Q3 2022 Choice Properties Real Estate Investment Trust Earnings Call
Good morning, and welcome to the choice property real estate investment Trust third quarter 2022 earnings.
My name is Colby and I will be your conference operator today.
Today's call is being recorded and all lines have been placed on mute.
After the Speakers' remarks, there will be a question and answer session.
If you'd like to ask a question simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question Press Star one again.
I would now like to hand, the conference over to your first speaker today earn Johnston. Please go ahead.
Thank you good morning, and welcome to the choice properties Q3, 2022 conference call in July .
And here this morning by rail diagnose President and Chief Executive Officer, Laurie <unk>, Chief Financial Officer, and antibiotics Executive Vice President leasing and operations before we begin today's call I would like to remind you that by discussing our financial and operating performance.
Bonding to your questions. We may make forward looking statements, including statements regarding choice properties objectives strategies to achieve those objectives as well as statements with respect to management's beliefs plans estimates intentions outlook and similar statements concerning anticipated future events results circumstances.
Performance or exceptions that are not historical fact these statements are based on our current estimates and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from the conclusions in these forward looking statements.
Additional information on the material risks that could impact our financial results and estimates and assumptions that were made in applying in making these statements can be found in the recently filed Q3 2022 financial statements and management's discussion and analysis, which are available on our website and on SEDAR and with that I will turn the call over to Ram.
Thank you Darren and good morning, everyone to start the call I will provide a brief recap of our quarterly performance and cover the highlights of our transaction and development activities.
We will cover our operational results followed by Mario who will conclude the call with a review of our financial results before we open the lines for Q&A.
Through our remarks today, you will hear common threat and then it's how well we are positioned to withstand the economic challenges that this environment may bring.
I say this because we have a strong and talented team.
A core portfolio stable yet positioned for growth.
Our strategic relationship with a major tenant loblaw is strong.
Our balance sheet is rock solid and finally, George Weston our largest unit holder is committed to supporting us as a long term or not.
Manager and developer of high quality real estate portfolio.
Turning to our business, we delivered strong we've delivered solid operating and financial results in the quarter.
Performance was underpinned by our teams consistent execution of our long term strategy.
Continued to deliver stable and consistent cash flows driven by the strength of our grocery anchored and necessity based retail portfolio and the realization of embedded rent growth in our industrial portfolio.
We further increase the quality of our portfolio through our capital recycling program.
We unlocked significant value in our development pipeline driving NII growth.
And we continue to manage risk and maintain flexibility through our industry leading balance sheet.
Looking at operational performance the strength of our portfolio and the hard work of our talented team is clearly apparent with occupancy at 97, 7% were nipple in our retail and industrial asset classes.
Once again delivered strong same asset NOI growth of <unk>.
Three 4% normalizing for large single tenant industrial building in Montreal that we back filled with Amazon our same asset growth was 4%.
Moving to transactions, we continue to execute on our capital recycling program, completing $59 $2 million of transactions, including $19 9 billion of acquisitions and $39 3 million of dispositions during the quarter.
On the acquisition front, we completed the purchase of approximately 34.
4000 square foot loblaw anchored retail asset located in established residential area in Toronto for.
<unk> for $19 2 million as part of this transaction, we entered into a new lease with loblaw on the site with 15 year is all fixed.
The site is a long term covered land play given the location mixed use designation in immediate area demographics.
On the disposition front, we continue to focus on exiting office as an asset class and in the quarter completed the disposition of an office property Montreal for $27 million.
We have four remaining office assets, which we plan to sell over time.
These examples illustrate thoughtfulness of our capital recycling program, while we remain active we're currently in a period of price discovery with smaller bed pools being experienced across all asset classes.
We are closely monitoring the market and seen the impacts on pricing firsthand.
IPP and land transactions.
Given our overall financial strength, we are not on any pressure to sell we will continue to sell when the time and price is right and acquired assets.
To increase the quality of our portfolio.
That said, we expect that over the next few quarters attractive opportunities will be in the current market and we have the balance sheet to execute on these opportunities.
We saw NAV growth in the quarter, primarily from the advancements of our development pipeline, we invested $55 million of capital in development and unlock value by achieving key zoning and entitlement milestones and two of our development projects tolerable and industrial development in calendar, Ontario and <unk>.
Golden mile a mixed use development in Toronto.
First on industrial.
Last quarter I spoke about the size quality and growth potential of our industrial portfolio, including our ability to significantly increase the size and value of our $3 3 billion dollar income producing portfolio through development in there.
<unk> fundamentals remain strong we have seen this firsthand through the significant rental growth we have achieved on industrial renewals in 2022.
