec building, we're doing in Calgary comes off the back of a strategic relationship whereby we bought if youll recall, the former Sears DC.
Knowing that's here is probably wasn't long for this world, but also about the facility with adjacent to Canadian tire is existing warehouse facilities in Western Canada and had some operational benefit being adjacent to the CP intermodal yards. So we.
We sort of got to these lands.
Through.
Our knowledge of the site the opportunity that presented to surface value collectively working with Canadian tire fulfilling their requirements and then leveraging that to find new incremental opportunities. So I don't think it will be out buying spec land to embark on industrial development, but we will continue to seek.
Seek out opportunities.
<unk>.
Opportunistically, we find great.
Great value working together with Canadian tire.
Okay, great. Thank you very much I'll turn it back thank you.
Thank you.
The next question is from Charles <unk> with National Bank Financial. Please go ahead.
Hi, good morning, everybody good morning.
Yeah.
Just wondering if maybe you can discuss fox around the level of the dividend it's been a while since you lost increase I thought maybe we'd be looking at something for 2022.
You just talk about where the board thinking about that right now.
Hello, Leslie and we obviously do talk to the board.
Three months every quarter about the level of distribution.
And April again, nothing to announce right now again, the top cut at all of our meetings going forward.
And with our with our continued.
Visible growth through the Canadian tire at leases and through sort of the rent escalations.
We obviously do see.
No continued improvement in the portfolio at that time would support a distribution and possibly in the future.
Okay.
And then.
Again, just to go back to the Calgary DC.
Yeah.
What is the type of tenants, you think youre going to draw for that facility.
Like what are their intended use of the core retail of the core E. Commerce like tower, how are you thinking about the.
The tenant mix at the site.
Alright.
I think it'll be warehousing, who is warehousing for it's hard to say right now.
Clearly retailers.
Hello.
You sort of bifurcated retailers and E Commerce, and I think those two effects.
Can you kind of go together more and more as time goes on.
Good.
Certainly be a prospect.
<unk> held out there still fulfilling mandates for others that are in the market and very active.
So it's hard to say specifically talent, but.
What.
There is certainly a lot of demand out there for warehouse space. So.
We'll be we'll be selective in terms of kind of quality and.
And trying to optimize obviously.
Somebody who is aligned with the sustainability initiatives that we have underway.
Okay and then just lastly, maybe you can give an update on you sort of talked a bit earlier about.
Good competition for your types type of App.
Has that sort of have impeded.
The ability to grow sort of like the non Canadian tire triple net portfolio or has it just been so much going on with.
Your core tenant.
We haven't really had.
How much opportunity to pursue much.
We are very fortunate and we're very happy about the amount of activity, we have ongoing with Canadian tire I wouldn't say that that impeded our ability to do anything noncommittal the entire related.
But certainly the.
Marketing investment market remains quite competitive.
And I think we'll just approach it the way, we always have which is.
Paying attention working relationships trying to find opportunities off market as possible.
Pursuing those investments that we feel meet our investment criteria of being great real estate good tenants long term leases.
With our financial parameters that makes sense for us. So we've certainly seen some aggressive deals, especially in Q4 and a lot of.
Single tenant small smaller transaction values, when I say smaller I mean under $20 million.
With cap rates.
Certainly pushing under 5%.
No.
But that pricing, we would we would not be in the market but.
We continue to watch it.
Look for look for our sweet spots as we always have.
Okay, and then just lastly.
<unk>.
King Carter store at young and Davenport here in Toronto Theres been some press that maybe they're looking to redevelop at play obviously.
Being at the edge of Yorkville, let's say would be highly thought.
Residential space.
I don't believe that portfolio has been.
REIT portfolio.
If some sort of redevelopment comes along is that something that CTV will be looking to participate on.
So you are correct.
Property is not in the REIT Canadian tire on that.
And has the interest.
I don't have much to say about it other than as you mentioned the highlights are really Prime example, some very high profile high value real estate at book or even Canadian tire continue to own.
Clearly could be a redevelopment project at some point in the future.
But until a formal application gets made we don't really have much in the way.
Commentary on it.
At this point.
Okay. That's great. Thanks, everybody. Thanks Bill Thanks.
Thank you. The next question is from CLSA, Ed with CIBC. Please go ahead.
