Q2 2022 CT Real Estate Investment Trust Earnings Call

August 9, 2022

upward pressure on cap rates in the coming quarters. Distributions in the quarter were 21.2 cents per unit, 5.7% higher than the second quarter of 2021 due to increases in the rate of distribution, which became effective with the monthly distributions paid in July 2021 and July 2022. This resulted in an AFFO pair ratio of 74.6% for the quarter, in line with the 74.5% for the same quarter last year. Turning now to the balance sheet, our debt metrics remain strong, with the interest cover ratio at 3.7 times in Q2 2022, consistent with the 3.7 times reported for the second quarter of 2021. CT recent debtness ratio has improved and was 40.2%, as at June 30th, 2022, compared to 40.9% last quarter and 41.2% as at year end. The decrease in the ratio was primarily due to the increase in fair value adjustments made to property, as well as acquisition, intensification, development activities completed in 2022, exceeding the growth in debtness. In the current interest rate environment, we are delighted to be largely insulated from refinancing risk, as we have no public debentures scheduled to mature until 2025, and almost no variable rate debt. Our liquidity remains strong, with $294 million available through our committed credit facilities, along with $20 million, $3 million of cash on hand, and a further $300 million available on our uncommitted facility with Canadian Tire Corporation. And with that, I will turn it 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 Himanshu Gupta with Scotiabank. Please go ahead. Thank you and good morning. So just on the valuation comment there, I mean obviously no adjustment or very minor adjustment down in Q2. And Leslie, I think you mentioned that you expect upward pressure on candidates in the second half of the year. So maybe can you elaborate?

comparable transactions that would inform our view of the market just yet.

Okay, so transaction activity has been slow, but have you got any like appraisals done or any local sentiment coming through suggesting one way or the other?

Yeah, as you mentioned, we actually had 36 appraisals done as a Q2, representing about 11% of our portfolio and that was one of the obviously key inputs to expand and those, you know, cover geographies, markets, etc. across our portfolio. So, you know, based on some of that feedback and other things such as, you know, the cap rate surveys and the other stuff that are provided by the various appraisal firms, you know, we took the view that that was really a flag.

to be, you know, sitting on a bit of cash, we generate a fair bit of, you know, cash flow from our operations, so those are the first two sources. You know, we have a significant amount of our credit facilities that are undrawn, so that would be our primary one. Obviously, our past practice has been typically when we reach a certain level of draw on our lines that, you know, our preference would be to term that out in the unsecured debt market. You know, I think that would still be something that we're looking towards, but obviously depending on the rate.

and Hmechue, we need to work with Oxford in response to the community and stakeholder engagement process that remains ongoing. We're updating and revising the master plan scheme as we speak. Our hope is that we'll be in a position to resubmit an application by the end of this year. That process obviously takes time. As we've mentioned previously, we cannot begin the development or at least phase one of the development until...

erosion in the property as we de-lease or manage expiries as we work towards that start date. I will be giving you specific items at this time with respect to the quantum or tiling.

All right and maybe just one follow-up I mean obviously you know cost of financing has moved up quite a bit compared to let's say the last two years does that change anything in terms of your Canada Square plans in terms of the mix of the property like residential versus office or other component within the property.

In terms of MIPS, no. I mean, the MIPS is actually somewhat prescribed as it relates to the zoning on the site. You know, and to remind everybody, we can build about 3 million square feet of total GLA, and we have to replace a large component of the commercial that exists as of today. You know, from a financing perspective, we'll obviously be in discussions with our partner, Oxford Properties, in terms of the optimal, you know, financing structure as we look to set the stage for the initial phase one.

Okay, got it. Fair enough. And I'll turn it back. Thank you guys.

and I'll turn it back. Thank you guys. Thank you.

Thank you.

Our next question is from Tom Wooley with the National Bank Financial. Please go ahead.

Bye. Good morning. Morning. Good morning.

Good morning. Good morning. Good morning. Good morning, everyone.