In the third quarter, we demonstrated our ability to create value to our industrial development pipeline.
7 million square feet industrial development pipeline is now fully zoned and we continue to advance our active developments at.
I told them all we hold an 85% interest in 300 and 380 net developable acres.
We achieved zoning in the quarter. This zoning allows for development of a warehouse distribution and industrial uses totaling over 6 million square feet and unlock significant value on the thought.
As a result of achieving this milestone we recorded a fair value gain of approximately $204 million.
We have assembled the landed on the mall at a cost of approximately 744.
All totaling 281 billion at CIT.
Based on the current zoning in market transactions.
Our current offerings value is $1 6 million per acre with a total value of approximately $515 million at should we expect to recognize further value on this development as the project progresses and expect to stock rating. The thought by the end of 2022 with zoning achieved a partner in <unk>.
<unk> team are actively responding to rfps and seeing increased interest in the salt.
Now starting these quite embryonic area, we made progress in the quarter.
On a 75% interest in 100, plus people acres of funding 70 industrial land as we discussed on our previous call Loblaw has entered into a land lease and plans to build a one 2 million square foot distribution facility on the first phase of the thought.
During the quarter the foundation permit for the first stage was issued in the past with the leather to loblaw localized started construction with rent commencement in Q1 2020 fault. We expect an initial yield of between six five and 7% on this first phase.
Moving to a mixed use development pipeline. We also achieved zoning in the quarter, while approximately 19 acre golden mile development in Toronto.
The current redevelopment plan contemplate a large mixed use master plan community to be built in phases with a focus on high density residential in rental units.
Working with our partner Daniels, we are on track to be the first development in the Golden mile area.
Assuming favorable market conditions, we will be in a position to commence the first phase of the project in approximately 18 months.
Lastly, our balance sheet remains strong we ended the quarter in a strong liquidity position with approximately $1 3 billion of available credit under the <unk> revolving credit facility at $12 $2 billion pool of unencumbered properties.
Im now going to pass the call on China to discuss our operational results Anna.
Thank you Ralph and good morning, everyone.
As Earl mentioned, we once again delivered strong operational results.
We remained near full occupancy ending the quarter at 97, 7% occupied an increase of 10 basis points compared to last quarter.
During the quarter, we had approximately one and a quarter million square feet of lease Expiries and we renewed 577000 square feet of that and we completed 710000 square feet of new leases commencing in the quarter.
Austin and positive absorption of 33000 square feet.
Okay.
Turning to our asset classes are approximately 44 million square foot retail portfolio, which consists of open air centers with necessity based tenants continues to show strength.
Demand for retail space with high consumers wanted immediate access to products and retailers realize e-commerce sales required to support that bricks and mortar.
Our tenants are optimistic as they look ahead with various retailers actively looking to expand.
Bank capital renovating existing locations.
We continue to benefit from the demand driven by retailers designer to be located in our centers alongside quality anchor tenants.
Any key retail categories, such as discount banners pet food <unk> and financial services to name a few continue to have a strong appetite for retail space.
Looking to grow their store networks and improve it to expansion and relocating to better centers.
Our retail portfolio occupancy once again continued to strengthen increasing 20 basis points to 97, 7% with positive absorption occurring in almost all major markets.
We completed 423000 square feet of renewals in the quarter, resulting in tenant retention of 90% renewables were completed at rent $2, 5% above expiring and 50% of the renewals. This quarter occurred in our five 2 million square foot power Center portfolio.
While in R. 22, 4 million square foot neighborhood center portfolio, we saw stronger rental growth with renewals completed at Brent five 3% above expiring rates.
We report rental rate spreads only on leases that expired and were renewed in the current quarter with most lease deal in a given quarter being executed six to 12 months earlier.
This quarter, we had several lease extensions take effect that were done at lower bench as they were negotiated during holiday as part of rental assistance packages.
The deal with an 80000 square foot cinema in.
In the current market. Our team is completing lease deals at spreads much higher than <unk> seen in Q3. These will take effect in future quarters.
In the quarter 49000 square feet of space was vacated at an average rent of $17 and Kathryn Zach.
90000 square feet of new retail Del's commenced in the quarter at an average rental rate of $21.50.
Turning to our industrial portfolio industrial market dynamics remain solid the <unk>.
National availability rate remained at an all time low in the third quarter holding at one 5% with nearly all markets, having availability rates at or near 10 year lows.
Year over year, Calgary, and Edmonton have recorded the greatest contraction in availability.
Asking industrial net rental rates grew year over year by 29, 4% to $12 89 per square foot a record high increase.
The increases we're seeing it across all markets driven by high construction costs and the scarcity of large bank product, which demands even higher rent premiums.