Thanks, Good morning.
Just wanted to one more I guess on the Calgary distribution Center development. Just wondering if this will be entirely in house development or if you are looking.
On any third party consultants that sort of specialize in that.
Zero building applications.
We're certainly using a consulting team of architects engineers to help facilitate the design.
And details of the project, but in terms of the development and construction.
Overseeing in house, we will use a general contractor to build it.
But we will use our own expertise and knowledge in the team to.
To carry it out.
Okay.
And then just on the Canadian tire lease extension in the quarter were they down at the same terms as the last quarter, where I think you got a lot more term in cap.
Escalators Glenn.
Yes, that's correct. So same format that we've been engaging in to date.
Remind you that's not necessarily the formula.
That's contained in the lease so that there is no assurance that on a go forward basis that will be how we continue to.
Transact on these deals but as of now that has been a formula in this scheme that works for both us and Canadian tire.
Okay and can you share how much more time you got for these extensions.
Presenting for the eight in the quarter.
Yes.
Worked out to be.
On average just under seven years.
Okay. Thank you that's all from me I'll turn it back thank you.
Thank you as a reminder, please press star then the number one on your telephone keypad. If you have a question. The next question is from Sam Damiani with TD Securities. Please go ahead, thank you and good morning, everyone.
Maybe just on the retail side.
Third party occupancy sort of party tenant occupancy is almost recovered back to pre pandemic I'm wondering if you could just maybe comment on the categories. The retail categories that have seen the most erosion in your portfolio in the most sort of recovery.
Sure. So if I can take that.
I think as a general comment we haven't seen much erosion or much need for recovery.
But clearly some of them.
Multi tenant.
Properties that we own.
Our.
Slated for redevelopment or improvement.
I've seen some.
Struggles with respect to fashion tendencies.
Our restaurant portfolio.
From an occupancy perspective has held up quite well, obviously they've had there.
Struggled with closures and mandates.
Impacting their business, but I think.
Today, that's more of a regional disparity based on.
Specific lockdowns associated with each province.
The the mid box guys have been really healthy the dollar stores that discount retailers.
Okay.
Yeah.
Liquor candidates all of that stuff continues to perform well.
And that too from a new deal perspective.
Continue to engage with our new development sites.
New leasing opportunities so.
I don't think its anything different than you would see in some of our peers portfolios in terms of the experience we've had.
But luckily it hasnt impacted us too much.
I think you mentioned the mixed use.
I believe one component of Canada square, maybe has been transferred into part, but just I guess on it.
NOI basis do you see much erosion in 2002, and 2022 or 2023.
The north end of that.
So it gets closer to.
Development.
Yes, Sam yes.
Yes, the 'twenty 202010 building at the North end of this I did that was that transferred.
There will start to be some erosion to that property obviously.
Leases that we've got leases scheduled to.
Sharon expire by the end 2000 Teu.
There will be some erosion as we have through into development, but obviously, we're trying to keep them there as long as possible and renewing and maintain kind of month to month basis.
As we can to push that out into the eventual redevelopment.
Okay. So let me, perhaps a little bit of erosion around the edges and over the next year or two.
Yes.
Okay.
Just looking at the fair value gains in the quarter and for the year I may have missed it but.
What was the mix between industrial and retail.
I think it was about half industrial half retail for the year.
For the year.
So fair to say that you've kind of recovered most of what you.
Go down in 2020 on the retail side.
Yes, Sir yes, we're close to where we were before on the retail side, yes. Okay. Perfect last question just on the Calgary Industrial development.
Congratulations there it looks just looks really good.
Sure and from many respects I was just wondering the timing I guess it was asked a little bit earlier, but was there like a zoning or some other sort of trigger that triggered the decision to stop.
<unk> now as opposed to last year or two years from now.
Yes.
We have received our development permit.
We intend to start construction in the spring.
Okay.
Great. Congrats again on the on the year in the quarter end.
Ill turn it back thank you thanks, Dan.
Thank you.
As there are no further questions at this time I will turn the call over to Ken Silver CEO for any closing remarks.
Thank you operator, and thank you all for joining US today, we look forward to speaking with you all in May.
Thank you. This concludes today's call you may now disconnect.
Yes.
Thank you. This concludes today's call you may now disconnect.
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