Just wondering with all of the completions this quarter, do you have a sense of like, and particularly since you've got one that's in a you know like a big DC coming online that's accounting for a big chunk of the square footage, just can you give us a sense of what the net rents will be on the added square footage this quarter? I just want to make sure there's no big deviation from sort of where the average net rent is right now.

Are you talking about the 598,000 square feet that was completed that came online or the new two new projects being made?

The 590.

I would say.

They would be in line with our current rents. Obviously the industrial property would probably be a little bit lower, but it would also be in line with our industrial portfolio. You know, they were all set at market, so I don't think there'd be much in the way of deviation from the average.

OK.

And then.

I appreciate the conversation you've sort of given around assessing fair value this quarter. I guess my question is this, like going through that process with the appraisals and your own work and talking to the community, the broader community.

Would it sort of suggest to you that maybe you could have been more aggressive prior to the smoothing rates with respect to cap rates?

And just to make sure I understand your question, what you mean over the last number of years writing down our...

Yeah, that you possibly like you could have been a little bit you could have maybe

you know, brought up valuations a little bit more prior to this moving cap rates, just given, you know, where things kind of are sitting right now.

Well, I think we've always tagged our cap rates where we think the market is. I would certainly suggest we've taken a conservative view of the market over the last number of years as cap rates have trended down, and I think we would likely take a similar approach as we anticipate possible movement upwards. But no, I don't think we should have been more aggressive. I think this gives us a little bit of leeway to wait for this period of price discovery to unfold. If you follow the

and figure out really where cap rates land. I mean, we don't want to be guessing at where our value is. We want to be using our, as Leslie said in the call, remarks, our consistent similar methodology to pinpoint where we think the value of our portfolio sits.

Okay, and then just maybe you can give a little bit of color on terms of what you're seeing in terms of third party acquisitions. Obviously, I would expect volumes probably significantly lower than it normally is.

Anything you can say with respect to pricing of assets right now.

Yeah, in the retail space for sure transaction volume has really just ceased through Q2. I've seen a couple new offerings come to market so I think it will be really interesting.

probably as we head into the.

Q4 end of year period to see if those trade and at what prices. On the industrial side, I think we're seeing a bifurcation of product type where there's much greater interest in short-term lease and even small day product where people still feel like they can get at the rent expiries and mark to market. The longer we did average stuff is still very much of interest. I think it's just, you know.

The IRRs are a little bit more challenged, so probably on a cap rate basis those will close the expansion there and there's probably a few trades that are in the market right now that could set a benchmark on that.

I think you'll continue to see that. I think on the retail, just further to your initial question, I think what we saw in the cap rate survey was coming from a relatively higher base, it's probably less subject to larger swings on a percentage basis in terms of valuations in Cameron.

Okay.

If you can just remind me.

Is there an automatic like...

rent formula on the renewal for the CTC leases. I would have known this cold at the time of the IPO but it's been a long time since then and I can't remember the exact formula.

We're happy to remind you, Talitz, okay. So the leases prescribe that rent in the renewal term is set at market, not less than the amount paid at the end of the initial term and not greater than a ceiling that is, you know, somewhat tied to inflation but capped at about $100.

12%.

And so can you give the average renewal spread on the leases that have been renewed thus far?

Yeah, I mean to remind you Tal, we've talked about this in past calls, even though that's what the lease calls for in discussions with CTC, we have thus far with those IPO or subsequently acquired community entire properties agreed to.

continue the annual rent escalations as they exist in the lease through the renewal term. So on average that would be the one and a half percent annual increases. As of now that formula seems to be working but that's not to suggest at any point in time either party couldn't go back and say they want to stick by the letter of the contract.

Perfect. All right. Thanks, everybody.

Thanks, everybody. Thank you.

Thank you. Once again, please press star 1 at this time if you have a question. Our next question is from Jenny Ma with BMO Capital Markets. Please go ahead.

Thank you. Good morning.

Maybe just a clarification on Kevin on what you just mentioned about the CTC renewal term. So you said the ceiling is not more than 112% of the expiring rent, is that correct?

you just mentioned about the CTC renewal term. So you said the ceiling is not more than 112% of the expiring rent, is that correct? Yes, correct.