Our industrial portfolio is fully occupied with occupancy at 99%.
We have 687000 square feet of industrial leases expire in the quarter.
Of which a single building accounted for 600000 square feet.
As we have discussed in previous calls this building was leased to Amazon in advance of the previous tenant vacating for a 10 year term at ranked 100% higher than the previous tenants expiring rent.
We also securing annual rent steps of two 775% throughout the term it's Amit.
In addition to this deal in Montreal, we completed the second deal with Amazon in Ottawa.
The deal was done at a strong market rent.
So with 275% embedded annual rent steps.
Both deals commenced in September of this year and Amazon begins paying rent in November once they complete fixed stream.
With respect to the balance of the Expiries, we renewed 46000 square feet of space in Western Atlantic, Canada at rents five 5% above expire expiring.
There were no lease expiry in Ontario this quarter.
We have significant embedded rental rate growth in our industrial portfolio and continue to see lease deals across our entire industrial portfolio at rents well above current in place rent.
Our current average in place industrial rent is $8 25 per square foot.
Looking at residential demand for rental residential continues to increase.
National vacancy is at a multiyear low of two 9% and average rents continue to rise.
Our rental residential portfolio consists of three stabilized assets, which ended the quarter at approximately 98% leased our two newest assets the Brixton and Liberty House located in the West Queen West and Liberty village neighborhood are 87% occupied resulting.
On a combined average occupancy rate of 91, 4% across our residential portfolio.
Subsequent to the quarter. We also concluded a 10 year deal with Thunder, a global apartment hotel operator for 40 suites.
Steel generates annual rent of over $1 3 million.
Our $4 53 per square foot with contractual 3% annual rent increases.
We completed this deal with the breakfast, we had minor landlord work to complete and anticipate rent for all the unit will commence by January of next year.
The residential portion of the Brixton, consisting of 350 units has now reached stabilized occupancy of 98%.
We expect to reach stabilized occupancy at Liberty House by the second quarter of next year, if not sooner.
Across our entire portfolio, we have limited leasing exposure for the balance of 2022 with committed renewals and new leasing exceeding that of our remaining expiries.
We are heading into 2023 with exceptionally well occupied and in demand necessity anchored retail centers leads to strong covenant tenant.
As well as a fully occupied high quality industrial portfolio with significant embedded rental rate growth.
Our portfolio will continue to deliver solid operating results and allow us to weather macroeconomic headwinds.
Now pass the call over to Mario to discuss our financial performance.
Thank you Anna and good morning, everyone.
We are pleased with our solid financial performance in the third quarter. Our results reflect both the stability in our portfolio and the growth potential from strong industrial real estate fundamentals.
Our reported funds from operations for the second quarter from third quarter was $173 1 million or $23 nine per unit. It was a very clean quarter with no significant or unusual one time items.
On a per unit diluted basis, our Q3 <unk> of $23 nine is in line with the third quarter of 2021.
On a gross dollar basis, our funds from operations for the quarter increased slightly when compared to the prior year.
Year over year increases in same asset NOI were offset by higher borrowing costs and.
And cash flow dilution from the Allied transaction and as a reminder, a foregone NOI from the sale of our office properties was only partially offset by distributions and interest income.
Excluding the impact of the Allied transaction <unk> growth over prior year would've been approximately 1%.
Occupancy increased slightly in the quarter and contributed to our strong say massive results.
Cash NOI increased by $7 4 million or three 4% compared to the third quarter of 2021.
By asset class retail increased by $6 5 million or three 7%.
The increase was primarily driven by higher rents on new leasing contractual rent steps and higher capital recoveries.
The increase also reflects a reduction in bad debt expense of 900000.
Industrial increased 400000 or one 2%.
Alluding a temporary decline in rental revenue due to a fixed period and one of our industrial buildings leased to Amazon industrial increased by $1 6 million or four 8%.
This increase was driven on high occupancy and significant rent growth on renewals.
And our mixed use residential and other category increased by 400000 for five 1%.
Turning to our balance sheet, our eye for snap increased three 4% to $13 six per unit, an increase of $310 million over last quarter.
Our NAV growth was driven by fair value gains on investment in development properties, partially offset by a downward fair value adjustments are on our investment in Allied properties units, where we are required to mark to market. This investment to its trading price as of September 30th.
Our fair value gains on investment properties of $344 million, representing an increase of two 2% were primarily driven by the progress on our future development pipeline and the strength of our industrial portfolio.
And our future development portfolio, we continue to drive NAV appreciation as we move our assets through the zoning and approval processes.