Now, is that a weighted average which would include the rent steps or is that 112 on day one of the renewal addenders rent steps on top of that?

That's 112 per cent, well, it's to be fed at a market rent so that's presumed to be a flat amount for the five-year option and that's 112 per cent is the amount greater than the rent on the last day of the expiring term.

So that is the weighted average then. That's one way to think about it.

For the five year registration? Yeah, okay. So I guess my question is,

Given the inflation we've seen, are there any triggers or data points where you start to rethink that 1.5% rent step? I'm not sure how much wiggle room there is with CTC, but is that something you might be seeing when you're negotiating with some of your smaller tenants? I recognize you guys don't have many of them, but what I'm just trying to think through is at what point do you start to see inflation figure into negotiating some of these rent escalations?

I don't think it has any influence on the discussions we're having with our smaller tenants. I think we've been pretty successful with our renewal program. I think it's a much smaller percentage of our portfolio.

On average, we're probably seeing rental lifts in the high single digits. Obviously, inflation is a consideration as we think through our renewals with main tire, but we certainly like the 1.5%, which provides organic growth in the base portfolio. The compounding effect of that escalation is also somewhat meaningful to us over an extended period of time.

And you know, it remains to be seen obviously the length of time that the inflationary period is with us and also its impact specifically on retail rents. So I think as of right now we're pretty content with the structure. Obviously as we get to each discrete lease negotiation, we're thinking our way through it and what makes sense for us and what makes sense for Canadian Tire. And obviously trying to look at...

portfolio on a holistic basis as well just to make sure we're continuing to transact on market terms and it works for both parties.

Okay, great. I want to turn to my next question on the debt capital markets. Recognize you guys have very little rolling or floating, so that's a good position to be in these days. But maybe this is for Leslie. Are you getting any indications on what unsecured debt is coming in at, and what that spread might be to secure debt, and if it remains elevated as we've seen in the past few months? Oops.

Yes, sure, we do follow the market and see what some of the other peers and people are doing. We're not currently actively in the unsecured market, so as it relates to our specific asset, no specific comps. Yes, obviously there's been a number of times over the years, etc., where the secure debt is a cheaper option, etc., but I think we also, as you mentioned, not to perhaps have any immediate term needs for some of that.

which the spread between unsecured and secured becomes wide enough that CT would consider going secure. I mean, I know you like the flexibility, but.

CT has a lot of it, so is that something worth considering or would the flexibility be the paramount consideration?

No Jenny, I think there's definitely an inflection point where we would consider pieces of secure debt. We do have a number of assets that could easily be suited to be circled up into a pool of assets to be securitized. So there is definitely that. We also have Canada Square where we do have property level debt with our co-owner Oxford Properties. That asset will continue to have some property specific and secure debt as well.

Okay, great. Thank you very much. I'll turn it back.

Thank you. Our next question is from Tammy Bird with RBC Capital Markets. Please go ahead. We'll go ahead and close the poll.

Thanks, good morning. Just in terms of the 6.8% cap rate on the just on those new investments, I know it's not a huge amount but you know that is a bit higher than the cap rate story is a bit higher than the last several quarters of investments in the low sixes. I'm just curious was that maybe a function of anticipating some higher financing rates or just maybe the nature of the assets or their locations.

Hi, Pami. I'd say there's a little bit of both. I mean, they were in smaller markets in Alberta. We're also kind of being mindful of the current rate environment. So, you know, I think we were satisfied with the yield on the project. You know, I think obviously going forward as we enter into new terms on new deals with Canadian Tire and other perspective tenants, we're being mindful of our cost of financing.

and certainly to make sure that our development investment activity remains accretive.

Thanks very much. That's all I had.

Thank you.

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

Thanks, good morning everyone. The only question I had was just on your discussions, ongoing discussions with Canadian Tire with respect to you know potential you know new expansions or additional stores in the next sort of near to medium term. You know how does that pipeline look today versus...

I guess historically in terms of is it above average, below average, kind of in line with the average in terms just in terms of framing how we should think about square footage growth on the retail side going forward.

Sure, and Sam if you'll recall, Canadian Tire held an investor day earlier this year where they announced some updated CapEx programs, one of which was related to the bricks and mortar both in the retail and the supply chain. Obviously, CT Read is a net beneficiary of that program as we'll be funding a large component of it. So I would say historically related to average since IPO, we'd probably be above average.

historically as it relates to our run rate in terms of project announcements and what you currently see in our development table over the last year, year and a half, we're probably

expecting more of the same going forward.

That's great. Thanks very much. I'll turn it back.

Thank you.

As there are no further questions at this time, I will turn the call over to Kevin Salzberg, President and CEO for closing remarks.

Thank you Valerie. We delivered solid results in the second quarter, improving the quality of our asset base and securing additional lease extensions with Canadian Tire. All of which serves to highlight the durability of our business model.

Our focus remains on expanding our exceptional retail and industrial asset base while adding to our robust pipeline of development opportunities in order to continue to drive growth in AFFO for unit and distribution.

With our strong balance sheet, CT Reith is well positioned to navigate through this current period of uncertainty, and we will continue to be opportunistic with the goal of delivering attractive risk-adjusted returns for our unit holders over the long term.

Thank you all for joining us this morning. I hope you all enjoy the rest of your summers and we look forward to speaking to you again in November after we release our Q3 results.

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

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time I would like to welcome everyone to CT REACH Q2 2022 Earnings Resolved Conference Call.

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

After the speaker's 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 2.

The speakers on today's call are Kevin Salzberg, President and Chief Executive Officer of CT REIT, Leslie Gibson, Chief Financial Officer of CT REIT, and Jody Spilgol, Senior Vice President, Real Estate of CT REIT.

Today's discussion may include forward-looking statements. These are statements based on management perceptions and beliefs.

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

Please see CT REIT public filings for discussion of these risk factors which are included in their 2021 MDNA and 2021 AIF, which can be found on CT REIT's website and on CDAR. I will now turn the call over to Kevin Salzberg, President and Chief Executive Officer of CT REIT. Kevin?

Thank you, Valerie, and good morning, everyone. We're very pleased to welcome you to C.P. Reid's second quarter 2022 investor conference call, which I feel fortunate to remind our listeners marks my first call as president and CEO .

As we have all witnessed since our last quarterly update, the overall economic picture has become increasingly more challenged.

And the global financial outlook even more uncertain.

Central banks continue to increase rates, elevated levels of inflation persist, and the prospects for an economic slowdown seem more pronounced.

In the face of such an opaque market context, however, CT Reap continues to deliver strong and stable results.

and growth in the FFO per unit.

Our portfolio, primarily net lease assets complemented by a growing industrial base, provides a solid foundation.

Our long-weighted average lease term and minimal debt maturities over the next few years insulate us from much of the current market-based risk that exists in today's environment.

As well, our privileged relationship with Canadian Tire provides a growth pipeline that is consistent and meaningful.

and our prospects beyond our core portfolio, including third-party acquisitions, intensification.

and surfacing value in underutilized assets provide additional avenues for us to explore as we navigate through these uncertain times.

We are truly fortunate to find ourselves in a position to be able to continue delivering meaningful growth all while prudently managing risk.

And as always, from this position of relative strength, we will continue to monitor the market for new opportunities.

With respect to what we accomplished in the quarter, I could not be prouder of the achievements of our team.

We delivered several significant project completions that Jody will speak to shortly, and the diversity of these investments certainly highlights the internal capabilities and strengths that we have built at Tiki Reef over the last few years.

by adding nearly 600,000 square feet of GLA to the portfolio and increasing our weighted average lease term via the completion of certain strategic lease extensions.

We continue to meaningfully grow and improve our asset base, as well as demonstrate how we work together with Canadian Tire to achieve our mutual objectives as it relates to our portfolio and their expanded store and supply chain network strategies.