Our development gains in the third quarter reflect key zoning milestones, we achieved at Telemark and Golden mile.
As I mentioned industrial market dynamics remained strong we continue to see our growth in our industrial portfolio with leases renewing at significantly higher rates with strong embedded growth.
Our fair value gains reflect the impact of the strong leasing and cash flow growth.
Looking ahead, we will continue to evaluate our industrial portfolio valuations and incorporate the impact of any market transactions, taking place subsequent to quarter end.
With respect to our retail portfolio valuations.
Given the steps we took in the second quarter to reflect current market conditions. No further cap rate adjustments were made during the quarter.
We believe our valuation to appropriately reflect the current market, including the pressure that higher cost capital is putting on real estate valuations.
Turning to our debt maturities.
We had minimal financing activity in the quarter for the remainder of the year, we have a very manageable $105 million of debt obligations coming due.
All of which are represented by construction debt that will be primarily refinance would take out the mortgage financing, including CNBC financing.
So we closed the quarter with strong debt metrics and ample liquidity our debt to EBITDA ratio was seven four times consistent with that of the third quarter. We have approximately 2021, and we have approximately $1 3 billion available on our credit facility.
This is further supported by approximately $12 2 billion of unencumbered properties.
So overall, our disciplined approach to financial management, including the steps we've taken so far in 2022.
<unk> well to manage risk and maintain our distribution as well as provide significant financial flexibility.
And with that rail Anna Erin and I will be glad to answer your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause just for a moment to compile the Q&A roster.
Your first question comes from the line of Mark Rothschild from Canaccord. Your line is open.
Thanks, Dan and good morning, everyone.
Just focusing on the retail portfolio to start the same property NOI was the I'm not sure. If you mentioned was there anything notable in the quarter.
That drove that number and should we infer anything from that for going forward.
Okay.
Nothing unusual market is a very strong quarter.
And we know we're starting to get some impact of the industrial rents going up retail has been solid at NSS and so no I think the.
We've always kind of targeting 2% two and a half I think right now we're at over three and I think we're going to be at that range.
For a bit.
And for the retail portfolio, what is driving that growth. It seems to have picked up is there anything notable there.
Just really mark just rental rate rental rate growth and higher occupancy.
Okay, great. Thanks, and then in the development.
Assets, where you had the value increase can you just maybe give a little color on what happened in the quarter or this year that allowed you to get that value increase.
Bill you mentioned as far as what the mile. Some other projects you have ongoing is this something that should continue to be material growth and value over the next year or two or is it maybe just something thats going to happen periodically.
Okay.
Mark Thanks for the question.
The most significant thing that happened in the quarter was achieving zoning milestones it but total mall and Golden model as.
With total industrial that has continued to trade up so it's a combination of both.
Achieving zoning milestones and where comparable that would be trading.
Maybe narrow can comment on future quarters, I don't think you're going to see something as significant in future quarters with milestones achieved exactly rail so mark where you have the Sony milestones you get that kind of a onetime pop because that you have.
A new use for that property that creates more value.
Once you have vis vis visibility to leasing you kind of get into a cash flow model and then youll just see gradual appreciation overtime so really.
As you see our planning pipeline evolve.
The onetime costs.
It is important to us.
And though you have zoning USA has to be able to access the site. So both at total mall, obviously, we can access the sites and then it goes above.
We have a phase that we can start construction on as we said over the next 18 months.
Okay.
Okay, great. Thanks, so much.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Sam Damiani from TD Securities. Your line is open.
Thanks, and good morning, everyone. Jamie just to get started again back on the retail leasing which has been very strong and obviously driving strong same property NOI growth are you seeing any signs of changes changes in the leasing market.
The lengthening of the conversion times to get lead get leases signed and if you have any comments on the ROE and a low situation do you see that causing any fallout as well.
Okay.
Hi, Tim No I mean, we're seeing very strong activity across the retail portfolio.
Tenants really looking for ready to go felt side I think the development site has maybe slowed down and some in some areas. So we're seeing really strong demand and it actually quick quicker turnover tie. This because we have ready to to the extent we have ready.
Those space.
Yeah.
And then with respect to Rona.
I actually see it as a good thing there is someone coming in and investing in the business, we have long term leases with Rona.
And.
Really.
Some are currently not occupied but there are talks of them reopening.
And for those.
If they don't we actually have interest from other retailers, where we could replace replace Ramadan and re demise the space.
Just also Sam to add a bit more color than I can comment on the retail development and we have been working closely with loblaw at shoppers drug Mart to particularly to add pads in front of many of our stores and I think we doing five sharpest dropbox at the moment is that correct yes.
Yes, we're doing five pads.