I am very pleased to welcome Jodi Spiegel, our Senior Vice President of Real Estate, to her first conference call with C.T. Reiss this quarter.

Jody has been a great addition to our senior executive team and has most definitely hit the ground running. So with that, I will turn the call over to Jody to provide an overview of our investment, leasing, and development activities. Jody?

Thanks Kevin and good morning everyone. As highlighted in our press release yesterday, we were pleased to announce two new investments this quarter totaling $30 million which, once completed, will add an incremental 149,000 square feet of GLA to the portfolio at a weighted average cap rate of 6.81%.

These new projects include the vending of land and the development of a new Canadian tire store in Lloydminster, Alberta, and the expansion of an existing Canadian tire store in Stettler, Alberta.

As Kevin highlighted, we had a busy quarter with respect to our investment and development activity. In total, we completed 12 previously announced investments totaling $111 million and added 590,000 square feet of GLA to the portfolio.

These projects included the expansion of our Code 2 to LAC distribution centre, the development of a new Canadian Tire store in Newstraw, Saskatchewan, the completion of Phase 2 of our Aurelia Ontario redevelopment, land acquisitions in Sherbrooke, East Quebec and in Invernier, British Columbia and also the expansion of seven Canadian Tire stores.

At the end of the second quarter, CT REIT had 28 properties that were at various stages of development, with six projects currently expected to be completed by the end of this year.

The projects in our development pipeline represent a total committed investment of approximately 366 million on completion, 90 million of which has already been spent and 150 million of which we anticipate will be spent in the next 12 months. Upon completion, these projects will add a total incremental growth feasible area of approximately 1.2 million square feet to the portfolio, 99% of which has been pre-released as at quarter end.

In the second quarter, we also completed lease extensions for three Canadian Tire stores and one Canadian Tire distribution centre.

As a result, the weighted average lease term of our portfolio increased to 8.6 years, one of the longest in the sector.

In addition to the CTC lease extensions, we are also happy to announce that we have successfully released the 100,000 square foot unit at our 11 Dufferin Industrial Building in Calgary, Alberta.

Based on the strength of our property and the Calgary Industrial Market, we were able to secure this new tenancy with the third-party logistics provider very quickly, achieving a 25% increase over expiring rents with minimal invested capital and new rent to begin prior to the end of this year.

With this most recent lease commitment, our portfolio remains 99.4% occupied in line with the last quarter. I will now turn it over to Lefley to review our financial results.

Thanks Jody, and good morning everyone.

As Kevin highlighted, we are very pleased with the results delivered by the REAP this quarter.

Second quarter AFFO per unit on a diluted basis was $0.28.04, an increase of 2.5% compared to Q2 of 2021.

primarily due to the impact of NOI variances, partially offset by increased personnel costs, which included the retirement expenses of our former CEO .

It should be noted that this is the last quarter that we expect to incur these retirement related expenses.

Excluding this one-time cost, AFFO per unit was $0.28.07, up 3.5% from the same period last year.

Deluded FFO per the unit this quarter was 31.3 cents.

a slight increase compared to 31.0 cents in Q2 of 2021 as the growth in FFO exceeded the increase in the way that average unit is outstanding.

Net operating income was $104.1 million for the quarter, an increase of 3.7%, or $3.7 million, compared to Q2 2021.

This NY growth was comprised primarily of 2.4% growth on a same store basis and 2.8% growth on a same property basis.

The same store NOI for the corridor grew by 2.4 million or 2.4% as a result of contractual rent escalations contributing nearly $1.6 million, including the 1.5% average annual rent escalations included in the Canadian Tire Leases.

with the balance of the growth primarily from the continued recovery of capital expenditures and interest earned on the unrecovered balance, which contributed approximately $0.7 million in the quarter.

In the second quarter, adjusted G&E expenses as a percentage of property revenue were 3.1%.

which was above the 2.5% in Q2 2021.

As previously mentioned, the accelerated amortization of long-term compensation costs related to our recent CEO transition have run through the P&L and drove slightly higher G&E expenses through the end of Q2, which amounted to $0.5 million in the current quarter.

Excluding this transition cost, adjusted G&A as a percentage of property revenue would have been 2.7%, comparable to the 2.5% in Q2 2021. With respect to our portfolio fair value, the REAP recorded a small adjustment of $6 million on our investment properties for the second quarter of 2022.

Determining fair value this quarter was particularly challenging in the absence of comparable sales transactions.

We continue to apply our same consistent methodology in looking at property valuations.

seeking external support and appraisal of community which informs our view of the market.

This led to no change in our overall cap race during the quarter of 6.05%.

with the increase in fair value being driven by higher NOI within our portfolio properties, and clean those projects completed in the quarter.

It should be noted, however, that our retail and industrial average cap rates did increase each by a couple of basis points, respectively this quarter. But due to the increased relative weighting of our industrial properties due to the transfers from properties under development, where it should have a lower relative cap rate than our average cap rate, the overall average remained consistent with Q1.

With the rise in interest rates that we have seen thus far in 2022 and the prospects for future central bank hikes for the balance of the year, we are anticipating the potential for upward pressure on cap rates in the coming quarters.

Distributions in the quarter were 21.2 cents per unit, 5.7% higher than the second quarter of 2021 due to increases in the rate of distribution, which became effective with the monthly distributions paid in July 2021 and July 2022.

This resulted in an AFFO pair ratio of 74.6% for the quarter, in line with the 74.5% for the same quarter last year.

Turning now to the balance sheet, our debt metrics remain strong with the interest cover ratio at 3.7 times the Q2 2022 consistent with the 3.7 times reported for the second quarter of 2021.

CC recent deadness ratio has improved and was 40.2% as at June 30, 2022, compared to 40.9% last quarter and 41.2% as at year end.

The decrease in the ratio was primarily due to the increase in fair value adjustments made to property, as well as acquisition, intensification, and development activities completed in 2022 exceeding the growth and indefinitely.

In the current interest rate environment, we are delighted to be largely insulated from refinancing risk as we have no public debentures scheduled to mature until 2025 and almost no variable rate debt.

Our liquidity remains strong, with $294 million available through our committed credit facilities, along with $20 million, $3 million of cash on hand, and a further $300 million available on our uncommitted facility with Canadian Tire Corporation.

And with that, I will turn it 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 Himanshu Gupta with Scotiabank. Please go ahead.

Thank you and good morning. So just one evaluation comment there. I mean obviously no adjustment or very minor adjustment down in Q2. And Leslie, I think you mentioned that you expect upward pressure on candidates in the second half of the year. So maybe can you elaborate that, any thoughts, what kind of potential impact you could see?

It's not so specific to me, I think with continued pressure on inflation with the expected increases in interest rates that are still to come, I think those are generally correlated with increase in the cap rates. So that's definitely something that we're looking at on the horizon. We just haven't seen that actually in practice and seen that in any kind of comparable transactions that would inform our view of the market just yet.

Okay, so transaction activity has been slow, but have you got any like appraisals done or any local sentiment coming through suggesting one way or the other?

Yeah, as you mentioned, we actually had 36 appraisals done as a Q2, representing about 11% of our portfolio and that was one of the obviously key inputs to expand and those, you know, cover geographies, markets, etc. across our portfolios. So, you know, based on some of that feedback and other things such as, you know, the cap rate surveys and the other stuff that are provided by the various appraisal firms, you know, we took a view that that was really a flat overall cap rate for us.

very little changes into the properties that were of our type. Got it. Thank you. And then just on the development spend for the next 12 months, I think you mentioned $150 million to be deployed. How do you look to finance that? I mean, any thoughts of exploring the unsecured venture market here?

I made sure we're fortunate to be, you know, sitting on a bit of cash. We generate a fair bit of cash flow from our operations. So those are the first two sources. You know, we have a significant amount of our credit facilities that are undrawn, so that would be our primary one. Obviously, our past practice has been typically when we reach a certain level of draw on our lines that, you know, our preference would be to turn that out in the unsecured debt market. You know, I think that that would still be something that we're looking towards.