We're still active in development from an O.
Overall supply perspective in the market there is slower supply, which is also driving demand for asphalt products kind of the point I was making.
Okay. Thanks, and you mentioned the Loblaw store.
It was acquired and with a newly signed new 15 year lease so can.
Can you.
Did you identify the location if you did I missed it.
It was on.
And Brent floor, Burnham Thorpe area and in telecom.
Got it okay. Good.
Last question from me is on the development side again, congratulations on the zoning at Tullow more in Golden mile.
And it looks like those to have pretty good visibility of Commencements I guess by 2020 for perhaps what steps do you need to achieve between now and then to actually be able to start to turn Bert on those projects. Both on the projects themselves and also capital couple of months.
Yes I.
I think on the industrial side.
There's not too many more incremental steps we have to obviously servicing turn on the internal side that we actually started to respond to rfps.
And.
Market.
The market dynamics are still exceptionally favorable on on the residential side.
We have a partner Daniels.
The first phase is getting to be a combination of both purpose built rental and conduct and as we are closer to the time, Sam I think it's a combination of.
Our belief in the pre sales.
Red saw obviously construction costs and then the financing environment to see if we will commence construction, but it's MSI 18 months out and we are very bullish on the <unk>, we have a very low debt cost.
Then have obviously broughton capital by bringing in a partner.
And just to just to finish up there I mean.
Starting this obviously both tomorrow gold model would be done in phases, so not meaningfully stressing the liquidity or the capital spend versus current levels.
No.
We've always focused on making sure we have a very strong balance sheet and we will never do anything that puts the entity at risk it will be very prudent in our approach to development.
Of course, thank you very much.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad.
Your next question comes from the line of journey MA from BMO capital markets. Your line is open.
Thank you good morning.
I wanted to ask about a comment that was made in the outlook, where you talked about.
Expectation that there might be downward pressure on fair value for the rest of 2022 from interest rates I'm, just wondering if considering that you've already taken.
<unk>.
Justin on the retail portfolio and there's good things going on in the industrial development portfolio I'm. Just wondering if that is just a general comment a lot as you're watching the macro environment or if there's certain.
Other things that you might be watching all forward for example transactions in the market that would.
How do you put that statement out there.
You guys are in a year right that was more of a just a general cautionary statement there's been so much volatility.
Got you don't know and so we just put out their sales statement, but right now.
Based on I think today the.
Consumer price index in the U S was down so I think.
We're more comfortable.
As far as the overall valuation climate and also with the recent some of the transaction.
We're going to look into that.
<unk>.
Very fulsome and.
Just compare that to our portfolio right right, yes, it's hard to call, Steve Hi, Jay for sure.
As far as.
Sorry go ahead.
Sorry January alright.
Okay.
My next question is on the retail portfolio.
Sounds like there's some very strong demand and good leasing activity happening.
With retail it's always been kind of like a 151 to one 5% rent step kind of a situation for a very long time and I'm just wondering when you combine the.
On the demand that youre seeing especially for the essential.
Essential retailer tenants as well as the inflationary environment is there any sort of pressure on those annual rent steps like we've seen for industrial or is that still a fairly steady one.
Under one 5% clip.
In terms of your your new leases renewals any any movement on the annual rent steps.
We're seeing we're seeing slight movement anywhere trying question because we do in many instances have multiple groups looking at similar stages and so we're seeing that increased demand and trying to leverage that as much as we can.
So I'm hopeful we'll break that 2% barrier.
As we do more leasing.
Okay, great is that concentrated towards more of a CR used or is it across the board.
No it's across the board in terms of the activity you mean.
I know the ability to push the rent steps.
Yes.
It's been across the board on our anchors certain anchors is it's much more difficult like a Walmart that's the world but.
Once you get into the smaller tenants.
Yeah, Okay, Okay great.
And then my last question is on the the notes receivable it looks like that balance has gone up.
An area you expect to have some growth and is there any sort of floating rate components on the rent sorry, the interest receivable on that.
Yes, Jamie.
The balances increased primarily because of the BTB, we took with allied and the majority of the loans receivables do have.
Due to all tied to prime rate. So we do get the benefit of.
Greece and receivable income.
Noninterest income should I say.
Okay, great. Okay. That's all for me. Thank you very much.
There are no further questions at this time I will now turn the call back over to Rael Diamond for closing remarks.
Thank you Colby so to summarize we are very pleased with our third quarter operating performance.
The consistency of our results the strength of our balance sheet and the progress on our development pipeline. This quarter demonstrates our team's ability to continue to deliver on our long term strategy in any environment.
Thank you for your interest your investment choice and for joining US This morning.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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