In terms of the development, Himanshu, we need to work with Oxford in response to the community and stakeholder engagement process that remains ongoing. We're updating and revising the master plan scheme as we speak. Our hope is that we'll be in a position to resubmit an application by the end of this year. That process obviously takes time, as we've mentioned previously.

We cannot begin the development, or at least phase one of the development until the LRT is completed. There's been no new announcements to my knowledge around the timing of completing that project, although it is clear driving to work every day that work continues and is ongoing. So we're just working through that process more generally. Obviously we've mentioned in the past that as we...

set the stage for the first phase. We'll see some NOI erosion in the property as we de-lease or manage expiries as we work towards that start date. I won't be giving you any specific guidance at this time with respect to the quantum or tiling.

In terms of mix, no. I mean the mix is actually somewhat prescribed as it relates to the zoning on the site. You know, to remind everybody we can build about 3 million square feet of total GLA and we have to replace a large component of the commercial that exists as of today. You know, from a financing perspective, we'll obviously be in discussions with our partner Oxford Properties in terms of the optimal financing structure.

as we look to set the stage for the initial phase one. Okay, got it. Fair enough. And I'll turn it back. Thank you.

Thank you.

Our next question is from Tom Wooley with the National Bank Financial. Please go ahead.

Hi, good morning.

Are you talking about the 598,000 square feet that was completed that came online or the two new projects being announced?

The 590.

I would say

Okay. Um, and then.

Would it sort of suggest to you that maybe you could have been more aggressive prior to this move in rates with respect to cap rates?

Just to make sure I understand your question, Jamin, over the last number of years writing down our...

Yeah, that you possibly like you could have been a little bit you could have maybe

you know, brought up valuations a little bit more prior to this moving cap rates, just given, you know, where things kind of are sitting right now.

Okay, and then just maybe you can give a little bit of color in terms of what you're seeing in terms of third party acquisitions. Obviously, I would expect volumes probably significantly lower than it normally is.

Anything you can say with respect to pricing of assets right now.

Yeah, in the retail space for sure transaction volume has really just ceased through Q2. I've seen a couple new offerings come to market so I think it'll be really interesting.

probably as we head into the.

to four end of year period to see if those trade and at what prices. On the industrial side, I think we're seeing a bifurcation of product type where there's much greater interest in short term lease and even small day product where people still feel like they can get at the rent expiries and mark to market. The longer we did average stuff is still very much of interest. I think it's just the IRRs are a little bit more challenged. So probably on a cap rate basis those will.

Okay. And then.

And then if you can just remind me.

Is there an automatic like...

rent formula on the renewal for the CTC leases. I would have known this cold at the time of the IPO but it's been a long time since then and I can't remember the exact formula.

We're happy to remind you, Talos, okay. So the leases prescribe that rent in the renewal term is set at market, not less than the amount paid at the end of the initial term and not greater than a ceiling that is, you know, somewhat tied to inflation but capped at about $100.

12%.

And so can you give the average renewal spread on the leases that have been renewed thus far?

Perfect. All right. Thanks, everybody.

Perfect. All right. Thanks, everybody. Thank you.

Thank you. Once again, please press star 1 at this time if you have a question. Our next question is from Jenny Ma with BMO Capital Markets.

Once again, please press star 1 at this time if you have a question. Our next question is from Jenny Ma with BMO Capital Markets. Please go ahead.

Thank you. Good morning. Maybe just a clarification on Kevin on what you just mentioned about the CTC renewal terms. So you said the ceiling is not more than 112% of the expiring rent. Is that correct? Yes.

Yes, correct. Now, is that a weighted average, which would include the rent steps, or is that 112 on day one of the renewal, and then there's rent steps on top of that?

That is the weighted average then. That's one way to think about it.

For the five year renovation. For the six year renovation. Yeah, okay. So I guess my question is.

I don't think it has any influence on the discussions we're having with our smaller tenants. I think we've been pretty successful with our renewal program there albeit a much smaller percentage of our portfolio.

On average, we're probably seeing rental lifts in the high single digits. Obviously, inflation is a consideration as we think through our renewals with the entire, but we certainly like the 1.5%, which provides organic growth in the base portfolio. The compounding effect of that escalation is also somewhat meaningful to us over an extended period of time. And it remains to be seen, obviously, that...

continue to transact on market terms and it works for both parties.

Okay, great. I want to turn to my next question on the debt capital markets. Recognize you guys have very little rolling or floating, so that's a good position to be in these days, but maybe this is for Lesley. Are you getting any indications on what unsecured debt is coming in at, and what that spread might be to secure debt, and if it remains elevated as we've seen in the past few months? Yesterday, I mean we did follow the market and see some of what some of the other peers and people are doing.

You know, we're not currently actively in the unsecured market, so as it relates to our specific assets, no specific costs. Yes, obviously there's been a number of times over the years and et cetera where the secured debt is a cheaper option, et cetera, but I think we also, I guess Aria, as you mentioned, fortunate not to perhaps have any immediate term needs for some of that. So I think we'll still look at, you know, not just the rate, but also the flexibility that some of the unsecured debt does give us.

So we'll definitely look at both but I'm not sure that just because the secured debt is less expensive now that you'll see a big change in our financing strategy.

Okay, and I guess my follow up to that is it's definitely going to be academic because there's no real need for it, but is there a point at which the spread between unsecured and secured become wide enough that CT would consider going secure? I mean, I know you like the flexibility, but...

CT has a lot of it. So is that something worth considering or would the flexibility be the paramount consideration?

No Jenny, I think there's definitely an inflection point where we would consider pieces of secure debt. We do have a number of assets that could easily be suited to sort of be circled up into a pool of assets to be securitized. So there is definitely that. We also have Canada Square where we do have property level debt with our Co-Enter Oxford properties and so that strategy for that asset will continue to have some property specific at secured debt as well.

Okay, great. Thank you very much. I'll turn it back. Thank you. Our next question is from Tammy Bird with RBC Capital Markets. Please go ahead.

Hi Pami, I'd say there's a little bit of both. I mean they were in smaller markets in Alberta. We're also kind of being mindful of the current rate environment. So I think we were satisfied with the yield on the project. You know I think obviously going forward as we enter into new terms on new deals with Canadian Tire and other...

for SACS and tenants. We're being mindful of our cost of financing and certainly need to make sure that our development investment activity remains agreed on.

Thanks very much. That's all I had.

Thanks very much. That's all I had. Thank you.

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

Thanks, good morning everyone. The only question I had was just on your discussions, ongoing discussions with Canadian Tire with respect to you know potential new expansions or additional stores in the next sort of near to medium term. How does that pipeline look today versus I guess historically in terms of is it above average, below average, kind of in line with the average in terms just in terms of framing how we should think about you know square footage growth on the retail side going forward?

Sure and Sam if you'll recall, Citi entire held an investor day earlier this year where they announced some updated CapEx programs one of which was related to the bricks and mortar both in the retail and the supply chain. Obviously CT REIT is a net beneficiary of that program as we'll be funding a large component of it. So I would say historically related to you know average since IPO we'd probably be above average.

historically as it relates to our run rate in terms of project announcements and what you currently see in our development table over the last year and a half, we're probably

expecting more of the same going forward.

That's great. Thanks very much. I'll turn it back.

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

Thank you.

As there are no further questions at this time, I will turn the call over to Kevin Salzberg, President and CEO , for closing remarks. Thank you, Valerie. We delivered solid results in the second quarter, improving the quality of our asset base and securing additional lease extensions with Canadian Tire, all of which serves to highlight the durability of our business model.

Our focus remains on expanding our exceptional retail and industrial asset base, while adding to our robust pipeline of development opportunities in order to continue to drive growth in AFFO for unit and distribution.

Thank you all for joining us this morning. I hope you all enjoy the rest of your summers, and we look forward to speaking to you again in November after we release our Q3 results.

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

Q2 2022 CT Real Estate Investment Trust Earnings Call

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